Economic Eye: Macro Analysis I

Chapter 1: IIP report

The all India IIP is a composite indicator that measures the short-term changes in the volume of production of a basket of industrial products during a given period with respect to that in a chosen base period. It is compiled and published monthly by the Central Statistics Office (CSO) with the time lag of six weeks from the reference month.

General Index:

 

In 2013-14 financial year growth rate of IIP was -0.1%. Y-O-Y monthly growth rate is showing positive in each month of 2014-15 financial year except in Oct’14. The growth rate is negative in October because of the more numbers of holidays (Diwali) fell in October whereas last year they were in November. There is a good recovery in month of November by increasing 3.9%. 

  

Fig 1: Graph representing general index

 

Consumer Durable Goods:

Growth rate of consumer durable goods has declined by 9% though better than last 6 months Y-O-Y growth rate which were in double digits. Growth of Office, accounting &computing machinery have declined by 34% while growth of  Radio, TV and communication equipment & apparatus  have declined by 70% in Dec’14. Consumer durable goods are showing negative growth since last two years. The recession is the reason behind it. 

Fig 2: Graph representing consumer durable goods

Consumer Non-Durable goods: 

Consumer non-durables is showing fair growth rate in November and December but poor in November. The main reason behind it is ban on sales of loose cigarettes which was withdrawn subsequently.

 

Fig 3: Graph representing consumer non durable goods

Basic Goods:
 

The growth rate of basic goods is recommendable in 2013-14. Although, results of December have not shown as good growth rate as that of the previous months. Good growth rate was because of the favorable base effect, improvements in the growth of coal production and electricity generation. General index is showing fair growth because of basic goods which has nearly half contribution to general index.

 

Fig 4: Graph representing basic goods

Capital Goods:

Y-O-Y growth rate of capital is subdued by 4.13% in Dec’14. Electrical machinery & apparatus which are growing at the rate of 13.4% and Furniture and manufacturing were showing 45.4% growth rate. Comparing the last year’s growth rate of capital goods with the current year, current year’s growth rate is better. 

Fig 5: Graph representing Capital goods

Intermediate Goods:

Y-O-Y growth rate for Dec’14 is .06%. This has reduced significantly compared to last year. This is due to sluggish demand.

Fig 6: Graph representing Intermediate goods

Chapter 2: Money Market Operations

Following is the money market volume leg for overnight segment. Data is captured for almost one month (29/12/2014 to 27/01/2015). Cyclic pattern is observed and cycle length is one week. We can see that volume reduces drastically on end of the week. (Generally Friday). On an average the volume for overnight segment stays at 1.2 lacks (crore INR) which falls drastically to some thousands (Crore INR) on the days week end.

Fig 7: Money Market VolumeLeg Overnight segment

On the other way it is observed that on the days week end, the term market picks up. This fact is evident from the graph below:

 

Fig 8: Money Market VolumeLeg Term segment

This trend is explained by the market behavior that since on Saturdays and Sundays market stay closed, demand on Fridays reduces a lot. People turn volume of money flow towards term segment i.e. notice money, term money etc. 

Market range of rate also varies on the Fridays due to the same effect. We can see from the Fig 9 that lower range of overnight segment rates decrease a lot on the day week ends.

 

Fig 9: Money Market Range- Overnight

RBI Fixed Repo rate is changed from 8.00 to 7.75 on 15th January 2015. Variable repo rate which is derived from auction every day, remain slightly more than Fixed rate. The fact is represented graphically in Fig 10.  

Fig 10: RBI repo Rate (Fixed vs. Variable)

Reserve Position

Reserve requirement for fortnight 09/01/2015 to 23/01/2015 is INR 3,37,307 Crore and the same for next fortnight is INR 3,39,218 Crore. The cash balance with RBI is kept somewhat more than required by banks. This is shown is Fig 11 graphically.

Fig 11: Reserve Position

Chapter 3: CRR and Interest Rates

The current policy repo and reserve repo rates stand at 7.75% and 6.75% (representing a cut of 25 basis points) respectively as lowered by the RBI recently. Also the SLR has been reduced by 50 basis points to 21.5% (with effect from the fortnight beginning February 7, 2015). This is expected to release around 40,000 Crore of additional funds in the banking system.

In the recently released sixth Bi-Monthly Monetary Policy Statement, it has been proposed that banks be allowed to offer non-callable deposits (i.e. no facility of premature withdrawal). Such deposits would possibly earn higher interest rates and in turn also benefit the banks wherein they would be assured of a certain amount of liquidity to meet short to medium term fund requirements.

The incremental credit deposit ratio has showed a continuous increase from 47.23% for the week ended November 14, 2014 to 57.5% for the week ended January 23, 2015. An increase of 10 percentage points indicates a healthy growth in credit demand. Also with the recent cut in repo rate and SLR, one can expect the ratio to maintain an upward trend.     

 

Fig 12: Incremental credit deposit ratio

Money Stock

One of the sources of M3 or broad money in the country – the credit given to the government by the Reserve Bank of India- has shown considerable decline in recent weeks.

 

Fig 13: Reserve credit to govt

 As can be seen from the adjoining figure the amount has declined from a high of ₹6,987.1 Bn for the fortnight ended March 31, 2014 to ₹4,594.3 Bn for the fortnight ended January 23, 2015. This would perhaps indicate better fiscal management by the government.

Chapter 4:GDP Contribution on Current Prices and Constant Prices

The trend followed by different sectors in GDP contribution YOY:

1.      Mining & quarrying

   

Fig 14: GDP contribution of mining at real price

Fig 15: GDP contribution of mining at nominal price

In real terms the Mining and Quarrying sector has been constantly declining and it is expected to be decline for few more in future as the major issues for achieving the envisaged growth are grant of environment and forest clearances, land acquisition and coal evacuation.

 

2.      Manufacturing

   

 

Fig 16: GDP contribution of manufacturing at real price

 

Fig 17: GDP contribution of manufacturing at nominal price

In manufacturing sector contribution in GDP is declining till 2013-14 but with upcoming policies from the government and more investment towards expected to contribute from this sector in upcoming years.

3.      Construction

 

Fig 18: GDP contribution of construction at real price

 

Fig 19: GDP contribution of construction at nominal price

The contribution in GDP follows a pattern that it increases and then it again declines it is following a cycle the contribution of might rise in few as it is expected growth of manufacturing sector so it also grow that sector.

 

Contribution of all sectors in GDP in 2014

 

Fig 20: Contribution of each sector in GDP at constant price in 2014

 

Fig 21: Contribution of each sector in GDP at current price in 2014

Sector wise Growth in GDP

The trend followed by different sectors in GDP growth YOY:

1    Agriculture, forestry & fishing

 

Fig 22: GDP growth of agriculture, forestry and fishing

Agriculture, forestry & fishing sector by almost 5% in 2013-14.This sector shows inconsistent growth as its growth rate highest in 2010-11 after it had declined and the in inflation in this sector remain almost constant year on year. It is around 6-7%.

2.      Mining & quarrying

 

Fig 23: GDP growth of mining and quarrying

Mining and quarrying sector is declining from 2010-11 even go to negative  growth rate as this sector faces issues like land acquisition, environment clearance and allocation of coal blocks as from 2009-10 this sector become politically controversial and  it growth rate decline there onwards.

3.      Manufacturing

 

Fig 24: GDP growth of manufacturing

Manufacturing sector declining sharply and reach to the negative growth rate but with coming of new policies and government focus on this sector it might grow in after few years.

4Electricity, Gas and Water supply

 

Fig 25: GDP growth of electricity, gas & water supply

Electricity, gas and water supply did not fluctuate in real terms but it shows in consistency in nominal terms which means inflation in this sector is inconsistent.

5.      Construction

 

Fig 26: GDP growth of construction

The growth rate of construction sector decline 13% to 1% from 2005-06 to 2013-14 as it is impact of manufacturing sector decline which has bearing on this sector.

6.      Trade, hotels & restaurant

 

Fig 27: GDP growth of trade, hotels & restaurant

This sector is also declining and it maintains its inflation level to the certain level, it does not fluctuate much.

7.      Transport, storage & communication

 

Fig 28: GDP growth of transport, storage and communication

The transport, storage and communication sector is showing inconsistent growth over the years and its growth come down from 12% to 6%. Its inflation also fluctuates in inconsistent manner.

8.      Financing, insurance, real estate & banking services

 

Fig 29: GDP growth of BFSI

This sector almost remains constant in growth rate it remain at 10% from 2005-06 to 2013-14 but it shows some variation in terms of nominal growth.

9.      Community and Social services

 

Fig 30: GDP growth of community & social services

This sector does not contribute much in GDP this sector is certain and does not shows any sharp changes, from 2005-06 its growth rate is 7% and in 2013-14 it around 5% does not fluctuate much.

Overall GDP growth

 

Fig 31: Overall GDP growth over the years

Overall growth rate of GDP is gone down but it is expected to show good numbers as India has change the method of GDP growth measuring which will show around 8% growth rate numbers.

Chapter 5: CPI

The CPI of food group in January was 256 which goes to 280 in October, 2014. Food group comes under main commodity, its CPI increased significantly. The heads in main commodity like Pan, Supari, Intoxicants and Tobacco and Others (remaining commodities other than main commodities) has shown some significant increase (Fig 32). The remaining commodities like Fuel & Lighting, Housing, Clothing Bedding & Footwear, Medical, Education, Transport & communication and Personal care CPI does not grown significantly in 2014.

Within the Food group most fluctuating commodity was fruits and vegetables are most fluctuating and also spices & condiment grown (Fig 33) significantly. The others commodities index in this heads are constantly with small amount.

 

Fig 32: CPI M-O-M of main commodities

 

Fig 33: CPI of food items M-O-M

Chapter 6: WPI

The commodities in Food articles WPI goes from 238.8 to 255 from January to October, 2014. All the articles in Food mainly increased and vegetables & fruits fluctuate the most. The no-food articles shows marginal decline in WPI in which fiber has decline the most. In minerals WPI remains almost constant every month. The other heads like manufactured products, fuel & power and paper & paper products do not show significant change. The overall WPI rises till august and then start declining till October, 2014 (Exhibit).

 

 

Fig 34: Overall WPI M-O-M

Chapter 7: Glossary of the terms used

1. Basic Goods: Any bulk raw material/product used for further production of new items in manufacturing and agriculture

2. Capital Goods: Plants, machinery and goods used for further investments

3. Intermediate Goods: Any good/product produced as incomplete product or which goes as input in production for further finishing

4. Consumer durable: Products directly used by consumers and having a larger durability (more than 2/3 years)

5. Consumer non-durable: Products that are directly used by consumers and can’t be preserved for long periods

6. Call Money: Money loaned by a bank that must be repaid on demand. Unlike a term loan, which has a set maturity and payment schedule, call money does not have to follow a fixed schedule. Brokerages use call money as a short-term source of funding to cover margin accounts or the purchase of securities. The funds can be obtained quickly.

7. CBLO: CBLO is a money market instrument that represents an obligation between a borrower and a lender as to the terms and conditions of the loan. Collateralized borrowing and lending obligations (CBLOs) are used by those who have been phased out of or heavily restricted in the interbank call money market.

8. Notice Money: ‘Call Money’ is the borrowing or lending of funds for 1day. Where money is borrowed or lend for period between 2 days and 14 days it is known as ‘Notice Money

9. Term Money: ‘Term Money’ refers to borrowing/lending of funds for period exceeding 14 days.

10. MSF: Marginal Standing Facility (MSF) is a new scheme announced by the Reserve Bank of India (RBI) in its Monetary Policy (2011-12) and refers to the penal rate at which banks can borrow money from the central bank over and above what is available to them through the LAF window.

11. SLF: The purpose of the Standing Liquidity Facility is to support settlement in the payments system by providing collateralized, overnight loans to direct participants in the payments system who are experiencing temporary shortfalls in their settlement balances

12. Repo Rate: The rate at which the RBI lends money to commercial banks is called repo rate.

13. Reverse Repo – The rate at which the Central Bank borrows from commercial banks.

14. SLR – The statutory liquidity ratio is the ratio of deposits parked by banks in assets such as government bonds and securities.

15. Incremental Credit- Deposit Ratio - It is the ratio of the credit growth in absolute terms to the deposit growth in absolute terms.

16. M3/Broad Money – M3 is the money supply in the country. Its components are currency with the public, demand and time deposits with banks and other deposits with RBI.

About the Author

 

This report has been authored by Tarun Vasnani, Monil Shah, Kapil Khatri and Sangram Keshari Dhal. All of them are pursuing MBA at Institute of Management, Nirma University, Ahmedabad, Gujarat, India.

 

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