Praying for Rain

The PMO has found utility for an IMF trained economist in divining the future of the Indian economy. Soothsayer.

One of the few numbers released by the Indian government relied on by the markets is the food inflation number because it can be independently confirmed by the vegetable cart that arrives at each home in the country early every morning.

Food inflation in India is running at an annual rate of 20%. The RBI is in the business of fighting inflation and encouraging economic growth by controlling the price and quantity of money. An increase in the price of money, interest rates, to reduce actual and expected inflation tends to make mortgages and car loans more expensive reducing economic growth. Potato prices double and the RBI has to turn off the tap.

The RBI lowered short term rates by almost 4% in early 2009 to insure lots of cheap money to support the economy and increase the value of bonds held by banks to dress up balance sheets. The RBI declared its intent to increase the price of money in 2010, before the inflation numbers went from benign to bombastic, but that message apparently did not reached the PMO.

The Chief Economic Advisor believes that growth will be 8% in 2010 because the monsoon will be normal, +1% of GDP, and by 2012 growth will be 9% because the global economy will recover. The monsoon bet is interesting because last years monsoon was the worst in 37 years and from biblical times these cycles tend to last more than one year in a stretch.

3% of Indian growth in 2009 was provided by the government. Strip it out and the number is under 5% for the year, with inflation over 8%.

Future global economic growth is a function of rescuing 15 million US mortage holders from the negative equity on their loans for which the Treasury Secretary admits the solution is difficult without a second and unaffordable trip down Troubled Asset Relief.

The net claim number on India's foreing exchange reserves has doubled to $100 billion from $50 billion before calculation of the oild and fertilizer subsidies which happen off the balannce sheet.

The World Bank invested $4 billion to recapitalize Indian PSU banks, $1.5 billion in the infrastructure term lender IIFCL, and varied State government initiatives predicated on growth and close to the vest financial covenants from the government.

Praying for rain and the continuation of cheap money may be the only economic solution


ndia economy to grow 8 pct in FY '11, adviser sa ays-report- Hindustan Times