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Economy Watch
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July 8 Updates
| Inflation pressure to ease
Despite the expected year-on-year rise in China's consumer prices in June, inflationary pressures will continue to ease as the price index drops month-on-month, analysts said.
The Consumer Price Index (CPI), the main measure of inflation, rose 3.1 percent year-on-year in May from 2.8 percent in April, hitting a 19-month high, but on a month-on-month basis, it has weakened 0.1 percent, according to the National Bureau of Statistics.
The bureau is scheduled to release economic data for June and the second quarter on July 15.
Most analysts predicted a CPI of 3.2 to 3.3 percent in June year-on-year while the month-on-month figure would descend due to declining food prices.
Zhu Baoliang, an economist with the State Information Center, said the index would continue to climb year-on-year before reaching its peak in August, mainly due to a lower statistical basis last year.
But the successive monthly decline would continue as the supply of seasonal vegetables improved significantly and prices have gone down, he said. In May, China's CPI dropped by 0.1 percent month-on-month.
According to statistics from the Ministry of Commerce, in the first three weeks of June, declines in the prices of vegetables, fruit and poultry all exceeded those in May.
Zhu said although price increases in meat, eggs and aquatic products rose by a bigger margin in June than the previous month, their increases could not offset declines of other food and non-food prices in the basket of CPI measurement.
Historically, except for 2007 and 2008, food prices in June are usually lower than that in May, said Lu Zhengwei, chief economist of Industrial Bank.
Food prices account for 32.6 percent of CPI, the biggest component in the CPI basket.
"What's more, prices of other goods usually witnessed month-on-month declines except in 2008, which helps drag down the index compared with the previous month," said Lu, who predicted June CPI would drop by 0.3 to 0.6 percent month-on-month.
Tang Jianwei, a senior analyst with the Bank of Communications, said inflationary pressures in the second half would ease significantly and CPI for the entire year could stay below 3 percent, meeting the government target.
He said the widely expected slowdown in economic growth in the second half as a result of the real estate tightening measures, and the appreciation of the yuan would help ease the pressure along with declining global commodity prices.
However, rising prices of grain and pork may be a source of uncertainty in the second half of the year, some analysts warned.
India Needs Contingency Plan by September to Contain Inflation
India needs a “contingency plan” by September to control inflation as prices are showing few signs of easing, former central bank Governor Bimal Jalan said.
“Inflation is an urgent issue and we don’t have a package as yet which can give us confidence,” Jalan, 69, who headed the Reserve Bank of India from 1997 to 2003, said in an interview in New Delhi yesterday. “We heard inflation will come down by March, then April. It was supposed to come down by now.”
Consumer prices in India are rising at least twice as fast compared with inflation rates in Brazil, Russia and China, the other three nations that make up the BRIC economies. Governor Duvvuri Subbarao is under pressure to raise interest rates in the monetary policy meeting on July 27 after an unscheduled quarter-point increase last week, the third since mid-March.
“Inflationary expectations could have been curbed had the RBI tightened rates more aggressively at the beginning of the year,” said Sonal Varma, a Mumbai-based economist at Nomura Holdings Inc. “More tightening is definitely needed.”
India’s 10-year government bond yield was little changed at 7.61 percent yesterday, near the highest level in more than a week. The Bombay Stock Exchange’s Sensitive Index advanced 1 percent to 17,614.48 while the rupee declined 0.3 percent to 46.90 against the dollar.
Consumer Prices
Prices paid by industrial and farm workers in India rose almost 14 percent in May, according to government data. By contrast, consumer-price gains are running at 5.2 percent in Brazil, 3.1 percent in China and 5.8 percent in Russia.
Inflation in India started picking up after a drought last year created shortages in rice, wheat and sugar. It accelerated as consumer demand for manufactured goods and services strengthened.
“Why didn’t you release more grains in the market to reduce the impact of the drought?” Jalan said. “All the good expectations are inflation will come down with a good monsoon and I hope that will happen. But, the real issue is that if that doesn’t happen, what should we do?”
Prime Minister Manmohan Singh’s government is relying on adequate rains in the June-to-September monsoon season, the main source of irrigation in the country, to boost agriculture output and drive down farm prices. Last year’s showers were the least since 1972.
Monsoon Rains
The monsoon covered the entire country nine days ahead of normal yesterday, raising prospects for bigger harvests of rice, cotton, soybeans and sugar cane.
Even so, the India Meteorological Department, which forecast rains to be adequate this year, failed to predict last year’s drought.
“We need to have a contingency plan,” Jalan said. “If inflation doesn’t come down in September, we should have a plan to subdue, control inflationary expectations.”
As inflation pressures remained unabated, Singh last month risked fanning it by raising gasoline and diesel prices to cut the government’s $5.5 billion fuel subsidy bill.
The move sparked a national strike in India on July 5, forcing schools and shops to remain shut and disrupting air, road and rail transport in several parts of the country.
Fuel Prices
Subbarao expects the fuel-price increase to boost the inflation rate by about a percentage point and on July 2 increased the central bank’s benchmark rates for the third time since mid-March.
He boosted the reverse repurchase rate to 4 percent and the repurchase rate to 5.5 percent, citing among other reasons, “strong underlying growth momentum.”
India’s $1.2 trillion gross domestic product expanded 8.6 percent in the first quarter of this year from a year earlier, the fastest pace after China and Brazil among major economies. Industrial output jumped 17.6 percent in April.
Growth in India’s services industry including software and telecommunications accelerated to a two-year high in June, according to the Purchasing Managers’ Index released by HSBC Holdings Plc and Markit Economics this week.
Exide Industries Ltd., India’s largest maker of automotive batteries, plans to boost capacity by as much as 60 percent by April to cater to customers such as Hero Honda Motors Ltd., Managing Director T.V. Ramanathan said in May.
“They will have to take strong action on the monetary, fiscal policy and on supply side” to control demand, Jalan said.
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