JPMorgan Chase Bank, Singapore Economic Research

Rajeev Malik Global Data Watch

November 9, 2007
JPMorgan Chase Bank, Mumbai
Gunjan Gulati

India Indian crude oil basket price and WPI inflation

US$ per barrel %oya
• Merchandise trade deficit narrowed in September
owing to slower growth of imports 80 15
WPI energy Indian crude oil basket
• Fiscal and revenue deficits of the central government
70 10
exceeded midyear target of 45% of the annual budget
• Expect a marginal hike in retail prices of domestic 60 5
fuels; oil companies to bear most of the burden
50 Overall WPI 0
Economic attention this week focused largely on the
government’s reaction to rising global crude oil prices. Do- 40 -5
2005 2006 2007
mestic retail prices of fuels are administered by the govern-
Merchandise trade balance
ment, and changes in global oil prices are not automatically
US$ billion/month, 3mma
passed to the domestic market. Separately, the merchandise
0
trade deficit unexpectedly narrowed in September owing to
-1
significantly slower growth of non-oil imports.
-2
-3
Merchandise trade deficit shrinks
-4
India’s merchandise trade deficit unexpectedly narrowed to
-5
US$4.4 billion in September 2007, much lower than the
-6
average of US$6.1 billion in the first five months of the
current fiscal year (which began April 1). Significantly -7
2000 2001 2002 2003 2004 2005 2006 2007
lower import growth relative to the previous few months
slimmed the deficit for September. The trade deficit for the
first half of the fiscal year thus stands at US$36.9 billion. Fiscal deficit exceeds midyear target
The federal government’s fiscal deficit, during the first half
Exports grew 19.3%oya in September, topping the 18.5% of the fiscal year that started in April, stood at Rs812 bil-
average of the previous five months. Export growth so far lion, 53.8% of the budget estimate for the full year. The
has been masking the underlying weakness likely to result fiscal deficit in April-September fell 6.1% below the
from this year’s rupee appreciation. Import growth moder- Rs865bn figure recorded during the same period of the pre-
ated to 2.3%oya, owing to a surprise deceleration in non-oil vious fiscal year. The revenue (operating) deficit totaled
imports (-0.1%). Non-oil imports had grown at a buoyant Rs611bn in this fiscal year’s first half—85.5% of the bud-
42.7%oya during April to August. The cause of geted target for the entire year. Note that the Fiscal Re-
September’s deceleration is unclear and there are no compo- sponsibility and Budget Management (FRBM) Act man-
nent details available. Also unclear is why, despite higher dates the government to restrict midyear targets for the fis-
global oil prices, the oil import bill in September rose only cal and revenue deficits to 45% of the full-year budget esti-
8%oya; less than the April-August figure of 9.3%. mates. The latter were set at 3.3% of GDP for the fiscal
deficit, and 1.5% of GDP fore the revenue deficit.
The rising crude oil import bill, strong non-oil imports, and
slower export growth are likely to widen the trade deficit Total receipts during the first six months grew 43%oya to
further in the rest of 2007-08. In our revised forecasts, we Rs2367 billion. Net tax revenue remained buoyant, grow-
expect the trade deficit to deteriorate to US$102.2 billion ing 23.5%oya, strengthened by strong collections of per-
this year from US$64.9bn in 2006-07. The wider trade gap sonal income tax (up 35.3%) and corporate tax (38.6%).
is likely to more than offset the sizable surplus in invisible Nontax revenue grew 19.2%oya. Total expenditure grew
trade—which reflects strong remittances from Indians 26.2%oya to Rs3179 billion. Recent political uncertainty
working abroad and software exports. The current account has increased the probability of a general election before
(CA) deficit is thus expected to worsen to US$22.2bn in the deadline of May 2009. The possibility of increased
2007-08 (1.9% of GDP) from US$9.6bn (1.1% of GDP) populist spending in the runup to an election is a key risk to
last year. However, financing the wider CA deficit will not achieving the fiscal and operating deficit targets.
be a problem as capital inflows, especially foreign direct
investment, will more than offset the CA shortfall. The India data watch is published biweekly, next on November 23.
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JPMorgan Chase Bank, Singapore Economic Research
Rajeev Malik India
November 9, 2007
JPMorgan Chase Bank, Mumbai
Gunjan Gulati

Politics of oil Mon Foreign exchange reserves

Nov 1 2 US$ billion
With the international crude oil price hovering close to Aug Sep Oct Nov 19
$100 per barrel, the government’s dilemma in deciding Total foreign reserves 229.3 247.8 262.5 ___
whether to raise domestic prices has intensified signifi- Fx reserves ex gold 221.5 240.4 255.1 ___
cantly. India imports more than 75% of its crude oil re-
Mon Industrial production
quirements. Further, state-run oil refineries control about
Nov 12 %oya, nsa
90% of the domestic fuel market. Any increase in interna- Jun Jul Aug Sep
tional crude prices hurts these oil marketing companies
Overall 9.0 7.5 10.7 9.4
(OMCs) significantly, since the domestic retail price of key %m/m, sa -0.3 -0.9 2.0 1.6
fuels is administered by the government. Mining 1.5 3.7 17.1 ___
Manufacturing 9.9 7.9 10.4 ___
Electricity 6.8 7.5 9.2 ___
The willingness of the government to announce a price
hike is affected by the likely negative impact of such action Fri Wholesale prices
on the ruling coalition’s political fortunes in a general elec- Nov 16 %oya
tion—increasingly likely to be held ahead of schedule—as Aug Sep Oct Nov 3
well as elections in two states in the near future. The gov- Overall 4.0 3.4 3.0 ___
ernment may announce a small price hike next week, but Primary 9.2 7.1 5.4 ___
Energy group -2.0 -2.5 -1.7 ___
the majority of the burden is likely to fall on the OMCs. Manufactured products 4.6 4.3 4.0 ___
Less than a month ago, the government agreed to issue
bonds totaling US$5.8 billion whose proceeds would par-
tially offset the revenue forgone from state-owned oil com-
panies selling local fuels at subsidized prices. That revenue Review of past week’s data
loss could amount to around 1.6% of GDP. The govern- Merchandise trade (Nov 1)
ment could also opt to cut the excise duty (at point of pro- US$ billion, nsa
duction) on gasoline and diesel fuel, thereby reducing the Jul Aug Sep
difference between the selling price and the product price. Trade balance -5.0 -6.9 -7.3 -4.4
Exports 12.5 12.7 11.8 12.8
%oya 18.5 18.9 14.5 19.3
Retail fuel prices were last changed in Feb 2007, when the Imports 17.5 19.6 19.1 17.2
prices of gasoline and diesel fuel were cut Rs2/liter and %oya 20.4 32.6 22.1 2.3
Rs1/liter, respectively, by way of a reduction in customs Oil 5.0 6.0 ___ 5.5
Non-oil 12.5 13.5 ___ 11.7
and excise duties. Currently, the rupee price of India’s im-
port basket of crude oil has surged nearly 60% since the Federal government fiscal balance (Oct 31)
last revision in the local prices of gasoline and diesel fuel. INR billion
However, political considerations continue to prolong the Jul Aug Sep
life of the oil subsidies, which are mainly off-budget. Total receipts 311.6 693.7 __ 686.6
Revenue 308.6 687.9 __ 338.7
Tax (net) 224.4 194.5 __ 611.4
Nontax 84.2 493.5 __ -272.7
Total expenditure 481.6 433.0 __ 465.2
Plan 119.2 125.1 __ 144.3
Data releases and forecasts Nonplan 362.5 308.0 __ 320.9
Interest payments 146.6 141.0 __ 97.8
Fiscal deficit 170.0 -260.7 __ -221.4
Weeks of November 12 - 23
Revenue deficit 137.5 -288.9 __ 76.1
Primary deficit 23.4 -401.7 __ -319.2
During wk Core infrastructure index
of Nov 12 %oya, nsa
Jun Jul Aug Sep
Overall 3.8 6.8 9.0 __
%m/m, sa -0.8 2.1 0.7 __
Electricity 6.8 7.5 8.7 __
Coal 1.3 1.1 8.7 __
Finished steel -0.1 9.6 8.5 __
Crude petroleum -1.8 0.9 6.4 __
Petroleum refining 9.9 4.7 8.2 __
Cement 5.6 9.0 16.2 __

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