[Investors Please Listen] Economy: Union Budget—Falls short on reforms

• After the re-election of the United Progressive Alliance (UPA) government at the centre, all eyes were on the first Union Budget to be announced by the new government. Set against the background of fiscal constraints and recovering but subdued economic activity, the final budget for FY2009-10 fell short of the expectations that had heightened after the decisive mandate in the general election. While the finance minister opened his speech with an emphasis on the need for additional stimulus (as the real economy is not yet out of the woods), the widely expected major announcements on non-plan revenue generation (divestments/privatisation) were conspicuously missing from his budget statement. Moreover, the budget was also silent on non-fiscal structural reforms, such as a hike in the foreign direct investment (FDI) limit in certain sectors. 
• In May 2009, India's trade deficit, though lower by 53.3% year on year (yoy), grew by 4% month on month (mom; a second consecutive sequential increase) and stood at USD5.2 billion. The exports contracted by 29.2% yoy while the imports fell by 39.2% yoy during the month. Though the pace of the decline in exports has moderated, we believe there is still some time before we could see a conclusive recovery in exports. Besides, the recent increase in oil prices would also have a bearing on India's trade deficit. 
• The Index of Industrial Production (IIP) continued its upward march in May 2009, as it saw an increase of 2.7% yoy as compared with the 1.2% yoy (revised) growth seen in the previous month. The improvement in industrial production primarily stemmed from a smart uptick in the manufacturing output during the month. The output of the manufacturing segment grew by 2.5% yoy, the highest in the past six months. Importantly, the IIP growth rate for April 2009 has been revised downwards to 1.2% yoy (vs earlier increase of 1.4% yoy) after the first revision. The improvement in the IIP growth rate is encouraging and may signal early signs of recovery. However, the growth rate is still weak compared with the year-ago levels. Moreover, many of the important indicators (like credit growth and exports) have yet to revive, leading us to believe that a conclusive recovery remains illusive. Having said that, the second half of the current fiscal should see further improvement in the overall economic activity and hence in the industrial production growth rate as well.
• After entering the negative zone in the last month, the inflation rate remained negative well through the past few weeks and came in at –1.17% for the week ended July 11, 2009. At –1.17% the inflation rate inched up on a week-on-week (w-o-w) basis from –1.21% in the previous week. The inflation rate has cooled off significantly from its peak and is now in the negative zone. The negative inflation rate is mainly due to the high base effect and not due to actual fall in prices. However, the inflation rate is likely to pick up in H2FY2010 on account of the expected economic recovery that ought to push up the overall consumption demand. 
• Globally, the real economies have shown some early signs of revival with the major developed economies witnessing a steady improvement in the economic activity. Meanwhile, the emerging economies too are bucking the trend as can be seen from the movement in their leading indicators. However, the situation has still not improved completely as some macro head winds persist (read more under "Global round-up").

Banking: Credit growth inching up

• The non-food credit growth for the industry has inched up marginally to 16.4% (as on July 03, 2009) after touching a low of 15.2% in the previous week. Moreover, the deposit growth for the industry has remained fairly stable at 21.9% vs 22% in the previous month. 
• With some pick-up seen in the credit offtake, the incremental credit-deposit (ICD) ratio improved to 53% from 50% in the previous month. However, the deployment rate (ie the credit-deposit [CD] ratio) has remained largely stable at ~68% on a month-on-month (m-o-m) basis.
• The money supply (M3) growth dipped marginally to 20% (as on July 03, 2009) as compared with 20.5% in the previous month. 
• The yields on government securities (G-Secs; ten-year) stood at 7.05% as on July 10, 2009, up from 6.92% seen in the previous month. The yields for longer maturities have inched up following the upwardly revised borrowing programme of the government. However, the yields on shorter maturities have eased in the comparable period, leading us to expect healthy treasury gains during Q1FY2010.

Equity markets: Volume growth takes a pause

• During the month-till-date (MTD) period (July 01-15, 2009) the average daily volumes in the equity markets declined, breaking the upward trend of the past few months. In June 2009 the average daily volume in the futures and options (F&O) and cash segments increased by 13.5% mom and 15.5% mom respectively. However, during the MTD period in July 2009, the average daily volumes in the F&O and cash segments were lower by 13.8% and 25.4% respectively. For July 2009, the MTD fund flows indicate the foreign institutional investors (FIIs) as well as the local mutual funds (MFs) have remained net buyers. 
• On the MF front, the total industry assets under management (AUMs) in June 2009 grew by a healthy 18.7% yoy; the growth was higher compared with the 6.4% y-o-y growth seen in the previous month. On an m-o-m basis, the total industry AUMs grew by 5% vs a 15.9% increase seen in the previous month and stood at Rs671,662 crore as in June 2009. 

Insurance: Back in the negative zone

• After growing by 8% yoy in the previous month, the annualised premium equivalent (APE) for the life insurance industry contracted by 7.9% yoy in May 2009. Even as the APE for the private players declined sharply by 22.9% yoy, Life Insurance Corporation of India (LIC) stood tall with a 16.2% y-o-y increase in its APE during the month. 
• In May 2009, the gross premium underwritten for the general insurance industry grew at a slower pace of 3.2% yoy, indicating a marginally lower growth compared with the 4% y-o-y increase in the previous month. The public sector players mainly drove the growth in the gross premium underwritten as they registered a growth of 5.5% yoy vs an 8.1% y-o-y increase in April 2009. Meanwhile, the gross premium underwritten for the private players remained largely flat on a y-o-y basis.

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