Reading the Future of India's Economy

For public consumption, the government has to be seen to be taking steps. But most experts are doubtful whether they will do any good. "I feel that the [inflation] numbers are going to be around 6% -- above the 5% magic benchmark," says Ajit Ranade, chief economist of the Aditya Birla group. "The inflation numbers for seasonal goods like fruits and vegetables may come down. There might be some moderation in food grains. But I don't see overall inflation numbers coming down very quickly. This is a global problem." The United Nations World Food Program (WFP) has compared the crisis to a silent tsunami and said that 100 million people are at risk. Wheat and rice prices have risen to record levels. "A wave of food-price inflation is moving through the world, leaving riots and shaken governments in its wake," as The Economist recently wrote in a cover story on the subject. "Agriculture is now in limbo. The world of cheap food has gone."

The Party May Not Be Over in India

Oil prices in India have crossed $110 a barrel, though these are not reflected in the inflation numbers as the government subsidizes fuel prices. Still, oil refineries are feeling the pinch. Indian Oil Corporation says it is losing Rs. 238 crore ($59 million) a day on retail fuel sales.

There are other worries. The Index of Industrial Production (IIP) plunged to 5.8% in January. It recovered to 8.6% in February, but that was much below the 11.2% recorded in February 2007. For the first 11 months of fiscal 2007-2008, the IIP has come down to 8.7%, compared to 11.2% for the same period last year. Growth has taken a backseat. "There is a crisis of confidence too," says Chakraborty of Enam.

Subprime Losses

Ripples of the subprime crisis in the U.S. have spread to India -- but they are ripples, not waves. Perhaps the only major sufferer among the banks and financial institutions is ICICI Bank IBN, which had a mark-to-market loss of $264 million as of January 31. The bank explained that it had provided $90 million already and would provide another $70 million. But the losses hit the headlines only after the answer to a Parliament question brought out the details. This gave rise to the feeling that there could be other losses hidden in the banking system.

According to one estimate, the total losses could add up to Rs. 20,000 crore ($5 billion). The RBI, however, says there is no systemic risk. Given the cautious nature of India's central bank, observers believe that the losses could be lower. The State Bank of India, the country's largest bank, says that its clients' derivative losses could be around Rs. 700 crore ($173 million). Unfortunately, not all banks are being open about their exposure. This has added to market fears that more shoes could drop in the future.

The corporate results so far have been a mixed bag. Even within sectors, there are no clear signals. Infosys created much enthusiasm within the information technology (IT) industry when it announced upbeat performance and strong prospects for the future. A few days later, India's largest IT company -- Tata Consultancy Services (TCS) -- poured cold water over the euphoria. "The TCS performance is below par," says Manik Taneja, an analyst with Emkay Share and Stock Brokers. Even so, some optimism lingers. Raamdeo Agarwal, joint managing director of Motilal Oswal Securities, says that if companies report the expected 18% to 20% growth in profits, the markets will recover.