Wednesday, February 29, 2012

India struggling with slower growth and rising costs

India's GDP had taken a turn for the worse in Q4, with growth rate of 6.1% - below analysts expectations. The correction in growth looks similar to the 08-09 period.

India GDP growth (Bloomberg)

This is particularly troublesome, given that inflation remains high. Even as food inflation has receded somewhat, wholesale inflation ex-food remains high.

Source: ISI Group

Corporate staffing costs continue to grow at double digit rates and a weaker rupee combined with the recent increase in oil prices is putting upward pressure on fuel costs in India. In addition, with government bonds still yielding above 8%, corporations are struggling with high funding costs. In effect these high government bond yields are crowding out corporate debt. All this adds up to declining corporate margins.

Given the reduction in GDP growth, it is likely that RBI will lower rates on March 15th. But the central bank continues to be in a tough spot trying to balance these inflationary pressures with slower growth. Risks of a "hard landing" in India remain high.
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