FRONT RUNNING

The early Q2 results suggest that the economy is undergoing some sort of growth recovery. But growth is still extremely weak going by the Index of Industrial Production (IIP). There may be a potential problem brewing in the form of rising crude prices.

According to a BS study, the combined revenue growth for a sample of 498 listed companies was 11.4 per cent yearon-year (YoY) in the July-September 2017 quarter. Interest costs are up 17 per cent for this sample — reflecting higher working capital requirements postgoods and services tax (GST).

Operating margins are high at 16.1 per cent, but operating profit growth is low at 5.1 per cent and net profit growth is low at 4.3 per cent. This was the first quarter with GST, so the operating environment is new in that sense. The big sectoral gainer was metals and mining, driven by a surge in global prices.

However, along with metals, crude prices have also risen, by 15 per cent in the past month. There have been production cutbacks by OPEC and Russia. More than that, there are fears of supply disruption driven by possible political instability in Saudi Arabia.

The Indian crude basket was trading at $62- 63 per barrel in early November. Those are the highest rates since June 2015. Many analysts believe that prices could rise till $70 even though shale producers will start coming into action. Of course, it is entirely possible that Russia, Iran and other oil exporters will ramp up production and help push prices down.

Low crude prices have been a key component of low inflation. The health of the current account and the size of the fiscal deficit are tied to energy prices. Low prices gave the government room to free retail prices and to impose high fuel taxes. Higher refining margins and free retail prices have helped engineer a turnaround in India’s PSU-dominated oil marketing sector. Bumper profits have also aided Reliance Industries in its drive to become a telecom powerhouse.

There are sundry sensitivity studies linking crude prices to various macrovariables. The Reserve Bank of India (RBI) estimates that consumer inflation rises by 0.3 per cent for every $10/barrel rise in price. The State Bank of India’s economic research assumes that the average price of the Indian crude basket could be $57 this fiscal instead of earlier assumptions of $55. That would mean a rise of 0.2 per cent in the current account deficit if other things are equal. However, political considerations could lead to either price controls (which means losses for the energy PSUs), or cuts in excise rates (which means lower revenues increasing the fiscal deficit).

The increase in global crude prices has already impacted the import bill which increased 17 per cent to $43.4 billion for the April-September 2017 period, YoY, compared to the same period last year. The rupee has also weakened.

The Consumer Price Index (CPI) for October was 3.58 per cent higher YoY. This reflects a rising trend, since the CPI for September 2017 was up 3.28 per cent YoY. It makes rate cuts by the RBI in its December review look more unlikely, even though the level is lower than the targeted 4 per cent rise in CPI. The fiscal deficit is almost guaranteed to exceed the targeted 3.2 per cent of GDP since 91 per cent of the full-year target had already been hit by October.

The October manufacturing Purchasing Managers’ Index (PMI) is barely positive at 50.3 (below 50 is contraction) and the services PMI is looking at little better at 51.7. The September IIP also indicates that the growth recovery is weak.

The IIP is up by 3.8 per cent YoY for September, lower than the 4.5 per cent registered for August. Manufacturing, with 78 per cent weight in the IIP, grew 3.4 per cent YoY in September and it was up 3.9 per cent for the half-year, April-September 2017. Mining, which has 14 per cent weight, was up 7.9 per cent in September and up 1.9 per cent YoY for April-September 2017. Electricity, with weight of 8 per cent, was up 3.4 per cent in September and up 5.7 per cent in April-September. Combined, the IIP was up 2.5 per cent for April-September. IIP contributes about 25 per cent to GDP computation. The Q2 JulySeptember GDP numbers should be released by end-November.

On the global front, traders seem to be happy enough with the possibility that Jerome Powell would be appointed Governor of the Federal Reserve. But there are fears that the Trump administration could be in very serious trouble, as several senior Trump aides have been indicted in the investigation of possible collusion with Russians during the 2016 presidential campaign.

On the bourses, the bull run saw a pit stop as prices corrected from the exalted 10,500 Nifty level. Both FPIs and domestic institutions remain buyers, so this is likely to be temporary. The downwards revision of multiple GST rates should provide a fillip to the optimists. But there could be some reversal of sentiment if crude prices spike again.