Uncle Sam's effect's

Even as the US economy grapples with a financial crisis, the developing Asian economies continue to be watched with growing apprehension. Last week, the Asian Development Bank (ADB) downscaled the growth expectations of many Asian economies — including India’s — in its half-yearly report, Asian Development Outlook 2008.

ADB attributes this to the worsening conditions in major industrial economies. “The myth of uncoupling has been exploded,” the report says. Among the other factors are the slowdown in Asia due to inflation; high borrowing costs; dampening investment and low consumer spending.

India’s gross domestic product (GDP) growth estimate for the current financial year (FY08-09) has been downgraded from 8 per cent to 7.4 per cent, and, for the next financial year (FY09-10), from 8.5 per cent to 7 per cent. ADB bluntly states that “Very large fiscal imbalance created by the current level of subsidisation of oil, fertiliser and food, as well as other off-budget items, sets a daunting task for economic management.”

Last month, a Citigroup research note had also revised its own estimates of India’s GDP from 7.7 per cent to 7.5 per cent for FY08-09 and from 7.9 per cent to 7.4 per cent for FY09-10.

Local economists, however, are not as pessimistic. “An 8 per cent GDP growth is possible thanks to growth in consumption (which will get a boost from the Sixth Pay Commission recommendations) as well as services and capital goods,

The debate continues.

Ranbaxy expresses disappointment over US FDA action

In response to the US Food and Drug Administration (US FDA)'s warning letters and import alert for drugs issued to Ranbaxy Laboratories Ltd regarding drug products produced in two Ranbaxy plants at Dewas and Paonta Sahib in India, the company said that it is very disappointed by the action taken by the US FDA.


In a press release, it said, "Ranbaxy is very disappointed in the action FDA has taken. The company has responded to each concern FDA has raised during the past two years and had thought that progress was being made. We are, however, pleased that FDA's testing and review led the agency to conclude that there is no reason to question the safety or effectiveness of Ranbaxy's drugs. The company has just received the warning letters that FDA has issued and has not had the opportunity to review those concerns that FDA has determined are unresolved. Once it has had an opportunity to review the issues, the company looks forward to continuing to cooperate with FDA to resolve the remaining issues."


According to the FDA announcement, the warning letters and import alert do not apply to Ranbaxy's other facilities including its three manufacturing facilities in the US, Ohm's Laboratories facilities in New Brunswick, North Brunswick, New Jersey, and Gloversville, New York, from which Ranbaxy delivers some 59 drug products to the US healthcare system, including: Simvastatin, Acyclovir, Minocycline, Clindamycin, Lorazepam, Loratadine-D, Cetirizine, Acetaminophen Extended release tablets, Lisinopril and Zolpidem.

Pharmabiz

Indian economy slowing down

For last years or three years from 2005-07, the Indian economy touched new highs. The gross domestic product (GDP) grew at an average rate of 9% during the period, with India becoming the second fastest-growing major economy of the world. This was the result of unprecedented growth in investments triggered by low interest rates, as well as high growth in demand. These low interest rates were, in turn, possible on account of a low inflation rate. However, the entire cycle seems to have turned.

India's growth engine is now showing signs of deceleration. The trouble started with the rise in inflation. The Indian economy, which was getting used to 5% inflation, is now having to deal with prices rising at the rate of more than 12%. The fact that the Reserve Bank of India (RBI) has started increasing the repo rate and cash reserve ratio (CRR) clearly indicates that the central bank can sacrifice a few basis points in GDP growth to contain inflation.

As a result of high inflation and a spate of interest rates hikes, there has been a slowdown in investment plans announced by industries. Analysis of data released by CMIE clearly indicates that the rate of implementation of corporate capital expenditure (capex) plan has slowed down. On an average, the rate of implementation for India Inc had come down to 44.8% as of end June '08, from 52.7% as of December '06. Simply put, Corporate India is implementing lesser investment plans these days.

The bigger worry is that as much as Rs 43,000 crore worth of investment plans (across industries) were shelved during the quarter ended June '08. The situation is unprecedented as this is the first time that the current bull run is witnessing such a colossal abandonment of investment plans. In fact, even capacity additions have been low, which is evident from the slowdown in completed projects. However, despite all this, what is astonishing is the pace at which India Inc is announcing its investment plans. This can be attributed to the fact that often, the stock market reacts positively to mega expansions plans by companies. But whether these plans materialise is another story. Nonetheless, even amidst concerns of an economic slowdown, corporates continue to announce new projects.

Broadly, the industry is divided into five categories - manufacturing, electricity, services, mining and construction. Of these, only manufacturing has not seen a slowdown in implementation of investment plans. Mining projects have seen one of the worst slowdown in implementation, with the rate crashing to 37% in June '08 from around 50% in December '06.

As for specific industries, ferrous metals, construction, electricity generation, transport services and petroleum products have been the highest gainers of investments that have been announced. However, in terms of implementation of these plans, some of them seem to have lost ground. Ferrous metals and organic chemicals have seen the highest rate of implementation vis-à-vis plans that were announced earlier. At a 52% rate of implementation, the organic chemicals sector was among the top few gainers. In case of ferrous metals, particularly steel, India has enough iron ore - a major raw material for steel. Steel prices - which are expected to remain bullish in the international market in the near term - are apparently providing a strong impetus for capacity expansion in the industry. As demand continues to outpace supply, the rate of implementation of steel projects remains high.

However, the list of losers is longer. Despite big announcements, many projects in the infrastructure sector, including petroleum, transport services (highways, rail projects, airports and ports) and electricity generation seem to have hit hurdles. For instance, the power sector saw a 720-basis point decline in project implementation: only 40% of the projects were under implementation at the end of June '08, against 47% in December '06. Similarly, transport services, which include roads and flyovers, have also fared poorly in terms of implementation of investment plans. The implementation rate in the sector has fallen to just 44.9% as on June '08 from 62.4% as of December '06.

However, a slowdown in infrastructure should not be surprising. Even when investments in other sectors were rising at a breathtaking pace till the end of FY08, infrastructure investment was rising at a much slower pace. For instance, private corporate investments rose to 16.1% of the GDP in FY08 from 5.4% of the GDP FY02. But infrastructure investments accounted for only 5.3% of the GDP in FY08. This shows that even when interest rates were low, enough money was not being invested in basic infrastructure like roads, ports and airports. Whatever little funds were flowing into the sector have further slowed down. Sectors like transport and power form the backbone of the economy and a slowdown in investments in these sectors will have a deeper impact on the entire economy.