6 Unit 4 Economic Policy

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GLG Institute Presentation

India: Economic and Policy Drivers of Growth

Paradeep Agrawal

Professor of Economics, Institute of Economic Growth


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2007 Gerson Lehrman Group Inc., All Rights Reserved

Discussion Points

Indian governments economic initiatives

India and its trading partners

Evolving business dynamics M&A and FDI

Emerging sectors and opportunities


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Outline of the Presentation

1. Brief Review of Reforms in the Indian Economy since1991

2. THE GDP: Growth Rates, Important Sectors etc.

3. Indias Trade : Major exports and imports, tradingpartners, BOP Situation

4. The inflation worry: Government finances,growth ofmoney supply and credit

5. Business prospects and GDP growth forecasts

6. Sectors to watch out for


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Economic Reforms Implemented

The Reforms thus designed were implemented throughseveral Sector Reforms viz.,

Trade and Exchange Rate Reforms,

Industrial Reforms,

Financial Sector Reforms

Reforms relating to Foreign Investment,

Fiscal Reforms and Public Sector Reforms


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Reforms on the way Reforms Under way1. Special Economic Zones may help industry and IT

sectors (but are facing problems in landacquisition)

2. Government emphasizing InfrastructureDevelopment which will increase economic activityand growth.

Next 10 years likely to see major infrastructuredevelopment in India

Reforms on the wish list (opposed by some within

UPA)1. Privatization of more public sector enterprises2. Labour market reform to make hiring and firing

easier


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WHY HAVE THE REFORMS BEEN

SO SUCCESSFUL IN INDIA India was already a reasonably mature industrial economy with

a strong tradition of entrepreneurship and all market institutionslargely in place along with a genuine democracy, free press and

impartial judiciary (unlike say in former USSR). Reforms have unleashed the creative energy of the IndianEntrepreneurs.

IT and Telecommunications sectors have seen revolutionarygrowth due to the emergence of several very successfuldomestic entrepreneurs.

Banking sector has improved considerably; international moneytransfers even more so.

Doing business outside of one own city or even country hasbecome easier due to improvements in telecom, banking, IT .


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Table 1: Growth Rates Global Scenario

COUNTRY 2004 2005 2006 2007(P) 2008(P)

ADVANCED ECONOMIES

EUROPE 2.0 1.4 2.6 2.3 2.3JAPAN 2.7 1.9 2.2 2.3 1.9

KOREA 4.7 4.2 5.0 4.4 4.4

UK 3.3 1.9 2.7 2.9 2.7

USA 3.9 3.2 3.3 2.2 2.8OECD 3.2 2.5 3.0 2.5 2.7

EMERGING ECONOMIES

ARGENTINA 9.0 9.2 8.5 7.5 5.5

BRAZIL 5.7 2.9 3.7 4.4 4.2

CHINA 10.1 10.4 10.7 10.0 9.5

INDIA 7.5 9.0 9.2 8.4 7.8

INDONESIA 5.0 5.7 5.5 6.0 6.3

MALAYSIA 7.2 5.2 5.9 5.5 5.8


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Indias GDP Growth

1. Real GDP Growth of over 6% for last 25 years and abou

t 9% over the last fou

ryears.

2. The drivers of this high growth have been:

IT and Telecom (Low cost)

Construction (home loans at low rates) and Infrastructure development

Manufacturing: Chemicals and Engineering goods (competitive advantage)

Exports: Chemicals, Engineering goods and IT Sectors

3. The recent performance of the economy:

1. Quarterly GDP growth

2. The sectoral growth performance

3. The important sectors of the economy

4. The savings and investment rates


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Growth rates of Industry, Service and G P

2

7

10

11

12

1 7- 1 - 1 -

00

2000-

01

2001-

02

2002-

0

200 -

0

200 -

0

200 -

0

200 -

07

Growthra

te

GDP Industry Service


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INDEX OF INDU TRIAL PROD.: ECTORAL & U E BASED CLASSIFICATION

INDUSTRY WEIGHT INIIP

GROWTH RATE

APRIL-MAR APRIL-FEBRUARY

2005-2006 2005-2006 2006-2007

SECTORAL

MINING 10.5 1.0 0.9 4.9

MANUFACTURING 79.4 9.1 9.1 12.1

ELECTRICITY 10.2 5.2 5.3 7.2

USE BASED

BASIC GOODS 35.6 6.7 6.5 10.1

CAPITAL GOODS 9.3 15.7 16.3 17.8

INTERMEDIATE GOODS 26.5 2.5 2.4 11.6CONSUMER GOODS (A+B) 28.7 12.0 12.0 9.5

A.CONSUMERDURABLES 5.4 15.3 14.7 9.8

B.CONSUMER NON-DURABLES

23.3 10.9 11.1 9.4

GENERAL 100 8.2 8.1 11.1


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Trends in Savings and Investment rate

1

11

1

3

31

33

3

1 1 1 1 1 3 3

%o

fGDP

o om a g o Cap al Fo ma o


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India: Trade and foreign investment

1. Global Scenario on Growth of Exports

2. Indias growth of Exports and imports

3. Indias exports by Principal commodities

4. Indias Direction of Exports

5. Indias Imports by Principal Commodities

6. Indias current Account Balance

7. Indias Balance of Payment Position

8. Indias Foreign Exchange Reserves


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GROWTH IN EXPORTS- GLOBAL SCENARIO (percent)

Region/country 2005 2006

WORLD 14.0 15.7

INDUSTRIAL COUNTRIES 8.5 12.6

US 10.8 14.5

GERMANY 7.3 15.1

JAPAN 5.2 9.2

DEVELOPING COUNTRIES 21.8 19.7NON OIL DEVELOPING COUNTRIES 19.2 19.7

CHINA 28.4 27.2

INDIA 29.6 21.1

KOREA 12.0 14.5

MALAYSIA 12.0 14.0

SINGAPORE 15.6 18.4

THAILAND 14.5 18.7


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DIRECTION OF INDIAS EXPORTS (US $ BILLION)

GROUP/COUNTRY 05-06 05-06 (APRIL-NOV.)06-07

OECD COUNTRIES 45.8 28.7 33.4

EU 22.4 14.0 16.3

NORTH AMERICA 18.4 11.6 13.2

US 17.4 11.0 12.4

OPEC 15.2 9.1 13.6

UAE 8.6 5.1 8.0

DEVELOPING COUNTRIES 39.7 24.6 32.0

ASIA 31.0 19.2 23.8

23.8CHINA 6.8 3.9 4.8SINGAPORE 5.4 3.6 4.2

TOTAL EXPORTS 103.1 63.9 80.9


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IMPORTSOF PRINCIPAL COMMODITIES

COMMODITY GROUP 2005-06

05-06 06-07

APRIL-NOVEMBERPETROLEUM $ RELATED PRODUCTS 44 27.8 39.4

EDIBLE OILS 2.0 1.5 1.5

IRON AND STEEL 4.6 32. 4.1

CAPITAL GOODS 37.7 19.6 27.1PEARLS,PRECIOUS&SEMI PRECIOUS 9.1 6.7 5.0

CHEMICALS 7.0 4.7 5.2

GOLD & SILVER 11.3 8.0 9.6

TOTAL IMPORTS 149.2 93.5 119.4

NON-OIL IMPORTS 105.2 65.7 80.0

NON-OIL IMPORTS(EXCUDINGGOLD&SILVER)

93.9 57.8 70.4

MAINLY INDUSTRIAL IMPORTS 87.5 53.3 64.5


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India's Balance of Payments (US $ Million)

ITEM 2005-06 2005-06 2006-07APRIL- MAR APRIL-DECEMBER

PARTIALLY REVISED PRELIMINARY

EXPORTS 105152 74573 91334

IMPORTS 156993 114662 143636

TRADE BALANCE -51841 -40089 -52302

INVISIBLE RECEIPTS 92294 63594 82633INVISIBLE PAYMENTS 49639 35447 42152

INVISIBLES, NET 42655 28147 40481

CURRENT ACCOUNT -9186 -11942 -11821

CAPITAL ACCOUNT (NET) 24238 13773 27972

FOREIGN DIRECT INVESTMENT 4730 3347 5822

PORTFOLIO INVESTMENT 12494 8161 5170

External COMMERCIAL

BORROWINGS

2723 -1211 9104


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Foreign Exchange Reserves of India March 2006to April 2007 (US $ Million)

120,000

130,000140,000

150,000

160,000

170,000180,000

190,000

200,000

210,000

Mar

-10

Apr-1

0

May

-10

Jun-

10

Jul-1

0

Aug-

10

Sep-

10

Oct-1

0

Nov-

10

Dec-

10

Jan-

11

Feb-

11

Mar

-11

Apr-1

1

US$million


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International Investment Position of India (US BILLION)

PERIOD MAR 05 MAR 06 JUNE 06 SEPT 06

PREVIOUSLY REVISED

PRELIM.A. ASSETS---$ Billion

% of GDP168.2(23.5)

183.5(22.9)

191.8 199.9

1.DIRECT INVESTMENT 10.0 13.0 13.6 14.4

2.POTFOLIO INVESTMENT 0.8 1.3 1.1 1.2

2.1 EQUITY SECURITIES 0.4 0.7 0.5 0.5

2.2 DEBT SECURITIES 0.4 0.6 0.6 0.7

3.OTHER INVESTMENTS 15.9 17.6 14.2 18.9

3.1 TRADE CREDITS 2.2 0.4 0.3 2.83.2 LOANS 1.9 2.6 1.6 2.3

3.3 CURRENCY& DEPOSITS 8.4 3.5 3.5 3.6

3.4 OTHER ASSETS 3.4 3.5 3.5 3.6

4. RESERVE ASSETS 141.5 151.6 162.9 165.3


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PERIOD MAR05

MAR06 JUNE 06 SEPT06

REVIOUSLY REVISED PRELIM

B. LIABILITIES 210.0(29.4)

231.3(28.9)

238.3 245.8

1.DIRECT INVESTMENT 44.0 50.7 51.5 54.9

2.PORTFOLIO INVESTMENT (6.2) 55.7 (6.3) 64.6 64.8 67.4

2.1 EQUITY SECURITIES (7.8) 43.2 (8.1)

54.

7 52.

5 54.8

2.2 DEBT SECURITIES 12.5 9.9 12.4 12.6

3.OTHER INVESTMENTS 110.3 116.0 122.0 123.5

3.1 TRADE CREDITS (15.4)9.6 (14.5)10.5 10.9 12.4

3.2 LOANS 65.7 68.2 70.7 72.2

3.3 CURRENCY& DEPOSITS 33.6 36.2 39.2 37.6

3.4 OTHER LIABILITIES 1.4 1.1 1.2 1.4

C. NET POSITION (A-B) -41.8 -47.8 -46.4 -45.4

(-5.9) (-6.0)


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The Inflation Worry

Recently (March 2007

), the inflation has gone up to about7%

which isabove the government and publics comfort level of under 5%. This hastriggered central bank action , raising interest rates on banks short termborrowing from RBI by 1% and the cash reserve ratio (CRR) from 5.5%to 6.5%.

This has created a squeeze on credit growth and raised lending rates byabout 2% to 3%.

However, interest rates are likely to have peaked and may begin to comedown.

Government finances are in good shape thanks to robust revenue growthand revenue deficit has declined from 4% in 2002-03 to 1.5% in 2006-07 while fiscal deficit has declined from 6.7% to 3.5% over same period

The inflation seems to be largely due to excessive demand which should

cool down once additional capacity is put in place.


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Annualised Growth Rate of Bank Credit

2

3

4

6 6

6

6 6 6

6

6 6

62 6 2 5 6


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Business Confidence in Indias Economy

1. Survey of Business confidence in Indian Economyshow a very marginal decline (about 2%) but remainsstrong.

2. Real GDP Growth for Indian Economy for 2007-2008is likely to be about 8.0 to 8.5 vs. 9.2% for 2006-07

3. Firms profit growth remain strong but could beaffected to some extent over the next year due tointerest rate increases.


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NET RESPONSEON A QUARTER AHEADEXPECTATIONS

PARAMETER RESPONSE OCT-DEC06

JAN-MAR07

APR-JUN07

1. OVERALL BUSINESS

SITUATION

BETTER 51.8 53.7 51.7

2. FINANCIALSITUATION

BETTER 41.9 44.5 43.8

3.WORK.CAPITALREQUIREMNT

INCREASE 35.4 36.2 35.3

4.AVAILIBILITY OFFINANCE

IMPROVE 33.04 36.2 35.2

5.PRODUCTION INCREASE 49.7 50.7 47.8

6.ORDER BOOKS INCREASE 46.3 47.3 45.7

7.PENDING ORDERS BELOWNORMAL

-2.1 -2.7 -2.2

8.COST OF RAW MAT. DECREASE -49.2 -41.7 -42.1

9.INVENTORY RAWMAT.

BELOWAVG.

-6.1 -7.1 -7.3


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TABLE CONTINUED

10.INVENTORY FINISHED GOODS BELOW AVG. -4.9 -5.2 -4.4

11. CAPACITYUTILISATION INCREASE 33.2

33.3 29.412. LEVEL OF CAP.UTILISATION ABOVE.

NORMAL10.9 12.8 11.5

13.PROD. CAPACITY (ASSESMENT) MORE THANADEQUATE

5.1 4.8 4.0

14.EMPLOYMENT IN COMPANY INCREASE 17.9 18.1 18.3

15.EXPORTS,IF APPLICABLE INCREASE 34.2 32.6 33.4

16.IMPORTS,IF ANY INCREASE 23.4 20.8 21.6

17.SELLING PRICES EXPECTED INCREASE 16.8 14.2 15.5

18.IF INCREASE EXPECTED INSELLING PRICES

INCREASE 14.5 10.5 12.1

19. PROFIT MATGIN INCREASE 9.2 11.6 9.9


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The Promising Sectors

1. Indias firms are on a investing spree due to highdemand and capital goods purchases are likely to behigh though the interest rate hikes may dampen it

2. IT sector should continue its steady performance fornext few years.

3. Large Infrastructure investments will be made inIndia over next ten years.

4. Telecom to continue rapid growth for next 2-3 yearsand then could slow down

5. Electricity generation capacity likely to double in next

5 years or so due to large shortages and rapidlyincreasing demand.


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IT and Software export

8 3

inUS$m

illion

T f w x


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h b b ( )

99 99 999 3


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Per Capita Electricity consumption (KWh)

00

0

400

4 0

00

199 1998 1999 000 001 00 00 004 00

C (KW )


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Possible Future Government Actions

Manufacturing, especially textiles, which is seen to havea huge employment potential could see govt. Action.Already the SEZs have been approved

CRR or interest rate increases could see some role back

as they are affecting constru

ction and capital goods

Petrochemicals industry, currently having administeredpricing, could be deregulated and opened tocompetition.

Organized Retail growing rapidly. FDI, could bepermitted


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Conclusion

Indian Economic fundamentals remain robust. Firms areinvesting at record rates and the growth of companyprofits remains robust.

Given the increase in interest rates due to risinginflation,the economic growth could slow down by about

1% but will still remain above 8% for next year.

Interest rates have peaked and are likely to slowlydecline over next year.

Thus the effect of interest rate increases should runitself out in 6 months to a year.

Documents

6 Unit 4 Economic Policy