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EconomyWatchAugust 2011Industry’s Voice or Policy Change

Economic Aairs and Research Division

FICCIDr. Soumya Kanti Ghosh: [email protected]

Anshuman Khanna: [email protected]

(with inputs rom Anna Mathew, Debashish Pal, Rajsekhar Bhattacharyya & Sakshi Arora)



FICCI Economy Watch, August 2011 2

HIGHLIGHTS

World economy in a tailspin ollowing Standard & Poor (S&P)

downgrading US Economy’s Long-Term Sovereign Credit Rating to AA+

rom AAA with a negative outlook (Page 3)

US recovery post 2008 on a slow path: Debt overhang in Europe

continues unabated (Page 3-4)

Why the RBI should cut rates in September monetary policy meeting

(Page 4)

Relationship between US & India GDP growth (Page 5-6)

A quick orecast o drivers / leading indicators o India’s external demand

and domestic demand portends slowdown going ahead (Page 6)

FICCI Business Condence Index at the lowest level in the last 2 years:

strong correlation with leading GDP growth (Page 8)

Government likely to breach the scal decit target or FY12: FICCI scal

decit projections (Page 9)

DEPB & Indian expor ts: the likely impact post Sep 2011 (Page 10)

Corporate margins take a hit (Page 14)




THE INDIAN ECONOMY –MACROVIEW

THEME WATCH – HEADINGFOR A SLOWDOWN?

The global nancial crisis just doesn’t seem to end. Ater a prolonged haggling

over the US debt crisis, the US House o Representative reached a consensus

on August 2nd to raise US debt ceiling and reduce government spending or

the decade ending 2021. This averted the possibility o a remarkable August

precipice, but triggered another. Global rating agency Standard & Poor (S&P)

on August 5, 2011 downgraded US Economy’s Long-Term Sovereign Credit

Rating to AA+ rom AAA with a negative outlook. According to S&P, thisrating action was primarily driven by the perception that (a) the agreed debt

ceiling plan envisaging $2.1 trillion spending cuts or the decade ending 2021

alls short o the S&P expectations ($4 trillion spending cuts to rearm US

rating at AAA) and (b) recent data revisions o US GDP growth supports

the contention that the economic recovery since 2008 has been more

muted, contrary to earlier perceptions o a robust recovery.

FICCI believes that there is no denying o the act that US scal position

remains a cause or concern. FICCI estimates show the US budget decit

currently running at over 9% o GDP, the third largest since Second World

War. As Table 1 show, decit reduction proposals by independent researchers

(Simpson & Bowles, Domenici-Rivlin) reveal that decit reduction plan in

terms o a sustainable debt trajectory is tantamount to US debt at / below

60% o GDP on or beyond 2021. Against this, cateris paribus, US debt will

touch 87% o GDP by 2021, and signicantly, 101% o GDP by 2021 under

a stressed scenario, as envisaged by S&P.

Table 1: The anatomy o US decit reduction proposals

CBO Simpson-Bowles

Domenici-Rivlin

S&P

Debt as a %GDP

87% by 2020 60% by 2024Below 60% by

2020

101% o GDP BY

2021

Data released by the US do support the contention that the US economic

recovery since 2008 has been sot and is taking longer than anticipated. It

now turns out that US GDP growth rate in the rst 2 quarters o 2011 was

still below the levels at the end o 2007. Real

Source: Congressional Budget

Estimates (CBO), Economist &

FICCI Research




GDP grew by an anemic 1.3% QoQ (annualised) during 2011:Q2 as per

advance estimate. The annual GDP growth rates or 2008 & 2009 were also

signicantly revised downwards. Additionally, on Aug 9, 2011 Fed emphasized

its accommodative stance o keeping the interest rates unchanged at

exceptionally low levels (0-0.25%) at least through mid-2013. Clearly,

headwinds like weakness in the nancial and housing sector, sovereign deaultconcerns, fattening o consumer spending and deleveraging issues are likely

to be the major concerns going into 2012 and even beyond.

Table 2: Revision in US GDP growth rates: real lowdown

Year Previous estimates Latest estimates

2008 0.0 -0.3

2009 -2.6 -3.5

2010 3.0 2.9

2010:Q4 3.1 2.3

2011:Q1 1.9 0.42011:Q2 1.8 1.3

Meanwhile, the Europe debt saga that started in Greece enguled Portugal

and Ireland later shows no signs o abating. FICCI believes that the debt

problem with the European countries is perhaps a chronic one with even

countries enjoying an AAA rating running up progressively unsustainable

debt levels since the 1990’s (in complete contravention to the Maastricht

treaty o 1992 that prohibits public debt in excess o 60% o GDP and budget

decit in excess o 3% o GDP). The debt saga has been urther accentuated

with country-specic problems like the weakening banking systems in Spain

& Ireland, reluctance to increase the lending capacity o European Financial

Stability Facility (EFSF) etc.

The problem may have been urther compounded by the aggressive

monetary policy tightening by European Central Bank (ECB) in 2011 (raising

rates by 1% at the beginning o April to 1.5% in Jul’11). The rate increase by

ECB was perhaps unjustied, as it is an open secret that countries in Europeare now undertaking erce scal austerity programmes. The rate increase is

likely to adversely impact mortgage rates in bailed-out countries. The ECB

action looks even more untenable given the recent news o German &

French economies showing almost zero growth during Q2 o 2011.

Source: FICCI Research &

www.bea.gov

FOCUS: THE DEBT OVERHANG IN EUROPE

India rated at BBB- is below Ireland

India’s Foreign Currency Long-Term Sovereign Credit Rating by S&P is at “BBB–“with a stable outlook (S&P: April 6, 2011). There are2 aspects to this rating. First, India’s rating is surprisingly, equivalent to Portugal at BBB- & even lower than that o Ireland at BBB+.Second, India’s public debt to GDP is at 37% (budget documents-FY12), whereas the public debt o Ireland & Portugal is more than

90% o GDP (reer Table3)




Table 3: Strange methodology o Rating Agencies

CountriesPublic debt as

a % GDP

Sovereign Rating

(S&P)

Portugal 93 BBB-

Greece 143 CC

Ireland 96 BBB+

France 82 AAA

Germany 83 AAA

Austria 72 AAA

Netherlands 63 AAA

Finland 48 AAA

Spain 60 AA

Italy 119 A+

Memoranda

India 37 BBB-

The RBI has tightened monetary policy 11 times since February 2010 (repo

rate increased rom 4.75% to 8% by July 2011) to contain infation.This

relentless hike in interest rates has resulted in sharp slowdown in industrial

growth (industrial growth at 6.8% during Apr-Jun’2011 vis-à-vis 9.6% in the

like period previous year), slowdown in investment intentions with growth in

private gross capital ormation declining to less than 1% in the rst quarter

o this scal. However, the trend o declining commodity prices (excluding

metals like gold and silver) since the US rating downgrade now augurs well

or a RBI rate cut. The Reuters-Jeeries CRB commodities index has declined

rom a peak o 370 in mid-April to 336 as on Aug’23’11. The EconomistCommodity Price Index has declined by 4.5% in the last 1 month (Aug9’11

index at 202.5). WTI & Brent crude prices have also declined close to $10/

barrel over the last month ending on Aug 23’11 (source: www.oil-price.

net) Clearly, there are unmistakable signs o a gradual decline in commodity

prices. In act, in the past, RBI had resorted to aggressive rate cuts (repo

rates were reduced rom a high o 9% to 4.75% during the short period

o 4 months ater the Lehman collapse) to pump prime the economy.

Interestingly, as we have stated earlier, the RBI may take cue rom examples

where central bank had increased rates, but only to retract later in the ace

o uncertain global environment (most recently, ECB) A cut in interest rates

at this juncture would also boost corporate India’s condence (including theexporters) which has taken a hit as refected in recent rounds o FICCI’s

Business Condence Sur vey.

It is worth noting that there is a correlation between the GDP growth rates

o India and the US even though there is a lag eect (reer Exposition 1: same

period correlation coecient between India & US GDP growth at 0.72) This

in turn implies that any growth or degrowth in the US has a possible impact

on India’s ortunes. Given that, the US economy has expanded by a bare

0.4% and 1.3% during 2011:Q1 and 2011:Q2 respectively, there is every

possibility that the growth rates o India Inc may be impacted during Q3 &

Q4 o current scal.

Source: Eurostat & FICCI Research

FOCUS: WHY THE RBI SHOULD CUT RATES?

FOCUS: US & INDIA GDP GROWTH CORRELATION




An interesting trend observation rom the exposition shows that or India,

there is a slowdown in GDP growth rates during quar ter 3 / quar ter 4. This

is corroborated by the low GDP growth rates during quarter 3 o FY09,

quarter 4 o FY10 and quarter 4 o FY11. Going by this trend or the current

scal Q3 & Q4 may possibly witness a urther slowdown in GDP growth

rate. The duration o this slowdown may vary and may be as much as our successive quarters (as per historical trends).

Exposition 1: India mirrors US GDP growth rates: with a lag

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

-9.0

-7.0

-5.0

-3.0

-1.0

1.0

3.0

5.0

7.0

9.0

2

0 0 7 : Q 1

2

0 0 7 : Q 2

2

0 0 7 : Q 3

2

0 0 7 : Q 4

2

0 0 8 : Q 1

2

0 0 8 : Q 2

2

0 0 8 : Q 3

2

0 0 8 : Q 4

2

0 0 9 : Q 1

2

0 0 9 : Q 2

2

0 0 9 : Q 3

2

0 0 9 : Q 4

2

0 1 0 : Q 1

2

0 1 0 : Q 2

2

0 1 0 : Q 3

2

0 1 0 : Q 4

2

0 1 1 : Q 1

2

0 1 1 : Q 2

US India

To corroborate the possibility o a slowdown, FICCI did a quick orecasting

o select growth drivers / leading indicators o India’s external demand and

domestic demand For external demand, we looked at the $ value o exports,

whereas or internal demand, we looked at cellular connections, cementdespatches and passenger car sales.

As Exposition 2 shows, a simple multiplicative Holt Winter (H&M) method

o orecasting external demand / exports indicates a possible export

slowdown in August. However, more strikingly, export data o Mar’11 & May-

Jul’11 reveal that these are data outliers (we dene a data to be an outlier

i it is more than 2 standard deviations rom the mean). It could be that the

huge surge in export demand in current scal may be an aberration and

break rom the past (also see section on External Sector).

Exposition 2: Export growth slowing down?

0

5000

10000

15000

20000

25000

30000

0

5000

10000

15000

20000

25000

30000

35000

A p r - 0 7

J u l - 0 7

O c t - 0 7

J a n - 0 8

A p r - 0 8

J u l - 0 8

O c t - 0 8

J a n - 0 9

A p r - 0 9

J u l - 0 9

O c t - 0 9

J a n - 1 0

A p r - 1 0

J u l - 1 0

O c t - 1 0

J a n - 1 1

A p r - 1 1

J u l - 1 1

Actual Exports Projected Exports

Source: CSO, www.bea.gov

(India data is on secondary axis)

FOCUS: INDIA HEADING FOR A SLOWDOWN?

Source: FICCI research (projected

exports are on secondary axis)

Note: Exports are projected through

a multiplicative H&M method




As ar as domestic demand is concerned, we analyzed a host o indicators

like cellular subscribers, cement dispatches and passenger car sales (reer

Expositions 3 till 5). The results indicate a clear slowdown/fattening o

domestic demand indicators (or example cellular connections, cement

despatches & passenger car sales). We also analyzed the impact o the

successive rate hikes on consumer demand to test or the hypothesis o whether the monetary policy transmission was complete. The results

revealed that passenger car sales are impacted through rate hikes (increase

in PLR rates & repo rates taken as a proxy) albeit with a lag o 2-3 months.

Exposition 3: Cellular connections fattening?

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

1000

2000

3000

4000

5000

6000

7000

8000

9000

A p r - 0 7

J u l - 0 7

O c t - 0 7

J a n - 0 8

A p r - 0 8

J u l - 0 8

O c t - 0 8

J a n - 0 9

A p r - 0 9

J u l - 0 9

O c t - 0 9

J a n - 1 0

A p r - 1 0

J u l - 1 0

O c t - 1 0

J a n - 1 1

A p r - 1 1

J u l - 1 1

Actual Cellular Subscribers Projected Cellular Subscribers

Exposition 4: Cement despatches declining

0

50

100

150

200

250

0

50

100

150

200

250

A p r - 0 7

J u l - 0 7

O c t - 0 7

J a n - 0 8

A p r - 0 8

J u l - 0 8

O c t - 0 8

J a n - 0 9

A p r - 0 9

J u l - 0 9

O c t - 0 9

J a n - 1 0

A p r - 1 0

J u l - 1 0

O c t - 1 0

J a n - 1 1

A p r - 1 1

J u l - 1 1

All India cement despatches Projected cement despatches

Exposition 5: Dip in passenger car sales

50000

100000

150000

200000

250000

300000

50000

100000

150000

200000

250000

300000

A p r - 0 7

A u g - 0 7

D e c - 0 7

A p r - 0 8

A u g - 0 8

D e c - 0 8

A p r - 0 9

A u g - 0 9

D e c - 0 9

A p r - 1 0

A u g - 1 0

D e c - 1 0

A p r - 1 1

A u g - 1 1

Actual car sales Projected car sales


cellular connections in lakhs are

on secondary axis) Note: cellular

connections projected through a

double exponential

smoothening model


cement despatches is on secondary

axis) Note: cement despatches

projected through multiplicative

H&M method


car sales is on secondary axis)

Note: car sales projected through amultiplicative H&M




FICCI’s Business Condence Index (BCI) is at its lowest level since Q3 o

2009. Based on FICCI’s BCI, we derived a FICCI Resilience Index (the sum

o all net positive responses during any survey).This index is a strong leading

indicator o GDP growth .The correlation with one period lag is 0.52 whichis robust. On the basis o FICCI’s Resilience Index, a urther slowdown is

expected.

Exposition 6: FICCI Resilience Index*

0

2

4

6

8

10

12

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

Q1 F Y 0 5

Q 3 F Y 0 5

Q1 F Y 0 6

Q 3 F Y 0 6

Q1 F Y 0 7

Q 3 F Y 0 7

Q1 F Y 0 8

Q 3 F Y 0 8

Q1 F Y 0 9

Q 3 F Y 0 9

Q1 F Y 1 0

Q 3 F Y 1 0

Q1 F Y 1 1

Q 3 F Y 1 1

Q1 F Y 1 2

FICCI GDP optimism index Leading quarterly GDP growth

m o r e

o p t i m i s t i c

m o r e p e s s i m i s t i c

Correlation coefficient :0.52

It’s now ocial. Prime Minister’s Economic Advisory Council (PMEAC) has

signicantly revised down growth orecast or the current scal to 8.2% romits earlier orecast o 9% (Feb’11).However, FICCI’s latest Economic Outlook

Survey (EOS) orecast growth or current scal at 7.9%.

Table 4: The crux o the GDP growth

2011-12 projections

PMEAC FICCI EOS

July

2010

Feb

2011

July

2011 July 2011

GDP 9.0 9.0 8.2 7.9

Agriculture & Allied Activities 4.0 3.0 3.0 3.8Industry 10.3 9.2 7.1 7.3

Mining & Quarrying 8.0 7.5 6.0 -

Manuacturing 10.5 9.0 7.0 -

Electricity, Gas & WaterSupply

9.0 7.0 7.0 -

Construction 11.0 10.5 7.5 -

Service 9.6 10.3 10.0 9.4

Trade, Hotels, Transport,Storage & Communication

10.0 11.0 10.8 -

Finance, Insurance, Realestate & Business services

10.5 10.5 9.8 -

Community & PersonalServices

7.5 8.8 8.5 -

FOCUS: FICCI RESILIENCE INDEX*

Source: FICCI Research

Note: *FICCI Resilience Index is

derived rom the FICCI Business

Confdence Survey by looking at the

net positive responses.

OUTPUT AND PRICES

Source: PMEAC Economic Outlook

11/12, FICCI EOS.




FICCI notes with concern the sharp downward revision in projected

growth rate in agriculture during FY12 to 3% (6.6% in FY-2011), a our year

low. In act, the prognosis on agricultural growth is worrisome with Indian

Meteorological Department (IMD) orecast that India will receive a ‘below

normal’ monsoon during August- September. There is also concern about

infation as PMEAC believes that headline WPI will remain elevated till Nov’11 at 9% or even higher and will soten only rom Dec’ 11 onwards.

Meanwhile, the annual point-to-point infation rate (provisional) in the rst

4 months o FY12 was 9.2% (vis-à-vis 9.98% during the like period in the

previous year) as per the latest data released by Oce o Economic Advisor

(EA). Given the wide divergence between provisional and nal rates, it is

likely that the infation rate is only a shade below 10% now.

Table 5: Infation rates sticky?

FY12 FY11

Jul’11 Month YTD Year Year

All Commodities 0.7 3.0 9.2 10.0

Primary Articles 0.2 5.2 11.3 19.1

Food Articles 1.4 7.7 8.2 18.5

Fuel & Power 2.5 5.1 12.0 13.3

Manuactured 0.3 1.5 7.5 5.8

The growth in money supply remains somewhat more than the targetedlevel or FY12. The latest data available as on July 15, 2011 indicates a growth

o 16.7% in Broad Money (M3). This is higher than the targeted level o

15.5% or the year 2011-12. It may also be noted that the money supply

growth target or the year FY12 was revised down rom 16% set in the May

3, 2011 policy statement to 15.5% in the recently announced monetary

policy review (July 26th, 2011).

Table 6: Growth in monetary indicators and RBI target

As on Jul15’11RBI target :

Jul 15’11

RBI target

May3’11FY11

YTD Year Year

M3 3.9 16.7 15.5 16.0 15.9

Credit* 1.6 18.7 18.0 19.0 21.2

Deposits 4.0 17.9 17.0 17.0 15.4

Source: Ofce o Economic Advisor,

Note: YTD Implies year till date

(as o July’11)

MONEY & BANKING

Source: RBI &FICCI Research

Note:*non-ood component




The state o Government nances continues to be in a state o bother with

the scal decit in the rst quarter constituting over 39% o the budgeted

scal decit. Total revenue collections during the same period were at ameasly 11.7% (vis-à-vis 27.8% previous year) o the budget estimates.

Expenditure pie was at 20.8% o budget, a tad lower than 21.8% last year.

Table 7: Fiscal indicators worrisome

Fiscal IndicatorsFY12:Q1

(Rs bn)

FY12-

Budget

FY12Q1FY11:Q1

% to Budget

Receipts 986 8449 11.7 27.8

Expenditure 2612 12577 20.8 21.8

Fiscal Decit 1626 4128 39.4 10.5

Rev. Decit 1346 3072 43.8 3.8

Primary Decit 1125 1448 77.0 0.0

There is now an increasing apprehension o Govt. breaching the scal decit

target o 4.6% or the year FY12.

FICCI believes that there are two aspects o the slippage o scal decit or

the current scal.

➲ First, is the likely slippage in absolute level o scal decit, given the

shortall in revenue and capital receipts. Budgeted tax collections or

FY12 at 18% is based on the premise o a 9% GDP growth and 5%

infation rate. With the ocial GDP projection now at 8.2%, and the

13% trend growth in tax collections during the most recent period (5

year period ended Mar’11) budgeted revenue receipts are unlikely to

be achieved (juxtapose this with reduced revenue receipts because o

recent reduction in customs & excise duties on crude & petroleum

products). Add to this, budgeted disinvestment receipts or FY12 at Rs

400 bn to be an ambitious target given the current state o stock market

(markets have declined by 17% in the current scal) In act, even during

FY10 when Sensex return was more than 50%, disinvestment collections

were at best Rs 245 bn.

➲ Second, even as the absolute level o scal decit is set to jump, the

Govt. may still be a beneactor o a higher level o nominal GDP, cour tesy

higher infation. This in turn will have a sobering impact on scal decit as

a % o GDP in FY12. Remember, in the last scal, the revised scal decitwas surprisingly at 5.1% (vis-à-vis budgeted 5.5%), thanks in part to an

upwardly revised nominal GDP.

PUBLIC FINANCE

Source: CAG

FOCUS: FISCAL DEFICIT TARGET FOR FY12 GOING AWRY?




Against this background, FICCI re-estimated scal decit by constructing 3

scenarios with the assumptions that:

➲ The government will be able to stick to its estimated expenditure growth

target o 3.4%, in FY12 which is the best case scenario

➲ The slippage o target will be only on the revenue and capital receiptside. (assuming status quo on expenditure side). In particular, the revenue

slippage is based on Govt’s own estimates o a monthly revenue loss

o Rs 1600 crore because o customs duty cut on June 24’11. The

revised disinvestment receipts are pegged at Rs 200 bn, based on trend

estimates.

➲ The nominal GDP will be higher than the targeted 14% with a much

higher than average infation rate o 5%.

Based on these scenarios, our analysis suggests that the scal decit during

FY12 could be around Rs. 4598 bn against the budget estimate o Rs. 4128

bn. Accordingly, scal decit ratio could be anywhere between 5.04% and

5.12%, against the budget estimate o 4.6% or FY12.

However, a word o caution on the expenditure side. FICCI eels containing

expenditure growth at 3.4% or FY’12 will be dicult given that trend

estimates reveal expenditure growth at 20% or the 5 year period ended

Mar’11. The lurking ear o expenditure overrun gets more real considering

among others, the case o oil subsidies. Oil subsidies are pegged at only Rs

240 bn in FY’12, even as average crude prices were $113/bbl or India’s

import basket during Apr-June’11.In contrast, during FY11, based on an

average crude price at $ 84/bbl, the oil subsidy bill was at a much higher Rs

384 bn.

Table 8: FICCI scal decit projections

Scenarios1 / Least

Likely2 / Less Likely 3 / More likely

Nominal GDP growth 14% 15.2% 15.9%

Fiscal decit as a % GDP5.12% 5.07% 5.04%

FICCI FISCAL DEFICIT SCENARIOS

Scenario 1 / Least likely: Budgeted nominal GDP growth rate at 14% & slippage in total receipts (revenue & capital)

Scenario 2 / Less likely Nominal GDP growth at 15.2% (assuming real GDP to be 8.2% as per PMEAC projection and the averageinfation at 7% as the RBI expects) & slippage in total receipts (revenue & capital)

Scenario 3 / More likely: Nominal GDP to be 15.9% (assuming real GDP to be 7.9 % as per FICCI’s Survey and the average infationto be 8% considering the current infation trend) & slippage in total receipts (revenue & capital)

Source: FICCI Research. Note:Receipts slippage o Rs 470 bn

actored in.




Index o Industrial Production (IIP) data or June 2011 notched up a smart

8.8% growth rate -the second highest in the last 10 months. The good thing

about the IIP growth rate or the rst 3 months o the current scal is

the minor revisions in IIP data or the months prior to June 2011. FICCIanalysis shows that, IIP growth based on the assumption o unchanged IIP

numbers (no revision in past IIP data) or months prior to June 2011 are

nearly identical with the IIP growth based on the assumption o revised IIP

numbers (revision in past IIP data).

Table 9: IIP Growth –Apr-Jun’11

Mining Manuacturing Electricity General

IIP growth – unchanged

numbers or monthsprior to June 2011

1.08% 7.32% 8.24% 6.69%

IIP growth-revisednumbers or monthsprior to June 2011

1.06% 7.47% 8.24% 6.8%

However, the bad thing is the continued month-on-month volatility in crucial

sectors like capital goods (or example, 37.7% in June’11 against 6.1% in

May’11).

At the use-based level, while investment demand (capital goods growth at

16.9% during Apr-Jun’2011 vis-à-vis 17.2% in the same period in the previous

year) growth was marginally lower, consumer demand (consumer durables

goods growth at 3.3% during Apr-Jun’2011 vis-à-vis 19.7% in the like period

previous year) was down signicantly. Clearly, there are signs o a downturn

in consumer demand as a result o a higher interest rate regime.

FICCI believes that investor sentiments are likely to remain depressed going

orward. Our analysis rom CMIE data shows that there has been a signicant

increase in the projects under implementation stalled to number o new

projects or the quarter ending June 2011 underlining the weak investment

sentiments.

Table 10: Projects Under Implementation Stalled / New Projects

Quarter ended New projectsImplementation stalled /

new projects

Jun’09 664 39%

Jun’10 1203 28%

Jun’11 877 47%

INDUSTRY

Source: FICCI Research

Source: CMIE & FICCI Research




Believe it or not, one thing in common between the US & India is the spate

o recent data revisions. Interestingly, all these data revisions now vehemently

support the contention that the economic recovery since 2008 (India

included) has been slower than ear lier anticipated. For example, the IIP datarecently released by the CSO with a new base year at 2004-05 shows a

lower growth as compared with 1993-94 base post FY2009.

Table 11: Revision in IIP growth rates

YearPrevious estimates / (1993-94

base)

Latest estimates /

(2004-05 base)

2008-09 3.2 2.5

2009-10 10.5 5.3

2010-11 8.2 7.8

India’s exports continue to sustain growth momentum. During June 2011

merchandise exports were valued at $29.2billion substantially higher than

$19.9 billion during the same month in 2010.

An upsurge in imports has also been evident in last ew months. Jun’11 isno exception as imports amounted to $36.9 billion during this month as

compared to $25.9 billion recorded in Jun’10. Trade decit increased to $7.6

billion in Jun’11.

Meanwhile, as per the latest press release (Aug’ 11’2011) issued by Press

Inormation Bureau (PIB), Govt. o India, India’s expor ts logged in a staggering

81.8% growth during the month o Jul’2011. India’s impor ts, too, registered a

growth o 51.5 % during the month.

During the period Apr-Jul’2011 while India’s exports were valued at $108.3

billion (54% growth), imports reached a level o $151 billion (40% growth)

during the same period. This rate o export growth is unprecedented and

may be dicult to sustain specially in the context o an

uneven global recovery and recent down turn in US and Euro zone.

Contraction o demand rom the international markets is likely to withhold

India’s emerging story o export growth. However, on the upside, increasing

product diversication in India’s export basket and successul implementation

o India’s Foreign Trade Agreements (FTAs) and bilateral trade and investment

treaties with some major economies may continue to act as an enabling

actor or export growth.

FOCUS: IIP DATA REVISION

Source: CSO

EXTERNAL SECTOR






As per the latest data, FDI infows into India touched a new high o $5.65

billion during Jun’11 as against $1.38 billion in Jun’10. During the rst quarter

o current scal, FDI infows jumped by 133% to reach $13.4 billion rom

$5.8 billion observed during the same period in FY11.

The portolio investments declined to $789 million in Jun’11 rom $1.3 billionin Jun’10. During the rst quarter o FY12 portolio investments declined to

$2.7 billion rom $ 4.6 billion in FY11.

The recently released World Investment Report reveals that FDI infows into

India have progressively declined rom 2008 onwards. It may also be noted

that dip in FDI fows into India has taken place at a time when FDI fows

to emerging economies like Brazil, China, Russian Federation, Chile, Mexico,

Malaysia has registered an increase. Hopeully the data or the rst quarter

o this scal refects a reversal o this declining trend in FDI.

Table 14- FDI infows in select countries (in $ billions)

Country 2006 2007 2008 2009 2010

LATIN AMERICA

Argentina 5.5 6.5 9.7 4.0 6. 3

Brazil 18. 8 34. 6 45. 0 25. 9 48. 4

Chile 7. 3 12.5 15.2 12. 9 15. 1

Mexico 20.1 29. 7 26. 3 15. 3 18. 7

ASIA

China 72. 7 83. 5 108. 3 95. 0 105. 7

India 20. 3 25. 4 42. 5 35. 7 24. 6

Korea 4.9 2. 6 8. 4 7. 5 6. 9Malaysia 6. 1 8.6 7. 2 1.4 9.1

Thailand 9. 5 11. 4 8. 4 5.0 5. 8

OTHERS

RussianFederation

29. 7 55. 1 75.0 36. 5 41. 2

India’s oreign exchange reserves observed much acceleration during the last

scal. In May ‘10, the reserves stood at $273.5 billion and crossed the level o

$300 billion in Feb’11. In Jun’11, the gure urther rose to $316 billion. The

latest data available by RBI show oreign exchange reserves at $314.6 billion

on July 8, 2011.

India’s total external debt increased signicantly rom $261.0 billion in end

March 2010 to $ 305.9 billion in end March 2011. This increase in external

debt was mainly attributed to the rising share o ECBs and short term debt.

These two components together contributed around 68% o total increase

in India’s external debt during this period. The share o NRI deposit in India’s

external debt observed a declining trend in recent years.

India’s debt service ratio has been declining over time [2009-10 being an

exception when debt service increased on account o large ECB repayments]and stood at 4.2 % during FY11.

FOCUS: FDI INFLOWS INTO INDIA

Source-UNCTAD World

Investment Report 2011




Table 15- India’s External Debt (in $billion)

Mar’08 Mar’09 Mar’10 Mar’11

Long-term debt 178.7 181.2 208.7 240.9

% to total (79.6) (80.7) (80.0) (78.8)

Short-term debt 45.7 43.4 52.3 65.0

% to total (20.4) (19.3) (20.0) (21.2)

Total 224.4 224.5 261.0 305.9

The latest available data on corporate sector perormance reveals that during

the quarter ended Jun’11, many sectors saw a signicant downward pressure

on prot margins. Comparing prot margin gures or quarter ending Jun’11with Jun’10 across sectors, it is evident that sectors like banking services, coal

& lignite, crude oil & natural gas construction & real estate, health services, IT

services, and metal & metal products witnessed a squeeze in prot margins.

High interest cost and inputs prices took a toll on the protability o these

sectors during the quarter under review.

Interestingly, Indian companies rom sectors like ood & beverages, hotel &

tourism, machinery and textiles witnessed an improvement in their prot

margins during the quarter ended Jun’11 vis-à-vis perormance during the

same quar ter last year.

Table 16- Protability o Indian Corporates (in %)

Indicators PAT / Total income

Jun-11 Jun-10

Banking services 10.34 12.63

Chemicals 6.48 1.24

Coal & lignite 10.63 14.86Crude oil & natural gas 31.99 32.34

Fee based nancial services 5.2 18.8

Food & beverages 12.29 5.18

Health services 5.53 9.17

Hotels & tourism 14.11 6.35

Industrial & inrastructural construction 5.05 6.86

Inormation technology 18.07 19.1

Machinery 9.1 5.14

Metals & metal products 9.5 10.49

Real estate 14.74 26.26

Textiles 5.16 3.81

Source-RBI

CORPORATE PERFORMANCE

Note- PAT: Proft ater tax

Source: FICCI Research & CMIE




Table 17: Policy calendar

Sector Date Description

Financial

July 7’11 Drat Micronance bill put out or comments

July 25’11Pension bill to be passed in Parliamentary StandingCommittee

Aug5’11Lock-in-period in oreign portolio investments ininrastructure halved

Aug23’11Premature redemptions rom mutual unds to betaxed

Corporates

July28’11 Manuacturing pol icy passed by Ministry o Labour

Aug9’11Announcement o construction o New Delhi-Mumbai industrial corridor

Others

July8’11 Nuclear regulator bill to be tabled in Parliament

July12’11 Mines bill to seek cabinet nod

July12’11Empowered Group o Ministers approves NationalFood Security bill

July25’11 Setting up o Environment regulator

July28’11 Drat Land Acquisition policy nalized

Aug5’11 Ministry moves new aviation policy

POLICY CALENDAR

Documents

Ficci Report