Monthly Review of Indian Economy

April 2011

Monthly Review of Indian Economy April 20111 Executive Summary

GDP Growth Initial guidance provided by Ministry of Finance indicated a growth of 9 percent in 2011-12. However, recent developments, particularly the loss of momentum in industrial growth, show that this could be a difficult target to achieve. Continued tightening of monetary policy and further escalation in global oil prices are the key downside risks to growth in 2011-12. Given the evolving situation, we expect GDP growth in 2011-12 to be in the range of 8 to 8.5 percent. Industrial Production Weakness in industrial production trend continues with IIP registering a growth of 7.8 percent during April-February 2010-11 as against a growth of 10.0 percent seen during April-February 200910. Performance of the mining and manufacturing sectors has been particularly weak. Our forecasts show that growth in IIP is likely to weaken further from 3.6 percent in February 2011 to 1.4 percent in March 2011.
Trends in IIP, WPI (YoY in Percent) and Monetary Policy Rates
20.0 15.0 10.0 5.0 0.0 -5.0 Jan'09 Feb'09 Mar'09 Apr'09 May'09 Jun'09 Jul'09 Aug'09 Sep'09 Oct'09 Nov'09 Dec'09 Jan'10 Feb'10 Mar'10 April'10 May'10 June'10 July'10 Aug'10 Sep'10 Oct'10 Nov'10 Dec'10 Jan'11 Feb'11 Mar'11 8 7 6 5 4 3 2 1 0

IIP WPI Repo Reverse Repo

Amongst use based industrial groups, capital goods sector again showed negative growth of 18.4 percent in February 2011. This comes on the back of similar performance in December 2010 (-9.3 percent) and January 2011 (-18.8 percent). If the present trend continues, then in March 2011 capital goods sector would see another dip in growth to the extent of 15 percent. Consumer goods segment however has seen improvement in growth, which is being driven by consumer durables segment. Improving consumer sentiment, strengthening employment scenario and increasing disposable incomes have contributed towards growth of consumption. Core Sector The sector recorded an overall growth of 5.7 percent during April-February 2010-11. This is better than 5.4 percent growth seen in April-February 2009-10. Growth has been powered by sectors like crude oil, steel and power. However, performance of the coal sector is a reason for worry.

This report has been prepared by the Economic Affairs and Research Division, FICCI 2|P a g e

Inflation Headline inflation in March 2011 increased to 8.98 percent from 8.31 percent in February 2011. The reading for January 2011 has also been revised upwards to 9.35 percent. Both core inflation and non-food manufactured products inflation are seeing an upward trend and gap between these and headline index is narrowing. These trends are indicative of generalization of inflation with inflationary pressures spreading from primary products to manufactured goods.
Headline, Core and Non-Food Manufactured Products Inflation, YoY in Percent

12.00 11.00 10.00 9.00 8.00 7.00 6.00 5.00 4.00 Apr-10 May-10 Jun-10 Aug-10 Sep-10 Nov-10 Dec-10 Feb-11 Mar-11 Oct-10 Jul-10 Jan-11

Headline Inflation Non-Food Manufactured Products Inflation Core Inflation

With its eye on headline inflation and core inflation, RBI is likely to continue with its tight monetary policy stance. Such a move however is not warranted as core (final goods) inflation as represented by CPI-IW without food and fuel components has come off its peak. Month on month growth in deseasonalised series of core CPI-IW is showing a downward trend reflecting moderation in retail prices. RBIs policy since March 2010 seems to be having some impact on the demand side and it should therefore put a break on further monetary tightening. Foreign Trade Data for the full year 2010-11 shows that exports grew by 37.5 percent [fastest growth since independence] and totaled US$ 246 billion. Imports also showed an increase of 21.2 percent and totaled US$ 350 billion. Strong export growth performance over the last five months has helped bring the trade deficit down to more manageable levels. In 2010-11, Indias trade deficit was of the order of US$ 104 billion. Apprehensions with regard to widening current account deficit have also been allayed. Commerce and Industry Ministry is now confident that the export target of US$ 450 billion by 201314 will be met. The final strategy paper for boosting Indias exports is expected to be out soon. Foreign Investments During the period April-February 2010-11, FDI flows into India totaled US$ 25.9 billion. Admittedly, FDI flows in 2010-11 have seen a slowdown from the previous year. Earlier in the year RBI had drawn attention to environment sensitive policies being pursued with regard to the mining sector, integrated township projects etc. which appear to have affected investors sentiments. Governments efforts to further liberalize the FDI policy continue. While announcing the third edition of the consolidated FDI policy, government proposed major changes related to pricing of convertible instruments, inclusion of fresh items for issue of shares against non-cash considerations
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and removal of the condition of prior approval in case of existing joint ventures / technical collaborations in the same field [Press Note 1]. Portfolio flows have seen a reversal in recent months. FIIs are getting increasingly wary about the impact of inflation on the India growth story. Forex Reserves In April 2010, Indias forex reserves totaled US$ 279.6 billion. By April 15, 2011, this figure had increased to US$ 308 billion. The Chief Economic Advisor, Dr. Kaushik Basu, has brought attention back on the issue of setting up a Sovereign Wealth Fund. Speaking at a recent seminar, Dr. Basu mentioned that it is time that India needs to seriously look at the issue of whether to set up a SWF. Money and Banking Up to March 25, 2011, M3 registered a growth of 16 percent as compared to a growth of 16.8 percent during the corresponding period of the previous year. With a nominal GDP growth of around 18 percent, this growth in M3 is relatively weak. In the previous four years, when nominal GDP growth was of the order of 15 to 16 percent, M3 growth was much higher around 20 percent. Data on credit flows shows that during April-March 2010-11 total bank credit registered a growth of 21.4 percent. Non-food credit also saw a similar increase of 21.2 percent. Deposit growth rate has lagged credit growth rate in 2010-11 as aggregate deposits grew by 15.8 percent. The slowdown in growth in deposits can be explained by unattractive card / deposit rates and continued high inflation rate that lowered the real rate of return on term deposits. Good performance of the equity market in the first half of 2010-11 also contributed to slowdown in deposit growth. Fiscal situation Strong tax revenue collections, 3G / BWA spectrum windfall and moderation in growth of overall expenditure have helped the government rein in fiscal deficit in 2010-11. According to revised estimates, fiscal deficit in 2010-11 is pegged at 5.1 percent of GDP and is down from 5.5 percent projected earlier.

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Monthly Review of Indian Economy April 2011 Index GDP Growth Industrial Production Core Sector Inflation Foreign Trade Foreign Investments Forex Reserves Exchange Rate Money and Banking Fiscal Situation 6 8 12 13 19 23 26 28 29 31

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Monthly Review of Indian Economy April 2011 GDP Growth According to the advance estimates provided by the Central Statistics Office (CSO), GDP at factor cost at constant prices is expected to register a growth of 8.6 percent in the year 201011. In the year 2009-10, GDP at factor cost at constant prices grew by 8.0 percent. Looking at numbers at the disaggregated level, we see that while agriculture and allied sector is projected to grow by 5.4 percent in 2010-11, industry and services sector are projected to grow by 8.1 percent and 9.6 percent respectively. Although the expected performance of the industry and services sector in 2010-11 is not very different from what was seen in 2009-10 when industry grew by 8.0 percent and services grew by 10.1 percent, it is the much improved performance of the agriculture sector in 2010-11 that is going to provide an uptick to overall GDP growth. It may be noted that growth in agriculture and allied sector in 2009-10 was muted at just about 0.4 percent.
Table 1 Growth in GDP at factor cost by economic activity (2004-05 prices) 2008-09 1 2 a b c d 3 a b Agriculture, forestry and fishing Industry Mining and quarrying Manufacturing Electricity, gas and water supply Construction Services Trade, hotels, transport and communication Financing, insurance, real estate and business services c Community, social and personal services 4 GDP at factor cost -0.1 4.4 1.3 4.2 4.9 5.4 10.1 7.6 12.5 12.7 6.8 2009-10 (QE) 0.4 8.0 6.9 8.8 6.4 7.0 10.1 9.7 9.2 11.8 8.0 2010-11 (AE) 5.4 8.1 6.2 8.8 5.1 8.0 9.6 11.0 10.6 5.7 8.6

QE: Quick Estimates AE: Advance Estimates

Source Ministry of Finance, Government of India

Another notable trend in growth rates at the sectoral level is the sharp decline seen in the case of community, social and personal services in 2010-11. While in 2008-09, this segment posted a growth of 12.7 percent, in 2009-10 growth, though lower, was still a robust 11.8 percent. In 2010-11, growth in this segment is expected to sharply go down to 5.7 percent. This trend is a reflection of modulation of additional expenditure that was undertaken by the government during the period of the global crisis. As private sector demand and expenditure is gaining strength, government has entered the fiscal consolidation mode and this has slowed the pace of expansion of community, social and personal services.
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In this context, it may be mentioned that in the October December quarter of 2008-09, community, social and personal services sector had witnessed a very strong growth of 22.6 percent highlighting the stimulus measures undertaken by the government to support economic activity. In comparison, the first three quarters of 2010-11 saw this sector register a growth of 7.8 percent, 7.4 percent and 4.8 percent respectively.
Chart 1 Growth in GDP (Quarterly figures), YoY in Percent

16 14 12 10 8 6 4 2 0 Q1 2008-09 Q2 2008-09 Q3 2008-09 Q4 2008-09 Q1 2010-11 Q2 2010-11 Q1 2009-10 Q2 2009-10 Q3 2009-10 -4 Q4 2009-10 -2 Q3 2010-11 GDP at factor cost Agriculture, forestry and fishing Industry Services

Source Ministry of Finance, Government of India

As regards GDP growth in the year 2011-12, initial estimates provided by the Finance Ministry indicated that the economy would better its performance and touch the 9 percent mark. In fact the Finance Minister had based his budget presentation for 2011-12 taking GDP growth for current year at 9 percent. However, as things stand today, meeting this target looks increasingly difficult. Most recent trends in industrial production [discussed in detail ahead] point towards a slowdown in industrial activity. What is particularly worrisome is the negative growth seen in case of the capital goods segment in the last three months. If we look at the growth numbers for a longer period, then we see that while industrial sector growth has been moderating since January 2010, the services sector has seen its growth coming down since the second quarter of 2009-10 [Chart 1]. This could be the beginning of a downward phase in the economic cycle and growth figures from now on will have to be carefully watched. With the RBI making it clear that it would maintain its anti-inflationary stance in the months ahead and with senior officials from the government agreeing that some amount of growth will have to be sacrificed if inflation is to be brought under control in a more sustainable manner, we should be prepared for a sub 9 percent growth in 2011-12. Besides the tight monetary policy stance, the other major downside risk to GDP growth in 2011-12 is further escalation in
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global oil prices. Given the evolving situation, we can expect GDP growth in 2011-12 to be in the range of 8 to 8.5 percent.
Chart 2 Trends in IIP, WPI (YoY in Percent) and Monetary Policy Rates
20.0

8 7

15.0

6
10.0

5 4

IIP WPI Repo

5.0

3 2

Reverse Repo

0.0 Jan'09 Feb'09 Mar'09 Apr'09 May'09 Jun'09 Jul'09 Aug'09 Sep'09 Oct'09 Nov'09 Dec'09 Jan'10 Feb'10 Mar'10 April'10 May'10 June'10 July'10 Aug'10 Sep'10 Oct'10 Nov'10 Dec'10 Jan'11 Feb'11 Mar'11

1 0

-5.0

Source Reserve Bank of India

In context of monsoon it may be noted that the Indian Meteorological Department has come out with its first forecast for this year. According to this initial forecast, India is set to have a normal South West monsoon, with rainfall during June-September 2011 forecast at 98 percent of the Long Period Average of 893 mm for the country as a whole. This augurs well for agriculture sector performance in the current year. Industrial Production Latest numbers made available by the CSO show that weakness in industrial production trend continues with IIP posting growth of a mere 3.6 percent in February 2011. In February 2010, the general index for industrial production had registered a growth of 15.1 percent. In fact, due to this good performance, industrial growth in the fourth quarter of 2009-10 was particularly strong and at its peak. Further, amongst the three broad sectors we see that growth in both the mining and manufacturing sectors has been particularly weak in the month of February 2011. While the mining sector grew by 0.6 percent year on year in February 2011, the manufacturing sector turned in a performance of 3.5 percent in the same month. The corresponding figures for February 2010 stand at 11.0 percent and 16.1 percent respectively. The only silver lining in this otherwise discouraging performance in February 2011 is growth in the electricity sector which saw production go up by 6.7 percent. In February 2010, growth in the electricity sector was about 7.3 percent.
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Table 2 Growth in Industrial Production 2009-10 2010-11 February 2010 (Apr-Feb) (Apr-Feb) 10.0 7.8 15.1 9.6 6.5 11.0 10.4 8.1 16.1 5.8 5.4 7.3 Use-based industrial groups 6.8 6.5 8.5 19.0 8.7 46.7 13.7 9.1 15.9 5.9 7.5 6.3 23.8 21.8 29.1 0.3 1.9 -0.8 February 2011 3.6 0.6 3.5 6.7 5.9 -18.4 8.4 11.1 23.4 6.1

General Index Mining Manufacturing Electricity Basic goods Capital goods Intermediate goods Consumer goods Durables Non-durables

Source CSO, MOSPI, Government of India

Chart 3 Growth in IIP, YoY in Percent

20.0 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 May'2009 May'2010 Nov'2009 July'2010 Jun'2009 Jul'2009 June'2010 Nov'2010 Sep'2009 Aug'2009 Aug'2010 Sep'2010 Feb'2010 Mar'2010 Dec'2009 Dec'2010 Feb'2011 Apr'2009 Apr'2010 Oct'2009 Oct'2010 Jan'2010 Jan'2011 Manufacturing Electricity General Mining

Source CSO, MOSPI, Government of India

The chart given above shows that growth in the general index for industrial production has been showing a declining trend since December 2009. When we de-seasonalise the growth data using the three month moving average (3MMA) and fit a linear trend to the same, we get a good fit with an R-Square value of 0.959. Using the same trend and projecting industrial production growth for March 2011, we get a value of 1.4 percent. This result indicates that we should be prepared to see another month of very low growth in industrial production.

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Chart 4 Trend growth rate in IIP December 2009 to February 2011

20.00 18.00 16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Series1 Linear (Series1) y = -1.0897x + 18.785 R = 0.9592

Source FICCI Research

Moving on when we look at the use based industrial groups we see that growth in basic goods, capital goods and intermediate goods segments has slowed down in February 2011 vis--vis performance in February 2010. In fact the performance of the capital goods segment is particularly worrisome as this sector showed a negative growth of 18.4 percent in February 2011. This comes on the back of similar performance registered in December 2010 (- 9.3 percent) and January 2011 (- 18.8 percent) and portends weakening of the investment cycle in the economy. While a part of this dip can be explained by the high base effect, factors like rising lending rates and rising raw material prices that are affecting margins of firms are now having an impact on investments. In fact, the year on year growth in gross fixed capital formation has come down from a robust 25.7 percent in Q1 of 2010-11 to just about 6 percent in Q3 of 2010-11 and is expected to see a further slide in Q4, 2010-11. Feedback gathered by FICCI from industry as part of its regular Business Confidence Surveys and Manufacturing Sector Surveys shows that rising interest rates have started having a bearing on investment projects with greater impact being felt by units in the SME sector.

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Chart 5 Performance of Capital Goods sector and Movement in Key Monetary Policy Rates
70.0 60.0 50.0 6 40.0 30.0 20.0 10.0 0.0 July'10 Jan'09 Jul'09 Jan'10 May'09 May'10 Nov'09 Mar'09 Mar'10 Nov'10 Sep'09 Sep'10 Jan'11 -10.0 -20.0 -30.0 March'11 2 1 0 5 4 3 Capital Goods Growth Repo Reverse Repo CRR 8 7

Source Reserve Bank of India

In fact when we project the growth for the capital goods sector using the 3MMA for growth and using a linear trend we see that growth in the month of March 2011 is expected to again dip by around 15 percent in this sector.
Chart 6 Trend growth rate in IIP (Capital Goods) December 2009 to February 2011
60 50 40 30 Series1 20 Linear (Series1) 10 0 -10 -20 1 2 3 4 5 6 7 8 9 10 11 12 13 14 y = -4.7264x + 60.596 R = 0.8678

Source FICCI Research

The only sector that saw an improvement in its performance in February 2011 vis--vis performance in February 2010 is the consumer goods sector. As data given in the table 2 shows consumer goods sector registered a growth of 11.1 percent in February 2011 as against 6.3 percent growth registered in the same month of previous year. Further, both the durables and the non-durables segments contributed to this growth.
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Growth in the durables goods segment has been robust through the year 2010-11 and the rise in interest rates has not had any visible impact on the performance of this sector. Improving consumer sentiment, strengthening employment scenario and increasing disposable incomes have contributed towards growth of consumption. The non-durables segment however saw anemic growth for a good part of 2010-11 with growth entering negative territory in the months of November and December 2010. It is only in January and February 2011 that we see growth in this segment of the industry picking up pace once again.
Chart 7 Growth in IIP Use based industrial groups, YoY in Percent
70.0 60.0 50.0 40.0 30.0 20.0 Intermediate goods 10.0 0.0
May'2009 May'2010 Nov'2009 June'2010 Mar'2010 Nov'2010 Sep'2009 July'2010 Sep'2010 Jun'2009 Jul'2009 Jan'2010 Aug'2009 Aug'2010 Feb'2010 Jan'2011 Dec'2009

Basic goods Capital goods

Consumer goods
Dec'2010 Feb'2011 Apr'2009 Apr'2010 Oct'2009 Oct'2010

-10.0 -20.0 -30.0

Source CSO, MOSPI, Government of India

Core Sector The core sector industries, which have a weight of about 27 percent in the index for industrial production, registered a growth of 5.7 percent during April to February 2010-11 as against 5.4 percent growth registered during the corresponding period of the previous year. Although at an aggregate level there is not much change seen in performance during the reporting period of 2010-11 vis--vis last year, significant variations are visible at individual sector level. Two industry segments that clearly stand out for weak performance in 2010-11 as compared to 2009-10 are cement and coal. Further, while crude oil, petroleum products and steel segments have shown an improvement in performance during the period April to February 2010-11 vis-vis the same period last year, no significant change in performance is noticed in case of the power sector.

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Table 3 Growth in Core Sector 2009-10 (Apr-Feb) 5.4 10.8 7.9 0.3 6.0 -0.4 5.2 2010-11 (Apr-Feb) 5.7 4.3 0.1 11.9 5.4 2.5 8.1 February 2010 4.2 7.9 6.7 4.0 6.9 0.7 -0.2 February 2011 6.8 6.5 -5.7 12.2 7.2 3.2 11.5

Overall Cement Coal Crude oil Power Petroleum products Steel

Source Office of Economic Adviser, MOC&I, Government of India

Latest numbers available for February 2011 also confirm that while cement and coal sector have registered weaker growth this year as compared to the same month last year, crude oil, petroleum products and steel sectors have seen an improvement in growth. It may be mentioned that in the case of the coal sector, factors like non receipt of statutory clearances on time, environmental hurdles, difficulty in acquisition of land and law & order problems in major coal producing states like Jharkhand have hit production in recent times. And in case of the cement sector, production has suffered due to rising cost of raw materials (particularly coal), difficulty in getting environmental clearances and moderation in spending by the government on irrigation and housing projects particularly in South India. Regarding the near term prospects for these two sectors, it can be said that while the strong growth of the construction sector in 2011-12 is expected to lead to a turnaround of the cement sector, resolution of issues related to environment would help the coal industry ramp up production in the current year. As regards output in the crude oil sector, the strong performance seen in 2010-11 (Apr-Feb) can be largely attributed to enhanced production by non-state companies like Cairn India, which has significantly ramped up its oil production capacity in the state of Rajasthan. Inflation Latest numbers for WPI based inflation show that headline inflation in March 2011 stands at 8.98 percent. This is higher as compared to 8.31 percent registered in February 2011. It is also important to note that while releasing the data for March 2011, the figure for January 2011 was revised upwards from 8.23 percent to 9.35 percent. This indicates that inflationary pressures continue and that final numbers for March 2011 could well be in double digit territory. Annual inflation rate for 2010-11 also highlights the continuous pressure the economy faces on the prices front. Overall inflation for 2010-11 stands at 9.4 percent and is much above what the RBI considers as the growth promoting inflation rate and which is about 5 percent.
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While the inflationary pressures in the economy, as measured by the headline inflation rate, are showing no signs of a let up, what is perhaps more important is the gradual pick up in the nonvolatile components of WPI. There are two ways in which one can look at and examine the non-volatile components of WPI. One is movement in non-food manufactured products inflation and the other is movement in core inflation. Core inflation is a broader concept as compared to non-food manufactured products inflation and captures the price behavior in non-food articles and minerals in addition to non-food manufactured products. The trends in these two indicators of inflation are shown in chart 8. Both these indicators have moved up over time.
Chart 8 Headline, Core and Non-Food Manufactured Products Inflation, YoY in Percent
12.00 11.00 10.00 9.00 8.00 7.00 6.00 5.00 4.00 May-10 Jun-10 Sep-10 Nov-10 Dec-10 Mar-11 Aug-10 Apr-10 Jul-10 Oct-10 Jan-11 Feb-11 Non-Food Manufactured Products Inflation Core Inflation Headline Inflation

While non-food manufactured products inflation has increased from 5.1 percent in September 2010 to 7.1 percent in March 2011, core inflation has increased from 6.7 percent in August 2010 to 8.9 percent in March 2011. The uptrend in non-food manufactured products inflation and core inflation as well as the narrowing of the gap between these two inflation indicators and headline inflation shows that inflationary pressures in the economy are getting generalized. In other words, price pressures are spilling over from food articles to non-food articles and nonfood manufactured products. A closer look at the inflation numbers at the disaggregated level shows that within the food articles segment, prices of items like vegetables, fruits, milk, egg, meat and fish have been going up appreciably in recent months. This increase can be explained by the rising demand for such products and which has not been supported by a corresponding increase in supplies. Apart from the supply demand gap, another reason which explains the increase in prices of these items [and this is particularly true for perishables like fruits and vegetables] is the rigidities that have gripped the marketing and distribution of such products through the country. The
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episodic inflation that we saw in case of onions in the month of December 2010 is a classic example of how even small disruptions in supply can have a large impact on prices in our country due to inefficient supply chains. Moving on now to the non-food articles group, we see that here strong inflationary pressures are coming from fibres such as cotton, jute and silk. Another segment within the primary articles group that is contributing to overall inflation is minerals where prices are going up due to higher global costs of copper and other base metals. In the fuel category, petrol prices have increased appreciably over time. This is a direct result of petrol price decontrol introduced by the government and the pass through following hardening of international crude prices. Coal prices are also increasing at a fast clip and adding to overall inflationary pressures. In the manufactured products category too signs of a buildup in inflation have strengthened with segments like edible oils, cotton textiles, manmade textiles, basic metal alloys, iron and steel & rubber and plastic products seeing an appreciable increase in prices. This increase in prices can be related to the increase in input costs as manufacturers have crossed the level beyond which holding price line is no longer a viable option. Finished textile companies have started passing on higher fibre costs to consumers. Metal products producers are raising prices following the higher global base metals and precious metals prices.
Table 4 WPI based inflation, YoY growth in Percent
Apr 10 11.00 21.45 20.49 18.08 34.60 13.61 6.43 9.09 7.78 11.27 7.44 5.06 -0.78 4.91 5.51 3.08 May 10 10.60 20.45 21.37 14.76 25.30 14.42 5.99 7.09 7.48 11.28 5.73 3.66 0.00 4.68 5.24 3.87 Jun 10 10.28 20.14 20.97 15.83 22.10 13.92 5.65 6.13 7.39 10.21 4.78 3.39 -1.24 5.22 5.25 2.07 Jul 10 10.02 19.09 18.48 15.30 31.60 13.26 5.73 7.34 7.32 10.09 4.90 4.58 0.00 5.01 4.36 3.05 Aug 10 8.82 15.96 14.96 15.81 23.80 12.55 5.11 4.58 6.81 10.36 4.66 5.10 0.08 4.65 4.34 2.13 Sep 10 8.93 18.17 16.29 20.75 26.80 11.06 4.84 3.62 6.33 9.84 2.76 5.28 -0.08 4.73 4.60 1.56 Oct 10 9.12 18.09 14.64 25.74 29.38 11.02 4.99 3.75 6.41 10.06 1.43 5.37 -1.38 6.20 4.95 2.55 Nov 10 8.08 14.67 10.14 25.50 29.46 10.32 4.89 1.07 6.02 11.67 2.20 5.71 -1.84 7.46 5.20 2.13 Dec 10 9.41 18.37 15.07 25.45 30.58 11.26 5.27 1.41 5.69 12.34 2.12 4.58 -1.39 7.77 4.99 3.01 Jan 11 9.35 18.44 16.68 26.60 16.12 11.41 5.19 -0.14 9.61 13.25 4.59 5.68 -2.53 9.15 5.53 2.49 Feb 11 8.31 14.79 10.65 29.80 16.78 11.49 4.94 -0.34 7.89 11.74 2.75 5.93 -1.12 8.26 5.43 1.82 Mar 11 8.98 12.96 9.47 25.88 12.22 12.92 6.21 2.40 7.32 15.64 3.21 7.20 -2.98 8.98 6.56 3.22 201011 9.40 17.60 15.60 21.80 24.40 12.20 5.40 3.70 7.20 11.50 3.90 5.10 -1.10 6.40 5.20 2.60

All commodities (I) Primary articles Food articles Non-food articles Minerals (II) Fuel and power (III) Manufactured products Food products Beverages and tobacco Textiles Wood and wood products Paper and paper products Leather and leather products Rubber and plastic products Chemicals and chemical products Non-metallic mineral products

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Basic metals, alloys and metal products Machinery and machine products Transport, equipment and parts

9.32 2.21 2.74

8.67 2.04 2.91

8.53 2.21 2.91

7.69 2.29 3.79

7.23 2.37 2.93

6.28 3.42 2.93

6.76 3.07 3.01

7.03 2.89 2.75

8.59 3.48 2.74

7.49 3.29 2.88

8.61 2.95 2.37

9.31 2.43 3.30

8.00 2.70 2.90

Source Office of the Economic Advisor, MOC&I, Government of India

On the whole, we see that inflation is getting generalized with a spillover from primary articles to manufactured products now being evident. The readings for March 2011 would give more reason to RBI to continue with the policy rate hikes in the months ahead. This will have a bearing on the growth performance particularly industrial production, which, as mentioned earlier, is already showing signs of moderation. In the context of RBIs monetary policy moves it may be mentioned that these moves are guided by the trend seen in headline inflation and core inflation measured on a year on year basis. Perhaps a better indicator of inflationary pressures and certainly a more forward looking input for policy moves is the month on month change in the index that is duly deseasonalised. Further, it may be mentioned that while the monetary policy tools have a bearing on inflation from the demand side, trends in WPI are a reflection of inflation emanating largely from the supply side. Therefore, the key indicator to follow from the perspective of demand side inflation management is movement in consumer prices. Globally, the central banks try to manage CPI inflation by affecting aggregate demand. The need to focus on CPI has become even more important today as the global commodity prices are on a rise and these impact input price inflation far more than prices of final goods as measured by CPI inflation. Against the above background let us take a look at movements in core inflation (WPI based) and core inflation (CPI based) and track the month on month movement using deseasonalised index values. For the purpose of our analysis, we have used CPI-IW as this is a reasonable indicator of consumer prices in India.
Table 5 Trends in Core Inflation, MOM growth based on 3MMA Period WPI Core Input Inflation* 0.78 1.03 1.25 1.13 0.78 -0.05 CPI (IW)* Core Final Goods Inflation 1.96 1.93 0.22 0.21 0.11 1.14

Jan 2010 Feb 2010 March 2010 Apr 2010 May 2010 Jun 2010
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Jul 2010 Aug 2010 Sep 2010 Oct 2010 Nov 2010 Dec 2010 Jan 2011 Feb 2011

0.09 0.19 0.49 0.60 0.76 1.02 0.89 1.12

1.08 1.22 0.26 0.39 0.29 1.19 -

Source FICCI Computations based on data sourced from CSO Note: Core Inflation of WPI and CPI is calculated by removing the Food and Fuel components from the respective General Index.

As the table above shows, the month on month movement in WPI based core inflation (core input inflation) is showing signs of an uptick in inflation. And with the RBIs focus being on this variable, a case for continuing monetary tightening is plausible. However, if we look at the numbers for CPI based core inflation (core final goods inflation) then we see that CPI-IW has been on a downward trend after having peaked at 2 percent at the start of 2010. If consumer prices have come off their peak and are now showing signs of moderation, then any move by the RBI to further tighten monetary policy could prove counterproductive as it would have a direct bearing on industrial and economic activity in the country. It may be added that a singular focus on WPI movement for deciding on monetary policy moves may not be a correct approach. This is particularly true in an environment characterized by rising commodity prices, as seen today, and which are likely to keep WPI based core inflation at elevated levels irrespective of large scale changes in the demand conditions. FICCIs analysis further shows that core final goods inflation which is what RBI should be targeting is expected to moderate from its value of 1.19 percent in December 2010 to 0.40 percent in September 2011 (when calculated on a 3MMA sequential basis). Given this situation, it is perhaps time that the RBI revisits is monetary policy stance and fine tunes the interest rate structure to stimulate growth.
Table 6 Projections for CPI (IW) Core Inflation Month Dec 2010 Jan 2011 Feb 2011 Mar 2011 Apr 2011 May 2011 June 2011
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MOM Growth 1.19 0.67 0.58 0.55 0.53 0.50 0.48

July 2011 Aug 2011 Sep 2011

0.45 0.43 0.40

Source FICCI Research

It may be recalled that we have had a similar episode of tight monetary policy engineering a slowdown in growth in the late 1990s. At that time, interest rates were hiked to as much as 12 percent to counter inflation. This, along with the Asian financial crisis, had a deep impact on Indias growth trajectory and it took us almost five year to come back to the high growth trajectory (See chart 9 for details).
Chart 9 Movement in Industrial Production, WPI based Inflation and Monetary Variables (BR and CRR) Period April 1996 to March 2003
16.0

14.0 12.0 10.0 8.0 6.0 4.0 2.0 IIP General WPI All Commodities CRR Bank Rate

0.0 Apr'96 Jul'96 Oct'96 Jan'97 Apr'97 Jul'97 Oct'97 Jan'98 Apr'98 Jul'98 Oct'98 Jan'99 Apr'99 Jul'99 Oct'99 Jan'2000 Apr'2000 Jul'2000 Oct'2000 Jan'2001 Apr'2001 Jul'2001 Oct'2001 Jan'2002 Apr'2002 Jul'2002 Oct'2002 Jan'2003

Source Reserve Bank of India

Finally, it may be re-emphasized that for addressing the inflation situation it is important that the government looks at debottlenecking the supply side both in the agriculture sector and in the manufacturing sector. Unless we take steps to boost agriculture productivity and to improve the marketing and distribution of food products in the country and unless greater investments are made in enhancing supplies of critical industrial inputs and raw materials, we cannot bring inflation level down in a sustainable manner.

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In the context of the agriculture sector, steps like decentralizing procurement operations of FCI, meeting PDS requirements in states to the extent possible, offloading food stocks in smaller lots over multiple locations leveraging tools such as e-auctions, de-listing horticulture products from APMC Act, encouraging private players to come and invest in agri-infrastructure, easing cross border movement of food products and evolving a robust centralized monitoring system to track progress of weather and crop situation particularly for perishables require urgent attention of the government. All of these would in some measure help us tackle the food inflation problem. Likewise we need to step up capacities across industries to increase supplies. This calls for encouraging investments by addressing issues such as procedural hassles, restrictive environmental regulations, land acquisition etc. As hikes in interest rates have a direct bearing on the investment activity, further tightening of monetary policy is inadvisable as it would prevent fresh capacities from coming on board. Foreign Trade In March 2011, Indias exports posted a growth of nearly 44 percent and touched a high of US$ 29.1 billion. Our imports on the other hand grew by 17.3 percent and attained a total value of US$ 34.7 billion. With exports and imports at these levels, Indias overall trade balance stood at US$ 5.6 billion in March 2011. Looking at trade numbers on a sequential basis we see that while imports have moved up from about US$ 27.3 billion in April 2010 to US$ 34.7 billion in March 2011, our exports have increased at a faster pace going up from US$ 16.9 billion to US$ 29.1 billion during the same period. It is this strong performance in exports, particularly seen in the last five months, which has helped bring the otherwise burgeoning trade deficit down to more manageable levels. The strong performance of the export sector has also helped calm fears about the sustainability of the current account deficit. Annual figures for 2010-11 show that exports have touched an all time high of US$ 246 billion and mark a robust growth of 37.5 percent over US$ 179 billion achieved in 2009-10. This incidentally is also the fastest annual growth that we have seen in exports since independence. Indias strong export performance in the year 2010-11 was fuelled by sectors such as engineering products, oil, gems and jewellery, textiles and pharmaceuticals. Imports too registered a strong growth of 21.2 percent in 2010-11 and touched US$ 350.3 billion. With total exports and imports at these levels, Indias total trade deficit in 2010-11 stood at US$ 104 billion. Further, these numbers translate into a total trade figure of almost US$ 600 billion, which is about half the size of Indias GDP of US$ 1.2 trillion.
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While releasing the export figures for the month of March 2011, the countrys Commerce Minister said that given this recent trend we are confident of attaining the export target of US$ 450 billion by 2013-14. In this context it may be pointed out that the Ministry for Commerce and Industry had recently put out a draft strategy paper for doubling Indias exports to US$ 450 billion by 2013-14. According to the draft strategy paper for exports released by the government, the export target of US$ 450 billion by 2013-14 will be driven by sectors like engineering goods (US$ 108 billion), gems and jewellery (US$ 64 billion), petroleum products (US$ 73 billion), textiles (US$ 36.5 billion) and drugs and pharmaceuticals (US$ 22 billion). Further, in the proposed strategy for exports, while effort would be made to retain presence and market share in old developed country markets, government would simultaneously focus on opening up new vistas both in terms of markets and products in regions including Asia, Africa and Latin America. The draft strategy paper also provides suggestions on creating infrastructure, easing procedural bottlenecks and developing skill levels for continuous value addition in exports. Consultations on this draft paper are now at an advanced stage and the final strategy paper is expected to be released soon by the Ministry.
Table 7 Exports and Imports in US$ Billion / YoY Growth in Percent Apr10 16.9 27.3 8.1 19.2 May10 16.1 27.4 8.8 18.6 Jun10 17.7 28.3 8.4 19.9 Jul10 16.2 29.2 7.7 21.5 Aug10 16.6 29.7 7.8 21.9 Sep10 18.0 27.1 7.5 19.7 Oct10 17.9 27.7 8.4 19.3 Nov10 18.9 27.8 7.7 20.1 Dec10 22.5 25.1 6.9 18.2 Jan11 20.6 28.6 7.9 20.7 Feb11 23.6 31.7 8.2 23.5 Mar11 29.1 34.7 -

Exports Imports Oil imports Non-oil imports Trade balance Growth in Exports Growth in Imports

-10.4 36.2 43.3

-11.3 35.1 38.5

-10.6 30.4 23

-12.9 13.2 34.3

-13.0 22.5 32.2

-9.1 23.2 26.1

-9.7 21.3 6.8

-8.9 26.5 11.2

-2.6 36.4 -11.1

-8.0 32.4 13.1

-8.1 49.7 21.2

-5.6 44.0 17.3

Source Department of Commerce, MOC&I, Government of India

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Chart 5 Exports, Imports and Trade Balance in US$ Billion

40

30

20 Exports ($ Bn) 10 Imports ($ Bn) Trade balance ($ Bn) 0 2010 Sept 2011 Jan 2010 May 2010 Aug 2010 Dec 2011 Feb 2010 Oct 2010 April 2010 June 2011 Mar 2010 July 2010 Nov

-10

-20

Source Department of Commerce, MOC&I, Government of India

If we look at the trade data for the last few years, we see that while Indias total exports have increased from US$ 66 billion in 2003-04 to US$ 182 billion in 2009-10, Indias total imports during the same time period went up from US$ 80 billion in 2003-04 to US$ 299 billion in 200910. The rapid increase in Indias imports relative to our exports over this period resulted in widening of the overall trade deficit. As the data in the following table shows, total trade deficit increased from US$ 13 billion in 2003-04 to US$ 117 billion in 2009-10. Alongside this increase in the absolute value of trade deficit, an increase in the trade deficit to GDP ratio was also seen. While in 2003-04, the trade deficit to GDP ratio stood at 2.5 percent, by 2008-09, this figure had jumped to over 10 percent. In 2009-10, the trade deficit to GDP ratio came down to 9.5 percent.
Table 8 Exports, Imports and Trade Balance in US$ Million Year Exports Imports GDP Ratio US$ million -13718 552377 -2.5 -33702 640485 -5.3 -51904 768538 -6.8 -61782 870553 -7.1 -91467 1128476 -8.1 -118650 1138643 -10.4 -117328 1237523 -9.5 Source Reserve Bank of India Trade Balance

2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

66285 85206 105152 128888 166162 189001 182163

80003 118908 157056 190670 257629 307651 299491

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The tread seen in the movement of countrys overall trade balance is also reflected in the nonoil trade balance. Looking at the same reference period as considered earlier, we find that Indias non-oil exports increased from US$ 60 billion in 2003-04 to US$ 150 billion in 2009-10. Our non-oil imports over this same period went up from US$ 58 billion to almost US$ 200 billion. Following from these trends we see that Indias non-oil trade balance, which was in surplus in 2003-04, turned into a large deficit of almost US$ 50 billion in 2009-10. While the increase in the non-oil trade deficit is by itself large, it is interesting to note that over time the pressure exerted by the rising imports of oil and increasing global prices of oil on Indias external balance has steadily gone up. This can be appreciated better when we look at the share of Indias non-oil trade balance in its overall trade balance. Data shows that this share was about 15 percent in 2004-05, 26 in 2005-06 and about 34 percent in 2006-07. However, since then oil imports started hitting our external balance in a more severe manner with growth in the share of non-oil trade balance in overall trade balance getting moderated. It may be noted that in 2007-08 the share of non-oil trade balance in overall trade balance was 41 percent. This figure increased in the subsequent year but at a slower pace registering a value of 44 percent. In 2009-10, this upward trend was reversed and the share of non-oil trade balance in overall trade balance came down to 42 percent.
Table 9 Non Oil Trade Flows in US$ Million Non Oil Exports 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 60274 76547 91451 107779 134541 157748 150531 Non Oil Imports 57580 81673 105203 128790 171795 210025 199702 Non Oil GDP Ratio Trade US$ Balance million 2694 552377 0.49 -5126 640485 -0.80 -13752 768538 -1.79 -21011 870553 -2.41 -37254 1128476 -3.30 -52277 1138643 -4.59 -49171 1237523 -3.97 Source Reserve Bank of India

While Indias trade account has been in a deficit, we have registered reasonably large surpluses on the invisibles account. This is largely due to the remittance inflows and receipts on account of services exports. As the table below shows, the balance on account of invisible flows has been in surplus throughout the period under consideration. It moved up from US$ 27.8 billion in 2003-04 to US$ 52.2 billion in 2006-07 and further to 78.9 billion in 2009-10. The corresponding increase in the invisibles balance to GDP ratio was 5 percent to 6 percent and further to 6.4 percent.

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Table 10 - Invisibles Balance Invisibles GDP US$ Ratio Balance million 27801 552377 5.0 31232 640485 4.9 42002 768538 5.5 52217 870553 6.0 75731 1128476 6.7 89923 1138643 7.9 78917 1237523 6.4 Source Reserve Bank of India

2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

The surplus on the invisibles account has helped keep the overall current account deficit down to manageable levels. We generally consider a CAD to GDP ratio of 2 to 2.5 percent [in deficit mode] as a comfortable level. Over the last seven years, this limit was breached only twice in 2008-09 and in 2009-10 when the CAD to GDP ratio touched (-) 2.5 percent and (-) 3.1 percent. In 2010-11, there was considerable concern expressed with regard to the movement in the CAD to GDP ratio. For a long time, it was felt that given the evolving trends, the CAD to GDP ratio would cross the 3.5 percent mark. What made matters worse was the fact that FDI flows had slowed down and a good part of the CAD was being financed by volatile flows like foreign institutional investments. However, the strong performance of the export sector in the third and more so in the fourth quarter of 2010-11 has helped bring the CAD level down and we now expect this to settle in the range of 2.5 to 2.7 percent.
Table 11 - CAD as a percent of GDP GDP US$ Ratio million 14083 552376.5 2.5 -2470 640485.42 -0.4 -9902 768537.61 -1.3 -9565 870553.22 -1.1 -15737 1128475.9 -1.4 -28728 1138643.3 -2.5 -38411 1237522.6 -3.1 Source Reserve Bank of India CAD

2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Foreign Investments Data on foreign investment flows shows that while FDI inflows in the country in the year 201011 have seen moderation as compared to inflows received during 2009-10, portfolio flows have been sizable, nearly matching the quantum received during the preceding year.

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As the table on the next page shows, FDI inflows into India during April 2010 to February 2011 totaled US$ 25.9 billion as against US$ 33.34 billion received during the same period in the previous year. With only a month to go before the close of fiscal 2011, total FDI flows are expected to fall much short of US$ 37.8 billion that were received during the year 2009-10. A look at the sector wise FDI inflows during the period April-January 2010-11 and comparing the same with inflows received during the corresponding period of 2009-10 shows that a sizable decline has taken place in sectors like services sector, telecommunications, construction, housing and real estate, electrical equipments and agricultural services. This slowdown in FDI flows is a matter of concern as FDI flows are of a more durable variety and often come with many tangible and intangible benefits. In fact given the importance of this issue, the central bank RBI has set up an internal working group to look into this development and try and understand the reasons for this slowdown. It may be mentioned that this dip in FDI flows into India has taken place at a time when FDI flows to some of the other emerging markets have gone up in 2010. This last finding was brought out earlier in a report released by UNCTAD.
Table 12 Foreign Investment Flows in US$ Million FDI 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10(P) Apr-Feb 2010-11 4,029 6,130 5,035 4,322 6,051 8,961 22,826 34,835 37,838 37,763 25,949 YOY Portfolio YOY Growth Investments Growth 87.0 2,760 -8.8 52.1 2,021 -26.8 -17.9 979 -51.6 -14.2 11,377 1,062.1 40.0 9,315 -18.1 48.1 12,492 34.1 154.7 7,003 -43.9 52.6 27,271 289.4 8.6 -13,855 -150.8 -0.2 32,376 333.7 31,386 FII* 1,847 1,505 377 10,918 8,686 9,926 3,225 20,328 -15,017 29,048 29,431 YOY Growth -13.5 -18.5 -75.0 2,796.0 -20.4 14.3 -67.5 530.3 -173.9 293.4 Total (FDI+Portfolio) 6,789 8,151 6,014 15,699 15,366 21,453 29,829 62,106 23,983 70,139 57,335

*FII is included in Portfolio Investments

Source Reserve Bank of India

Table 13 Sector Wise Foreign Investment Flows in US$ Million

Sector 2010-11 (Apr-Jan) US$ Million 2,995.19 1,331.69 1032.67 2009-10 (Apr-Jan) US$ Million 3,876.66 2,461.40 1,320.31 % change in 201011 vis-vis 200910 -22.74 -45.90 -21.79

% to total FDI Inflows (Apr-Jan 2010-11) 17.54 7.8 6.05

% to total FDI Inflows (Apr-Jan 2009-10) 16.95 10.86 5.81

1 2 3
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Services Sector Telecommunications Power

4 5 6 7 8 9 10 11 12

Metallurgical Industries Construction Activities Housing & Real Estate Computer Software & Hardware Petroleum & Natural Gas Industrial Machinery Automobile Industry Trading Information & Broadcasting (Including Print Media) Cement And Gypsum Products Chemicals (Other Than Fertilizers) Hospital & Diagnostic Centres Drugs & Pharmaceuticals Consultancy Services Hotel & Tourism Sea Transport Air Transport (Including Air Freight) Electrical Equipments Agriculture Services Non- Conventional Energy Miscellaneous Industries

1011.25 1006.02 1048.1 707.83 540.5 539.75 1191.43 447.1 366.46

350.19 2,316.43 2,648.82 676.39 222.46 179.17 1002.61 492.86 442.1

188.77 -56.57 -60.43 4.65 142.97 201.25 18.83 -9.28 -17.11

5.92 5.89 6.14 4.14 3.16 3.16 6.98 2.62 2.15

1.53 10.03 11.57 2.95 1 0.78 4.39 2.15 1.93

13 14 15 16 17 18 19 20 21 22 23 24

606.89 382.21 200.85 204.71 226.63 259.36 290.22 135.05 108.58 41.37 181.34 1,318.05

31.37 287.61 114.76 198.33 319.82 573.35 275.2 18.27 685.02 1,308.37 497.73 916.79

1834.62 32.89 75.02 3.22 -29.14 -54.76 5.46 639.19 -84.15 -96.84 -63.57 43.77

3.55 2.24 1.18 1.2 1.33 1.52 1.7 0.79 0.64 0.24 1.06 7.72

0.13 1.24 0.5 0.86 1.39 2.49 1.18 0.08 2.77 5.78 2.1 3.96

Source SIA Newsletter, DIPP

While we wait for the findings of RBIs internal working group on this subject, it may be mentioned that in January this year RBI had alluded to the environment sensitive policies being pursued with regard to the mining sector, integrated township projects and construction of ports, and which appear to have affected investors sentiments. RBI had also raised issues related to procedural delays, land acquisition and availability of quality infrastructure and highlighted that if these are addressed expeditiously then Indias share in FDI flows to EMEs could go up in the future. Senior officials in the Industry Ministry have also expressed apprehension over slowing down of FDI and made a strong case for further liberalization of the FDI policy framework in the country. In fact a strong indication to foreign investors about Indias intent to further improve the policy framework for FDI was given recently when at the release of the third edition of the consolidated FDI policy, the government announced major changes related to pricing of
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convertible instruments, inclusion of fresh items for issue of shares against non-cash considerations and removal of the condition of prior approval in case of existing joint ventures / technical collaborations in the same field [Press Note 1]. While these announcements are welcome, the government should follow up now on policy reforms in areas like retail, insurance, defense and banking sector. Likewise emphasis on procedural reforms should continue to enhance the ease of doing business in India. Coming now to portfolio inflows we see that during the period April - February 2010-11 India received a total of US$ 31.4 billion in portfolio flows. Although this figure is encouraging, most recent trends show that portfolio investors have been net sellers in the Indian market. As the economic situation in US and Europe is improving slowly, there are opportunities emerging for FII investors in their home countries. Further, given the strong concerns institutional investors have with regard to the inflation situation in emerging markets including India, FII inflows could remain muted at least in the near term. The only positive in sight presently is the massive monetary expansion being undertaken by the Bank of Japan following the crisis [Tsunami / Earthquake / Nuclear Disaster] and the continued Quantitative Easing in US. Both these developments could result in some money flowing towards Indian shores. It may however be added that this massive monetary expansion would also have a downside as it will continue to fan commodity prices and which would hurt us from the inflation side. Forex Reserves Indias foreign exchange reserves increased as we moved ahead in fiscal 2010-11. As data given in the table below shows, while in April 2010, Indias foreign exchange reserves totaled US$ 279.6 billion, in September 2010 this figure had increased to US$ 292.9 billion. Most recent numbers show that the countrys foreign exchange reserves have shot up further crossing the US$ 300 billion mark. With this level of reserves, India is the seventh largest holder of foreign exchange reserves in the world.
Table 13 Foreign Exchange Reserves in US$ Million Forex Reserves 279,633 273,544 275,710 284,183 283,142 292,870 297,956 292,389 297,334

April 2010 May 2010 June 2010 July 2010 Aug 2010 Sept 2010 Oct 2010 Nov 2010 Dec 2010
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Jan 2011 Feb 2011

299,224 301,592
Source Reserve Bank of India

Although other countries with huge forex reserves have strengthened their external position on the basis of positive or surplus trade and current account, in case of India this huge build up of reserves is largely due to inflow of funds on the capital account. Nevertheless, this large holding of forex reserves has attracted a lot of attention and several options suggested on how to optimally utilize these reserves. In this context it is interesting to note that the countrys Chief Economic Advisor, Dr. Kaushik Basu, has once again brought the focus back on the question of India having its own Sovereign Wealth Fund. Speaking at a recent seminar, Dr. Basu mentioned that it is time that India needs to seriously look at the issue of whether to set up a Sovereign Wealth Fund. In context of Indias external situation and level of comfort with regard to forex reserves, an important variable to look at is the external debt position and particularly the movement in short term debt over time. Table 14 Indias External Debt in US$ Million / At End March
2006 Short term debt (1) Long term debt (2) Total external debt (3) (1) / (3) (%) Short term debt to Forex Reserves (%) Total debt service Debt service ratio 19,539 119,575 139,114 14.0 12.9 19,560 10.1 2007 28,130 144,230 172,360 16.3 14.1 11,404 4.7 2008 45,738 178,669 224,407 20.4 14.8 14,947 4.8 2009 PR 43,362 181,153 224,515 19.3 17.2 15,514 4.4 2010 QE 52,471 208,983 261,454 20.1 18.8 18,919 5.5 Dec 2010 QE 62,620 234,891 297,511 21.0 21.1 3.9

Source Ministry of Finance, Government of India

Data shows that Indias short term debt has increased from US$ 43.4 billion in end March 2009 to US$ 52.5 billion in end March 2010 and further to US$ 62.6 billion in end December 2010. As a percent of total external debt, the share of short term debt has gone up from 19.3 percent in end March 2001 to 20.1 percent in end March 2010 and further to 21.0 percent in December 2010. At these levels of short term debt, Indias external position can be said to be reasonably comfortable. Further, the fact that short term debt is about 21 percent of Indias foreign exchange reserves is also a comforting feature regarding Indias external situation. Data also shows that our debt service ratio has been declining over time [2009-10 being an exception when debt service increased on account of large ECB repayments] and stood at 3.9 percent at end December 2010.
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Exchange Rate Most recent trends in the movement of the INR vis--vis major vehicle currencies show that while the Indian Rupee has appreciated against the USD and Pound Sterling, it has depreciated against the Euro. No large variation was noted in INRs movement against the Japanese Yen. As data given in the table below shows the Rupee appreciated against the USD by 1 percent between February 2011 and March 2011. During the same time, the value of the Rupee moved up by about 0.8 percent against the Pound Sterling. Against the Euro, the Rupee weakened with its value coming down by almost 1.5 percent between February 2011 and March 2011.
Table 15 Rupees per unit of foreign currency (Yearly / monthly average basis) USD 40.3561 51.2287 45.4965 44.4995 45.7865 46.5443 46.8373 46.5679 46.0616 44.4583 45.0183 45.1568 45.3934 45.4538 44.9895 -1.02 Pound Sterling 80.8054 72.9041 68.4360 68.2384 67.1747 68.6952 71.5150 72.9736 71.6578 70.3381 71.8498 70.4635 71.5394 73.2921 72.7033 -0.80 Japanese Yen 0.4009 0.5251 0.5018 0.4763 0.4969 0.5122 0.5343 0.5465 0.5454 0.5428 0.5457 0.5425 0.5496 0.5503 0.5502 -0.02 Euro 62.6272 66.9207 61.7653 59.6648 57.6553 56.9016 59.7636 59.9700 60.0592 61.7153 61.4981 59.6652 60.5178 62.0904 63.0314 1.52

March, 2008 March, 2009 March, 2010 2010-11 April 2010 May 2010 June 2010 July 2010 Aug 2010 Sept 2010 Oct 2010 Nov 2010 Dec 2010 Jan 2011 Feb 2011 Mar 2011 MOM growth in Mar 2011

Source Reserve Bank of India

One of the factors that affect the competiveness of Indias exports vis--vis exports from other countries is the relative movement in the national exchange rates. In the following table, we provide the movement in the national currencies of select countries vis--vis the US$. The data shows that between February 2011 and March 2011, all currencies analyzed have seen an appreciation against the US$. The only exception has been the Pakistani Rupee. Data further shows that while the Indian Rupee has seen greater appreciation against the USD compared to the Brazilian Real and the Malaysian Ringgit, currencies like the Indonesian Rupiah, the South African Rand and the Thai Baht have gained more against the USD between February 2011 and March 2011.
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Table 16 Exchange rate vis--vis USD for selected countries (monthly average basis) Brazilian Real 2010-11 April 2010 May 2010 June 2010 July 2010 Aug 2010 Sept 2010 Oct 2010 Nov 2010 Dec 2010 Jan 2011 Feb 2011 Mar 2011 M-o-M growth in Mar 2011 1.76 1.80 1.81 1.77 1.76 1.72 1.68 1.71 1.70 1.67 1.67 1.66 -0.55 Indian Rupee 44.50 45.77 46.56 46.87 46.57 46.04 44.42 44.88 45.17 45.38 45.46 44.99 -1.02 Indonesian Rupiah 9027.33 9183.39 9148.36 9053.80 8971.76 8975.11 8928.05 8931.61 9024.20 9036.00 8916.53 8760.48 -1.75 Malaysian Ringgit 3.21 3.26 3.26 3.21 3.15 3.11 3.10 3.11 3.13 3.06 3.04 3.03 -0.26 Pakistani Rupee 83.99 84.38 85.37 85.60 85.68 85.86 86.01 85.60 85.78 85.76 85.38 85.40 0.02 South African Rand 7.35 7.65 7.63 7.54 7.30 7.13 6.91 6.96 6.84 6.92 7.17 6.92 -3.54 Thai Baht 32.28 32.37 32.48 32.34 31.78 30.82 29.97 29.85 30.11 30.58 30.71 30.37 -1.12

Source International Monetary Fund

Money and Banking Latest figures available from RBI show that broad money or M3 (up to March 25, 2011) registered an increase of 16 percent as compared to a growth of 16.8 percent during the corresponding period of the previous year. The year on year growth as on March 25, 2011 was also 16 percent as against 17.1 percent growth seen in the previous year. Amongst the key components of M3, currency held with the public saw an increase of 19.8 percent in the period up to March 25, 2011 (previous year growth being 15.9 percent) and time deposits with bank went up by 18.2 percent as against a growth of 16.3 percent witnessed during the same period in the previous year. Demand deposit held with banks however saw a marginal decline registering a negative growth of 0.6 percent as against a growth of 21.3 percent seen in the previous year. Looking at the sources of money supply growth (up to March 25, 2011) we see that while bank credit to the commercial sector went up by 20.6 percent, net bank credit to the government went up by 13.4 percent. Net foreign exchange assets of the banking sector have seen an increase of 6.9 percent during the same period. In the context of money supply growth it may be mentioned that with a nominal GDP growth of around 18 percent, this growth of 16 percent is relatively weak. In the previous four years,
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when nominal GDP growth was of the order of 15 to 16 percent, M3 growth was much higher around 20 percent. Our analysis shows that while in 2006-07 and 2007-08, net foreign exchange assets of the banking sector and bank credit to the commercial sector grew at a relatively fast pace and contributed to overall money supply growth, in 2008-09 and 2009-10, the high growth in money supply was powered by rapid expansion in net bank credit to the government. In 201011, growth in net bank credit to the government and net foreign exchange assets of the banking sector slowed down considerably. Further, although bank credit to the commercial sector picked up pace in 2010-11, it is still below the expansion seen in 2006-07. Data on credit flows shows that in the financial year 2010-11 total bank credit registered a growth of 21.4 percent. Growth in bank credit in the year 2009-10 was of the order of 16.9 percent. Further, when we look at the figures for non-food credit, we see that growth in 2010-11 has been of the order of 21.2 percent as compared to 17.1 percent seen in the previous year. Growth in deposits in 2010-11 has not only lagged growth seen in overall bank credit and nonfood credit but it also falls behind the growth in deposits seen in 2009-10. While in 2010-11, aggregate deposits grew by 15.8 percent, in 2009-10 aggregate deposits had registered a growth of 17.2 percent. The slowdown in growth in deposits can be explained by unattractive card / deposit rates and continued high inflation rate that lowered the real rate of return on term deposits. Good performance of the equity market in the first half of 2010-11 also contributed to slowdown in deposit growth. However, with time as credit growth gathered pace, banks started facing a tight liquidity situation. Data on interest rates in the call money market show that borrowing / lending rates started moving up in the second half of 2010-11. This is also the period when liquidity injection by the central bank under the LAF / Repo window increased and on occasions crossed the Rs. 1 lakh crore mark. As the liquidity situation tightened, banks were forced to increase the card rates. The increase in card rates, which started in July 2010, picked up pace with hikes being particularly aggressive from December 2010 onwards. This move has helped bank garner more deposits in the last quarter of 2010-11.

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Table 17 Credit and Deposit Growth (Rs. Crore)

Item

Outstanding as on 2010 2011

Variation over Financial year so Year - on - Year far 2009-10 2010-11 2010 2011 16.9 17.1 17.2 21.4 21.2 15.8 16.9 17.1 17.2 21.4 21.2 15.8

Bank Credit Non Food Credit Aggregate Deposits

Mar. 26 Mar. 25 32,44,788 39,38,659 31,96,299 38,74,376 44,86,574 52,04,703

Source Reserve Bank of India

Fiscal Situation Data on the fiscal position of the government shows that during the period April to February 2010-11, tax revenues (net) registered a growth of 28.4 percent over the same period of 200910. Non-tax revenues have also shown a sizable increase of over 109 percent during April to February 2010-11 due to the large payments received by the government of account of 3G / BWA spectrum auctions. Non-debt capital receipts of the government have also increased by 78.1 percent and totaled Rs. 33,251 crore during April to February 2010-11.
Table 18 Trends in Central Government Finances: April February 2011 (Rs. Crore) BE 2010-11 RE 2010-11 Actuals Apr-Feb 2011 670336 460624 209742 33251 10506 22745 703617 668140 607814 201169 60326 310565 263259 47306 978705 Percent of Actuals to Revised Estimates 85.5 81.7 95.3 104.7 116.7 100.0 86.3 81.3 83.6 83.6 63.6 78.6 80.5 69.5 80.4 Actuals Apr-Feb 2010 458752 358641 100091 18672 5886 12786 477404 601198 557414 177257 43784 257107 217191 39916 858305 Growth in 2011 over 2010 46.1 28.4 109.6 78.1 78.5 77.9 47.4 11.1 9.0 13.5 37.8 20.8 21.2 18.5 14.0

Revenue Receipts Tax Revenues (Net) Non Tax Non-Debt Capital Receipts Recovery of Loans Other Receipts Total Receipts Non-Plan Expenditure On Revenue Account Interest Payments On Capital Account Plan Expenditure On Revenue Account On Capital Account Total Expenditure

682212 534094 148118 45129 5129 40000 727341

783833 563685 220148 31745 9001 22744 815578

735657 821552 643599 726729 248664 240757 92058 94803 373092 395024 315125 326928 57967 68096 1108749 1216576

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Fiscal Deficit Revenue Deficit Primary Deficit

381408 276512 132744

400998 269844 160241

275088 200707 73919

68.6 74.4 46.1

380901 315873 203644

-27.8 -36.5 -63.7

Source Controller General of Accounts, Government of India

As regards expenditure, latest figures show that while non-plan expenditure has shown an increase of 11.1 percent during the period under review, plan expenditure has gone up by 20.8 percent during the same time period. On the whole, total government expenditure at Rs. 9,78,705 during April to February 2010-11 was about 14 percent higher compared to the same period in the previous year. Strong tax revenue collections, 3G / BWA spectrum windfall and moderation in growth of overall expenditure have helped the government rein in the fiscal deficit in 2010-11. During April to February 2010-11, fiscal deficit of the central government totaled 69 percent of the revised estimates and showed a fall of nearly 28 percent over the same period of the previous fiscal. Further, while presenting the budget for 2011-12, the Finance Minister announced that fiscal deficit in the year 2010-11 will be scaled down from 5.5 percent as projected earlier to 5.1 percent. Looking at the figures for government receipts for the year 2011-12 as given in the next table, we see that the gross tax revenues are budgeted to grow by a healthy 18.5 percent. With no major tax changes announced in the budget for 2011-12, the government is banking on strong growth in the economy, good corporate performance and a rise in wages and salaries to translate into this growth in tax collections. Revenue from corporation tax is expected to show an increase of 21.5 percent in 2011-12. This shows that there is a clear expectation on part of the government that the corporate sector would see high growth in the current year. It may also be noted that the small increase affected in the MAT rate from 18 percent to 18.5 percent in the last budget would also bring in more revenue under this head in 2011-12. With regard to income tax collections, we see the government projecting an increase of 16.2 percent. It may be recalled that in the last budget, the government, in its bid to provide some relief to people from high and rising inflation, had increased the exemption limit for individual income tax payers from Rs. 1,60,000 to Rs. 1,80,000. However, despite this revenue depressing move, income tax collections are expected to go up. Coming to collections under excise, we saw that in the budget the Finance Minister desisted calls for complete roll back of the stimulus measures and accordingly held the central excise duty rate constant at 10 percent. FICCI had aggressively worked for maintaining the excise rate at this level. We had urged the Finance Minister that by keeping rates constant, industrial production would get a leg up and this will translate into higher tax collections. The
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government accepted FICCIs argument and left the excise rate untouched. It is banking on high industrial growth to lead to a growth of 19.2 percent in excise collections. On customs, the projected increase in collections in 2011-12 is to the tune of 15.1 percent. Again with the peak rate of customs duty remaining unchanged at 10 percent, it is the increasing quantum of imports resulting from an uptick in domestic economic activity that is likely to yield revenues to the tune of Rs. 1,51,700 crore. Finally, on service tax collections the budgeted figures show an increase of 18.2 percent. The increasing share of services sector in the economy and extension of the service tax net are the two reasons that lie behind this projected growth in tax collections.
Table 19 Central governments revenue and capital receipts 2011-12 in Rs Crore 2010-11 2011-12 (RE) (BE) 1231576 1237728 783833 789892 563685 664457 786888 932440 137263 163550 131800 151700 296377 359990 141566 164526 69400 82000 1910 1973 8572 8701 3900 4525 219303 263458 220149 125435 19728 19578 48727 42624 2756 2173 147795 59891 1143 1169 447743 447836 9001 15020 355414 343000 22264 14500 22744 40000 17781 24182 10000 10000 10539 1134 Growth 0.5 0.8 17.9 18.5 19.2 15.1 21.5 16.2 18.2 3.3 1.5 16.0 20.1 -43.0 -0.8 -12.5 -21.2 -59.5 2.3 0.0 66.9 -3.5 -34.9 75.9 36.0 0.0 -89.2

Total receipts Revenue receipts Tax revenue (net) Gross tax revenue Excise duties Customs duty Corporation tax Taxes on income Service tax Tax on UTs Other taxes Transfer to NCCF States' share Non-tax revenue Interest receipts Dividends and profits External grants Other non-tax revenue UT's without legislature Capital receipts Recovery of loan (net) Net market borrowings External assistance (net) Disinvestment Small savings (net) State provident funds Others
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Source Ministry of Finance, Government of India

While gross tax revenues are projected to grow by 18.5 percent in 2011-12, non-tax revenues are projected to show a decline by 43 percent. This is understandable as the strong growth seen under this head in 2010-11 was on account of the large payments received due to 3G / BWA auctions. Since this was a one off event, non-tax revenues would show a decline in 201112. Moving on to non-debt capital receipts we see that inflows on account of recovery of loans are expected to register an increase of 67 percent in 2011-12. Further, proceeds from disinvestment, which are pegged at Rs. 40,000 crore, would mark an increase of 76 percent in 2011-12. It may be noted that even in 2010-11 the government had targeted an amount of Rs. 40,000 crore from disinvestment. However, the actual amount realized by the end of the fiscal year 2011 was only about Rs. 22,744 crore. There are several cases of PSUs where disinvestment was planned in 2010-11 but which could not completed on time. It is hoped that these units would undergo the disinvestment process in 2011-12.
Table 20 Central governments expenditure 2011-12 in Rs Crore Plan Expenditure 2010-11 RE 2011-12 BE 395024 441547 Non-Plan Expenditure 821552 816182 Total Expenditure 1216576 1257729 Plan Expenditure % change 30.20 11.78 Non-Plan Expenditure % change 13.93 -0.65 Total Expenditure % change 18.75 3.38

Source Ministry of Finance, Government of India

Figures for central governments expenditure for the year 2011-12 show that the government has budgeted a very small increase of 3.4 percent in its overall expenditure in 2011-12 over 2010-11. Further, within the overall expense head, while plan expenditure is expected to show an increase of 11.8 percent in 2011-12, non-plan expenditure will see a compression to the tune of 0.65 percent. Non-plan expenditure of the central government has been growing at a fast clip since 2006-07 with its growth rate ranging between 13 percent to 23 percent. This increase has been on account of factors like higher spending on food and fertilizer subsidies, implementation of the sixth pay commission award and debt waiver for the farmers. However, in 2011-12, the government sees its overall expenditure going down significantly under heads such as petroleum subsidy, spending on capital outlay and fertilizer subsidy and this would in turn balance the increase seen under heads such as interest payments, defence services and pensions. As regards plan expenditure, we again see a moderation in growth in 2011-12 as plan expenditure had shown an increase of over 20 percent in four of the five preceding years. However, despite this moderation in overall plan expenditure growth, allocations for sectors
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like health, education, women and child development have seen a substantial jump in 2011-12 a trend which underlines the governments commitment to achieving inclusive growth through emphasis on the social sectors. While the budgeted estimates for various heads under plan and non-plan expenditure reflect commitment on part of the government to usher in fiscal discipline and bring government finances back on track in line with the FRBM targets, a few of these initial estimates look somewhat ambitious to achieve. Some of the heads where the government is likely to overshoot its budget estimates in 2011-12 are MGNREGA [Wages under MGNREGA have been increased and are now linked to CPI-AL], petroleum subsidy [BE 2011-12 shows a fall to Rs. 20,000 crore from Rs. 35,000 crore in 201011. This looks difficult given the outlook for international oil prices], fertilizer subsidy [Again rising international prices of fertilizers would make any large scale reduction difficult], food subsidy [BE at Rs. 60,572 crore in 2011-12 is slightly lower than RE for 2010-11. This will be difficult to maintain as higher procurement will call for higher storage and carrying costs. Another imponderable is the introduction of the Food Security Bill]. As mentioned earlier, the Finance Minister had based the budget projections for 2011-12 taking a growth of 9 percent. Since, achieving this growth target itself is now doubtful, there is reason to believe that the revenue projections of the government may also suffer. If the revenues fall short of the anticipated amounts and the expenditure overshoots the targeted amounts, then meeting the fiscal deficit target of 4.6 percent in 2011-12 will be a challenging task.
Table 21 Fiscal Indicators of Central Government (as a percentage of GDP) Tax-GDP ratio 2006-07 2007-08 2008-09 2009-10 2010-11 11.05 11.99 10.86 10.16 10.77 Direct Tax to GDP ratio 5.37 6.31 5.99 6.21 6.20 Custom Duty to GDP ratio 2.02 2.10 1.79 1.27 1.67 Union Excise to GDP ratio 2.75 2.50 1.95 1.58 1.75

Source Reserve Bank of India CSO, Indian Public Finance Statistics and Budget Documents (various years)

In the context of central government finances, it is interesting to note the movement in the tax to GDP ratio over time. As the table given above shows, the tax to GDP ratio for the central government increased from 11.05 percent in 2006-07 to almost 12 percent in 2007-08. However, in the subsequent years, the tax to GDP ratio came down to 10.86 percent (2008-09) and 10.16 percent (2009-10). This decline can be explained by the huge moderation that was seen in the growth of gross tax revenues in these two years.
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While in 2008-09, gross tax revenues of the central government grew by 2.05 percent, in 200910, gross tax revenues grew by 3.18 percent. It may be recalled that this period corresponds with the global financial and economic crisis and the government had introduced a series of fiscal stimulus measures to support economic activity. As part of these measures, the excise rates were cut in two phases and as a result we saw a dip in excise collection and which is also reflected in the downtrend seen in union excise to GDP ratio. Further, slowdown in domestic economy also limited import growth and this in turn led to a decline in customs duty collections. As the economy gained traction and growth started moving back to the pre-crisis trajectory, the government also introduced a calibrated exit strategy from the fiscal stimulus measures in the budget for 2010-11. The excise rate cut introduced earlier was partially rolled back and this led to an increase in excise collections. Customs duty collections also improved on the back of pick up in imports and higher duty on crude and petroleum products. With direct taxes collections also going up sharply in 2010-11, overall gross tax collections went up by 26 percent in 2010-11. This also lifted that tax to GDP ratio in 2010-11 to 10.77 percent from 10.16 percent in 2009-10. While this improvement is noteworthy, it may be mentioned from a global perspective, the tax to GDP ratio in India is still on the lower side. As the data in the following table shows tax to GDP ratio in India is lower when compared with some of the other emerging economies. This highlights the need to continue moving ahead on the path towards tax reforms and simultaneously widen the tax base within the country. It is hoped that with the introduction of the GST and the DTC, the tax to GDP ratio in India would move up.
Table 22 Comparison of Tax Revenue (as a percentage of GDP) with other emerging countries (Rs. Crore) 2005 9.92 16.71 8.68 12.50 26.86 17.24 2006 11.03 16.46 9.19 12.25 16.57 28.38 16.73 2007 11.90 16.81 9.93 12.43 16.55 28.86 16.11 2008 11.20 16.72 10.27 13.03 15.76 27.81 16.46 2009 9.79 15.64 11.42 12.86 25.41 15.15

India Brazil China Indonesia Russian Federation South Africa Thailand

Source World Bank

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