Economy Watch

Industrys Voice for Policy Change

August 2011

Economic Affairs and Research Division FICCI Dr. Soumya Kanti Ghosh: soumya.ghosh@ficci.com Anshuman Khanna: anshuman.khanna@ficci.com (with inputs from Anna Mathew, Debashish Pal, Rajsekhar Bhattacharyya & Sakshi Arora)

FICCI Economy Watch, August 2011

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

downgrading US Economys Long-Term Sovereign Credit Rating to AA+ from 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 forecast of drivers / leading indicators of Indias external demand

and domestic demand portends slowdown going ahead (Page 6)

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

strong correlation with leading GDP growth (Page 8)

Government likely to breach the fiscal deficit target for FY12: FICCI fiscal

deficit projections (Page 9)

DEPB & Indian exports: the likely impact post Sep 2011 (Page 10) Corporate margins take a hit (Page 14)

FICCI Economy Watch, August 2011

THE INDIAN ECONOMY MACROVIEW

THEME WATCH HEADING FOR A SLOWDOWN?
The global financial crisis just doesnt seem to end. After a prolonged haggling over the US debt crisis, the US House of Representative reached a consensus on August 2nd to raise US debt ceiling and reduce government spending for the decade ending 2021. This averted the possibility of a remarkable August precipice, but triggered another. Global rating agency Standard & Poor (S&P) on August 5, 2011 downgraded US Economys Long-Term Sovereign Credit Rating to AA+ from AAA with a negative outlook. According to S&P, this rating action was primarily driven by the perception that (a) the agreed debt ceiling plan envisaging $2.1 trillion spending cuts for the decade ending 2021 falls short of the S&P expectations ($4 trillion spending cuts to reaffirm US rating at AAA) and (b) recent data revisions of US GDP growth supports the contention that the economic recovery since 2008 has been more muted, contrary to earlier perceptions of a robust recovery. FICCI believes that there is no denying of the fact that US fiscal position remains a cause for concern. FICCI estimates show the US budget deficit currently running at over 9% of GDP, the third largest since Second World War. As Table 1 show, deficit reduction proposals by independent researchers (Simpson & Bowles, Domenici-Rivlin) reveal that deficit reduction plan in terms of a sustainable debt trajectory is tantamount to US debt at / below 60% of GDP on or beyond 2021. Against this, cateris paribus, US debt will touch 87% of GDP by 2021, and significantly, 101% of GDP by 2021 under a stressed scenario, as envisaged by S&P.

Table 1:The anatomy of US deficit reduction proposals

CBO Source: Congressional Budget Estimates (CBO), Economist & FICCI Research Debt as a % GDP SimpsonBowles 60% by 2024 DomeniciRivlin Below 60% by 2020 S&P 101% of GDP BY 2021

87% by 2020

Data released by the US do support the contention that the US economic recovery since 2008 has been soft and is taking longer than anticipated. It now turns out that US GDP growth rate in the first 2 quarters of 2011 was still below the levels at the end of 2007. Real

FICCI Economy Watch, August 2011

GDP grew by an anemic 1.3% QoQ (annualised) during 2011:Q2 as per advance estimate. The annual GDP growth rates for 2008 & 2009 were also significantly revised downwards. Additionally, on Aug 9, 2011 Fed emphasized its accommodative stance of keeping the interest rates unchanged at exceptionally low levels (0-0.25%) at least through mid-2013. Clearly, headwinds like weakness in the financial and housing sector, sovereign default concerns, flattening of 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 2008 2009 2010 2010:Q4 2011:Q1 Source: FICCI Research & www.bea.gov 2011:Q2 Previous estimates 0.0 -2.6 3.0 3.1 1.9 1.8 Latest estimates -0.3 -3.5 2.9 2.3 0.4 1.3

FOCUS: THE DEBT OVERHANG IN EUROPE

Meanwhile, the Europe debt saga that started in Greece engulfed Portugal and Ireland later shows no signs of 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 1990s (in complete contravention to the Maastricht treaty of 1992 that prohibits public debt in excess of 60% of GDP and budget deficit in excess of 3% of GDP).The debt saga has been further accentuated with country-specific problems like the weakening banking systems in Spain & Ireland, reluctance to increase the lending capacity of European Financial Stability Facility (EFSF) etc. The problem may have been further compounded by the aggressive monetary policy tightening by European Central Bank (ECB) in 2011 (raising rates by 1% at the beginning of April to 1.5% in Jul11). The rate increase by ECB was perhaps unjustified, as it is an open secret that countries in Europe are now undertaking fierce fiscal 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 of German & French economies showing almost zero growth during Q2 of 2011. India rated at BBB- is below Ireland
Indias Foreign Currency Long-Term Sovereign Credit Rating by S&P is at BBBwith a stable outlook (S&P: April 6, 2011).There are 2 aspects to this rating. First, Indias rating is surprisingly, equivalent to Portugal at BBB- & even lower than that of Ireland at BBB+. Second, Indias public debt to GDP is at 37% (budget documents-FY12), whereas the public debt of Ireland & Portugal is more than 90% of GDP (refer Table3)

FICCI Economy Watch, August 2011

Table 3: Strange methodology of Rating Agencies

Countries Portugal Greece Ireland France Germany Austria Netherlands Finland Spain Italy Memoranda India Public debt as a % GDP 93 143 96 82 83 72 63 48 60 119 37 Sovereign Rating (S&P) BBBCC BBB+ AAA AAA AAA AAA AAA AA A+ BBB-

Source: Eurostat & FICCI Research

FOCUS: WHY THE RBI SHOULD CUT RATES?

The RBI has tightened monetary policy 11 times since February 2010 (repo rate increased from 4.75% to 8% by July 2011) to contain inflation.This relentless hike in interest rates has resulted in sharp slowdown in industrial growth (industrial growth at 6.8% during Apr-Jun2011 vis--vis 9.6% in the like period previous year), slowdown in investment intentions with growth in private gross capital formation declining to less than 1% in the first quarter of this fiscal. However, the trend of declining commodity prices (excluding metals like gold and silver) since the US rating downgrade now augurs well for a RBI rate cut.The Reuters-Jefferies CRB commodities index has declined from a peak of 370 in mid-April to 336 as on Aug2311. The Economist Commodity Price Index has declined by 4.5% in the last 1 month (Aug911 index at 202.5). WTI & Brent crude prices have also declined close to $10/ barrel over the last month ending on Aug 2311 (source: www.oil-price. net) Clearly, there are unmistakable signs of a gradual decline in commodity prices. In fact, in the past, RBI had resorted to aggressive rate cuts (repo rates were reduced from a high of 9% to 4.75% during the short period of 4 months after the Lehman collapse) to pump prime the economy. Interestingly, as we have stated earlier, the RBI may take cue from examples where central bank had increased rates, but only to retract later in the face of uncertain global environment (most recently, ECB) A cut in interest rates at this juncture would also boost corporate Indias confidence (including the exporters) which has taken a hit as reflected in recent rounds of FICCIs Business Confidence Survey.

FOCUS: US & INDIA GDP GROWTH CORRELATION

It is worth noting that there is a correlation between the GDP growth rates of India and the US even though there is a lag effect (refer Exposition 1: same period correlation coefficient 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 Indias fortunes. 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 of India Inc may be impacted during Q3 & Q4 of current fiscal.

FICCI Economy Watch, August 2011

An interesting trend observation from the exposition shows that for India, there is a slowdown in GDP growth rates during quarter 3 / quarter 4. This is corroborated by the low GDP growth rates during quarter 3 of FY09, quarter 4 of FY10 and quarter 4 of FY11. Going by this trend for the current fiscal Q3 & Q4 may possibly witness a further slowdown in GDP growth rate. The duration of this slowdown may vary and may be as much as four successive quarters (as per historical trends). Exposition 1: India mirrors US GDP growth rates: with a lag
9.0 7.0 5.0 3.0 1.0 10.0 9.5 9.0 8.5 8.0 7.5

2007:Q1

2007:Q2

2007:Q3

2007:Q4

2008:Q1

2008:Q2

2008:Q3

2008:Q4

2009:Q1

2009:Q2

2009:Q3

2009:Q4

2010:Q1

2010:Q2

2010:Q3

2010:Q4

2011:Q1

2011:Q2
0

-1.0 -3.0 -5.0 -7.0 -9.0

7.0 6.5 6.0 5.5

Source: CSO, www.bea.gov (India data is on secondary axis)

US

India

FOCUS: INDIA HEADING FOR A SLOWDOWN?

To corroborate the possibility of a slowdown, FICCI did a quick forecasting of select growth drivers / leading indicators of Indias external demand and domestic demand For external demand, we looked at the $ value of exports, whereas for internal demand, we looked at cellular connections, cement despatches and passenger car sales. As Exposition 2 shows, a simple multiplicative Holt Winter (H&M) method of forecasting external demand / exports indicates a possible export slowdown in August. However, more strikingly, export data of Mar11 & MayJul11 reveal that these are data outliers (we define a data to be an outlier if it is more than 2 standard deviations from the mean). It could be that the huge surge in export demand in current fiscal may be an aberration and break from the past (also see section on External Sector). Exposition 2: Export growth slowing down?
35000 30000 25000 20000 15000 10000 5000 0 30000 25000 20000 15000 10000 5000

Oct-07

Oct-08

Oct-09

Apr-07

Apr-08

Apr-09

Apr-10

Oct-10

Apr-11

Jan-08

Jan-09

Jan-10

Jan-11

Jul-07

Jul-08

Jul-09

Jul-10

Source: FICCI research (projected exports are on secondary axis) Note: Exports are projected through a multiplicative H&M method

Actual Exports

Projected Exports

Jul-11

FICCI Economy Watch, August 2011

As far as domestic demand is concerned, we analyzed a host of indicators like cellular subscribers, cement dispatches and passenger car sales (refer Expositions 3 till 5). The results indicate a clear slowdown/flattening of domestic demand indicators (for example cellular connections, cement despatches & passenger car sales). We also analyzed the impact of the successive rate hikes on consumer demand to test for the hypothesis of 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 of 2-3 months. Exposition 3: Cellular connections flattening?
9000 8000 7000 6000 5000 4000 3000 2000 1000 10000 9000 8000 7000 6000 5000 4000 3000 2000 1000

Source: FICCI research (projected cellular connections in lakhs are on secondary axis) Note: cellular connections projected through a double exponential smoothening model

Apr-07

Apr-08

Apr-09

Apr-10

Apr-11

Jul-07

Jul-08

Jul-09

Jul-10

Oct-07

Oct-08

Oct-09

Oct-10

Jan-08

Jan-09

Jan-10

Actual Cellular Subscribers

Projected Cellular Subscribers

Exposition 4: Cement despatches declining

250 200 150 100 50 250 200 150 100 50 0

Source: FICCI research (projected cement despatches is on secondary axis) Note: cement despatches projected through multiplicative H&M method

Oct-07

Oct-08

Oct-09

Apr-07

Apr-08

Apr-09

Apr-10

Oct-10

Jan-11

Apr-11

Jan-08

Jan-09

Jan-10

Jan-11

Jul-07

Jul-08

Jul-09

Jul-10

All India cement despatches

Projected cement despatches

Exposition 5: Dip in passenger car sales

300000 250000 200000 150000 100000 50000 300000 250000 200000 150000 100000 50000

Dec-07

Dec-08

Dec-09

Aug-07

Aug-08

Aug-09

Aug-10

Dec-10

Source: FICCI research (projected car sales is on secondary axis) Note: car sales projected through a multiplicative H&M

Actual car sales

Projected car sales

Aug-11

Apr-07

Apr-08

Apr-09

Apr-10

Apr-11

Jul-11

Jul-11

FICCI Economy Watch, August 2011

FOCUS: FICCI RESILIENCE INDEX*

FICCIs Business Confidence Index (BCI) is at its lowest level since Q3 of 2009. Based on FICCIs BCI, we derived a FICCI Resilience Index (the sum of all net positive responses during any survey).This index is a strong leading indicator of GDP growth .The correlation with one period lag is 0.52 which is robust. On the basis of FICCIs Resilience Index, a further slowdown is expected. Exposition 6: FICCI Resilience Index*
1 0.8 0.6 0.4 0.2 0 4 12

more optimistic

Correlation coefficient :0.52

10 8 6

more pessimistic

Source: FICCI Research Note: *FICCI Resilience Index is derived from the FICCI Business Confidence Survey by looking at the net positive responses.

Q1FY05

Q3FY05

Q1FY06

Q3FY06

Q1FY07

Q3FY07

Q1FY08

Q3FY08

Q1FY09

Q3FY09

Q1FY10

Q3FY10

Q1FY11

Q3FY11

Q1FY12

-0.2 -0.4

2 0

FICCI GDP optimism index

Leading quarterly GDP growth

OUTPUT AND PRICES

Its now official. Prime Ministers Economic Advisory Council (PMEAC) has significantly revised down growth forecast for the current fiscal to 8.2% from its earlier forecast of 9% (Feb11).However, FICCIs latest Economic Outlook Survey (EOS) forecast growth for current fiscal at 7.9%. Table 4:The crux of the GDP growth
2011-12 projections PMEAC July 2010 9.0 4.0 10.3 8.0 10.5 9.0 11.0 9.6 10.0 Feb 2011 9.0 3.0 9.2 7.5 9.0 7.0 10.5 10.3 11.0 July 2011 8.2 3.0 7.1 6.0 7.0 7.0 7.5 10.0 10.8 FICCI EOS July 2011 7.9 3.8 7.3 9.4 -

GDP Agriculture & Allied Activities Industry Mining & Quarrying Manufacturing Electricity, Gas & Water Supply Construction Service Trade, Hotels, Transport, Storage & Communication Finance, Insurance, Real estate & Business services Source: PMEAC Economic Outlook 11/12, FICCI EOS. Community & Personal Services

10.5 7.5

10.5 8.8

9.8 8.5

FICCI Economy Watch, August 2011

FICCI notes with concern the sharp downward revision in projected growth rate in agriculture during FY12 to 3% (6.6% in FY-2011), a four year low. In fact, the prognosis on agricultural growth is worrisome with Indian Meteorological Department (IMD) forecast that India will receive a below normal monsoon during August- September. There is also concern about inflation as PMEAC believes that headline WPI will remain elevated till Nov 11 at 9% or even higher and will soften only from Dec 11 onwards. Meanwhile, the annual point-to-point inflation rate (provisional) in the first 4 months of FY12 was 9.2% (vis--vis 9.98% during the like period in the previous year) as per the latest data released by Office of Economic Advisor (EA). Given the wide divergence between provisional and final rates, it is likely that the inflation rate is only a shade below 10% now. Table 5: Inflation rates sticky?
FY12 Jul11 All Commodities Primary Articles Food Articles Source: Office of Economic Advisor, Note: YTD Implies year till date (as of July11) Fuel & Power Manufactured Month 0.7 0.2 1.4 2.5 0.3 YTD 3.0 5.2 7.7 5.1 1.5 Year 9.2 11.3 8.2 12.0 7.5 FY11 Year 10.0 19.1 18.5 13.3 5.8

MONEY & BANKING

The growth in money supply remains somewhat more than the targeted level for FY12.The latest data available as on July 15, 2011 indicates a growth of 16.7% in Broad Money (M3). This is higher than the targeted level of 15.5% for the year 2011-12. It may also be noted that the money supply growth target for the year FY12 was revised down from 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 Jul1511

RBI target : Jul 1511

RBI target May311

FY11

YTD M3 Source: RBI &FICCI Research Note:*non-food component Credit* Deposits 3.9 1.6 4.0

Year 16.7 18.7 17.9 15.5 18.0 17.0

Year 16.0 19.0 17.0 15.9 21.2 15.4

FICCI Economy Watch, August 2011

10

PUBLIC FINANCE
The state of Government finances continues to be in a state of bother with the fiscal deficit in the first quarter constituting over 39% of the budgeted fiscal deficit. Total revenue collections during the same period were at a measly 11.7% (vis--vis 27.8% previous year) of the budget estimates. Expenditure pie was at 20.8% of budget, a tad lower than 21.8% last year. Table 7: Fiscal indicators worrisome
FY12:Q1 (Rs bn) FY12Budget FY12Q1

Fiscal Indicators

FY11:Q1 % to Budget

Receipts Expenditure Fiscal Deficit Rev. Deficit Source: CAG Primary Deficit

986 2612 1626 1346 1125

8449 12577 4128 3072 1448

11.7 20.8 39.4 43.8 77.0

27.8 21.8 10.5 3.8 0.0

FOCUS: FISCAL DEFICIT TARGET FOR FY12 GOING AWRY?

There is now an increasing apprehension of Govt. breaching the fiscal deficit target of 4.6% for the year FY12. FICCI believes that there are two aspects of the slippage of fiscal deficit for the current fiscal. First, is the likely slippage in absolute level of fiscal deficit, given the shortfall in revenue and capital receipts. Budgeted tax collections for FY12 at 18% is based on the premise of a 9% GDP growth and 5% inflation rate. With the official GDP projection now at 8.2%, and the 13% trend growth in tax collections during the most recent period (5 year period ended Mar11) budgeted revenue receipts are unlikely to be achieved (juxtapose this with reduced revenue receipts because of recent reduction in customs & excise duties on crude & petroleum products). Add to this, budgeted disinvestment receipts for FY12 at Rs 400 bn to be an ambitious target given the current state of stock market (markets have declined by 17% in the current fiscal) In fact, even during FY10 when Sensex return was more than 50%, disinvestment collections were at best Rs 245 bn. Second, even as the absolute level of fiscal deficit is set to jump, the Govt. may still be a benefactor of a higher level of nominal GDP, courtesy higher inflation.This in turn will have a sobering impact on fiscal deficit as a % of GDP in FY12. Remember, in the last fiscal, the revised fiscal deficit was surprisingly at 5.1% (vis--vis budgeted 5.5%), thanks in part to an upwardly revised nominal GDP.

FICCI Economy Watch, August 2011

11

Against this background, FICCI re-estimated fiscal deficit by constructing 3 scenarios with the assumptions that: The government will be able to stick to its estimated expenditure growth target of 3.4%, in FY12 which is the best case scenario The slippage of target will be only on the revenue and capital receipt side. (assuming status quo on expenditure side). In particular, the revenue slippage is based on Govts own estimates of a monthly revenue loss of Rs 1600 crore because of customs duty cut on June 2411. 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 inflation rate of 5%.

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 average inflation 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 FICCIs Survey and the average inflation to be 8% considering the current inflation trend) & slippage in total receipts (revenue & capital)

Based on these scenarios, our analysis suggests that the fiscal deficit during FY12 could be around Rs. 4598 bn against the budget estimate of Rs. 4128 bn. Accordingly, fiscal deficit ratio could be anywhere between 5.04% and 5.12%, against the budget estimate of 4.6% for FY12. However, a word of caution on the expenditure side. FICCI feels containing expenditure growth at 3.4% for FY12 will be difficult given that trend estimates reveal expenditure growth at 20% for the 5 year period ended Mar11. The lurking fear of expenditure overrun gets more real considering among others, the case of oil subsidies. Oil subsidies are pegged at only Rs 240 bn in FY12, even as average crude prices were $113/bbl for Indias import basket during Apr-June11.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 fiscal deficit projections
Scenarios Nominal GDP growth Source: FICCI Research. Note: Receipts slippage of Rs 470 bn factored in. Fiscal deficit as a % GDP 1 / Least Likely 14% 2 / Less Likely 15.2% 3 / More likely 15.9%

5.12%

5.07%

5.04%

FICCI Economy Watch, August 2011

12

INDUSTRY
Index of Industrial Production (IIP) data for 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 for the first 3 months of the current fiscal is the minor revisions in IIP data for the months prior to June 2011. FICCI analysis shows that, IIP growth based on the assumption of unchanged IIP numbers (no revision in past IIP data) for months prior to June 2011 are nearly identical with the IIP growth based on the assumption of revised IIP numbers (revision in past IIP data). Table 9: IIP Growth Apr-Jun11
Mining IIP growth unchanged numbers for months prior to June 2011 Manufacturing Electricity General

1.08%

7.32%

8.24%

6.69%

IIP growth-revised numbers for months prior to June 2011 Source: FICCI Research

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 (for example, 37.7% in June11 against 6.1% in May11). At the use-based level, while investment demand (capital goods growth at 16.9% during Apr-Jun2011 vis--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-Jun2011 vis--vis 19.7% in the like period previous year) was down significantly. Clearly, there are signs of a downturn in consumer demand as a result of a higher interest rate regime. FICCI believes that investor sentiments are likely to remain depressed going forward. Our analysis from CMIE data shows that there has been a significant increase in the projects under implementation stalled to number of new projects for the quarter ending June 2011 underlining the weak investment sentiments. Table 10: Projects Under Implementation Stalled / New Projects
Implementation stalled / new projects 39% 28% 47%

Quarter ended Jun09 Jun10 Source: CMIE & FICCI Research Jun11

New projects 664 1203 877

FICCI Economy Watch, August 2011

13

FOCUS: IIP DATA REVISION

Believe it or not, one thing in common between the US & India is the spate of 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 earlier anticipated. For example, the IIP data recently 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

Previous estimates / (1993-94 base) 3.2 10.5 8.2 Latest estimates / (2004-05 base) 2.5 5.3 7.8

Year 2008-09 2009-10 Source: CSO 2010-11

EXTERNAL SECTOR
Indias 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 few months. Jun11 is no exception as imports amounted to $36.9 billion during this month as compared to $25.9 billion recorded in Jun10. Trade deficit increased to $7.6 billion in Jun11. Meanwhile, as per the latest press release (Aug 112011) issued by Press Information Bureau (PIB), Govt. of India, Indias exports logged in a staggering 81.8% growth during the month of Jul2011. Indias imports, too, registered a growth of 51.5 % during the month. During the period Apr-Jul2011 while Indias exports were valued at $108.3 billion (54% growth), imports reached a level of $151 billion (40% growth) during the same period. This rate of export growth is unprecedented and may be difficult to sustain specially in the context of an uneven global recovery and recent down turn in US and Euro zone. Contraction of demand from the international markets is likely to withhold Indias emerging story of export growth. However, on the upside, increasing product diversification in Indias export basket and successful implementation of Indias Foreign Trade Agreements (FTAs) and bilateral trade and investment treaties with some major economies may continue to act as an enabling factor for export growth.

FICCI Economy Watch, August 2011

14

Table 12: Export & Imports (in $ bn & %)

Apr-Jun11 Exports Imports Oil imports Non Oil imports Source: Ministry of Commerce Trade Balance 79 110.6 30..5 80.1 -31.6 Apr-Jun10 54.2 81.2 25.8 55.3 -27.0 % growth rate 45.7 36.2 18.1 44.7 17.0

FOCUS: DEPB & INDIAN EXPORTS

The Duty Entitlement Pass Book (DEPB) scheme expires after Sep3011. Under this scheme, exporters received incentives equivalent to 8-9% of their merchandise shipments. Currently, this export incentive is available for the product groups like (a) engineering products (b) chemicals (c) plastics, (d) leather and leather products, (e) sports goods (f) fish and fish products (g) food products (h) handicrafts (i) electronics (j) textiles and (k) miscellaneous products. FICCI estimated the incremental share of these exports to total incremental exports for the 3 year period ended FY11 (refer table 15). The results show that as on FY11, this share was more than 50%. Subsequently, the withdrawal of DEPB scheme may act as a disincentive for exporters post Sep11 (refer Impact column in Table 13)

Table 13: Exports & DEPB

Incremental share in total exports (%) FY09 Leather & leather products Source: FICCI Research & DGCI&S. Note: 1. A horizontal arrow in the impact column indicates the post Sep11 impact may be not large. A declining arrow however indicates an impact in the downward direction 2. We have not considered FY10, since it was an outlier as total exports plummeted following global crisis. . Sports Goods Chemicals products & Plastics Engineering products Electronic Goods Textiles products Handicrafts Incremental ratio to total exports (%) 0.37 0.05 7.62 30.46 16.54 3.79 -0.93 57.9 Incremental share in total exports (%) FY11 0.56 0.02 4.81 37.25 4.43 3.82 -0.01 57.2

Product group

Impact

FICCI Economy Watch, August 2011

15

As per the latest data, FDI inflows into India touched a new high of $5.65 billion during Jun11 as against $1.38 billion in Jun10. During the first quarter of current fiscal, FDI inflows jumped by 133% to reach $13.4 billion from $5.8 billion observed during the same period in FY11. The portfolio investments declined to $789 million in Jun11 from $1.3 billion in Jun10. During the first quarter of FY12 portfolio investments declined to $2.7 billion from $ 4.6 billion in FY11.

FOCUS: FDI INFLOWS INTO INDIA

The recently released World Investment Report reveals that FDI inflows into India have progressively declined from 2008 onwards. It may also be noted that dip in FDI flows into India has taken place at a time when FDI flows to emerging economies like Brazil, China, Russian Federation, Chile, Mexico, Malaysia has registered an increase. Hopefully the data for the first quarter of this fiscal reflects a reversal of this declining trend in FDI. Table 14- FDI inflows in select countries (in $ billions)
Country Argentina Brazil Chile Mexico China India Korea Malaysia Thailand Source-UNCTAD World Investment Report 2011 Russian Federation 2006 5.5 18. 8 7. 3 20.1 72. 7 20. 3 4.9 6. 1 9. 5 29. 7 2007 2008 LATIN AMERICA 6.5 9.7 34. 6 45. 0 12.5 15.2 29. 7 26. 3 ASIA 83. 5 108. 3 25. 4 42. 5 2. 6 8. 4 8.6 7. 2 11. 4 8. 4 OTHERS 55. 1 75.0 2009 4.0 25. 9 12. 9 15. 3 95. 0 35. 7 7. 5 1.4 5.0 36. 5 2010 6. 3 48. 4 15. 1 18. 7 105. 7 24. 6 6. 9 9.1 5. 8 41. 2

Indias foreign exchange reserves observed much acceleration during the last fiscal. In May 10, the reserves stood at $273.5 billion and crossed the level of $300 billion in Feb11. In Jun11, the figure further rose to $316 billion. The latest data available by RBI show foreign exchange reserves at $314.6 billion on July 8, 2011. Indias total external debt increased significantly from $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 of ECBs and short term debt. These two components together contributed around 68% of total increase in Indias external debt during this period. The share of NRI deposit in Indias external debt observed a declining trend in recent years. Indias 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 4.2 % during FY11.

FICCI Economy Watch, August 2011

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Table 15- Indias External Debt (in $billion)

Mar08 Long-term debt % to total Short-term debt % to total Source-RBI Total 178.7 (79.6) 45.7 (20.4) 224.4 Mar09 181.2 (80.7) 43.4 (19.3) 224.5 Mar10 208.7 (80.0) 52.3 (20.0) 261.0 Mar11 240.9 (78.8) 65.0 (21.2) 305.9

CORPORATE PERFORMANCE
The latest available data on corporate sector performance reveals that during the quarter ended Jun11, many sectors saw a significant downward pressure on profit margins. Comparing profit margin figures for quarter ending Jun11 with Jun10 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 profit margins. High interest cost and inputs prices took a toll on the profitability of these sectors during the quarter under review. Interestingly, Indian companies from sectors like food & beverages, hotel & tourism, machinery and textiles witnessed an improvement in their profit margins during the quarter ended Jun11 vis--vis performance during the same quarter last year. Table 16- Profitability of Indian Corporates (in %)
Indicators PAT / Total income

Jun-11 Banking services Chemicals Coal & lignite Crude oil & natural gas Fee based financial services Food & beverages Health services Hotels & tourism Industrial & infrastructural construction Information technology Machinery Metals & metal products Real estate Note- PAT: Profit after tax Source: FICCI Research & CMIE Textiles 10.34 6.48 10.63 31.99 5.2 12.29 5.53 14.11 5.05 18.07 9.1 9.5 14.74 5.16

Jun-10 12.63 1.24 14.86 32.34 18.8 5.18 9.17 6.35 6.86 19.1 5.14 10.49 26.26 3.81

FICCI Economy Watch, August 2011

17

POLICY CALENDAR
Table 17: Policy calendar
Sector Date July 711 Financial July 2511 Description Draft Microfinance bill put out for comments Pension bill to be passed in Parliamentary Standing Committee Lock-in-period in foreign portfolio investments in infrastructure halved Premature redemptions from mutual funds to be taxed Manufacturing policy passed by Ministry of Labour Announcement of construction of New DelhiMumbai industrial corridor Nuclear regulator bill to be tabled in Parliament Mines bill to seek cabinet nod Empowered Group of Ministers approves National Food Security bill Setting up of Environment regulator Draft Land Acquisition policy finalized Ministry moves new aviation policy

Aug511 Aug2311 July2811 Corporates Aug911 July811 July1211 July1211 Others July2511 July2811 Aug511