Economy matters june 2013

2,213 views

Published on

Global economies are witnessing two-speed recovery with the US economy showing firm signs of recovery, while growth in Euro Area still languishing in sub-optimal territory. Among the Asian economies, growth in Japan and China too continues to remain tepid. We discuss this in detail in the section on Global Trends in this month’s issue of Economy Matters. In the section on Domestic Trends, we analyze that the economic condition in the present scenario is in greater disarray than it was during the breakout of the global financial crisis of 2008-09, when both government as well as the RBI were quick to respond to the challenges and brought the economy back to recovery path within no time. In Corporate Performance, we examine the sectoral performance in the last fiscal in order to find the sectors which were badly hit in the wake of the current bout of economic crisis. The Sectoral spotlight for this issue is on Agriculture, a traditionally important sector of the Indian economy because of its enormous contribution in being the provider of basic source of livelihood to the most of the population in India. However in the recent past various challenges such as low agricultural yield, declining share of public investment, and lack of technological advancements have plagued the sector. We discuss the sector’s challenges and suggest measures to bolster its output. In the Special Article, we discuss India's deteriorating external position in the last few years, manifesting itself in a steady deterioration in the current account which slipped from a surplus at the start of the last decade to a huge deficit of 4.8 per cent in 2012-13. Bulk of the deterioration in current account is attributable to the sharp rise in merchandise trade deficit over the last decade. Ultimately, for India to contain its current account deficit at a more sustainable level of 2.0-2.5 per cent of GDP, it is essential that we ensure competitiveness of our goods and services, so that our imports are contained and exports boosted.

Published in: Business, Economy & Finance
0 Comments
2 Likes
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total views
2,213
On SlideShare
0
From Embeds
0
Number of Embeds
1
Actions
Shares
0
Downloads
40
Comments
0
Likes
2
Embeds 0
No embeds

No notes for slide

Economy matters june 2013

  1. 1. ECONOMYMATTERSVolume 01 No. 06June 2013 Inside This Issue Rising Risks for Current Account Deficit Cover Story Foreword 1 Executive Summary 2 Comparison of Various Macro- economic Forecasts: 2013-14 3 Global Trends 4 Domestic Trends 8 Corporate Performance 11 Sector in Focus: Agriculture 15 Special Article: Rising Risks for Current Account Deficit 20 Economy Monitor 26
  2. 2. Global economies are witnessing two-speed recovery with the US economy showingfirmsignsofrecovery,whilegrowthinEuroAreaisstilllanguishingin sub-optimal territory. Among the Asian economies, growth in Japan and China too continues to remain tepid. The optimism shown by the US Federal Reserve, in wake of encouraging economic indicators coming out of the US economy, has led to worries about the possible tapering of its asset purchase programme by end of the current year. The repercussions of this development have been felt globally, highlighted by sharp strengthening of the US dollar. The Indian Rupee too has felt the heat and weakened by more than10percentsincethestartofthisfiscal. On the domestic front, the economic condition in the present scenario is in greaterdisarraythanitwasduringthebreakoutoftheglobalfinancialcrisisof 2008-09, when both government as well as the RBI were quick to respond to the challenges and brought the economy back to recovery path within no time. The economic performance remains weak on all fronts, except for the solace of moderating trend in WPI inflation. But this positive too runs the risk of reversing soon in the wake of the sharp weakening of Rupee in recent months.Clearly,thepolicymakershavetheirjobcutout,giventheintensityof the slowdown currently. Some 'out of the box' measures are the need of the hour. India'sexternalpositionhasbeenworseningforsometime,manifestingitself in a steady deterioration in the current account which slipped from a surplus atthestartofthelastdecadetoahugedeficitof4.8percentin2012-13.Bulkof the deterioration in current account is attributable to the sharp rise in merchandise trade deficit over the last decade. Widening of current account deficit has led to sharp weakening of Rupee against the US$ amongst other things. The financing of CAD also remains a problem with the capital flows running the risk of reversing abruptly. Ultimately, for India to contain its currentaccountdeficitatamoresustainablelevelof2.0-2.5percentofGDP,it is essential that we ensure competitivenessof our goods and services, so that ourimportsarecontainedandexportsboosted. FOREWORD 1 JUNE 2013 Chandrajit Banerjee Director-General, CII
  3. 3. 2 EXECUTIVE SUMMARY GlobalTrends DomesticTrends CorporatePerformance Growth movements across the major global economies remain far from positive. Even as the US Federal Reserve showed optimism about the recovering US economy, growth in Euro Area has been constantly plummeting to negative levels. Among the Asian economies, waning growth prevails in Japan and China as well. Aggressive monetary policy reforms were seen in US, aimed at stimulating economy and lowering unemployment, and Japan, aimed at combating deep- rooted deflation; policy decisions in Europe though, are yet to jolt the continent out of recession. A mix of ingenuous and effective fiscal and monetary policies is bothindispensableanddesirableinthecurrenttimes. The performance of almost all the economic indicators in the current scenario remains weak with the only exception of WPI inflation. But the recent sharp depreciation in the Rupee has wiped out any such gains aswell.Admittedly,theeconomyisnotpassingthrough the best of times. It will be not an exaggeration to say that the domestic scenario looks to be in greater disarray than it was during the global financial crisis of 2008-09, when both the government as well RBI were quick to respond to the challenges and brought the economybacktorecoverypathwithinnotime. The performance of Indian corporates across various sectors remained mostly lackluster over the financial year 2012-13. Though, rise in profitability, driven considerably by declining input costs, especially cost of interest, provided some cheer. Uninspiring demand in the domestic economy and slackening of infrastructure projects remained issues of concern. Our analysis showsthatintermsofprofitabilitygrowth,sectorssuch as Capital Goods, Auto & Auto Parts, Metals & Minerals, Media & Entertainment and Consumer Durables displayed worrying trends. Among the relatively healthy sectors were Textile, Paper & Wood, Leather & Rubber, FMCG and Health Care & Pharmaceuticals. Moderate performance was displayed by Fertilizers & Chemicals, Banks & Financial Institutions, Oil & Gas, IT & Telecom, Construction & Construction Material and Powersectors. Agriculture has traditionally been an important sector of the Indian economy because of its enormous contribution in being the provider of basic source of livelihood to the most of the population in India. Globally India is amongst the leading producers of various agricultural products and crops like milk, pulses and jute etc. However in the recent past various challengessuchaslowagriculturalyield,decliningshare of public investment, and lack of technological advancements have plagued the sector. Overdependence on monsoon has been another major concern. As a result of these inefficiencies, food inflation has been one of the adverse by-products. With 53 per cent arable land available, there is huge room for improvement. Immense opportunities in mechanization,foodprocessingandfoodmanagement as well as branding supplemented by policy support from the government can help India cement its position asaglobalagriculturalpowerhouse. India's external position has been worsening for some time, manifesting itself in a steady deterioration in the current account which slipped from a surplus at the start of the last decade to a huge deficit of 4.8 per cent ofGDPin2012-13.Ouranalysisshowsthatthebulkofthe deterioration in the current account deficit is attributable to the sharp rise in merchandise trade deficit in the last decade or so, when it jumped by over 14 times. Amongst the various sub-sectors of exports, textilesectordidtheworstbothintermsofdeclineinits share in total exports and its growth rate over the last decade. Amongst the imports, gold & silver and coal products saw a sharp jump in their imports growth. Ultimately, for India to contain its current account deficit at a more sustainable level of 2.0-2.5 per cent of GDP, it is essential that we ensure competitiveness of our goods and services, so that our imports are containedandexportsboosted. SectorinFocus:Agriculture SpecialArticle ECONOMY MATTERS
  4. 4. 3 Comparison of Various Macroeconomic Forecasts: 2013-14 3 JUNE 2013 CII 6.0-6.4 5.3 5.5-6.0 6.50 na Citigroup 5.7 4.4 5.5 6.75 -4.1 Credit Suisse 6.5 5.8 5.9 6.75 -3.5 CRISIL 6.0 4.4 6.3 6.88 -4.5 DBS Bank 5.7 na 6.7 7.00 -4.0 Deustche Bank 6.0 2.7 5.7 6.50 -4.1 EIU 6.3 4.0 7.0 na -3.9 Goldman Sachs 6.4 na 6.0 7.00 -3.5 HSBC 6.0 5.0 6.1 7.25 -4.2 JP Morgan 5.8 na 6.3 7.00 -4.6 Morgan Stanley 5.9 na 6.2 7.00 -3.9 Nomura 5.2 na 5.5 6.75 -4.7 UBS 6.5 5.5 na 7.00 -4.4 Standard Chartered 6.0 na 6.3 7.00 -4.1 Real GDP Industrial Production WPI Inflation Interest Rate (y-o-y%) (y-o-y%) (y-o-y%) (Repo Rate) % (as a % of GDP) Current Acount na: not available
  5. 5. 4ECONOMY MATTERS GLOBAL TRENDS Gauging the Economic Performance of Major Economies The Real Gross Domestic Product in US softened to 1.8 per cent on a y-o-y basis in the first quarter of 2013 as compared to 2.4 per cent in the corresponding quarter of previous fiscal. Positive contributions to growth were made by personal consumption expenditure, whose growth improved to 2.1 per cent against a 1.8 per cent in the first quarter of 2012. An upturn was seen in the growthofresidentialfixedinvestmentto12.8percentin the first quarter of 2013 against 9.3 per cent in the comparing period last year. However, sharp drop in non- residential fixed investment to 4.1 per cent, against 12.5 per cent last year, resulted in large decline in the growth ofprivatedomesticinvestmentto4.3percentinthefirst quarterof2013against14.1percentlastyear. Growth Growth movements across the major economies of the world remain far from positive, as a downturn is visible across continents. Even as the US Federal Reserve showed optimism about the recovering US economy, growth in Euro Area has been constantly plummeting to negative levels. Among the Asian economies, waning growth prevails in Japan and China as well. Aggressive monetary policy reforms were seen in US, aimed at stimulating economy and lowering unemployment, and Japan, aimed at combating deep-rooted deflation; policy decisions in Europe though, are yet to jolt the continentoutofrecession. and government final consumption expenditure fell sharply to -1.2 per cent and -0.6 per cent respectively in the reporting quarter, as compared to growth rates of 1.3 per cent and 1.0 per cent respectively last year. The decline in gross fixed capital formation worsened to 5.5 In Euro Area, the GDP growth rate contracted further by 1.1 per cent on a y-o-y basis in the first quarter of the currentyearascomparedto-0.1percentseeninthefirst quarterof2012.AmongstthevarioussectorsofGDP,the growth of household final consumption expenditure US GDP Growth (y-o-y%) 2.4 2.1 2.6 1.7 1.8 1Q12 2Q12 3Q12 4Q12 1Q13 Source: Bureau of Economic Analysis
  6. 6. 5 Germany and Austria did moderately well during the beginning of last year but crashed to flat growths recently. Belgium, Netherlands and Spain faced marginal negative growth rates during the past five quarters; Slovenia, Italy and Portugal witnessed sharp de-growthovertheperiod. per cent in the reporting quarter, as against decline of 1.2 per cent in the same period last year. The growth trendsamongindividualcountriesintheEuroAreawere varied (see below table). The figures in Estonia and Slovak Republic remained in the positive territory during 2012 and in the first quarter of 2013; Ireland, trusts. Dragging on growth, private non-residential investment witnessed de-growth to the tune of 5.2 per cent in the first quarter of the current year, against 6.9 per cent in the corresponding period last year. Growth in private consumption and government consumption too saw decline to 1.1 per cent and 1.6 per cent respectively, as compared to 3.9 per cent and 2.3 per centlastyear. In the Asian continent, Japan saw its GDP growth slipping to 0.2 per cent on a y-o-y basis, as compared with growth to the tune of 3.2 per cent in the same period last year. Growth of public investment strengthened to 13.1 per cent as compared to 4.9 per cent previously. Growth in private residential investment improved significantly to 9.5 per cent against a flat growth last year, with the Central Bank injectingliquidityandpurchasingrealestateinvestment Euro Area GDP Growth (y-o-y%) -0.1 -0.5 -0.7 -1 -1.1 1Q12 2Q12 3Q12 4Q12 1Q13 Source: European Central Bank Country 1Q12 2Q12 3Q12 4Q12 1Q13 Austria 1.1 0.9 0.9 0.5 0.0 Belgium 0.2 -0.4 -0.4 -0.5 -0.6 Estonia 4.0 2.8 3.1 3.0 1.3 Finland 1.6 0.1 -0.7 -1.6 -2.2 France 0.3 0.1 0.0 -0.3 -0.4 Germany 1.3 1.0 0.9 0.3 -0.3 Ireland 2.1 0.8 0.9 0.0 NA Italy -1.7 -2.5 -2.6 -2.8 -2.4 Luxembourg -0.3 0.6 -0.5 1.6 NA Netherlands -0.9 -0.5 -1.3 -1.2 -1.3 Portugal -2.3 -3.2 -3.6 -3.8 -4.0 SlovakRepublic 2.9 2.3 1.9 1.0 0.8 Slovenia -0.8 -2.3 -2.8 -2.8 -3.3 Spain -0.7 -1.4 -1.6 -1.9 -2.0 EuroArea -0.1 -0.5 -0.7 -1.0 -1.1 GDP growth (y-o-y %) for Major Euro Area countries Source: European Central Bank JUNE 2013 Note: NA- Not Available
  7. 7. 6ECONOMY MATTERS decline in growth of capital goods formation, while private consumption remained the main contributor to growth. Real GDP growth in China tapered off in the first quarter of 2013 to 7.7 per cent from 8.1 per cent in the first quarter of 2012. The decline in growth was triggered by firmly anchored in line with their aim of maintaining inflation rates below, but close to 2 per cent over the medium-term. Among the Asian economies, Japan has been facing prolongednearzeroandnegativeinflation.However,in wake of recent policy reforms, the CPI-based inflation rate rose to 0.6 per cent during May 2013 as compared to 0.1 per cent in April 2013. Inflation stood at -0.3 per cent for first quarter of this fiscal as compared to 0.3 per cent over the same period last year. The monetary expansioncampaignbyBankofJapantargets2percent inflationinlessthan2years. In China, the CPI-based inflation for May 2013 softened to 2.1 per cent, helped by moderation in vegetable prices, from a rate of 2.4 per cent in April 2013, and a much higher rate of 3.2 per cent in February 2013. The inflationrateinthefirstquarterthisyearstoodat2.4per cent. China has set its inflation target for this year at 3.5 percent. Inflation In US, inflation rates have been brought down steadily for the past year. CPI-based inflation increased to 1.4 per cent in May 2013 as compared to an all-time low of 1.1 per cent in April 2013 mainly due to a rise in housing costs. Inflation stood at 1.7 per cent in first quarter of the current year as compared to 2.8 per cent in the same period last year. The Federal Open Market Committee anticipates that inflation over the medium-term will run atorbelowits2percentdesiredrange. InEuroArea,whileCPI-basedinflationhoveredbetween 2.0 per cent to 3.0 per cent during the last two years, it has come down consistently in the recent few months. The CPI-based inflation rate stood at 1.4 per cent in May 2013 as compared to 1.2 per cent in April 2013. Inflation for first quarter of the current year stood at 1.9 per cent as compared to 2.7 per cent in the same period last year. Inflation expectations for the Euro Area continue to be Japan GDP Growth (y-o-y%) Source: Bank of Japan 3.2 3.9 0.3 0.4 0.2 1Q12 2Q12 3Q12 4Q12 1Q13 China GDP Growth (y-o-y%) 8.1 7.6 7.4 7.9 7.7 1Q12 2Q12 3Q12 4Q12 1Q13 Source: National Bureau of Statistics Monthly Inflation for 2013 (y-o-y %) Source: Various Central Banks Websites 4.0 3.0 2.0 1.0 0.0 -1.0 Jan Feb Mar Apr May USA Euro Area Japan China Jan Feb Mar Apr May Jan Feb Mar Apr May Jan Feb Mar Apr May
  8. 8. 7 Interestrates The US Federal Funds Rate is currently at 0 to 0.25 per cent per annum. The interest rate on the main refinancing operations of the Euro Area was decreased by 25 basis points to 0.50 per cent in May 2013, after a gap of 10 months. This accommodative stance is aimed at supporting prospects for a recovery in the current atmosphereof weakeconomicsentiments. The Bank of Japan intends to conduct money market operations to increase the monetary base at an annual pace of 60-70 trillion yen, which stood at 159.2 trillion yen at the end of May 2013. The basic loan rate and interest rate applied to complementary deposit facility were unchanged at 0.3 per cent per annum and 0.1 per cent per annum respectively since December 2008. The People's Bank of China kept the base lending rate for working capital at 6 per cent per annum, unchanged since July 2012. In a shift from the prudent fiscal and tight monetary policy in 2008, it is expected to follow a pro-active fiscal policy and a moderately easy monetary policytostimulatetheeconomy. The connections between global events and trends in Indian economy have been strong. Substantial impact was seen on the rupee, which recorded the worst fall in a decade among the Asian currencies, closing at an all- time low of 60.6 against the US dollar on June 27. The crash was attributed to massive capital outflows on worries of withdrawal of the US stimulus, month-end dollar demand from importers and reported cash crunchinChina. Despite an uncertain and gloomy atmosphere ruling over the global economies, there might be some sanguinity after all, following policy initiatives in US and Japan. Structural reforms to correct regional imbalances in the Euro Area are expected. A mix of ingenuous and effective fiscal and monetary policies is bothindispensibleanddesirableinthecurrenttimes. Quantitative Easing- Part Three(QE3) Ripples were created across the world as US Federal Reserve Chairman, Ben Bernanke confirmed what markets had anticipated for past few weeks - a calibrated winding down of billion dollar bond buys worth US$85 billion per month, which have infused US$12 trillion of additional liquidity into global financial markets since the global financial crisis of 2008-09 and helped in keeping long-term interest rates low to boost borrowingandspending.Initsmonetarypolicymeeting held during June 18-19, 2013, Bernanke said that economic activity has been expanding at a moderate pace, longer-terminflationexpectationshaveremained stable, labor market conditions have shown improvement, though the unemployment rate remains elevated. The Federal Open Market Committee felt that fiscal policy is restraining economic growth. Confidence on the private sector to propel the recovery, even with lesser push from the Fed, reduced government spending and higher taxes, drove the Fed's optimistic stance. The withdrawal could begin later this year and end by the middle of 2014, if the economy continues to perform as expected. However, the Federal Reserve maintained that its main Federal Fund Rate won't be increased unless unemployment falls below 6.5 per cent. To support a stronger economic recovery, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. Taken together, these actions should maintain downward pressure on longer- term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative. JUNE 2013
  9. 9. 8ECONOMY MATTERS DOMESTIC TRENDS 2012-13: An Encore of 2008-09 or Worse? 2012-13, while, the growth had dipped to 6.7 per cent in 2008-09 and recovered swiftly, thereafter, to 8.4 per cent in 2009-10. Interestingly the moderation in growth in the financial crisis year of 2008-09 was largely underpinned by a sharp softening in agricultural and industrial growth. The bellwether of the Indian economy- the services sector continued to grow at a healthydouble-digitrateof10.0percentthen.In2012-13 on the other hand, the moderation in growth was broad-based with growth in all the three pivotal sectors decelerating. From the demand-side too, in 2012-13, all the domestic demand drivers slowed down with investment growth falling to multi-year lows as compared to still respectable performance in 2008-09. In another indicator of slowing of growth, non-food credit growth slumped to a decade low of 14 per cent in 2012-13, falling short of Reserve Bank of India's projection of 16 per cent, as demand for loans from companies remained weak. In 2008-09, however, it stoodataround18percent. Index of industrial production growth averaged 1.1 per cent in 2012-13 as compared to 2.9 per cent in 2008-09. The relatively healthy growth rate in 2008-09, however, masks the strong negative trend in the data post September 2008, when the actual crisis broke out with the collapse of the Lehman Brothers. In the first seven months of the fiscal (till October 2008), industrial production growth averaged a healthy 7.5 per cent as compared to -3.6 per cent in the five months thereafter. In fact, industrial output remained in the negative territory in the seven consecutive months starting from December2008. As discussed in the section on global trends, the major economies of the world continue facing turbulent times, with only US seeing some glimmer of hope as it saw a fall in its unemployment rate coupled with steady improvement in its growth rates since the last two quarters. The global gloom is finding a reflection in the domestic scenario as well, with all the major economic indicators showing little signs of turn-around. Decadal low GDP growth, historic high current account deficits, Rupeeslippingbelow60perUS$andmildimprovement in industrial production numbers are currently characterisingtheIndianeconomy. The only silver lining visible seems to be the steady moderation witnessed in the WPI based inflation rates, givingRBIthenecessaryleg-roomtocutinterestratesin order to spur growth. But the recent sharp depreciation in the Rupee has narrowed down the scope of this option.Admittedly, theeconomyis notpassingthrough the best of times. It will be not an exaggeration to say that the domestic scenario looks to be in greater disarray than it was during the global financial crisis of 2008-09, when both government as well as the RBI were quick to respond to the challenges and brought the economy back to recovery path within no time. In this article, we would aim to provide a snapshot of comparison of the present scenario with the period of crisis in 2008-09 in terms of the major macroeconomic indicators. GDP growth moderated to a decadal low of 5 per cent in ( A ) . G D P a n d I n d u s t r i a l ProductionGrowth INDIA
  10. 10. 9 contracting by 5.7 per cent as compared to 14.2 per cent growth during 2008-09. Capital goods sector is regarded as the indicator of investment activities in the economy; hence the dismal performance by the sector in the last fiscal does not bode well for the investment outlookand meaningfuleconomicrecovery. During the last fiscal, we saw industrial production growthremainingweakuniformlyformostmonths.The overallgrowthloggedwasinfacttheweakest industrial output growth in the new base series starting from 2004-05. More importantly, it was characterised by the worst performance ever by capital goods segment- brought down inflation sharply. In fact the extent of demand destruction was so severe that economy faced deflationforaperiodof2monthsin2009-10. In contrast, in 2012-13, though economic growth remained lower than the levels seen in 2008-09, but inflation continuedtoremainaboveRBI'scomfortzone of 5-5.5 per cent. It has slipped below 5 per cent only in the first two months of the current fiscal, with the latest reading at 4.7 per cent in May 2013. The main reason for inflation remaining high last year, despite sharp dip in growth, is the imbalances emerging in the demand- supply scenario, especially of food articles. As we will discuss in this month's 'Sector in Focus' too, agricultural production has lagged demand, thus leading to shortagesinfoodsupply. (B).WPIInflation WPI-based inflation averaged 7.4 per cent in 2012-13 as compared to 8.1 per cent in 2008-09. Though inflation averaged lower last year, food inflation, which remains one of its most critical components as it has the most profound impact on the common man, remained high. Food inflation remained high at 9.3 per cent in 2012-13 as comparedto8.9percentin2008-09. Again, 2008-09 was a year of two halves, with double- digitinflationlevelsseeninthefirsttwoquarterof2008- 09, followed by sharp softening. WPI-based inflation dipped to a low of 1.6 per cent by March-2009 as compared to a high of 11.2 per cent seen in August 2008. Thesharpshrinkingofdemandpostthesecondquarter, Source: CSO 6.7 5.0 1.9 0.1 4.4 2.1 10.0 7.1 y-o-y% FY09 FY13 FY09 FY13 FY09 FY13 FY09 FY13 Total GDP Agri Industry Services 15 10 5 0 -5 -10 y-o-y% Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar 2008-09 2012-13 Industrial Production GrowthGDP Growth JUNE 2013 Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar 2008-09 2012-13 12 10 8 6 4 2 0 y-o-y% WPI Inflation Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar 2008-09 2012-13 13 12 11 10 9 8 7 6 y-o-y% Total Food Inflation (Primary and Manufacturing) Source: Office of Economic Advisor
  11. 11. 10ECONOMY MATTERS sharp depreciation of the Rupee was mainly led by reversal of net FII inflows in the wake of the financial crisis and not so much by the worsening of the external account parameters. Moreover, Rupee is apparently more vulnerable in the current period as compared to 2008-09,becauseofthefollowingreasons: Highandrisingtradeandcurrentaccountdeficits Higher reliance on short-term foreign capital than themorestableFDIflowstofinancetheCAD Rising growth concerns leading to shrinking growth differential with advanced economies like US and waninginvestorconfidence DecliningnetinvisiblesbalancetocoverCAD Rapidly declining import cover in terms of months of foreignexchangereserves v v v v v C).ExternalAccount Current account deficit (CAD) remained high at 4.8 per centofGDPin2012-13ascomparedto2.3percentofGDP in 2008-09. Plunge in exports in the wake of global demand destruction along with inelastic imports has led tothesteepwideningofthemerchandisetradedeficitin the last fiscal. Consequently, in 2012-13, the Rupee weakened close to 5.3 per cent, ending the year at 54.4 perUS$comparedto51.7perUS$atthebeginningofthe year. In fact, Rupee has continued to slide in the current fiscal too, having lost close to 12 per cent since the start ofthefiscaltilljustJune26th2013. However, during the crisis period of 2008-09, the extent of weakening of the Rupee was much sharper. Rupee lostclosetoamassive28percentinvalueasittoucheda low of 51.1 per US$ by end-March 2009 as compared to a high of 40.0 per US$ at the start of the fiscal year. The Conclusion The present macroeconomic scenario is in a much worse condition than it was during the global financial crisis of 2008-09. The performance of almost all the economic indicators in the current scenario remains weak with the only exception of WPI inflation. Clearly, policy makers need to act decisively in the current period to bring the economy backongrowthtrackattheearliest,asthepresentsituationismuchweakerthantheoneprevailingin2008-09. Source: RBI Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar 2008-09 2012-13 60 55 50 45 40 35 30 Rs per US$ Exchange Rate Movement Rising External Account Vulnerability Trade deficit as a % of GDP 10.6 9.8 Current Account deficit as a % of GDP 4.8 2.3 Invisibles balance as a % of GDP 5.8 7.5 Domestic GDP growth % 5.0 6.7 Import Cover (no. of months) 7.0 Ratio of Short-term debt to total debt 24.8 19.3 Trade deficit 195.7 119.5 Invisibles balance 107.4 91.6 Current Account deficit 88.1 27.9 2012-13 2008-09 US$ billion
  12. 12. 11 Analysing Sectoral Performance in 2012-13 Textile, Paper & Wood, Leather & Rubber, FMCG and Health Care & Pharmaceuticals. Moderate performance was displayed by sectors such as Fertilizers & Chemicals, Banks & Financial Institutions, Oil & Gas, IT & Telecom, Construction&ConstructionMaterialandPower. The analysis factors in the financial performance during the past two fiscal years of a balanced panel of 3,040 1 Indian firms, spread across 16 major sectors . The information was extracted from the Ace Equity database. The performance of Indian corporates across various sectors remained mostly lackluster over the financial year 2012-13, though rise in profitability provided some cheer. A respite in the form of declining cost of services and raw materials, as well as cost of interest rate could not do much to salvage the India Inc from a large fall in net sales during the year. Our analysis shows that profitability growth in sectors such as Capital Goods, Auto & Auto Parts, Metals & Minerals, Media & Entertainment and Consumer Durables displayed worrying trends. Among the healthy sectors were CORPORATE PERFORMANCE Source: CII calculations using Ace Equity database Growth in Overall Economy (y-o-y%) 22.5 10.9 11.7 6.2 -5.2 4.0 Net Sales Operating Profit PAT FY12 FY13 to the year before, exception being the Textile sector. Net sales growth in Textile sector improved to 13.2 per cent in the last fiscal as compared to 11.1 per cent in 2011- 12, attributable largely to increased exports during the period. Aggregate net sales growth during 2012-13 stood at a measly 10.9 per cent as compared to a healthy 22.5 per cent in 2011-12, an outcome of uninspiring demand in the domestic economy. During the previous year, growth in net sales witnessed a decline in all sectors as compared 1 Auto & Auto Parts, Banks & Financial Institutions, Capital Goods, Construction & Construction Material, Consumer Durables, Fertilizers & Chemicals, FMCG, Health Care & Pharmaceuticals, IT & Telecom, Media & Entertainment, Metals & Minerals, Oil & Gas, Power, Textile, Paper & Wood, Leather and Rubber JUNE 2013
  13. 13. 12ECONOMY MATTERS contracted by 2.3 per cent in 2012-13 as compared to a growth of 10.6 per cent in the year before, reflecting the poor investment scenario in the economy. This is in tandem with the poor performance of the capital goods sector in IIP. Sinking demand for goods & services and slackening infrastructure projects remained issues of concernforcapitalgoodssector. Banks & Financial Institutions sector saw a growth in net sales to the tune of 17.7 per cent, maximum among all sectors, but lower than its 33.3 per cent growth witnessedduring2011-12.ConsumerDurablesandPower sector witnessed moderation in net sales growth to the tune of 1.9 per cent and 0.3 per cent respectively in 2012- 13 as compared to growth rates of 5.5 per cent and 15.0 per cent in 2011-12. The Capital Goods sector's growth and Media & Entertainment sectors saw a rise, all the other sectors witnessed a reduction in growth of operating profits in 2012-13 as compared to 2011-12. Sectors like Fertilizers & Chemicals, Power, Capital Goods, Consumer Durables and Metals & Minerals saw contraction in their operating profits during the last fiscal. On an aggregate basis, operating profits (profits earned from the core business operations excluding investments and the effects of depreciation, interest and taxes) growth fell to 6.2 per cent in 2012-13 as compared to 11.7 per cent in 2011-12. Amongst the sectors, while Textile, Paper & Wood, Leather & Rubber Source: CII calculations using Ace Equity database 33.3 17.7 30.2 14.6 17.0 13.9 11.113.2 13.5 11.4 Banks and Financial Institutions Oil and Gas FMCG Textile Paper and wood FY12 FY13 Net Sales Growth (y-o-y%) For Top 5 Performing Sectors 15.5 3.5 15.2 3.3 5.5 1.9 15.0 0.3 10.6 -2.3 Auto and Auto Parts Metals and Minerals Consumer Durables Power Capital Goods FY12 FY13 Net Sales Growth (y-o-y%) For Bottom 5 Performing Sectors Source: CII calculations using Ace Equity database 15.9 40.8 -13.6 30.3 18.216.7 21.2 15.3 23.5 9.8 Leather and Rubber Textile FMCG Banks and Financial Institutions IT and Telecom FY12 FY13 Operating Profit Growth (y-o-y%) For Top 5 Performing Sectors 17.3 -1.7 13.6 -1.9 -1.3 -5.2 -6.7 -5.5 3.5 -5.9 Fertilizers and Chemicals Power Capital Goods Consumer Durables Metals and Minerals FY12 FY13 Operating Profit Growth (y-o-y%) For Bottom 5 Performing Sectors and stood at 4.0 per cent in the last fiscal as against contraction to the tune of 5.2 per cent during the year before, driven considerably by declining input costs, A positive sign, however, came in form of improved PAT growth of the firms in 2012-13 as compared to 2011-12. Overall PAT growth moved into the positive territory
  14. 14. 13 materials, saw its profitability margins improving on the back of increased domestic and global investment in the sector.Leather&Rubber,FMCG,Fertilizers&Chemicals, Banks & Financial Institutions and Oil & Gas sectors too saw marginal upturn in PAT growth, mainly due to declining input costs. Even though PAT growth improved in Capital Goods, Metals & Minerals and Consumer Durables sectors in the previous year, it still remained in the negative territory. The sectors were hurt by the high interest rates, policy uncertainty and globalslowdown,amongstotherfactors. especially cost of interest. PAT growth rose sharply in Textile, Paper & Wood and Health Care & Pharmaceuticals sector, rising to 1088.5 per cent, 120.7 per cent and 15.9 per cent respectively in 2012-13 as comparedtogrowthrateof-95.8percent,-93.7percent and -66.5 per cent in the year before. Improvement in net sales, increasing FDI and government boost led to highprofitabilityinTextilessector. The Health Care & Pharmaceuticals sector, despite suffering a marginal rise in cost of services and raw Similar respite was obtained from a softening in the growth of interest cost to 19.4 per cent in 2012-13 as compared to 45.2 per cent in 2011-12. This moderation was seen across all the sectors, without any exception. The sectors that benefited the most were Paper & Wood, Leather & Rubber, IT & Telecom, and Capital Goods, where growth in interest cost fell to as much as 0.7 per cent, 17.9 per cent, 16.3 per cent and 2.5 per cent in 2012-13 from growth rates of 47.4 per cent, 66.5 per cent, 108.5 per cent and 57.2 per cent in 2011-12. This mirrors the reduction in interest rates by the RBI in the recent months; in the fourthquarter of 2012-13 itself, RBI cutthereporateby50bps. On an aggregate basis, growth in cost of services and raw materials moderated to 9.1 per cent in 2012-13 as compared to 26.7 per cent in the previous year, much to thereliefofthecompanies.Theshrinkageisattributable to both cost efficient practices employed by the Indian firms as well as slowdown in new projects. Significant costefficiencieswerevisibleinsectorssuchasLeather& Rubber, Oil & Gas and Power whereas moderate margins were experienced in Paper & Wood, Banks & Financial Institutions, Auto & Auto Parts and Metals & Minerals sectors. The exceptions were sectors including Health Care & Pharmaceuticals, Media & Entertainment and Consumer Goods where the growth in cost of servicesandrawmaterialsacceleratedlastyear. Source: CII calculations using Ace Equity database -95.8 -93.7 120.7 24.2 25.5 13.2 22.9 -66.5 15.9 Textile Paper and Wood Leather and Rubber FMCG Health Care and Pharma PAT Growth (y-o-y%) For Top 5 Performing Sectors -21.6 -6.8 1.2 -8.5 14.2 12.8 -20.132.9 -39.4-37.5 Fertilizers and Chemicals Power Capital Goods Consumer Durables Metals and Minerals PAT Growth (y-o-y%) For Bottom 5 Performing Sectors 1088.5 FY12 FY13 FY12 FY13 JUNE 2013
  15. 15. 14ECONOMY MATTERS projects, expansion in exports and accommodating economic reforms would help to lift the economy, increase sales and raise the profitability for the Indian corporatesectorintheyearstocome. While the current government policies should boost sectors such as Textile and Health Care & Pharmaceuticals, strong stimulus is vital for Capital Goods, Auto & Auto Parts, and Metals & Minerals sectors. Further, an array of fresh infrastructure Source: CII calculations using Ace Equity database Growth in Input Cost (y-o-y%) 26.7 9.1 45.2 19.4 30.7 11.5 Cost of Services and Raw Materials Cost of Interest Aggregate Cost FY12 FY13
  16. 16. Overview Agriculturehastraditionallybeenanimportantsectorof theIndianeconomy,providingbasicsourceoflivelihood to a bulk of the population in India. The latest round of NSSOreflectscloseto49 percentofthetotalworkforce being engaged in the agricultural sector. Agricultural sector is expected to meet the demands of escalating population, as well as contribute to the foreign exchangeearningsthroughexports. India has witnessed significant development in the sector since independence, attributable to technological revolutions and favorable policies. Food grains production scaled over 5 times from 1951-52, standing at 259.3 million tons in 2011-12. Globally, India ranks one in production of milk, pulses, jute and jute-like fibers; is placed second in production of rice, wheat, SECTOR IN FOCUS Agriculture sugarcane, groundnut, vegetables, fruits and cotton; and is amongst the leading producers of spices and plantation crops as well as livestock, fisheries and poultry. Growth in the sector has been largely volatile. Though theaverageannualgrowthrateimprovedto3.3percent duringthe11thfiveyearplanfrom2.4percentduringthe 10th five year plan, it still remains below the targeted growth of 4 per cent per annum. Further, the year-on- year growth pattern reflects its over-dependence on monsoons as well as external markets scenario. The share of agriculture in GDP remains another worrying issue. In recent times, challenges like low yield, waning public investment and lack of technological advancements have plagued the sector. Sluggish agricultural growth is a concern, given its critical role in meetinggrowingdemandforfood. 2008-09 2009-10 2010-11 2011-12 2012-13 14.5 15.8 14.6 14.1 13.7 Share of Agriculture in GDP Source: Central Statistics Organization 15 JUNE 2013
  17. 17. 16ECONOMY MATTERS relation between agricultural growth and overall GDP. Corresponding to a rise in agricultural growth from 0.1 per cent in 2008-09 to 7.7 per cent in 2010-11, overall GDP growthrosefrom6.7percentto9.3percentinthesame period. The same trend has also been witnessed when overallGDPfellfrom6.2percentin2011-12to5.0percent in2012-13;agriculturegrowthfellinconjunctionfrom3.6 percentto1.9percentforcomparableperiod. In the following section we discuss the various growth trends in agriculture and highlight the critical areas whichneedurgentredressal. (I) Growth Data from the last five years supports the two-way TRENDS 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 % Growth in Agriculture %Growth in GDP 9.3 5.8 6.7 8.6 7.7 9.3 3.6 6.2 1.9 5.0 y-o-y% 0.1 1 Source:CSO Overall GDP Growth VS Agriculture Growth As far as the comparison with targeted growth is concerned, actual growth rates have remained considerablylower.Inthe11thFiveYearplan,agriculture recorded a growth of 3.3 per cent against the target of 4 per cent. The 12th Five Year Plan too targets 4 per cent growth in agriculture, even though the current situation remainsgrim. Amongst states, agricultural growth recorded wide variations. During 2007-08 to 2011-12, Madhya Pradesh, Chattisgarh, Rajasthan, Jharkhand and Karnataka were the top five performing states in terms of agricultural growth, with MP and Chattisgarh recording the maximum growth of 7.6 per cent. Jammu & Kashmir, Maharashtra, Punjab, Himachal Pradesh and Kerala were the bottom five performing states, with Kerala recordingacontractioningrowthby0.7percent. Target Growth vs Actual Growth over 5 Year Plans (y-o-y%) 4.0 3.6 4.5 2.5 4.0 2.5 4.0 3.3 8th Five Year Plan 9th Five Year Plan 10th Five Year Plan 11th Five Year Plan ActualPlanned Source: Planning Commission
  18. 18. 17 growth in exports over 2008-09 to 2011-12. Further, exports increased from US$29.8 billion in 2011-12 to US$33.54 billion in 2012-13. Wheat exports from India are expected to grow by 23 per cent in 2013-14, on back of strong global prices and surplus domestic supply. Exports of rice are also expected to rise due to robust demandfromWestAsia,AfricaandSouth-EastAsia. Despite the volumes, India's share in global exports is below par when compared to countries like US, Brazil and China. Despite being a leading producer, India is placedtenthinglobalagriculturalandfoodexports. The FAIDA-3 report, released by CII-Mckinsey, highlights that in order for Indian exports to be globally cost competitive, there is a need for improvement in quality and safety standards, emphasis on branding domestic goodsandastablelong-termtradepolicy. (II)InvestmentTrends (III)Exports Low investment has been worrying, leading to declining growth in agriculture sector. Gross capital formation in the sector as percentage of agricultural GDP improved only marginally from 14.9 per cent in 2006-07 to 19.8 per cent in 2011-12, quite low when compared with overall capitalformationintheeconomystandingat35percent ofGDP.Anothermajorconcernisthecontinuousdecline in public sector capital formation in agriculture which moderated sharply from 25 per cent in 2006-07 to about 15 per cent in 2011-12. This was prompted by an increase in share of subsidies, which form a bulk of the total public sector expenditure allocated to agriculture, even asonlyaround20percentgoesasinvestments. Trends in exports have been positive, with a 120 per cent techniques are adopted and advanced technology is madeavailableatlowercosts. The impact of poor monsoons on agricultural productionis enormousas despite a significantincrease in area under irrigation over the years, almost 55 per cent of total cultivable land is still un-irrigated. There is a noted correlation between agricultural output and deviationfromLongPeriodAveragerainfall. (IV)AgriculturalYield Low agriculture yield has been major drawback, having impact on growth and investment in the sector. Though mostcropswitnessedimprovedgrowthratesduringthe 11th Plan as compared to the 10th Plan, yields were much lower when likened with developed countries. For healthier yields, it is pivotal that modern farming JUNE 2013 India Occupies 10th position in global exports with a share of 2.1% India 2.1 Malaysia, 2.3 Argentina, 2.7 Thailand, 2.9 Indonesia, 2.9 Canada, 3.6 China, 3.9 Brazil, 5.2 United States, 10.1 extra-EU (27), 9.5 European Union, 37.7 India's Position in Global Exports (%) Source: WTO, International Trade Statistics 2012
  19. 19. 18ECONOMY MATTERS Source: Indian Meteorological Department & CSO (V)FoodPrices A major impact of low yield has been the growing rate of food inflation. Food inflation has recently increased by 2 per cent and reached a level of 9.3 per cent in 2012-13 from last year indicating the continuous surge in prices. Steep rise in MSP (Minimum Support Price) has also hurt food prices. Despite their incentivizing motive, one of thenegativeimpactshasbeenriseinfoodprices. Rice Wheat Coarse Grain Barley Cotton Major OilseedsCorn World Yield (metric tons per hectare)2012-13Domestic Yield (metric tons per hectare) 2012-13 3.6 4.4 3.2 3.0 1.6 3.6 2.4 4.9 2.1 2.6 0.50 0.80 1.0 2.0 Comparison of Yield (2012-13) Source: US Department of Agriculture 15 10 5 0 -5 -10 -15 -20 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 Percentage growth in Agroculture % Monsoon deviation from LPA Vulnerability to Deficient Monsoons
  20. 20. 19 (VI)Distribution Loopholes in the distribution chain of agricultural commodities remain an issue. Higher marketing transaction costs and low price realization by the farmers in regulated markets has resulted into fragmented supply chains with large intermediations. As per CII-MCKINSEY report, up to six intermediaries in fruits and vegetable chain commonly occur in India as compared to just the wholesaler and retailer in the US foodsupplychain. JUNE 2013 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 25 20 15 10 5 0 -5 -10 -15 -20 -25 % Deviation of monsoons from LPA WPI- Food Inflation (%) % Growth in food-grain production Impact of Deficient Monsoon on Food Inflation and Production (y-o-y %) Source: IMD, Ministry of Industry & Ministry of Agriculture Recommendations The proposals for the sector are not entirely contingent upon technology or investment. The problem is also institutional.CIIrecommendsthefollowingmeasuresinordertoimprovethesector'soutputandproductivity. 1. Linking agriculture to markets can be achieved by implementation of the Model Act (amended APMC Act), taking out fruits & vegetables and fisheries from the ambit of the law, providing freedom to farmers to sell directly to food processing companies, aggregators etc. and ensuring that market fee is applicable on availing marketfacilitiesandnotontransactionsoutsidethemarketyard. 2. Creation of a common market for agricultural produce can be brought about by transition to single license and singlepointlevyofmarketfee. 3. Creation of a land market for commercial agriculture is possible through consolidation of sizeable farmlands by leasing, to benefit from economies of scale, protection to farmer against any possible loss of his land to the tenant and formulation of permissible leasing period and other provisions to incentivize the lessee to invest in improvementofproductivity. 4. Thereisaneedtoencouragingprivatesectorinvestmentsinthesector. CONCLUSION The agriculture sector in India continues to be plagued by multiple challenges like low productivity and yield, inadequate access to irrigation water, poor delivery mechanism and weak marketing chain, and inadequate investment capital. A strong capital base, thus, becomes crucial for tackling issues like adoption of advanced technology and development of infrastructure for facilitating all agricultural activities. Also important is significant increases in public and private expenditure in research and development, extension services, irrigation and rural infrastructure. At the same time, resource use-efficiency and prevention of over-exploitation of natural resources alsoneedtobetakenuptopromotesustainablepractices.
  21. 21. 20ECONOMY MATTERS surplus to the tune of US$14.1 billion (2.3 per cent of GDP) at the start of the decade (2003-04) to a huge deficit of US$88.2 billion (-4.8 per cent of GDP) by 2012- 13.ThedeteriorationinCADhasworsenedinthelasttwo years, with the deficit rising above 4 per cent for the first time ever. Bulk of the deterioration in CAD is due to the astronomical rise in merchandise trade deficit from US$13.7 billion in 2003-04 to US$195.7 billion in 2012-13, a jumpofover14times intheperiodoflast10years. Burgeoning Current Account Deficit The recent sharp rise in the current account deficit (CAD), both in absolute terms and as a percentage of GDP, due to the sharp widening of the merchandise trade deficit has exacerbated the risks on the external account. Current account balance has slipped from a Rising Risks for Current Account Deficit SPECIAL ARTICLE Current Account Has Widened Sharply in the Last One Decade Source: RBI 20 10 0 -10 -20 -30 -40 -50 -60 Current account balance (US$ bn) Current account balance (as a % of GDP) RHS 3 2 1 0 -1 -2 -3 -4 -5 -6 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 DissectingCurrentAccountDeficit Thecurrentaccountbalancecomprisesofthebalanceof trade of merchandise goods and net invisibles transactions i.e. net exports of business, financial and Widening of CAD has led to sharp weakening of Rupee against the US$ amongst other things. The financing of CAD also remains a problem with the capital flows runningtheriskofreversingabruptly.
  22. 22. 21 JUNE 2013 software services, net transfer payments (includes workers' remittances) and net income received from abroad. Merchandise deficit (MD) and transfers have been the dominant component influencing the overall balance. Over the decade, however, while the contribution of net inflow of transfers has remained stable, that of MD has increased sharply. MD stood at 10.6 per cent of GDP in 2012-13 as compared to 4.7 per centin2003-04,growingatCAGRof8.5percent.Arisein invisibles, more specifically from software services, has been partially offsetting MD. Net software exports have grown at a CAGR of 17.8 per cent over the last decade. In 2012-13,invisiblessurplussurgedtoUS$107.5billioneven as the MD inflated to US$195.7 billion, pushing the CAD to 4.8 per cent of GDP from 4.2 per cent in the previous fiscal year, which is way above the range of 2.5 - 3.0 per centthatisconsideredtobe sustainableforIndia. MD has increased on account of a host of global and domestic factors, which led to moderate growth in merchandise exports and higher growth in imports. Exports growth suffered due to the adverse impact of suppressed external demand. Imports growth meanwhile continued to remain buoyant mainly due to inelastic imports of two commodities - petroleum, oil & lubricants (POL) and gold. Our analysis shows that merchandise trade deficit without net gold imports would have been 3.0 percentage points of GDP lower thanthatrecordedduring2012-13. (US$ billion) 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 Merchandise -13.7 -33.7 -51.9 -61.8 -91.5 -119.5 -118.2 -130.6 -189.8 -195.7 -Exports 66.3 85.2 105.2 128.9 166.2 189.0 182.4 250.5 309.8 306.6 -Imports 80.0 118.9 157.1 190.7 257.6 308.5 300.6 381.1 499.5 502.2 Invisibles 27.8 31.2 42.0 52.2 75.7 91.6 80.0 84.6 111.6 107.5 -Services 10.1 15.4 23.2 29.5 38.9 53.9 36.0 48.8 64.1 64.9 -Transfers 22.2 20.8 24.7 30.1 41.9 44.8 52.0 53.1 63.5 64.0 -Income -4.5 -5.0 -5.9 -7.3 -5.1 -7.1 -8.0 -17.3 -16.0 -21.5 TotalCurrentAccount 14.1 -2.5 -9.9 -9.6 -15.7 -27.9 -38.2 -45.9 -78.2 -88.2 Broad components of current account balance (as per old format) Source: RBI India's Trade Deficit with and without Gold Imports Source: RBI & CII estimates 0 -2 -4 -6 -8 -10 -12 % of GDP 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 MD with gold imports MD without gold imports
  23. 23. 22ECONOMY MATTERS Exports & Imports: Sectoral Performance Another step-down analysis into the components of the MD reveals that even though exports have grown at a CAGR of about 16.5 per cent during the last decade, imports have grown at more than 20 per cent. This suggests that the underlying trend in MD is dominated bytrendinimports. Indiasawitsforeigntradeexpandremarkablyinthepast decade. India's total trade with the world touched US$809 billion in 2012-13, growing at a compounded annual growth rate of 18.7 per cent since 2003-04. Although, the pace of exports growth was punctuated twice by sharp slowdown in the world economy during 2008-09andduringthelasttwofiscalyears,India'strade prospects have continued to grow over time. India's exports were worth US$64.0 billion in 2003-04, which morethanquadrupledtoUS$300.5billionin2012-13. In the merchandise trade, manufacturing goods still constitute the lion share of total merchandise exports. They constituted over 60 per cent of total exports in 2012-13, a fraction that has remained mostly unchanged over the decade, although dipped marginally last year. The value of manufactured goods exports has more than quadrupled to US$186.8 billion over the decade. Exports of primary products, with their share remaining fairly constant at little below 15 per cent during 2003-04 to 2012-13, have also scaled over five times in dollar value terms, growing at a CAGR of 18.0 per cent over the last ten years. Importantly, petroleum and its products have broughtinsubstantialrevenuesthatsoaredfromUS$2.6 billionin2003-04toUS$55.6billionin2012-13.Theirshare too has increased four times in the decade to a little below20percentin2012-13.Jumpinexportvaluesisalso attributable to soaring agricultural, mineral and metal commodityprices. In a worrying sign, growth in exports of manufactured productsmoderatedsharplyto18.2percentin2012-13as comparedto37.2percentintheyearbefore.Amongthe manufactured goods, exports of chemical & allied products grew the fastest, with growth figures standing at 28.8 per cent in 2012-13 and 26.0 per cent in 2011-12, surpassing the growth in traditional sectors such as textile and products (particularly readymade garments) andgems&jewellery. Exports of engineering goods have their outlook more intensely entwined with the global economic prospects, hence their growth slipped sharply last year. Engineering goods exports moderated sharply to 15.4 percentin2012-13ascomparedtoahealthy51.9percent in the year before. However over the last decade, the sector grew at a CAGR of 22 per cent, which was a good performance going by the industry standards. Amongst the various categories of engineering goods, transport equipmentwitnessedthemaximumgrowth,standingat 30.3 per cent in 2012-13, though much lower than 63.4 Imports of Gold on a Rise ImportofGold (US$billion) GrowthRate(y-o-y%) 2001-02 4.1 -0.7 2002-03 4.2 1.2 2003-04 3.8 -7.8 2004-05 6.5 69.5 2005-06 10.5 61.7 2006-07 10.8 2.8 2007-08 14.5 33.5 2008-09 16.7 15.6 2009-10 20.7 23.9 2010-11 28.6 38.2 2011-12 40.5 41.6 2012-13 56.2 38.7 Source: RBI
  24. 24. 23 JUNE 2013 per cent last fiscal. Electronic Goods sector, on the other hand, witnessed sharp decline. Growth in export of iron & steel goods moderated sharply to 26.1 per cent as compared to 41.2 per cent in 2011-12 in tandem with the banonminingofironoreinmajorproducingstates. Major labour-intensive products such as gems & jewellery and textile products saw moderation in export growth in 2012-13 as compared to 2011-12, despite the doling of sops for the ailing sector in the Foreign Trade Policy in recent quarters. The deceleration in growth has been caused by shrinking demand in developed countries. Further, an adverse trend was visible in the share of textile & textile products which fell to nearly halfover2003-04to2012-13period. Petroleum & petroleum products saw a weakening in the growth of exports to 34.0 per cent in 2012-13 as compared to a healthy 47.1 per cent in 2011-12. Primary products, on the other hand, saw desirable improvement in the growth of exports to 38.8 per cent against 24.4 per cent in 2011-12, on the backing of an expansion in export of agriculture and allied products, even as the export of ores and minerals contracted sharplyoverthelasttwoyears. Table 1: Sectoral Exports Source: RBI & CII estimates Percentage Shares of Growth Rates (y-o-y%) CAGR (%) Total Exports 2003-04 2011-12 2012-13 2003-04 2011-12 2012-13 2003-04 to 2012-13 Manufactured 62.9 51.6 62.2 20.6 37.2 18.2 16.6 Goods Engineering 14.1 19.0 22.3 29.8 51.9 15.4 22.2 Goods Transport Equipment 2.1 5.2 7.0 30.7 63.4 30.3 31.7 Machinery & Instruments 3.1 3.9 4.8 15.8 24.1 21.3 21.7 Manufacture of Metals 2.9 2.8 3.2 15.2 53.1 13.7 17.9 Electronic Goods 2.0 2.7 3.0 6.9 50.3 8.4 21.7 Iron and Steel 2.9 1.7 2.1 106.7 41.2 26.1 13.3 Gems & Jewelry 14.1 13.2 15.6 23.6 39.6 15.9 17.9 Chemicals & 11.7 9.4 12.4 23.2 26.0 28.8 17.4 Allied Products Basic Chemicals, 7.3 6.3 8.1 26.0 22.4 26.6 18.0 Pharmaceuticals & Cosmetics Plastic & Linoleum 1.9 1.5 2.1 23.7 39.4 36.0 17.9 Products Rubber, Glass, Paints, 1.9 1.2 1.6 21.7 30.6 32.7 14.8 Enamels Textile & Textile 18.2 7.9 9.3 13.8 22.0 15.6 9.2 Products Readymade Garments 8.9 3.8 4.6 13.6 8.4 18.0 9.2 Cotton Yarn & Fabrics 5.2 1.9 2.3 9.1 57.0 17.6 7.3 Manmade Yarn & Fabrics 2.1 1.4 1.7 28.8 18.7 18.4 13.9 Petroleum 4.0 13.6 18.5 21.6 47.1 34.0 36.0 Products Primary 13.6 10.7 15.2 21.5 24.4 38.8 18.0 Products Agriculture & 10.5 7.9 12.5 13.7 36.5 54.6 18.8 Allied Products Ores & Minerals 3.1 2.8 2.7 58.1 -0.3 -5.6 15.1
  25. 25. 24ECONOMY MATTERS India's total imports have grown over six times over the last ten years, standing at US$491.0 billion in 2012-13. The shares of both non-bulk as well as bulk imports have increased over the years. Non-bulk imports, with a share of nearly 55 per cent, amounted US$274.7 billion in 2012- 13, after having increased seven fold since 2003-04. Bulk imports, with a share of little over 40 per cent, rose by nine times to US$214.8 billion over the decade. Bulk imports broadly include petroleum products and consumption goods. While, non-bulk imports include mainlycapitalgoodsandexportsrelateditems. Non-bulk imports, on whole, witnessed a declined growth of 25.6 per cent in 2012-13 as compared to 34.1 per cent in 2011-12, even though the number stood at mere 19.1 per cent in 2003-04. Among non-bulk imports, an enormous growth of around 44 per cent was seen in the import of gold & silver over last two years. This is a huge increase from negative growth during 2003-04. Notably,itssharetoohasmorethandoubledsince2003- 04. In particular, the share of gold alone in 2012-13 was 11.5 per cent of the total imports, an outcome of the frenzied buying in response to steep drop in international gold prices along with lack of attractive financial instruments in the wake of high inflation. An increase in gold import duty and several other measures to incentivise financial savings were taken by the government to curb gold imports in the last quarter of 2012-13. Coal, coke & briquettes too registered a high growth of 77.5 per cent in their imports, a large increase from 9.5 per cent in 2011-12, in response to an increased demand from power stations and steelmakers. Their share too, hasdoubledoverthedecade.CapitalGoodssectorsawa rise in its imports from 19.3 per cent in 2011-12 to 26.5 per cent in 2012-13, much lower though from 36.6 per cent in 2003-04. Among capital goods, transport equipment showedhighgrowthinimportsascomparedtoprevious year, though the figure was still lower than that in 2003- 04. This growth was, however, partly contributed by a sharpriseinprices.Importsinprojectgoodstooshowed increase,bothintermsofvalueandshare. Bulkimportsincreasedsharplythisyearwithagrowthof 42.1 per cent as compared to 20.6 per cent in 2011-12 and 19.9 per cent in 2003-04. Among bulk imports, petroleum, crude & products, with a share of little over 30 per cent in total imports, showed large increase in growth of imports to 46.2 per cent as compared to 21.6 percentin2011-12.Therisewascreditedtobothincrease inshareandincreaseinprices. Imports in fertilizers sector, not only saw its share getting tripled since 2003-04, but also grew sharply by 60.8 per cent in 2012-13 as compared to 4.8 per cent in 2011-12, mostly because of a sharp increase in imports of manufactured fertilisers. This was in tandem with increased production and exports of agriculture and allied products, and was responded by the government with a decrease in custom duties on import of equipment for setting up and expansion of fertilizer projects. Consumption goods saw a growth in imports by 31.2 per cent as compared to a contraction by 1.8 per centlastyear,evenasitssharehasbeenfluctuatingover theyears. Growthinimportsofiron&steelandnon-ferrousmetals sawadrop.Ahighexcisedutytodiscourageexportsand givemoreaccesstoironoretoIndiansteelmakersdrove thisdecline.
  26. 26. 25 JUNE 2013 Conclusion India's external position has been deteriorating for some time, manifesting itself in a steady deterioration in the current account which slipped from a surplus at the startofthelastdecadetoahugedeficitof4.8percentin 2012-13. Our analysis shows that the bulk of the deterioration in CAD is attributable to the sharp rise in merchandise trade deficit in the last decade or so, when it jumped by over 14 times. Amongst the various sub- sectors of exports, textile sector did the worst both in terms of decline in its share in total exports and its growth rate over the last decade. Some urgent remedial measures for this sector are the need of the hour. Amongst the imports, gold & silver and coal products saw a sharp jump in their imports growth during the last decade. Both these items have been the main culprits from the imports side responsible for the widening of the trade deficit in the last decade. Though recently policy makers have taken some measures to curb imports of these two commodities, but a lot more still needs to be done. As regards to arresting gold imports, apart from the administrative measures to curb the same, we also need to address the lack of alternative savings instruments that are perceived to be safe in the long-termbytheinvestors. Ultimately,forIndiatocontainitscurrentaccountdeficit at a more sustainablelevel of 2.0-2.5 per cent of GDP,it is essential that we ensure competitiveness of our goods and services, so that our imports are contained and exportsboosted. Source: RBI & CII estimates Table 2: Sectoral Imports Percentage Shares of Growth Rates (y-o-y%) CAGR (%) Total Exports 2003-04 2011-12 2012-13 2003-04 2011-12 2012-13 2003-04 to 2012-13 Non Bulk 47.4 44.7 55.9 19.1 34.1 25.6 22.2 Imports Capital Goods 17.2 16.1 20.2 36.6 19.3 26.5 22.1 Electronic Goods 7.2 5.4 6.6 48.1 26.7 22.8 19.3 Machinery excluding 4.6 4.9 6.2 20.0 21.2 26.8 23.8 Electrical Transport Equipment 2.4 2.3 2.9 65.1 -2.2 22.7 22.2 Project Goods 0.7 1.3 1.8 -4.6 31.2 43.0 32.1 Gold & Silver 5.5 8.7 12.5 -6.4 43.5 44.4 30.5 Gold 4.9 8.3 11.5 -7.8 41.6 38.7 30.8 Pearls, Precious & 7.7 7.1 6.2 31.2 114.0 -11.8 17.5 Semi precious Stones Organic & Inorganic 3.9 3.1 3.9 8.1 27.9 24.5 20.1 Chemicals Coal, Coke & 1.6 2.0 3.5 8.4 9.4 77.5 30.2 Briquettes Artificial Resins & 1.0 1.4 1.5 16.0 37.7 9.6 25.4 Plastic Material Bulk Imports 31.1 30.9 43.7 19.9 20.6 42.1 24.3 Petroleum, Crude 22.5 21.7 31.5 26.0 21.6 46.2 24.3 & Products Iron and Steel 1.2 2.1 2.4 13.2 25.9 15.5 28.9 Fertilizers 0.8 1.5 2.3 -7.8 4.8 60.8 33.8 Manufactured 0.5 1.3 1.9 -21.4 3.6 51.0 38.6 Fertilizers Metalliferous Ores, 1.3 2.0 2.7 -9.3 26.3 37.9 29.1 Metal Scrap Consumption Good 3.1 1.8 2.4 18.0 -1.8 31.2 17.0 Edible Oils 2.3 1.3 2.0 33.8 17.4 47.2 18.2 Non Ferrous Metals 0.9 0.8 1.0 3.0 35.7 19.8 22.0
  27. 27. 26ECONOMY MATTERS ECONOMY MONITOR GLOBAL GDP (y-o-y%) DOMESTIC GDP GROWTH (y-o-y%) WPI INFLATION (y-o-y%) INDEX OF INDUSTRIAL PRODUCTION (IIP) (y-o-y%) US GDP Growth (y-o-y%) Japan GDP Growth (y-o-y%) IndustryOverall GDP Overall 1Q12 2Q12 3Q12 4Q12 1Q13 2.4 2.1 2.6 1.7 1.8 -0.1 -0.5 -0.7 -1.0 -1.1 1Q12 2Q12 3Q12 4Q12 1Q13 Euro Area GDP Growth (y-o-y%) 3.2 3.9 0.2 0.4 0.4 1Q12 2Q12 3Q12 4Q12 1Q13 8.1 7.6 7.4 7.9 7.7 1Q12 2Q12 4Q12 China GDP Growth (y-o-y%) 3Q12 1Q13 5.1 5.4 5.2 4.7 4.8 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 2.0 2.9 1.7 1.8 1.4 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 Agriculture 2.1 1.8 1.3 2.5 2.7 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 7.3 7.7 7.6 6.7 6.6 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 Services 7.3 7.3 5.7 4.9 4.7 Jan-13 Feb-13 Mar-13 Apr-13 May-13 11.4 10.5 7.4 5.8 6.7 Primary Jan-13 Feb-13 Mar-13 Apr-13 May-13 9.3 10.6 7.8 8.8 7.3 Fuel Jan-13 Feb-13 Mar-13 Apr-13 May-13 4.9 4.8 4.3 3.4 3.1 Manufacturing Jan-13 Feb-13 Mar-13 Apr-13 May-13 General Manufacturing Electricity Mining 0.6 2.5 3.4 1.9 -1.6 Jan-13 Feb-13 Mar-13 Apr-13 May-13 2.7 2.1 4.2 2.3 -2.1 Jan-13 Feb-13 Mar-13 Apr-13 May-13 6.4 -3.2 3.5 4.2 6.2 Jan-13 Feb-13 Mar-13 Apr-13 May-13 -1.8 -7.7 -2.7 -3.3 -5.7 Jan-13 Feb-13 Mar-13 Apr-13 May-13
  28. 28. 27 JUNE 2013 14.9 10.3 17.8 20.1 12.2 Exports (%) Imports (%) Jan-13 Feb-13 Mar-13 Apr-13 May-13 Trade Deficit (US$ Bn) 21.7 17.1 21.1 31.8 18.2 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 Current Account Deficit (US$ Bn) 53.8 54.4 58.4 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Avg Exchange Rate (Rs/US$) 54.4 55.0 EXTERNAL ACCOUNT Source: RBI, CSO, SEBI, Office of Economic Advisor, Bureau of Economic Analysis, Euro Stat, Bank of Japan, National Bureau of Statistics MONETARY VARIABLES (%) CAPITAL FLOWS (US$ billion) OTHER IMPORTANT INDICATORS (y-o-y%) Jan-13 Feb-13 Mar-13 Apr-13 May-13 Non-Food Credit Growth (y-o-y%) Jan-13 Feb-13 Mar-13 Apr-13 May-13 12.7 12.4 12.4 12.5 12.1 M3Growth (y-o-y%) Repo Rate (%) Apr-13 Jun-13May-13 7.75 7.50 7.25 7.25 Cash Reserve Ratio (%) 4.00 4.00 4.00 4.00 Feb-13 Mar-13 Apr-13 May-13 Net FII Flows (US$ billion) Net FDI Flows (US$ billion) Forex Reserves (US$ billion) 290.6 292.6 296.4 287.9 285.5 Feb-13 Mar-13 Apr-13 May-13 Jun-13 ECB flows (US$ billion) Feb-13 Mar-13 Apr-13 May-13 Jun-13 5.3 2.7 2.0 5.2 -7.5 2.3 0.5 1.0 2.8 4QFY12 2QFY13 3QFY13 4.00 Jun-13 4.2 4QFY131QFY13 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Core Sector Growth (y-o-y%) 10.2 3.1 8.3 8.2 3.0 Cement Production Growth (y-o-y%) Steel Production Growth (y-o-y%) -20.5 -23.6 -7.8 11.5 2.5 Commercial Vehicles Production Growth (y-o-y%) 1.9 0.5 6.6 1.9 4.1 Jan-13 Feb-13 Mar-13 Apr-13 May-13 3.7 3.2 2.4 2.3 -2.4 15.8 16.1 14.0 14.7 15.5 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 3.1 2.6 1.3 2.8 1.95 Feb-13 Mar-13 4.2 6.9 1.7 -1.1 -4.6 2.6 -2.9 11.0 6.9 -0.4 Feb-13 Mar-13 Apr-13 May-13 Jun-13
  29. 29. DISCLAIMER Copyright©2013byConfederationofIndianIndustry(CII),Allrightsreserved. No part of this publication may be reproduced, stored in, or introduced into a retrieval system, or transmitted in any form or by any means (electronic, mechanical, photocopying, recording or otherwise), without the prior written permission of the copyright owner. CII has made every effort to ensure the accuracy of information presented in this document. However, neither CII nor any of its office bearers or analysts or employees can be held responsible for any financial consequences arising out of the use of information provided herein. However, in case of any discrepancy, error, etc., same may please be brought to thenoticeofCIIforappropriatecorrections. Published by Confederation of Indian Industry (CII), The Mantosh Sondhi Centre; 23, Institutional Area, Lodi Road, New Delhi- 110003(INDIA), Tel:+91-11-24629994-7,Fax:+91-11-24626149;Email:info@cii.in;Web:www.cii.in
  30. 30. ECONOMYMATTERS n n n Keeps readers abreast of global & domestic economic developments Monthly Journal of top management of 8000 companies Read by CII Members, Thought Leaders, Diplomats, Policy Makers, MPs and other decision makers The Facts n n n n n n Domestic Trends Corporate Performance Sector in Focus Special Article Economy Monitor Global Trends The Coverage CII invites full-page* Advertisements for this flagship document at an attractive rate of Rs 50,000 per issue and Rs 5 lakh for 12 issues * Full page size : 11.75 inch (Height) by 8.25 inch (Width) For more details, Please Contact: Confederation of Indian Industry The Mantosh Sondhi Centre, 23, Institutional Area, Lodi Road, New Delhi- 110003 (INDIA) Tel : +91-011-24629994-7, Fax: +91-011-24626149; Email: Ecoresearch@cii.in Dr. Danish A. Hashim, Director- Economic Research
  31. 31. Economic Research Services CII's Economic Research Wingprovides customised, comprehensive and in-depth research and analysisthroughitsteamofreputedandexperiencedeconomists. Capable of efficiently catering to wide ranging research needs of various stakeholders including; industries, business houses,governmentandinternationalorganizations. Services Portfolio Research Fields Economy CII conducts research by industry /region/ state to offer - Macroeconomic perspective on the economy Inputs for policy formulation Forecasting of trends v v v International CII works with international organisations to offer - Analysis of global economic trends Analysis of business trends Management strategies v v v CII works in over 50 sectors and offers - Sector reports Comprehensive business & market research Surveys v v v Industry Society & Living CII analyses socio-economic indicators to offer - Research and analysis on public policy Social security and public management systems v v CII Economic Research Advantages Wide presence within India v v 63 offices in India 10 centers of excellence Large global footprint v v 7 overseas offices Institutional partnership with 224 counterpart organizations in 90 countries v v Access to over 7100 direct and 90,000 indirect members (including SMEs and MNCs) Liason with government & international organizations A reference point for Indian Industry Highly experienced team vWell established team of economists with expertise in handling diverse topics and sectors For CII Economic Research Services, please contact Dr. Danish A. Hashim, Director- Economic Research 23, Institutional Area, Lodi Road, New Delhi- 110 003, India, T: +91-11-2462 9994-7, Extn: 409, F: +91 -11-2462 6149, M: 9650446625, E: danish.hashim@cii.in Research Projects Business Research & Consulting Customised Reports Industry Surveys Regular Publications
  32. 32. Notes
  33. 33. Notes
  34. 34. The Confederation of Indian Industry (CII) works to create and sustain an environment conducive to the development of India, partnering industry, Government, and civil society, through advisory and consultative processes. CIIisanon-government,not-for-profit,industryledandindustrymanagedorganization,playingaproactiverolein India's development process. Founded over 118 years ago, India's premier business association has over 7100 member organizations, from the private as well as public sectors, including SMEs and MNCs, and an indirect membershipofover90,000companiesfromaround257nationalandregionalsectoralassociations. CII charts change by working closely with Government on policy issues, interfacing with thought leaders, and enhancing efficiency, competitiveness and business opportunities for industry through a range of specialised servicesandgloballinkages.Italsoprovidesaplatformforconsensus-buildingandnetworkingondiverseissues. Extending its agenda beyond business, CII assists industry to identify and execute corporate citizenship programmes. Partnerships with over 120 NGOs across the country carry forward our initiatives for integrated and inclusive development, in affirmative action, healthcare, education, livelihood, diversity management, skill development,empowermentofwomen,andwater,tonameafew. The CII Theme for 2013-14 is Accelerating Economic Growth through Innovation, Transformation, Inclusion and Governance.Towardsthis,CIIadvocacywillaccordtopprioritytosteppingupthegrowthtrajectoryofthenation, while retaining a strong focus on accountability, transparency and measurement in both the corporate and social eco-system, building a knowledge economy, and broad-basing development to help deliver the fruits of progress tomany. With 63 offices including 10 Centres of Excellence in India, and 7 overseas offices in Australia, China, France, Singapore, South Africa, UK, and USA, as well as institutional partnerships with 224 counterpart organizations in 90countries,CIIservesasareferencepointforIndianindustryandtheinternationalbusinesscommunity. ABOUT CII Research The CII Research team regularly tracks economic, political and business developments within India and abroad to comment on the emerging economic scenario for the Indian corporate sector. It tracks policy developments, offers comprehensive analysis of industries and comments on and analyzes the economic climate through its regularpublications–EconomyMatters,BusinessOutlookSurveyand,FortnightlyEconomicUpdates. We have in-house expertise in providing the most comprehensive, in-depth, unbiased and incisive analysis and forecasts on the Indian economy and various sectors. CII Research is also well versed and well equipped to offer customized research based consultancy services on any theme. It has been catering to the needs of various stakeholders including industries, business houses and government providing meaningful insights about the prevailing trends, outlook on likely future trends, factors behind these trends, existing government policies and policyrecommendationswith an objectiveto help stakeholders in better understandingof the issues at hand.The objective of CII Research is to assist stakeholders in taking more informed and strategic decisions with due focus ontheattainmentofshorttermaswellaslongtermgoals. Formoredetailsandtoadvertiseinourproducts,write tousatecoresearch@cii.in

×