Current State of IndianEconomyJune 2011                          Page | 1
Current State of Indian Economy – June 20111EXECUTIVE SUMMARYGDP growth      GDP growth figures for Q4, 2010-11, highligh...
Core Sector   Data for April 2011 shows a perceptible decline in performance of the core sector with growth dipping from ...
   The re-emergence and intensification of the sovereign debt crisis in Europe and the expected halt of    quantitative e...
Growth in Net Sales (%)                                                              Growth in Total Expenses (%)30       ...
Current State of Indian Economy – June 2011INDEXMACRO ECONOMY                                 7   GDP Growth             ...
Current State of Indian Economy – June 2011GDP GrowthThe Central Statistical Organisation (CSO) has released the revised e...
Moving on to the quarterly estimates for GDP growth for the fourth quarter of 2010-11, we see thatalthough the economy’s p...
With regard to GDP growth in the year 2011-12, it was noted even in our earlier report that the initialguidance provided b...
Table 4 – Comparison of weights assigned in the Old and New series of IIP Indices                  Sectors                ...
Table 5 – Trends in Industrial Production – YOY growth in percent                                     2009-10             ...
chooses to evaluate. In fact, as per the old series, the slowdown in industrial growth is moreaccentuated with growth in I...
It was mentioned even in our earlier report that the rising interest rates in the economy have startedhaving a bearing on ...
base year has also been revised to 2004-05. The new expanded list of sectors that now make up the coresector along with th...
fertilizer sector can be attributed to reported shortages in availability and supply of both coal andnatural gas.In case o...
Looking at inflation data at the disaggregated level throws up an interesting trend. For most part of the      year 2010, ...
percent. Further, as per the latest data available, ‘Manufactured Goods’ segment recorded an inflationof 7.3 percent in Ma...
Fourth, the government has recently announced a hike in the Minimum Support Prices [MSP] for goodslike paddy, soybean and ...
44.9 percent, to Asia by 43 percent and to Middle East by 31 percent during April-December 2010 overthe corresponding peri...
prices. It is also important to note that rising crude oil prices have increased the inland transportationcost and even th...
Table 17 – Foreign Investment Flows in US$ Million    Year            FDI             YoY         Portfolio     YoY       ...
22   Electrical equipments          154.36       641.41       -75.93    ↓      0.84         2.61       ↓   23   Textiles  ...
weaken. The re-emergence and intensification of the sovereign debt crisis in Europe and the expectedhalt of quantitative e...
Exchange RateMost recent trends in the movement of the INR vis-à-vis major vehicle currencies show that the IndianRupee ha...
Indian economy
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Indian economy
Indian economy
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Indian economy
Indian economy
Indian economy
Indian economy
Indian economy
Indian economy
Indian economy
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Indian economy

  1. 1. Current State of IndianEconomyJune 2011 Page | 1
  2. 2. Current State of Indian Economy – June 20111EXECUTIVE SUMMARYGDP growth GDP growth figures for Q4, 2010-11, highlight an unmistakable downward trend. While in Q1, 2010-11, GDP grew by 9.3 percent, in Q4, 2010-11, GDP growth came down to 7.8 percent. Sectors like manufacturing and mining & quarrying have seen considerable erosion of growth momentum over the last one year. While consumption demand is still holding, a sharp decline in growth of investments is seen. Growth in Gross Fixed Capital Formation [GFCF] has dipped from 17.4 percent in Q1, 2010-11 to 0.4 percent in Q4, 2010-11. Given the evolving situation, growth in 2011-12 is likely to be close to the 8 percent mark. Quarterly Growth in GDP (2004-05 prices) 14 12 10 8 6 4 2 0 Q1 2010-11 Q2 2010-11 Q3 2010-11 Mining and quarrying Manufacturing Q4 2010-11 GDP at factor costIndustrial Production Weakness in industrial production trend continues. In April 2011, IIP registered a growth of 6.3 percent. In April 2010, growth in IIP was to the tune of 13.1 percent. Amongst the use based industrial groups, a similar streak of weakness is seen with growth in the capital goods segment, intermediate goods segment and consumer goods segment slowing down from 35.5 percent, 11.9 percent and 13.8 percent respectively in April 2010 to 14.5 percent, 3.4 percent and 2.9 percent in April 2011. IIP growth and Repo rate 14 13 12 11 10 9 8 7 6 5 4 Dec10 Jan11 Jun10 Aug10 May10 Mar11 Apr10 Jul10 Sep10 Oct,10 Nov10 Feb11 Apr11 IIP Repo rate1 This report has been prepared by the Economic Affairs and Research Division, FICCI Page | 2
  3. 3. Core Sector Data for April 2011 shows a perceptible decline in performance of the core sector with growth dipping from 8.5 percent in April 2010 to 4.6 percent in April 2011. Sectors like natural gas, fertilizers, cement and steel are largely responsible for this poor performance. Growth in the coal sector however moved from (-) 2.9 percent in April 2010 to 2.8 percent in April 2011.Inflation The inflation situation in the economy continues to be a cause for concern. Despite large scale tightening of the monetary policy by the RBI and other steps taken by the government, inflation continues to remain close to the double digit mark. In May 2011, WPI based headline inflation stood at 9.1 percent. This is higher than 8.7 percent inflation recorded in April 2011. Core inflation too has moved up from 8 percent in April 2011 to 8.6 percent in May 2011. Near term outlook for inflation is not too encouraging and there are chances that we may see inflation jump to the double digit territory on a few occasions. High international oil prices, likely decontrol of diesel prices, high global food prices and hike in Minimum Support Prices for the upcoming agriculture season are some of the factors that constitute the upside risks to inflation.Foreign Trade The strong momentum in exports, seen particularly during the second half of 2010-11, has continued in the year 2011-12 as well. In April 2011 exports totaled US$ 23.8 billion and represented a growth of 34.4 percent over the same month of the previous year when exports totaled US$ 17.7 billion. While this strong start in 2011-12 is encouraging, there are indications that this high growth will not be sustained in the months ahead. Rising interest rates, rising raw materials costs and oil prices, withdrawal of incentive schemes like DEPB and likely slowdown in Asian economies are some of the reason that have tempered the outlook for exports. In April 2011, our imports totaled US$ 32.8 billion and registered a growth of 14.1 percent over the same month of the previous year when imports amounted to US$ 28.8 billion. With developments in the Middle East and North Africa region showing no signs of a let up and with OPEC resisting any upward revision in daily oil production quota, oil prices are likely to remain firm in the near term. This will continue to put pressure on India’s overall oil import bill. As regards non-oil imports, while a slowdown in the domestic economy could lead to some moderation in the non-oil import bill, any large respite here can be ruled as prices of commodities other than oil are also firming up.Foreign Investments In 2010-11, foreign investment flows into India saw a dip of about 17 percent over the previous year. Further, this dip is largely on account of a slowdown seen in case of FDI. In 2009-10, FDI inflows into India totaled US$ 37.7 billion. In 2010-11, this figure came down to US$ 27 billion. Data also shows that of out of the top 25 sectors, 15 sectors have seen a dip in FDI flows during April – Feb 2010-11 compared to the same period in 2009-10. Sectors like services, construction, housing and real estate, telecommunication and agricultural services are the ones where investment flows have slowed down considerably. In 2010-11, portfolio flows totaled US$ 31.5 billion and were only a tad below US$ 32.4 billion received in 2009-10. The outlook for portfolio flows in the current year is not too encouraging. Global fund managers are particularly concerned over the evolving macro-economic situation with inflation showing limited signs of abatement and growth slowing down at a fast clip. Page | 3
  4. 4.  The re-emergence and intensification of the sovereign debt crisis in Europe and the expected halt of quantitative easing policy in the US by the end of June 2011 are also downside factors for portfolio flows for emerging markets including India.Forex Reserves In April 2011, India’s foreign exchange reserves totaled US$ 313 billion. The increasing size of our foreign exchange reserves has drawn attention of the policymakers. Just some time back, Dr. Kaushik Basu, Chief Economic Advisor, Ministry of Finance, had raised the question of India to consider having a Sovereign Wealth Fund. In more recent times, a few independent analysts have opined that a part of these huge reserves be deployed to import commodities which are or could be in short supply in the economy.Money and Banking The year on year growth in money supply in the period up to May 21, 2011 was 16.8 percent. Growth in the corresponding period [up to May 22, 2010] in the previous year was 15.1 percent. The year on year growth in non-food credit in the period up to May 21, 2011 has been almost 22.1 percent. This is higher than the credit growth target of 19 percent set by the RBI for the current year. Growth in deposits in the period up to May 21, 2011 has been of the order of 17.4 percent and is in line with RBI target growth of 17 percent for the current year. These numbers indicate that the trend seen in the previous year – of deposit growth lagging credit growth – continues in the current financial year. The growth rate in deposits has picked up in recent months and to that extent eased some pressure on the banks as they worked hard to maintain their margins.Fiscal Situation The provisional estimates for 2010-11 for various fiscal variables show a definite improvement over the revised estimates (RE), with a more than anticipated rise in revenue collection and reduction in expenditure. The striking feature of the new estimates is the reduction in fiscal deficit [4.7 percent] number compared to the revised estimate [5.1 percent] given during presentation of the union budget. Though the fiscal deficit numbers for 2010-11 are encouraging, maintaining fiscal discipline in 2011-12 is looking increasingly difficult.Corporate Sector Performance – Q4, 2010-11 In the fourth quarter of fiscal 2010-11, corporate India turned out a good performance both in terms of sales and profits. Such a performance is particularly noteworthy as it came at a time when overall expenses are going up at a fast clip. Net sales of ‘All Industries’ in the fourth quarter of 2010-11 registered a growth of 23.5 percent. This is the highest growth in net sales that we have seen in the last eight quarters. Further, while firms from the manufacturing sector saw an increase of 22.26 percent in net sales in the last quarter of 2010-11, companies from the services (other than financial) sector saw sales going up by 27.46 percent. Within the manufacturing sector, growth in sales has been particularly strong in sectors such as textiles, cement, steel and transport equipment. Performance of the food and beverages sector and the chemicals sector lagged the average growth for the manufacturing sector as a whole. Total expenses for ‘All Industries’ went up by 23.52 percent in Q4, 2010-11. This growth is the highest seen in last four quarters. Further, while the manufacturing sector saw total expenses rise by 21.68 percent in Q4, 2010-11, services (other than financial) saw an increase of 31.29 percent. Within the manufacturing sector, the increase in total expenses in the quarter under review was particularly high in sectors such as cement [48.12 percent] and steel [30.06 percent]. Page | 4
  5. 5. Growth in Net Sales (%) Growth in Total Expenses (%)30 4020 3010 20 10 0 0 Q1 09-10 Q2 09-10 Q3 09-10 Q4 09-10 Q1 10-11 Q2 10-11 Q3 10-11 Q4 10-11-10 Q1 09-10 Q2 09-10 Q3 09-10 Q4 09-10 Q1 10-11 Q2 10-11 Q3 10-11 Q4 10-11 -10-20 -20 All industries All industries Manufacturing Manufacturing Services (other than financial) Services (other than financial) Page | 5
  6. 6. Current State of Indian Economy – June 2011INDEXMACRO ECONOMY 7 GDP Growth 7 Industrial Production 9 Core Sector 13 Inflation 15 Foreign Trade 18 Foreign Investments 20 Forex Reserves 23 Exchange Rate 24 Money and Banking 25 Fiscal Situation 27CORPORATE SECTOR PERFORMANCE – Q4, 2010-11 31 All industries 31 Textiles 33 Cement 34 Steel 35 Chemicals 36 Transportation 37 Food and Beverages 38ROUND UP OF KEY DEVELOPMENTS 39 Draft National Manufacturing Policy 39 RBI’s Financial Stability Report 39CHARTS 40 Industrial Production 40 Inflation 42 Foreign Trade and Foreign Investments 43DATA ON INTEREST RATES 44
  7. 7. Current State of Indian Economy – June 2011GDP GrowthThe Central Statistical Organisation (CSO) has released the revised estimates for GDP for 2010-11.Alongside, it also released the quarterly estimates for GDP for the fourth quarter of 2010-11.According to the latest numbers made available by CSO, India’s GDP at factor cost at constant pricesregistered an increase of 8.5 percent in the year 2010-11. This revised estimate of 8.5 percent growthfor GDP in 2010-11 is only a shade below the advance estimates that had pegged GDP growth for 2010-11 at 8.6 percent.This slight dip in overall GDP growth can be attributed to weaker performance in sectors such as ‘miningand quarrying’, ‘manufacturing’, ‘trade, hotels, transport and communication’ and ‘financing, insurance,real estate and business services’ than anticipated earlier.In case of the agriculture and allied activities sector, we find that the revised estimates have peggedgrowth in 2010-11 at 6.6 percent, which is much higher compared to the advance estimates that had putgrowth at 5.4 percent.In this context it is important to note that the third advance estimates of crop production released bythe Ministry of Agriculture have shown a significant upward revision as compared to second advanceestimates in the production of wheat [84.27 million tonnes from 81.47 million tonnes], pulses [17.29million tonnes from 16.51 million tonnes], oilseeds [302.51 lakh tonnes from 278.48 lakh tonnes] andsugarcane [340.54 million tonnes from 336.70 million tonnes]. These revisions are responsible for liftingthe GDP growth rate for agriculture and allied activities sector.Another sector where we see a substantial upward revision in growth rate between the advance andrevised estimates is the ‘community, social and personal services’ sector. While in its advance estimate,CSO had indicated a growth of 5.7 percent for this sector, in the revised estimates this figure has beenmoved up to 7.0 percent. This revision comes on the back of a larger increase in total expenditure of thecentral government than anticipated earlier.The moderation in the expected pace of expansion of the ‘mining’ and ‘manufacturing’ sectors can berelated to certain adverse policy developments as well as hardening of the interest rates in theeconomy. Further, as performance of the ‘financing, insurance, real estate and business services’ sectoris closely related to performance of the manufacturing sector, this sector too has seen a slippage ingrowth between advance and revised estimates. Table 1 – Growth in GDP at factor cost by economic activity (2004-05 prices) 2008-09 2009-10 2010-11 2010-11 (QE) (AE) (RE) 1 Agriculture, forestry and fishing -0.1 0.4 5.4 6.6 2 Mining and quarrying 1.3 6.9 6.2 5.8 3 Manufacturing 4.2 8.8 8.8 8.3 4 Electricity, gas and water supply 4.9 6.4 5.1 5.7 5 Construction 5.4 7.0 8.0 8.1 6 Trade, hotels, transport and communication 7.6 9.7 11.0 10.3 7 Financing, insurance, real estate and business services 12.5 9.2 10.6 9.9 8 Community, social and personal services 12.7 11.8 5.7 7.0 9 GDP at factor cost 6.8 8.0 8.6 8.5 QE: Quick Estimates AE: Advance Estimates RE: Revised Estimates Source – CSO, MOSPI, Govt. of India Page | 7
  8. 8. Moving on to the quarterly estimates for GDP growth for the fourth quarter of 2010-11, we see thatalthough the economy’s performance is still decent at 7.8 percent, an unmistakable downward trend isvisible. Quarterly growth estimates show that GDP growth has come down from 9.3 percent in Q1,2010-11 to 8.9 percent in Q2, 2010-11 to 8.3 percent in Q3, 2010-11 and further down to 7.8 percent inQ4, 2010-11.Amongst sectors, the ones that have seen a considerable erosion of growth momentum over the lastone year are ‘mining and quarrying’ and ‘manufacturing’. While in case of the former, the growth figureshave come down from 7.1 percent in Q1, 2010-11 to 1.7 percent in Q4, 2010-11, in case of the latter,growth has moderated from 12.7 percent in Q1, 2010-11 to 5.5 percent in Q4, 2010-11.The performance of the ‘agriculture and allied activities’ sector in the fourth quarter has beenparticularly strong at 7.5 percent. The other sectors that have registered strong growth in Q4, 2010-11are ‘electricity, gas and water supply’ [7.8 percent], construction [8.2 percent], ‘trade, hotels, transportand communication’ [9.3 percent] and ‘financing, insurance, real estate and business services’ [9.0percent]. Table 2 – Growth in GDP at factor cost by economic activity (2004-05 prices) – Quarterly numbers Q1 Q2 Q3 Q4 2010-11 2010-11 2010-11 2010-11 1 Agriculture, forestry and fishing 2.4 5.4 9.9 7.5 2 Mining and quarrying 7.1 8.2 6.9 1.7 3 Manufacturing 12.7 10.0 6.0 5.5 4 Electricity, gas and water supply 5.6 2.8 6.4 7.8 5 Construction 7.7 6.7 9.7 8.2 6 Trade, hotels, transport and communication 12.6 10.9 8.6 9.3 7 Financing, insurance, real estate and business services 9.8 10.0 10.8 9.0 8 Community, social and personal services 8.2 7.9 5.1 7.0 9 GDP at factor cost 9.3 8.9 8.3 7.8 Source – CSO, MOSPI, Govt. of IndiaA look at quarterly GDP figures by expenditure class shows that growth in private final consumptionexpenditure is maintained at a robust 8 percent even in the fourth quarter of the fiscal 2010-11.However, what is worrisome is the trend in the growth numbers for gross fixed capital formation, whichshows that year on year growth has tapered from 17.4 percent in Q1, 2010-11 to just about 0.4 percentin Q4, 2010-11. This is a clear indication of weakness in the investment activity level in the economy anddoes not bode well for growth in the current year. Table 3 – Growth in GDP at market prices by expenditure (2004-05 prices) – Quarterly numbers Q1 2010- Q2 2010- Q3 2010- Q4 2010- 11 11 11 11 1 Private Final Consumption Expenditure 8.9 8.9 8.6 8.0 2 Government Final Consumption Expenditure 6.7 6.4 1.9 4.9 3 Gross Fixed Capital Formation 17.4 11.9 7.8 0.4 4 Change in Stocks 11.7 9.0 5.1 4.6 5 Valuables 28.0 21.2 18.5 32.3 6 Exports 10.0 10.7 24.8 25.0 7 Imports 15.5 11.6 0.4 10.3 8 GDP at Market Prices 9.4 9.1 9.2 7.7 Source – FICCI computations based on data provided by CSO, MOSPI, Govt. of India Page | 8
  9. 9. With regard to GDP growth in the year 2011-12, it was noted even in our earlier report that the initialguidance provided by Ministry of Finance of 9 percent growth is looking increasingly difficult to achieve.With time even the government has come around this view and growth projection for the year 2011-12has been lowered to 8 to 8.5 percent.It is interesting to note that in FICCI’s most recent Economic Outlook Survey, results of which werereleased in May 2011, the median forecast for GDP growth in the current year comes to 8 percent.The inputs and projections provided by various participating economists in this survey show that whilethe agriculture and allied activities sector is projected to grow by 3.7 percent this year, industry andservices sector are poised to grow by 8 percent and 9.2 percent respectively.The key risks to growth in India in the current year are the negative impact of continuous tightening ofmonetary policy by RBI and a slowdown in global growth due to high international oil prices. Further,although the Indian Meteorological Department has projected a normal monsoon this year, we will haveto wait for more updates to get a clearer picture on the spatial distribution of the monsoon. Projected GDP growth [India] in 2011-12 Projected growth [Sectors] in 2011-12 Organisation Projection in % 10 9.2 Morgan Stanley 7.7 8 8 8 IMF 7.8 6 FICCI 8.0 3.7 Nomura 8.0 4 DBS 8.0 2 CARE 8.0 0 Standard Chartered 8.1 GDP Agriculture Industry Services Indicus 8.7 and allied Dun and Bradstreet 8.8 activities ADB 8.8 Source – FICCI Compilation Source – FICCI Economic Outlook Survey, May 2011Industrial ProductionThe Central Statistical Organisation (CSO) has revised the base year for the industrial production dataseries from 1993-94 to 2004-05. The new series also incorporates a much larger set of items2 that reflectthe contemporary production activity in the country and is expected to offer a better gauge of thecountry’s industrial activity. The weighting diagram of the three major sectors under two digit levelindices and four different goods sectors under use – based classification has also changed to capture thechanging structure of economy effectively. The new set of weights that would now be followed is givenin the following table.2 Some of the items included in the new series are mobile phones, digital cameras, fruit juices, laptops, new chemical items andprocessed food. Page | 9
  10. 10. Table 4 – Comparison of weights assigned in the Old and New series of IIP Indices Sectors Old series New series 1993-94 Base Year 2004-05 Base Year Two-digit level Indices Mining 10.47 14.16 Manufacturing 79.36 75.53 Electricity 10.17 10.32 General Index 100.00 100.00 Use- based Index Basic goods 35.57 45.68 Capital goods 9.26 8.83 Intermediate goods 26.51 15.69 Consumer goods 28.66 29.81 Durables 5.37 8.46 Non durables 23.30 21.35 General Index 100.00 100.00 Source – CSO, MOSPI, Govt. of IndiaAs the above table shows, in the new series, while the weight of the mining sector has gone up that ofthe manufacturing sector has gone down. Amongst the use based segments, while basic goods haveseen their weight go up substantially, intermediate goods have seen a reduction in the weight assignedfor construction of the index.Even before data as per the new series for industrial production was brought out by CSO, economicanalysts had predicted that data as per the new series would provide an upward bias to growth as itwould incorporate ‘new fast growing sectors’ of the economy.The new numbers have confirmed this and we see a substantial change in growth performance in 2010-11 when we compare the results of the new series with the results based on the old series. It is alsointeresting to note that the adverse impact on industrial production in the period following the globalslowdown is also accentuated as per the new series and this is reflected in the numbers for 2009-10.As the data given in the next table shows, overall industrial production [as per the new series] registereda growth of 8.2 percent in 2010-11. And this is much better than the 5.3 percent growth clocked in2009-10. Further, a good part of industrial growth in 2010-11 was driven by the manufacturing sector,which recorded a growth of 8.9 percent compared to a growth of 4.8 percent in 2009-10. The other twosectors, mining and manufacturing, however saw their performance going down in 2010-11 comparedto 2009-10.Coming to the use-based classification, we see that all sectors, barring consumer durables, saw animprovement in performance in 2010-11 over 2009-10. And among the sectors that saw animprovement in performance, the capital goods sector stands out as its growth improved from 1percent in 2009-10 to 15 percent in 2010-11.As mentioned earlier, these numbers, based on the new industrial production series, reflect a muchdifferent and improved performance compared to results based on the old series. Page | 10
  11. 11. Table 5 – Trends in Industrial Production – YOY growth in percent 2009-10 2010-11 2010-Apr 2011-Apr Old New Old New Old New Old New Series Series Series Series Series Series Series SeriesGeneral Index 10.5 5.3 7.8 8.2 16.6 13.1 4.4 6.3Mining 9.9 7.9 5.9 5.2 12.0 9.2 2.1 2.2Manufacturing 11.0 4.8 8.2 8.9 18.0 14.5 4.4 6.9Electricity 6.0 6.1 5.6 5.5 6.9 6.5 6.4 6.4 Use-based industrial groupsBasic goods 7.2 4.7 6.3 6.0 9.1 6.7 5.6 7.3Capital goods 20.9 1.0 9.5 15.0 64.1 35.5 2.5 14.5Intermediate goods 13.6 6.0 8.8 7.2 10.8 11.9 2.4 3.4Consumer goods 6.2 7.7 7.5 8.3 11.9 13.8 5.9 2.9Durables 24.6 17.0 21.0 14.1 32.1 23.3 9.2 3.8Non-durables 0.4 1.4 2.2 3.9 4.8 6.8 4.5 2.1 Source – CSO, MOSPI, Govt. of India Coming now to the growth figures for the month of April 2011, we see that overall industrial production [as per the new series] registered a growth of 6.3 percent. This performance is much weaker compared to a growth of 13.1 percent registered in April 2010. Amongst other sectors a palpable slowdown is noticeable in sectors such as mining and manufacturing with growth slowing from 9.2 percent and 14.5 percent respectively in April 2010 to 2.2 percent and 6.9 percent respectively in April 2011. Amongst the use based industrial groups, a similar streak of weakness is seen with growth in the capital goods segment, intermediate goods segment and consumer goods segment slowing down from 35.5 percent, 11.9 percent and 13.8 percent respectively in April 2010 to 14.5 percent, 3.4 percent and 2.9 percent in April 2011. Table 6 – Trends in Industrial Production – YOY growth in percent [Old Series] Month/ Mining Mfg Electricity General IIP Month/ Mining Mfg Electricity General IIP Year growth Year growth Dec09 11.12 19.62 5.42 17.95 Dec10 5.97 2.07 5.99 2.58 Jan10 15.34 17.90 5.57 16.78 Jan11 1.76 3.68 10.47 4.03 Feb10 11.02 16.11 7.33 15.13 Feb11 0.99 3.63 6.75 3.65 Mar10 12.31 16.45 8.33 15.55 Mar11 0.39 8.42 7.19 7.78 Apr10 11.97 18.00 6.87 16.64 Apr11 2.06 4.37 6.43 4.38 Source – CSO, MOSPI, Govt. of India Table 7 – Trends in Industrial Production – YOY growth in percent [New Series] Month/ Mining Mfg Electricity General IIP Month/ Year Mining Mfg Electricity General IIP Year growth growth Dec09 7.52 10.24 5.45 9.50 Dec10 5.93 8.72 5.97 8.17 Jan10 11.61 14.48 5.55 13.33 Jan11 1.69 8.09 10.49 7.52 Feb10 8.17 15.30 7.35 13.73 Feb11 0.95 7.21 6.76 6.44 Mar10 11.07 16.31 8.33 14.94 Mar11 0.27 10.35 7.18 8.87 Apr10 9.20 14.45 6.53 13.08 Apr11 2.15 6.88 6.44 6.30 Source – CSO, MOSPI, Govt. of India The slow growth of the industrial sector seen in the month of April 2011 is part of a longer trend visible since the close of 2010. As data given in the tables above show, industrial production numbers have been weak for some time now and this trend is confirmed irrespective of the data series that one Page | 11
  12. 12. chooses to evaluate. In fact, as per the old series, the slowdown in industrial growth is moreaccentuated with growth in IIP being under 5 percent in four of the last five months.If we look at the numbers for the industrial production as per the use based classification, we again seea loss of momentum in industrial production in recent months. The only point of departure betweendata based on the old and the new series is in the reported performance of the capital goods sector.Using the old series, we see that capital goods production has registered negative growth in three of thelast five months with growth in April 2011 still being an anemic 2.53 percent. However, as per the newseries, capital goods production registered a growth of 15.4 percent and 14.5 percent in the months ofMarch and April 2011.These figures, which are not all that weak, will have to be monitored going aheadto see if some trend is emerging here. Table 8 – Trends in Industrial Production – Use Based / YOY growth in percent [Old Series] Month/ Year Basic Capital Intermediate Consumer Total Durable Non-durable Dec09 8.35 42.89 23.50 10.45 41.04 2.96 Jan10 11.47 57.93 22.23 0.42 28.21 -7.02 Feb10 8.53 46.68 15.85 6.27 29.09 -0.83 Mar10 10.79 36.00 13.54 9.27 32.57 1.50 Apr10 9.12 64.10 10.82 11.88 32.12 4.83 Source – CSO, MOSPI, Govt. of India Table 9 – Trends in Industrial Production – Use Based / YOY growth in percent [Old Series] Month/ Year Basic Capital Intermediate Consumer Total Durable Non-durable Dec10 6.10 -9.00 6.79 3.50 19.48 -1.89 Jan11 7.57 -18.06 7.75 12.22 23.88 7.89 Feb11 6.03 -18.15 8.61 11.04 23.46 6.00 Mar11 4.39 13.56 6.14 8.16 12.74 6.15 Apr11 5.63 2.53 2.37 5.92 9.19 4.47 Source – CSO, MOSPI, Govt. of India Table 10 – Trends in Industrial Production – Use Based / YOY growth in percent [New Series] Month/ Year Basic Capital Intermediate Consumer goods Total Durable Non-durable Dec09 5.81 4.84 12.44 15.08 46.45 0.20 Jan10 8.74 14.28 14.19 18.61 57.40 0.01 Feb10 5.61 39.41 10.34 16.61 28.89 8.73 Mar10 7.35 48.60 10.97 12.62 12.96 12.36 Apr10 6.66 35.48 11.89 13.82 23.28 6.75 Source – CSO, MOSPI, Govt. of India Table 11 – Trends in Industrial Production – Use Based / YOY growth in percent [New Series] Month/ Year Basic Capital Intermediate Consumer Total Durable Non-durable Dec10 7.80 20.16 8.08 3.57 7.78 0.65 Jan11 7.68 5.35 7.39 8.23 12.49 5.02 Feb11 5.58 -4.05 5.75 12.13 18.23 7.49 Mar11 6.26 15.40 1.80 11.67 13.92 9.86 Apr11 7.31 14.46 3.43 2.87 3.80 2.07 Source – CSO, MOSPI, Govt. of India Page | 12
  13. 13. It was mentioned even in our earlier report that the rising interest rates in the economy have startedhaving a bearing on industrial activity. Recent news reports indicating increase in inventories withautomobile dealers, decline in steel imports, slowdown in cement sales, fewer inquiries for purchase ofcommercial vehicles and build up of unsold stocks with real estate players are all symptomatic of aslowdown and highlight how consumption and investment demand are responding to the evolvinginterest rate scenario. Such developments have created a negative perception and depressed theconfidence level of corporate India. Table 12 – Projects under implementation stalled and new projects announced Under Implementation Stalled New Projects Qtr ending Nos Rs Crore Nos Rs Crore Jun 2009 257 281384 654 242061 Sep 2009 293 337359 760 382118 Dec 2009 308 311214 1047 458435 Mar 2010 330 318251 1169 572300 Jun 2010 338 305545 1178 708103 Sep 2010 376 272760 993 356784 Dec 2010 390 291816 982 292872 Mar 2011 389 274366 989 252912 Source – CMIEIn this context it may be mentioned that once the pace of investments, which is crucial for overallgrowth of the economy, loses momentum, it is difficult to bring it back. Unfortunately, we may just bestanding at the tipping point of such a situation. The data on projects under implementation stalled andnew projects announced provided by the Centre for Monitoring the Indian Economy (CMIE) confirmsthat the pace of investments has taken a beating. As the table given above shows while the totalnumber of projects under implementation stalled has been slowly inching up over the last one year, thetotal number of new projects announced in a quarter has been falling during the same time.When we view the trends in GDP growth and gross fixed capital formation presented in the earliersection along with the trends in industrial production and new investment intentions of corporate India,we reach the conclusion that the health of the economy is not in the best of states and that some urgentaction is required to arrest this slowdown in investments.In fact, in FICCI’s most recent Business Confidence Survey, members of corporate India had indicated thefollowing five point strategy for the authorities to revitalize industrial and economic growth in thecountry –  Lower interest rates, particularly the cost of credit to SMEs.  Fasten the pace of implementation of infrastructure projects.  Check the incessant rise in price of industrial inputs and raw materials.  Continue with incentives offered to exporters.  Maintain fiscal discipline.Core SectorThe composition of the core sector has also undergone a change with two new segments being added tothe existing list of six industries. These two new segments are fertilizers and natural gas and with theaddition of these segments the combined weight of core sector in IIP has increased from 27 percent to37.9 percent. As part of this revision, weights of the existing sectors have also seen some change and Page | 13
  14. 14. base year has also been revised to 2004-05. The new expanded list of sectors that now make up the coresector along with the weights attached is presented in the following table. Table 13 – Segments of the Core Sector Segment Weight in the old series Weight in the new series Overall Index 26.68 37.90 Coal 3.22 4.38 Crude Oil 4.17 5.21 Natural Gas - 1.71 Refinery Products 2.00 5.94 Fertilizers - 1.25 Steel 5.13 6.68 Cement 1.99 2.41 Electricity 10.17 10.32 Source – Office of Economic Adviser, MOC&I, Govt of IndiaIf we look at the numbers for the core sector as per the new series, we see that this sector registered agrowth of 5.7 percent during the year 2010-11. This growth was lower than the growth of 6.6 percentthat was posted in the year 2009-10. At the disaggregated level, the sectors that saw a weakerperformance in the year 2010-11 vis-à-vis 2009-10 are coal, natural gas, fertilizers, cement andelectricity. The remaining sectors namely crude oil, refinery products and steel saw an improvement inperformance in 2010-11 over 2009-10. Table 14 – Growth in the core sector – New series 2009-10 2010-11 April 2010 April 2011 (Apr-March) (Apr-March)Overall 6.64 5.72 8.50 4.62Coal 8.12 -0.30 -2.96 2.84Crude Oil 0.55 11.94 5.16 10.97Natural Gas 44.59 9.97 54.11 -9.32Refinery Products -0.45 2.98 5.34 6.62Fertilizers 12.69 -0.02 7.83 -1.33Steel 6.05 8.89 12.91 4.80Cement 10.53 4.52 8.76 -1.06Electricity 6.17 5.48 6.89 6.79 Source – Office of Economic Adviser, MOC&I, Govt of IndiaAs the data given in the table above shows, performance of the coal sector nose-dived in 2010-11 withgrowth plummeting from 8.12 percent in 2009-10 to (–) 0.3 percent in 2010-11. The main reason whyproduction in the coal sector remained almost flat in 2010-11 is the tough stance and stringentenvironmental norms with regard to coal mining adopted by the Ministry for Environment and Forests.Additionally, law and order problems in select mining areas of the country also had a bearing on overallcoal production.Just like coal, performance of the natural gas sector also deteriorated with growth slipping from a highof 44.6 percent in 2009-10 to just about 10 percent in 2010-11. This dip in growth of natural gasproduction can be ascribed to the fall in natural gas production in the KG D6 basin operated by Reliance.The performance of the fertilizer sector has also been lackluster with growth slowing down dramaticallyfrom 12.69 percent in 2009-10 to a negative 0.02 percent in 2010-11. This poor state of affairs in the Page | 14
  15. 15. fertilizer sector can be attributed to reported shortages in availability and supply of both coal andnatural gas.In case of the cement sector, the growth numbers show a drop from 10.53 percent in 2009-10 to 4.52percent in 2010-11. As mentioned in our earlier report, this drop can be attributed to rising cost of rawmaterials (particularly coal) and difficulties in getting environmental clearances. Slowdown in theexecution of government projects in recent months particularly in the five poll bound states has also hadan impact on cement sector. Additionally, there are reports that the construction sector is facingshortages of labour and this has affected cement dispatches and production.The slowdown in growth in the electricity sector from 6.17 percent in 2009-10 to 5.48 percent in 2010-11 can mainly be attributed to poor performance in the thermal power generation segment thataccounts for nearly 65 percent of the total generation capacity in the country. Thermal powergeneration suffered a major setback during the last fiscal due to shortage of coal and delays in providingfuel linkages to thermal plants. A considerable number of power projects were said to get delayedbecause of uncertainty in the availability and supply of coal. The Ministry of Environment and Forest(MoE&F) categorized 203 coal blocks as no go mining zones and this has also contributed to supplyshortfalls. According to estimates given by Ministry of Coal, these 203 coal blocks could have generatedaround 1.3 lakh MW of power annually, thus, helping attain the yearly target for the year.Amongst the sectors that saw an improvement in performance in 2010-11 over the previous year, crudeoil stands out as growth in this sector jumped from 0.55 percent in 2009-10 to 11.94 percent in 2010-11.This growth was driven by companies in the private sector and the joint sector and their share indomestic oil production improved from 15.6 percent in 2009-10 to 25.7 percent in 2010-11. RelianceIndustries and Cairn India showed exemplary performance and contributed the maximum to thisincrease in oil output during the year.The latest numbers for the month of April 2011 show that there has been a perceptible decline in theperformance of the core sector with growth dipping from 8.5 percent in April 2010 to 4.62 percent inApril 2011. Sectors like natural gas, fertilizers, cement and steel are largely responsible for this poorperformance. A positive take away from April 2011 numbers is the performance of the coal sector,which grew by 2.84 percent.InflationThe inflation situation in the economy continues to be a cause for concern. Despite large scaletightening of the monetary policy by the RBI and other steps taken by the government, inflationcontinues to remain close to the double digit mark.Data shows that WPI based headline inflation stood at 10 percent in the year 2010-11. This is not onlymuch higher compared to the average inflation rate of 3.6 percent seen in 2009-10 but also way abovethe 5 percent mark considered as the ‘growth promoting inflation level’ or the ‘normal inflation level’ bythe RBI.Latest numbers on inflation are available for the month of May 2011 and these show that headlineinflation stood at 9.1 percent in May 2011. Although it is slightly lower than 10.5 percent inflationregistered in May 2010, it is still too high as per RBI’s standards. Data on the month on month growth inWPI based inflation also shows that the underlying inflationary pressures in the economy aremaintained. The month on month growth in inflation in May 2011 stood at 0.7 percent. In the previoustwo months – March and April – the corresponding figures stood at 0.9 percent and 0.7 percentrespectively. Page | 15
  16. 16. Looking at inflation data at the disaggregated level throws up an interesting trend. For most part of the year 2010, it was the ‘Primary Articles’ segment which contributed substantially to overall inflation. Further, within the ‘Primary Articles’ segment, it was ‘Food Articles’ where inflation was at an uncomfortably high level throughout 2010. However, beginning 2011, we see that the contribution of the other two broad segments, namely ‘Fuel & Power’ and ‘Manufactured Goods’, to overall inflation has gone up swiftly while that of ‘Primary Articles’ has come down. It is however important to note that while inflation in case of ‘Food Articles’ may be trending down, it is still high for any comfort. Further, while inflationary pressures seen in case ‘Fuel and Power’ can be attributed to the increase in prices of items like petrol and coal, the buildup of inflationary pressure in manufactured goods is largely the result of rising prices of raw materials and industrial inputs and which are being passed on by manufacturers in the final prices of their products. With inflationary pressures slowly spreading to all the three broad segments of WPI, the RBI has also drawn attention towards inflation getting increasingly generalized. In fact, if we look at the numbers for core inflation, which captures the non-volatile components of WPI, then we see that over time the gap between headline inflation and core inflation has been coming down. In fact in the month of May 2011, core inflation stood at 8.6 percent. This was not only higher compared to core inflation in the month of April 2011 (8.0 percent) but also close to overall inflation rate, which, as previously mentioned, stood at 9.1 percent in May 2011. Further, if we look at the numbers for month on month growth of core inflation, then we see that while in April 2011, the MOM growth stood at 0.1 percent, in May 2011, it went up to 0.5 percent. Table 15 – WPI based Inflation – YOY growth in Percent Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May 10 10 10 10 10 10 10 10 10 11 11 11 11 11All Commodities 10.9 10.5 10.3 10.0 8.9 9.0 9.1 8.2 9.4 9.5 9.5 9.7 8.7 9.1I Primary Articles 21.4 20.4 20.1 19.1 16.0 18.2 18.1 14.7 18.4 18.4 15.9 13.4 12.0 11.3(A) Food Articles 20.5 21.4 21.0 18.5 15.0 16.3 14.6 10.1 15.1 16.7 11.0 9.4 8.7 8.4a. Fruits and Veg 14.3 15.8 18.9 13.2 3.3 12.2 12.4 7.9 25.8 40.0 16.1 18.9 17.6 17.4b. Milk 27.9 28.4 26.2 26.1 26.9 24.1 21.0 18.0 18.3 13.8 12.5 4.4 4.7 6.4c. Eggs, meat, fish 38.6 45.5 39.0 31.4 27.0 29.5 27.4 18.9 19.4 15.7 12.7 13.5 10.7 6.4d. Condiments and spices 35.4 36.1 39.7 43.5 39.9 32.5 30.2 23.8 37.7 37.7 30.8 20.4 16.6 16.1(B) Non-food articles 18.1 14.8 15.8 15.3 15.8 20.8 25.7 25.5 25.4 26.6 34.4 27.3 27.3 22.3a. Fibers 17.1 15.8 18.1 16.2 15.7 36.3 42.3 44.7 47.1 56.2 89.2 87.7 86.1 59.0Raw cotton 16.2 14.5 17.3 13.2 13.1 35.3 43.7 46.6 47.5 59.6 101.4 103.0 101.2 68.4Raw Jute 17.8 13.7 14.9 23.8 22.9 43.8 34.3 40.0 44.1 38.7 38.5 38.7 39.0 40.0b. Oil seeds 6.5 2.3 2.1 2.2 2.5 4.7 7.5 3.1 3.3 3.5 7.9 10.9 10.0 12.2(C) Minerals 34.6 25.3 22.1 31.6 23.8 26.8 29.4 29.5 30.6 16.1 17.7 15.2 7.4 11.9a. Metallic minerals 36.4 29.9 43.7 63.3 59.8 55.1 64.2 69.9 63.7 24.6 23.6 25.8 13.0 13.1II Fuel and power 13.6 14.4 13.9 13.3 12.5 11.1 11.0 10.3 11.3 11.4 12.4 12.5 13.3 12.3(A) Coal 7.9 7.9 7.9 7.9 7.9 7.9 3.8 0.2 0.2 0.1 3.9 13.3 15.9 13.3(B) Mineral oils 18.4 18.1 17.1 15.9 16.0 13.6 14.6 14.5 15.9 16.7 17.1 14.7 15.4 15.9(C) Electricity 3.4 8.6 8.6 8.6 5.0 5.0 5.0 5.0 5.0 3.6 3.6 3.6 3.6 -1.3III Manufactured products 6.4 5.9 5.6 5.8 5.2 5.0 5.1 5.0 5.4 5.3 6.3 7.4 6.2 7.3(A) Food products 9.1 7.1 6.1 7.3 4.6 3.6 3.8 1.1 1.4 -0.1 0.0 2.4 5.7 7.3(B) Beverages, tobacco 7.8 7.5 7.4 7.3 6.8 6.3 6.4 6.0 5.7 9.6 8.6 8.8 7.4 7.9(C ) Textiles 11.3 11.3 10.2 10.1 10.4 9.8 10.1 11.7 12.3 13.2 15.6 18.3 14.1 15.9(D) Wood and wood products 7.4 5.7 4.8 4.9 4.7 2.8 1.4 2.2 2.1 4.6 3.8 3.6 2.0 4.7(E) Paper and paper products 5.1 3.7 3.4 4.6 5.1 5.3 5.4 5.7 4.6 5.7 7.1 8.4 6.0 7.0(F) Leather and leather products -0.8 0.0 -1.2 0.0 0.1 -0.1 -1.4 -1.8 -1.4 -2.5 -1.2 -1.5 -1.2 -1.4(G) Rubber and rubber products 4.9 4.7 5.2 5.0 4.6 4.7 6.2 7.5 7.8 9.2 9.6 10.6 9.2 8.7(H) Chemicals and products 5.5 5.2 5.2 4.4 4.3 4.6 4.9 5.2 5.0 5.5 6.6 7.4 6.0 7.1(I ) Non-metallic mineral products 3.1 3.9 2.1 3.1 2.1 1.6 2.5 2.1 3.0 2.5 2.5 3.7 3.2 3.0(J) Basic metal, alloys 8.8 8.4 8.2 7.9 7.5 7.2 7.7 7.8 9.2 8.5 11.1 11.7 7.1 7.9(K) Machinery and machine tools 2.2 2.0 2.2 2.3 2.4 3.4 3.1 2.9 3.5 3.3 3.4 3.2 2.6 3.2(L) Transport, equpt and parts 2.7 2.9 2.9 3.8 2.9 2.9 3.0 2.7 2.7 2.9 3.0 3.6 2.2 4.0 Source – Office of Economic Adviser, MOC&I, Govt of India Coming now to the segment wise analysis, we see that prices in the ‘Manufactured Goods’ category registered an increase of 6.3 percent in the year 2010-11. The corresponding figure in 2009-10 was 1.8 Page | 16
  17. 17. percent. Further, as per the latest data available, ‘Manufactured Goods’ segment recorded an inflationof 7.3 percent in May 2011. Looking at the sub-categories within this broad group, we see that sectorslike food products, beverages and tobacco, paper and paper products, rubber and plastic products,chemical and chemical products, and basic metals and metal products are seeing significant inflation. Asalready mentioned, the buildup in prices in many of these industries is largely due to increasing costpressures which manufacturers are now finding difficult to absorb.In case of the ‘Fuel and Power’, overall inflation in 2010-11 stood at 12.2 percent. The correspondingfigure in 2009-10 was (-) 2.1 percent. Further, as per the latest data available, this segment recorded aninflation of 12.3 percent in May 2011. Inflation in this segment is being driven by high and rising pricesof items like coal and mineral oils. One may recall that petrol prices in the country are now beingregularly aligned with international prices following decontrol of the price mechanism and this is havinga bearing on overall inflation in this broad category.Finally, in case of the ‘Primary Articles’ category overall inflation in 2010-11 stood at 17.7 percent. Thecorresponding figure in 2009-10 was 12.7 percent. Further, in the month of May 2011, this segmentrecorded an inflation of 11.3 percent. Although over time inflation in this segment has been showingsigns of moderation and which have come on the back of inflation going down in case of food articles,the non-food articles segment has seen a trend of rising inflation. In fact, in May 2011, inflation in thenon-food articles segment stood at a high 22.3 percent. High and rising prices of fibers like raw cottonand raw jute are responsible for high inflation seen in case of non-food articles.With regard to outlook for inflation in the months ahead, it may be mentioned that at least in the firsthalf of the current year, overall inflation is likely to remain sticky at the present levels. In fact there aregood chances that we may see a jump back to the double digit territory on a few occasions. And thefactors that lie behind this prognosis are given below.First, international crude oil prices continue to remain high. With developments in the Middle East andNorth Africa region showing no signs of abatement and with OPEC countries in their most recentmeeting [June 8, 2011] failing to reach a consensus on increasing their daily oil production quota, thereare limited chances of oil prices coming down in the near future. A slowdown in global growth in 2011that is widely anticipated could put a lid to international oil prices but any large scale downward revisionis being ruled out at this moment. As a result, we can expect inflationary pressures in the ‘Fuel andPower’ category to continue. Moreover, this pressure could further mount once the governmentannounces decontrol of diesel and LPG prices.Second, in the context of inflation in the ‘Fuel and Power’ segment, one must also take note of the risingprices of coal. Recent media reports show that coal production target for 2011-12 has been cut downprimarily on account of rising concerns over environmental issues. Coal shortage of nearly 142 milliontonnes is expected in 2011-12 and our imports this year could be as much as 114 million tonnes. Besidespower generation, this situation of coal shortage does not augur well even for the price line in case ofcoal.Third, global food prices are likely to remain firm in the near term. According to recent reports broughtout by FAO, global food prices would continue to remain a concern in 2011. The FAO has warned thatwhile the harvest this year would be critical, restoring market balances will take some time. Hence, wecan expect upward pressures on food prices in the global markets to persist. As global food prices have abearing on food prices in India, we have another element that is not likely to work in favour of bringinginflation down. Page | 17
  18. 18. Fourth, the government has recently announced a hike in the Minimum Support Prices [MSP] for goodslike paddy, soybean and corn for the upcoming agricultural season. This increase in MSP will also have abearing on the trend in food prices in the near term. There are chances that food inflation mayaccelerate once the new crop comes into the market in October 2011.Given the above factors, we expect concerns on inflation to remain on the policy agenda through theyear 2011. Further, with policy rate hikes by RBI having failed to deliver on the stated objective ofreining in inflationary pressures and bringing down inflationary expectations, it is time that governmentactively pursues supply side measures to curtail inflation.Foreign TradeFinancial year 2010-11 was exceptionally good for Indian exporters. With overall exports amounting toUS$ 245.5 billion, the sector registered a growth of 37.7 percent in 2010-11 over the previous year. Andthis was a record growth witnessed in exports since independence.Further, when we look at the monthly data for exports for the year 2010-11 as given in the table below,we see that growth in exports has been particularly strong since November 2010. While during theperiod April to October 2010, exports grew at an average rate of 26.8 percent, overall growth was muchhigher in the remaining part of the year. In fact, during November 2010 and March 2011, India’s exportsgrew at a whopping 44.3 percent on average.The onset of recovery in the global economy, which was led by the emerging economies, coupled withcontinuation of export sops announced by the government as part of the fiscal packages offered duringthe crisis period gave the sector the much needed impetus. The support provided by the government inthe form of measures such as interest subvention of 2 percent on pre and post shipment export creditwas instrumental in reviving the badly hit labor intensive export oriented industries. Table 16 – Exports and Imports in US$ billion / YOY growth in percent Exports Imports Trade Petroleum Non-POL Export Import balance crude & items growth growth products imports imports 2010-Apr 17.7 28.8 -11.0 9.5 19.3 42.2 48.9 2010-May 15.7 26.6 -10.9 8.6 18.0 27.57 32.61 2010-June 19.3 25.9 -6.7 7.8 18.1 41.5 12.4 2010-July 16.0 26.5 -10.5 8.2 18.3 11.7 22.0 2010-Aug 16.4 27.1 -10.6 6.9 20.2 21.0 20.6 2010-Sep 18.1 25.1 -7.0 7.5 17.6 23.9 16.7 2010-Oct 17.7 28.6 -11.0 8.1 20.6 19.4 10.4 2010-Nov 20.2 25.3 -5.2 7.4 17.9 35.0 1.4 2010-Dec 25.6 28.2 -2.6 8.4 19.7 55.2 -0.3 2011-Jan 21.4 31.4 -10.0 9.6 21.8 37.5 24.4 2011-Feb 23.6 31.7 -8.1 8.2 23.5 49.7 21.1 2011-Mar 29.1 34.7 -5.6 9.4 25.3 43.9 17.3 2011-Apr 23.8 32.8 -9.0 10.2 22.6 34.4 14.1 Source – CMIEIn addition, the strategy of the government to continue exploring new and diverse markets for India’sexports proved to be truly rewarding. Destination wise data available for the period April-December2010 shows a significant increase in exports to regions like Latin America, Africa and other Asiancountries. For a long time India’s exports had been concentrated in US and the European countries andthe crisis provided a good opportunity to explore these other markets. India’s exports to Africa grew by Page | 18
  19. 19. 44.9 percent, to Asia by 43 percent and to Middle East by 31 percent during April-December 2010 overthe corresponding period in 2009-10.Given this exemplary performance in exports, Commerce Minister, Mr. Anand Sharma, recentlyindicated that India should be able to achieve exports of US$ 500 billion by the year 2013-14. He alsopointed out that sectors like engineering goods, petroleum products, gems and jewellery, drugs andpharmaceuticals have done particularly well during the year 2010-11. Engineering goods were India’stop exports in the year 2010-11 amounting to US$ 60 billion and registering a growth of over 80 percentvis-à-vis the previous year. Further, while readymade garments registered a growth of 42.9 percent inthe year 2010-11 over 2009-10, gems and jewellery and pharmaceuticals both witnessed a growth ofabout 15 percent. Petroleum products recorded a growth of 50.5 percent in 2010-11.The strong momentum in exports, seen particularly during the second half of 2010-11, has continued inthe year 2011-12 as well. Latest numbers available for the month of April 2011 show that exports in thismonth amounted to US$ 23.8 billion and represented a growth of 34.4 percent over the same month ofthe previous year when exports totaled US$ 17.7 billion.While this strong start in the year 2011-12 is encouraging, there are indications that this high growthmay not be sustained in the months ahead. And there are both domestic and external reasons thatmake such a forecast likely. In fact in FICCI’s latest Survey on Exports, which was completed in themonth of May 2011, exporters indicated that going ahead their performance could weaken on accountof the following factors –Firstly, the interest subvention of 2 percent on pre and post shipment credit announced to support theexporters during the slowdown owing to the crisis came to an end in March 2011. The exporters nowhave to pay a higher rate of interest to the banks for obtaining export credit. Further, this is happeningat a time when the lending rates are already going up following the increase in the base rates of thebanks and this would impact the production cost structure of the exporters.Secondly, the DEPB scheme is finally coming to an end. As this is coming in quick succession followingthe withdrawal of interest subvention, the exporters are finding themselves under reasonable pressureto maintain competitiveness in the global market. Although most recent reports show that thegovernment has agreed to an extension of the DEPB scheme by another three months i.e. till September20113, a large section of the exporting community feel that India’s exports are still not robust enoughand that such incentives should not be completely done away with. Exporters are hoping that during theintervening three month period, the government would evolve an alternate scheme that would supportexporters.Thirdly, off late there has been a significant increase in exports from India to Asian countries. However,with inflation emerging as concern in other Asian countries as well and the central banks responding byraising interest rates, the demand in this region is likely to face some moderation. This will certainlyhave some bearing on India’s exports to the Asian market.Fourthly, rising raw material costs and oil prices is also having a bearing on the exporters. Almost threequarters of the respondents in FICCI’s latest Export Survey said that they are facing difficulty due to highraw material prices. The textile sector is facing the heat due to surging cotton and yarn prices, thechemical sector is being impacted due to increasing polymer prices, processed foods segment is facingthe brunt of high fruit and vegetable prices and engineering goods are being affected by high steel3 The DEPB scheme was to come to a close by end June 2011. However, the government has decided to extend it by anotherthree months. Page | 19
  20. 20. prices. It is also important to note that rising crude oil prices have increased the inland transportationcost and even the international ocean freight rates have moved up recently.While the aforementioned factors are likely to dampen the buoyancy seen in exports in recent times,one must also take note of the state of the global economy as this has a bearing on the performance ofIndia’s exports. Latest estimates provided by the IMF show that global growth is expected to moderatein the year 2011. According to the IMF, the global economy is expected to grow by 4.4 percent in theyear 2011. In 2010, the global economy grew by 5.0 percent. The IMF has also indicated that the worldtrade volume is likely to grow by 7.4 percent in 2011 as against a growth of 12.4 percent seen in 2010.The general slowdown in the global economy and global trade volumes projected for 2011 is also adownside risk to India’s export performance in the current year.Coming to imports next, we see that in the year 2010-11 our imports totaled US$ 350.4 billion. Thisrepresents an increase of about 21.8 percent over the previous year’s imports of about US$ 287.6billion. During the year 2010-11, imports of both petroleum crude and products (POL) and non-petroleum crude and products (Non POL) went up. While POL imports amounted to US$ 101.7 billion in2010-11 and posted a growth of 16.7 percent over the previous year, non-POL imports amounted to US$248.7 billion and registered a growth of 24.0 percent over the previous year.Latest data available shows that in the month of April 2011 our imports totaled US$ 32.8 billion andregistered a growth of 14.1 percent over the same month of the previous year when imports amountedto US$ 28.8 billion.In the context of this rise in imports, it is important to take note of the rising international prices of oil,which have pushed our POL import bill upwards. Otherwise in terms of volume there hasn’t been asignificant increase in POL imports. Price of oil in the international market has been moving up over thelast year with the spot price for Brent crude ruling around US$ 113 a barrel – an increase of 45 percentover the previous year – in the last week of May 2011.With developments in the Middle East and North Africa region showing no signs of a let up and withOPEC in its last meeting deciding not to hike the overall quota for oil production, oil prices are likely toremain firm in the near term. This will continue to put pressure on India’s overall oil import bill. Asregards non-oil imports, while a slowdown in the domestic economy could lead to some moderation inthe non-oil import bill, any large respite here can be ruled as prices of commodities other than oil arealso firming up. Another point to take note of is the likely increase in imports of LNG in 2011 due toshortfall in RIL’s KG D6 block. This too would lead to an increase in India’s import bill as imported gas isnearly 3 times as costly compared to gas supplied by Reliance.With exports likely to come under pressure and imports showing little signs of easing in the comingmonths, the trade balance in 2011-12 could widen.Foreign InvestmentsData on total foreign investment flows into the country shows that in 2010-11, foreign investment flowsinto India saw a dip of about 17 percent over the previous year. Further, when we look at the two maincomponents of foreign investment, namely foreign direct investment and portfolio investment, we seethat the dip is largely on account of a slowdown seen in case of FDI. As the table below shows, FDI flowsinto India in 2009-10 were to the tune of US$ 37.7 billion and in 2010-11 this figure came down to US$27 billion. Portfolio flows, which were to the tune of US$ 32.4 billion in 2009-10, saw a marginal dip toabout US$ 31.5 billion in 2010-11. Page | 20
  21. 21. Table 17 – Foreign Investment Flows in US$ Million Year FDI YoY Portfolio YoY FII* YoY Total Investment YoY Growth Investments Growth Growth (FDI+ Portfolio) Growth 2000-01 4,029 2,760 1,847 6,789 2001-02 6,130 52.1 2,021 -26.8 1,505 -18.5 8,151 20.1 2002-03 5,035 -17.9 979 -51.6 377 -75.0 6,014 -26.2 2003-04 4,322 -14.2 11,377 1,062.1 10,918 2,796.0 15,699 161.0 2004-05 6,051 40.0 9,315 -18.1 8,686 -20.4 15,366 -2.1 2005-06 8,961 48.1 12,492 34.1 9,926 14.3 21,453 39.6 2006-07 22,826 154.7 7,003 -43.9 3,225 -67.5 29,829 39.0 2007-08 34,835 52.6 27,271 289.4 20,328 530.3 62,106 108.2 2008-09 37,838 8.6 -13,855 -150.8 -15,017 -173.9 23,983 -61.4 2009-10(P) 37,763 -0.2 32,376 -333.7 29,048 -293.4 70,139 192.5 2010-11(P) 27,024 -28.4 31,471 -2.8 29,422 1.3 58,495 -16.6* FII is included in Portfolio Investment Source – Reserve Bank of IndiaIf we look at the figures for FDI over the last few years, we see that the quantum received in 2010-11was the lowest in the last four years. Quarterly numbers further highlight that FDI flows in the fourthquarter of 2010-11 were the lowest since the third quarter of 2007-08. This clear slowing down in theflow of FDI funds towards India should be a matter of concern for the authorities.Further, data on sector wise FDI flows into India for the period April to February 2010-11 shows that outof a total of top 25 sectors, 15 sectors saw a dip in FDI flows in 2010-11 compared to flows in theprevious year. And out of these 15 sectors, it is sectors like services, construction activities, housing andreal estate, telecommunication and agricultural services that have taken the biggest hit in terms ofinflows compared to corresponding period of the previous year i.e. 2009-10. Table 18 – Sector Wise Foreign Direct Investment Flows in US$ Million Sector 2010-11 2009-10 % change % to total % to total (Apr- Feb) (Apr- Feb) in 2010-11 FDI FDI US$ million US$ million vis-à-vis Inflows Inflows 2009-10 (Apr- Feb (Apr- Feb 2010-11) 2009-10) 1 Services sector 3,274.02 4,184.64 -21.76 ↓ 17.84 17.02 2 Telecommunications 1,410.14 2,495.34 -43.49 ↓ 7.68 10.26 ↓ 3 Automobile 1,320.38 1,009.34 30.82 7.19 4.12 4 Power 1,236.76 1,335.70 -7.41 ↓ 6.74 5.48 5 Housing and real estate 1,109.33 2,703.50 -58.97 ↓ 6.04 11.01 ↓ 6 Construction 1,071.64 2,810.18 -61.87 ↓ 5.84 11.29 ↓ 7 Metallurgical industries 1,044.37 372.83 180.12 5.69 1.51 8 Computer software / hardware 766.24 872.88 -12.22 ↓ 4.18 3.52 9 Cement and gypsum products 607.58 33.64 1,706.12 3.31 0.13 10 Petroleum and natural gas 562.38 223.43 151.70 3.06 0.94 11 Industrial machinery 553.49 246.27 124.75 3.02 0.99 12 Trading 473.39 560.23 -15.50 ↓ 2.58 2.27 13 Information and broadcasting 406.37 467.39 -13.06 ↓ 2.21 1.9 14 Chemicals other than fertilizers 383.69 346.19 10.83 2.09 1.39 15 Hotel and tourism 301.43 707.93 -57.42 ↓ 1.64 2.86 ↓ 16 Sea transport 290.46 275.21 5.54 1.58 1.1 17 Consultancy services 237.87 340.65 -30.17 ↓ 1.30 1.38 ↓ 18 Hospital and diagnostic centres 231.63 129.49 78.88 1.26 0.52 19 Drugs and pharmaceuticals 211.53 210.39 0.54 1.15 0.85 20 Non-conventional energy 181.94 497.91 -63.46 ↓ 0.99 1.96 ↓ 21 Food processing 166.37 262.71 -36.67 ↓ 0.91 1.05 ↓ Page | 21
  22. 22. 22 Electrical equipments 154.36 641.41 -75.93 ↓ 0.84 2.61 ↓ 23 Textiles 108.46 139.03 -21.99 ↓ 0.59 0.56 24 Agricultural services 41.75 1,317.06 -96.83 ↓ 0.23 5.43 ↓ 25 Miscellaneous industries 1,323.01 1,003.14 31.89 7.24 4.03 Source – SIA Newsletter, DIPPAs this slowdown in FDI is happening at a time when the country is preparing plans to achieve a targetgrowth of 9 to 9.5 percent over the 12th Plan Period, it becomes important to get to the core of this issueand take corrective action. FDI flows are an important source of funds for us and have in the pastsupplemented domestic resources for meeting investment requirements in a whole host of sectors.FICCI’s interaction with economists, policy experts and analysts shows that the emergence of othercompeting economies, particularly in the Asian region, could be one of the factors that lie behind thisslowdown in FDI flows towards India. While this proposition requires further research, economists andpolicy experts concur with the view that there are tangible factors linked to India which could also beresponsible for making foreign investors a little wary for committing more funds. And amongst thesedomestic factors, two issues stand out.First is the state of the macro-economy, which is far from comfortable. With inflation remainingstubbornly high, growth slowing down due to aggressive monetary tightening by RBI and thegovernment throwing limited light on how the fiscal deficit target of 4.6 percent for the current yearwould be achieved, investors may have been prompted to get into a ‘wait and watch’ mode before thedomestic situation improves.Second set comprises factors such as environment sensitive policies being pursued with respect tocertain sectors, slow movement on resolving the land acquisition problem and issues of governance andcorruption that have been grabbing headlines and showing the country in poor light. As all of theseissues have a bearing on the perception and confidence level of foreign investors, these may havelimited FDI inflows into the country.In this context, it may be reiterated that completion of the much awaited FDI policy reforms in sectorssuch as insurance, defence and multi-brand retail would also give a boost to overall FDI flows into thecountry.Coming to portfolio investments, as already mentioned, in 2010-11 portfolio flows totaled US$ 31.5billion and were only a tad below US$ 32.4 billion received in the previous year. FIIs, which form a majorcomponent of portfolio investments, were to the tune of US$ 29.4 billion in 2010-11 and saw littlechange from the figure for the previous year which was US$ 29 billion. While portfolio flows stoodhigher than FDI flows last year, the outlook for funds flows on portfolio account going ahead is also nottoo encouraging.Given continuous monetary policy tightening by the central bank, interest rates are on an upswing. Thiscoupled with rising prices of raw materials is likely to have an adverse impact on the profit margins offirms across sectors in the year ahead. As this would constrain the capacity of firms to distributedividends, FIIs are likely to take a conservative view on India and Indian companies as they do theirreturn on investment calculations. Signs of this are already emerging as in a recent survey [June 2011]conducted by the Bank of America Merrill Lynch amongst global fund managers, India was placedamongst the least favourite equity market by Asia-Pacific investors.Additionally, with the RBI contemplating tightening of rules relating to exit of foreign investors andprivate equity funds who put their money in Indian firms, investors’ sentiments are expected to further Page | 22
  23. 23. weaken. The re-emergence and intensification of the sovereign debt crisis in Europe and the expectedhalt of quantitative easing policy in the US by the end of June 2011 are also downside factors forportfolio flows for emerging markets including India.It may be mentioned that the Finance Minister of India, Pranab Mukherjee, tried to allay fears of fundmanagers and foreign institutions investors focused on India at recent conference. He urged FIIs to beoptimistic about Indian growth story and to take a long term view on its performance rather gettingdisturbed with the short term developments and statistics.As a measure of assurance, the Finance Minister told fund managers that the government wouldcontinue to take investor friendly policies and has already started the next generation financial sectorreforms such as widening and deepening of the Indian securities markets, liberalizing the policy onforeign capital flows, strengthening the regulatory and other institutional architecture and reducingtransaction cost in the securities markets.These announcements however did little to reduce concerns amongst fund managers, who are lookingfor better management of the macro-economy and forward movement on crucial economic reforms.Forex ReservesIndia’s foreign exchange reserves increased as we moved ahead in fiscal 2010-11. As data givenin the table below shows, while in April 2010, India’s foreign exchange reserves totaled US$279.6 billion, in September 2010 this figure had increased to US$ 292.9 billion. Most recentnumbers show that the country’s foreign exchange reserves have shot up further crossing theUS$ 300 billion mark. With this level of reserves, India is amongst the ten largest holders of foreignexchange reserves in the world. Table 19 – Foreign Exchange Reserves in US$ Million Forex Reserves April 2010 279,633 May 2010 273,544 June 2010 275,710 July 2010 284,183 Aug 2010 283,142 Sept 2010 292,870 Oct 2010 297,956 Nov 2010 292,389 Dec 2010 297,334 Jan 2011 299,224 Feb 2011 301,592 March 2011 305,486 April 2011 313,671 Source – Reserve Bank of IndiaThe increasing size of our foreign exchange reserves has drawn attention of the policymakers. Asmentioned in our previous report, just some time back, Dr. Kaushik Basu, Chief Economic Advisor,Ministry of Finance, had raised the question of India to consider having a Sovereign Wealth Fund. Inmore recent times, a few independent analysts have opined that a part of these huge reserves bedeployed to import commodities which are or could be in short supply in the economy. This lastsuggestion was made in context of managing the stubbornly high inflation by bridging the demand-supply mismatch. Page | 23
  24. 24. Exchange RateMost recent trends in the movement of the INR vis-à-vis major vehicle currencies show that the IndianRupee has depreciated against all the major global currencies.As the data given in the table below shows, the Rupee depreciated against the US$ by 1.2 percentbetween April 2011 and May 2011. During the same time period, while the value of the Rupee wentdown against the Pound Sterling by 1 percent, Rupee’s depreciation against the Japanese Yen was of amuch larger magnitude – 3.8 percent. Against the Euro too we saw the Rupee becoming a little weakand depreciating by about 0.4 percent between April 2011 and May 2011. Table 20 – Rupees per unit of foreign currency (Yearly/monthly average basis) USD Pound Sterling Japanese Yen Euro March, 2008 40.3561 80.8054 0.4009 62.6272 March, 2009 51.2287 72.9041 0.5251 66.9207 March, 2010 45.4965 68.4360 0.5018 61.7653 2010-11 April 2010 44.4995 68.2384 0.4763 59.6648 May 2010 45.7865 67.1747 0.4969 57.6553 June 2010 46.5443 68.6952 0.5122 56.9016 July 2010 46.8373 71.5150 0.5343 59.7636 Aug 2010 46.5679 72.9736 0.5465 59.9700 Sept 2010 46.0616 71.6578 0.5454 60.0592 Oct 2010 44.4583 70.3381 0.5428 61.7153 Nov 2010 45.0183 71.8498 0.5457 61.4981 Dec 2010 45.1568 70.4635 0.5425 59.6652 Jan 2011 45.3934 71.5394 0.5496 60.5178 Feb 2011 45.4538 73.2921 0.5503 62.0904 Mar 2011 44.9895 72.7033 0.5502 63.0314 April 2011 44.3681 72.7215 0.5334 64.2269 May 2011 44.9048 73.4310 0.5535 64.4829 MOM growth in 1.2 1.0 3.8 0.4 May 2011 Source – Reserve Bank of IndiaOne of the factors that affect the competitiveness of India’s exports vis-à-vis exports from othercountries is the relative movement in the national exchange rates. In the following table, we provide themovement in the national currencies of select countries vis-à-vis the US$.The data shows that between April 2011 and May 2011, majority of the currencies analyzed havedepreciated against the US$. The only exception is the Indonesian Rupiah, which has appreciated againstthe US$ over the same time period. The Malaysian Ringgit did not see any movement against the US$during the period under study.Further, amongst all currencies that have weakened against the US$ during this period, it is the SouthAfrican Rand that lost the most – a depreciation of almost 2.1 percent. This is followed by the BrazilianReal (depreciated by 1.3 percent) and the Indian Rupee (depreciated by 1.1 percent). Both the PakistaniRupee and the Thai Baht have lost about 0.6 percent each against the US$ over the two month –April/May 2011 – period. Page | 24

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