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Monthly Review of Indian Economy – April 20111 Executive Summary
GDP Growth Initial guidance provided by Ministry of Finance indicated a growth of 9 percent in 2011-12. However, recent developments, particularly the loss of momentum in industrial growth, show that this could be a difficult target to achieve. Continued tightening of monetary policy and further escalation in global oil prices are the key downside risks to growth in 2011-12. Given the evolving situation, we expect GDP growth in 2011-12 to be in the range of 8 to 8.5 percent. Industrial Production Weakness in industrial production trend continues with IIP registering a growth of 7.8 percent during April-February 2010-11 as against a growth of 10.0 percent seen during April-February 200910. Performance of the mining and manufacturing sectors has been particularly weak. Our forecasts show that growth in IIP is likely to weaken further from 3.6 percent in February 2011 to 1.4 percent in March 2011.
Trends in IIP, WPI (YoY in Percent) and Monetary Policy Rates
20.0 15.0 10.0 5.0 0.0 -5.0 Jan'09 Feb'09 Mar'09 Apr'09 May'09 Jun'09 Jul'09 Aug'09 Sep'09 Oct'09 Nov'09 Dec'09 Jan'10 Feb'10 Mar'10 April'10 May'10 June'10 July'10 Aug'10 Sep'10 Oct'10 Nov'10 Dec'10 Jan'11 Feb'11 Mar'11 8 7 6 5 4 3 2 1 0
IIP WPI Repo Reverse Repo
Amongst use based industrial groups, capital goods sector again showed negative growth of 18.4 percent in February 2011. This comes on the back of similar performance in December 2010 (-9.3 percent) and January 2011 (-18.8 percent). If the present trend continues, then in March 2011 capital goods sector would see another dip in growth to the extent of 15 percent. Consumer goods segment however has seen improvement in growth, which is being driven by consumer durables segment. Improving consumer sentiment, strengthening employment scenario and increasing disposable incomes have contributed towards growth of consumption. Core Sector The sector recorded an overall growth of 5.7 percent during April-February 2010-11. This is better than 5.4 percent growth seen in April-February 2009-10. Growth has been powered by sectors like crude oil, steel and power. However, performance of the coal sector is a reason for worry.
This report has been prepared by the Economic Affairs and Research Division, FICCI 2|P a g e
Inflation Headline inflation in March 2011 increased to 8.98 percent from 8.31 percent in February 2011. The reading for January 2011 has also been revised upwards to 9.35 percent. Both core inflation and non-food manufactured products inflation are seeing an upward trend and gap between these and headline index is narrowing. These trends are indicative of generalization of inflation with inflationary pressures spreading from primary products to manufactured goods.
Headline, Core and Non-Food Manufactured Products Inflation, YoY in Percent
12.00 11.00 10.00 9.00 8.00 7.00 6.00 5.00 4.00 Apr-10 May-10 Jun-10 Aug-10 Sep-10 Nov-10 Dec-10 Feb-11 Mar-11 Oct-10 Jul-10 Jan-11
Headline Inflation Non-Food Manufactured Products Inflation Core Inflation
With its eye on headline inflation and core inflation, RBI is likely to continue with its tight monetary policy stance. Such a move however is not warranted as core (final goods) inflation as represented by CPI-IW without food and fuel components has come off its peak. Month on month growth in deseasonalised series of core CPI-IW is showing a downward trend reflecting moderation in retail prices. RBI’s policy since March 2010 seems to be having some impact on the demand side and it should therefore put a break on further monetary tightening. Foreign Trade Data for the full year – 2010-11 – shows that exports grew by 37.5 percent [fastest growth since independence] and totaled US$ 246 billion. Imports also showed an increase of 21.2 percent and totaled US$ 350 billion. Strong export growth performance over the last five months has helped bring the trade deficit down to more manageable levels. In 2010-11, India’s trade deficit was of the order of US$ 104 billion. Apprehensions with regard to widening current account deficit have also been allayed. Commerce and Industry Ministry is now confident that the export target of US$ 450 billion by 201314 will be met. The final strategy paper for boosting India’s exports is expected to be out soon. Foreign Investments During the period April-February 2010-11, FDI flows into India totaled US$ 25.9 billion. Admittedly, FDI flows in 2010-11 have seen a slowdown from the previous year. Earlier in the year RBI had drawn attention to environment sensitive policies being pursued with regard to the mining sector, integrated township projects etc. which appear to have affected investors’ sentiments. Government’s efforts to further liberalize the FDI policy continue. While announcing the third edition of the consolidated FDI policy, government proposed major changes related to pricing of convertible instruments, inclusion of fresh items for issue of shares against non-cash considerations
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3G / BWA spectrum windfall and moderation in growth of overall expenditure have helped the government rein in fiscal deficit in 2010-11. The slowdown in growth in deposits can be explained by unattractive card / deposit rates and continued high inflation rate that lowered the real rate of return on term deposits.8 percent during the corresponding period of the previous year.5 percent projected earlier. In the previous four years. Non-food credit also saw a similar increase of 21. India’s forex reserves totaled US$ 279. Basu mentioned that it is time that India needs to seriously look at the issue of whether to set up a SWF. FIIs are getting increasingly wary about the impact of inflation on the India growth story. 2011. With a nominal GDP growth of around 18 percent. Forex Reserves In April 2010.and removal of the condition of prior approval in case of existing joint ventures / technical collaborations in the ‘same field’ [Press Note 1]. Kaushik Basu.1 percent of GDP and is down from 5. has brought attention back on the issue of setting up a Sovereign Wealth Fund. Dr. Dr. 4|P a g e .4 percent. M3 registered a growth of 16 percent as compared to a growth of 16.8 percent. According to revised estimates. Speaking at a recent seminar. Fiscal situation Strong tax revenue collections. Portfolio flows have seen a reversal in recent months. this figure had increased to US$ 308 billion. Deposit growth rate has lagged credit growth rate in 2010-11 as aggregate deposits grew by 15. Money and Banking Up to March 25. fiscal deficit in 2010-11 is pegged at 5.6 billion.2 percent. Good performance of the equity market in the first half of 2010-11 also contributed to slowdown in deposit growth. Data on credit flows shows that during April-March 2010-11 total bank credit registered a growth of 21. The Chief Economic Advisor. 2011. By April 15. M3 growth was much higher around 20 percent. this growth in M3 is relatively weak. when nominal GDP growth was of the order of 15 to 16 percent.
Monthly Review of Indian Economy – April 2011 Index GDP Growth Industrial Production Core Sector Inflation Foreign Trade Foreign Investments Forex Reserves Exchange Rate Money and Banking Fiscal Situation 6 8 12 13 19 23 26 28 29 31 5|P a g e .
GDP at factor cost at constant prices is expected to register a growth of 8. though lower. It may be noted that growth in agriculture and allied sector in 2009-10 was muted at just about 0. In the year 2009-10.6 12.0 9. this segment posted a growth of 12. real estate and business services c Community.6 QE: Quick Estimates AE: Advance Estimates Source – Ministry of Finance.3 4. it is the much improved performance of the agriculture sector in 2010-11 that is going to provide an uptick to overall GDP growth. government has entered the fiscal consolidation mode and this has slowed the pace of expansion of community.7 percent. As private sector demand and expenditure is gaining strength.0 2010-11 (AE) 5. In 2010-11. we see that while agriculture and allied sector is projected to grow by 5.4 10.5 12.1 4.4 percent. growth in this segment is expected to sharply go down to 5.4 7. 6|P a g e . Although the expected performance of the industry and services sector in 2010-11 is not very different from what was seen in 2009-10 when industry grew by 8.2 8.4 1.8 percent.6 percent in the year 201011.7 percent. in 2009-10 growth.6 5.0 6.6 percent respectively.8 8.1 percent and 9. forestry and fishing Industry Mining and quarrying Manufacturing Electricity. insurance.7 6.0 10.0 percent and services grew by 10.4 8.1 percent. Looking at numbers at the disaggregated level.8 5. While in 2008-09.8 6.1 8.8 2009-10 (QE) 0. transport and communication Financing. gas and water supply Construction Services Trade. social and personal services. social and personal services in 2010-11.9 5. was still a robust 11. hotels.1 6.0 percent.9 8. industry and services sector are projected to grow by 8.Monthly Review of Indian Economy – April 2011 GDP Growth According to the advance estimates provided by the Central Statistics Office (CSO). Government of India Another notable trend in growth rates at the sectoral level is the sharp decline seen in the case of community. social and personal services 4 GDP at factor cost -0.4 8. This trend is a reflection of modulation of additional expenditure that was undertaken by the government during the period of the global crisis.6 11. GDP at factor cost at constant prices grew by 8.2 4.4 percent in 2010-11.7 9.2 11. Table 1 – Growth in GDP at factor cost by economic activity (2004-05 prices) 2008-09 1 2 a b c d 3 a b Agriculture.1 9.7 8.0 10.1 7.
7. Government of India As regards GDP growth in the year 2011-12. In comparison. YoY in Percent 16 14 12 10 8 6 4 2 0 Q1 2008-09 Q2 2008-09 Q3 2008-09 Q4 2008-09 Q1 2010-11 Q2 2010-11 Q1 2009-10 Q2 2009-10 Q3 2009-10 -4 Q4 2009-10 -2 Q3 2010-11 GDP at factor cost Agriculture. Most recent trends in industrial production [discussed in detail ahead] point towards a slowdown in industrial activity. the first three quarters of 2010-11 saw this sector register a growth of 7. Besides the tight monetary policy stance. With the RBI making it clear that it would maintain its anti-inflationary stance in the months ahead and with senior officials from the government agreeing that some amount of growth will have to be sacrificed if inflation is to be brought under control in a more sustainable manner.8 percent respectively. as things stand today. Chart 1 – Growth in GDP (Quarterly figures). This could be the beginning of a downward phase in the economic cycle and growth figures from now on will have to be carefully watched. community.6 percent highlighting the stimulus measures undertaken by the government to support economic activity. forestry and fishing Industry Services Source – Ministry of Finance.8 percent.4 percent and 4. meeting this target looks increasingly difficult. However. initial estimates provided by the Finance Ministry indicated that the economy would better its performance and touch the 9 percent mark. In fact the Finance Minister had based his budget presentation for 2011-12 taking GDP growth for current year at 9 percent. If we look at the growth numbers for a longer period. we should be prepared for a sub 9 percent growth in 2011-12. social and personal services sector had witnessed a very strong growth of 22. What is particularly worrisome is the negative growth seen in case of the capital goods segment in the last three months. then we see that while industrial sector growth has been moderating since January 2010. the other major downside risk to GDP growth in 2011-12 is further escalation in 7|P a g e .In this context. it may be mentioned that in the October – December quarter of 2008-09. the services sector has seen its growth coming down since the second quarter of 2009-10 [Chart 1].
0 percent and 16.0 Source – Reserve Bank of India In context of monsoon it may be noted that the Indian Meteorological Department has come out with its first forecast for this year. due to this good performance.5 percent. with rainfall during June-September 2011 forecast at 98 percent of the Long Period Average of 893 mm for the country as a whole.0 Jan'09 Feb'09 Mar'09 Apr'09 May'09 Jun'09 Jul'09 Aug'09 Sep'09 Oct'09 Nov'09 Dec'09 Jan'10 Feb'10 Mar'10 April'10 May'10 June'10 July'10 Aug'10 Sep'10 Oct'10 Nov'10 Dec'10 Jan'11 Feb'11 Mar'11 1 0 -5. amongst the three broad sectors we see that growth in both the mining and manufacturing sectors has been particularly weak in the month of February 2011.global oil prices.7 percent.3 percent. growth in the electricity sector was about 7. Given the evolving situation. In February 2010.0 5 4 IIP WPI Repo 5. According to this initial forecast. industrial growth in the fourth quarter of 2009-10 was particularly strong and at its peak.0 3 2 Reverse Repo 0. India is set to have a ‘normal’ South West monsoon. In February 2010. WPI (YoY in Percent) and Monetary Policy Rates 20.0 6 10.1 percent respectively.5 percent in the same month. 8|P a g e . the general index for industrial production had registered a growth of 15.6 percent year on year in February 2011. the manufacturing sector turned in a performance of 3. The only silver lining in this otherwise discouraging performance in February 2011 is growth in the electricity sector which saw production go up by 6. Industrial Production Latest numbers made available by the CSO show that weakness in industrial production trend continues with IIP posting growth of a mere 3.0 8 7 15.6 percent in February 2011.1 percent. In fact. we can expect GDP growth in 2011-12 to be in the range of 8 to 8. While the mining sector grew by 0. Further. The corresponding figures for February 2010 stand at 11. This augurs well for agriculture sector performance in the current year. Chart 2 – Trends in IIP.
8 21. Government of India Chart 3 – Growth in IIP. Using the same trend and projecting industrial production growth for March 2011.0 May'2009 May'2010 Nov'2009 July'2010 Jun'2009 Jul'2009 June'2010 Nov'2010 Sep'2009 Aug'2009 Aug'2010 Sep'2010 Feb'2010 Mar'2010 Dec'2009 Dec'2010 Feb'2011 Apr'2009 Apr'2010 Oct'2009 Oct'2010 Jan'2010 Jan'2011 Manufacturing Electricity General Mining Source – CSO.4 6.3 23.0 2.3 Use-based industrial groups 6.4 8.1 General Index Mining Manufacturing Electricity Basic goods Capital goods Intermediate goods Consumer goods Durables Non-durables Source – CSO.959.8 29.0 6.5 6.0 12.6 0.9 5. we get a good fit with an R-Square value of 0.7 13.0 8.1 9.6 3.9 -0.5 11.0 0.5 8.0 4.5 19.1 5.0 10.4 8.7 5.0 14.1 23.5 6.0 16.8 February 2011 3. MOSPI.8 6. 9|P a g e .9 7.0 8.1 0.0 7. This result indicates that we should be prepared to see another month of very low growth in industrial production.6 6. we get a value of 1. Government of India The chart given above shows that growth in the general index for industrial production has been showing a declining trend since December 2009.1 16.4 percent.Table 2 – Growth in Industrial Production 2009-10 2010-11 February 2010 (Apr-Feb) (Apr-Feb) 10.8 5.0 18.8 15. MOSPI.1 15.4 11. When we de-seasonalise the growth data using the three month moving average (3MMA) and fit a linear trend to the same.9 -18.7 9. YoY in Percent 20.7 46.0 10.3 1.4 7.
8 percent) and portends weakening of the investment cycle in the economy. In fact. 10 | P a g e .00 6.00 18.7 percent in Q1 of 2010-11 to just about 6 percent in Q3 of 2010-11 and is expected to see a further slide in Q4.9.00 8.785 R² = 0. factors like rising lending rates and rising raw material prices that are affecting margins of firms are now having an impact on investments.3 percent) and January 2011 (.00 4.00 2.00 0.00 16.9592 Source – FICCI Research Moving on when we look at the use based industrial groups we see that growth in basic goods.18. While a part of this dip can be explained by the high base effect.00 10. 2010-11.4 percent in February 2011.00 12. capital goods and intermediate goods segments has slowed down in February 2011 vis-à-vis performance in February 2010.00 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Series1 Linear (Series1) y = -1. This comes on the back of similar performance registered in December 2010 (. In fact the performance of the capital goods segment is particularly worrisome as this sector showed a negative growth of 18.Chart 4 – Trend growth rate in IIP – December 2009 to February 2011 20. Feedback gathered by FICCI from industry as part of its regular Business Confidence Surveys and Manufacturing Sector Surveys shows that rising interest rates have started having a bearing on investment projects with greater impact being felt by units in the SME sector. the year on year growth in gross fixed capital formation has come down from a robust 25.0897x + 18.00 14.
0 March'11 2 1 0 5 4 3 Capital Goods Growth Repo Reverse Repo CRR 8 7 Source – Reserve Bank of India In fact when we project the growth for the capital goods sector using the 3MMA for growth and using a linear trend we see that growth in the month of March 2011 is expected to again dip by around 15 percent in this sector.0 -20.0 6 40.8678 Source – FICCI Research The only sector that saw an improvement in its performance in February 2011 vis-à-vis performance in February 2010 is the consumer goods sector. As data given in the table 2 shows consumer goods sector registered a growth of 11.0 0.596 R² = 0. both the durables and the non-durables segments contributed to this growth.1 percent in February 2011 as against 6. Further. 11 | P a g e .7264x + 60.0 July'10 Jan'09 Jul'09 Jan'10 May'09 May'10 Nov'09 Mar'09 Mar'10 Nov'10 Sep'09 Sep'10 Jan'11 -10.0 10.0 -30.0 20. Chart 6 – Trend growth rate in IIP (Capital Goods) – December 2009 to February 2011 60 50 40 30 Series1 20 Linear (Series1) 10 0 -10 -20 1 2 3 4 5 6 7 8 9 10 11 12 13 14 y = -4.3 percent growth registered in the same month of previous year.0 50.Chart 5 – Performance of Capital Goods sector and Movement in Key Monetary Policy Rates 70.0 30.0 60.
0 Source – CSO.0 0. YoY in Percent 70. registered a growth of 5.0 20.0 Intermediate goods 10. Improving consumer sentiment. strengthening employment scenario and increasing disposable incomes have contributed towards growth of consumption. no significant change in performance is noticed in case of the power sector. The non-durables segment however saw anemic growth for a good part of 2010-11 with growth entering negative territory in the months of November and December 2010.Growth in the durables goods segment has been robust through the year 2010-11 and the rise in interest rates has not had any visible impact on the performance of this sector. petroleum products and steel segments have shown an improvement in performance during the period April to February 2010-11 vis-àvis the same period last year.0 -20. Further.0 May'2009 May'2010 Nov'2009 June'2010 Mar'2010 Nov'2010 Sep'2009 July'2010 Sep'2010 Jun'2009 Jul'2009 Jan'2010 Aug'2009 Aug'2010 Feb'2010 Jan'2011 Dec'2009 Basic goods Capital goods Consumer goods Dec'2010 Feb'2011 Apr'2009 Apr'2010 Oct'2009 Oct'2010 -10. MOSPI.0 -30.4 percent growth registered during the corresponding period of the previous year. while crude oil. 12 | P a g e . Two industry segments that clearly stand out for weak performance in 2010-11 as compared to 2009-10 are cement and coal.0 60. It is only in January and February 2011 that we see growth in this segment of the industry picking up pace once again.0 40. Government of India Core Sector The core sector industries. Chart 7 – Growth in IIP – Use based industrial groups.7 percent during April to February 2010-11 as against 5. significant variations are visible at individual sector level. Although at an aggregate level there is not much change seen in performance during the reporting period of 2010-11 vis-à-vis last year.0 30. which have a weight of about 27 percent in the index for industrial production.0 50.
And in case of the cement sector. the strong performance seen in 2010-11 (Apr-Feb) can be largely attributed to enhanced production by non-state companies like Cairn India.2 3.9 5.3 0.4 percent and is much above what the RBI considers as the ‘growth promoting inflation rate’ and which is about 5 percent.23 percent to 9.5 8.8 6. It is also important to note that while releasing the data for March 2011.4 10. crude oil. production has suffered due to rising cost of raw materials (particularly coal).9 0.Table 3 – Growth in Core Sector 2009-10 (Apr-Feb) 5. resolution of issues related to environment would help the coal industry ramp up production in the current year.4 2. it can be said that while the strong growth of the construction sector in 2011-12 is expected to lead to a turnaround of the cement sector.9 0. which has significantly ramped up its oil production capacity in the state of Rajasthan.7 -0.3 6. Government of India Latest numbers available for February 2011 also confirm that while cement and coal sector have registered weaker growth this year as compared to the same month last year. 13 | P a g e . As regards output in the crude oil sector.35 percent. Regarding the near term prospects for these two sectors.8 7.98 percent. difficulty in acquisition of land and law & order problems in major coal producing states like Jharkhand have hit production in recent times. MOC&I.7 12.2 7.7 4. Overall inflation for 2010-11 stands at 9. Inflation Latest numbers for WPI based inflation show that headline inflation in March 2011 stands at 8.5 Overall Cement Coal Crude oil Power Petroleum products Steel Source – Office of Economic Adviser.1 11. environmental hurdles. This indicates that inflationary pressures continue and that final numbers for March 2011 could well be in double digit territory.9 6. It may be mentioned that in the case of the coal sector.2 7.0 6.5 -5.2 February 2011 6. This is higher as compared to 8.31 percent registered in February 2011. Annual inflation rate for 2010-11 also highlights the continuous pressure the economy faces on the prices front. petroleum products and steel sectors have seen an improvement in growth. the figure for January 2011 was revised upwards from 8.0 -0. difficulty in getting environmental clearances and moderation in spending by the government on irrigation and housing projects particularly in South India.2 11.2 2010-11 (Apr-Feb) 5. factors like non – receipt of statutory clearances on time.7 4.4 5.1 February 2010 4.
There are two ways in which one can look at and examine the non-volatile components of WPI. Apart from the supply demand gap.00 11. The 14 | P a g e . prices of items like vegetables.00 5.1 percent in March 2011.00 10.7 percent in August 2010 to 8. A closer look at the inflation numbers at the disaggregated level shows that within the food articles segment. fruits. meat and fish have been going up appreciably in recent months. milk. another reason which explains the increase in prices of these items [and this is particularly true for perishables like fruits and vegetables] is the rigidities that have gripped the marketing and distribution of such products through the country.00 May-10 Jun-10 Sep-10 Nov-10 Dec-10 Mar-11 Aug-10 Apr-10 Jul-10 Oct-10 Jan-11 Feb-11 Non-Food Manufactured Products Inflation Core Inflation Headline Inflation While non-food manufactured products inflation has increased from 5.00 6. as measured by the headline inflation rate.While the inflationary pressures in the economy. Chart 8 – Headline. The uptrend in non-food manufactured products inflation and core inflation as well as the narrowing of the gap between these two inflation indicators and headline inflation shows that inflationary pressures in the economy are getting generalized.00 9. This increase can be explained by the rising demand for such products and which has not been supported by a corresponding increase in supplies. In other words. One is movement in non-food manufactured products inflation and the other is movement in core inflation.00 4. egg. are showing no signs of a let up.1 percent in September 2010 to 7.9 percent in March 2011.00 7. core inflation has increased from 6. Core inflation is a broader concept as compared to non-food manufactured products inflation and captures the price behavior in non-food articles and minerals in addition to non-food manufactured products. The trends in these two indicators of inflation are shown in chart 8.00 8. price pressures are spilling over from food articles to non-food articles and nonfood manufactured products. YoY in Percent 12. Both these indicators have moved up over time. what is perhaps more important is the gradual pick up in the nonvolatile components of WPI. Core and Non-Food Manufactured Products Inflation.
20 5. Metal products producers are raising prices following the higher global base metals and precious metals prices. Finished textile companies have started passing on higher fibre costs to consumers.78 4.20 4.39 10.37 14.09 7.99 3.27 7.81 23. This is a direct result of petrol price decontrol introduced by the government and the pass through following hardening of international crude prices.26 5.10 13.76 5.44 16.60 15.08 4.28 -0.49 18.65 6.65 4.40 12.48 15.67 10.13 Dec 10 9.39 7.40 5.67 2.62 6.10 0.58 11.34 2.79 10.30 14.36 3.32 10.58 6.40 3.45 20.99 7.99 3.07 Jul 10 10.91 5.93 18.60 21.08 May 10 10.33 9.49 Feb 11 8.12 18.71 -1.38 6.07 6.20 5.64 25.37 15.96 15.50 3.15 5.90 5.07 25.12 4.09 4.40 7. iron and steel & rubber and plastic products seeing an appreciable increase in prices.24 3. YoY growth in Percent Apr 10 11.26 5.58 -1.48 11. Coal prices are also increasing at a fast clip and adding to overall inflationary pressures.06 1. In the manufactured products category too signs of a buildup in inflation have strengthened with segments like edible oils.68 -2.32 15.13 7.31 14.98 8.41 10.77 4.21 2.93 -1.39 -1.40 17.88 12.60 13.05 Aug 10 8.02 4.73 7.14 20.30 31.97 15.73 4.22 12.38 11.76 25.50 29.64 3.06 -0.20 2.01 4.46 10. jute and silk.45 30.41 5.96 14.89 1. Table 4 – WPI based inflation.36 4.87 Jun 10 10.80 24.10 6.20 2. Another segment within the primary articles group that is contributing to overall inflation is ‘minerals’ where prices are going up due to higher global costs of copper and other base metals.60 16.08 4. cotton textiles.09 14.83 22.24 5.98 6.43 9.28 20.58 0.56 3.13 Sep 10 8.09 7.96 9.81 10.53 2.61 13.59 5. Moving on now to the non-food articles group.14 9.37 -1.26 5.20 11.70 7. we see that here strong inflationary pressures are coming from ‘fibres’ such as cotton.17 16.94 -0.01 Jan 11 9.98 12.45 21.89 11.75 5.21 4.95 2.42 5.74 29.34 7. petrol prices have increased appreciably over time.51 3.90 4.75 6.00 5.22 201011 9.60 13.60 1.19 -0.92 6.12 8.14 25.12 11.53 9.41 5.00 21.69 12.02 19.65 29.35 18.28 5.06 4. basic metal alloys.82 15. In the fuel category.44 5.34 2.80 11.80 12.55 5. This increase in prices can be related to the increase in input costs as manufacturers have crossed the level beyond which holding price line is no longer a viable option.84 3. manmade textiles.78 3.32 4.20 -2.78 11.66 5.25 4.56 Oct 10 9.29 20.08 34.60 All commodities (I) Primary articles Food articles Non-food articles Minerals (II) Fuel and power (III) Manufactured products Food products Beverages and tobacco Textiles Wood and wood products Paper and paper products Leather and leather products Rubber and plastic products Chemicals and chemical products Non-metallic mineral products 15 | P a g e .66 0.92 5.22 5.34 7.60 20.82 Mar 11 8.43 1.75 26.55 Nov 10 8.11 4.00 4.73 3.49 4.08 14.61 6.25 2.84 2.46 5.‘episodic inflation’ that we saw in case of onions in the month of December 2010 is a classic example of how even small disruptions in supply can have a large impact on prices in our country due to inefficient supply chains.10 -1.27 1.78 11.02 11.21 7.68 26.43 5.41 18.80 16.74 2.84 7.68 5.09 18.47 25.
95 2.37 2. Government of India On the whole.21 2. we have used CPI-IW as this is a reasonable indicator of consumer prices in India.03 1. Further.78 -0.03 2.93 6.00 2.05 CPI (IW)* Core Final Goods Inflation 1.90 Source – Office of the Economic Advisor.32 2.93 0.43 3.96 1.11 1. it may be mentioned that while the monetary policy tools have a bearing on inflation from the demand side.69 2.13 0. Against the above background let us take a look at movements in core inflation (WPI based) and core inflation (CPI based) and track the month on month movement using deseasonalised index values.91 7.78 1.89 2.30 8. MOC&I. as mentioned earlier.88 8.53 2.49 3. MOM growth based on 3MMA Period WPI Core Input Inflation* 0.74 8. equipment and parts 9.25 1. This will have a bearing on the growth performance particularly industrial production.79 7.75 8.28 3. trends in WPI are a reflection of inflation emanating largely from the supply side.01 7. In the context of RBI’s monetary policy moves it may be mentioned that these moves are guided by the trend seen in headline inflation and core inflation measured on a year on year basis. we see that inflation is getting generalized with a spillover from primary articles to manufactured products now being evident. Perhaps a better indicator of inflationary pressures – and certainly a more forward looking input for policy moves – is the month on month change in the index that is duly deseasonalised. alloys and metal products Machinery and machine products Transport.42 2.48 2.67 2. is already showing signs of moderation. For the purpose of our analysis.21 2. Globally. the key indicator to follow from the perspective of demand side inflation management is movement in consumer prices.70 2. Therefore.22 0.61 2. The need to focus on CPI has become even more important today as the global commodity prices are on a rise and these impact input price inflation far more than prices of final goods as measured by CPI inflation.04 2.74 7.29 3.37 9. the central banks try to manage CPI inflation by affecting aggregate demand.76 3.Basic metals.07 3.14 Jan 2010 Feb 2010 March 2010 Apr 2010 May 2010 Jun 2010 16 | P a g e . Table 5 – Trends in Core Inflation.23 2. which.93 6.21 0. The readings for March 2011 would give more reason to RBI to continue with the policy rate hikes in the months ahead.59 3.29 2.91 8.31 2.
19 0. then any move by the RBI to further tighten monetary policy could prove counterproductive as it would have a direct bearing on industrial and economic activity in the country.67 0.22 0. This is particularly true in an environment characterized by rising commodity prices.26 0.50 0. the month on month movement in WPI based core inflation (core input inflation) is showing signs of an uptick in inflation.53 0.89 1.40 percent in September 2011 (when calculated on a 3MMA sequential basis).Jul 2010 Aug 2010 Sep 2010 Oct 2010 Nov 2010 Dec 2010 Jan 2011 Feb 2011 0.48 . Given this situation.12 1. As the table above shows.19 percent in December 2010 to 0. FICCI’s analysis further shows that core final goods inflation – which is what RBI should be targeting – is expected to moderate from its value of 1.29 1. if we look at the numbers for CPI based core inflation (core final goods inflation) then we see that CPI-IW has been on a downward trend after having peaked at 2 percent at the start of 2010. as seen today. However.76 1. It may be added that a singular focus on WPI movement for deciding on monetary policy moves may not be a correct approach.02 0.19 0.55 0. And with the RBI’s focus being on this variable.39 0.19 - Source – FICCI Computations based on data sourced from CSO Note: Core Inflation of WPI and CPI is calculated by removing the Food and Fuel components from the respective General Index. If consumer prices have come off their peak and are now showing signs of moderation. it is perhaps time that the RBI revisits is monetary policy stance and fine tunes the interest rate structure to stimulate growth.09 0.60 0.08 1. and which are likely to keep WPI based core inflation at elevated levels irrespective of large scale changes in the demand conditions.58 0.49 0. a case for continuing monetary tightening is plausible. Table 6 – Projections for CPI (IW) Core Inflation Month Dec 2010 Jan 2011 Feb 2011 Mar 2011 Apr 2011 May 2011 June 2011 17 | P a g e MOM Growth 1.
WPI based Inflation and Monetary Variables (BR and CRR) Period – April 1996 to March 2003 16.July 2011 Aug 2011 Sep 2011 0. interest rates were hiked to as much as 12 percent to counter inflation.0 IIP General WPI All Commodities CRR Bank Rate 0.0 10.0 6. This. Chart 9 – Movement in Industrial Production.40 Source – FICCI Research It may be recalled that we have had a similar episode of tight monetary policy engineering a slowdown in growth in the late 1990s. it may be re-emphasized that for addressing the inflation situation it is important that the government looks at debottlenecking the supply side both in the agriculture sector and in the manufacturing sector.0 Apr'96 Jul'96 Oct'96 Jan'97 Apr'97 Jul'97 Oct'97 Jan'98 Apr'98 Jul'98 Oct'98 Jan'99 Apr'99 Jul'99 Oct'99 Jan'2000 Apr'2000 Jul'2000 Oct'2000 Jan'2001 Apr'2001 Jul'2001 Oct'2001 Jan'2002 Apr'2002 Jul'2002 Oct'2002 Jan'2003 Source – Reserve Bank of India Finally.0 12. 18 | P a g e . along with the Asian financial crisis.0 2. Unless we take steps to boost agriculture productivity and to improve the marketing and distribution of food products in the country and unless greater investments are made in enhancing supplies of critical industrial inputs and raw materials.0 4.45 0.43 0.0 8. had a deep impact on India’s growth trajectory and it took us almost five year to come back to the high growth trajectory (See chart 9 for details). we cannot bring inflation level down in a sustainable manner.0 14. At that time.
Foreign Trade In March 2011. With exports and imports at these levels.3 billion in April 2010 to US$ 34. This calls for encouraging investments by addressing issues such as procedural hassles. easing cross border movement of food products and evolving a robust centralized monitoring system to track progress of weather and crop situation particularly for perishables require urgent attention of the government. With total exports and imports at these levels.In the context of the agriculture sector.3 billion. Our imports on the other hand grew by 17. Likewise we need to step up capacities across industries to increase supplies. gems and jewellery. steps like decentralizing procurement operations of FCI. India’s exports posted a growth of nearly 44 percent and touched a high of US$ 29.5 percent over US$ 179 billion achieved in 2009-10. Annual figures for 2010-11 show that exports have touched an all time high of US$ 246 billion and mark a robust growth of 37.2 percent in 2010-11 and touched US$ 350. our exports have increased at a faster pace going up from US$ 16. oil. As hikes in interest rates have a direct bearing on the investment activity.6 billion in March 2011. The strong performance of the export sector has also helped calm fears about the sustainability of the current account deficit. Imports too registered a strong growth of 21. further tightening of monetary policy is inadvisable as it would prevent fresh capacities from coming on board. It is this strong performance in exports. which has helped bring the otherwise burgeoning trade deficit down to more manageable levels. Looking at trade numbers on a sequential basis we see that while imports have moved up from about US$ 27. India’s strong export performance in the year 2010-11 was fuelled by sectors such as engineering products.9 billion to US$ 29. meeting PDS requirements in states to the extent possible. land acquisition etc. 19 | P a g e .7 billion in March 2011.7 billion. restrictive environmental regulations.1 billion. particularly seen in the last five months.3 percent and attained a total value of US$ 34. these numbers translate into a total trade figure of almost US$ 600 billion. de-listing horticulture products from APMC Act. India’s overall trade balance stood at US$ 5. textiles and pharmaceuticals. offloading food stocks in smaller lots over multiple locations leveraging tools such as e-auctions. encouraging private players to come and invest in agri-infrastructure. This incidentally is also the fastest annual growth that we have seen in exports since independence. India’s total trade deficit in 2010-11 stood at US$ 104 billion. which is about half the size of India’s GDP of US$ 1. Further. All of these would in some measure help us tackle the food inflation problem.1 billion during the same period.2 trillion.
Government of India 20 | P a g e .8 21.6 28. According to the draft strategy paper for exports released by the government.7 8. Table 7– Exports and Imports in US$ Billion / YoY Growth in Percent Apr10 16.5 11.1 34. government would simultaneously focus on opening up new vistas both in terms of markets and products in regions including Asia.7 28. In this context it may be pointed out that the Ministry for Commerce and Industry had recently put out a draft strategy paper for doubling India’s exports to US$ 450 billion by 2013-14. textiles (US$ 36.1 -9.1 27.8 -8.9 27.5 Aug10 16.6 44. gems and jewellery (US$ 64 billion).1 7.1 49.8 7.5 19.3 Nov10 18.2 34.6 7.6 29.1 6.9 13.2 -9.9 Sep10 18. Consultations on this draft paper are now at an advanced stage and the final strategy paper is expected to be released soon by the Ministry.1 -8.7 Oct10 17. the export target of US$ 450 billion by 2013-14 will be driven by sectors like engineering goods (US$ 108 billion). easing procedural bottlenecks and developing skill levels for continuous value addition in exports.3 -11.9 20.1 38.3 35.9 Jul10 16. Further.8 18.6 Jun10 17.4 19.4 13. Africa and Latin America.7 20.5 25.4 23 -12. The draft strategy paper also provides suggestions on creating infrastructure.3 Source – Department of Commerce.7 21.1 23. while effort would be made to retain presence and market share in ‘old developed country markets’.9 27.5 32.0 27.6 36.6 31.2 23.1 -8.4 8.3 6.2 43.3 -13.2 Jan11 20.9 18.9 27.9 26.1 Dec10 22.4 36.1 19.2 26. MOC&I.5 Mar11 29.0 32. in the proposed strategy for exports.7 7. petroleum products (US$ 73 billion).5 -10.4 19.4 -11.3 8. the country’s Commerce Minister said that given this recent trend we are confident of attaining the export target of US$ 450 billion by 2013-14.2 -5.3 8.2 7.7 21.7 8.7 - Exports Imports Oil imports Non-oil imports Trade balance Growth in Exports Growth in Imports -10.7 Feb11 23.0 22.5 billion) and drugs and pharmaceuticals (US$ 22 billion).While releasing the export figures for the month of March 2011.7 21.2 -2.2 May10 16.6 30.2 29.0 17.
5 Source – Reserve Bank of India Trade Balance 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 66285 85206 105152 128888 166162 189001 182163 80003 118908 157056 190670 257629 307651 299491 21 | P a g e . we see that while India’s total exports have increased from US$ 66 billion in 2003-04 to US$ 182 billion in 2009-10. total trade deficit increased from US$ 13 billion in 2003-04 to US$ 117 billion in 2009-10.5 -33702 640485 -5.3 -51904 768538 -6. India’s total imports during the same time period went up from US$ 80 billion in 2003-04 to US$ 299 billion in 200910. Imports and Trade Balance in US$ Billion 40 30 20 Exports ($ Bn) 10 Imports ($ Bn) Trade balance ($ Bn) 0 2010 Sept 2011 Jan 2010 May 2010 Aug 2010 Dec 2011 Feb 2010 Oct 2010 April 2010 June 2011 Mar 2010 July 2010 Nov -10 -20 Source – Department of Commerce. by 2008-09. Alongside this increase in the absolute value of trade deficit.5 percent. While in 2003-04. an increase in the trade deficit to GDP ratio was also seen. The rapid increase in India’s imports relative to our exports over this period resulted in widening of the overall trade deficit. this figure had jumped to over 10 percent.1 -91467 1128476 -8. As the data in the following table shows. Table 8 – Exports.8 -61782 870553 -7.5 percent.1 -118650 1138643 -10.Chart 5 – Exports.4 -117328 1237523 -9. the trade deficit to GDP ratio stood at 2. MOC&I. In 2009-10. Imports and Trade Balance in US$ Million Year Exports Imports GDP Ratio US$ million -13718 552377 -2. Government of India If we look at the trade data for the last few years. the trade deficit to GDP ratio came down to 9.
49 -5126 640485 -0.79 -21011 870553 -2. Looking at the same reference period as considered earlier. we have registered reasonably large surpluses on the invisibles account.4 percent. While the increase in the non-oil trade deficit is by itself large.2 billion in 2006-07 and further to 78. it is interesting to note that over time the pressure exerted by the rising imports of oil and increasing global prices of oil on India’s external balance has steadily gone up. Our non-oil imports over this same period went up from US$ 58 billion to almost US$ 200 billion.9 billion in 2009-10. Following from these trends we see that India’s non-oil trade balance.59 -49171 1237523 -3. In 2009-10. As the table below shows. It may be noted that in 2007-08 the share of non-oil trade balance in overall trade balance was 41 percent. It moved up from US$ 27. 26 in 2005-06 and about 34 percent in 2006-07.97 Source – Reserve Bank of India While India’s trade account has been in a deficit.8 billion in 2003-04 to US$ 52.41 -37254 1128476 -3. The corresponding increase in the invisibles balance to GDP ratio was 5 percent to 6 percent and further to 6. This figure increased in the subsequent year but at a slower pace registering a value of 44 percent. Data shows that this share was about 15 percent in 2004-05.80 -13752 768538 -1. which was in surplus in 2003-04. However.The tread seen in the movement of country’s overall trade balance is also reflected in the nonoil trade balance. 22 | P a g e . the balance on account of invisible flows has been in surplus throughout the period under consideration. This can be appreciated better when we look at the share of India’s non-oil trade balance in its overall trade balance. since then oil imports started hitting our external balance in a more severe manner with growth in the share of non-oil trade balance in overall trade balance getting moderated. This is largely due to the remittance inflows and receipts on account of services exports. we find that India’s non-oil exports increased from US$ 60 billion in 2003-04 to US$ 150 billion in 2009-10.30 -52277 1138643 -4. turned into a large deficit of almost US$ 50 billion in 2009-10. this upward trend was reversed and the share of non-oil trade balance in overall trade balance came down to 42 percent. Table 9 – Non Oil Trade Flows in US$ Million Non Oil Exports 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 60274 76547 91451 107779 134541 157748 150531 Non Oil Imports 57580 81673 105203 128790 171795 210025 199702 Non Oil GDP Ratio Trade US$ Balance million 2694 552377 0.
0 75731 1128476 6. there was considerable concern expressed with regard to the movement in the CAD to GDP ratio. 23 | P a g e .Table 10 .7 89923 1138643 7.Invisibles Balance Invisibles GDP US$ Ratio Balance million 27801 552377 5. However.1 -15737 1128475.5 2. For a long time.9 78917 1237523 6.5 percent mark.61 -1.9 42002 768538 5.9 -1.0 31232 640485 4.1 percent.5 percent [in deficit mode] as a comfortable level.6 -3.4 Source – Reserve Bank of India 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 The surplus on the invisibles account has helped keep the overall current account deficit down to manageable levels. In 2010-11.CAD as a percent of GDP GDP US$ Ratio million 14083 552376.4 -28728 1138643.7 percent. this limit was breached only twice – in 2008-09 and in 2009-10 when the CAD to GDP ratio touched (-) 2. We generally consider a CAD to GDP ratio of 2 to 2. portfolio flows have been sizable.5 to 2.1 Source – Reserve Bank of India CAD 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 Foreign Investments Data on foreign investment flows shows that while FDI inflows in the country in the year 201011 have seen moderation as compared to inflows received during 2009-10. nearly matching the quantum received during the preceding year. What made matters worse was the fact that FDI flows had slowed down and a good part of the CAD was being financed by volatile flows like foreign institutional investments.42 -0.3 -9565 870553.22 -1.5 -2470 640485.5 percent and (-) 3.3 -2. the strong performance of the export sector in the third and more so in the fourth quarter of 2010-11 has helped bring the CAD level down and we now expect this to settle in the range of 2.5 52217 870553 6. Over the last seven years. the CAD to GDP ratio would cross the 3. it was felt that given the evolving trends. Table 11 .5 -38411 1237522.4 -9902 768537.
1 40.017 29.003 -43.6 27.151 6.5 -75.062.366 21.918 8.106 23.6 -14.1 48.699 15.69 1032. Table 12 – Foreign Investment Flows in US$ Million FDI 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10(P) Apr-Feb 2010-11 4.34 billion received during the same period in the previous year.8 6. It may be mentioned that this dip in FDI flows into India has taken place at a time when FDI flows to some of the other emerging markets have gone up in 2010.As the table on the next page shows. This last finding was brought out earlier in a report released by UNCTAD. electrical equipments and agricultural services.961 22.40 1.271 289.461.2 11.386 FII* 1.021 -26.5 -18.763 25.835 37.048 29.4 8.1 2.331.335 *FII is included in Portfolio Investments Source – Reserve Bank of India Table 13 – Sector Wise Foreign Investment Flows in US$ Million Sector 2010-11 (Apr-Jan) US$ Million 2.9 293. housing and real estate.6 -13.05 % to total FDI Inflows (Apr-Jan 2009-10) 16.5 530.0 2.130 5. This slowdown in FDI flows is a matter of concern as FDI flows are of a more durable variety and often come with many tangible and intangible benefits.9 52.0 9.139 57.829 62.014 15. total FDI flows are expected to fall much short of US$ 37.492 34.320.0 -20.9 979 -51.505 377 10. A look at the sector wise FDI inflows during the period April-January 2010-11 and comparing the same with inflows received during the corresponding period of 2009-10 shows that a sizable decline has taken place in sectors like services sector.983 70.838 37.79 ↓ ↓ ↓ % to total FDI Inflows (Apr-Jan 2010-11) 17. the central bank – RBI – has set up an internal working group to look into this development and try and understand the reasons for this slowdown.876. construction.54 7.995.035 4.796.322 6.8 52. telecommunications.8 -0.31 % change in 201011 vis-àvis 200910 -22.19 1.4 14.431 YOY Growth -13.376 333.4 Total (FDI+Portfolio) 6.3 -173.7 31.029 6. FDI inflows into India during April 2010 to February 2011 totaled US$ 25.328 -15.1 12.81 ↓ 1 2 3 24 | P a g e Services Sector Telecommunications Power .377 1.225 20.1 154.2 32.926 3.3 -67.90 -21.8 -17.67 2009-10 (Apr-Jan) US$ Million 3.95 10.7 7.9 billion as against US$ 33.453 29.66 2.789 8.8 billion that were received during the year 2009-10.315 -18.86 5.051 8.686 9.826 34. With only a month to go before the close of fiscal 2011.855 -150.949 YOY Portfolio YOY Growth Investments Growth 87.0 2.847 1.760 -8. In fact given the importance of this issue.74 -45.
land acquisition and availability of quality infrastructure and highlighted that if these are addressed expeditiously then India’s share in FDI flows to EMEs could go up in the future.76 5. DIPP While we wait for the findings of RBI’s internal working group on this subject.5 0.5 539.89 75. integrated township projects and construction of ports.86 442.61 114.28 -17.79 1834.97 201.1 707.02 3.46 179.75 1191.2 18.25 18.21 200.37 287.24 0.03 11.86 1.79 0. and which appear to have affected investors’ sentiments.16 6.05 31.83 540.18 0.02 1.02 1048.78 4.316.43 4.34 1.84 -63.89 382.22 -29.27 685.17 1002.19 2.96 ↔ ↓ ↓ ↓ ↓ ↓ ↓ ↓ Source – SIA Newsletter.15 -96.11 ↓ ↓ 5.43 447.82 573. In fact a strong indication to foreign investors about India’s intent to further improve the policy framework for FDI was given recently when at the release of the third edition of the consolidated FDI policy.72 0.57 2.57 43.35 275.15 1.22 135.36 290.62 2.62 32.39 2.648.308.95 1 0.4 5 6 7 8 9 10 11 12 Metallurgical Industries Construction Activities Housing & Real Estate Computer Software & Hardware Petroleum & Natural Gas Industrial Machinery Automobile Industry Trading Information & Broadcasting (Including Print Media) Cement And Gypsum Products Chemicals (Other Than Fertilizers) Hospital & Diagnostic Centres Drugs & Pharmaceuticals Consultancy Services Hotel & Tourism Sea Transport Air Transport (Including Air Freight) Electrical Equipments Agriculture Services Non.89 6.16 3.52 1.Conventional Energy Miscellaneous Industries 1011.46 350.24 1.46 639.14 -54.13 1.58 41.14 4.63 259.77 -56.37 181.85 204.78 2.43 2.39 2. Senior officials in the Industry Ministry have also expressed apprehension over slowing down of FDI and made a strong case for further liberalization of the FDI policy framework in the country.1 188.82 676.25 1006.14 3.53 10.24 1.77 ↓ ↓ 3.1 3.61 492.65 142.33 319.71 226.19 -84.2 1.92 5.15 1.37 497.39 222.49 1.05 108.73 916. it may be mentioned that in January this year RBI had alluded to the environment sensitive policies being pursued with regard to the mining sector.55 2.18 1.1 366.93 ↓ ↓ ↓ ↓ 13 14 15 16 17 18 19 20 21 22 23 24 606. the government announced major changes related to pricing of 25 | P a g e .98 2.7 0.64 0.08 2.57 -60. RBI had also raised issues related to procedural delays.83 -9.06 7.77 5.33 1.318.76 198.
It may however be added that this massive monetary expansion would also have a downside as it will continue to fan commodity prices and which would hurt us from the inflation side.870 297. Most recent numbers show that the country’s foreign exchange reserves have shot up further crossing the US$ 300 billion mark. the government should follow up now on policy reforms in areas like retail. Table 13 – Foreign Exchange Reserves in US$ Million Forex Reserves 279.142 292. there are opportunities emerging for FII investors in their home countries. With this level of reserves. while in April 2010.956 292. insurance.334 April 2010 May 2010 June 2010 July 2010 Aug 2010 Sept 2010 Oct 2010 Nov 2010 Dec 2010 26 | P a g e . The only positive in sight presently is the massive monetary expansion being undertaken by the Bank of Japan following the crisis [Tsunami / Earthquake / Nuclear Disaster] and the continued Quantitative Easing in US. Coming now to portfolio inflows we see that during the period April . given the strong concerns institutional investors have with regard to the inflation situation in emerging markets including India. India is the seventh largest holder of foreign exchange reserves in the world.710 284. Further.633 273. Both these developments could result in some money flowing towards Indian shores.544 275.February 2010-11 India received a total of US$ 31.convertible instruments. As data given in the table below shows.183 283.6 billion. Forex Reserves India’s foreign exchange reserves increased as we moved ahead in fiscal 2010-11. in September 2010 this figure had increased to US$ 292. defense and banking sector. India’s foreign exchange reserves totaled US$ 279. As the economic situation in US and Europe is improving slowly.389 297. While these announcements are welcome. inclusion of fresh items for issue of shares against non-cash considerations and removal of the condition of prior approval in case of existing joint ventures / technical collaborations in the ‘same field’ [Press Note 1].4 billion in portfolio flows. FII inflows could remain muted at least in the near term. Likewise emphasis on procedural reforms should continue to enhance the ease of doing business in India.9 billion. most recent trends show that portfolio investors have been net sellers in the Indian market. Although this figure is encouraging.
891 297.947 4. Dr.5 Dec 2010 QE 62.8 2009 PR 43.153 224.5 billion in end March 2010 and further to US$ 62.360 16. Table 14 – India’s External Debt in US$ Million / At End March 2006 Short term debt (1) Long term debt (2) Total external debt (3) (1) / (3) (%) Short term debt to Forex Reserves (%) Total debt service Debt service ratio 19.514 4.130 144.511 21. Kaushik Basu. In context of India’s external situation and level of comfort with regard to forex reserves.1 2007 28.4 2010 QE 52. the fact that short term debt is about 21 percent of India’s foreign exchange reserves is also a comforting feature regarding India’s external situation. Further. in case of India this huge build up of reserves is largely due to inflow of funds on the capital account.Jan 2011 Feb 2011 299.4 billion in end March 2009 to US$ 52.539 119.7 2008 45.454 20.1 11.738 178. an important variable to look at is the external debt position and particularly the movement in short term debt over time. this large holding of forex reserves has attracted a lot of attention and several options suggested on how to optimally utilize these reserves. 27 | P a g e .3 percent in end March 2001 to 20.114 14.560 10. At these levels of short term debt.0 21.0 percent in December 2010. Government of India Data shows that India’s short term debt has increased from US$ 43.919 5.2 15.1 18.471 208. Basu mentioned that it is time that India needs to seriously look at the issue of whether to set up a Sovereign Wealth Fund.230 172.407 20.1 3.4 14.669 224.404 4.6 billion in end December 2010.983 261.8 14.620 234. Speaking at a recent seminar.9 percent at end December 2010. the share of short term debt has gone up from 19. Dr. In this context it is interesting to note that the country’s Chief Economic Advisor.592 Source – Reserve Bank of India Although other countries with huge forex reserves have strengthened their external position on the basis of positive or surplus trade and current account.224 301.3 14.575 139.9 Source – Ministry of Finance.9 19. has once again brought the focus back on the question of India having its own Sovereign Wealth Fund.362 181.515 19.3 17. Data also shows that our debt service ratio has been declining over time [2009-10 being an exception when debt service increased on account of large ECB repayments] and stood at 3. Nevertheless.8 18.1 percent in end March 2010 and further to 21.0 12. India’s external position can be said to be reasonably comfortable. As a percent of total external debt.
7865 46.6553 56. 2010 2010-11 April 2010 May 2010 June 2010 July 2010 Aug 2010 Sept 2010 Oct 2010 Nov 2010 Dec 2010 Jan 2011 Feb 2011 Mar 2011 MOM growth in Mar 2011 Source – Reserve Bank of India One of the factors that affect the competiveness of India’s exports vis-à-vis exports from other countries is the relative movement in the national exchange rates.2921 72.1568 45.5150 72. The data shows that between February 2011 and March 2011. currencies like the Indonesian Rupiah.5425 0.02 Pound Sterling 80. it has depreciated against the Euro.5122 0.3561 51. the Rupee weakened with its value coming down by almost 1.4965 44.4995 45.5457 0.8 percent against the Pound Sterling.7153 61.80 Japanese Yen 0.7653 59.6578 70.4981 59.2384 67.9700 60. The only exception has been the Pakistani Rupee.2287 45.5496 0. we provide the movement in the national currencies of select countries vis-à-vis the US$.5018 0.5679 46. Table 15– Rupees per unit of foreign currency (Yearly / monthly average basis) USD 40. all currencies analyzed have seen an appreciation against the US$. Data further shows that while the Indian Rupee has seen greater appreciation against the USD compared to the Brazilian Real and the Malaysian Ringgit.5178 62.0616 44.5502 -0.6648 57.6272 66. the value of the Rupee moved up by about 0.3381 71.0592 61.7033 -0.5465 0.4583 45.5454 0.7636 59.8498 70.8373 46.3934 45.0183 45. Against the Euro. 2009 March.0314 1. 2008 March.5343 0.5394 73.5443 46.4969 0.5428 0.4009 0.1747 68. No large variation was noted in INR’s movement against the Japanese Yen.Exchange Rate Most recent trends in the movement of the INR vis-à-vis major vehicle currencies show that while the Indian Rupee has appreciated against the USD and Pound Sterling. the South African Rand and the Thai Baht have gained more against the USD between February 2011 and March 2011.6952 71.4360 68.5251 0. In the following table.4763 0.9207 61. 28 | P a g e .02 Euro 62.5 percent between February 2011 and March 2011.4635 71.9736 71.9041 68.9895 -1.5503 0. During the same time.8054 72.0904 63.6652 60. As data given in the table below shows the Rupee appreciated against the USD by 1 percent between February 2011 and March 2011.52 March.9016 59.4538 44.
In the previous four years.54 7.33 9183.8 percent in the period up to March 25. net bank credit to the government went up by 13.82 29. Demand deposit held with banks however saw a marginal decline registering a negative growth of 0.53 8760.75 Malaysian Ringgit 3.60 85.71 1.77 1. Net foreign exchange assets of the banking sector have seen an increase of 6.26 Pakistani Rupee 83. Looking at the sources of money supply growth (up to March 25.76 85.48 32. Amongst the key components of M3.68 1.26 3.36 9053.Table 16 – Exchange rate vis-à-vis USD for selected countries (monthly average basis) Brazilian Real 2010-11 April 2010 May 2010 June 2010 July 2010 Aug 2010 Sept 2010 Oct 2010 Nov 2010 Dec 2010 Jan 2011 Feb 2011 Mar 2011 M-o-M growth in Mar 2011 1.30 7.68 85. currency held with the public saw an increase of 19. 29 | P a g e . 2011 (previous year growth being 15.55 Indian Rupee 44.91 6.70 1.72 1.04 3.01 85.34 31.71 30.2 percent as against a growth of 16.76 1.99 84.46 44.1 percent growth seen in the previous year.6 percent as against a growth of 21.11 3.88 45.17 45.15 3.12 Source – International Monetary Fund Money and Banking Latest figures available from RBI show that broad money or M3 (up to March 25.54 Thai Baht 32. 2011) registered an increase of 16 percent as compared to a growth of 16.42 44.3 percent seen in the previous year.28 32.67 1. The year on year growth as on March 25.92 7.03 -0.78 30.05 8931.02 Indonesian Rupiah 9027.11 3.37 85.39 9148.37 -1.87 46.92 -3.06 3.65 7.21 3.38 85.76 8975.17 6.80 8971.3 percent witnessed during the same period in the previous year.77 46.38 45.61 9024.60 85.8 percent during the corresponding period of the previous year.81 1.80 1.10 3.96 6.48 -1.86 86. 2011) we see that while bank credit to the commercial sector went up by 20. In the context of money supply growth it may be mentioned that with a nominal GDP growth of around 18 percent.26 3.84 6.21 3.78 85.76 1.58 30.67 1.04 44.11 8928. 2011 was also 16 percent as against 17.50 45.02 South African Rand 7.4 percent.56 46.66 -0.57 46.9 percent) and time deposits with bank went up by 18.97 29.6 percent.63 7.38 85.40 0.20 9036.11 30.85 30.9 percent during the same period.99 -1.35 7.13 3. this growth of 16 percent is relatively weak.00 8916.13 6.37 32.
aggregate deposits grew by 15. we see that growth in 2010-11 has been of the order of 21. As the liquidity situation tightened. Further.4 percent. the high growth in money supply was powered by rapid expansion in net bank credit to the government.9 percent. However. Data on interest rates in the call money market show that borrowing / lending rates started moving up in the second half of 2010-11. picked up pace with hikes being particularly aggressive from December 2010 onwards. In 201011. it is still below the expansion seen in 2006-07.2 percent. banks started facing a tight liquidity situation. Growth in bank credit in the year 2009-10 was of the order of 16.1 percent seen in the previous year.when nominal GDP growth was of the order of 15 to 16 percent. net foreign exchange assets of the banking sector and bank credit to the commercial sector grew at a relatively fast pace and contributed to overall money supply growth. The slowdown in growth in deposits can be explained by unattractive card / deposit rates and continued high inflation rate that lowered the real rate of return on term deposits. This is also the period when liquidity injection by the central bank under the LAF / Repo window increased and on occasions crossed the Rs. when we look at the figures for non-food credit. with time as credit growth gathered pace. Data on credit flows shows that in the financial year 2010-11 total bank credit registered a growth of 21. Our analysis shows that while in 2006-07 and 2007-08. The increase in card rates. in 2008-09 and 2009-10.8 percent. While in 2010-11. Further. This move has helped bank garner more deposits in the last quarter of 2010-11. Good performance of the equity market in the first half of 2010-11 also contributed to slowdown in deposit growth. which started in July 2010. 30 | P a g e . growth in net bank credit to the government and net foreign exchange assets of the banking sector slowed down considerably. M3 growth was much higher around 20 percent. 1 lakh crore mark. in 2009-10 aggregate deposits had registered a growth of 17. banks were forced to increase the card rates.2 percent as compared to 17. although bank credit to the commercial sector picked up pace in 2010-11. Growth in deposits in 2010-11 has not only lagged growth seen in overall bank credit and nonfood credit but it also falls behind the growth in deposits seen in 2009-10.
4 21.7 95.5 81.788 39.96.on .703 Source – Reserve Bank of India Fiscal Situation Data on the fiscal position of the government shows that during the period April to February 2010-11.2 15.4 21.6 78.2 15.3 104.0 13. Crore) Item Outstanding as on 2010 2011 Variation over Financial year so Year .8 21.6 78.4 11.9 47.8 Bank Credit Non Food Credit Aggregate Deposits Mar.9 17.5 69. 26 Mar.9 17.7 100.1 78.4 percent over the same period of 200910.4 109. Non-tax revenues have also shown a sizable increase of over 109 percent during April to February 2010-11 due to the large payments received by the government of account of 3G / BWA spectrum auctions.1 percent and totaled Rs.6 83.3 81.04.1 28.6 63.5 37.7 116.4 Actuals Apr-Feb 2010 458752 358641 100091 18672 5886 12786 477404 601198 557414 177257 43784 257107 217191 39916 858305 Growth in 2011 over 2010 46.8 16.5 14.2 18.376 44.Year far 2009-10 2010-11 2010 2011 16.2 21. Crore) BE 2010-11 RE 2010-11 Actuals Apr-Feb 2011 670336 460624 209742 33251 10506 22745 703617 668140 607814 201169 60326 310565 263259 47306 978705 Percent of Actuals to Revised Estimates 85.8 20.659 31.0 Revenue Receipts Tax Revenues (Net) Non Tax Non-Debt Capital Receipts Recovery of Loans Other Receipts Total Receipts Non-Plan Expenditure On Revenue Account Interest Payments On Capital Account Plan Expenditure On Revenue Account On Capital Account Total Expenditure 682212 534094 148118 45129 5129 40000 727341 783833 563685 220148 31745 9001 22744 815578 735657 821552 643599 726729 248664 240757 92058 94803 373092 395024 315125 326928 57967 68096 1108749 1216576 31 | P a g e .5 80.251 crore during April to February 2010-11. 25 32.Table 17 – Credit and Deposit Growth (Rs. Non-debt capital receipts of the government have also increased by 78.2 21.299 38.3 83. tax revenues (net) registered a growth of 28.38.5 77.6 80.86.1 17.0 86. Table 18 – Trends in Central Government Finances: April – February 2011 (Rs.44.74.1 17.1 9. 33.574 52.
5 percent in 2011-12. With regard to income tax collections. the Finance Minister announced that fiscal deficit in the year 2010-11 will be scaled down from 5.2 percent. the government.4 46. 1. During April to February 2010-11.8 percent during the same time period. total government expenditure at Rs. Looking at the figures for government receipts for the year 2011-12 as given in the next table. latest figures show that while non-plan expenditure has shown an increase of 11.5 percent in the last budget would also bring in more revenue under this head in 2011-12. fiscal deficit of the central government totaled 69 percent of the revised estimates and showed a fall of nearly 28 percent over the same period of the previous fiscal. had increased the exemption limit for individual income tax payers from Rs. income tax collections are expected to go up. We had urged the Finance Minister that by keeping rates constant. Coming to collections under excise. Strong tax revenue collections. However. while presenting the budget for 2011-12. industrial production would get a leg up and this will translate into higher tax collections. 3G / BWA spectrum windfall and moderation in growth of overall expenditure have helped the government rein in the fiscal deficit in 2010-11.5 percent.188.8.131.52 380901 315873 203644 -27.6 74. On the whole.1 percent during the period under review. we saw that in the budget the Finance Minister desisted calls for complete roll back of the stimulus measures and accordingly held the central excise duty rate constant at 10 percent. the government is banking on strong growth in the economy.7 Source – Controller General of Accounts. The 32 | P a g e .000.5 -63. 1. Government of India As regards expenditure.705 during April to February 2010-11 was about 14 percent higher compared to the same period in the previous year. It may be recalled that in the last budget.1 percent. Revenue from corporation tax is expected to show an increase of 21. plan expenditure has gone up by 20. good corporate performance and a rise in wages and salaries to translate into this growth in tax collections. in its bid to provide some relief to people from high and rising inflation. 9. we see that the gross tax revenues are budgeted to grow by a healthy 18. This shows that there is a clear expectation on part of the government that the corporate sector would see high growth in the current year. FICCI had aggressively worked for maintaining the excise rate at this level. despite this revenue depressing move. It may also be noted that the small increase affected in the MAT rate from 18 percent to 18. With no major tax changes announced in the budget for 2011-12. we see the government projecting an increase of 16. Further.8 -36.5 percent as projected earlier to 5.000 to Rs.Fiscal Deficit Revenue Deficit Primary Deficit 381408 276512 132744 400998 269844 160241 275088 200707 73919 68.
2 percent in excise collections.0 -0.5 16.8 17.9 36.2 3.2 18. On customs.1 -43.9 -3.1 21.700 crore.5 16.51.3 1. 1. it is the increasing quantum of imports resulting from an uptick in domestic economic activity that is likely to yield revenues to the tune of Rs. Finally. the projected increase in collections in 2011-12 is to the tune of 15.government accepted FICCI’s argument and left the excise rate untouched. on service tax collections the budgeted figures show an increase of 18.0 66. Government of India .0 0.8 -12.2 Total receipts Revenue receipts Tax revenue (net) Gross tax revenue Excise duties Customs duty Corporation tax Taxes on income Service tax Tax on UTs Other taxes Transfer to NCCF States' share Non-tax revenue Interest receipts Dividends and profits External grants Other non-tax revenue UT's without legislature Capital receipts Recovery of loan (net) Net market borrowings External assistance (net) Disinvestment Small savings (net) State provident funds Others 33 | P a g e Source – Ministry of Finance. Table 19 – Central government’s revenue and capital receipts – 2011-12 in Rs Crore 2010-11 2011-12 (RE) (BE) 1231576 1237728 783833 789892 563685 664457 786888 932440 137263 163550 131800 151700 296377 359990 141566 164526 69400 82000 1910 1973 8572 8701 3900 4525 219303 263458 220149 125435 19728 19578 48727 42624 2756 2173 147795 59891 1143 1169 447743 447836 9001 15020 355414 343000 22264 14500 22744 40000 17781 24182 10000 10000 10539 1134 Growth 0.9 75.5 0.3 0. The increasing share of services sector in the economy and extension of the service tax net are the two reasons that lie behind this projected growth in tax collections.5 19.5 -21.2 percent.1 percent.2 -59.0 20.5 2.2 15. It is banking on high industrial growth to lead to a growth of 19.5 -34.0 -89. Again with the peak rate of customs duty remaining unchanged at 10 percent.9 18.
defence services and pensions. There are several cases of PSUs where disinvestment was planned in 2010-11 but which could not completed on time. non-tax revenues are projected to show a decline by 43 percent. It is hoped that these units would undergo the disinvestment process in 2011-12. However.5 percent in 2011-12. allocations for sectors 34 | P a g e . Further. However. implementation of the sixth pay commission award and debt waiver for the farmers. in 2011-12.8 percent in 2011-12.000 crore from disinvestment. which are pegged at Rs. the actual amount realized by the end of the fiscal year 2011 was only about Rs. proceeds from disinvestment.000 crore. Non-plan expenditure of the central government has been growing at a fast clip since 2006-07 with its growth rate ranging between 13 percent to 23 percent. It may be noted that even in 2010-11 the government had targeted an amount of Rs. while plan expenditure is expected to show an increase of 11. However. despite this moderation in overall plan expenditure growth.4 percent in its overall expenditure in 2011-12 over 2010-11. 22. Moving on to non-debt capital receipts we see that inflows on account of recovery of loans are expected to register an increase of 67 percent in 2011-12. Table 20 – Central government’s expenditure – 2011-12 in Rs Crore Plan Expenditure 2010-11 RE 2011-12 BE 395024 441547 Non-Plan Expenditure 821552 816182 Total Expenditure 1216576 1257729 Plan Expenditure % change 30. 40. This is understandable as the strong growth seen under this head in 2010-11 was on account of the large payments received due to 3G / BWA auctions.65 percent.78 Non-Plan Expenditure % change 13. we again see a moderation in growth in 2011-12 as plan expenditure had shown an increase of over 20 percent in four of the five preceding years. non-tax revenues would show a decline in 201112. This increase has been on account of factors like higher spending on food and fertilizer subsidies.20 11. would mark an increase of 76 percent in 2011-12.38 Source – Ministry of Finance. 40.75 3. Since this was a one off event. the government sees its overall expenditure going down significantly under heads such as petroleum subsidy.744 crore. Further.While gross tax revenues are projected to grow by 18. Government of India Figures for central government’s expenditure for the year 2011-12 show that the government has budgeted a very small increase of 3. non-plan expenditure will see a compression to the tune of 0.93 -0.65 Total Expenditure % change 18. spending on capital outlay and fertilizer subsidy and this would in turn balance the increase seen under heads such as interest payments. within the overall expense head. As regards plan expenditure.
95 1.16 percent (2009-10).10 1.572 crore in 2011-12 is slightly lower than RE for 2010-11.02 2.like health. the tax to GDP ratio for the central government increased from 11. it is interesting to note the movement in the tax to GDP ratio over time.79 1.6 percent in 2011-12 will be a challenging task. in the subsequent years. 60.05 11. As mentioned earlier. achieving this growth target itself is now doubtful.86 percent (2008-09) and 10.05 percent in 2006-07 to almost 12 percent in 2007-08.21 6. women and child development have seen a substantial jump in 2011-12 – a trend which underlines the government’s commitment to achieving inclusive growth through emphasis on the social sectors. Table 21 – Fiscal Indicators of Central Government (as a percentage of GDP) Tax-GDP ratio 2006-07 2007-08 2008-09 2009-10 2010-11 11.37 6. As the table given above shows. 20. the Finance Minister had based the budget projections for 2011-12 taking a growth of 9 percent. While the budgeted estimates for various heads under plan and non-plan expenditure reflect commitment on part of the government to usher in fiscal discipline and bring government finances back on track in line with the FRBM targets. food subsidy [BE at Rs.86 10.000 crore in 201011. 35 | P a g e . If the revenues fall short of the anticipated amounts and the expenditure overshoots the targeted amounts.58 1. education. there is reason to believe that the revenue projections of the government may also suffer.99 6. This decline can be explained by the huge moderation that was seen in the growth of gross tax revenues in these two years.000 crore from Rs. Indian Public Finance Statistics and Budget Documents (various years) In the context of central government finances.16 10. Since.75 2.99 10. However.20 Custom Duty to GDP ratio 2. This looks difficult given the outlook for international oil prices].75 Source – Reserve Bank of India CSO.77 Direct Tax to GDP ratio 5. then meeting the fiscal deficit target of 4.31 5. a few of these initial estimates look somewhat ambitious to achieve. 35.27 1.50 1. Some of the heads where the government is likely to overshoot its budget estimates in 2011-12 are MGNREGA [Wages under MGNREGA have been increased and are now linked to CPI-AL]. Another imponderable is the introduction of the Food Security Bill]. This will be difficult to maintain as higher procurement will call for higher storage and carrying costs. petroleum subsidy [BE 2011-12 shows a fall to Rs.67 Union Excise to GDP ratio 2. the tax to GDP ratio came down to 10. fertilizer subsidy [Again rising international prices of fertilizers would make any large scale reduction difficult].
The excise rate cut introduced earlier was partially rolled back and this led to an increase in excise collections. gross tax revenues grew by 3.05 percent. This also lifted that tax to GDP ratio in 2010-11 to 10.38 16. Customs duty collections also improved on the back of pick up in imports and higher duty on crude and petroleum products. the tax to GDP ratio in India would move up.While in 2008-09.46 2009 9.55 28. Further.73 2007 11. While this improvement is noteworthy. It is hoped that with the introduction of the GST and the DTC.16 percent in 2009-10.72 10. Table 22 – Comparison of Tax Revenue (as a percentage of GDP) with other emerging countries (Rs. in 200910. It may be recalled that this period corresponds with the global financial and economic crisis and the government had introduced a series of fiscal stimulus measures to support economic activity.71 8.86 16. With direct taxes collections also going up sharply in 2010-11. gross tax revenues of the central government grew by 2.42 12.86 25.86 17.03 15.25 16.43 16.46 9.81 16.18 percent. the government also introduced a calibrated exit strategy from the fiscal stimulus measures in the budget for 2010-11.77 percent from 10.15 India Brazil China Indonesia Russian Federation South Africa Thailand Source – World Bank 36 | P a g e .81 9. slowdown in domestic economy also limited import growth and this in turn led to a decline in customs duty collections. it may be mentioned from a global perspective. the excise rates were cut in two phases and as a result we saw a dip in excise collection and which is also reflected in the downtrend seen in union excise to GDP ratio.92 16.27 13.03 16. overall gross tax collections went up by 26 percent in 2010-11.64 11. This highlights the need to continue moving ahead on the path towards tax reforms and simultaneously widen the tax base within the country.24 2006 11.79 15.90 16.93 12.76 27.11 2008 11.68 12.19 12. As part of these measures.20 16.57 28. the tax to GDP ratio in India is still on the lower side. As the economy gained traction and growth started moving back to the pre-crisis trajectory.41 15. As the data in the following table shows tax to GDP ratio in India is lower when compared with some of the other emerging economies. Crore) 2005 9.50 26.
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