Crisil Ecoview: September 2011

CRISIL EcoView
EXECUTIVE SUMMARY ............................................................ 1 OUTLOOK .................................................................................... 2
QUARTERLY UPDATE: GDP ....................................................
QUARTERLY UPDATE: MONSOON ......................................
INDIA'S LINKAGES WITH THE WORLD ECONOMY AND ITS IMPLICATIONS .........................................................
INDUSTRIAL PRODUCTION ................................................. 13
THE EXTERNAL SECTOR ........................................................ 15
INFLATION .................................................................................. 16
MONEY AND BANKING ......................................................... 18
MARKETS ..................................................................................... 20
GLOBAL ECONOMIC OUTLOOK ......................................... 23
September 2011
E I I
conomic Research
A monthly review and analysis of key macro-economic parameters along with outlooks on drivers of the economy, presented by CRISIL's team of renowned economists. Periodic outlooks and views on key regulatory and policy announcements, besides regular in-depth analysis of key themes also form part of this document, titled 'CRISIL EcoView'.
ndustry Research
An annual service on 47 industries, our Industry Research Service offers a detailed analysis of the market, factors impacting performance, players and outlooks on the performance and profitability of sectors.
ndustry Risk Score

Covering 139 industries, CRISIL Industry Risk Scores capture the influence of industry variables and the extent of their impact on cash flows and debt repayment ability of companies in an industry over a short-to-medium term horizon. These scores are accessed by a large numbers of banks and corporates to assess industry risks while evaluating the performance of companies.
Overview
Navigating the global headwinds
India's GDP growth has been slowing since the third quarter of 2010-11. The first quarter data for 2011-12 shows that interest rate hikes have tempered both household consumption and investment demand. In this scenario, heightened risks of a double dip in advanced economies create serious downside risks for India's growth. S&P has lowered the 2011 growth outlook for the US economy to 1.7 per cent from 2.4 per cent. Growth in the EU is expected to slow down to 1.7 per cent in 2011. Japan will remain in recession in 2011 due to the disastrous effects of the Tsunami. These forecasts form the basis of external scenario for our India growth outlook, which we have currently retained at 7.7- 8.0 per cent for 2011-12. Our growth forecast assumes that growth in developed economies will slow sharply, but they will avoid another recession. The big question is- what if the advanced economies slide into recession once again? Our analysis using last 20-year data indicates that business cycles of Indian economy are not decoupled from the business cycles of advanced economies like United States and Europe. But the long run trend growth rates in India and developed countries are divergent- growth trending up for India and trending down for advanced countries. Two conclusions can be drawn from this - first, India will not emerge unscathed if advanced countries slide into recession again; second, the divergent long-term trends imply that even if the medium term growth potential of advanced economies is impaired, India's growth potential does not necessarily decline too. Some characteristics of the Indian economy provide buffer against global turbulence. India's dependence on exports is low to begin with and in the last few years, it has also gained from diversification away from the US and the EU and towards faster growing economies in Asia, Africa, and Latin America. The share of India's exports to the African and Latin American economies doubled in 2010 from that in 2000, while China's share in India's exports has increased almost eight times in the same period. This, together with large share of domestic consumption in its GDP, provides some resilience against the hit to exports that typically happens when export destinations of advanced economies crumble. These strengths notwithstanding, India remains exposed to the short-term pain of a possible double dip in advanced countries which in addition to trade, manifests through investment and confidence channels.
Dharmakirti Joshi Sunil K. Sinha Vidya Mahambare Parul Bhardwaj Dipti Saletore Sheetal Pincha Anuj Agarwal Aindrila Roy Chowdhury
Chief Economist Senior Economist Senior Economist Economist Economist Economist Economist Economist
All eyes are now focused on the RBI's stance in its September 16 monetary policy meeting. The July policy was quite hawkish in tone. But since then while the downside risks to growth have increased, inflation continues to remain stubbornly high. The growth-inflation trade off in India is clearly becoming more marked. Correctly timing a pause or reversal of the current tight monetary stance will prove to be a tricky task. If you pause or cut interest rates too soon, you risk inflation; if you do it too late, you risk a sharper-than-expected slowdown. We are heading towards the end of the tight cycle and in our opinion a 25 basis points hike in repo rate on September 16 could be the last one if growth in advanced economies flounders further.
Contact Details:
Email: research@crisil.com Mumbai: +91 (22) 3342 8000 Delhi: +91 (11) 4250 5100 Dharmakirti Joshi Chief Economist, CRISIL
September 2011
Executive Summary
GDP growth slips to 7.7 per cent in Q1FY12
Indian economy grew at its weakest pace in the first quarter of 2011-12 in the last 6 quarters. Industrial growth dropped to 5.1 per cent from 9.1 per cent a year earlier, primarily due to mining and construction growth declining sharply to 1.8 and 1.2 per cent respectively. Private consumption growth decelerated to 6.3 per cent from 9.5 per cent a year earlier. We expect growth for 2011-12 to lie in the range of 7.7-8.0 per cent.
Headline inflation remains above 9 per cent in July 11

Headline inflation continued to remain above 9 per cent for the eighth consecutive month in July at 9.2 per cent. It was 9.4 per cent in June. While inflation in primary articles was 11.3 per cent in July 2011, manufacturing inflation remained high at 7.5 per cent. CRISIL expects average WPI inflation in the range of 8.0-8.5 per cent for 2011-12 after taking into account a rise in minimum support price for food grains & second round effects of fuel price hike.
Below normal monsoon until August end

For the country as a whole, rainfall during this year's monsoon was 0.4 per cent above the long period average (LPA) as of August 31. While average rainfall has been normal, the regional distribution of rainfall is not satisfactory. Gujarat (-53.0 per cent), Haryana (31.7 per cent) and Assam (-30.4 per cent) have received deficient rainfall whereas Rajasthan (+27.8 per cent) and Madhya Pradesh (+23.0 per cent) have received excess rains. In the states with deficient rainfall cotton, bajra and tur are relatively the worst affected crops.
Credit growth touches 20 per cent in August 11

Bank credit growth picked up to 20.3 per cent for fortnight ending August 12, 2011 relative to 19.4 per cent a month earlier, largely driven by growth in nonfood credit. Deposit growth picked up to 18.6 per cent during the same period. Bank credit to NBFC sector continued to grow rapidly at over 50 per cent in July. Banking sector liquidity continued to be in the deficit in August. However, liquidity deficit fell with lower government borrowing during the month compared to July.
Industry growth rebounds to 8.8 per cent in June 11

Industrial production grew at faster-than-expected 8.8 per cent in June 2011 from 5.9 per cent in May with the manufacturing sector growing at the doubledigit rate. While capital goods growth rebounded to 37.7 per cent, consumer goods growth, which is a sign of consumer spending, plunged to 1.6 per cent. With overall economic growth slowing down, industrial output is expected to grow at 7.3 per cent in 2011-12.
Rupee falls sharply in August led by foreign capital outflow

Rupee depreciated by 1.9 per cent in August compared to a month earlier. By August-end, it sharply depreciated to 46.0 per US$, a decline of 4.2 per cent over July-end with FII investment posting net outflows of US$1.8 billion in August compared to an inflow of US$ 2.4 billion in the previous month. Rupee fell against all major currencies in August but more sharply against the Pound and Japanese Yen. Rupee will remain weak in near future. However, stronger growth in India vis--vis the West should settle the rupee in the range of 43.0-44.0 per US$ by March 2012.
Merchandise exports grow at nearly 82 per cent in July 11

During July 2011, exports were recorded at US$29.3 billion, growing at 81.8 per cent. Imports expanded at 51.5 per cent, reaching US$40.4 billion due to robust oil imports growth of 37 per cent and non-oil imports growth at 58.1 per cent. Export growth is unlikely to sustain in the second half of 2011-12 due to uncertainty in the US and EU. Growth in imports is expected to sustain given strong domestic demand and high commodity prices.
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Outlook
2011-12 Growth Agriculture Industry Services Total 2.7 7.3 9.4 7.7-8.0
Rationale Higher inflation pressure and rising interest rates are likely to affect investment and consumption growth, thus impacting overall growth in 2011-12. Impact of past rate hikes, pressure on profit margins, the direct and indirect impact of elevated crude prices and global economic uncertainty pose further downside risks to overall growth. Despite a normal monsoon, agriculture growth would decline because of a higher base.
Inflation
WPI-Average
8.0-8.5
Inflation has remained stubbornly high, at above 9 per cent, for the last 6 months. Non-food manufacturing inflation remains firm due to strong demand. The hike in MSP and second round effects of the recent increase in fuel prices will put further upward pressure on inflation.
Interest rate
10-year G-Sec (Year-end)
8.1-8.3
The 10-year yields are primarily influenced by the size and timing of government borrowings. With the government expected to complete most of its market borrowings before the end of 2011-12, we expect the yields to settle at 8.1-8.3 per cent by March-end.
Exchange rate
Re / US $ (Year-end)
43.0-44.0
The outlook for capital flows for the remaining part of 2011-12 remains uncertain, given the increased risks to global economy. We expect the rupee to appreciate, albeit at a slower pace as compared to 2010-11.
Fiscal deficit
as a % of GDP
5.0
CRISIL expects fiscal deficit in 2011-12 to settle at 5.0 per cent of the GDP - a slippage of 40 basis points as compared to the government's budgeted number of 4.6 per cent. This is mainly because the governments expenditure is likely to overshoot due to an increase in subsidies on oil and fertilisers and the potential impact of the Food Security Bill. This along with lower tax buoyancy and shortfall on the disinvestment front will lead to higher fiscal deficit.
Quarterly update: GDP

Indian economy grew at 7.7 per cent in the first quarter of 2011-12. This is its weakest pace in six quarters. In the first GDP growth slips quarter of the previous to 7.7 per cent fiscal, the economy grew at 8.8 per cent (the revised figure; initial estimates were 9.3 per cent).
quarrying sector grew at just 1.8 per cent, as against 7.4 per cent in the first quarter of the previous fiscal. The slowdown in mining growth is worrying and its persistence can adversely impact other sectors particularly manufacturing. Electricity, gas growth stood at 7.9 per cent in the quarter as against 5.6 per cent in the same period last year. In the first quarter of 2011-12, growth in the services sector remained strong at 10.0 per cent as compared to 10.4 per cent growth in the corresponding period last year. The robust consumption growth from relatively high income households appears to have pushed trade, hotels, transport and communications segment. Therefore, it registered a slightly better performance than last fiscal growing at a rate of 12.8 per cent in the first quarter of 2011-12 as against 12.1 per cent in the same quarter of 2010-11. In contrast, financing, insurance, real estate and business services grew by 9.1 per cent in the first quarter of 2011-12, as compared to 9.8 per cent in the corresponding period last year. Similarly, growth in community, social and personal services declined to 5.6 per cent first in the first quarter of 2011-12 as compared to 8.2 per cent in the first quarter of the previous year. Estimates based on the expenditure side of the GDP also point to a slowdown in GDP growth rate. GDP at market prices grew by 8.5 per cent in the first quarter of 2011-12, as against 9.1 per cent during the first quarter of 2010-11. Among various components, private final consumption expenditure (PFCE) slowed down sharper-than-expected due to high base
Figure I: Growth rate (%)
Agricultural GDP grew at 3.9 per cent in the first quarter of 2011-12. Major crops - rice, wheat, pulses and coarse cereals recorded output growth of 11.3, 6.3, 4.9 and 0.7 per cent, respectively during the Rabi season of agriculture year 2010-11. Industrial GDP series was revised to incorporate the changes necessitated by the revised IIP series. Consequently, industrial growth dropped to 5.1 per cent in the reporting quarter, primarily Construction sector d u e t o worst hit manufacturing sector growth dipping to 7.2 per cent from 10.6 per cent in the first quarter of 2010-11. The sector breakdown pointed towards the construction sector as one of the worstperforming sectors of the economy. Higher interest rates dampened the housing market and drew out a dismal performance from the sector - grew at a rate of 1.2 per cent in the first quarter of 2011-12, down from 7.7 per cent a year earlier.
During the first quarter of 2011-12, the mining and

Table 1: Supply side GDP growth (y-o-y,%) GDP at factor cost Agriculture Industry Manufacturing Construction Services Trade, Hotels, Transport & Communication Community, social & personal services Source: CSO 12.5 8.2 5.6 27.6 12.1 12.8 Weight 100.0 13.6 28.0 16.0 7.7 58.4 Q1FY11 8.8 2.4 9.1 10.6 7.8 10.4 Q1FY12 7.7 3.9 5.1 7.2 1.2 10.0
10.0
5.0
0.0 Q1FY11 Q1FY12 Q1FY11 Q1FY12 Q1FY11 Q1FY12
Industry
Construction
Mining
Note: QE=Quick Estimates, RE=Revised Estimates
Source: CSO
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and rising interest rates in the economy. It grew at 6.3 per cent the first quarter of 2011-12 vis--vis 9.5 per cent in the first quarter last year. In addition to higher interest rates, fading off of the fiscal stimulus also appears to have adversely impacted the PFCE. Government Final Consumption Expenditure (GFCE) in first quarter of 2011-12 plummeted to 2.1 per cent as against 6.7 per cent in the first quarter of 2010-11. Growth in gross fixed capital formation (GFCF), however, Slowdown in consumption w a s a growth decelerated demand positive surprise. side growth to 8.5 per cent GFCF figure of Rs 4.11 crore (at constant 2004-05 prices) for the first quarter shows a year-on-year growth of 7.9 per cent. Although it is lower than 11.1 per cent in the first quarter of last year, it is better than 0.4 per cent GFCF growth recorded in the last quarter of previous fiscal.
Outlook
Given high inflationary pressure and the need for fiscal consolidation, there is hardly any room available for either monetary or fiscal support to the economy in the near term, even if the external environment deteriorates further. Therefore, we will continue to closely monitor our 2011-12 growth forecasts which we currently maintain at 7.7-8.0 per cent.
On the external-trade front, growth in exports and imports accelerated in the first quarter as compared to first quarter of 2010-11. Exports grew sharply by 24.3 per cent and imports by 23.6 per cent. The contribution of net trade to GDP was recorded at 1.7 per cent.
Table 2: Demand-side GDP growth, y-o-y % GGDP at market price Private Consumption Govt. Consumption Fixed Investment Change in Stocks Exports Imports Source: CSO Weight 100.0 60.5 10.4 31.2 3.5 24.3 33.0 Q1FY11 9.1 9.5 6.7 11.1 9.3 9.8 15.2 Q1FY12 8.5 6.3
Figure II: Growth Rate (%)

12.0
8.0
2.1 7.9 4.7 24.3 23.6

0.0 Q1FY11 Q1FY12 Q1FY11 Q1FY12 Q1FY11 Q1FY12 4.0
Private Consumption
Fixed Investment
Govt. Consumption
Source: CSO
Quarterly update: Monsoon

Monsoon rains have been progressing normally over June 1 to August 31, 2011. As per the latest data from IMD (Indian Meteorological Department), rainfall in India, from June 1 to August 31, was 0.4 per cent higher than the Long Period Average (LPA), which is the average rainfall in the past 50 years. Although rains had slipped 8.0 per cent below normal in the week from August 22 to August 26, its distribution is now more important than quantity as crops are in the growing stage and need rains at only regular intervals. The regional distribution of rainfall however, is not satisfactory. The IMD data shows the skewed pattern of rainfall deficient in North-east India (-14 per cent deviation from the LPA) whereas above normal in India's monsoon the southern peninsula (+5 per cent). North-west likely to be normal India (+4per cent) and central India (+6 per cent) received normal rainfall. Among major states, Gujarat (-53.0 per cent), Haryana (-31.7 per cent) and Assam (-30.4 per cent) have received deficient rainfall whereas Rajasthan (+27.8 per cent) and Madhya Pradesh (+23.0 per cent) have received excess rains. into account to arrive at the index value. A higher DRIP score indicates a more adverse impact of deficient rainfall. According to CRISIL's DRIP score, till August 31, 2011, deficient rainfall has adversely affected regions such as Gujarat, Haryana and Orissa and cotton, bajra and tur being relatively the worst affected crops.
CRISIL measures the impact of deficient rainfall on agriculture using its proprietary index named Deficient Rainfall Impact Parameter (DRIP). DRIP takes rainfall deficiency and share of unirrigated area
Table I: Crop-wise DRIP scores

30-Aug 2006 Rice Jowar Bajra Soyabean Sugarcane Tur Groundnut Maize Cotton All Crops Food Grain DRIP 3.5 4.1 9.8 0.1 5.7 7.5 0.1 6.0 10.1 5.3 3.9 For the period from 1st June to 29-Aug 3-Sep 2-Sep 1-Sep 31-Aug 2007 2008 2009 2010 2011 2.1 3.1 15.1 5.1 3.2 6.2 0.1 6.7 11.8 3.7 4.5 1.9 13.2 11.6 11.3 1.5 10.6 0.0 6.3 21.9 3.38 5.6 6.4 17.0 31.0 15.1 8.5 19.2 0.4 18.7 25.0 9.9 12.2 4.8 2.9 8.9 5.3 3.3 7.6 0.0 5.4 11.4 4.2 5.1 2.6 1.3 8.7 0.2 0.7 5.1 0.0 3.0 15.6 2.0 2.8
Table II: State-wise DRIP scores

For the period from 1st June to 30-Aug 291-Aug 3-Sep 2-Sep 1-Sep 31-Aug 2006 2007 2008 2009 2010 2011 Andhra Pradesh Bihar Gujarat Haryana Karnataka Madhya Pradesh Maharashtra Orissa Punjab Rajasthan Tamil Nadu Uttar Pradesh West Bengal 2.8 8.5 15.0 14.1 3.6 0.0 0.0 0.0 0.6 0.0 7.4 7.7 1.3 0.0 0.0 18.6 14.1 0.0 11.7 0.0 0.0 0.9 11.7 0.0 7.6 0.0 0.0 0.0 32.9 12.2 2.6 11.7 17.3 0.0 0.0 1.5 0.0 0.0 0.0 8.6 10.9 29.3 24.3 0.0 21.1 16.2 0.0 1.3 24.6 1.3 14.8 10.1 0.0 9.9 19.7 7.3 0.0 12.6 0.0 9.8 0.3 0.0 0.0 8.0 6.4 0.0 0.7 27.4 17.2 0.0 0.0 0.4 9.3 0.6 0.0 0.0 1.5 0.0
Source : IMD and CRISIL estimates
Source : IMD and CRISIL estimates
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I. India's linkages with the world economy and its implications

Introduction
The financial crisis of 2008 led to significant fiscal stimulus by the advanced countries to offset the downturn in private demand. Increased expenditure and lower tax revenues, in turn, worsened their fiscal positions calling in question short and medium term fiscal sustainability and elevated sovereign default risk, especially in the United States and several European countries. The fundamental reason for the increased risk to global economy remains the same escalated debt levels. The difference albeit this time being that the debtors are governments rather than households and financial institutions. The rising risk of sovereign defaults has undermined the prospects for global economic recovery and financial stability, especially of European financial markets. European financial institutions hold large amounts of corporate and government bond from the PIIGS economies, namely Portugal, Italy, Ireland, Greece and Spain. If advanced countries fall back into recession again, emerging economies India not isolated from i n c l u d i n g adverse global developments India would not remain immune to these adverse developments as witnessed during the crisis of 2008. The business cycles of the Indian economy are not decoupled from the economic cycles of the United States and Europe (Fig 1.1), although in the long run, growth of India and developed countries does show a divergent trend. In this theme, we analyse India's linkages with the global economy and the channels through which India would get impacted, if global economic recovery slows sharply. Subsequently, we analyse the impact of fiscal and monetary loosening during the 2008 crisis on the Indian economy; the monetary and fiscal space available to India currently and the likelihood of another policy stimulus.
Transmission channel
The immediate impact of global economic downturn on India is felt via the investment channel with adverse impacts on capital flows. As confidence and risk appetite of global investors declines given increased economic uncertainty, foreign capital begins to outflow from the emerging markets. This impacts the foreign exchange markets, equity and debt markets as well as the balance of payments position. The crisis is also transmitted via the real channel with its impact on India's exports and imports amidst the global turmoil and in turn, impacts the current account position. These adverse
Figure 1.1: Trends decoupled..Not economic cycles (GDP Growth rate)

European Union 12 10 8 6 4 2 0
1990 1993 1996 1999 2002 2005 2008 2010
Figure 1.2: Transmission channel
India
United States
Trade Channel
Merchandise exports
IT/TES exports
Investment Channel
Foreign Direct Investment
Portfolio Investments
-2 -4 -6
Currency Channel
Export Competitiveness
Profit Margins
Source: International Monetary Fund, World Economic Outlook Database, April 2011
developments lead to a lower demand for Indian currency relative to its supply, thereby lowering its value in the short term. In other words, the currency tends to depreciate in the short term.
Trade channel Merchandise exports

India's merchandise exports, which stood at nearly $55 billion in 2000, surged close to $280 billion in 2010. This leap could have been higher if not for the economic, financial and geo-political turmoil post 2008. Over the past decade, the pattern of exports has Slower export undergone a change. The share growth to the of exports to MENA (Middle East and Northern Africa) US and EU countries and Asia has been amidst crisis rising, where as the share of developed regions like EU and the US has been declining over the years. In 2000, exports to MENA countries and Asia formed nearly 10.9 per cent and 31.3 per cent of total exports 2010, their shares stood at 17.2 per cent and 49.3 per cent respectively. For EU and US, their shares in total exports were down to 23 per cent and 17 per cent in 2005 from 26 per cent and 22 per cent in 2000; they further declined to 20 per cent and 14 per cent respectively in 2010.
to Asia by 152.4 per cent; to EU by 90.8 per cent and to the US by 87.6 per cent. Going forward in the event of a double dip, exports to the developed economies are expected to grow at a receding rate or might even decline. The diversification of exports into Asia and MENA regions and their robust demand from other export destination would provide a transient buffer to India's exports in such a situation. Considering the nature of commodities exported (Fig 1.3), manufactured exports increased to nearly $130 billion in 2010 from $26 billion in 2000. Fuel exports surged to $32.7 billion in 2010 from $1.44 billion in 2000. Increase in fuel exports is attributable to increase in the refining capacity of India, discovery of fuel resources and rising export price for fuel-related commodities. Looking at the share of MENA countries in 2010, fuel exports to MENA countries formed nearly a quarter of the total fuel exports in 2010. For exports of primary commodities, MENA countries formed nearly 17 per cent of the total exports of primary commodities in 2010. In addition to diversification of commodities and destinations, in the aftermath of 2008 crisis and the subsequent recovery, India's exports also got a boost due to factors such as (1) favourable policy boost extended in 2010 via schemes such as Focus Market Scheme (FMS), Focus Product Scheme (FPS), and extension of DEPB (duty entitlement passbook scheme); (2) rising petroleum and commodity prices including gold have led to higher export prices for
Over the period 2005 to 2010, the growth of exports was as follows - to MENA countries by 191.6 per cent;
Figure 1.3: Commodity wise exports (USD bn)

Primary commodities 300 250 200 150 100 50 Ores and Metals Fuels Manufactured Goods
Figure 1.4: Commodity wise exports, 2010 (USD bn)

MENA 140 120 100 80 60 40 20 0 European Union (EU) Asia United States
0 2000 2005 2010
Primary commodities
Ores and Metals
Fuels
Manufactured Goods
Source: UNCTAD
Source: UNCTAD
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India's major exports. Oil prices have averaged around $117 per barrel in the first quarter of this fiscal as compared to an average of around $78.5 during the same period last year. While exports surged by 51.9 per cent in the first quarter of the current fiscal, as compared to the first quarter of the last fiscal, surge in the value of fuel exports is partly attributable to the rise in global prices of oil. There are several rapidly evolving factors in the global arena. These, however, are likely to slowdown export growth going forward. (1) Economic growth in three out of top five destinations is projected to register sharp slowdown (2) Government has indicated withdrawal of export promotion policies which could hamper export growth (3) Mounting input costs in terms of rising interest cost and wage bill will put pressure on profits (4) Stiff competition from other exporters like China, Vietnam and Pakistan in sectors such as textiles. The fall in India's ranking as a major exporter of textiles to the US and EU comes in the aftermath of appreciating rupee, rise in domestic prices and wages, and lack of new technology. Slowdown in merchandise exports growth (comprising almost 56 per cent of overall exports) is bound to impact GDP growth adversely.
by 9.6 per cent in 2009-10 while exports of software services grew only at around 7.0 per cent, half the rate at which they grew in the previous fiscal. Among the major Indian software companies (Fig. 1.5), TCS' revenues grew at 5.3 per cent in 2009-10, down from 6.7 per cent in 2008-09. During the same period, Services exports Infosys posted only a 3.0 need to diversify per cent growth in its to sustain growth revenues during 2009-10 momentum as compared to 11.7 per cent in 2008-09. The revenues from US also saw a declining trend. For both Infosys and Tech Mahindra, revenues from the US grew at half the rate during 2009-10 compared to the previous fiscal. A similar trend was observed in revenues from Europe. While revenue growth increased sharply in 2010-11, considering the fact that the US and Europe are the largest markets for Indian BPO and software exporters, another downturn in these regions would negatively impact the industry, especially given limited opportunities to diversify into newer markets.
Investment channel Portfolio investment

The pull out of FII investment into India after September 2008 following the collapse of the Lehman Brothers was the first and immediate impact of the 2008 crisis on the Indian economy (Table 1.1). After
IT Exports
Indian exports of services stood at $35.5 billion in the fourth quarter of 2010-11. Exports of software services comprised nearly 48 per cent of this total. Following the 2008 crisis, total exports of services fell
Figure 1.5: Revenues of the Indian IT companies

9000
TCS Infosys Tech Mahindra
Table 1.1: Growth of Foreign Investment Flows Year 2006-07 2007-08 2008-09 2009-10(P) FDI (%) 154.7 52.6 8.6 -0.2 -19.6 Portfolio I -43.9 289.4 -150.8 -333.7 -2.8 FII (%) -67.5 530.3 -173.9 -293.4 1.3 ECB(%) 45.6 45.1 -49.7 -3.7 13.1
7000
5000
3000
1000 0
2007-08
2008-09
2009-10
2010-11
2010-11(P) Source: RBI
Source: CRISIL Research
recording net portfolio inflows of US$27 billion in 2007-08, a net outflow of nearly US$14 billion was recorded in the following year, even when Indian economy grew at a significantly faster rate than a number of other emerging markets. Net portfolio flows rose to the tune of US$32.3 billion in 2009-10 after dipping marginally to about US$31.4 billion in 2010-11. FIIs, which form a major component of portfolio investments, stood at US$29.4 billion in 2010-11, changing marginally from US$29.0 billion, the figure for the previous year. However, in the first quarter of 2011-12, FIIs declined by 30 per cent and stood at US$2.4 billion. In the case of further intensification of the sovereign debt crisis in Europe and the weakening of growth in the US, FII investment in India in the short term would be adversely impacted yet again due to rising risk averseness, as witnessed recently (Fig 1.6). Interest rates are on an upswing given the continuous monetary tightening by the central bank. This coupled with rising prices of raw materials is likely to adversely impact profit margins of firms, thereby, adversely affecting investor sentiments. Signs of this are already emerging as India was placed amongst the least desired equity market by Asia Pacific investors in the survey by the Bank of America Merrill Lynch in June 2011. The investors' sentiments are likely to weaken further, as the RBI is contemplating tightening of rules relating to foreign investors and private equity funds for those who put money in Indian firms.
Foreign Direct Investment (FDI)

Following the liberalised FDI policy (2005), India became a big lead in attracting FDI flows due to its macroeconomic stability coupled with a large potent market, removal of restrictions on expansion and easy access to technology. However, from 2008-09 FDI inflow slowed down before finally contracting by 19.6 per cent in 2010-11. This slowdown in FDI flows is a matter of concern as FDI flows are of a more durable variety and often come with many tangible and intangible benefits. In 2010-11, FDI inflows have been the lowest in the last 4 years, and have moderated to US$30.3 billion as compared to US$ 37.8 billion worth of inflows received during 2009-10 (Fig. 1.7). Further, data on sector wise FDI flows into India shows that the real estate sector was hit the most, accounting for US$0.4 billion in 2010-11 as compared to US$2.1 billion in 2009-10. Business services came in second with US$0.5 billion in 2010-11 as compared to US$1.5 billion in 2009-10, followed by the construction sector (US$1.5 billion in 2010-11 as compared to US$3.5 billion in 2009-10). With the weak growth in developed economies, a surge in global liquidity created by quantitative easing and continued expectations of resilient performance by the Indian economy, FDI inflows could be impacted positively. FDI inflows surging by 133 per cent in the first quarter of 2011-12 to US$13.4 billion support the fact. The potential of India as an attractive FDI destination
Figure 1.6: Net FII Inflows (USD bn)

20
Figure 1.7: Foreigh Investment Flows (USD bn)

50 FDI Portfolio Investments ECB
15
40 30
10
20
5
10 0
2005-06
Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY12 Q2FY12 Q1FY11 Q2FY11 Q3FY11 Q4FY11
2006-07
2007-08
2008-09
2009-10(P) 2010-11(P)
-10 -20
-5
Source: RBI
Source: RBI
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CRISIL EcoView
can materialise in effect provided that policy actions are taken to ease barriers of entry and facilitate business, which would attract FDI into the country. For instance, long-standing issues like lack of infrastructure, problems in land acquisition, procedural delays etc, limit FDI inflows into the country. Moreover, foreign investors planning to enter the retail space as well as banking in India or increasing their stake in insurance ventures are awaiting the required policy changes. Such regulatory uncertainties have vitiated the investment climate in the country. In order to keep the investment activity buoyant even in tough times, India will have to be marketed as a promising investment destination and progressive policy reforms are imperative for the same.
borrowings by Indian businesses. It was expensive for Indian companies to raise money at high rates of interest; hence, they resorted to cheaper foreign debt. Raising funds abroad via ECBs has been one of the major ways of funding the global expansion plans by Indian companies. On an average, companies avail a differential of 3-4 per cent on borrowing costs, making it more attractive to raise funds outside India, especially if they are to be invested abroad. Stronger rupee has also made borrowing abroad more attractive. If another global downturn is to follow, the cost of borrowing abroad for Indian companies will rise and willingness to lend will decline in the face of increased risk averseness.
Currency channel
The demand for and supply of currency determines the value of rupee. The demand for rupee largely depends upon the demand for India's goods and services abroad. In addition, foreign investors' demand for rupee rises when they increase their investment in India. The supply of rupee depends upon our demand for foreign goods and services as well as Indian companies' investment abroad. As discussed above, during the periods of higher global economic uncertainty foreign investors', especially FIIs demand for rupee declines sharply as they pull down their investment out of India. As a result, the currency tends to depreciate. The similar impact was seen during the crisis of 2008. Most recent trends in
External Commercial Borrowings (ECBs)

ECBs of Indian corporation abroad contracted by nearly 50 per cent in 2008-09 after being hit sharply by the global crisis. After recording a further marginal decline in 2009-10, ECBs rose nearly 11 per cent in 2010-11. In recent months, ECBs stood at $2.1 billion in April 2011 and were up at $3.3 billion in June 2011. ECBs by Indian corporations jumped by nearly 59 per cent in the first quarter of the current fiscal vis--vis the last fiscal. The rise in economic activity of Indian corporations during economic upturn of the last decade was in part funded by the FDI and external commercial
Figure 1.8: Rupees per unit of foreign currency (monthly average basis)
60 55 50 45 40 35 30
US$
Aug-08
Aug-09
Aug-10
Dec-08
Dec-09
Dec-10
Source: RBI
Aug-11
Apr-08
Apr-09
Apr-10
Apr-11
the movement of the Indian rupee vis--vis major currencies show that it has depreciated against all the major global currencies. The rupee depreciated against the USD by 1.9 per cent and 3.4 per cent against the Pound Sterling between July 2011 and August 2011(Fig. 1.8). A moderation in exports goods and services, constant rise in imports also points to the depreciation of the currency. In spite of the rupee depreciating in the short run, due to fairly robust performance of the Indian economy amidst global uncertainty and slow growth, it is expected to appreciate by March-end 2012, if global economy does not slide back into a recession.
Policy actions
Stimulus packages in India were in place, in sync with other countries, to tackle the downturn of 2008. Although a large part of an increase in government expenditure, namely implementation of the Sixth Pay Commission recommendation in 2008-09 and 200910 was planned ahead of the crisis, but timings of the implementation happened to fall in line with the crisis. In addition, the government reduced taxes and duties and allowed the fiscal deficit to expand beyond the targeted levels in 2008-09 and early 200910. Under the Sixth Pay Commission and in efforts to boost social security programmes for the informal sector and rural infrastructure spending under the NREGS, private consumption received a boost. The stimulus in various forms had a notable positive impact on the economy.
Government consumption expenditure increased by 15.7 per cent during 2007-08 and by 20.7 per cent on 2008-09. According to rough estimates, stipulating that government expenditure rose in line with the trend growth of 6.5 per cent in the previous 3 years, GDP growth (at market prices) would have been 4.6 per cent in 2008-09 and 8.1 per cent in 2009-10 instead of the actual growth 4.9 per Stimulus keept cent and 9.1 per cent in the the economy going respective years (Fig. 1.9). amidst crisis While this reflects the direct impact of fiscal stimulus on the Indian economy, the indirect impact was felt on sectors such as consumer durables and automobiles, which saw a jump in their demand following fiscal stimulus.
In addition to fiscal stimulus, the RBI reversed the tight stance of the monetary policy quickly and sharply post September 2008. Between October 2008 and April 2009, the repo rate was reduced by 425 basis points to 4.75 per cent, the reverse repo rate was reduced by 275 basis points to 3.25 per cent, and the cash reserve ratio (CRR) was reduced by a cumulative 400 basis points to 5.0 per cent (Table 1.2). This resulted in provision of primary liquidity to the order of nearly 10.5 per cent of GDP. The loose monetary policy was aimed at reducing the cost of borrowing and boosting the availability of credit in the economy. The RBI also took a number of conventional and unconventional measures to augment domestic and foreign exchange liquidity.
Figure 1.9: GDP growth with and without fiscal stimulus

12 10 8 6 4 2 0 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 GDP growth without stimulus GDP growth with stimulus
Table 1.2: Monetary Policy Rates Instrument As at Oct-08 Apr-09 Extent of Reductio (basis points)
Repo Rate
9.00%
4.75%
425
Reverse Repo
6.00%
3.25%
275
Cash Reserve Ratio (Percentage of NDTL) Source: RBI 9.00% 5.00% 400
Source: CRISIL Estimates
September 2011
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India tackled the 2008 crisis with fiscal stimulus and monetary easing although this time Indian authorities are not left with many policy options. The country is already plagued by high fiscal deficit and inflationary pressures. The fiscal deficit has risen to 7.3 per cent of the GDP in 2010-2011 from 4.1 per cent of the GDP in 2007-08. The need for fiscal consolidation and mounting inflation pressures imply the fiscal policy loosening is not on cards in the near future. Indeed, to fight sustained high level of inflation, the RBI increased interest rates by 475 bps over the past 17 months with scope Indian authorities for further rise. D e s p i t e 1 1 out of policy options cumulative interest to tackle another crisis rate hikes inflation, especially core inflation (non-food manufacturing) continues to remain high at 7.2 per cent in July 2011. The RBI itself does not expect the WPI inflation to come down below 7 per cent even by March 2012. Throughout 2011-12, therefore, headline inflation will remain above the RBI's comfort zone of 5.0 to 5.5 per cent. CRISIL expects the average inflation to be in the range of 8.0-8.5 per cent for 2011-12 (Fig. 1.10). With inflation plaguing the economy, the RBI is left with no room for monetary easing if the global economic recovery slows any further. At the same time with high fiscal deficit, the government cannot undertake any further increases in expenditure.
Conclusion
The financial crisis of 2008 bears testimony to the fact that India is not isolated from the global economy. It is well linked and integrated to the world via different channels. Over the years, India's exports to EU and US have fallen, while that to MENA countries and Asia is on the rise. Indian services exports driven by software exports and BPO are seeing a decline in the growth of business from EU and US. With global investors moving their money into safe assets, portfolio investment plunged as a direct result of the crisis. In addition, FDI activity also moderated. Indian economy during the 2008 crisis had a stimulus package in terms of increased government spending and loose monetary policy to its side. In the current scenario, the economy is already battling with inflation and high fiscal deficits; no stimulus either from monetary and fiscal policy can be expected. Instead, India will have to fast track several key reforms in sectors such as manufacturing, agriculture, and infrastructure and liberalise policies to encourage durable foreign capital in the form of FDI. Only then it will be able to maintain its current growth rate in case of a double dip recession in advanced countries.
Figure 1.10: Inflation

12.00
10.00
8.00
6.00
4.00
2.00
0.00
Aug-09
Aug-10
Dec-09
Dec-10
Feb-10
Aug-11
-2.00
Source: Ministry of Industry
Dec-11
Feb-11
Jun-09
Jun-10
Apr-09
Apr-10
Oct-09
Oct-10
Jun-11
Apr-11
Oct-11
Mar-12
II. Industrial Production

Industrial output growth revived moderately and reached 8.8 per cent in June 2011 as compared to 5.9 per cent (revised) in May 2011. This revival can in part be attributed to low base and to recovery in the manufacturing sector. On a seasonally adjusted monthly basis, the IIP index was up 2 per cent as Industrial output compared to a decline of growth rebounds 1.5 per cent in the previous in June 2011 month. On a 3-month moving average basis, industrial growth remained steady at an average of 6.8 per cent during the 3 months ending June 2011 albeit lower than previous averages- 7.0 per cent average of 3 months ending May 2011 and 9.6 per cent of the corresponding period last year. A near 7.0 per cent industrial growth, however, in the first quarter of 2011-12, despite a fragile global scenario, rising inflation and tightening monetary policy indicates a fair amount of resilience in the Indian economy. performers in manufacturing sector). The mining segment, on the other hand, grew moderately clocking a mere 0.6 per cent as against 1.3 per cent in the previous month. The poor Slowdown in performance of the sector mining sector - a since the start of 2011 is worrying trend worrying and could be attributed to regulatory issues. In addition, the electricity sector also witnessed some moderation in June 2011, posting a growth of 7.9 per cent as against 10.3 per cent of the previous month.
Amongst the broad categories of industrial production, the manufacturing sector improved significantly by registering a growth of 10 per cent in June 2011, much higher than 6.1 per cent in the previous month (Figure 2.1). Average growth for the sector during the period April June 2011-12 stood at 7.5 per cent as compared to 10.3 per cent in the same period last year. Amongst the 2-digit classification of manufacturing, out of 22 industry groups, 15 groups showed positive growth (see Table 2.2 for the
Figure 2.1: Manufacturing Sector Growth (%)
15.0
The capital goods sector, considered as the barometer of investment activity in the economy, grew sharply at 37.7 per cent in June 2011. On excluding the capital goods sector, industrial output for June 2011 would drop to 4.4 per cent. This facet points towards the sector's major role Capital goods remain in the robust volatile, surprises i n d u s t r i a l on the upside production data of June. As the growth of capital goods sector has been highly volatile in the recent past, sustainability of industrial growth witnessed in June 2011 looks unsustainable. Cumulatively for the first 3 months of the current fiscal, growth in capital goods stood at 16.9 per cent as compared to 17.2 per cent during the same period
Table 2.1: Sectoral Growth (y-o-y %) April-June Weight June-10 June-11 2010-11 2011-12 General 1000 755.27 141.57 103.16 355.7 92.6 265.1 286.6 53.7 233.0 7.5 7.9 7.0 8.8 10.0 0.6 9.6 10.4 8.0 6.8 7.5 1.1 8.2 7.2 16.8 2.2 4.2 3.3 4.9
10.0
10.0
Manufacturing Mining Electricity Basic Capital Intermediates Consumer Goods
9.0 7.9
5.0
4.8
3.6 7.9 5.4 Use Based Industry (%) 3.8 7.5 5.5 3.7 8.6 13.3 21.3 7.5 37.7 1.8 1.6 1.0 2.1 17.2 10.7 11.5 19.7 5.4
0.0
FY10 FY11 Jun
Nov
FY11
Jun FY12
-Durables -Non durables Source: CSO
Source: CSO
September 2011
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last year. Basic goods, on the other hand, have continued to post steady growth rates since the start of 2011. For June 2011, growth in basic goods stood at 7.5 per cent as compared to 7.3 per cent last month. Worryingly, though, intermediate goods used in the production of final goods have remained sluggish since last couple of months, with the first quarter 2011-12 average standing at an anaemic 2.2 per cent as compared to a healthy 10.7 per cent in the same period last year. Growth in consumer goods, an indicator of consumption demand, slowed down to 1.6 per cent in June 2011, compared to 6.7 per in the previous month. With the rising interest rate and persistent inflation eroding the purchasing power of consumers, production of both consumer durables and non-durables slowed to 1.0 and 2.1 per cent respectively during the reporting month. It indicates that consumption demand, which constitutes around 58 per cent of the total demand, is waning. Sluggish growth in private consumption during the first quarter of 2011-12 also testifies this. For the first quarter of 2011-12, consumer goods grew at an average 4.2 per cent as compared to 11.5 per cent in the same quarter of last fiscal. Forward-looking indicators of the economy paint a mixed picture about future growth prospects. Cement production growth has remained sluggish so far this fiscal, contracting in the first quarter. But a positive surprise awaited in July 2011, as cement
Table 2.2: Performers in Manufacturing Sector (%) April-June Weight June-10 June-11 2010-11 2011-12 29.6 Office Eqp 3.1 -9.3 19.1 -10.0 24.1 Electronics 19.8 -23.0 88.9 -0.4 20.2 Motor Vehicles 40.6 39.3 14.5 42.3 19.0 Other transport 18.3 27.1 18.6 30.5 14.9 Metal Products 30.9 13.8 12.0 15.1 14.8 Basic metals 113.4 1.3 17.7 3.4 11.8 Food & Bev 72.8 16.4 6.7 15.9 10.9 Media 10.8 8.9 11.1 10.5 8.4 Medical 5.7 30.0 -10.3 18.4 8.1 Paper 10.0 4.2 6.2 3.8 6.0 Petroleum products 67.2 2.2 4.2 2.4 Source: CSO
production growth jumped to 9 per cent y-o-y although mainly due to low base. Commercial vehicles (CV) sales growth too showed an uptick in the month, after performing lacklustrely so far this fiscal. Year-on-year incremental credit to industry moderated in June 2011, pointing a slowdown in industrial growth going forward.
Outlook
Manufacturing sector rebounded in June 2011 mainly aided by the capital goods sector. However, due to high volatility in capital goods sector data lately, it has become difficult to draw any meaningful conclusion from its movement. But the weakness in consumer goods growth points towards a declining consumption growth. Notwithstanding the resilience shown by the June 2011 IIP data, industrial output growth is likely to remain muted for few more months this fiscal. It, however, will recover thereafter mainly supported by low base.
Table 2.3: Laggards in Manufacturing Sector (%) April-June Weight June-10 June-11 2010-11 2011-12 Leather products Chemical Tobacco NMMP Apparel Furniture Mach. & Eqp Rubber Communication Textiles Wood 5.8 100.6 15.7 43.1 27.8 30.0 37.6 20.3 9.9 61.6 10.5 -7.2 1.1 29.8 4.0 8.5 -9.8 29.9 13.9 30.0 4.4 -6.6 15.7 -1.0 9.6 3.2 -5.5 10.3 2.2 -0.3 -10.1 -4.3 -0.3 7.5 -1.5 9.5 6.8 4.0 -1.9 38.0 18.9 19.5 4.8 9.3 4.9 3.7 3.6 0.5 0.1 0.1 -1.6 -2.1 -3.5 -4.3 -7.6
Note - Please refer to Annex (Table 8.4) for full description of abbrev used in the text
III. External Sector

Continuing with its strong performance since the start of 2011, exports grew at a whopping 81.8 per cent in July 2011, as compared to 46.4 per cent in the previous month. A low base of last year mainly drove this robust growth, as in level terms exports at US$29.3 billion in July 2011 remained Helped by a low almost unchanged base, exports grew at from the previous 81 per cent in July 2011 month. Engineering goods, petroleum products and Gems & Jewellery were significant drivers of the export performance in the reporting month. On a cumulative basis, exports growth for the first 4 months of 2011-12 stood at 54.0 per cent as compared to 34.5 per cent during the same period last year. strong at 58.1 per cent in July 2011 as compared to 27.5 per cent in July 2010 given buoyant domestic consumption demand. In rupee terms as well, exports posted a healthy growth of 72.4 per cent and imports growth stood at 43.7 per cent in the reporting month. Of late, heightened uncertainties arising from the fragile global scenario have c l o u d e d t h e Diversification from performance of exports. However, developed countries to owing to Indian help India's exports exports diversifying from US and EU towards faster growing Asian economies, Africa and Latin America, exports growth have been shielded from a sharp fall. The share of India's exports to Africa and Latin American economies has doubled in 2010 from its 2000 levels, while China's share has increased by almost 8 times for the same period.
Imports too expanded at a healthy pace of 51.5 per cent to reach US$40.4 billion in July 2011. In level terms, however, imports outpaced exports; consequently, the trade deficit rose by almost 45 per cent on monthly basis to reach US$11.1 billion in July 2011 as compared to US$7.7 billion in the previous month. Amongst the broad categories of imports, oil imports grew at a robust pace of 37 per cent in July 2011 as compared to a subdued 13.7 per cent in the same month last year. Even on a month-on-month basis, oil imports jumped by 12.4 per cent, reflecting the strong underlying trend, as global crude oil prices remained elevated. Non-oil imports growth too remained
Outlook
Exports have grown robustly in the first 4 months of 201112. But this strong growth is unlikely to sustain during the second half of 2011-12 mainly due to persistent uncertainty in growth outlook of Europe and US. However, India's attempt to diversify its exports destinations is paying rich dividends and is likely to prevent a sharp fall in exports. Meanwhile, imports are growing due to sustained domestic demand and high commodity prices. This is also putting upward pressure on the trade deficit.
Figure 3.1: Exports Performance (US$ bn)

250.0 200.0 150.0 100.0 50.0 0.0 FY10 FY11 Apr May FY12 June Jul 178.0 245.9
Table 3.1: Trade Performance July-10 July-11 Exports Imports Oil Imports Non-oil Imports Trade Balance Exports Imports Oil Imports Non-oil Imports Trade deficit April-July 2010-11 2011-12
Merchandise (US$ billion) 108.3 16.1 29.3 70.4 151.0 26.7 40.4 107.9 42.0 8.4 11.4 34.2 109.1 18.3 29.0 73.7 -42.7 -10.5 -11.1 -37.5 y-o-y % 54.0 12.6 81.8 34.5 40.0 22.8 51.5 29.1 22.7 13.7 37.0 42.6 48.0 27.5 58.1 23.6 13.8 42.8 5.1 19.9
Source: Ministry of Commerce
Source: Ministry of Commerce
September 2011
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IV. Inflation
Inflation declined to 9.2 per cent in July 2011, compared to 9.4 per cent in the previous month. This was primarily led by some slowdown in food inflation (both within primary articles and in manufactured products). Non-food manufacturing WPI inflation inflation, however, continued to rise and has posts marginal kept inflation at elevated decline in levels. Despite some July 2011 moderation, fuel inflation remained high. Inflation for May 2011 was revised substantially upwards to 9.6 per cent, compared to 9.1 per cent released earlier. Such high revisions in data have continued to raise concerns. inflation during the month could be higher than in July 2011. During August 2011, weekly inflation in primary articles has been higher at 12.6 per cent given higher food prices; fuel inflation stood at 12.8 per cent. Higher fuel inflation in August 2011 was expected on the back of delayed impact of diesel, LPG and kerosene price hikes announced in June 2011. The government had raised prices of these items by 7.7 per cent, 14.3 per cent and 16.5 per cent respectively. Going forward, second-round impact of these hikes are bound to get reflected in manufactured goods' inflation, besides the overall fuel basket. In July 2011, inflation in primary articles declined to 11.3 per cent from 12.2 per cent in the previous month, in response to a substantial slowdown in food and non-food articles' inflation. Inflation in minerals also declined; however, this category comprises a smaller we i g h t i n o ve r a l l inflation. Inflation in Food inflation picks primary food articles fell to 8.3 per cent in up in August July 2011 from 8.4 per cent in the previous month. Similarly, inflation in nonfood articles fell to 15.5 per cent compared to 18.6 per cent over the same period. The declining trend in food prices, as noted above, however, appears to have reversed in August 2011, due to the impact of sharp rise in minimum support prices (MSP) and disruption in supply of vegetables and fruits owing to rains in some parts of the country. Over the past few months,
The seasonally-adjusted inflation data also reflects persistent price pressures in the economy. On a month-on-month average basis, this index has climbed 0.7 per cent during January to July 2011. Consumer price inflation based on industrial workers softened to 8.4 per cent in July 2011, compared to 8.6 per cent in the previous month. During the first quarter of 2011-12, consumer price inflation remained relatively unchanged from the previous quarter, at about 8.9 per cent. Some respite in recent months seems to have come from a marginal slowdown in food price inflation. However, the weekly trends in primary articles and fuel inflation during August 2011 suggest that overall
Figure 4.1: Headline Inflation (y-o-y %)
12.0 11.3 9.6 10.0 9.2 8.4 6.0 3.8 WPI CPI-IW
Table 4.1: Inflation in Major Product Groups Weight Jul-10 April-July Jul-11 2010-11 2011-12 y-o-y % General Primary Fuel Manufacturing 100.00 20.12 14.91 64.97 10.0 19.1 13.3 5.8 9.2 11.3 12.0 7.5 10.4 20.3 13.8 5.9 9.5 12.9 12.6 7.3
Contribution to inflation Primary

0.0 FY10 FY11 Jul FY11 Jan Jul FY12
44.8 20.2 35.5
31.1 20.4 48.0
44.9 19.8 35.3
34.0 20.3 45.8
Fuel Manufacturing
Source: Ministry of Industry & CRISIL Estimate
inflation in food and vegetables had reported a sustained decline. However, inflation in milk which had been declining since March 2011, again entered double-digit growth in June 2011 and has continued its surge, as per weekly data released for August 2011. Among non-food items, inflation in fibres fell to 29.7 per cent in July 2011, compared to 43.8 per cent in the previous month whereas inflation in oil seeds has remained stubborn at around 14 per cent. Fuel inflation was marginally lower in July 2011, at 12.0 per cent compared to 12.8 per cent in the previous month. On an m-o-m basis, however, the index was 2.5 per cent higher compared to 0.7 per cent increase recorded in the previous month. Higher pass-through of fuel price hikes announced in June 2011 is now being reflected in the index. Consequently, inflation in administered price categories was higher on an m-o-m basis in July 2011. Inflation in kerosene stood at 13.1 per cent, while in was 6.8 per cent for diesel. Manufacturing inflation was slightly higher at 7.5 per cent in July 2011, compared to 7.4 per cent in the previous month. Upward pressures came from higher non-food manufacturing inflation, which stood at 7.5 per cent in July 2 0 1 1 a s Non-food manufacturing compared to inflation refuses to budge 7.2 per cent in June 2011. Manufacturing food inflation declined substantially to 7.6 per cent in July 2011 as compared to 8.5 per cent
in June 2011. Amongst non-food manufacturing, inflation in basic metals and alloys, chemical and chemical products, wood and wood products, paper and leather products and transport equipment pushed the index higher. On the other hand, inflation in textiles, non-metallic mineral products, machinery and machine tools and rubber and plastic products posted some decline. Although overall food index (both primary and manufactured) declined to 8.0 per cent in July 2011, persistent increase in non-food manufacturing inflation has kept the headline inflation at elevated levels. The Central Bank is trying to tame this inflation by tightening monetary policy. As the RBI approaches closer to the end of its monetary tightening cycle, the stubborn non-food inflation may decline slightly as the cumulative impact of past and recent rate hikes comes into play.
Outlook
Inflation has remained stubborn in the range of 9.2 to 9.6 per cent. During August 2011 too, weekly trends show a renewed pickup in inflation. Recent hikes in fuel prices and already elevated food prices are exerting continuous pressure on headline inflation, while stubborn non-food manufacturing inflation has yet to witness a significant impact of monetary tightening. We expect inflation to lower to some extent over the next few months, as impact of past rate hikes becomes more pronounced. We expect average inflation to be in the range of 8.0- 8.5 per cent during 2011-12.
Table 4.2: Inflation in Primary Articles (y-o-y %) Weight Cereals Pulses Fruits & Vegetables Eggs,Meat & Fish Fibres Oilseeds Metallic Minerals Other Minerals 3.37 0.72 3.84 2.41 0.88 1.78 0.49 0.13 Jul-10 8.3 14.4 13.2 31.4 16.2 2.2 63.3 -1.2 April-July Jul-11 2010-11 2011-12 5.3 (7.4) 11.7 9.2 29.7 14.0 6.3 9.4 7.7 21.5 15.5 38.6 16.8 3.3 43.3 0.1 5.0 (8.2) 16.0 9.1 54.4 12.3 11.7 11.5
Table 4.3: Inflation in Manufactured Products (y-o-y %) Weight Chemicals Food Products Textiles Machine Tools Metal & Alloys Transport Eqp. NMMP Rubber & Plastic 112.02 9.97 7.33 8.93 10.75 5.21 2.56 2.99 Jul-10 4.4 7.3 10.1 2.3 7.9 3.8 3.1 5.0 April-July Jul-11 2010-11 2011-12 7.9 7.6 12.9 2.7 10.1 2.9 3.3 7.7 5.1 7.4 10.7 2.2 8.3 3.1 3.0 5.0 7.4 7.5 15.1 2.9 8.7 2.1 3.7 8.3
September 2011
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V. Money and Banking

Money supply (M3) growth showed a reversal of trend in August 2011. Till July 2011, the growth rate continued to fall which reversed this month. This may have an adverse affect on inflation which is already high and has led RBI to make several rate hikes this year. The repo, reverse repo and the marginal standing facility (MSF) rates stood at 8 per cent, 7 per cent and 9 per cent respectively. Bank credit growth picked up in August 2011 as against last month. It grew at a rate of 20.3 per cent for fortnight ending 12th August, 2011, after a brief period of moderation. It was 19.4 per cent during the fortnight ending 15th July, 2011. For the period under r e v i e w, f o o d credit growth Contrary to expectations, was substantially credit growth actually lower compared increased t o J u l y. I t dropped from 68.4 per cent for the fortnight ending 15th July, 2011 to 54.4 per cent for the fortnight ending 12th August, 2011. However, corresponding increase in non-food credit was not witnessed. Non food credit growth, though showed an upward trend for the fortnight ending August 12, 2011 (19.8 per cent) vis--vis fortnight ending 15th July, 2011 (18.7 per cent), it was lower than last year's growth rate (20.6 per cent). As per data on sectoral deployment of bank credit for July 2011, credit to agriculture slowed to 11.76 per cent as against 12.83 per cent in June 2011. Credit growth to industry slowed down to 21.21 per cent in July 2011, as compared to 22 per cent in the previous month. Credit growth to the construction, consumer durables and telecom industries saw a double digit decline. Services sector, however, saw a slightly higher credit growth in July 2011 (21.25 per cent) as against 20.86 per cent in June 2011. The main growth driver was the Non-Banking Financial Corporations (NBFC) industry which showed 55.65 per cent growth in July 2011 as against 44.52 per cent in June 2011. However, double digit dip in credit growth was noticed in sectors like computer software and micro credit. Deposit growth showed a marginal increase over the previous month. For the fortnight ending July 15th 2011, deposit growth was at 18 per cent. This increased to 18.6 per cent for the fortnight ending August 12th, 2011 and was also higher than the deposit growth of 14.1 per cent for the same period last year. For the fortnight under review, credit deposit ratio declined to 73.7 per cent, from 74.1 per cent in the previous month but is still higher than 72.6 per cent recorded for the same period last year. Incremental credit deposit ratio continued to be lower at 79.5 per cent compared to 98.3 per cent in the same period last year.
Figure 5.1: Money Supply Growth (%)

20.0 19.3 16.0 15.2 y-o-y 17.3
Table 5.1: Scheduled Commercial Banking Indicators (y-o-y%) Outstanding as on 12th Aug 2010 2011 Aggregate Deposits Bank Credit 14.1 20.1 -4.0 20.6 8.1 72.6 18.6 20.3 54.4 19.8 16.1 73.7 Financial Year so far 2010-11 2011-12 3.1 3.7 -3.2 3.8 4.9 98.3* 4.1 2.8 12.7 2.6 12.4 79.5*
10.0
Food Credit Non-Food credit Investments

0.0 FY10 FY11 May FY11 Jan FY12 Aug
Credit-Deposit Ratio Source: RBI
Source: RBI, CRISIL Estimate
*Note: Incremental credit deposit ratio as on date
M3 growth increased to 17.3 per cent as of fortnight ending August 12, 2011, compared to 16.7 per cent during the same period in July 2011. Bank credit to commercial sector grew by 19.6 per cent in this period, which was 19 per cent in the same period last month. Growth rate of the net bank credit to the government also showed an increase to 22.5 per cent this month as against 21.8 per cent in the previous month. Scheduled commercial banks (SCBs) investments in securities stood at 15.9 per cent for the fortnight ending August 12, 2011. However, total investments in government securities fell marginally to 30.7 per cent for the same period. Government borrowed significantly lesser during August 2011 as compared to last month. In August 2011, the amount borrowed via treasury bills was Rs. 40,000 crore, cash management bills was Rs. 14,000 crore and as state development loans was Rs. 14,100 crore compared to Rs. 63,000 crore, Rs. 20,000 crore and Rs. 10,500 crore in the Government borrowings previous month. Tightening of decline to Rs 68,100 crores the monetary in August 2011 policy increased the average call rates to around 7.8 per cent in August 2011. However, daily net transactions under the liquidity adjustment facility (LAF) window on an average basis stood at Rs. 391.5 billion in August 2011 which was Rs. 420.6 billion in the previous month.
Outlook
Out of the total of Rs. 1, 30, 000 crore that the government aimed to raise from the market in the quarter ending September 2011, 79 per cent has already been borrowed in July and August 2011. This means government borrowing is unlikely to put any pressure on liquidity. However, sustained pressure on interest rates is likely to impact credit growth adversely.
Figure 5.2: Liquidity Situation In India

2100.0 1500.0 900.0 300.0 -300.0 3.0 -900.0 -1500.0 -2100.0 6.0
Net LAF transactions Rs bn (LHS) Call rates Repo rate Reverse repo rate
9.0
Apr-10 FY11
Oct-10
Dec-10
Feb-11
Apr-11
Jan-11 FY12
Aug-11
0.0
Source: CCIL & RBI
September 2011
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VI. Markets
Currency
The Indian rupee slid sharply during August 2011. It fell to 46.02 to a dollar from 44.2 to a dollar in the previous month. Fresh concerns about worsening of US and Eurozone growth prospects, in addition to uncertainty relating to sovereign crisis, led to outflows from Indian markets. Steep losses in domestic equity markets during the month also weighed on foreign investor sentiments. Rupee nosedives Higher dollar demand f r o m i m p o r t e r s i n on weak global cues response to elevated commodity prices and settlement of dues with Iran over crude oil payments pushed the US dollar higher and exerted downward pressure on the rupee. Although crude oil prices fell during most of August 2011 in response to weaker global cues, they increased sharply by the end of the month. On an average basis, Brent crude fell to US$109.9 per barrel during the month compared to US$117.0 per barrel in the previous month. By August-end, however, Brent crude touched US$115.6 per barrel. during the month, it fell more sharply against the yen and pound. It fell by 4.9 per cent against the yen, 3.4 per cent against the pound, and 2.3 per cent against the euro. The yen, which had been steadily strengthening against the dollar, finally gave way after the Bank of Japan intervened in the foreign exchange market by selling it. The rise of the yen, primarily fuelled by dollar weakness, was hurting Japanese exporters and weakening an economy still recovering from the natural disaster. Bearish investor sentiments resulted in net foreign investments outflow of US$1.8 billion in August, 2011 compared to an inflow of US$2.4 billion in the previous month. During the current fiscal till date (April to August 2011) net portfolio inflows stood at US$2.4 billion compared to US$12.2 billion in the same period of 2010.
Outlook
August 2011 was bearish for the rupee and we expect this sentiment to hold on for some more time until as some clarity over the sovereign crisis in Eurozone emerges. However, stronger growth prospects in India vis--vis the developed economies are likely to bring back inflows towards the end of this fiscal. We expect rupee to settle in the range of 43.0 to 44.0 to a dollar by March-end 2012.
Buoyed by these developments, the rupee's volatility increased sharply and it traded in the range of 44.0 to 46.1 to a dollar in August 2011. The rupee depreciated by 1.9 per cent against the dollar on an average basis and by 4.2 per cent on a month end basis. Although the rupee weakened against all major currencies
Figure 6.1: Net FII Inflows and Exchange Rate
3.0
Table 6.1: Currency Movement (Averages)

55.0
Net Fll inflow US$ bn (LHS) Rs per USD
USD
GBP
Euro
Yen
Indian Rupee vis--vis FY 10 FY 11 1H FY11 2H FY11 1Q FY12 July-11 August-11 1-month 6-months Source: RBI 47.4 45.6 46.1 45.1 44.7 44.4 45.3 2.1 3.1 Note: * As of 18th August, 2011 75.9 70.9 70.1 71.7 73.0 71.7 74.1 67.1 60.2 59.0 61.4 64.4 63.5 64.9 51.1 53.3 51.9 54.7 54.9 55.9 58.7
45.0 0.0
-2.0 Jul-08 FY09
May-09 FY10
Dec-09
Oct-10 FY11
35.0 Aug-11 FY12
Forward premia*
Source: SEBI, RBI
Debt
The month gone by witnessed the benchmark 10year yields softening as compared to the previous month because government borrowed significantly lesser during August 2011 as compared to last month. Although market was expecting a 25 basis point policy rate hike in the RBI's first quarter review in July 2011 but when RBI increased the policy rate Yield on 10-year by 50 basis point it G-sec softens reacted sharply sending bond yields higher towards the end of July 2011. However, the yields on 10 year G-sec began softening in the 1st week of August 2011 and the yield on the 10 year G-sec hovered in the range of 8.43 to 8.28 during the first fortnight of August 2011. The yield on the benchmark 7.80 maturing 2021 paper ended August 2011 at 8.3 per cent, almost 20 bps lower than July 2011 levels.
In the near term much of the bond market dynamics is expected to be guided by two factors- rate of inflation and the quantum of government borrowing. Out of the total of Rs. 1, 30, 000 crore that the government has aimed to raise from the market in the quarter ending September 2011, Rs. 1, 03, 000 crore has already been borrowed in July and August 2011. This means government borrowing is unlikely to put much pressure on bond market. However, sustained inflationary pressure and another rate hike by RBI may put upward pressure on yields going forward. Yield on the AAA corporate bond ended August 2011 at 9.4 per cent as against 9.5 per cent last month. The spread between the 10-year corporate and government bond rose by 10 bps in August 2011 as compared to the last month.
Outlook
With heightened inflationary pressure and the possibility of further monetary tightening by the RBI, we expect some upward movement on the yields of both short and long term papers in the near term. However, we expect these yields to remain relatively stable during the remaining months of this fiscal due to relatively orderly completion of the government's borrowing program so far. Therefore, we expect 10-year G-sec yields to settle in the range of 8.1-8.3 per cent by end March 2011-12.
Yields across the short-term 1-year government bond rose during the month and stood at 8.2 per cent. The yield curve, which is the spread between 10-year and 1-year bond became flat in August 2011 as compared to the previous month indicating rising uncertainty in the near term in the economy. FIIs outflow was to the tune of US$ 1.8 billion in the reporting month as compared to an inflow of US$ 2.4 billion in July 2011.
Figure 6.2: 10-year G-sec yields, year-end and month-end (%)

9.0
Figure 6.3: Risk Premia, year end & month end (%)
2.0
Spread between AAA corporate & 10-yr G-sec
7.8
8.0 7.9
8.3
1.1
7.0
1.2
1.1
1.0 0.9
5.0 FY10 FY11 Aug FY11 Jan Aug FY12
0.0
FY10 FY11
Aug
FY11
Jan
FY12
Aug
Source : CCIL
Source: FIMMDA
September 2011
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Equity
Indian equity markets followed a downward trend during August 2011. The sensex was down to 16,676.8 on August 30, 2011 from 18,314.3 on August 1, 2011, indicating a fall of 8.9 per cent. As compared to August 2010, on an average, the sensex was down by 7.1 per cent. Global economic growth concerns began dampening the domestic sentiment during the first week of August 2011. As a consequence sensex began to slide and came down from 18,314 on August 1, 2011 to 17,306 on August 5, 2011. Thereafter, sensex slipped further as S&P downgraded the US government's AAA sovereign credit rating. On August 8, sensex slipped further to 16,759, but recovered somewhat to 17,131 on August 10, 2011 but closed the week at 16.840. Even during the second fortnight of August 2011 the roller coaster ride of sensex continued sometimes due to the fears of RBI hiking key interest rates to curb inflation, sometimes due to investors picking up recently beaten fundamentally strong stocks and sometimes due to the cues coming from the global markets. With the news of GDP growth coming in at 7.7 per cent for the first quarter of 2011-12 as compared to 8.8 per cent in the corresponding period last fiscal, sensex ended the month at 16677. In August 2011, there was a net outflow of FIIs to the
Figure 6.4: Indian Equity Market Performance
Yearly returns Monthly returns
tune of USD$1.8 billion. Outflows from the equity market were US$2.4 billion. The P/E ratio, on an average fell to 18.4 in August 2011, down from 19.6 in the last month and 21.6 in August 2010. Indian companies have had a lower valuation amidst expectations of interest rate hikes and high inflation. Concerns about a slowdown in the Indian economy also triggered a selloff in the local stock market. For August 2011, the major global equity indices fell on a monthly basis. Apart from S&P 500, they showed a similar trend. S&P 500 fell 6.1 per cent on a monthly basis; however, it rose by 8.6 per cent on an annual basis during the month. S&P 500 averaged 1,185.23, Nikkie-225 averaged 9,072.9, and MSCI EME averaged 1,104.1 in August 2011.
Figure 6.5: Global Equity Market Performance

Yearly returns Monthly returns
-2.4
-7.0 -9.3 -7.1 -9.3 -10.1 -9.0
-4.7 S&P CNX Nifty -7.9 Sensex -20.1
NIKKEI-225
MSCI WORLD
8.6 S&P CNX 500 -6.1
S&P 500
-7.9
-7.8
CNX Mid Cap

Note : Returns are for the period of August 2011
-20.4
8.7
MSCI EME
Source: NSE, BSE
Source: Yahoo Finances
Note : Returns are for the period of August 2011
VII. Global Economic Outlook

The recovery in the global economy observed since the end of 2010 has slowed down lately due to a set of transitory factors: in particular, Japanese earthquake, debt crisis in EU area, slow recovery in US economy and adverse impact on real incomes due to high commodity prices. However, growth signals emanating from several emerging economies continue to be encouraging despite inflationary pressures witnessed in these economies especially owing to elevated food and commodity prices. According to the second estimate released by the Bureau of Economic Analysis, the US economy grew at 1.0 per cent (q-o-q, annualised) during the second quarter of 2011, a 0.3 per cent downward revision from the advance estimate. Real GDP increased in the second quarter of 2011, mainly due to better Downward revision contributions from for US growth exports, nonresidential fixed investment, private inventory investment, and federal government spending. However, their gains were partly offset by a negative contribution from state and local government spending. Non residential fixed investment increased at 9.9 per cent during the second quarter of 2011, as compared to 2.1 per cent in the previous quarter. Residential fixed investments made an upturn, growing at 3.4 per cent in the second quarter of 2011, in contrast to a contraction of 2.4 per cent in the first quarter of 2011. According to the second estimate, United Kingdom's GDP grew at 0.8 per cent (q-o-q, annualised) during the second quarter of 2011, which is same as the preliminary estimate released last month. UK's GDP was driven by growth in construction and services industries. Business services and real estate was the biggest contributor to UK's GDP growth, followed by transport, storage and communications. However, output in production industries contracted at an annualised rate of 6.4 per cent during the second quarter of 2011, higher than 0.4 per cent contraction seen in the last quarter. The construction and services sector, both grew at an annualised rate of 2.0 per cent during the second quarter. However, in the first quarter, output in construction had fallen by 13.6 per cent and services sector has grown by 3.6 per cent. UK had registered a growth of 2.0 per cent in the first quarter. In Japan, production and exports have continued to increase with the easing of supply-side constraints. Business fixed investment also picked up, aided partly by the restoration of disaster stricken facilities. Despite these positive developments, Japanese GDP growth has still not moved into positive territory; it has contracted by 1.3 per cent (q-o-q, annualised) in the second quarter of 2011, as compared to a contraction of 3.6 per cent in the first quarter. China posted a GDP growth of 9.6 per cent in the second quarter of 2011, only marginally lower than 9.7 recorded in the first quarter.
Table 7.1: GDP Growth (q-o-q, annualised %)

2009 United States -2.6 2010 Q2-10 2.9 1.3 1.7 4.0 10.3 1.7 4.4 4.0 3.3 10.3 Q3-10 Q4-10 Q1-11 Q2-11 2.6 2.8 1.2 4.8 9.6 3.1 -2.0 1.2 2.4 9.8 1.9 2.0 2.5 -3.6 9.7 1.0 0.8 1.7 -1.3 9.6
Table 7.2: Trade Balance (Billion, National Currency)

Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11
United States
United Kingdom Euro Area Japan China (US$ billion)
-46.9 -3.9 -15.6 -479.4 6.5
-45.4 -2.4 -3.0 650.3 -7.3
-46.8 -2.8 1.6
-43.6 -3.2 -4.1
-50.2 -4.1 0.2
-53.0 -4.5 0.9 67.3 22.3
United Kingdom -4.9 Euro Area Japan China* -4.1 -6.3 9.1
186.3 -464.8 -853.7 0.1 11.4 13.0
Source: Statistical Bureau, Respective Countries
Note: * y-o-y %
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According to the flash estimate by Eurostat, GDP in the Euro area grew at 1.7 per cent in the second quarter of 2011 as compared to 2.5 per cent in the first quarter. Major economies - Germany and France grew at 2.8 and 1.6 per cent respectively in the second quarter of 2011. For June 2011, US exports totaled $170.9 billion and imports $223.9 billion. As a result, the US trade deficit for June 2011 stood at $53 billion, up from $50 billion (revised) last month. Exports and imports for June 2011 were $4.1 billion and $1.9 billion less, than May 2011, respectively. The decrease in exports of goods was mainly on account of decreases in industrial supplies and materials, capital goods, foods, feeds, and beverages. An increase, however, occurred in consumer goods. Automotive vehicles, parts, and engines remained virtually unchanged. Looking at imports, decrease occurred in industrial supplies and automotive vehicles, parts, and engines; capital goods and consumer goods; however, foods, feeds, and beverages showed an increase. Imports and exports of services remained mostly unchanged from May to June with most of the changes being small and offsetting. On an annual basis, exports were up 12.91 per cent and imports were up 12.97 per cent for June 2011. UK's trade deficit in goods and services rose to 4.5 billion in June 2011 from 4.0 billion in May 2011. The deficit in goods was up to 8.9 billion and the surplus in services was 4.4 billion in June 2011, unchanged
from May 2011. Japan's exports have been increasing with the easing of supply-side constraints. Exports plunged in both March and April this year on a month-on-month basis due to supply-side constraints stemming from the earthquake disaster, but they turned around in May 2011 on a month-on-month basis, with an increase of 4.5 per cent. Exports were also up sharply by 8.6 per cent in June 2011, recovering close to pre-earthquake level. Exports of motor vehicles and related goods and also consumer goods increased rapidly in June 2011. IT-related items and capital goods and parts Japanese exports also witnessed an upturn. recover to On the other hand, exports of intermediate goods fell pre-quake levels for two months in a row, notably among those to emerging economies. Imports increased marginally. On a month to month basis, imports were up by 0.3 per cent in the reporting month. The highest increase was seen in imports of consumer goods, imports of which grew at 11.1 per cent. Japan's trade balance stood at 67.3 billion in June 2011. For China, trade balance stood at $22.3 billion during the same period. Chinese exports grew at 3.05 per cent in June 2011 in relation to last month while imports fell at nearly the same rate.
In June 2011, the trade surplus of the Euro area with the rest of the world stood at 0.9 billion, up from 0.7
Table 7.4: Policy Interest Rate (End of Month %)
Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11
Table 7.3 Consumer Price Inflation (y-o-y %)

Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11
United States
1.6 4.0 2.3 0.0 4.9
2.1 4.4 2.4 0.0 4.9
2.7 4.0 2.7 0.0 5.4
3.2 4.5 2.8 0.3 5.3
3.6 4.5 2.7 0.3 5.5
3.6 4.2 2.7 0.2 6.4
3.6 4.4 2.5 0.2
United States
0.0-0.25 0.0-0.25 0.0-0.25 0.0-0.25 0.0-0.25 0.0-0.25
United Kingdom Euro Area Japan China
United Kingdom
0.5
0.5
0.5
0.5
0.5
0.5
Euro Area
1.00
1.25
1.25
1.25
1.50
1.50
Japan
0-0.1
0-0.1
0-0.1
0-0.1
0.1
0.1
6.5
China
6.1
6.3
6.3
6.3
6.6
6.6
billion in June 2010 and 0.2 billion last month. In relation to May 2011, exports fell by 4.7 per cent and imports by 4.1 per cent. On an annual basis, exports grew at 3 per UK has the highest cent as compared to 21 trade deficit in per cent in May 2011; the Euro area imports grew at 3 per cent as compared to 17per cent last month. Germany posted the highest surplus of 65.9 billion during January-May 2011 period, whereas UK posted the highest deficit of 46.7 billion during the same period.
furniture, household equipment & maintenance and housing rent and downward pressure came from food & non-alcoholic beverages. The CPI remained unchanged between June and July this year compared with a fall of 0.2 per cent a year ago. At an aggregate level, prices for food and non-alcoholic beverages rose by 0.3 per cent between June and July this year, as compared to a 1.0 per cent rise during the same period last year. The biggest push came from financial services, where overall fees rose this year but fell last year especially for arranging mortgages. According to the flash estimate issues by Eurostat, Euro area inflation in July 2011 stood at 2.5 per cent and is expected to be the same for August 2011. The inflation in July 2011 was lower than 2.7 per cent recorded in the previous two months. Inflation in Japan stood at 02 per cent in July 2011, same as the previous month. Inflation in China reached 6.5 per cent in July 2011. This is the highest inflation rate in 2011 so far, up from 6.4 per cent recorded in the previous month.
Inflation in the US stood at 3.6 per cent for a third month in a row. The food index rose by 0.4 per cent in July 2011, up from 0.2 per cent in June 2011. After declining in May and June, the energy index increased by 2.8 per cent in July 2011. The index for all items less food and energy rose by 0.2 per cent in July 2011 after increasing 0.3 per cent in both May and June 2011. The change in the index for all items less food and energy continued its upward trend, rising by 1.8 per cent in July 2011, with the shelter and apparel indexes being major contributors. The energy index stood at 19.0 per cent for July 2011. In July 2011, inflation in UK stood at 4.4 per cent, up from 4.2 per cent in the last month, though marginally less than 4.5 per cent recorded in May 2011. The upward pressures to inflation mainly came from financial services, clothing & footwear,
Figure 7.1: Europe Brent (US$ per barrel)
130.0
Policy rates
The policy rates for August 2011 remained Policy rates remain unchanged. The unchanged for the European Central Bank reporting countries (ECB) maintained its policy rate at 1.5 per cent. The Bank of England maintained its bank rate at
Figure 7.2: Commodity Price Movements

m-o-m y-o-y
13.0 -4.7
109.9
Aluminium
20.2
95.0
Steel
1.3 42.8
77.0
-4.2 23.6
Soya Oil*
60.0
Augl-10
Dec-10
Apr-11
Aug-11
7.5
Wheat
Source: Energy Information Administration
Source: Metal Bulletin, FAO
*Note: Data is available only upto March 2011
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0.5 per cent. China maintained the base lending rate at 6.6 per cent. Japan and the US maintained their policy rates close to zero.
Commodity price movements

In August 2011, the monthly average price of crude (Europe brent) was $109.92, down from $116.91 in the previous month. On a month-on-month basis, crude prices fell by 6 per cent; steel prices rose by 1.3 and 20.2 per cent on a monthly basis and annual basis respectively. Aluminum prices in July 2011, however, fell by 4.7 per cent on a monthly basis but rose by 13 per cent on an annual basis. Wheat prices in August 2011 rose by 7.5 per cent on a monthly basis and by 23.6 per cent on an annual basis.
VIII. Annexure
Table 8.1: Annual Data Summary Real GDP growth at factor cost, 2004-05 base (y-o-y%)1
Total
9.7 8.8 7.9 6.2 7.7 4.5 1.9 2.3 1.7 3.9 7.0 5.0 5.1 9.1
Agriculture
11.0
Industry
10.7 10.2
Services
10.4 8.2 10.0
FY08 FY09 FY10 FY11 FY12
WPI Inflation, 2004-05 base (y-o-y%)2

Inflation
12.4 8.0 6.2 4.8 3.8 9.1 10.4 9.6
Primary goods
17.7
9.5
Fuel
11.6 12.9 12.3 12.6
Manufacturing
8.8
11.0 8.3
12.7 7.3 6.2 4.9 0.0 2.2 -2.1 5.7
FY08 FY09 FY10 FY11 FY12 WPI CPI-IW
Index of Industrial Production (y-o-y%)1

General
15.5
Electricity
18.4
Manufacturing
Mining
7.9
8.2 6.8 5.3 2.5 2.8 6.4 6.1 5.6
8.2 5.2
9.0
4.6 7.5 2.6 1.1
4.8 2.5
External Variables (US$ bn)2

Exports
245.9 185.3 176.6 163.1 108.3 251.7
Imports
303.7 278.7 350.7
Merchandise Trade Deficit

118.4 102.1 88.5 42.7 104.8
Current account deficit3

38.4 28.7 44.3
151.0 9.8
15.7
Figures for FY12 are : 1 Apr-June, 2 Apr-Jul, 3 Apr-Mar (FY11) Source: RBI, CSO, DGCIS
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Table 8.2: Annual Data Summary

Interest Rates, year-end (%)4
1-yr G-sec
8.2 7.6 7.4 6.2 4.2 7.9 7.6 7.1 5.00 5.00
10-yr G-sec
7.9 8.3 7.75
Repo rate5
6.00 6.75 8.00
Reverse repo5
7.00 5.75 3.50 3.50
Markets (year-end)5
INR/USD
51.0 40.0 45.1 45.0 46.0
INR/EURO
67.5 60.6 63.2
Forex Reserves (US$ bn)6

309.2 66.7 252.3 277.0 303.5 318.2
Net FII flows (US$ bn)7

30.3 16.0 32.2
63.1
2.4
-11.4
FY08 FY09 FY10 FY11 FY12 FY08 FY09 FY10 FY11 FY12 FY08 FY09 FY10 FY11 FY12 FY08 FY09 FY10 FY11 FY12
Equity Market (year-end)5

Sensex
19445 15644 17528 4735 9709 3021 798 16677
S&P CNX Nifty

5834 5249 5001 1323
S&P 500
1219 1169 1169 20.1
Sensex P/E
21.3 21.2 18.4
13.7
Government Finances
Centre Fiscal Deficit (as % of GDP) State Fiscal deficit (as % of GDP)
2.9 6.0 6.4 5.1 4.6 2.5 1.5 2.4 2.6 2.2
Money and Banking8

Non-food credit growth (%) M3 growth (%)
23.1 17.5
16.9
23.0 19.8
21.1
18.6 16.7 16.6 17.3
FY08 FY09 FY10 FY11 FY12 (RE) (BE)
FY08 FY09 FY10 FY11 FY12 (RE) (BE)
FY08 FY09 FY10 FY11
FY12
Figures for FY12 are :

4
Avg of Apr-Aug, 5 as on Aug 30, 6 as on Aug 30, 7 cumulative of April-Aug, 8 for the fortnight ending Aug 12 Source: CCILINDIA, BSE, RBI and Ministry of Finance Note: RE-Revised estimates, BE-Budget estimates
Table 8.3: Quarterly Growth rates
Real GDP - at 2004-05 prices (y-o-y%)

Mining & Quarrying Trade hotels, transport and comm
Financing, Insurance & real estate
Q3FY10 -1.6
Agri, forestry& fishing
5.2 8.9
11.4
4.5
8.3 7.3 9.2
10.8 13.7 12.1 10.9 8.6 9.3 12.8
8.5 6.3 9.8 10.0 10.8 9.0 9.1
Community, social & prsnl serv
7.6 8.3 8.2 7.9 5.1 7.0 5.6
Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12
1.1 2.4 5.4 9.9 7.5 3.9
Manufacturing
15.2 10.6 10.0 6.0 5.5 7.2
Electricity, gas & water
7.4 8.2 6.9 1.7 1.8
5.5 2.8 6.4 7.8 7.9
Construction
7.7 6.7 9.7 8.2 1.2
Real GDP - at 2004-05 prices (y-o-y%)

Q3FY10 Q4FY10 Q1FY11
7.3 9.4 8.8
GDP Deflator (%)

8.8 20.1 2.9 7.2
-1.6
9.5
9.4 10.2
8.2 12.9
Agriculture
Services
Overall
Overall
Q2FY11 Q3FY11 Q4FY11 Q1FY12
8.9 8.3 7.8 7.7
5.4 9.9 7.5 3.9
8.4 7.1 6.1 5.1
9.9 8.4 8.7 10.0
9.4 9.8 8.8 8.3
Services
10.4
Industry
2.4
9.1
11.4
Agri & allied services
1.1
12.4
12.7
22.7 23.4 20.5 18.0 16.8 12.3
Industry
9.1 7.5 7.5 7.4 7.1
9.4 7.9 7.5 6.9 8.0
WPI Inflation - 2004-05 base (y-o-y%)

Q3FY10 4.5 14.2 9.5 21.4 -1.3
2.7
CPI Inflation (y-o-y%)

13.3
Commodity prices
15.5 75.0 76.0 78.0 77.0 87.0 105.0 117.0 516 581 663 594 619 743 693
Crude-Europe Brent($/barrel)
Agricultural Labours
Fuel, power& lubricants
Industrial workers
Overall
Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12
10.2 14.0
5.3 6.0
15.3 13.7 10.3 9.2 9.0 8.9
16.6 13.9 9.9 7.9 8.8 9.4
Primary
10.5 9.3 8.9 9.6 9.6
20.7 17.7 17.0 15.9 13.4
12.3 10.9 12.1 12.7
5.3 5.2 6.3 7.2
Index of Industrial Production (y-o-y%)

6.1 14.0
Used-based classification of IIP (y-o-y%)

8.8
Intermediate goods
Steel prices ($/tonnes)
Mfing
Q3FY10 Q4FY10
6.1 15.4
7.5 10.4
3.8 7.1
5.0 7.2
-2.4 34.1 17.2
10.5 15.9
11.8 10.7 6.3 7.4 5.5 2.2

4.2
Electricity
General
Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12
9.6 6.8 8.6 7.9 6.8
10.4
8.0
Consumer goods
Manufacturing
Basic goods
Capital goods
5.4 2.2 6.5 8.2 8.2
5.5 3.9 7.8 6.6 7.2
11.5 6.6 4.4 11.6
Mining
7.4 9.2 8 .9 7.5
6.3 6.3 1.0 1.1
15.8 22.1 5.8 16.8
Source: CSO, Ministry of Industry and Energy Information Administration (EIA)
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Table 8.4: Full description of abbreviations used in the text Sectors Food products and beverages Tobacco products Textiles Wearing apparel; dressing and dyeing of fur Luggage, handbags, saddlery, harness & footwear; tanning and dressing of leather products Wood and products of wood & cork except furniture; articles of straw & plating materials Paper and paper products Publishing, printing & reproduction of recorded media Coke, refined petroleum products & nuclear fuel Chemicals and chemical products Rubber and plastics products Other non-metallic mineral products Basic metals Fabricated metal products, except machinery & equipment Machinery and equipment n.e.c. Office, accounting & computing machinery Electrical machinery & apparatus n.e.c. Radio, TV and communication equipment & apparatus Medical, precision & optical instruments, watches and clocks Motor vehicles, trailers & semi-trailers Other transport equipment Furniture; manufacturing n.e.c. Abbreviation Food & Bev Tobacco Textiles Apparel Leather products Wood Paper Media Petroleum products Chemical Rubber NMMP Basic metals Metal Products Mach. & Eqp Office Eqp Electronics Communication Medical Motor Vehicles Other transport Furniture
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Crisil Ecoview: September 2011

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Crisil Ecoview: September 2011

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CRISIL EcoView

EXECUTIVE SUMMARY ............................................................ 1 OUTLOOK .................................................................................... 2

QUARTERLY UPDATE: GDP ....................................................

QUARTERLY UPDATE: MONSOON ......................................

INDUSTRIAL PRODUCTION ................................................. 13

THE EXTERNAL SECTOR ........................................................ 15

MONEY AND BANKING ......................................................... 18

GLOBAL ECONOMIC OUTLOOK ......................................... 23

ndustry Risk Score

Headline inflation remains above 9 per cent in July 11

Below normal monsoon until August end

Credit growth touches 20 per cent in August 11

Industry growth rebounds to 8.8 per cent in June 11

Rupee falls sharply in August led by foreign capital outflow

Merchandise exports grow at nearly 82 per cent in July 11

10-year G-Sec (Year-end)

Quarterly update: GDP

During the first quarter of 2011-12, the mining and

0.0 Q1FY11 Q1FY12 Q1FY11 Q1FY12 Q1FY11 Q1FY12

Note: QE=Quick Estimates, RE=Revised Estimates

Figure II: Growth Rate (%)

2.1 7.9 4.7 24.3 23.6

Quarterly update: Monsoon

Table I: Crop-wise DRIP scores

Table II: State-wise DRIP scores

Source : IMD and CRISIL estimates

Source : IMD and CRISIL estimates

I. India's linkages with the world economy and its implications

Figure 1.1: Trends decoupled..Not economic cycles (GDP Growth rate)

Figure 1.2: Transmission channel

Foreign Direct Investment

Trade channel Merchandise exports

Figure 1.3: Commodity wise exports (USD bn)

Figure 1.4: Commodity wise exports, 2010 (USD bn)

0 2000 2005 2010

Ores and Metals

Investment channel Portfolio investment

Figure 1.5: Revenues of the Indian IT companies

2010-11(P) Source: RBI

Source: CRISIL Research

Foreign Direct Investment (FDI)

Figure 1.6: Net FII Inflows (USD bn)

Figure 1.7: Foreigh Investment Flows (USD bn)

External Commercial Borrowings (ECBs)

Figure 1.9: GDP growth with and without fiscal stimulus

Source: CRISIL Estimates

Figure 1.10: Inflation

Source: Ministry of Industry

II. Industrial Production

Manufacturing Mining Electricity Basic Capital Intermediates Consumer Goods

FY10 FY11 Jun

-Durables -Non durables Source: CSO

III. External Sector

Figure 3.1: Exports Performance (US$ bn)

Source: Ministry of Commerce

Source: Ministry of Commerce

Contribution to inflation Primary

44.8 20.2 35.5

31.1 20.4 48.0

44.9 19.8 35.3

34.0 20.3 45.8

Source: Ministry of Industry

Source: Ministry of Industry & CRISIL Estimate