India Shining in 2011??

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CONTENTS

Indian Economy in 2011 – An Overview

Factors that will push GDP up

Factors that will push GDP down

Global economy and India

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Indian Economy in 2011 – An Overview

The inherent strength of India's domestic demand will enable it to maintain 8.4 per cent
annual growth over the next year. The five supply-side issues, which, if addressed, can
put India on a sustained 10 per cent growth trajectory. Domestic demand, spurred by a
large growing young population, and robust consumption and investment rates, will
support 8.4 per cent economic growth. An increase in discretionary spending by middle
class households will boost demand for durables like automobiles and white goods, and
services like hotels, restaurants, and tourism. Financial services such as consumer
finance, asset management, and insurance will grow briskly to cater to the needs of the
rising middle and affluent class. Rising incomes will also propel demand for healthcare
and education services, particularly in the private sector. The Indian economy is not
demand-constrained; rather, it is the supply-side issues that limit the growth prospects.
The five key issues that need to be addressed to unleash India's growth potential are:
the quantity and quality of physical infrastructure, skill shortages in its bulging
population, faltering agriculture and consequent high food inflation, fiscal inflexibility to
spend on health, education and physical infrastructure, and a governance deficit. If
India overcomes the prevailing deficit in most segments of physical infrastructure, its
growth prospects will receive a tremendous boost. This necessitates the removal of
policy hurdles in setting up infrastructure projects to attract private investment, and the
mobilization of funds for infrastructure development. Another key issue is the mismatch
of skills. If jobs are created and youth are equipped with the required skill-sets, India's
economic growth will accelerate. The prevailing skill deficit, in terms of insufficient
quantity and quality of workforce, limits productivity, increases wages, and raises
unemployment levels. Only about 10 per cent of India's youth (15-29 years) receive
vocational training, and the majority of engineering graduates are unemployable in the
IT/ITES sector without additional training. In the 2000-2010 decade, agricultural growth
became more volatile; the average slipped to 2.5 per cent in this period from 3.2 per
cent in the 1990s.

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However, the demand for food increased, pushing up food prices. Rekindling agriculture
by accelerating productivity-enhancing reforms is critical for taming persistently high
food inflation. India's main fiscal challenge is not reduction in debt and deficit ratios; this
objective can be achieved by another spurt of high growth, as evidenced by the
improvement in fiscal ratios during the growth upturn between 2003 and 2007. The
country's fundamental fiscal issue lies in expanding its fiscal flexibility, which would
enable it to increase spending on education, health, and physical infrastructure. Finally,
the need to improve governance standards is vital. Addressing governance-related
issues will not only lift growth and accelerate poverty reduction, but will also greatly
enhance India's already growing stature in the global landscape.

. The inherent strength of India is domestic demand that will enable it to maintain above
said annual growth. Spurred by better-than-expected growth, the government had in its
mid-year economic review in December revised upward its forecast for economic
expansion in 2010-11 to 8.75 per cent, plus or minus 0.35 per cent, from the earlier
estimate of 8.5 per cent.

Factors That Will Push GDP Up

Industry has rebounded sharply and exports have turned positive. Private consumption
is picking up and more importantly investment is showing signs of resurgence. The
global environment has improved beyond initial expectations with Asia leading the
rebound. The optimism is evident in budgetary expectation of 8.5 per cent GDP growth
in 2010-11. We can easily assume that India’s GDP can grow at the speed of approx
9% in the year 2011. The year 2010 has seen an impressive growth rate of 8.5%. The
growth on 2010 was fueled was huge investment linked funding which is likely to
continue in 2011.

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Factors to watch

The overall growth of Gross Domestic Product (GDP) at factor cost at constant
prices, as per the Revised Estimates of CSO was 7.4 per cent in 2009-10. The
growth in real GDP is placed at 8.9 per cent in the second quarter of 2010-11.

The cumulative rainfall received for the country as a whole, during the Post Monsoon
season (October-December), was 21 per cent above the normal. Food grains (rice
and wheat) stocks held by FCI and State agencies were 48.73 million tonnes as on
November 1, 2010

Overall growth in the Index of Industrial Production (IIP) was 2.7 per cent during
November 2010 as compared to 11.3 per cent in November 2009. During April
November 2010-11, IIP growth was 9.5 per cent as compared to 7.4 per cent during
April-November 2009-10.

Core infrastructure-supportive sectors grew by 2.3 per cent in November 2010 as

compared to the growth of 5.9 per cent in November 2009. During April-November
2010-11 these sectors grew by 5.0 per cent as compared to 4.5 per cent during
April-November 2009-10.

Broad money (M3) (up to December 17, 2010) increased by 7.7 per cent as
compared to 9.4 per cent during the corresponding period of the last year. The year-
on-year growth, as on December 17, 2010 was 15.0 per cent as compared to 18.0
per cent last year.

Exports, in US dollar terms increased by 26.5 per cent and imports increased by
11.2 per cent, during November 2010. Foreign Currency Assets stood at US $ 268.1
billion at end December 2010 compared to US$ 258.8 billion at end December 2009.

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Rupee appreciated against Pound Sterling, Japanese Yen

and Euro,
and depreciated against US Dollar in the month of December 2010 over November
2010.

Year-on-year inflation in terms of Wholesale Price Index was 8.43 per cent for
the month of December, 2010 as compared to 6.92 per cent in December, 2009.

Tax revenue (net to Centre) during April-November, 2010-11 recorded a growth of

27.4 per cent compared with corresponding period of 2009-10.

Non-tax revenue grew by 142.5 per cent in April-November 2010-11 on

account of one-off nature of receipts of proceeds from Spectrum auction.

Factors that will pull GDP lower

With the inflation showing no signs of moderation, it is widely expected that RBI will
raise the key policy rates during its quarterly monetary policy review on January
25.While higher inflation was on expected lines due to persistent high food prices,
economists said a more worrying factor was the upward revision in the inflation
numbers for October to 9.1% from 8.6% estimated earlier.

Typically, during a phase of rising inflation, the revised numbers are higher than the
provisional numbers due to the system followed by the statisticians. The deceleration in
headline inflation in November had prompted policymakers to put the end-March
inflation at 6%, but the finance minister later revised the projection to 6.5%. This could
be a tough task and could end in the 7%-8% range, far above RBI's comfort level of 5%-
5.5% stating that rising food and commodity prices are major challenges for the
government.

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Factors to watch

India's food price index had risen for the fifth straight month to 18.3% in late
December, its highest in more than a year, while fuel prices climbed 11.63%,
government data last week showed.

Food makes up a little over 14% of the wholesale price index, while fuel contributes
about 15%, and a quickening or softening in these components will put pressure on
the headline figure in either direction.

Industrial output in November rose a slower-than-expected 2.7% from a year earlier,

sharply lower than the previous month's revised annual growth of 11.3%,
government data showed on Wednesday.

The central bank is expected to raise its key rates by 25 basis points at its policy
review on January 25, in its efforts to squeeze inflation back to its projected level of
5.5% by end-March.

The RBI had raised its key rates six times last year and analysts in a Reuters poll
forecast rates to rise by another 75 basis points in Jan 2011.

Global Economy and India

The fundamentals of the Indian Economy are sound. A steady improvement is expected
in the year ahead. Reforms may get further push. The Trade deficit, Inflation, Fiscal
Position would continue to pose the challenge. Infrastructural constraint would need to
be addressed. The excise duty burden is expected to be enhanced by the Government
in the coming budget. Even in this back drop risks from domestic developments is much
less than that expected from international. Sovereign Debt Crisis can disrupt the global
order.

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The currency issues between China and USA can disrupt investor’s confidence. The
easing of liquidity by USA may force emerging markets to tighten their belt. This can
add to the global tension. Many of these issues have haunted investors in the past and
no easy solution is in sight. The Indian economy is far more exposed to global
developments than in the past open. Thus the decision taken by any country or
international bodies would be important from our point of view.

China has significant influence on the commodity prices. Any additional supply of
liquidity would influence the commodity markets. The steps the countries take to fight
the inflation driven by liquidity would need to be tracked in the year ahead. In this kind of
scenario prudent investors would spread their bets to take care of the high volatility
which the asset classes would experience. The equities are considered to be the best
asset. It gives the highest return. At present the global economy is in a state of flux. The
volatility is high. The inflation could be high going forward. India is having a high trade
deficit. In a time like this hedging of risks would be prudent. Other asset classes provide
opportunity for hedging the risk and shrewd investor would exploit this aspect of other
asset classes.

The factors that will drive the growth of Indian economy are pretty simple if we see, the
rise of the middle class (500 million), Non Resident Indians investing in Indian realty,
Foreign Direct Investment entering the market, expansion of MNCs and Indian
multinationals, proliferation of educational institutions, growth of IT, BPO, food
processing & healthcare - all these are the factors responsible for the growth of Indian
realty. The Indian GDP is growing more than 8.5%% and India has already opened up
the realty space as well.

GDP is expected to grow around 8 – 9% during 2011, disaggregating the growth data
on a sectoral basis, and the buoyancy in the services sector will support the overall
growth process while the consolidation in the industrial activity and relatively lower

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growth in agricultural sector as compared to the previous year is expected to restrain

the overall GDP growth in 2011.The substantial government thrust on infrastructure
projects, the infrastructure development is expected to witness sustained growth
thereby propelling the growth in the industrial sector. The industrial component of the
GDP is set to register a high growth of around 10.3% during 2011.

Indian stock markets are likely to gain 15 percent in 2011 on the back of an estimated 8-
9 percent economic growth with robust performances by IT, auto, banking and financial
stocks, Telecom stocks look interesting. Despite the odds, the sector should do well.
Growth in the banking and financial sector is also good. Adding strong growth and
proposed reforms, especially in insurance and pension, would help upside in financial
stocks. The govt. proposes to increase the FDI cap to 49 percent in the insurance
sector from the current 26 percent. After hitting a record closing of 21,004.96 points Nov
5, the 30-share bellwether index finished 2010 at 20,509.09 points, with a gain of 17.43
percent over the previous year close. WPI headline inflation and non-food inflation have
moderated to 7.5 percent y/y and 7.9 percent y/y in November 2010 from the peaks of
11 percent y/y and 8.9 percent y/y (in April 2010) respectively.

Monthly trade deficit narrowed to 7.1 percent of GDP, annualized in November, from the
peak of 10.8 percent of GDP, annualized in August 2010. The market is likely to
consolidate in its current range in the near term and then a steady but not spectacular
rise for the rest of 2011. We expect style rotation in 2011. Investors will have to watch
out for the beaten-down low ROE, high beta players and stocks of less dividend-
focused companies. Equities look more attractive than long bonds but not by a big
margin. Equities may continue to beat long bonds in 2011, although the gap may narrow
compared to 2010.

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