Eye On The Tiger: India Economics

India Economics
Eye On The Tiger

June 2011
• Too slack macro policy settings have seen the economy move decisively into overheating territory
and inflation problems intensify. A sustained period of below-trend, sub-8% GDP growth is now
required to bring cyclical inflation problems to heel. Accordingly, although the risks to both inflation
and policy rates remain skewed to the upside, risks to growth are to the downside.
• The RBI finally stepped up the pace of policy tightening in May but its expectation that the economy Richard Iley
is already slowing, so reducing the scale of future policy tightening, looks optimistic. Evidence of any Chief Asia Economist
genuine slowdown is so far limited. Service sector indicators still suggest solid growth while (852) 2108 5104
manufacturing appears to be booming. The 2011 Q1 GDP data were stronger than they looked. richard.iley@asia.bnpparibas.com
• With the WPI backdata being steadily revised up and fiscal slippage likely, considerable further Mole Hau
policy tightening this year looks inevitable. We target a further four 25bp rate hikes this year, lifting Asia Economist
our year-end repo rate target to 8.25%. More restrictive policy settings will produce the sub-par (852) 2108 5620
economic growth now required to regain inflation control. Our FY2013 GDP forecast is cut to 7¼%. mole.hau@asia.bnpparibas.com
• The mix of continued upside risks to inflation and policy but building downside risks to growth Dominic Bryant
should ensure that ‘curve flattening’ in rates markets continues and keeps equities on the backfoot Senior Asia Economist
for the time being. Curve steepening and a stronger performance by equities await harder evidence (852) 2108 5105
of demand destruction, and its corollary, greater certainty over the timing and peak in policy rates. dominic.bryant@asia.bnpparibas.com
Please refer to important information found at the end of the report www.GlobalMarkets.bnpparibas.com
Contents
Eye on the Tiger ........................................................................................................3-9

Chart Book ............................................................................................................10-44
Economic Basics 10-11
GDP Developments 12-14
Monsoon Trends 15
Industrial Trends 16-18
Services Sector Indicators 19
Survey Evidence 20
OECD Leading Economic Indicator (LEI) 21
Trade Trends 22-24
Current and Capital Accounts 25-27
Inflation 28-33
Public Finances 34-37
Money, Credit and Liquidity 38-39
Financial Market Developments 40-42
Population and Demographics 43-44
Appendix ...............................................................................................................45-48
Key Economic and Financial Forecasts 45
The Balance of Payments 46
Capital Account – Gross Inflows & Outflows 46
Monetary Aggregates 47
Union Budget Highlights 47
Balance Sheet of Indian Scheduled Commercial Banks 48
Upcoming Key Economic Release Dates 48
Richard Iley / Mole Hau June 2011

Eye On The Tiger 2 www.GlobalMarkets.bnpparibas.com
Eye on the Tiger
Chart 1: Capacity Utilisation
The Indian economy is rapidly approaching
RBI survey – net responses on expectations about capacity utilisation
a pivot point. Too slack macro policy setting for 35
too long has seen the economy move decisively 30
into overheating territory and inflation problems 25

intensify further.
20
A sustained period of below-trend, sub-8%

15
GDP growth is now likely required to bring
cyclical inflation problems to heel. Accordingly, 10
although the risks to both inflation and policy 5

rates remain skewed to the upside, risks to
0
growth are moving sharply to the downside.
-5
The RBI recognised the mounting gravity of 05 06 07 08 09 10 11
the situation in its last monetary policy review in Source: RBI, BNP Paribas
early May. The 50bp rate hike it delivered was a
welcome attempt to catch up. But its expectation Chart 2: Back To The 70s!
that the economy is already slowing, so
reducing the need for further aggressive policy
tightening, looks optimistic.
Evidence of any genuine loss of economic
momentum is limited. Service sector indicators
still suggest solid growth while manufacturing
appears to be booming. And 2011Q1 GDP
number showed 10% annualised q/q growth.
Combined with the prospect of further
upward revisions to the WPI back-data and the
strong likelihood of fiscal slippage,
considerable further policy tightening in the
Source: Reuters EcoWin Pro, BNP Paribas
balance of 2011 looks inevitable.
We target another four 25bp rate hikes in Since late 2009, various editions of this report have
this year’s remaining five policy reviews, lifting argued that risks to economic growth, inflation and, in
our year-end repo rate target to 8.25%. turn, policy rates have all been consistently skewed
Restrictive policy settings will eventually to the upside. This has been a legacy of the
produce the demand destruction and sub-par extraordinary policy stimulus – both monetary and
economic growth now required to regain fiscal – that was poured into the Indian economy
inflation control. We have cut our FY2013 GDP around the time of the global financial crisis, its tardy
growth forecast to 7¼%. withdrawal and building evidence of a structural food
inflation problem. In the face of persistent fiscal
The evolving mix of continued upside risk to backsliding (the IMF estimates that India’s cyclically
inflation and policy rates but downside risk to adjusted primary deficit was still 5.3% of GDP in
growth should ensure that ‘curve flattening’ in 2010 vs 0.8% in 2007), the Reserve Bank of India’s
rates markets continues and keeps equities on (RBI) self-styled ‘calibrated’ approach to normalising
the back foot for a while longer. the level of policy rates has failed to prevent the
economy from moving decisively into overheating
But curve steepening and a stronger
territory. This has augmented the economy’s
performance by equities await clear-cut
emerging structural food inflation problem that the
evidence of demand destruction, and its
last Eye on The Tiger discussed in detail, with a
corollary, greater certainty on the timing and
more orthodox cyclical inflation problem.
peak in policy rates.
A range of indicators signal that the economy has
been overheating for some time, and is now
operating above full capacity. The RBI’s survey
Richard Iley June 2011

shows industrial capacity utilisation has moved Chart 3: Too Optimistic
above its previous peak attained during 2006-2007. 10 RBI's forecasts of W PI Inflation by March 2011
Our statistical estimate of the output gap is in positive
9 Actual = 8.98%
territory and of course the behaviour of inflation itself
8
signals overheating. Both our bespoke core
7
measures of WPI inflation – a US-style ex-food and
6
energy and a 10% trimmed mean – have been
running at a double-digit pace over the last 6-9 5
months, driving serial upward surprises to headline 4
WPI despite a welcome albeit partial deceleration in 3
food price inflation. Perhaps the most overwhelming 2
evidence comes from the latest national accounts 1
data. Upwards revisions to 2010 GDP now reveal 0

Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan 11 Feb 11 Mar 11
that nominal GDP (measured at factor cost) boomed
by 20.3% last year; the second strongest gain in Source: Reuters EcoWin Pro, BNP Paribas
headline GDP on record apart from 1973! On the
alternative factor costs basis, nominal GDP gained Chart 4: GDP Growth & Trend
by 19.1%; the strongest since 1988 (Chart 2).
Having been persistently surprised by the strength of

inflation over the last year and indeed in 2009 (Chart
3), the RBI increasingly recognises the extent of the
cyclical inflation problem facing the Indian economy.
It acknowledged that the calibrated approach to
normalising policy settings was leaving it ‘behind the
curve’ and allowing the economy to head deeper into
overheating territory. Most worrying from the central
bank’s perspective is building evidence that faster
inflation rates and persistent upward inflation
surprises are getting engrained in the fabric of the
economy and in turn threatening to add a further
‘ratchet effect’ to the inflationary process. The latest Chart 5: Forward OIS Rates Bed Down At 8%
DBI survey for example showed corporates’ pricing
14 Onshore INR IRS, %
intentions running at record levels. Accordingly, at its
May monetary policy review, the RBI recognised that 12
inflation control, even at the cost of short-term 10yr-10yr forward
demand destruction, must now be its absolute 10
priority. Consistent with this, the RBI pushed through 8

a 50bp increase in the repo rate as we had exhorted
it to do and also introduced several other measures 6
intended to ensure that its more aggressive policy

tightening gained additional traction. 4 5yr-5yr forward
2
The unsavoury reality now facing the Indian economy
Jul 01
Jan 03
Jul 04
Jan 06
Jul 07
Jan 09
Jul 10
Apr 02
Oct 03
Apr 05
Oct 06
Apr 08
Oct 09
Apr 11
is that, having moved into overheating territory, policy

settings must be tightened sufficiently to bring growth Source: Reuters EcoWin Pro, BNP Paribas
decisively below trend for several quarters if control
of the inflationary situation is to be regained and There is a soft intellectual consensus that a neutral
wobbling inflation expectations stabilised. With level of policy rate could be as low as 6.25%. But
estimates of both the neutral level of policy rates and these estimates are based largely on the average
the economy’s real trend growth uncertain, the risk of experienced over the last decade; a period over
over-tightening and a hard(ish) landing for the which it is universally accepted that the economy’s
economy has risen. As a result, while short-term trend growth performance accelerated from perhaps
risks to inflation and policy rates remain skewed to c.6% to c.8% (Chart 4). Indeed, the structure of the
the upside, the risks to economic growth are now OIS swaps markets, where forward rates seem to
decisively skewed to the downside for the first time in bed down over the very long term at around 8-8.25%,
over two years. suggests a considerably higher level for the
‘equilibrium’ interest rate (Chart 5) underscoring the
upside risk to policy rates.

A policy rate of at least 8% and GDP growth Chart 6: Capital Goods Output Roller-Coaster
decisively below 8% would appear the inevitable
recipe for the Indian economy. The key questions
therefore become how quickly will the RBI push
policy into the decisively restrictive zone now
required and how pernicious and durable will be the
impact on GDP growth?
The RBI opined in its last policy statement that it

already discerned clear signs of economic slowdown
led by reduced thrust in capital goods production.
Given the extreme volatility of the capital goods
segment of the official index of industrial production
(IIP) data, which we have previously bemoaned, any
judgements based on the behaviour of these lumpy Source: Reuters EcoWin Pro, BNP Paribas
and low-quality data are unwise. Almost inevitably,
the latest IIP report released a few weeks after the Chart 7: Extraordinary Export Surge
RBI’s May policy review showed renewed strength in
March capital goods output (Chart 6) with our
seasonally adjusted estimate accelerating to a record
187% on a six-month annualised basis! Note that the
strength of the IIP data in March necessarily creates
helpful ‘carry over’ effects for 2011Q2 growth.
Abstracting from the roller-coaster ride generated by

the official IIP data, which as previously argued are
best ignored, evidence of any genuine slowdown in
the economy is flimsy to say the least. Non-food
bank credit growth remains solid at c.22% y/y while
the manufacturing PMI survey, a better guide to
industrial trends, is similarly robust with the headline Source: Reuters EcoWin Pro, BNP Paribas
index still around 60. Moreover, recent trade data,

although showing some moderation in April, have than a slowdown. Further reinforcing this sense is the
been little short of explosive. Goods exports have strength of labour demand in the manufacturing
surged at a close to a 100% annualised rate in the sector as signalled by the latest Manpower survey
six months to April and now stand some 35% above (see Survey Evidence section).
their pre-crisis levels, leaving India with the strongest
relative performance in Asia over the last few years. Outside of the industrial sector, there is more
tentative evidence of some deceleration and demand
Goods exports strength in recent months relative to a destruction in the construction and services sectors.
range of other indicators such as the US ISM new The PMI services survey, at around 55.0 in April, has
orders or GDP-weighted G3 economic growth (both shown some deceleration. In an attempt to generate
detailed in the Trade Trends section) suggest that a broader-based and more comprehensive view of
this strength is unlikely to last, although exports the service sector activity, we have developed a
should remain well supported for several months to ‘composite services indicator’. Drawing on the 10
come. Part of exports’ unprecedented recent strength main indicators that the RBI includes in its quarterly
may reflect the expiry of a government scheme this assessment of the services sector (tourist arrivals,
July that gives import duty credit against exports commercial vehicles, cement and steel production,
which is leading to ‘preponing’ of exports to lock in railway traffic and a variety of civil aviation cargo
these benefits. This would also provide a partial indicators), we derive a composite indicator of
explanation for the similarly extraordinary strength of aggregate service sector related activity. The
ex-oil goods imports in recent months which typically methodology is relatively straightforward: the data
offer a useful cross-check on both the strength of are seasonally adjusted then aggregated using the
domestic demand and its cyclical position, further so-called ‘Conference Board’ technique which
cementing the sense that the economy is operating derives weights for the components inversely
at, or above, its supply frontier. proportionate to their volatility. While a number of
elements of the index – rail cargo, commercial
Overall, the trade data, even allowing for any inflating vehicle production and cement production – have
‘preponing’ effects, signal manufacturing boom rather shown signs of ebbing, tourist arrivals and civil

aviation traffic remain buoyant up to April, leaving our Chart 8: BNPP Composite Services Indicator
composite still comfortably above its post-2003 trend
(Chart 8) and growing at no worse than trend
whether measured on a 3-month or 6-month
annualised rate.
Growth ‘bears’ will of course point to 2011Q1 GDP

data to argue that a significant slowdown is already
in train. And while Q1 GDP data showed a further
deceleration in y/y growth to 7.8%, this masked the
fact that on a seasonally adjusted, sequential basis,
overall GDP actually forged ahead at a near 10%
annualised pace. Upward revisions to the 2010 data,
which lifted calendar year growth to 9.0% vs a
previously estimated 8.6%, generated more Source: Reuters EcoWin Pro, BNP Paribas
challenging base effects. This was particularly true
for Q1 when growth this time last year was bumped Chart 9: Indian GDP
up to 3.2% q/q according to our estimates.
The sectoral composition of the Q1 GDP data was

also revealing. Viewed by output, manufacturing
picked up by a buoyant 3.0% q/q by our calculations
and, given the helpful carry-over effects discussed
above, Q2 prospects also look relatively propitious.
Construction output was strong (up 3.0% q/q) but
services output was a mixed bag. The ‘trade, hotel,
transport and communications’ segment boomed
with a 3.7% q/q gain by our estimates while ‘FIRE’
registered a relatively sluggish 0.7% q/q increase.
Lastly, the ‘community, social and personal service
segment’, which is a useful proxy for government
consumption, posted a sluggish 0.9% q/q increase. Chart 10: GDP Deflators
Overall, the sectoral dynamics of Q1 growth fit with
and tend to reinforce our prior conjectural
assessment of the Indian economy in 2011H1; a
booming manufacturing sector with solid, albeit
mixed, growth in the service sector. The other
dominant element of the Q1 GDP report was the
increasingly incontrovertible evidence that the
economy is overheating. As stated above, upgrades
to the back-data left nominal GDP growth in calendar
2010 north of 20% when measured at market prices
and not far shy at factor cost. And, crucially, the GDP
deflator – the price element of nominal GDP and by
definition the best aggregate guide to domestic cost Source: Reuters EcoWin Pro, BNP Paribas
and price pressures – remained worryingly strong in
2011Q1. At market prices, the GDP deflator gained
9.7% y/y, while measured at factor cost it rose by push up toward levels not seen since the first half of
8.8% y/y (Chart 10). 2008. And with the RBI still playing catch up, swaps
curves have understandably begun to price in the
With little hard evidence that the monetary policy has mounting risk of a hard(ish) landing for the economy
so far been tightened sufficiently to ensure a and, eventually, the turn in the policy cycle as 2-year
sustained period of sub-8% GDP growth that will forward rates begin to dip below 1-year forward rates
likely be required to bring cyclical inflation pressures for the first time since 2008H2.
to heel, the RBI still has considerable work to do.
Crucially that is the clear judgement of the bond Another 25bp hike in the repo rate – now established
market where the 2-year yield, approaching 8.35% at as the key policy rate across the cycle – at the RBI’s
th
the time of writing in early June, has continued to next policy review on June 16 looks a racing

certainty. That would take the repo rate up to 7.5%. Chart 11: Still Playing Catch Up
However, further tightening beyond is likely. Our
base case is that the macro-conjuncture will compel
the RBI to lift the repo rate to 8.25% by year-end, so
delivering four rate hikes in this year’s remaining five
policy reviews. In turn, this level of policy rate
assuming continued transmission into higher deposit
and lending rates should produce a significant growth
slowdown that reaches a crescendo in FY2010H2.
Our FY2012 and FY2013 GDP forecasts are cut to
7.6% and 7.3% before recovery to 8.5% growth in
FY2014. Slower growth will spread across the
manufacturing and services sectors with capex
inevitably bearing the brunt when viewed from an
expenditure perspective. Source: Reuters EcoWin Pro, BNP Paribas
With the RBI’s two key inflation assumptions – crude Chart 12: Subsidy Optimism - I
oil prices reaching USD110 per barrel by year end 2.5 India central government non-plan expenditure - subsidies, % of GD P
and a largely normal monsoon – shared by us at

present, two other factors are important in driving our 2.0
view of the policy outlook and in turn that the building

downside risks to growth will crystallise later this year 1.5
Total F ertiliser
and in 2013.
1.0
Food
First, and perhaps most importantly, the upside risk
of continued fiscal backsliding stressed by the RBI in 0.5
Petroleum
its May policy statement is expected to maintain the
pressure on the central bank. As has been previously 0.0
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11RE
FY12BE
well documented, the government’s expectations for
a 0.5% of GDP reduction in the central government’s
deficit in FY2012 are heavily based upon roseate
assumptions for subsidies expenditure. Chart 13: Subsidy Optimism - II
Specifically, despite the backdrop of high (and rising) 1.5 India Budget Forecast Dynamics, % of GDP
Deficit Reducing　　　Deficit Increasing
global commodity prices, particularly crude oil prices, 1.0

subsides are budgeted to fall by a record 12.5% in
0.5
cash terms. With the one-off fiscal adrenaline shot of
the 3G and BWA auction proceeds, which was worth 0.0
a stunning 1.4% of GDP in FY2011, necessarily

-0.5
disappearing this year, the government is under
pressure to keep fiscal consolidation on track and -1.0
support monetary policy as it seeks to damp -1.5

Tax Revenue
Expenditure
Expenditure
Revenue
Disinvestment
Recovery of
o/w Subsidies
Non-Tax
Fiscal Deficit
inflationary pressure.
Non-Plan
Recepits
Loans
Plan
Trends in disinvestment proceeds in FY2011 ended

up disappointing. But despite missing its INR40,000 Source: Reuters EcoWin Pro, BNP Paribas
crore (INR400bn) target by a considerable margin in
FY2011 (now estimated at INR22,744 crore), the
government still expects disinvestment to raise cash growth of 16.7% in the preceding four years!
INR40,000 crore or 0.4% of GDP this year, which, One silver lining for the government’s deficit
given last year’s miss, reduces FY2012’s budget forecasts may once again be rampant nominal GDP.
deficit forecast by around 0.2% of GDP. But it is the The Union Budget’s forecasts assume nominal GDP
wildly optimistic assumptions on subsidies, which are growth (at market prices) of ‘only’ 14% in FY2012.
forecast to slice 0.5% of GDP from the deficit in Our latest forecasts assume nominal growth of 16%
FY2012, that are the key drivers (Chart 13). The rest despite cutting our ‘real’ GDP forecast for FY2012 to
of non-plan expenditure, which includes interest 7.6%. But while higher inflation is a helpful salve to
payments, defence, police and pensions spending, the government’s deficit arithmetic, it does nothing to
importantly is assumed to grow by only 2.3% in cash support the RBI in its attempt to deflate domestic
terms, which looks equally optimistic given average demand. Despite our forecast for several percentage

points more nominal GDP growth in FY2012, we Chart 14: Where Are We?
expect slippage on non-plan expenditure in 1.8 India WPI inflation, revised less provisional, % points
particular, which will leave the central government’s
1.6
deficit close to 5% of GDP.
1.4
The second key factor likely to maintain the pressure 1.2
on the RBI to keep tightening the monetary policy 1.0
screws in the second half of 2011 is WPI inflation’s 0.8
seemingly serial proclivity to be revised upwards. In 0.6
turn a function of poor data quality and the extremely 0.4
low initial response rates within the WPI sample, 0.2

initial estimates of WPI inflation have been revised 0.0
up by an average of 0.8% points over the last year.
Nov-09
Nov-10
Jan-10
Jun-10
Jul-10
Jan-11
Oct-09
Dec-09
Feb-10
Mar-10
Apr-10
May-10
Aug-10
Sep-10
Oct-10
Dec-10
Feb-11
Accordingly, the RBI is likely to discover that WPI
inflation in March and April was running closer to Source: Reuters EcoWin Pro, BNP Paribas
10% y/y, even above, rather than the c.9% currently
estimated, leaving the central bank further behind the Chart 15: BNPP WPI Inflation Forecasts
curve than it believed at the time of its May policy 12 India W PI, % y/y
BNPP
review. Even without upward revisions, the f'cast
10
combination of expected hikes in diesel prices in
June and still bubbling ‘core’ inflation pressure given 8
Headline
the economy’s positive output gap is expected to
6
keep WPI inflation running close to 9% y/y until at
least 2011Q4. Until greater clarity emerges on the 4
progress of this year’s monsoon and upside risks to

2
crude oil prices subside, the risks to inflation will US-style core
remain skewed to the upside. Double-digit WPI 0
inflation until Q4 cannot be ruled.

-2
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Slower growth and increasingly helpful base effects
should coalesce to produce a genuine improvement
in inflation by the end of FY2012, although the risks Chart 16: Onion & Cotton Price Base Effects
to the RBI’s current forecast for March 2012 of 6%
are skewed to the upside. Beyond the gradual
diminution of overheating pressure as sub-8% GDP
growth begins to remove the economy’s positive
output gap, base effects from two categories within
WPI – onions and raw cotton prices – should help
drive down WPI closer toward the RBI’s 6% forecast.
Despite having a combined weight of just under 1%,
these two elements of the WPI basket have been
adding between 0.5% and 0.7% to y/y WPI inflation
in recent months.
Onion prices, after their eye-watering super spike in

late-2010, have fallen back to earth and should begin
to exert favourable base effects soon. The latest Chart 17: Mind The Gap
weekly WPI also show a welcome retrenchment in
raw cotton prices suggesting that their considerable
impact on WPI inflation over the last year should
progressively fade. Even on the conservative
assumption of unchanged onion and cotton prices to
the end of 2012, their combined impact should crimp
WPI by 0.2% in FY2012Q4; implying a swing of close
to a percentage point in the overall WPI inflation
(Chart 16).
But the prospect of these helpful base effects on

inflation should be no cause for complacency. Our

reduced GDP forecasts only see our estimates for Chart 18: Inflationary Twist
the non-agricultural economy’s output gap falling
back into negative territory by 2012Q1, underlining
the scale of the challenge facing the RBI to bring
cyclical inflation pressures back under control (Chart
17). Nor should the RBI’s increasingly ‘hot’ war
against cyclical inflationary pressure deflect attention
away from the need for continued policy reform to
improve India’s structural inflation problems. As we
have stressed in previous ‘Eye on the Tigers’, a
particularly invidious aspect of inflationary pressure
in recent years has been the worrisome tendency for
consumer food prices to outstrip gains in wholesale
prices, implying an unhelpful widening of retail
margins (Chart 18). Source: Reuters EcoWin Pro, BNP Paribas
Accordingly, recent recommendations by the Inter- Chart 19: Growth/Inflation Trade Off
Ministerial Group (IMG), chaired by Kaushik Basu, to
open up multi-brand retail to foreign investors and
also for a reformulation of the Agricultural Produce
Marketing Committee (APMC) law to help reduce
supply bottlenecks would be extremely helpful in
working to reduce this gap. Rapid progress on these
reforms would greatly help the war against inflation.
More generally, policies to attract greater inward
foreign direct investment, which woefully slipped
behind that of Singapore’s in USD terms, would help
intensify competitive forces within the Indian
economy and work to reduce structural pressure on
inflation. Both a faster pace of structural reform and
greater fiscal discipline are vital in complimenting and
reinforcing the RBI’s anti-inflationary stance and Chart 20: Forward OIS Rates Inverting
preventing a further deterioration in the
1.75 Onshore INR OIS, 1yr-2yr forward less 1yr-1yr forward, %
growth/inflation trade off (Chart 19).
1.50
In the short term, however, the evolving mix of 1.25
continued upside risks to inflation and policy rates 1.00

but building downside risks to growth should ensure 0.75
that ‘curve flattening’ in rates markets continues and
0.50
keeps equities on the back foot for a while longer
despite their egregious underperformance so far in 0.25
2011 and the fact that valuations are now beginning 0.00
to creep into more attractive territory (see Financial -0.25
Markets section). Curve steepening and its likely -0.50

corollary, a stronger performance by equities, await 04 05 06 07 08 09 10 11
more clear-cut evidence of demand destruction, and Source: Reuters EcoWin Pro, BNP Paribas, As June 2 2011
nd
its corollary, greater certainty over the timing and

peak in policy rates. The OIS market is now
beginning to price in rate cuts some 12-24 months
out as 1-year/2-year forward swaps rates begin to
invert relative to 1-year/1-year forward rate (Chart
20). This dovetails with our forecast that the turn in
the policy cycle should arrive in 2012H2, prompting
our forecast of a significant revival of economic
growth in calendar 2013/FY2014.

Economic Basics – I
GDP By Industry GDP By Expenditure
India GDP by industry, as a % of GDP, 2010
Trade, Hotels,
Transport & Comm.
Agriculture, Forestry &

Fishing
Financing & Business

Services
Manufacturing
Community, Social &

Personal Services
Construction
Mining & Quarrying
Electricity, Gas & Water

Supply
0 5 10 15 20 25
Source: BNP Paribas, Reuters EcoWin Pro Source: BNP Paribas, Reuters EcoWin Pro
Services are the dominant pillar of the Indian economy, worth Viewed by expenditure, private consumption, at almost 60% of
55% of GDP in 2010. Agriculture and allied activities, at 20.8%, GDP, dominates the economy. At c.20% of GDP, gross exports
are almost as large as industry’s 24.2% (construction, 8.1%; are low by Asian standards. The capex share has picked up
electricity, 1.5%; and manufacturing, 14.6%). since 2004, rising to over 30% of total in recent years.
Goods Exports By Commodity Goods Exports By Destination

India exports by commodity, FY2010
Agricultural &
Chemicals Ores & Minerals
Allied Products
Products 4.9%
10.0%
Petroleum 9.7% Others
Products 10.9%
15.7%
Engineering
Gems & Goods
Jewellery Textiles
21.5%
16.2% 11.1%
Source: BNP Paribas, RBI, Reuters EcoWin Pro Source: BNP Paribas, Reuters EcoWin Pro
Viewed by commodity, India’s export sector is well diversified. The vast majority of Indian exports, of over one-third, go to the
Engineering goods are the dominant category. Textiles, gems, G3. China and Hong Kong combined in contrast absorb a lowly
jewellery and agricultural products all account for significant 11% of Indian goods. The rest of Asia ex-Japan accounts for
portions. c.12% of Indian exports, following Middle East’s c.16% share.
Goods Imports By Commodity Imports By Origin

India imports by commodity, FY2010 35 India imports by origin, as a % of total
Crude & OPEC

30
Petroleum
Products
Others 30.3%
25
20.5%
20
Asia ex-Japan, China & HK
15 China & HK
Eurozone
10
Gold & Silver Capital Goods
10.1% Metals 15.2% US
Pearls & Chemicals Food & Related
6.6% Items 5
Precious Stones 8.1% Japan
5.7% 3.5%
UK
0
04 05 06 07 08 09 10
As with most Asian economies, India is a significant net importer A geographical breakdown of India’s imports paints a similar
of commodities. Crude and petroleum products account for picture, with OPEC absorbing close to 30% of Indian demand in
almost one-third of India’s import bill, meaning trade trends are FY2010. Oil demand aside, Asia (24%) is the most important
frequently driven by oil price shocks. supplier of Indian imports, followed closely by the G3 (19%).

Economic Basics – II
WPI Weights (2004/05=100) CPI Weights (2010=100)
India WPI weights (2004/05=100) India CPI weights (2010=100)
Primary Articles: Food Transport & Household

communication requisites
Primary Articles: Others 7.6% 4.3% Food & non-
Recreation & Personal care & Others alcoholic
amusement effects 1.1%
Fuel & Power beverages
1.4% 2.9%
47.6%
Manufactures: Machinery Medical care
& Transport Equip. 5.7%
Manufactures: Chemicals Education
3.3%
Manufactures: Food,
Beverage & Tobacco
Manufactures: Basic
Metals
Housing
Manufactures: Textiles 9.8%
Clothing, bedding Fuel & light Pan, tobacco &
Manufactures: Others & footwear 9.5% intoxicants
4.7% 2.1%
0 3 6 9 12 15
Food (primary and manufactured) effectively makes up over 24% At 47.6%, the newly revised CPI has a much higher weighting of
of the Indian WPI while energy-related items are worth some food. Housing has a weight of 9.8%, close to fuel and light’s
15% of the representative basket. Excluding food, manufactured share of 9.5%. Transport and communication, medical care,
goods account for around 53% of the WPI. clothing and household requisites all have significant weights.
General Government Debt Investment vs. Savings

120 General government gross debt, as a % of GDP
100
80 2011F
60
40 2010
20
0
G-7 Advanced G-20 Emerging G-20 India Asia ex-Japan
ex-India
Source: BNP Paribas, IMF Source: BNP Paribas, Reuters EcoWin Pro
By Asian or EM standards, India’s public debt is high at over 70% Both gross saving and investment have moved sharply higher
of GDP. However, Indian debt levels remain favourable vis-à-vis over the last decade with both averaging close to 35% of GDP in
debt levels in the ‘developed’ world. India’s fast nominal GDP FY2010. Consistent with India’s current account deficit,
growth also greatly improves its debt sustainability arithmetic. investment spending typically outpaces the flow of gross savings.
International Investment Position GDP (PPP) Per Capita

60 GDP (PPP) per capita, international dollar, '000, 2010
50
40
30
20
10
0
Malaysia
US
Eurozone
Singapore
Hong Kong
Taiwan
Japan
S.Korea
Thailand
China
Indonesia
India
Philippines
World
Source: BNP Paribas, Reuters EcoWin Pro Source: BNP Paribas, IMF, Reuters EcoWin Pro
Similarly, consistent with India’s persistent current account With cost-of-living adjusted GDP per capita of just above USD3k
deficit, India is a net, albeit small, international debtor. At the end according to the IMF’s latest estimates, India remains an
of FY2010, India’s net international investment position (NIIP) extremely poor economy. Per capita incomes in China are more
was in the red by USD158bn or 11.8% of GDP. than 2x higher at c.USD7.5k.

GDP Developments – I
GDP Growth Contributions to GDP By Output
12 Contributions to y/y GDP growth, % points
Industry
10 GDP (% y/y)
0
Services
Agriculture & allided activities
-2
Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1
06　　　　　　07　　　　　　08　　　　　　09　　　　　　 10　　　　 11
Annual growth of Indian GDP slowed to 7.8% y/y in the first three Viewed by output, non-agricultural sectors remained the main
months of 2011. However, it disguised the fact that the Indian contributors to GDP growth on a year-on-year basis as services
economy expanded by a solid c.2.5% q/q after registering its first rebounded while the industrial sector stayed solid. Agriculture
q/q contraction since at least 2004 in Q4 by our calculations. and allied activities moderated, but from a strong Q4.
GDP – Services GDP – Manufacturing
The rebound in the services sector was attributable to community Manufacturing production has been a reliable guide to
social and personal services and trade, hotel, transport and manufacturing value added, which is included in GDP.
communication services. FIRE and business services growth Favourable carryover effects from monthly production suggest
slowed, reflecting a base effect from a 4.4% q/q in Q1 2010. the latter is likely to stay strong in Q2 after a 3.0% q/q gain in Q1.
GDP – Construction & Utilities Value Added GDP – Agriculture
The high-frequency monthly series on infrastructure production Following back-to-back sequential falls through much of 2009,
also correlates reasonably well with growth in construction and agricultural GDP has seen witnessed a strong snapback. In Q1
utilities valued added. It has shown no signs of any genuine 2011 the sector registered slower growth of 3.2% q/q annualised,
deceleration as yet. but it followed a 10.3% gain in Q4.

GDP Developments – II
GDP – Agriculture – II Contributions to GDP By Demand
7.5 112 20 Contributions to y/y GDP growth, % points
108 Government
6.0 Agricultural GDP (% y/y) IMD f'cast 15 Fixed investment consumption
104
4.5
100 10
3.0
96
5
1.5 92
88
0.0 0
84
-1.5
-5 Valuables
80
Error Private consumption Inventories
-3.0 Monsoon rainfall
76 Net trade
(% of LPA, RHS)
-10
-4.5 72 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1
98 99 00 01 02 03 04 05 06 07 08 09 10 11 06　　　　　　07　　　　　　08　　　　　　09　　　　　　10　　　　11
The historical relationship suggests agricultural output growth is Viewed by demand, the slowdown in Q1 2011 was more
strongly influenced by swings in rainfall, which is nonetheless domestically driven, and particularly by fixed capex. Net trade
highly uncertain. continued to contribute positively to y/y GDP growth, albeit to a
lesser extent than in Q4.
Domestic Demand Private Consumption vs. Employment

14 India GDP, % y/y
12
Domestic demand
10
GDP
8
0
Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1
06　　　　　　07　　　　　　08　　　　　　09　　　　　　10　　　　11
The fact that net trade continued to be a strong contributor in Q1 Measures of labour market trends are thin on the ground in India,
means Indian domestic demand growth, at 5.5% y/y, fell short of but the evolution of the composite PMI employment index, while
overall GDP (at market prices) growth of 7.7% y/y by a relatively volatile, points to some solid, albeit unspectacular gains in
large margin. private consumption.
General Government Consumption Fixed Investment vs. Capital Goods Output – I
The counterpart to community, social and personal services’ In line with capital goods output, fixed investment growth slowed
rebound in Q1 was government consumption. This saw growth markedly to only 0.4% y/y in Q1. However, it primarily reflects a
on a year-on-year basis push higher to 4.9% from 1.9% but base effect from Q1 last year when capex rose 9.8% q/q. In
remain below the extremes seen in the aftermath of the crisis. sequential terms, capex advanced by an estimated 1.7% q/q.

GDP Developments – III
Fixed Investment vs. Capital Goods Output – II Inventories Contribution
2.5 Contribution from change in inventories to y/y GDP growth, % points
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
-2.5
Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1
06　　　　　　07　　　　　　08　　　　　　09　　　　　　10　　　　11
The divergence of the levels of capital goods production and With the pace of business stocking-building broadly stable
fixed investment points the scope for the former to fall back from through much of the post-crisis period, the contribution from the
here or for the latter to pick up, or for both. y/y change in the change in inventories, which is what matters for
annual GDP growth, remains limited.
Export & Import Contributions Exports vs. ISM New Orders

8 Contributions to y/y GDP growth, % points
4 Exports
2
-2
-4
-6
Net trade
-8
-10
Imports
-12
-14
Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1
06　　　　　　07　　　　　　08　　　　　　09　　　　　　10　　　　11
Exports continued to register solid growth of 25% y/y in Q1 2011. Notwithstanding a tick-down in May, the US ISM new orders
Import growth picked back up to 10.3% y/y from 0.4%. As a balance suggests Indian exports look on course to remain solid
result, net trade was a strong boost to GDP, adding c.2.3pp to at least in the next few months.
overall growth.
Imports vs. INR REER GDP – Nominal vs. Real
The historic correspondence of swings in the effective real INR Strong real economic growth and surging prices coalesced to
exchange rate and import demand has weakened in recent see nominal GDP growth remain close to the high end of the
quarters. However, the strength of the INR in real terms still historical range, which indicates that the Indian economy was
points to import growth picking up from here. overheating in Q1 2011.

Monsoon Trends
Monsoon Rainfall Kharif Foodgrains Production
Source: BNP Paribas, India Meteorological Department Source: BNP Paribas, CEIC
According to the India Meteorological Department’s forecast, total The monsoon is the main source of water for Kharif (summer)
rainfall for the 2011 monsoon season is expected to be broadly food grains output, which still accounts for around 50% of total
normal at 98% of the long period average (LPA). Indian agricultural production.
Agricultural GDP vs. Monsoon Rainfall WPI Food Price Inflation
Source: BNP Paribas, CEIC Source: BNP Paribas, Reuters EcoWin Pro
Unsurprisingly, the historical relationship suggests overall Last year’s monsoon, with total rainfall 2% above the LPA,
agricultural output, which contributes close to 15% of Indian GDP, helped damp food price inflation, which had jumped up to 20% as
fluctuates with the monsoon. a result of 2009’s drought.
Monsoon Rainfall – IMD Forecasts vs. Actual LPA Trends

10 Ind ia m on s oo n ra in fa ll, % de via tio n from L PA 870 Long period average* of rainfall during June to September, millimetres
5 865
0 860
-5 855
IM D fo rec a s t 850
-10
845
-15
840
-20 A c tu al
* 50-year moving average of rainfall
835
1920
1925
1930
1935
1940
1945
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
-25
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Source: BNP Paribas, India Meteorological Department Source: BNP Paribas, Ministry of Earth Science
Historically, however, forecast errors over the monsoon are large. As noted by the RBI, there has been a secular decline in the LPA
In 2010, for example, actual rainfall was broadly in line with IMD’s rainfall during June-September over the years. This reflects
estimate. In 2009, however, the actual outturn was 22% below the deterioration in climatic conditions that may have long-run
LPA, falling far short of IMD’s forecast of 4% below the LPA. detrimental consequences for agricultural output in India.

Industrial Trends – I
Asian Industrial Production Industrial Production Growth – I
India, like most of its regional peers, experienced an industrial India’s industrial output data have been unusually volatile in the
soft-patch in H2 2010 when its output moved broadly sideways. aftermath of the crisis; a point also noted by the RBI. Smoothing
Since then, industrial production, while volatile, has grown through volatility, output growth in year-on-year terms has picked
strongly and is now 20% above pre-crisis levels. up of late, albeit from some subdued levels by Indian standards.
Industrial Production Growth – II Industrial Production – Level vs. Trend
Momentum for Indian industrial production growth, having stalled Official data suggest that, with growth having slowed in H2 2010,
in the final months of 2010, has picked up once again. This Indian industrial output in level terms is now close to its trend
suggests the y/y rate of growth should continue to push higher established prior to the global financial crisis.
from here.
Capacity Utilisation Industrial Production By Sector

35 RBI survey – net responses on expectations about capacity utilisation
30
25
20
15
10
-5
05 06 07 08 09 10 11
Source: BNP Paribas, RBI Source: BNP Paribas, Reuters EcoWin Pro
Hard production data have been mixed but survey data have Growth in electricity production has been picking up since Q3
been consistently firmer. The RBI’s survey on capacity utilisation, 2010. However, the recent rebound in overall industrial
for example, suggests the sector is probably operating at, or production growth in y/y terms has largely reflected the dominant
even above, full capacity in early 2011. manufacturing sector.

Industrial Trends – II
Facilities Production vs. Fixed Capex Transport Equipment Output vs. Autos Sales – I
The historical correspondence between the levels of fixed capex The majority of the recent pick up in transport equipment
and output of machinery and equipment has weakened production is consistent with the strength in foreign demand for
somewhat since the global financial crisis. However, there still autos. Domestic auto sales growth has fallen back from its peak
appears to be some upside for investment from here. seen in early 2010 but remains strong by historical standards.
Transport Equipment Output vs. Autos Sales – II Infrastructure Production
In level terms, the historical relationship between transport Infrastructure industries growth, which has traditionally been a
equipment production and domestic motor vehicle sales has reasonably good guide to growth in construction and electricity,
broken down recently. It underlines the strength of foreign gas and water supply activities, is picking up.
demand and dovetails with the surge in Indian exports at present.
Capital Goods Production Industrial Production By Use-based Group – I
Month-on-month changes in capital goods output even on a Even with its output worth a lowly 9.3% of overall production,
seasonally adjusted basis since mid-2009 have been implausibly distortions in the capital goods output data have exaggerated the
large over the last year or so; essentially 3-5 standard-deviation swings of the industrial cycle, inevitably generating a signal
events. extraction problem for the production data.

Industrial Trends – III
Industrial Production By Use-based Group – II Consumer Goods Production
Viewed from a use-based perspective, the wild swings in the y/y Production of durable goods has driven the expansion in overall
rate of production growth have primarily been a function of the consumer goods production. However, production of non-durable
volatility in capital goods output. Production growth in other consumer goods has picked up in early 2011.
sectors, meanwhile, has been solid.
Non-Capital Goods Production Growth Non-Capital Goods Production
Stripping out the volatile capital goods element, the remaining Unsurprisingly, non-capital goods industrial production is back on
90% or so of industrial output has seen ‘underlying’ growth its pre-crisis trend and continues to set fresh highs,
running at close to a 13% annualised pace over the past 3 notwithstanding a tick-down in March.
months.
Industrial Production vs. OECD LEI Industrial Production – Q2 Prospects
The OECD’s leading indicator for India, which traditionally The positive industrial data in March has generated a favourable
correlates reasonably well with momentum in Indian industrial carryover effect for Q2. Maintaining March’s level of production
production, does not point to overall output growth slowing from through June would see industrial output advance by a further
here. 2.1% q/q gain after a 2.3% increase in Q1.

Services Sector Indicators
Railway Goods Traffic Commercial Vehicles Production
7 Railway goods traffic, % 3m/3m annualised 100 Commerical vehicles production, % 3m/3m annualised
6
80
5
4 60
3 40
2
20
1
0 0
-1 -20
-2
-40
-3
-4 -60
02 03 04 05 06 07 08 09 10 11 02 03 04 05 06 07 08 09 10 11
Railway goods traffic has appeared a drag on the transport Growth in commercial vehicles production in 3m/3m annualised
sector since mid-2010. Having peaked in October 2010, the terms, while still positive, has similarly fallen back markedly in
3m/3m annualised growth rate has since slowed notably and slid recent months.
into negative territory from February 2011.
Cargo Handled Cement Production

15 Cargo handled - international, % 3m/3m annualised 10 Cement production, % 3m/3m annualised
8
10
6
5 4
2
0
0
-2
-5
-4
-10 -6
02 03 04 05 06 07 08 09 10 11 02 03 04 05 06 07 08 09 10 11
The resilience in the transport sector over the past three months, Leading indicators of construction activity, meanwhile, suggest
however, has been evident in tourist arrivals, domestic the trend is of a steady improvement, with both cement and
passenger traffic and air cargo handled at domestic and finished steel production registering above-average gains in
international terminals. 3m/3m annualised terms.
BNPP Growth Momentum Indicator – I BNPP Growth Momentum Indicator – II
Our in-house growth momentum indicator for the services sector, In terms of growth rates, our growth momentum indicator on a
constructed using the Conference Board methodology, bottomed 3m/3m annualised basis, having peaked in August 2009, is
out in December 2008 and is now back on trend. running around average levels at present, suggesting continued
robust performance.

Survey Evidence
DBI Survey – Business Optimism – I DBI Survey – Business Optimism – II
The DBI survey reveals that business confidence in India has The majority of the surge in optimism for Q2 was driven by
continued to strengthen after its crisis-induced lows. At 183.3 in employees, inventory levels and particularly selling prices, which
Q2, the index is now back close to the highs seen during the reached a record high. New orders, volume of sales and net
2006-2007 boom. profits moderated but remain well above their long-run averages.
Manufacturing PMIs RBI Survey – Capacity Utilisation

2 Manufacturing PMI, SD from mean 35 RBI survey – net responses on expectations about capacity utilisation
30
1 India
25
0
20
-1 15
10
-2
Asia ex-India*
5
-3
0
* Asia ex-India: China, S.Korea and Taiwan

-4 -5
05 06 07 08 09 10 11 05 06 07 08 09 10 11
Source: BNP Paribas, Reuters EcoWin Pro Source: RBI
On the production front, the headline manufacturing PMI for India The RBI’s survey on capacity utilisation suggests strong growth
remains robust both in absolute and relative terms. It points to has left capacity short. The index is now in line the extremes
still-solid underlying strength of the manufacturing sector despite seen in late 2007/early 2008, adding to the sense that the
volatile hard activity data. economy is overheating.
Employment Outlook – I Employment Outlook – II

60 India Manpower survey – net employment outlook by sector, %
60 India Manpower survey – net employment outlook,
seasonally adjusted, % Q4'10
50 50 Q3'10
Q1'11
Q2'11
40 40
30
30
20
20
10
10
0
Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 0
Finance & Manufacturing Mining & Public Admin Services Transport & Wholesale&
07　　　　　 08　　　　　 09　　　　　 10　　　 11 Real Estate Construction & Education Utilities Retail
Source: Manpower Employment Outlook Source: Manpower Employment Outlook
The Manpower survey is an important source of survey evidence The improvement in the employment outlook for Q2 was broad-
on Indian labour market developments. The latest survey based. The latest survey reveals six out of the seven industries
suggests that labour demand in India is now the strongest on expect to accelerate hiring during Q2. Manufacturing was the
record. strongest, reinforcing the sense of a manufacturing boom.

OECD Leading Economic Indicator (LEI)
OECD India LEI OECD India LEI Components – I
Source: BNP Paribas, Reuters EcoWin Pro, OECD Source: BNP Paribas, Reuters EcoWin Pro, OECD
After peaking in early 2010, the Indian OECD leading indicator Industrial production of durable goods has contributed positively
has registered a string of m/m declines. This has left the index in to the Indian OECD leading indicator over the past six months.
level terms below the 100 benchmark, which represents the long- Passenger car sales have also picked up, but to a lesser extent.
term trend of activity, since last December.
OECD India LEI Components – II OECD LEIs – BRICs – I
The weakness in the OECD leading indicator has clearly been India is not alone among its BRICs peers in seeing the OECD
evident in the money supply sub-component. Share prices, leading indicator falter over the past six months. The OECD
production of manufactured non-metallic mineral products and leading indicator for Brazil has similarly witnessed a loss of
call money rate have also been a drag. momentum, with the 6-month annualised growth rate in the red.
OECD LEIs – BRICs – II OECD India LEI vs. Industrial Production
In level terms, India’s and Brazil’s OECD leading indicators are However, the trend-restored OECD leading indicator, which
below their long-term averages. The indicators for China and correlates well with trends in the level of India’s industrial
Russia, however, continue to point to activity in the two production, suggests little genuine loss of momentum as yet.
economies running above trend.

Trade Trends – I
Trade Balance By Country – I Trade Balance By Country – II
20 India trade balance by country, USD bn, 2010 20 India trade balance by country, USD bn
0 0
-20 -20 2010
-40 -40
2009
-60 -60
-80 -80
-100 -100
-120 -120
Total OPEC China & Asia ex- Japan United EU United Total OPEC China & Asia ex- Japan United EU United
HK Japan, Kingdom States HK Japan, Kingdom States
China & China &
HK HK
India has consistently run a goods trade deficit. For calendar On a year-on-year basis, India’s merchandise trade deficit
2010, it reached USD 107bn, with the OPEC nations the major widened by USD 19bn in 2010. The majority of that came as
contributor, followed by China and Asia. The UK, the US and the higher oil import bill saw the trade deficit with OPEC almost USD
EU were among the few net importers of Indian goods. 20bn or 50% larger.
Imports / Exports Ratio Exports By Commodity

India exports by commodity, FY2010
Agricultural &
Chemicals Ores & Minerals
Allied Products
Products 4.9%
10.0%
Petroleum 9.7% Others
Products 10.9%
15.7%
Engineering
Gems & Goods
Jewellery Textiles
21.5%
16.2% 11.1%
In the 12 months to April 2011, for which latest data are Manufactured goods, worth close to 60% of total Indian exports,
available, India witnessed a narrowing in its merchandise trade have been the dominant pillar of India’s export sector and
deficit as booming exports outstripped brisk import growth. remained so in FY2010, followed by petroleum and primary
products.
Export Growth vs. PMI New Export Orders Export Growth vs. G3 GDP Growth
Indian exports have been stronger than survey evidence would However, India’s relatively high trade exposure to the developed
have suggested. It in part likely reflects the Duty Entitlement world, where the recovery is increasingly gaining traction, also
Passbook (DEFB), an export incentive scheme, which may not offers some explanation of the strength in Indian exports which
be extended beyond June 2011. have bucked regional trends.

Trade Trends – II
Export Growth vs. ISM New Orders Exports / GDP Ratios – India vs. China
The US ISM new orders balance, a proxy of for demand of Indian exports’ share of GDP at present is comparatively low by
developed economies, has been a reliable guide to Indian export Asian standards. However, India’s degree of orientation appears
trends. It suggests Indian exports should continue to post solid on course to follow a similar trajectory to that of China’s since its
gains at least in the next few months or so. liberalisation with an around 12-13 year lag.
Imports By Origin Imports By Commodity – II

35 India imports by origin, as a % of total In dia im po rts by c om m o dity , F Y 20 10
OPEC C rud e &

30 Pe troleu m
Pro du c ts
O the rs 30 .3 %
25
20 .5%
20
Asia ex-Japan, China & HK
15 China & HK
Eurozone
10
G old & S ilve r C a pita l G o od s
US 10 .1 % M eta ls F oo d & R elate d 15 .2%
5 Pe arls & C he m ic als
6.6 % Ite m s
Japan Pre c io us S ton es 8.1 %
5 .7 % 3.5 %
UK
0
04 05 06 07 08 09 10
OPEC accounted for over 30% of India’s imports in 2010. The OPEC countries’ significance as a source of Indian imports
However, India’s source of imports is skewed increasingly reflects India’s position as a significant net oil-importer. For
towards Asia and particularly China and Hong Kong, which FY2010 as a whole, imports of this category accounted for close
combined have become India’s largest supplier since late 2007. to one-third of India’s total import bill, followed by capital goods.
Import Growth Momentum Oil Imports vs. WTI
Indian merchandise imports also have witnessed a sharp Indian import growth has picked up as the pace of oil import
rebound after slowing through much of 2010 H2. Over the past growth has regained momentum in line with global oil price
six months, imports have jumped at a spectacular c.75% rate on trends. Our WTI and USD/INR assumptions imply annual oil
an annualised basis. import growth is yet to peak.

Trade Trends – III
Oil Imports Non-oil Imports
16 India crude oil imports, million metric tonnes
15
14
13
12
11
10
8 3mma
6
04 05 06 07 08 09 10 11
The jump in India’s oil import bill reflects not only higher prices Imports of non-oil components on our estimates also have
but also rising quantities as oil import volumes have begun to regained their pre-crisis trend, having run below it through much
pick up once again. of 2010. It nonetheless at least in part reflects the impact of
global commodity prices.
Imports Of Primary Food Import Growth vs. INR REER

3000 India imports of primary food, INR crore
2500
2000
1500
1000
500
0
03 04 05 06 07 08 09 10
India saw its imports of primary food products jump decisively The lagged impact of the post-QE2 upward pressure on the
higher in late 2009 as the worst drought since 1972 hurt nominal INR exchange rate propelled further by rising domestic
domestic output. 2010’s better monsoon reduced import demand inflation appears among factors that should boost import demand
but the trend remains up. in the coming quarters.
Exports & Imports World Trade Shares

11 % of world trade, beginning of period=100
10
9 NIEs* (1967)
8
7
Japan (1955)
6 China (1978)
5
3 ASEAN-4 (1973)
1
India (1991) * Excludes Taiwan
0
0 10 20 30 40 50 60
Years From Starts
Indian imports and exports have now both regained their pre- The prospective increase in India’s export share as
crisis levels, despite the fact that the former fell more sharply industrialisation/urbanisation accelerates and FDI continues to
than the latter at their worst during the global financial crisis. flow in should see its world trade share, while lagging its regional
peers at present, rise strongly, following the path of other Asians.

Current and Capital Accounts – I
Savings & Investment – I Savings & Investment – II
India’s savings increased sharply during the 2000s, rising from The corollary to the short fall of savings relative to investment is
one-quarter of GDP to over one-third by 2008. This surge, that India’s current account has traditionally been in deficit and its
however, has continued to be matched by a more than capital account in surplus, as it has to borrow savings from
commensurate increase in its investment ratio. foreign countries to finance the upswing in domestic investment.
Savings & Investment – III Savings & Investment – IV

15 India gross savings less gross capital formation, as a % of GDP, FY
10
Household
5
Total
-5
Private corporate
Public sector
-10
53 56 59 62 65 68 71 74 77 80 83 86 89 92 95 98 01 04 07 10
Source: BNP Paribas, Reuters EcoWin Pro, World Bank Source: BNP Paribas, Reuters EcoWin Pro
There is a stark contrast with China, which has seen gross The majority of the shortfall of savings relative to investment
savings increase in excess of its gross investment since 1993, comes from the public sector, followed by private corporates.
leading to large current account surpluses. This is in contrast to the household sector, whose financial
surplus stands in excess of 10% of GDP.
Current Account Balance – I Current Account Balance – II
India’s current account deficit blew out to a record 3.2% of GDP A breakdown of India’s current account position highlights the
in 2010 though it masked the fact that the shortfall encouragingly interplay between continued surpluses on services and current
narrowed sharply in the final three months of the year. transfers but also a persistently large goods trade deficit.

Current and Capital Accounts – II
Oil Trade Balance Ex-Oil Current Account Balance
1 India oil trade balance, as a % of GDP, FY 6 India current account balance, as a % of GDP, FY
5
0
4 Ex-oil
-1 3
2
-2
1
-3
0
-4 -1
-2 Total
-5
-3
-6 -4
71 74 77 80 83 86 89 92 95 98 01 04 07 10 71 74 77 80 83 86 89 92 95 98 01 04 07 10
Source: BNP Paribas, CEIC Source: BNP Paribas, Reuters EcoWin Pro
India’s sustained goods deficit flows from its position as a Excluding oil components, we estimate that India’s current
substantial net oil importer. Its oil trade deficit exploded to 5.4% account balance would have been consistently in surplus since
of GDP in FY2009 before falling to 4.3% in FY2010. early the 1990s, running close to 1½% of GDP in FY2010.
Services Account Balance Transfer – Private Remittances
Software services, the largest contributor to the services trade Net private remittances, after having jumped to 4% of GDP
surplus, have been stable at c.3⅓% of GDP in recent years. The during the global financial crisis, have slipped back to c.3% of
non-software balance, however, has swung into deficit since late GDP over the last year.
2009, leaving the overall surplus smaller in 2010.
Capital Account Balance Capital Inflows – I

175 India gross capital inflows, USD billions
150
Total
125
100
75
Portfolio investment
50
25
FDI
0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
India, by definition, must attract net financing i.e. a surplus on its Underlying the solid capital account surplus was a spectacular
capital account to cover its current account deficit. In 2010, the explosion in gross capital, and particularly portfolio, inflows in the
registered a healthy surplus of over 4% of GDP, easily covering final months of last year, reflecting the initial impact of the
the year’s borrowing requirements. Federal Reserve’s QE2 stoking capital outflows from the US.

Current and Capital Accounts – III
Capital Inflows – II FDI Inflows – India vs. Singapore
60 India gross capital inflows, as a % of total, 4-quarter moving average
Banking capital
Portfolio investment
Loans
50
40
30
20
10
FDI
0
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
However, with gross portfolio inflows rising to a record 52% of India’s relative failure as a magnet for FDI is illustrated by the
total inflow and FDI inflows falling to just 7%, its rising reliance on fact that Singapore attracted considerably more FDI inflows than
hot money flows inevitably leaves the economy and, of course, India in 2010.
the INR increasingly exposed to swings in global risk appetite.
Balance Of Payments FX Reserves
The fact that its overall balance of payments was in “surplus”, at Net capital flows have been in excess of India’s borrowing
close 1% of GDP, means that India was building up its reserve requirements, hence resulting in a net accretion to India’s foreign
assets. exchange reserves.
Net International Investment Position (NIIP) NIIP – Other Investments
India is traditionally a net borrower from the world, with its NIIP Within the ‘other investments’ category of the Indian net
consistently negative since at least FY1997 and reaching -12% international investment position, the bulk of the net liabilities is
of GDP in FY2010, despite its large reserve assets accounting accounted for by the net external liabilities of the public sector
for almost ¾ of total gross international assets. within “loans”.

Inflation – I
WPI Inflation WPI Food Price Inflation
WPI inflation, the benchmark price pressure metric the Indian Elevated WPI inflation persists despite food price inflation, which
authorities primarily monitor, after bottoming out in mid-2009, has accounts for c.24% of the index, falling back to 7.6% y/y
since picked up sharply. Stubbornly at close to double-digit currently, having run over 20% y/y in late 2009 and early 2010.
territory at present, it remains well above the RBI’s comfort zone.
WPI Food Price Inflation - II WPI – Primary Food Weights (2004/05=100)

India WPI - primary food weights, 2004/05=100
Condiments &
Eggs, Meat & Spices Others
1.3% Food Grains
Fish 4.0%
28.5%
16.8%
Milk
22.6% Fruits &
Vegetables
26.8%
The majority of the slowing in food prices seen of late comes Within the primary food articles category, food grains and fruits
from primary food articles as manufactured food price inflation and vegetables are the two dominant components, worth close to
has picked back up. Inflation in the former, however, is still 29% and 27%, respectively. Milk (23%) and eggs, meat and fish
running at close to c.9-10% at present. (17%) also account for significant portions.
Contributions To WPI Primary Food Inflation WPI Primary Food Inflation – Onions
Despite their inflation rates falling back from their January high, Swings in fruit and vegetables prices largely reflect onion prices,
fruit and vegetables remain the largest contributor to current WPI the trend of which looks increasingly favourable. Having jumped
primary food price inflation. to over 150% y/y previously, inflation in the category has
retreated and should continue to do so as base effects kick in.

Inflation – II
WPI Primary Food Inflation – Cyclical? WPI Primary Food Inflation – Or Structural?
Inflation in other components of the category of primary food However, an increasing divergence between the food price index
articles also has witnessed a welcome respite following last and the overall WPI is apparent. As noted by the RBI, this implies
year’s normal monsoons. It appears to confirm the presence of a structural change in relative prices driven particularly by rising
cyclical sensitivity to monsoons. demand for protein and alternative protein sources.
Higher Incomes, More Protein Production Of Pulses Per Capita

160 Average monthly consumption, INR, rural areas 35 India production of pulses per capita, kilogram, FY
140
30
120
100 25
80
Milk 20
60
40 Egg, fish & meat 15
20
Pulses 10
0
0-235
235-270
270-320
320-365
365-410
410-455
455-510
510-580
580-690
690-890
890-1155
≥ 1155
0
Monthly per-capita expenditure, INR 51 54 57 60 63 66 69 72 75 78 81 84 87 90 93 96 99 02 05 08 11
The RBI estimates that, with per-capita income rising by c.39% Sluggish growth of per output of pulses - the major source of
during FY05-FY10, some 220mn people would have reached the protein in Indian diet - has left per capita availability of pulses
threshold income level at which the RBI finds Indian diets shift broadly stagnating over the last decade, contributing to an
decisively towards higher consumption of proteins. emerging structural imbalance between demand and supply.
Core WPI vs. CRB Index – Cost Push? WPI Food Price Inflation Short-Term Outlook – I
220 India WPI – food – primary articles & manufactured, 2004/05=100
BNPP f'cast
200
180
160
140
120
100
80
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Persistent price increases in global commodities may also have Our short-to-medium term food inflation forecasts, conditioned on
played a role in the seeming secular upward drift of our US-style, the assumption of ‘normal’ monsoons, anticipate food inflation
‘core’ WPI gauge since 2003. will return to its 2005-2008 trend when monsoon rainfall was
largely in line with its LPA.

Inflation – III
WPI Food Price Inflation Short-Term Outlook – II WPI Mineral Oils vs. WTI
23 India WPI – food – primary articles & manufactured, % y/y
20 BNPP f'cast
18
15
13
10
8
5
3
0
-3
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Falling back from close to 20% y/y in early 2010 to now stand at While largely set by the government, domestic fuel prices have
around 7½%, food (primary and manufactured) price inflation is been tracking global oil prices closely. Our WTI and INR
expected to continue trending lower in the balance of the year, assumptions imply Indian WPI ‘mineral oils’ inflation should
given “normal" monsoons. continue staying high in the next few quarters or so.
WPI – US-style ‘Core’ WPI – Non-food Primary Articles
Underlying inflation pressures are clearly evident with the 6- After peaking in February 2011, inflation in WPI non-food primary
month annualised rate in our US-style core gauge running close articles has since started falling back. It largely reflects swings in
to 11½%. At c.7½% at present, the y/y rate also remains raw cotton price inflation, which has slowed to c.65% y/y
uncomfortably close to the high end of its historical range. currently, having surged to in excess of 100% in early 2011.
WPI – Non-food Primary Articles – Raw Cotton WPI – US-style ‘Core’ vs. Non-food Manufactures
Base effects are favourable in the balance of the year as the However, the US-style core measure inevitably tracks more
previous jump in raw cotton prices, included in the non-food closely swings in inflation in the non-food manufacturing segment
articles category and worth 0.7% of the Indian WPI, drops out of of WPI, the y/y rate of which remains uncomfortably elevated.
the annual comparison.

Inflation – IV
WPI – Non-food Manufactures vs. CRB Index WPI – Trimmed Mean vs. US-style ‘Core’
Source: BNP Paribas, Reuters EcoWin Pro Source: BNP Paribas
India’s non-food manufactured WPI in turn moves in line with Our 10% trimmed mean WPI, an alternative measure of
trends in global commodity prices. The surge in commodity underlying inflation trends, at present has similarly been running
prices globally over the past year suggests risks to Indian at close to 8.0% on a y/y basis, reinforcing the presence of
inflation are skewed to the upside. generalised inflation pressures.
Food Price Inflation vs. Trim Points The Least-Often-Excluded Components

35 India WPI, % 6-month annualised Number of months excluded (out of 199), 1994–2011
30 Primary Articles: Food
25 10% Upper trim point Manufactures: Textiles
20 Manufactures: Paper Products
15 Manufactures: Food
10 Manufactures: Basic Metals & Alloys
5 Manufactures: Transport Equipment
0 Manufactures: Rubber & Plastic
-5
Manufactures: Beverages & Tobacco Products
-10 Primary food articles Manufactured food

Manufactures: Machinery
-15 10% Lower trim point Manufactures: Chemicals
-20
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 0 20 40 60 80 100 120 140
Source: BNP Paribas Source: BNP Paribas
Food components, both primary and manufactured, of the WPI Food items actually occupy two of the ten least-often-excluded
are excluded from our 10% symmetric trimmed mean less components in our 6-month annualised 10% trimmed mean
frequently than one might expect. measure. Key manufactured goods – chemicals and machinery –
are the two least frequently trimmed elements.
Mineral Oil Price Inflation vs. Trim Points The Most-Often-Excluded Components
70 India WPI, % 6-month annualised Number of months excluded (out of 199), 1994–2011
Fuel, Power, Light &
60 Lubricants: Mineral Oils
50 Mineral oils 10% Upper trim point Primary Articles:

Minerals
40
Primary Articles: Non
30 Food
Manufactures: Wood &

20 Wood Products
10 Fuel, Power, Light &

Lubricants: Coal Mining
0
Fuel, Power, Light &
Lubricants: Electricity
-10
Manufactures: Non
-20 10% Lower trim point Metallic Mineral Products
-30 Manufactures: Leather &

Leather Products
-40
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 0 20 40 60 80 100 120 140
The monthly inflation rate for the energy-related components Indeed, the mineral oils component of WPI tops the list of the
“mineral oils” on a 6-month annualised basis appears more components most often excluded from the trimmed mean, with
volatile, frequently rising (falling) by more than the higher (lower) primary articles (both minerals and non-food) also well-
trim points and hence getting ‘trimmed’ away. represented.

Inflation – V
CPI-IW vs. WPI Food Price Inflation – CPI-IW vs. WPI
Having run consistently higher than the WPI rate by a large Swings in CPI-IW inflation largely reflects food prices, which are
margin since late 2008, CPI-IW, running at close to 9% y/y worth c.46% of the basket and are in turn driven by food price
currently, has now moved more into line with WPI inflation. developments at the wholesale level. Given normal monsoons,
CPI-IW food inflation, hence, should continue slowing from here.
CPI-IW – Total vs. Non-food CPI-IW – Housing

25 India CPI-IW, % y/y 35 India CPI-IW housing inflation, % y/y
Total 30
20
25
Assuming index
15 flat through June
20
15
10
Non-food
10
5
5
0 0
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Trends in non-food categories, however, reveal that the fallback Inflation in the housing category has been key source of slower
in consumer price inflation in recent months is not a pure food non-food CPI-IW inflation. It is currently at 12% y/y after running
phenomenon. Non-food price inflation has also been on a over 20% in 2010H2, and will remain so at least through June
downtrend since mid-2010, slowing to c.9% currently. 2011 with its index level revised only every 6 months.
CPI-IW – Ex-food & Housing PCE Deflator vs. CPI-IW

22.5 India CPI-IW, % y/y
20.0
Total
17.5
15.0
12.5
10.0
7.5
5.0
Ex-food and housing
2.5
0.0
-2.5
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Excluding the impact of the crosscurrents on CPI of the housing CPI-IW has historically been a reasonably good guide to trends
and food components, we estimate that Indian CPI inflation in the key national accounts measure of consumer inflation – the
would have crept higher to close to 3%, in line with levels seen in PCE deflator. It has fallen back recently, pointing to the scope for
late 2008 and early 2009. the PCE deflator to slow from here.

Inflation – VI
WPI Inflation Expectations – Median CPI-IW Inflation Expectations – Median
6.5 RBI survey of professional forecasters, avg. WPI inflation, median 7.5 RBI survey of professional foercasters, avg. CPI-IW inflation, median
7.0
6.0
5 year
6.5
5 year
5.5
6.0
5.0
5.5
4.5 10 year
10 year 5.0
4.0 4.5
FY08Q4
FY09Q1
FY09Q2
FY09Q3
FY09Q4
FY10Q1
FY10Q2
FY10Q3
FY10Q4
FY11Q1
FY11Q2
FY11Q3
FY08Q4
FY09Q1
FY09Q2
FY09Q3
FY09Q4
FY10Q1
FY10Q2
FY10Q3
FY10Q4
FY11Q1
FY11Q2
FY11Q3
Source: RBI Survey of Professional Forecasters Source: RBI Survey of Professional Forecasters
The latest quarterly survey of professional forecasters was not Consumer price expectations, similarly, are also showing signs of
available at the time of writing but the FY11 Q3 survey showed becoming unglued, with both 5-year and 10-year-ahead median
that both 5-year- and 10-year-ahead median WPI expectations inflation expectations staying steady at uncomfortably high
remained close to their record highs. levels.
WPI Inflation Expectations – Volatility CPI-IW Inflation Expectations – Volatility

1.0 RBI survey of professional foercasters, avg. WPI inflation, standard deviations 1.6 RBI survey of professional foercasters, avg. CPI-IW inflation, standard deviations
0.9 1.4
5 year 1.2 10 year

0.8
1.0
0.7
0.8 5 year
0.6
0.6
0.5
0.4
0.4 0.2
10 year
0.3 0.0
FY08Q4
FY09Q1
FY09Q2
FY09Q3
FY09Q4
FY10Q1
FY10Q2
FY10Q3
FY10Q4
FY11Q1
FY11Q2
FY11Q3
FY08Q4
FY09Q1
FY09Q2
FY09Q3
FY09Q4
FY10Q1
FY10Q2
FY10Q3
FY10Q4
FY11Q1
FY11Q2
FY11Q3
Uncertainty about inflation expectations for WPI over both the 5- Uncertainty about 5-year-ahead inflation expectations for CPI-IW
year and 10-year horizons increased in FY2011Q3. It probably abated somewhat while that about 10-year ahead inflation
reflects, inter alia, strong spot inflation and serial upward expectations continued to pick up.
revisions to back data since the FY2011Q2 survey.
WPI Inflation Expectations – Min. & Max. CPI-IW Inflation Expectations – Min. & Max.
8.0 RBI survey of professional foercasters, average WPI inflation over the next 10 yr 9.5 RBI survey of professional foercasters, avg. CPI-IW inflation over the next 10 yrs
7.5
8.5
7.0
6.5
7.5
Maximum Maximum
6.0
5.5 6.5
5.0
5.5
4.5
Minimum
4.0
4.5
Minimum
3.5
3.0 3.5
FY08Q4
FY09Q1
FY09Q2
FY09Q3
FY09Q4
FY10Q1
FY10Q2
FY10Q3
FY10Q4
FY11Q1
FY11Q2
FY11Q3
FY08Q4
FY09Q1
FY09Q2
FY09Q3
FY09Q4
FY10Q1
FY10Q2
FY10Q3
FY10Q4
FY11Q1
FY11Q2
FY11Q3
The FY2011 Q3 survey showed the dispersion of 10-year-ahead The spread of longer-term inflation expectations for CPI-IW also
inflation expectations for WPI widened as forecasters anticipated increased in FY2011 Q3 as some forecasters saw CPI-IW
average Indian WPI inflation to run as high as 7.5% y/y over the inflation average 8.0% y/y notwithstanding the slowing in ‘spot’
next 10 years inflation helped by the retreat of food and housing price inflation.

Public Finances – I
Central Government Deficit Net Bank Credit To Government
7 India central government fiscal deficit, as a % of GDP
FY11RE
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
Source: BNP Paribas, Ministry of Finance Source: BNP Paribas, Reuters EcoWin Pro
The Indian central government had seen its fiscal deficit steadily The increasing loss of the government’s fiscal discipline since the
improving before the outbreak of the global financial crisis. global financial crisis is evident in net bank credit to the
Having spurt to a decade high of 6.4% of GDP in FY2010, the government sector, which has reverted to its strong upward trend
ratio is estimated to have ticked back down 5.1% in FY2011. in place through 1990-2002.
Central Government Revenues & Expenditure Central Government Non-Tax Revenue Receipts
18 India central government budget, as a % of GDP 250000 India central government non-tax revenue receipts 3.5
17 % of GDP (RHS) 3G and BWA 3.0

Expenditure auction proceeds
200000
16
2.5
15
150000
14 2.0
13 1.5
100000
12 Revenue INR crore
1.0
11
50000
0.5
10
9 0 0.0
FY11RE
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11RE
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
Source: BNP Paribas, Ministry of Finance Source: BNP Paribas, Ministry of Finance
The estimated decline in the deficit ratio in FY2011 was a result FY2011’s surge in the revenue share primarily reflects the 1.3%
of a strong revenue outturn, with the revenue share rising to of GDP one-off 3G and BWA auction proceeds, almost 0.8% of
10.4% of GDP from 9.3%. The decline in the expenditure share, GDP higher than initially projected by the government.
down from 15.6% of GDP to 15.4%, was limited.
Central Government Net Tax Revenue Receipts Central Government Disinvestment Proceeds
600000 India central government net tax revenue receipts 9 30000 India central government disinvestment proceeds, INR crores
500000 25000
% of GDP (RHS)
8
400000 20000 * Net of proceeds of INR34308.6 crore

from RBI for stake in State Bank of India
300000 7 15000
200000 10000
INR crore 6
100000 5000
0 5 0
FY11RE
FY11RE
FY02
FY03
FY04
FY05
FY06
FY07
FY09
FY10
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY08*
Net tax revenues receipts ticked higher to 7.2% relative to GDP The final component of revenues is capital receipts from
in FY2011 from 7.0%. However, they fell short of the budget disinvestment. At INR22744 crore, or 0.3% of GDP, in FY2011,
estimate of 7.6% of GDP and remain some way below their pre- disinvestment proceeds fell short of the government’s projection
crisis peak of 8.8% of GDP seen in FY2008. of INR40000 crore, or 0.6% of GDP, back in its FY2011 budget.

Public Finances – II
Central Government Expenditure Central Government Non-Plan Expenditure
14 India central government expenditure, as a % of GDP 6 India central government non-plan expenditure, as a % of GDP
12 5
Non-plan expenditure Interest payments
10 4
8 3
Defence
6 2
Plan expenditure Subsidies
4 1
Pensions
Police
2 0
FY11RE
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11RE
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
The minimal decline in the overall expenditure share in FY2011 Non-plan expenditure, in contrast, fell to 10.4% of GDP in
masked the fact that plan expenditure actually picked up to 5.0% FY2011 from 11.0%, with the decline evident across the board,
of GDP from 4.6% FY2010, in part reflecting higher social/rural thanks to strong nominal GDP growth. In cash terms, however,
allocations such as infrastructure and education spending. most categories witnessed yet another year of strong increases.
Central Government Primary Deficit Central Government Deficit – FY2012BE

240000 India central government primary deficit 4 7 India central government fiscal deficit, as a % of GDP
INR crore
6
190000
3
5
140000
2
4
% of GDP (RHS)
90000
3
1
40000
2
0
-10000
1
-60000 -1 0
FY11RE
FY12BE
FY11RE
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
Initially entering the crisis with a primary surplus of 0.9% of GDP For FY2012, the Indian central government fiscal deficit relative
in FY2008, India has since seen its primary balance swing to GDP is budgeted to fall back further to a four-year low of 4.6%
sharply into deficit. The shortfall widened to a record high of from 5.1% in FY2011.
3.1% of GDP in FY2010 before narrowing to 2.0% in FY2011.
Revenue & Expenditure – FY2012BE Central Government Deficit – FY2012BE

18 India central government budget, as a % of GDP 450000 India central government fiscal deficit, INR crore
17 400000
Expenditure
16 350000
15 300000
14 250000
13 200000
12 Revenue 150000
11 100000
10 50000
9 0
FY11RE
FY12BE
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11RE
FY12BE
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
Source: BNP Paribas, Ministry of Finance Source: BNP Paribas, India Ministry of Finance
The decline in the fiscal deficit ratio in FY2012, however, is likely While the deficit ratio is budgeted to fall by 0.5pp in FY2012, the
to be largely expenditure driven, as its share is projected to fall to cash deficit is actually likely to risie by 2.9% y/y after falling by
14.0% of GDP from 15.4% in FY2011. The revenue share is also 4.2% y/y in FY2011.
expected to decline but to a lesser extent, to 9.4% of GDP.

Public Finances – III
Expenditure On Subsidies – FY2012BE Non-Plan Expenditure – FY2012BE
2.5 India central government non-plan expenditure - subsidies, % of GDP 100 India central government non-plan expenditure, % y/y
80
2.0
Subsidies
60
1.5 Fertiliser
Total
40
1.0 Total
Food
20
Total ex-subsidies
0.5
0
Petroleum
0.0 -20
FY11RE
FY12BE
FY11RE
FY12BE
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
The budgeted decline in the expenditure share looks unduly The rest of non-plan expenditure is also only assumed to grow by
optimistic, however. Expenditure on subsidies is deemed to fall just 2.3% in cash terms, which looks equally optimistic given
by a record 12.5%, or 0.5% of GDP, in FY2012 at a time when average cash growth of 16.7% in the preceding four years
commodity, and particularly oil, prices are surging.
Disinvestment Proceeds – FY2012BE Budget Forecast Dynamics

0.7 India central government disinvestment proceeds, INR crores 1.5 India Budget Forecast Dynamics, % of GDP
Deficit Reducing　　　Deficit Increasing
0.6 1.0
* Net of proceeds of INR34308.6 crore

0.5 0.5
from RBI for stake in State Bank of India
0.4 0.0
0.3 -0.5
0.2
-1.0
0.1
-1.5
Revenue
o/w Subsidies
Expenditure
Expenditure
Tax Revenue
Recovery of
Fiscal Deficit
Disinvestment
Non-Tax
Non-Plan
Recepits
Loans
Plan
0.0
FY11RE
FY12BE
FY02
FY03
FY04
FY05
FY06
FY07
FY09
FY10
FY08*
Disinvestment proceeds are once again budgeted at a strong With the one-off proceeds from 3G and BWA auctions
INR40000 crore, or 0.4% of GDP, in FY2012. However, at INR necessarily disappearing, it is the overly optimistic assumptions
22744 crore in FY2011, they fell short of the government’s on subsidies the key to the deficit reduction in FY2012.
projection of INR40000 crore in its FY2011 budget.
Central Government Fiscal Outlook Change In Central Government Fiscal Deficit – I

1 India central government fiscal deficit, as a % of GDP 0.50 1-year change in fiscal deficit, as a % of GDP
0 0.25
0.00
-1
-0.25
-2
-0.50
-3
-0.75
(3.5%)
-4
-1.00
(4.1%)
-5 (4.6%)
-1.25
(5.1%)
-6 -1.50
2010-2011 Revised 2011-2012 Budget 2012-2013 Target 2013-2014 Target 2010-2011 Revised 2011-2012 Budget 2012-2013 Target 2013-2014 Target
Estimates Estimates set in 2011-2012 set in 2011-2012 Estimates Estimates set in 2011-2012 set in 2011-2012
Union Budget Union Budget Union Budget Union Budget
Over the medium term, the Indian central government now pegs The medium-term fiscal assumptions imply that the central
its fiscal deficit ratio at 4.1% of GDP and 3.5% in FY2013 and government’s fiscal position relative to GDP is expected to
FY2014, respectively. improve by another 0.5pp in FY2013, followed by a further 0.6pp
improvement in FY2014.

Public Finances – IV
Change In Central Government Fiscal Deficit – II Structural Primary Balance – I
2 General government cyclically adjusted primary balance, % of potential GDP
0.50 1-year change in fiscal deficit, as a % of GDP
1 Asia ex-Japan & India

0.25 Due to fiscal consolidation
0
0.00
-1
-0.25
G-7
-2
-0.50
G-20
-3
-0.75
-4 India
-1.00 Total Due to nominal GDP growth
-5
-1.25
-6
-1.50
2010-2011 Revised 2011-2012 Budget 2012-2013 Target 2013-2014 Target
Estimates Estimates set in 2011-2012 set in 2011-2012 -7
2006 2007 2008 2009 2010 2011F 2012F 2013F 2014F 2015F 2016F
Union Budget Union Budget
Source: BNP Paribas, Ministry of Finance Source: BNP Paribas, IMF Fiscal Monitor, April 2011
The projected decrease in the deficit ratio in the next two fiscal According to the IMF’s structural primary balance estimates,
years, nonetheless, is solely driven by strong nominal GDP India loosened fiscal policy aggressively in response to the global
growth. Only in FY2014 will there be an appreciable decline in its financial crisis. The bulk of this deterioration is expected to
cash deficit in absolute terms. persist until 2016.
Structural Primary Balance – II Change In Structural Primary Balance, 2010-2014

12 Cyclically-adjusted primary balance, % of potential GDP 3.0 Change in general government cyclically adjusted primary balance,
2010–2014, % of potential GDP
10 2.5
8 2007
2010 2.0
6 2014F
1.5
4
1.0
2
0.5
0
0.0
-2
-4 -0.5
-6 -1.0
Hong Kong
Thailand
Asia ex-Japan,
Philippines
China
India
Malaysia
S. Korea
Singapore
Indonesia
Malaysia
S. Korea
Singapore
Hong Kong
China
Indonesia
Thailand
India
Philippines
Asia ex-Japan,
ex-India
ex-India
Source: BNP Paribas, IMF Fiscal Monitor, April 2011 Source: BNP Paribas, IMF Fiscal Monitor, April 2011
By 2014, most Asian countries will see a cyclically adjusted On IMF figures, India is on course to see a modest fiscal
primary surplus. India, with Malaysia, are the two main tightening of around 1.5 percentage points of GDP over the next
exceptions, with the IMF forecasting a cyclically adjusted primary four years.
deficit of close to 4% of potential GDP for India.
General Government Debt – I General Government Debt – II

80.0 India general government gross debt, as a % of GDP 120 General government gross debt, as a % of GDP
110
77.5
100
75.0 90
80
2011F
72.5
70
60
70.0
50
67.5 40 2010
30
65.0
20
62.5 10
0
60.0 G-7 Advanced G-20 Emerging G-20 India Asia ex-Japan
2006 2007 2008 2009 2010 2011F 2012F 2013F 2014F 2015F 2016F ex-India
Source: BNP Paribas, IMF Fiscal Monitor, April 2011 Source: BNP Paribas, IMF Fiscal Monitor, April 2011
The IMF expects India’s gross general government debt level to At over 7.0% of GDP at present, India’s gross public debt is
continue falling but will remain above 60% of GDP by the end of easily amongst the highest in Asia as well as emerging
2016. economies. However, its position nonetheless remains
favourable when compared to that of the ‘developed’ world.

Money, Credit and Liquidity – I
Bank Credit To Commercial Sector / GDP Commercial Bank Credit
Bank credit to the commercial sector jumped by almost 20% of However, after bottoming out in late 2009, growth in bank credit
nominal GDP since 2004 to stand close to 60% of GDP by end- to the commercial sector has recovered strongly. It is now close
2009 before the global financial crisis left the ratio lower as bank to levels seen prior to the crisis despite some moderation since
credit growth slowed. the turn of the year.
Commercial Bank Credit – Non-food Credit Growth vs. Deposit Growth
Commercial bank non-food credit growth has picked up neatly Growth in commercial bank deposit, while still lagging behind that
since early 2010. In level terms, it is now running well above its in bank credit, has started to creep higher in response to
pre-crisis trend, having undershot it briefly in 2009 H2 and early increases in deposit rates.
2010.
Credit To Deposit Ratio Net Repo Balance

200000 India net repo position, INR crore
150000
100000
50000
-50000
-100000
-150000
-200000
Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr
08　　　　　　　　　09　　　　　　　　　10　　　　　11
Source: BNP Paribas, Reuters EcoWin Pro Source: BNP Paribas, CEIC
However, reflecting strong bank credit growth not matched by The net repo balance reveals that the banking system has been
commensurate bank deposit growth, the bank-credit deposit rate running a smaller deficit of c.INR0.7 trn daily in the year to date
has continued to pick up from the crisis-induced low. At c.75%, it against the deficit of c.INR1 trn seen through much of 2010Q4.
is now in line with its pre-crisis highs.

Money, Credit and Liquidity – II
Liquidity Adjustment Facility (LAF) Corridor New Operating Procedure Of Monetary Policy
– The repo rate will be the key monetary policy signalling

rate.
– The revised LAF corridor will have a fixed width of 200bp,
with the repo rate in the middle.
– The floor will be the reverse repo rate, fixed at 100bp
below the repo rate.
– The ceiling wll be the Marginal Standing Facility (MSF)
rate, fixed at 100bp above the repo rate.
– The weighted average O/N call money rate will be the
operating target of monetary policy
Source: BNP Paribas, Reuters EcoWin Pro Source: RBI
A shift from absorption mode to injection mode in the liquidity In its Annual Policy Review for 2011-12, the RBI decided to
adjustment facility (LAF), accordingly, implies a cumulative adopt a new operating practice for monetary policy. The repo
increase of 400bp in effective policy rates since March 2010. rate is now formally the key policy signalling rate, with the revised
LAF corridor having a fixed width of 200bp.
Reserve Money vs. Cash Reserve Ratio (CRR) Broad Money Supply
30 India money supply, % y/y
25
M3
20
15
10 M1
5
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Growth in reserve money has moved in tandem with changes in Growth of broadly money supply M3 in y/y terms since early
the CRR. Reflecting the cumulative 100bp increase in the CRR, 2010 has generally been below the RBI’s target of 17% until very
reserve money growth had picked up strongly through much of recently. M1 growth, meanwhile, has tumbled to close to the low
2010 before falling back somewhat in early 2010. end of its historical range.
Money Supply By Component Money Supply By Source
The majority of the recent acceleration in M3 growth and slump By source, the main driver of the pick-up in M3 growth has been
in M1 growth reflects a shift from low interest bearing demand bank credit to the commercial sector. Growth of net foreign
deposits to more lucrative time deposits as a result of a sharp exchange assets (NFEA) of the banking sector has also
increase in deposit rates. continued to recover from the weakness seen during early 2010.

Financial Market Developments – I
Corporate Paper Outstanding Net Corporate Profit Margin
12.5 India corporate profit after tax to sales, %
11.0
9.5
8.0
6.5
5.0
04 05 06 07 08 09 10
Issuance of commercial paper, after falling from the final months Indian corporate profits relative to sales, after staging a recovery
of 2010 to early 2011, has picked back up recently. in 2009, have fallen back in recent quarters. At 8.3% of sales in
the final three months of 2010, corporate profits remain some
way below their pre-crisis highs.
Interest Payments To Gross Profit Ratio SBI Deposit Rates vs. Repo Rate
35 India corporate interest payments to gross profits, % 15.0 per cent
30 13.5
25 12.0
20 10.5 SBI 1-year deposit rate
15 9.0
10
Repo rate
7.5
5 6.0
0 4.5
04 05 06 07 08 09 10 00 01 02 03 04 05 06 07 08 09 10 11
Source: BNP Paribas, CEIC Source: BNP Paribas, Bloomberg
Interest expenses began to creep higher in early 2010, to stand Transmission of monetary policy is increasingly evident as banks
at 20.6% of corporate net profits in Q4 2010. This reflects the have started to raise deposit rates to accommodate strong credit
RBI’s continued efforts to tighten monetary policy. growth.
Real Policy Rates Onshore INR IRS – I

1.5 Onshore INR IRS spreads, %
1.0
0.5
0.0
-0.5 1yr spot less 1yr-1yr forward
-1.0
-1.5
-2.0
1yr spot less 1yr-2yr forward
-2.5
-3.0
08 09 10 11
Source: BNP Paribas, Reuters EcoWin Pro Source: BNP Paribas, Bloomberg
However, adjusted for underlying inflation, real interest rates Continued inflation fears in India combined with little hard
remain barely positive. The pressure, therefore, remains on the evidence of any genuine economic slowdown means markets are
RBI to continue to raise interest rates. still pricing in considerable tightening over the next year although
expectations of rates cuts further out are getting built in.

Financial Market Developments – II
Onshore INR IRS – II Repo Rate vs. 2-year Government Bond Yields
1.75 Onshore INR IRS – 5-yr less 2-yr, %
1.50
1.25
1.00
0.75
0.50
0.25
0.00
-0.25
-0.50
04 05 06 07 08 09 10 11
Source: BNP Paribas, Bloomberg Source: BNP Paribas, Reuters EcoWin Pro
Curve flattening in India is progressing with the 5yr-2yr spread The Indian curve is ‘bear flattening’ as short terms rates continue
now just c.3bp. 10yr-2yr spread has also flattened to just 6bp. to march higher. At c.100bp, the spread of 2-year government
However, until harder evidence of slow growth materialises, the yields over the repo rate remains unusually wide by historical
bear flattening may continue. standards.
Net Equity Investment By FIIs Stock Markets Turnover

30000 India net equity investment by FIIs, INR crore 35 India BSE & NSE turnover, INR trillion
25000
30
20000
3mma Derivatives
15000 25
10000
20
5000
15
0
-5000 Cash
10
-10000
5
-15000
-20000 0
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 02 03 04 05 06 07 08 09 10 11
The decline in equity prices is largely attributable to a slowdown The increased stock market volatility seen of late reflects
in net equity investment by foreign institutional investors (FIIs). substantial increases in the activity in the derivatives segment
After bottoming out around the turn of the year, however, there which now accounts for almost 90% of overall turnover values.
are signs of a return of money inflows to Indian equity markets.
SENSEX Price To Earnings Ratio SENSEX Price To Book Value Ratio

60 India SENSEX P/E ratio 11 India SENSEX P/B ratio
55 10
50 9
45
8
40
7
35
+1 St. Dev 6
30 +1 St. Dev
5
25
Mean Mean
4
20
15 3
-1 St. Dev 2 -1 St. Dev

10
5 1
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
The recent correction to Indian equities has seen the SENSEX’s The SENSEX’s P/B ratio has similarly fallen back, to around 3.4x
P/E fall back below its long-run average levels to stand at 19x at present, against its long-run average levels of just below 3.8x.
currently, having risen to over 24x in October 2010.

Financial Market Developments – III
MSCI – India vs. Asia ex-Japan INR vs. USD
Indian equities have given up most of their gains made through After bottoming out in early 2009, the INR has since continued to
much of the post May 2009 election period when they appreciate against the USD to now stand close to levels seen
outperformed most of their regional peers. immediately prior to the outbreak of the global financial crisis.
Effective INR Exchange Rate Gold Reserves
The post-crisis strength in the INR and the still-wide inflation In an effort to hedge against the USD weakness, the RBI in early
differentials between India and its major trading partners have November 2009 bought 200 metric tonnes of gold from the IMF
left the INR’s effective exchange rate in real terms elevated by for USD 6.7bn and has since continued to accumulate its gold
historical standards. reserves to now reach a record 7.7% of total reserves holdings.
Financial & Monetary Conditions Index (FMCI) FMCI vs. Industrial Production
Our bespoke financial and monetary conditions index (FMCI) The tightening in financial conditions seen of late is in line with
began to tighten in early 2010 and has turned positive since last the moderation in the y/y growth rate of industrial activity,
October. At 0.2 at present, it suggests overall financial conditions suggesting increasingly restrictive financial and monetary
in India are now mildly restrictive by historical standards. conditions are feeding through the real economy.

Population and Demographics – I
Population – I Population – II
The CSO estimates that India’s population reached 1.186 billion The growth rate of India’s population has, however, clearly
in 2010, up from 1.019 billion in 2000, 839 million in 1990 and slowed. Averaging around 2¼% through the 1960s and 1970s,
679 million in 1980. Back in 1950, India’s population was a little population growth eased to around 1¾% in the 1990s, dwindling
below 360 million. further this decade. 2010 saw record low growth of just 1.4%.
Population Projections Birth & Death Rates
Despite much more sluggish growth, India’s population should The key driver of India’s slower rate of population growth has
nonetheless continue to climb. The US Census Bureau projects been a steady decline in the birth rate, from just over 30 births
that India’s population should reach almost 1.45 billion by 2025 per 1000 in 1990 to around 22½ by 2008. The death rate has
and over 1.80 billion by 2050. flattened out around 7½ per 1000.
Life Expectancy Global Working-Age Population, 2010

25 Working age population, as a % of world total, 2010
20
15
10
0
US
China
India
Europe
Indonesia
Japan
Others
Africa
Latin America
South East
Western Asia
Asia
Source: BNP Paribas, Reuters EcoWin Pro Source: BNP Paribas, United Nations
Life expectancy climbed steadily in the past two decades, rising At around 781 million at present as per the United Nations’
from around 57 years in 1987 to around 64 by 2009. Notably estimates, India’s working-age population currently accounts for
female life expectancy, which until the mid-1980s ran below that around 17% of the world’s total of 4524 million, following China’s
of males, exceeds male life expectancy by almost three years. share of 21.5%.

Population and Demographics – II
Dependency Ratios – I Dependency Ratios – II
105 Dependents relative to working age population
95
United Nations estimates

85
75 India
65
China
55
45
Japan
35
60 65 70 75 80 85 90 95 00 05 10 15 20 25 30 35 40 45 50
Source: BNP Paribas, United Nations Source: BNP Paribas, United Nations
In the 1960s and much of the 1970s, China and India had similar India’s demographic position is highly favourable with the secular
demographics with dependency ratios, i.e. ratios of elderly and decline in the dependency ratio set to accelerate in the coming
children to working age population, at c.80%. China’s ratio began years. By contrast, China is rapidly approaching its demographic
to plummet much faster than India from late 1970s onwards. inflexion point where the dependency ratio begins to climb.
Median Age Of Population Global Working-Age Population, 2020 over 2010

35 % contribution to addition to working age population in 2020 over 2010
Median Age Of Population
30
2005 2010E 2015E 2020E
India 23.7 25.0 26.5 28.1 25
Indonesia 26.5 28.2 30.1 32.0 20
Brazil 27.0 29.0 31.3 33.6 15
China 32.1 34.2 35.6 37.1 10
USA 36.0 36.6 37.2 37.9 5
Russia 37.3 38.1 38.9 40.0 0
UK 38.9 39.9 40.3 40.4 -5
US
India
China
Indonesia
Japan
Europe
Africa
Latin America
South East
Western Asia
Western Europe 40.5 42.2 43.8 44.9

Asia
Japan 43.1 44.7 46.6 48.6
Source: BNP Paribas, United Nations Source: BNP Paribas, United Nations
The increasingly divergent trends in ‘Chindia’s’ dependency ratio In turn, India will increasingly emerge as the key marginal
will inevitably be reflected in the average ages of population. supplier of labour in the global economy. The United Nations
According to United Nations’ projections, China’s median age will projects that India will account for over 1/4 of the 515 million
tick up to 37.1 by 2020, compared to India’s 28.1. increase in global working-age population over the next 10 years.
Tertiary Education Enrolment Urban Population
Source: BNP Paribas, World Bank Source: BNP Paribas, United Nations, World Bank
While still lagging those in China, trends in education in India China’s much faster pace of urbanisation relative to India’s
have improved over the past few years, which clearly help create reflects its lead in terms of growth so far but as per the United
the platform of productive employment for the rapidly rising Nations’ estimates India is well placed to narrow the gap with
working-age population. China in terms of the share of urban population.

Appendix
Economic and Financial Forecasts
Fiscal Year 2010 2011 2012
(1 ) (1 ) (1 ) (1 ) (1) (1) (1 ) (1 ) (1)
’09 ’10 ’11 ’12 ’13 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Com ponents of G rowth
G DP 6.9 8.0 8.5 7.6 7.3 9.4 9.3 8.9 8.3 7.8 8.0 6.5 8.4 7.4 6.9 6.9 7.3
Agriculture & Allied Activities 1.9 1.3 6.5 4.7 4.7 2.2 3.0 5.8 9.6 6.6 6.4 4.8 3.6 4.6 4.5 4.6 4.7
- Agriculture & Forestry & Fishing 2.2 0.4 6.6 5.2 4.7 1.1 2.4 5.4 9.9 7.5 7.2 5.5 3.8 4.7 4.5 4.7 4.7
- Mining & Q uarrying 0.0 6.9 5.8 2.1 4.6 8.9 7.1 8.2 6.9 1.7 1.3 0.7 1.9 4.3 4.4 4.4 4.6
Industry 4.8 8.1 8.1 8.7 7.0 12.7 10.5 8.4 7.2 6.5 9.0 9.6 9.3 7.1 6.3 6.3 7.1
- Manufacturing 4.2 8.8 8.3 7.8 6.5 15.2 12.7 10.0 6.0 5.5 8.2 8.1 8.4 6.5 5.7 5.8 6.9
- Electricity, G as & W ater Supply 5.8 6.4 5.7 8.0 5.8 7.3 5.6 2.8 6.4 7.8 8.6 9.8 8.5 5.1 5.3 5.2 5.8
- Construction 5.8 7.0 8.1 10.8 8.2 9.2 7.7 6.7 9.7 8.2 10.7 12.8 11.2 8.8 7.7 7.6 7.8
Services 9.7 10.1 9.4 8.2 8.1 10.2 10.7 9.9 8.4 8.7 8.3 7.7 8.7 8.3 7.9 7.7 8.0
- T rade, Hotel, T ransport & Com m . 7.8 9.7 10.3 10.1 8.0 13.7 12.6 10.9 8.6 9.3 10.0 10.8 11.0 8.9 8.2 7.7 7.7
- FIRE & Business Service 10.9 9.2 9.9 7.4 8.5 6.3 9.8 10.0 10.8 9.0 8.0 7.0 6.8 7.9 7.5 7.8 8.7
- Com m unity, Social & Personal Ser. 11.8 11.8 7.0 5.4 7.8 8.3 8.2 7.9 5.1 7.0 5.2 2.6 6.3 7.5 7.5 7.6 7.9
Industrial Production 3.8 8.3 7.8 7.2 6.3 13.7 11.3 9.0 6.2 5.3 7.5 7.5 7.6 6.2 5.5 5.6 6.5
Private Consum ption 6.5 7.5 8.6 7.8 7.4 7.4 8.8 8.7 8.7 8.1 7.1 7.4 8.4 8.3 7.5 7.0 7.2
Public Consum ption 11.4 16.0 5.0 5.4 8.4 3.1 7.4 4.9 1.2 6.6 2.4 -0.7 8.0 12.5 9.5 7.6 8.2
Fixed Investm ent 2.7 7.0 9.0 7.9 7.7 18.9 17.8 11.9 8.0 0.1 4.9 8.7 9.2 8.8 7.9 7.3 7.1
Exports 15.2 -7.1 17.7 20.8 15.9 4.4 9.4 11.2 24.3 25.4 26.7 27.4 16.5 14.6 14.3 15.4 16.3
Im ports 22.4 -2.0 9.3 20.1 14.4 18.1 15.7 11.5 0.3 10.5 15.0 23.3 27.8 15.3 14.2 13.9 13.9
Net T rade (Cont. to Growth, y/y) -2.6 -1.1 1.0 -1.0 -0.5 -3.9 -2.3 -0.8 4.8 2.1 1.3 -0.6 -3.5 -1.0 -0.8 -0.5 -0.3
Mem o:
Non-Agriculture G DP 7.8 9.4 8.9 8.2 7.7 10.9 10.5 9.4 8.0 7.8 8.3 8.1 8.7 7.8 7.3 7.2 7.7
Nom inal GDP 12.5 17.7 20.2 16.0 13.5 28.5 22.5 20.2 20.6 18.2 17.8 18.1 16.0 12.7 13.6 13.2 13.5
Nom inal GDP (INR tn) 55.7 65.5 78.8 91.3 103.6 18.8 17.6 18.1 20.8 22.2 20.8 21.4 24.1 25.1 23.6 24.2 27.4
Calendar Year 2010 2011 2012

(1) (1 ) (1 ) (1 ) (1 ) (1) (1) (1 ) (1 ) (1)
’09 ’10 ’11 ’12 ’13 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
G DP 7.2 9.0 7.7 7.1 8.3 9.4 9.3 8.9 8.3 7.8 8.0 6.5 8.4 7.4 6.9 6.9 7.3
Mem o:
Non-Agriculture G DP 8.3 9.7 8.2 7.5 8.9 10.9 10.5 9.4 8.0 7.8 8.3 8.1 8.7 7.8 7.3 7.2 7.7

(1) (1 ) (1 ) (1 ) (1 ) (1) (1) (1 ) (1 ) (1)
’09 ’10 ’11 ’12 ’13 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Inflation
W PI 2.4 9.6 8.8 6.2 5.3 9.6 10.5 9.3 8.9 9.4 8.9 9.1 7.8 6.3 6.5 6.1 6.0
W PI (Food) 12.1 13.9 7.0 5.8 5.7 19.5 15.7 12.3 9.1 8.0 7.4 6.8 6.0 4.7 6.3 6.5 5.9
W PI (ex. Food & Energy) 0.2 7.0 8.1 6.2 5.7 5.1 7.3 7.1 8.3 9.3 8.0 8.5 6.9 5.3 6.4 6.6 6.3
CPI - Industrial W orkers 10.9 12.0 7.9 5.8 5.8 15.3 13.7 10.3 9.2 9.0 9.0 7.4 6.5 5.1 5.9 6.2 5.9

(1) (1 ) (1 )
’09 ’10 ’11 ’12 ’13 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
External Trade
T rade Balance (USD bn) -107.0 -133.7 -162.9 -194.0 -222.2 - - - - - - - - - - - -
Current Account (USD bn) -25.9 -51.8 -57.4 -59.2 -60.7 - - - - - - - - - - - -
Current Account (% of GDP) -2.0 -3.1 -2.9 -2.6 -2.3 - - - - - - - - - - - -
Fiscal Year 2010 2011 2012

(1 ) (1 )
’09 ’10 ’11 ’12 ’13 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Financial Variables
Cen. G ov. Budget (INR tn) 3.4 4.2 4.0 4.6 4.7 - - - - - - - - - - - -
Cen. G ov. Budget (% of GDP) -6.1 -6.4 -5.1 -5.0 -4.5 - - - - - - - - - - - -
(2 )
G ross Cen. G ov. Debt (% G DP) 56.3 53.4 50.5 49.2 48.8 - - - - - - - - - - - -

(1) (1 ) (1 ) (1 ) (1 ) (1) (1) (1 ) (1 ) (1)
’09 ’10 ’11 ’12 ’13 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
(2)
Interest and FX Rates
Repo Rate (% ) 4.75 6.25 8.25 7.50 7.00 5.00 5.25 6.00 6.25 6.75 7.50 8.00 8.25 8.25 8.25 7.75 7.50
3-Month Rate (% ) 4.18 8.60 9.00 8.00 7.50 5.00 6.00 7.10 8.60 9.85 9.50 9.00 9.00 9.50 9.00 8.25 8.00
USD/INR 46.53 44.70 45.00 43.00 42.00 44.92 46.45 44.95 44.70 44.60 46.00 45.50 45.00 44.50 44.00 43.50 43.00
Footnotes: (1) Forecast (2) At factor cost (3) End period.
Figures are year on year percentage changes unless otherwise indicated
Source: BNP Paribas

The Balance of Payments (USD bn)
1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10
Gross international reserves 33.2 38.7 42.9 54.7 76.1 113.0 141.5 151.6 199.2 309.7 252.0 279.1
% of GDP 8.0 8.6 9.3 11.5 15.0 18.7 19.6 18.1 20.9 25.0 21.0 20.0
Change in international reserves 3.5 5.5 4.2 11.8 21.4 36.9 28.6 10.1 47.6 110.5 -57.7 27.1
1 Current account balance -4.0 -4.7 -2.7 3.4 6.3 14.1 -2.5 -9.9 -9.6 -15.7 -27.9 -38.4
% of GDP -1.0 -1.0 -0.6 0.7 1.2 2.3 -0.3 -1.2 -1.0 -1.3 -2.3 -2.8
Merchandise trade balance -13.2 -17.8 -12.5 -11.6 -10.7 -13.7 -33.7 -51.9 -61.8 -91.5 -119.5 -118.4
% of GDP -3.2 -4.0 -2.7 -2.4 -2.1 -2.3 -4.7 -6.2 -6.5 -7.4 -9.9 -8.5
2 Capital account balance 8.4 10.4 8.8 8.6 10.8 16.7 28.0 25.5 45.2 106.6 6.8 53.4
FDI, net 2.5 2.2 3.3 4.7 3.2 2.4 3.7 3.0 7.7 15.9 19.8 18.8
Portfolio flows, net -0.1 3.0 2.6 2.0 0.9 11.4 9.3 12.5 7.1 27.4 -14.0 32.4
3 Errors and omissions, net -0.2 0.7 -0.3 -0.2 -0.2 0.6 0.6 -0.5 1.0 1.3 1.1 -1.6
4 Valuation change -0.7 -0.9 -1.7 0.1 4.4 5.4 2.4 -4.9 11.0 18.4 -37.7 13.6
Memo:
Non-FDI capital account balance
(including errors and omissions) 5.8 8.9 5.3 3.6 7.4 15.0 24.9 21.9 38.5 92.0 -12.0 33.1
GDP At Current Market Prices 415.7 450.3 459.3 477.3 508.9 603.6 723.8 838.1 953.1 1239.2 1202.7 1393.9
Footnotes: The non-FDI capital account balance is the capital account balance minus net FDI plus net errors and omissions
Source: BNP Paribas, CEIC
Capital Account – Gross Inflows

Total FDI Portfolio Loans Other
USD bn % of GDP % of Total
1996/97 36.2 9.3 7.9 13.7 49.0 29.4
1997/98 39.3 9.6 9.4 14.2 44.0 32.4
1998/99 34.2 8.2 7.8 9.4 43.2 39.5
1999/00 40.5 9.0 5.6 24.6 32.2 37.6
2000/01 54.1 11.8 7.6 25.2 44.0 23.3
2001/02 43.3 9.1 14.4 21.4 26.8 37.4
2002/03 46.4 9.1 11.1 19.0 24.9 44.9
2003/04 75.9 12.6 5.9 37.2 25.9 31.0
2004/05 98.5 13.6 6.2 41.5 30.7 21.6
2005/06 144.4 17.3 6.4 47.2 27.3 19.1
2006/07 233.3 24.5 10.1 47.0 23.4 19.5
2007/08 438.4 35.2 8.5 53.3 18.8 19.4
2008/09 313.6 25.8 12.4 41.0 19.8 26.7
2009/10 345.7 24.9 11.1 46.3 21.4 21.1
Capital Account – Gross Outflows

Total FDI Portfolio Loans Other
USD bn % of GDP % of Total
1996/97 24.2 6.2 0.8 6.8 53.4 39.0
1997/98 29.4 7.2 0.5 12.7 42.5 44.4
1998/99 25.7 6.2 1.0 12.8 40.2 46.0
1999/00 30.1 6.7 0.6 23.0 38.1 38.2
2000/01 45.3 9.9 1.8 24.4 40.9 32.9
2001/02 34.7 7.3 4.3 21.1 37.1 37.6
2002/03 35.5 7.0 5.5 22.2 43.4 28.9
2003/04 59.1 9.9 3.5 28.5 40.6 27.4
2004/05 70.5 9.7 3.4 44.8 27.5 24.4
2005/06 118.9 14.2 5.2 46.8 26.6 21.5
2006/07 188.1 19.7 8.5 54.5 16.0 21.0
2007/08 331.8 26.7 6.5 62.2 12.5 18.8
2008/09 306.9 25.2 6.2 46.5 17.6 29.7
2009/10 292.3 21.1 6.8 43.7 20.8 28.7

Monetary Aggregates (12-month change, INR bn)
2010 2011
Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Nov
M3 (1+2+3 = 4+5+6+7-8) 7345 7339 7273 7834 7808 7704 8912 8597 9966 8840 9063 8890
Components
1 Currency with the Public 1116 1303 1421 1386 1442 1330 1278 1482 1304 1460 1503 1467
2 Aggregate Deposits with Banks 6289 6046 5917 6446 6380 6374 7634 7127 8677 7290 7560 7424
2.1 Demand Deposits with Banks 914 757 886 1041 786 723 1308 1294 1339 350 397 -42
2.2 Time Deposits with Banks 5375 5288 5031 5405 5594 5651 6326 5834 7337 6940 7163 7467
3 'Other' Deposits with Banks -61 -9 -65 2 -14 0 0 -12 -15 90 -1 -1
Sources
4 Net Bank Credit to Government 3606 3637 3160 3319 3306 2914 3260 3179 2898 2709 2564 3032
4.1 RBI's Net Credit to Government 1386 1552 1769 1948 1975 1713 1619 1872 1770 1791 1483 1839
4.1.1 RBI's Net Credit to the Centre 1388 1552 1771 1948 1972 1715 1604 1868 1771 1791 1463 1825
4.2 Others Banks' Credit to Government 2220 2085 1390 1371 1332 1202 1641 1308 1128 918 1080 1194
5 Bank Credit to Commercial Sector 4770 5034 5538 5877 5645 5695 6331 6991 8648 7291 7389 7191
6 NFEA of Bank Sector -651 3 -258 -200 -366 12 10 275 76 640 792 943
6.1 NFA of the RBI -426 228 -168 -110 -276 -135 -138 128 35 599 751 966
7 Government's Currency Liabilities to the Public 13 13 13 13 14 14 14 15 15 14 14 13
8 Net Non-Monetary Liabilities of the Banking Sector 393 1347 1180 1174 792 932 703 1864 1839 1814 1696 2289
Memo:
M3 (% y/y) 15.0 14.8 14.7 15.5 15.4 15.0 17.2 16.4 19.1 16.5 16.6 15.9
Union Budget Highlights (INR crore)

2010/11 2010/11 2011/12
2009/10 Budget Revised Budget 2011/12 BE over
Actuals Estimates Estimates Estimates 20010/11 RE (%)
1 Revenue Receipts 572811 682212 783833 789892 0.8
2 Tax Revenue (net to Centre) 456536 534094 563685 664457 17.9
3 Non-tax Revenue 116275 148118 220148 125435 -43.0
4 Capital Receipts (5+6+7) 451676 426537 432743 467837 8.1
5 Recoveries of Loans 8613 5129 9001 15020 66.9
6 Other Receipts 24581 40000 22744 40000 75.9
7 Borrowings and other Liabilities 418482 381408 400998 412817 2.9
8 Total Receipts (1+4) 1024487 1108749 1216576 1257729 3.4
9 Non-plan Expenditure 721096 735657 821552 816182 -0.7
10 On Revenue Account of which, 657925 643599 726749 733558 0.9
11 Interest Payments 213093 248664 240757 267986 11.3

12 On Capital Account 63171 92508 94803 82624 -12.8
13 Plan Expenditure 303391 373092 395024 441547 11.8
14 On Revenue Account 253884 315125 326928 363604 11.2
15 On Capital Account 49507 57967 68096 77943 14.5
16 Total Expenditure (9+13) 1024487 1108749 1216576 1257729 3.4
17 Revenue Expenditure (10+14) 911809 958724 1053677 1097162 4.1
18 of which, Grants for Creation of Capital Assets 31317 90792 146853 61.7
19 Capital Expenditure (12+15) 112678 150025 162899 160567 -1.4
20 Revenue Deficit (17-1) 338998 276512 269844 307270 13.9
(% of GDP) 5.2 4.0 3.4 3.4 0.0
21 Fiscal Deficit {16-(1+5+6)} 418482 381408 400998 412817 2.9
(% of GDP) 6.4 5.5 5.1 4.6 -0.5
22 Primary Deficit (21-11) 205389 132744 160241 144831 -9.6
(% of GDP) 3.1 1.9 2.0 1.6 -0.4
Memo:
GDP At Current Market Prices 6550271 6934700 7877947 8980860 14.0
Source: Ministry of Finance

Balance Sheet of Indian Scheduled Commercial Banks – Business in India (INR bn)
2010 2011
Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar
Liabilities (1+2+3+4+5) 51206 51250 51091 52434 52231 52616 55503 53501 55431 55403 56490 57921
1 Liabilities with Banking System 909 925 970 1004 951 976 1014 913 1063 989 1043 1084
2 Deposits 45592 45718 45612 46747 46741 47113 49670 47944 49858 49874 50880 52047
3 Borrowings, other than RBI, IDBI, NABARD, IEB 1278 1317 1208 1288 1290 1200 1080 1359 1169 1235 1236 1317
4 Other Demand and Time Liabilities 3428 3290 3277 3374 3241 3305 3683 3239 3292 3261 3298 3424
5 Borrowings from Reserve Bank 0 0 23 20 9 23 56 46 50 44 34 50
Assets (6+7+8+9+10) 51154 51390 52225 52878 52751 53417 54883 54897 56900 56595 57779 59360
6 Cash in Hand 284 281 283 290 291 301 311 311 335 321 312 302
7 Balance with Reserve Bank 3118 3103 3076 3003 2968 2918 3492 3109 3129 2906 3160 3192
8 Assets with Banking System 1145 1136 1244 1239 1174 1205 1266 1128 1298 1162 1311 1480
9 Investment 14261 14399 14080 14546 14779 14742 14548 14666 14485 14829 14867 15000
9.1 Government Securities 14199 14337 14018 14489 14723 14688 14498 14618 14438 14786 14823 14955
9.2 Other Securities 62 62 62 57 55 54 50 48 47 43 44 46
10 Bank Credits 32346 32471 33542 33800 33540 34252 35267 35684 37654 37377 38130 39387
10.1 Food Credits 543 506 537 514 473 502 507 591 659 612 653 643
10.2 Non Food Credits 31803 31965 33005 33286 33067 33750 34760 35093 36994 36765 37477 38744
India: Upcoming Key Economic Release Dates

Date Country Event Reference Period
June 2011
10 India Industrial Production April 2011
14 India Manpower Survey Q3 2011
14 India Monthly WPI May 2011
16 India RBI Mid-Quarter Policy Review –
July 2011
1 India Merchandise Trade May 2011
12 India Industrial Production May 2011
14 India Monthly WPI June 2011
26 India RBI First Quarter Policy Review –
August 2011
1 India Merchandise Trade June 2011
12 India Industrial Production June 2011
15 India Monthly WPI July 2011
30 India GDP Q2 2011
September 2011
1 India Merchandise Trade July 2011
12 India Industrial Production July 2011
14 India Monthly WPI August 2011
October 2011
3 India Merchandise Trade August 2011
12 India Industrial Production August 2011
14 India Monthly WPI September 2011
November 2011
1 India Merchandise Trade September 2011
11 India Industrial Production September 2011
14 India Monthly WPI October 2011
30 India GDP Q3 2011
December 2011
1 India Merchandise Trade October 2011
12 India Industrial Production October 2011
14 India Monthly WPI November 2011
Source: Bloomberg, Ministry of Finance, RBI. Releases dates as of 3 June 2011

NOTES

NOTES

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Eye On The Tiger: India Economics

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India Economics

Eye On The Tiger

Eye on the Tiger ........................................................................................................3-9

GDP Developments 12-14

Industrial Trends 16-18

Services Sector Indicators 19

OECD Leading Economic Indicator (LEI) 21

Trade Trends 22-24

Current and Capital Accounts 25-27

Public Finances 34-37

Money, Credit and Liquidity 38-39

Financial Market Developments 40-42

Population and Demographics 43-44

The Balance of Payments 46

Capital Account – Gross Inflows & Outflows 46

Union Budget Highlights 47

Balance Sheet of Indian Scheduled Commercial Banks 48

Upcoming Key Economic Release Dates 48

Richard Iley / Mole Hau June 2011

too long has seen the economy move decisively 30

into overheating territory and inflation problems 25

 A sustained period of below-trend, sub-8%

although the risks to both inflation and policy 5

Richard Iley June 2011

months, driving serial upward surprises to headline 4

WPI despite a welcome albeit partial deceleration in 3

food price inflation. Perhaps the most overwhelming 2

evidence comes from the latest national accounts 1

data. Upwards revisions to 2010 GDP now reveal 0

Having been persistently surprised by the strength of

inflation control, even at the cost of short-term 10yr-10yr forward

demand destruction, must now be its absolute 10

priority. Consistent with this, the RBI pushed through 8

intended to ensure that its more aggressive policy

is that, having moved into overheating territory, policy

Richard Iley June 2011

The RBI opined in its last policy statement that it

Abstracting from the roller-coaster ride generated by

index still around 60. Moreover, recent trade data,

Richard Iley June 2011

Growth ‘bears’ will of course point to 2011Q1 GDP

The sectoral composition of the Q1 GDP data was

Richard Iley June 2011

and a largely normal monsoon – shared by us at

view of the policy outlook and in turn that the building

global commodity prices, particularly crude oil prices, 1.0

a stunning 1.4% of GDP in FY2011, necessarily

support monetary policy as it seeks to damp -1.5

Trends in disinvestment proceeds in FY2011 ended

Richard Iley June 2011

The second key factor likely to maintain the pressure 1.2

on the RBI to keep tightening the monetary policy 1.0

screws in the second half of 2011 is WPI inflation’s 0.8

seemingly serial proclivity to be revised upwards. In 0.6

turn a function of poor data quality and the extremely 0.4

low initial response rates within the WPI sample, 0.2

progress of this year’s monsoon and upside risks to

remain skewed to the upside. Double-digit WPI 0

inflation until Q4 cannot be ruled.

Onion prices, after their eye-watering super spike in

But the prospect of these helpful base effects on

Richard Iley June 2011

In the short term, however, the evolving mix of 1.25

A sustained period of below-trend, sub-8%