Monthly Review of Indian Economy

April 2011

Monthly Review of Indian Economy – April 20111 Executive Summary
GDP Growth Initial guidance provided by Ministry of Finance indicated a growth of 9 percent in 2011-12. However, recent developments, particularly the loss of momentum in industrial growth, show that this could be a difficult target to achieve. Continued tightening of monetary policy and further escalation in global oil prices are the key downside risks to growth in 2011-12. Given the evolving situation, we expect GDP growth in 2011-12 to be in the range of 8 to 8.5 percent. Industrial Production Weakness in industrial production trend continues with IIP registering a growth of 7.8 percent during April-February 2010-11 as against a growth of 10.0 percent seen during April-February 200910. Performance of the mining and manufacturing sectors has been particularly weak. Our forecasts show that growth in IIP is likely to weaken further from 3.6 percent in February 2011 to 1.4 percent in March 2011.
Trends in IIP, WPI (YoY in Percent) and Monetary Policy Rates
20.0 15.0 10.0 5.0 0.0 -5.0 Jan'09 Feb'09 Mar'09 Apr'09 May'09 Jun'09 Jul'09 Aug'09 Sep'09 Oct'09 Nov'09 Dec'09 Jan'10 Feb'10 Mar'10 April'10 May'10 June'10 July'10 Aug'10 Sep'10 Oct'10 Nov'10 Dec'10 Jan'11 Feb'11 Mar'11 8 7 6 5 4 3 2 1 0

IIP WPI Repo Reverse Repo

Amongst use based industrial groups, capital goods sector again showed negative growth of 18.4 percent in February 2011. This comes on the back of similar performance in December 2010 (-9.3 percent) and January 2011 (-18.8 percent). If the present trend continues, then in March 2011 capital goods sector would see another dip in growth to the extent of 15 percent. Consumer goods segment however has seen improvement in growth, which is being driven by consumer durables segment. Improving consumer sentiment, strengthening employment scenario and increasing disposable incomes have contributed towards growth of consumption. Core Sector The sector recorded an overall growth of 5.7 percent during April-February 2010-11. This is better than 5.4 percent growth seen in April-February 2009-10. Growth has been powered by sectors like crude oil, steel and power. However, performance of the coal sector is a reason for worry.


This report has been prepared by the Economic Affairs and Research Division, FICCI 2|P a g e

Inflation Headline inflation in March 2011 increased to 8.98 percent from 8.31 percent in February 2011. The reading for January 2011 has also been revised upwards to 9.35 percent. Both core inflation and non-food manufactured products inflation are seeing an upward trend and gap between these and headline index is narrowing. These trends are indicative of generalization of inflation with inflationary pressures spreading from primary products to manufactured goods.
Headline, Core and Non-Food Manufactured Products Inflation, YoY in Percent

12.00 11.00 10.00 9.00 8.00 7.00 6.00 5.00 4.00 Apr-10 May-10 Jun-10 Aug-10 Sep-10 Nov-10 Dec-10 Feb-11 Mar-11 Oct-10 Jul-10 Jan-11

Headline Inflation Non-Food Manufactured Products Inflation Core Inflation

With its eye on headline inflation and core inflation, RBI is likely to continue with its tight monetary policy stance. Such a move however is not warranted as core (final goods) inflation as represented by CPI-IW without food and fuel components has come off its peak. Month on month growth in deseasonalised series of core CPI-IW is showing a downward trend reflecting moderation in retail prices. RBI’s policy since March 2010 seems to be having some impact on the demand side and it should therefore put a break on further monetary tightening. Foreign Trade Data for the full year – 2010-11 – shows that exports grew by 37.5 percent [fastest growth since independence] and totaled US$ 246 billion. Imports also showed an increase of 21.2 percent and totaled US$ 350 billion. Strong export growth performance over the last five months has helped bring the trade deficit down to more manageable levels. In 2010-11, India’s trade deficit was of the order of US$ 104 billion. Apprehensions with regard to widening current account deficit have also been allayed. Commerce and Industry Ministry is now confident that the export target of US$ 450 billion by 201314 will be met. The final strategy paper for boosting India’s exports is expected to be out soon. Foreign Investments During the period April-February 2010-11, FDI flows into India totaled US$ 25.9 billion. Admittedly, FDI flows in 2010-11 have seen a slowdown from the previous year. Earlier in the year RBI had drawn attention to environment sensitive policies being pursued with regard to the mining sector, integrated township projects etc. which appear to have affected investors’ sentiments. Government’s efforts to further liberalize the FDI policy continue. While announcing the third edition of the consolidated FDI policy, government proposed major changes related to pricing of convertible instruments, inclusion of fresh items for issue of shares against non-cash considerations
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and removal of the condition of prior approval in case of existing joint ventures / technical collaborations in the ‘same field’ [Press Note 1]. when nominal GDP growth was of the order of 15 to 16 percent. Forex Reserves In April 2010. has brought attention back on the issue of setting up a Sovereign Wealth Fund. Non-food credit also saw a similar increase of 21. Portfolio flows have seen a reversal in recent months. 2011.2 percent. The slowdown in growth in deposits can be explained by unattractive card / deposit rates and continued high inflation rate that lowered the real rate of return on term deposits. Good performance of the equity market in the first half of 2010-11 also contributed to slowdown in deposit growth. Kaushik Basu.8 percent. fiscal deficit in 2010-11 is pegged at 5.5 percent projected earlier. this figure had increased to US$ 308 billion.1 percent of GDP and is down from 5. FIIs are getting increasingly wary about the impact of inflation on the India growth story. Money and Banking Up to March 25. With a nominal GDP growth of around 18 percent. Fiscal situation Strong tax revenue collections.8 percent during the corresponding period of the previous year. 3G / BWA spectrum windfall and moderation in growth of overall expenditure have helped the government rein in fiscal deficit in 2010-11. Dr. 2011. Deposit growth rate has lagged credit growth rate in 2010-11 as aggregate deposits grew by 15. Speaking at a recent seminar. In the previous four years. According to revised estimates.6 billion. The Chief Economic Advisor. India’s forex reserves totaled US$ 279. this growth in M3 is relatively weak. M3 registered a growth of 16 percent as compared to a growth of 16. 4|P a g e . Basu mentioned that it is time that India needs to seriously look at the issue of whether to set up a SWF. Dr. M3 growth was much higher around 20 percent.4 percent. Data on credit flows shows that during April-March 2010-11 total bank credit registered a growth of 21. By April 15.

Monthly Review of Indian Economy – April 2011 Index GDP Growth Industrial Production Core Sector Inflation Foreign Trade Foreign Investments Forex Reserves Exchange Rate Money and Banking Fiscal Situation 6 8 12 13 19 23 26 28 29 31 5|P a g e .

7 9.0 percent. social and personal services. though lower. transport and communication Financing.2 8.6 QE: Quick Estimates AE: Advance Estimates Source – Ministry of Finance. As private sector demand and expenditure is gaining strength.7 percent.7 percent. gas and water supply Construction Services Trade.4 percent in 2010-11.2 11.0 9. in 2009-10 growth.0 10.6 percent respectively.8 8. Although the expected performance of the industry and services sector in 2010-11 is not very different from what was seen in 2009-10 when industry grew by 8. government has entered the fiscal consolidation mode and this has slowed the pace of expansion of community.9 8.8 6. this segment posted a growth of 12. In the year 2009-10.8 percent.0 2010-11 (AE) 5.1 percent. 6|P a g e .1 8.0 percent and services grew by 10. was still a robust 11.7 6.1 4. GDP at factor cost at constant prices grew by 8.1 6. This trend is a reflection of modulation of additional expenditure that was undertaken by the government during the period of the global crisis. In 2010-11. It may be noted that growth in agriculture and allied sector in 2009-10 was muted at just about 0.4 8. real estate and business services c Community. industry and services sector are projected to grow by 8. While in 2008-09.Monthly Review of Indian Economy – April 2011 GDP Growth According to the advance estimates provided by the Central Statistics Office (CSO).8 2009-10 (QE) 0. GDP at factor cost at constant prices is expected to register a growth of 8.9 5.6 12.4 percent.1 7. social and personal services in 2010-11. Table 1 – Growth in GDP at factor cost by economic activity (2004-05 prices) 2008-09 1 2 a b c d 3 a b Agriculture. growth in this segment is expected to sharply go down to 5.6 11.2 4.4 8.0 10. social and personal services 4 GDP at factor cost -0.4 1.7 8. Looking at numbers at the disaggregated level. it is the much improved performance of the agriculture sector in 2010-11 that is going to provide an uptick to overall GDP growth.4 10.3 4.8 5. we see that while agriculture and allied sector is projected to grow by 5.1 9.5 12.1 percent and 9.0 6. forestry and fishing Industry Mining and quarrying Manufacturing Electricity. hotels.6 5.6 percent in the year 201011. Government of India Another notable trend in growth rates at the sectoral level is the sharp decline seen in the case of community.4 7. insurance.

7. In comparison. Most recent trends in industrial production [discussed in detail ahead] point towards a slowdown in industrial activity. If we look at the growth numbers for a longer period. Chart 1 – Growth in GDP (Quarterly figures). However. forestry and fishing Industry Services Source – Ministry of Finance.8 percent. it may be mentioned that in the October – December quarter of 2008-09. With the RBI making it clear that it would maintain its anti-inflationary stance in the months ahead and with senior officials from the government agreeing that some amount of growth will have to be sacrificed if inflation is to be brought under control in a more sustainable manner. meeting this target looks increasingly difficult. the first three quarters of 2010-11 saw this sector register a growth of 7. the other major downside risk to GDP growth in 2011-12 is further escalation in 7|P a g e .6 percent highlighting the stimulus measures undertaken by the government to support economic activity. In fact the Finance Minister had based his budget presentation for 2011-12 taking GDP growth for current year at 9 percent. Besides the tight monetary policy stance. This could be the beginning of a downward phase in the economic cycle and growth figures from now on will have to be carefully watched.4 percent and 4. as things stand today. YoY in Percent 16 14 12 10 8 6 4 2 0 Q1 2008-09 Q2 2008-09 Q3 2008-09 Q4 2008-09 Q1 2010-11 Q2 2010-11 Q1 2009-10 Q2 2009-10 Q3 2009-10 -4 Q4 2009-10 -2 Q3 2010-11 GDP at factor cost Agriculture.8 percent respectively. social and personal services sector had witnessed a very strong growth of 22. What is particularly worrisome is the negative growth seen in case of the capital goods segment in the last three months. community. the services sector has seen its growth coming down since the second quarter of 2009-10 [Chart 1].In this context. initial estimates provided by the Finance Ministry indicated that the economy would better its performance and touch the 9 percent mark. we should be prepared for a sub 9 percent growth in 2011-12. Government of India As regards GDP growth in the year 2011-12. then we see that while industrial sector growth has been moderating since January 2010.

Chart 2 – Trends in IIP.0 6 10.0 8 7 15. In fact. industrial growth in the fourth quarter of 2009-10 was particularly strong and at its peak.3 oil prices. the manufacturing sector turned in a performance of 3. amongst the three broad sectors we see that growth in both the mining and manufacturing sectors has been particularly weak in the month of February 2011. This augurs well for agriculture sector performance in the current year.7 percent.1 percent. WPI (YoY in Percent) and Monetary Policy Rates 20. According to this initial forecast.6 percent in February 2011.0 Source – Reserve Bank of India In context of monsoon it may be noted that the Indian Meteorological Department has come out with its first forecast for this year.0 3 2 Reverse Repo 0. growth in the electricity sector was about 7. the general index for industrial production had registered a growth of 15.1 percent respectively. In February 2010.0 percent and 16.0 5 4 IIP WPI Repo 5.5 percent. we can expect GDP growth in 2011-12 to be in the range of 8 to 8. due to this good performance. with rainfall during June-September 2011 forecast at 98 percent of the Long Period Average of 893 mm for the country as a whole. While the mining sector grew by 0. 8|P a g e . Given the evolving situation. India is set to have a ‘normal’ South West monsoon. Industrial Production Latest numbers made available by the CSO show that weakness in industrial production trend continues with IIP posting growth of a mere 3. In February 2010.5 percent in the same month. Further.0 Jan'09 Feb'09 Mar'09 Apr'09 May'09 Jun'09 Jul'09 Aug'09 Sep'09 Oct'09 Nov'09 Dec'09 Jan'10 Feb'10 Mar'10 April'10 May'10 June'10 July'10 Aug'10 Sep'10 Oct'10 Nov'10 Dec'10 Jan'11 Feb'11 Mar'11 1 0 -5. The only silver lining in this otherwise discouraging performance in February 2011 is growth in the electricity sector which saw production go up by 6. The corresponding figures for February 2010 stand at 11.6 percent year on year in February 2011.

4 7.0 7.0 14.1 General Index Mining Manufacturing Electricity Basic goods Capital goods Intermediate goods Consumer goods Durables Non-durables Source – CSO. Using the same trend and projecting industrial production growth for March 2011.3 Use-based industrial groups 6.5 6.1 23.0 10. MOSPI.3 1.0 6.9 -0.0 10.9 -18.4 11. When we de-seasonalise the growth data using the three month moving average (3MMA) and fit a linear trend to the same.0 4.6 6.Table 2 – Growth in Industrial Production 2009-10 2010-11 February 2010 (Apr-Feb) (Apr-Feb) 10.7 46.8 6.0 16.4 6.1 15. 9|P a g e .0 18. Government of India Chart 3 – Growth in IIP.6 0.6 3.1 9.7 9.5 19.0 May'2009 May'2010 Nov'2009 July'2010 Jun'2009 Jul'2009 June'2010 Nov'2010 Sep'2009 Aug'2009 Aug'2010 Sep'2010 Feb'2010 Mar'2010 Dec'2009 Dec'2010 Feb'2011 Apr'2009 Apr'2010 Oct'2009 Oct'2010 Jan'2010 Jan'2011 Manufacturing Electricity General Mining Source – CSO. YoY in Percent 20.1 0.4 8. we get a good fit with an R-Square value of 0.8 29.5 8.7 5.0 12.7 13.5 11.4 percent. Government of India The chart given above shows that growth in the general index for industrial production has been showing a declining trend since December 2009.0 0.3 23.0 8. MOSPI. we get a value of 1.9 7.0 8.959.8 February 2011 3.1 5.8 21. This result indicates that we should be prepared to see another month of very low growth in industrial production.9 5.4 8.8 15.8 5.1 16.5 6.0 2.

00 4.00 10.18. While a part of this dip can be explained by the high base effect.Chart 4 – Trend growth rate in IIP – December 2009 to February 2011 20.00 2.00 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Series1 Linear (Series1) y = -1.9592 Source – FICCI Research Moving on when we look at the use based industrial groups we see that growth in basic goods.3 percent) and January 2011 (.00 0.785 R² = 0.0897x + 18.8 percent) and portends weakening of the investment cycle in the economy.4 percent in February 2011. In fact the performance of the capital goods segment is particularly worrisome as this sector showed a negative growth of 18. In fact. 10 | P a g e . capital goods and intermediate goods segments has slowed down in February 2011 vis-à-vis performance in February 2010.00 14.00 18. the year on year growth in gross fixed capital formation has come down from a robust 25.9.00 12.00 8.00 6. factors like rising lending rates and rising raw material prices that are affecting margins of firms are now having an impact on investments. Feedback gathered by FICCI from industry as part of its regular Business Confidence Surveys and Manufacturing Sector Surveys shows that rising interest rates have started having a bearing on investment projects with greater impact being felt by units in the SME sector.7 percent in Q1 of 2010-11 to just about 6 percent in Q3 of 2010-11 and is expected to see a further slide in Q4. 2010-11. This comes on the back of similar performance registered in December 2010 (.00 16.

0 0.0 6 40.0 -20. Further.0 60.0 50. 11 | P a g e .0 July'10 Jan'09 Jul'09 Jan'10 May'09 May'10 Nov'09 Mar'09 Mar'10 Nov'10 Sep'09 Sep'10 Jan'11 -10. As data given in the table 2 shows consumer goods sector registered a growth of 11. both the durables and the non-durables segments contributed to this growth.596 R² = 0.0 March'11 2 1 0 5 4 3 Capital Goods Growth Repo Reverse Repo CRR 8 7 Source – Reserve Bank of India In fact when we project the growth for the capital goods sector using the 3MMA for growth and using a linear trend we see that growth in the month of March 2011 is expected to again dip by around 15 percent in this sector.0 30.8678 Source – FICCI Research The only sector that saw an improvement in its performance in February 2011 vis-à-vis performance in February 2010 is the consumer goods sector.3 percent growth registered in the same month of previous year.0 20.7264x + 60.1 percent in February 2011 as against 6.0 10.Chart 5 – Performance of Capital Goods sector and Movement in Key Monetary Policy Rates 70. Chart 6 – Trend growth rate in IIP (Capital Goods) – December 2009 to February 2011 60 50 40 30 Series1 20 Linear (Series1) 10 0 -10 -20 1 2 3 4 5 6 7 8 9 10 11 12 13 14 y = -4.0 -30.

It is only in January and February 2011 that we see growth in this segment of the industry picking up pace once again. 12 | P a g e .4 percent growth registered during the corresponding period of the previous year. Chart 7 – Growth in IIP – Use based industrial groups.0 30.0 60. no significant change in performance is noticed in case of the power sector.Growth in the durables goods segment has been robust through the year 2010-11 and the rise in interest rates has not had any visible impact on the performance of this sector. while crude oil. Although at an aggregate level there is not much change seen in performance during the reporting period of 2010-11 vis-à-vis last year.0 40.0 20. registered a growth of 5. Improving consumer sentiment.0 0.0 Intermediate goods 10.7 percent during April to February 2010-11 as against 5. YoY in Percent 70. Further. petroleum products and steel segments have shown an improvement in performance during the period April to February 2010-11 vis-àvis the same period last year. MOSPI. Two industry segments that clearly stand out for weak performance in 2010-11 as compared to 2009-10 are cement and coal.0 -20.0 May'2009 May'2010 Nov'2009 June'2010 Mar'2010 Nov'2010 Sep'2009 July'2010 Sep'2010 Jun'2009 Jul'2009 Jan'2010 Aug'2009 Aug'2010 Feb'2010 Jan'2011 Dec'2009 Basic goods Capital goods Consumer goods Dec'2010 Feb'2011 Apr'2009 Apr'2010 Oct'2009 Oct'2010 -10. The non-durables segment however saw anemic growth for a good part of 2010-11 with growth entering negative territory in the months of November and December 2010. significant variations are visible at individual sector level. Government of India Core Sector The core sector industries.0 -30.0 50. which have a weight of about 27 percent in the index for industrial production. strengthening employment scenario and increasing disposable incomes have contributed towards growth of consumption.0 Source – CSO.

crude oil.3 0.3 6. Annual inflation rate for 2010-11 also highlights the continuous pressure the economy faces on the prices front.2 7.2 3. Regarding the near term prospects for these two sectors.8 6. MOC&I.9 0. And in case of the cement sector. petroleum products and steel sectors have seen an improvement in growth.9 5.4 percent and is much above what the RBI considers as the ‘growth promoting inflation rate’ and which is about 5 percent.5 8.0 6. difficulty in acquisition of land and law & order problems in major coal producing states like Jharkhand have hit production in recent times. the strong performance seen in 2010-11 (Apr-Feb) can be largely attributed to enhanced production by non-state companies like Cairn India.98 percent. This indicates that inflationary pressures continue and that final numbers for March 2011 could well be in double digit territory.2 2010-11 (Apr-Feb) 5.Table 3 – Growth in Core Sector 2009-10 (Apr-Feb) 5. factors like non – receipt of statutory clearances on time.23 percent to 9.7 -0. Inflation Latest numbers for WPI based inflation show that headline inflation in March 2011 stands at 8.5 -5. It may be mentioned that in the case of the coal sector. It is also important to note that while releasing the data for March 2011.4 5. production has suffered due to rising cost of raw materials (particularly coal). This is higher as compared to 8.4 10.4 2.1 February 2010 4.9 0.2 February 2011 6. Government of India Latest numbers available for February 2011 also confirm that while cement and coal sector have registered weaker growth this year as compared to the same month last year.5 Overall Cement Coal Crude oil Power Petroleum products Steel Source – Office of Economic Adviser.2 7. difficulty in getting environmental clearances and moderation in spending by the government on irrigation and housing projects particularly in South India.2 11.31 percent registered in February 2011.7 4.7 12.1 11.9 6. 13 | P a g e . which has significantly ramped up its oil production capacity in the state of Rajasthan. it can be said that while the strong growth of the construction sector in 2011-12 is expected to lead to a turnaround of the cement sector.8 7. the figure for January 2011 was revised upwards from 8. Overall inflation for 2010-11 stands at 9. environmental hurdles.0 -0.35 percent. As regards output in the crude oil sector. resolution of issues related to environment would help the coal industry ramp up production in the current year.7 4.

are showing no signs of a let up. There are two ways in which one can look at and examine the non-volatile components of WPI.00 5. A closer look at the inflation numbers at the disaggregated level shows that within the food articles segment. The trends in these two indicators of inflation are shown in chart 8.00 7. In other words.00 6. Core and Non-Food Manufactured Products Inflation. meat and fish have been going up appreciably in recent months. price pressures are spilling over from food articles to non-food articles and nonfood manufactured products.00 9.1 percent in September 2010 to 7.9 percent in March 2011.While the inflationary pressures in the economy. The uptrend in non-food manufactured products inflation and core inflation as well as the narrowing of the gap between these two inflation indicators and headline inflation shows that inflationary pressures in the economy are getting generalized. The 14 | P a g e . another reason which explains the increase in prices of these items [and this is particularly true for perishables like fruits and vegetables] is the rigidities that have gripped the marketing and distribution of such products through the country. YoY in Percent 12.00 10. This increase can be explained by the rising demand for such products and which has not been supported by a corresponding increase in supplies. Both these indicators have moved up over time. core inflation has increased from 6.00 11. One is movement in non-food manufactured products inflation and the other is movement in core inflation.00 4. what is perhaps more important is the gradual pick up in the nonvolatile components of WPI.00 8.00 May-10 Jun-10 Sep-10 Nov-10 Dec-10 Mar-11 Aug-10 Apr-10 Jul-10 Oct-10 Jan-11 Feb-11 Non-Food Manufactured Products Inflation Core Inflation Headline Inflation While non-food manufactured products inflation has increased from 5.1 percent in March 2011. prices of items like vegetables. as measured by the headline inflation rate.7 percent in August 2010 to 8. egg. Apart from the supply demand gap. Chart 8 – Headline. milk. Core inflation is a broader concept as compared to non-food manufactured products inflation and captures the price behavior in non-food articles and minerals in addition to non-food manufactured products. fruits.

96 15.09 14.81 10.09 4.84 7.80 24.97 15.37 15.68 26.58 6.91 5.82 15. jute and silk. manmade textiles.60 16.96 14.12 18.73 7. Metal products producers are raising prices following the higher global base metals and precious metals prices.13 Dec 10 9.53 2.00 5.32 15.48 11.42 5.20 5.41 18.62 6.99 3.21 2.75 26.48 15.20 2. basic metal alloys.96 9.00 4.59 5.90 4.35 18.90 5.74 29.92 6.60 13.69 12.49 4.21 4.43 1.60 21.01 4.29 20.10 6.40 12.09 18.60 20.34 7.87 Jun 10 10.07 25.31 14.94 -0.32 10.20 4.06 1.45 21.43 9.60 1.76 5.45 30.06 -0.38 11.20 -2.30 14.02 19. This is a direct result of petrol price decontrol introduced by the government and the pass through following hardening of international crude prices.33 9.39 7.74 2.12 4.83 22.82 Mar 11 8.67 10.37 14.01 Jan 11 9.70 7.24 3.28 20.98 12.37 -1.17 16.34 7.55 Nov 10 8.49 18.73 3. Table 4 – WPI based inflation.13 Sep 10 8. Finished textile companies have started passing on higher fibre costs to consumers.44 16.56 Oct 10 9.92 5.07 6.66 5.15 5.22 12.68 5.25 2.78 4.02 4.00 21.26 5.99 3.12 8.53 9.08 14.60 13.20 5.58 0.28 5. In the fuel category.51 3.09 7.30 31.39 -1.19 -0.45 20.13 7.27 1.41 5.89 1.60 All commodities (I) Primary articles Food articles Non-food articles Minerals (II) Fuel and power (III) Manufactured products Food products Beverages and tobacco Textiles Wood and wood products Paper and paper products Leather and leather products Rubber and plastic products Chemicals and chemical products Non-metallic mineral products 15 | P a g e .95 2.99 7.08 May 10 10.47 25.55 5.68 -2.26 5.64 25.08 34.98 8. petrol prices have increased appreciably over time. Coal prices are also increasing at a fast clip and adding to overall inflationary pressures. Another segment within the primary articles group that is contributing to overall inflation is ‘minerals’ where prices are going up due to higher global costs of copper and other base metals.61 13.41 5.24 5.78 11.‘episodic inflation’ that we saw in case of onions in the month of December 2010 is a classic example of how even small disruptions in supply can have a large impact on prices in our country due to inefficient supply chains.75 6.05 Aug 10 8. we see that here strong inflationary pressures are coming from ‘fibres’ such as cotton.73 4.32 4.61 6.79 10.67 2.50 29.25 4.58 -1.20 11.76 25.80 11.78 11.26 5.60 15.65 6.49 Feb 11 8.10 0.14 25.02 11.43 5.38 6.34 2.65 4.50 3.27 7.58 11.40 7.46 10.66 0.88 12.93 18.22 201011 9. This increase in prices can be related to the increase in input costs as manufacturers have crossed the level beyond which holding price line is no longer a viable option.46 5.65 29.84 2.78 3.20 2.07 Jul 10 10.34 2.89 11.71 -1.98 6.10 13.84 3.36 3.64 3.10 -1.40 17.21 7.40 3.28 -0.22 5.93 -1.75 5.44 5. YoY growth in Percent Apr 10 11.40 5.14 20.80 12.56 3.09 7.11 4. cotton textiles.14 9.06 4. In the manufactured products category too signs of a buildup in inflation have strengthened with segments like edible oils.41 10.12 11.36 4.81 23.08 4.80 16.08 4. Moving on now to the non-food articles group. iron and steel & rubber and plastic products seeing an appreciable increase in prices.39 10.77 4.

it may be mentioned that while the monetary policy tools have a bearing on inflation from the demand side.67 2.79 7.59 3.74 8. Therefore.91 8. Government of India On the whole.43 3. we have used CPI-IW as this is a reasonable indicator of consumer prices in India.11 1. the central banks try to manage CPI inflation by affecting aggregate demand.93 6.30 8.95 2.74 7.75 8. This will have a bearing on the growth performance particularly industrial production.78 1.21 2.04 2.37 2. trends in WPI are a reflection of inflation emanating largely from the supply side.78 -0.14 Jan 2010 Feb 2010 March 2010 Apr 2010 May 2010 Jun 2010 16 | P a g e . Against the above background let us take a look at movements in core inflation (WPI based) and core inflation (CPI based) and track the month on month movement using deseasonalised index values. In the context of RBI’s monetary policy moves it may be mentioned that these moves are guided by the trend seen in headline inflation and core inflation measured on a year on year basis.29 2.23 2.93 0.69 2. MOC&I.00 2.28 3.25 1.53 2. MOM growth based on 3MMA Period WPI Core Input Inflation* 0.05 CPI (IW)* Core Final Goods Inflation 1. Table 5 – Trends in Core Inflation.21 0.48 2.61 2. Globally. The need to focus on CPI has become even more important today as the global commodity prices are on a rise and these impact input price inflation far more than prices of final goods as measured by CPI inflation.90 Source – Office of the Economic Advisor.96 1.29 3.Basic metals. as mentioned earlier.03 2. For the purpose of our analysis. which.91 7. is already showing signs of moderation.31 2.21 2.49 3. alloys and metal products Machinery and machine products Transport. Further. we see that inflation is getting generalized with a spillover from primary articles to manufactured products now being evident.32 2.70 2.03 1. The readings for March 2011 would give more reason to RBI to continue with the policy rate hikes in the months ahead.37 9.22 0. Perhaps a better indicator of inflationary pressures – and certainly a more forward looking input for policy moves – is the month on month change in the index that is duly deseasonalised.42 2.13 0. equipment and parts 9.89 2.76 3.07 3.01 7. the key indicator to follow from the perspective of demand side inflation management is movement in consumer prices.88 8.93 6.

If consumer prices have come off their peak and are now showing signs of moderation.19 - Source – FICCI Computations based on data sourced from CSO Note: Core Inflation of WPI and CPI is calculated by removing the Food and Fuel components from the respective General Index.58 0.19 0.19 0. as seen today. it is perhaps time that the RBI revisits is monetary policy stance and fine tunes the interest rate structure to stimulate growth.60 0. This is particularly true in an environment characterized by rising commodity prices. However.39 0. then any move by the RBI to further tighten monetary policy could prove counterproductive as it would have a direct bearing on industrial and economic activity in the country. a case for continuing monetary tightening is plausible.67 0.29 1. Given this situation.09 0.53 0.55 0.22 0.02 0.49 0.76 1. And with the RBI’s focus being on this variable.40 percent in September 2011 (when calculated on a 3MMA sequential basis).19 percent in December 2010 to 0. As the table above shows.48 . FICCI’s analysis further shows that core final goods inflation – which is what RBI should be targeting – is expected to moderate from its value of 1. Table 6 – Projections for CPI (IW) Core Inflation Month Dec 2010 Jan 2011 Feb 2011 Mar 2011 Apr 2011 May 2011 June 2011 17 | P a g e MOM Growth 1. the month on month movement in WPI based core inflation (core input inflation) is showing signs of an uptick in inflation.08 1.89 1.26 0. if we look at the numbers for CPI based core inflation (core final goods inflation) then we see that CPI-IW has been on a downward trend after having peaked at 2 percent at the start of 2010.Jul 2010 Aug 2010 Sep 2010 Oct 2010 Nov 2010 Dec 2010 Jan 2011 Feb 2011 0. It may be added that a singular focus on WPI movement for deciding on monetary policy moves may not be a correct approach.12 1. and which are likely to keep WPI based core inflation at elevated levels irrespective of large scale changes in the demand conditions.50 0.

0 6.0 4.43 0. Chart 9 – Movement in Industrial Production. along with the Asian financial crisis.0 2.0 12. Unless we take steps to boost agriculture productivity and to improve the marketing and distribution of food products in the country and unless greater investments are made in enhancing supplies of critical industrial inputs and raw materials. At that time.0 Apr'96 Jul'96 Oct'96 Jan'97 Apr'97 Jul'97 Oct'97 Jan'98 Apr'98 Jul'98 Oct'98 Jan'99 Apr'99 Jul'99 Oct'99 Jan'2000 Apr'2000 Jul'2000 Oct'2000 Jan'2001 Apr'2001 Jul'2001 Oct'2001 Jan'2002 Apr'2002 Jul'2002 Oct'2002 Jan'2003 Source – Reserve Bank of India Finally. we cannot bring inflation level down in a sustainable manner.0 14. This. WPI based Inflation and Monetary Variables (BR and CRR) Period – April 1996 to March 2003 16.40 Source – FICCI Research It may be recalled that we have had a similar episode of tight monetary policy engineering a slowdown in growth in the late 1990s.45 0. had a deep impact on India’s growth trajectory and it took us almost five year to come back to the high growth trajectory (See chart 9 for details).July 2011 Aug 2011 Sep 2011 0. interest rates were hiked to as much as 12 percent to counter inflation.0 10.0 8. 18 | P a g e .0 IIP General WPI All Commodities CRR Bank Rate 0. it may be re-emphasized that for addressing the inflation situation it is important that the government looks at debottlenecking the supply side both in the agriculture sector and in the manufacturing sector.

All of these would in some measure help us tackle the food inflation problem. Imports too registered a strong growth of 21. It is this strong performance in exports. gems and jewellery. steps like decentralizing procurement operations of FCI. Likewise we need to step up capacities across industries to increase supplies. which is about half the size of India’s GDP of US$ 1. restrictive environmental regulations. particularly seen in the last five months. India’s total trade deficit in 2010-11 stood at US$ 104 billion.5 percent over US$ 179 billion achieved in 2009-10.3 billion in April 2010 to US$ 34. textiles and pharmaceuticals.3 billion. land acquisition etc. India’s exports posted a growth of nearly 44 percent and touched a high of US$ 29. de-listing horticulture products from APMC Act. which has helped bring the otherwise burgeoning trade deficit down to more manageable levels. these numbers translate into a total trade figure of almost US$ 600 billion. Looking at trade numbers on a sequential basis we see that while imports have moved up from about US$ 27. 19 | P a g e . Annual figures for 2010-11 show that exports have touched an all time high of US$ 246 billion and mark a robust growth of 37.7 billion in March 2011. With exports and imports at these levels.2 percent in 2010-11 and touched US$ 350. offloading food stocks in smaller lots over multiple locations leveraging tools such as e-auctions. Further. India’s overall trade balance stood at US$ 5.9 billion to US$ 29. oil.6 billion in March 2011. encouraging private players to come and invest in agri-infrastructure. Foreign Trade In March 2011.2 trillion. This incidentally is also the fastest annual growth that we have seen in exports since independence.1 billion during the same period.In the context of the agriculture sector. Our imports on the other hand grew by 17.3 percent and attained a total value of US$ 34. With total exports and imports at these levels. our exports have increased at a faster pace going up from US$ 16. The strong performance of the export sector has also helped calm fears about the sustainability of the current account deficit. easing cross border movement of food products and evolving a robust centralized monitoring system to track progress of weather and crop situation particularly for perishables require urgent attention of the government.7 billion. This calls for encouraging investments by addressing issues such as procedural hassles. meeting PDS requirements in states to the extent possible. India’s strong export performance in the year 2010-11 was fuelled by sectors such as engineering products.1 billion. further tightening of monetary policy is inadvisable as it would prevent fresh capacities from coming on board. As hikes in interest rates have a direct bearing on the investment activity.

5 19.7 28. the country’s Commerce Minister said that given this recent trend we are confident of attaining the export target of US$ 450 billion by 2013-14. while effort would be made to retain presence and market share in ‘old developed country markets’.7 - Exports Imports Oil imports Non-oil imports Trade balance Growth in Exports Growth in Imports -10. Government of India 20 | P a g e .3 Source – Department of Commerce. gems and jewellery (US$ 64 billion).1 Dec10 22.7 Feb11 23.6 36.4 13. Africa and Latin America.3 -11.2 34.3 35.2 May10 16.1 38.While releasing the export figures for the month of March 2011.9 18.3 Nov10 18.5 32.8 -8. In this context it may be pointed out that the Ministry for Commerce and Industry had recently put out a draft strategy paper for doubling India’s exports to US$ 450 billion by 2013-14.7 Oct10 17.8 18.8 21.3 8.2 23.5 billion) and drugs and pharmaceuticals (US$ 22 billion).4 23 -12.2 -2.6 Jun10 17. Further.2 -5.7 7.2 29.2 43.1 6.9 Jul10 16.9 13.7 21.7 8.9 27. textiles (US$ 36.2 -9.9 26.1 34. According to the draft strategy paper for exports released by the government.6 44.5 25. The draft strategy paper also provides suggestions on creating infrastructure.1 -8.7 21.0 32.9 20. Consultations on this draft paper are now at an advanced stage and the final strategy paper is expected to be released soon by the Ministry. MOC&I.4 8.3 6.3 8.0 27.6 7.5 11.1 7.1 -8.6 30.4 19.7 20.9 Sep10 18.8 7.4 19.9 27. Table 7– Exports and Imports in US$ Billion / YoY Growth in Percent Apr10 16. in the proposed strategy for exports.1 27. petroleum products (US$ 73 billion).5 Aug10 16.1 -9.1 23.5 Mar11 29.6 28. government would simultaneously focus on opening up new vistas both in terms of markets and products in regions including Asia.2 26.2 7.5 -10.6 29.1 19.6 31.4 -11.1 49.3 -13.7 21. the export target of US$ 450 billion by 2013-14 will be driven by sectors like engineering goods (US$ 108 billion).9 27.0 17.7 8.0 22. easing procedural bottlenecks and developing skill levels for continuous value addition in exports.4 36.2 Jan11 20.

MOC&I. Imports and Trade Balance in US$ Billion 40 30 20 Exports ($ Bn) 10 Imports ($ Bn) Trade balance ($ Bn) 0 2010 Sept 2011 Jan 2010 May 2010 Aug 2010 Dec 2011 Feb 2010 Oct 2010 April 2010 June 2011 Mar 2010 July 2010 Nov -10 -20 Source – Department of Commerce.5 percent. In 2009-10.8 -61782 870553 -7. Government of India If we look at the trade data for the last few years. the trade deficit to GDP ratio came down to 9.Chart 5 – Exports.4 -117328 1237523 -9.1 -91467 1128476 -8.5 Source – Reserve Bank of India Trade Balance 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 66285 85206 105152 128888 166162 189001 182163 80003 118908 157056 190670 257629 307651 299491 21 | P a g e . Alongside this increase in the absolute value of trade deficit. As the data in the following table shows. The rapid increase in India’s imports relative to our exports over this period resulted in widening of the overall trade deficit.1 -118650 1138643 -10. India’s total imports during the same time period went up from US$ 80 billion in 2003-04 to US$ 299 billion in 200910.5 percent. by 2008-09.3 -51904 768538 -6. this figure had jumped to over 10 percent. Table 8 – Exports. While in 2003-04.5 -33702 640485 -5. Imports and Trade Balance in US$ Million Year Exports Imports GDP Ratio US$ million -13718 552377 -2. the trade deficit to GDP ratio stood at 2. an increase in the trade deficit to GDP ratio was also seen. total trade deficit increased from US$ 13 billion in 2003-04 to US$ 117 billion in 2009-10. we see that while India’s total exports have increased from US$ 66 billion in 2003-04 to US$ 182 billion in 2009-10.

As the table below shows. Our non-oil imports over this same period went up from US$ 58 billion to almost US$ 200 billion. Data shows that this share was about 15 percent in 2004-05. the balance on account of invisible flows has been in surplus throughout the period under consideration. since then oil imports started hitting our external balance in a more severe manner with growth in the share of non-oil trade balance in overall trade balance getting moderated.9 billion in 2009-10. However.8 billion in 2003-04 to US$ 52.The tread seen in the movement of country’s overall trade balance is also reflected in the nonoil trade balance. In 2009-10. This figure increased in the subsequent year but at a slower pace registering a value of 44 percent. While the increase in the non-oil trade deficit is by itself large. which was in surplus in 2003-04.80 -13752 768538 -1.79 -21011 870553 -2.97 Source – Reserve Bank of India While India’s trade account has been in a deficit. This is largely due to the remittance inflows and receipts on account of services exports.30 -52277 1138643 -4.4 percent. we have registered reasonably large surpluses on the invisibles account. It may be noted that in 2007-08 the share of non-oil trade balance in overall trade balance was 41 percent.49 -5126 640485 -0. it is interesting to note that over time the pressure exerted by the rising imports of oil and increasing global prices of oil on India’s external balance has steadily gone up. Looking at the same reference period as considered earlier. The corresponding increase in the invisibles balance to GDP ratio was 5 percent to 6 percent and further to 6. It moved up from US$ 27.41 -37254 1128476 -3. we find that India’s non-oil exports increased from US$ 60 billion in 2003-04 to US$ 150 billion in 2009-10. Following from these trends we see that India’s non-oil trade balance. 22 | P a g e . this upward trend was reversed and the share of non-oil trade balance in overall trade balance came down to 42 percent.2 billion in 2006-07 and further to 78. Table 9 – Non Oil Trade Flows in US$ Million Non Oil Exports 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 60274 76547 91451 107779 134541 157748 150531 Non Oil Imports 57580 81673 105203 128790 171795 210025 199702 Non Oil GDP Ratio Trade US$ Balance million 2694 552377 0. 26 in 2005-06 and about 34 percent in 2006-07. turned into a large deficit of almost US$ 50 billion in 2009-10. This can be appreciated better when we look at the share of India’s non-oil trade balance in its overall trade balance.59 -49171 1237523 -3.

nearly matching the quantum received during the preceding year.9 42002 768538 5.5 52217 870553 6.5 2.4 Source – Reserve Bank of India 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 The surplus on the invisibles account has helped keep the overall current account deficit down to manageable levels. What made matters worse was the fact that FDI flows had slowed down and a good part of the CAD was being financed by volatile flows like foreign institutional investments.Invisibles Balance Invisibles GDP US$ Ratio Balance million 27801 552377 5. We generally consider a CAD to GDP ratio of 2 to 2.4 -28728 1138643.7 percent.9 78917 1237523 6.6 -3.7 89923 1138643 7.42 -0.5 -2470 640485.5 -38411 1237522.5 percent and (-) 3.5 percent mark.61 -1. there was considerable concern expressed with regard to the movement in the CAD to GDP ratio. it was felt that given the evolving trends.3 -9565 870553.5 to 2. the CAD to GDP ratio would cross the 3.1 percent.0 31232 640485 4. In 2010-11. the strong performance of the export sector in the third and more so in the fourth quarter of 2010-11 has helped bring the CAD level down and we now expect this to settle in the range of 2.9 -1. Table 11 .4 -9902 768537.0 75731 1128476 6. Over the last seven years. For a long time.CAD as a percent of GDP GDP US$ Ratio million 14083 552376. portfolio flows have been sizable. However.1 -15737 1128475.Table 10 . this limit was breached only twice – in 2008-09 and in 2009-10 when the CAD to GDP ratio touched (-) 2.3 -2.22 -1. 23 | P a g e .1 Source – Reserve Bank of India CAD 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 Foreign Investments Data on foreign investment flows shows that while FDI inflows in the country in the year 201011 have seen moderation as compared to inflows received during 2009-10.5 percent [in deficit mode] as a comfortable level.

31 % change in 201011 vis-àvis 200910 -22.0 9. It may be mentioned that this dip in FDI flows into India has taken place at a time when FDI flows to some of the other emerging markets have gone up in 2010.376 333.8 -0. This slowdown in FDI flows is a matter of concern as FDI flows are of a more durable variety and often come with many tangible and intangible benefits.6 27. total FDI flows are expected to fall much short of US$ 37. the central bank – RBI – has set up an internal working group to look into this development and try and understand the reasons for this slowdown.829 62.492 34. In fact given the importance of this issue.7 7.4 Total (FDI+Portfolio) 6.017 29.847 1.328 -15.69 1032.8 billion that were received during the year 2009-10.As the table on the next page shows.1 2.86 5.835 37.81 ↓ 1 2 3 24 | P a g e Services Sector Telecommunications Power .5 530.139 57.1 48.271 289. A look at the sector wise FDI inflows during the period April-January 2010-11 and comparing the same with inflows received during the corresponding period of 2009-10 shows that a sizable decline has taken place in sectors like services sector. construction.505 377 10.876.315 -18.961 22.838 37.90 -21.54 7.66 2.048 29.130 5.949 YOY Portfolio YOY Growth Investments Growth 87.918 8.0 2. With only a month to go before the close of fiscal 2011.9 52.05 % to total FDI Inflows (Apr-Jan 2009-10) 16.386 FII* 1. This last finding was brought out earlier in a report released by UNCTAD.760 -8.67 2009-10 (Apr-Jan) US$ Million 3.225 20.014 15.051 8.8 -17.029 6.4 14.855 -150.79 ↓ ↓ ↓ % to total FDI Inflows (Apr-Jan 2010-11) 17.686 9.9 billion as against US$ 33.453 29.320.5 -18.19 1.983 70. FDI inflows into India during April 2010 to February 2011 totaled US$ 25.331.789 8.3 -67.74 -45.8 6.6 -14.461. telecommunications.3 -173.699 15.995.8 52.062.5 -75.151 6.035 4.826 34. Table 12 – Foreign Investment Flows in US$ Million FDI 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10(P) Apr-Feb 2010-11 4.2 11.34 billion received during the same period in the previous year.40 1.2 32.9 979 -51.4 8.95 10.6 -13.926 3.0 2.377 1.1 40.106 23.1 154.9 293.003 -43.796.366 21. housing and real estate.431 YOY Growth -13.763 25.021 -26. electrical equipments and agricultural services.335 *FII is included in Portfolio Investments Source – Reserve Bank of India Table 13 – Sector Wise Foreign Investment Flows in US$ Million Sector 2010-11 (Apr-Jan) US$ Million 2.322 6.1 12.0 -20.7 31.

Senior officials in the Industry Ministry have also expressed apprehension over slowing down of FDI and made a strong case for further liberalization of the FDI policy framework in the country.57 43.648.92 5.95 1 0.64 0. integrated township projects and construction of ports.1 366.96 ↔ ↓ ↓ ↓ ↓ ↓ ↓ ↓ Source – SIA Newsletter.77 5.65 142.15 1.83 540.58 41.02 1.37 287.22 135.39 2.89 382. DIPP While we wait for the findings of RBI’s internal working group on this subject.1 707.73 916.46 350.84 -63.39 222.2 1. RBI had also raised issues related to procedural delays.79 1834.98 2.63 259.46 179. land acquisition and availability of quality infrastructure and highlighted that if these are addressed expeditiously then India’s share in FDI flows to EMEs could go up in the future.76 198.16 3. In fact a strong indication to foreign investors about India’s intent to further improve the policy framework for FDI was given recently when at the release of the third edition of the consolidated FDI policy.36 290.18 0.83 -9.43 447.78 2.15 -96.11 ↓ ↓ 5.85 204.77 ↓ ↓ 3.15 1.24 1.33 1.62 32.7 0.46 639.24 1.27 685.1 188.19 2.37 497.78 4.49 1.19 -84.34 1.5 539. the government announced major changes related to pricing of 25 | P a g e .05 31.25 1006.35 275.82 676.79 0.28 -17.05 108.18 1.14 -54.24 0.77 -56.89 75.13 1.308.03 11.02 3.71 226.62 2.08 2.82 573.22 -29.76 5.53 10.61 114.5 0.33 319.97 201.318.61 492.17 1002.37 181.72 0.75 1191.02 1048. and which appear to have affected investors’ sentiments.43 4.86 1.16 6.86 442.4 5 6 7 8 9 10 11 12 Metallurgical Industries Construction Activities Housing & Real Estate Computer Software & Hardware Petroleum & Natural Gas Industrial Machinery Automobile Industry Trading Information & Broadcasting (Including Print Media) Cement And Gypsum Products Chemicals (Other Than Fertilizers) Hospital & Diagnostic Centres Drugs & Pharmaceuticals Consultancy Services Hotel & Tourism Sea Transport Air Transport (Including Air Freight) Electrical Equipments Agriculture Services Non.1 3.2 18.57 -60.316. it may be mentioned that in January this year RBI had alluded to the environment sensitive policies being pursued with regard to the mining sector.89 6.25 18.21 200.14 3.55 2.52 1.57 2.39 2.14 4.43 2.Conventional Energy Miscellaneous Industries 1011.06 7.93 ↓ ↓ ↓ ↓ 13 14 15 16 17 18 19 20 21 22 23 24 606.

Although this figure is encouraging. Forex Reserves India’s foreign exchange reserves increased as we moved ahead in fiscal 2010-11. most recent trends show that portfolio investors have been net sellers in the Indian market. insurance.183 283.9 billion. defense and banking sector.February 2010-11 India received a total of US$ 31. The only positive in sight presently is the massive monetary expansion being undertaken by the Bank of Japan following the crisis [Tsunami / Earthquake / Nuclear Disaster] and the continued Quantitative Easing in US. given the strong concerns institutional investors have with regard to the inflation situation in emerging markets including India. the government should follow up now on policy reforms in areas like retail.4 billion in portfolio flows.870 297. Likewise emphasis on procedural reforms should continue to enhance the ease of doing business in India.956 292. Further.544 275. As data given in the table below shows. inclusion of fresh items for issue of shares against non-cash considerations and removal of the condition of prior approval in case of existing joint ventures / technical collaborations in the ‘same field’ [Press Note 1].convertible instruments. FII inflows could remain muted at least in the near term.710 284. Most recent numbers show that the country’s foreign exchange reserves have shot up further crossing the US$ 300 billion mark.6 billion. India’s foreign exchange reserves totaled US$ 279.389 297.334 April 2010 May 2010 June 2010 July 2010 Aug 2010 Sept 2010 Oct 2010 Nov 2010 Dec 2010 26 | P a g e . As the economic situation in US and Europe is improving slowly. there are opportunities emerging for FII investors in their home countries. With this level of reserves. Both these developments could result in some money flowing towards Indian shores.633 273.142 292. while in April 2010. While these announcements are welcome. India is the seventh largest holder of foreign exchange reserves in the world. Table 13 – Foreign Exchange Reserves in US$ Million Forex Reserves 279. It may however be added that this massive monetary expansion would also have a downside as it will continue to fan commodity prices and which would hurt us from the inflation side. in September 2010 this figure had increased to US$ 292. Coming now to portfolio inflows we see that during the period April .

Data also shows that our debt service ratio has been declining over time [2009-10 being an exception when debt service increased on account of large ECB repayments] and stood at 3.515 19.8 2009 PR 43.1 18.362 181.3 14.153 224.3 17. Speaking at a recent seminar.4 2010 QE 52. As a percent of total external debt.919 5.230 172. Dr.8 18.1 2007 28. Nevertheless.9 19.1 11.1 3.669 224.5 Dec 2010 QE 62.9 percent at end December 2010.0 12. India’s external position can be said to be reasonably comfortable. Basu mentioned that it is time that India needs to seriously look at the issue of whether to set up a Sovereign Wealth Fund.114 14. Government of India Data shows that India’s short term debt has increased from US$ 43.539 119. In this context it is interesting to note that the country’s Chief Economic Advisor. 27 | P a g e .8 14.2 15.592 Source – Reserve Bank of India Although other countries with huge forex reserves have strengthened their external position on the basis of positive or surplus trade and current account.4 billion in end March 2009 to US$ 52.224 301. At these levels of short term debt.947 4.130 144. Table 14 – India’s External Debt in US$ Million / At End March 2006 Short term debt (1) Long term debt (2) Total external debt (3) (1) / (3) (%) Short term debt to Forex Reserves (%) Total debt service Debt service ratio 19.3 percent in end March 2001 to 20.891 297.407 20.7 2008 45. Further.560 10.6 billion in end December 2010.620 234.514 4.575 139.983 261.Jan 2011 Feb 2011 299.454 20.1 percent in end March 2010 and further to 21.0 21. In context of India’s external situation and level of comfort with regard to forex reserves. Dr.4 14. has once again brought the focus back on the question of India having its own Sovereign Wealth Fund. an important variable to look at is the external debt position and particularly the movement in short term debt over time.0 percent in December 2010. the fact that short term debt is about 21 percent of India’s foreign exchange reserves is also a comforting feature regarding India’s external situation. Kaushik Basu.738 178.404 4.9 Source – Ministry of Finance.471 208.360 16. the share of short term debt has gone up from 19. this large holding of forex reserves has attracted a lot of attention and several options suggested on how to optimally utilize these reserves.511 21.5 billion in end March 2010 and further to US$ 62. in case of India this huge build up of reserves is largely due to inflow of funds on the capital account.

we provide the movement in the national currencies of select countries vis-à-vis the US$.80 Japanese Yen 0.5018 0. During the same time.6652 60.7033 -0.5454 0.5122 0.7636 59. 28 | P a g e . In the following table. As data given in the table below shows the Rupee appreciated against the USD by 1 percent between February 2011 and March 2011.5251 0. all currencies analyzed have seen an appreciation against the US$.5679 46.3381 71.4635 71. 2010 2010-11 April 2010 May 2010 June 2010 July 2010 Aug 2010 Sept 2010 Oct 2010 Nov 2010 Dec 2010 Jan 2011 Feb 2011 Mar 2011 MOM growth in Mar 2011 Source – Reserve Bank of India One of the factors that affect the competiveness of India’s exports vis-à-vis exports from other countries is the relative movement in the national exchange rates.1747 68. Data further shows that while the Indian Rupee has seen greater appreciation against the USD compared to the Brazilian Real and the Malaysian Ringgit.5502 -0.5457 0.5343 0. the value of the Rupee moved up by about 0.4583 45.5178 62.8373 46.4981 59.4995 45.9736 71.5425 0.6272 66.2384 67. No large variation was noted in INR’s movement against the Japanese Yen. it has depreciated against the Euro.4360 68.0183 45.5394 73.3934 45.52 March. The data shows that between February 2011 and March 2011. Against the Euro.6952 71.02 Euro 62.4538 44.5443 46. currencies like the Indonesian Rupiah.5150 72. the South African Rand and the Thai Baht have gained more against the USD between February 2011 and March 2011. Table 15– Rupees per unit of foreign currency (Yearly / monthly average basis) USD 40.7653 59.2921 72.02 Pound Sterling 80.8498 70.0904 63.5503 0.2287 45.4763 0. The only exception has been the Pakistani Rupee.5496 0.9895 -1.0616 44.6553 56.3561 51.4009 0.8 percent against the Pound Sterling.1568 45.6648 57.5428 0.9016 59.5 percent between February 2011 and March 2011.9207 61.0592 61.9041 68.5465 0.8054 72.4965 44.0314 1. 2008 March. the Rupee weakened with its value coming down by almost 1.4969 0.Exchange Rate Most recent trends in the movement of the INR vis-à-vis major vehicle currencies show that while the Indian Rupee has appreciated against the USD and Pound Sterling.7865 46.6578 70.9700 60.7153 61. 2009 March.

03 -0.21 3.67 1.11 3.86 86.48 -1.6 percent. net bank credit to the government went up by 13.77 1.37 32. 2011) registered an increase of 16 percent as compared to a growth of 16.80 1.10 3.12 Source – International Monetary Fund Money and Banking Latest figures available from RBI show that broad money or M3 (up to March 25.11 30.35 7.78 30. 2011 was also 16 percent as against 17.65 7.01 85.85 30.50 45.21 3.46 44.36 9053.02 Indonesian Rupiah 9027. 2011 (previous year growth being 15.82 29.26 3.60 85.04 3.88 45.11 3.99 84.81 1. this growth of 16 percent is relatively weak.37 85.56 46.04 44.34 31. In the previous four years.71 1.70 1.92 -3.75 Malaysian Ringgit 3.76 85.78 85.9 percent) and time deposits with bank went up by 18.66 -0.67 1.84 6.97 29.17 6.76 1. In the context of money supply growth it may be mentioned that with a nominal GDP growth of around 18 percent.54 Thai Baht 32.63 7.6 percent as against a growth of 21.99 -1.06 3.2 percent as against a growth of 16.11 8928. Looking at the sources of money supply growth (up to March 25. 2011) we see that while bank credit to the commercial sector went up by 20.30 7.72 1.9 percent during the same period. Net foreign exchange assets of the banking sector have seen an increase of 6.37 -1.87 46.38 85.3 percent seen in the previous year.92 7.13 3.40 0.28 32.61 9024.1 percent growth seen in the previous year.68 1. 29 | P a g e .3 percent witnessed during the same period in the previous year.54 7.4 percent.33 9183.55 Indian Rupee 44.53 8760.68 85. currency held with the public saw an increase of 19.02 South African Rand 7.96 6.15 3.76 1.57 46. Demand deposit held with banks however saw a marginal decline registering a negative growth of 0.Table 16 – Exchange rate vis-à-vis USD for selected countries (monthly average basis) Brazilian Real 2010-11 April 2010 May 2010 June 2010 July 2010 Aug 2010 Sept 2010 Oct 2010 Nov 2010 Dec 2010 Jan 2011 Feb 2011 Mar 2011 M-o-M growth in Mar 2011 1.77 46. Amongst the key components of M3.17 45.8 percent in the period up to March 25.42 44.76 8975.20 9036.38 85.00 8916.26 Pakistani Rupee 83.8 percent during the corresponding period of the previous year.05 8931.80 8971.38 45.26 3. The year on year growth as on March 25.13 6.48 32.39 9148.60 85.58 30.71 30.91 6.

which started in July 2010. growth in net bank credit to the government and net foreign exchange assets of the banking sector slowed down considerably. In 201011. net foreign exchange assets of the banking sector and bank credit to the commercial sector grew at a relatively fast pace and contributed to overall money supply growth.2 percent. we see that growth in 2010-11 has been of the order of 21. in 2008-09 and 2009-10. As the liquidity situation tightened. Further. The increase in card rates. 30 | P a g e . it is still below the expansion seen in 2006-07. aggregate deposits grew by 15. M3 growth was much higher around 20 percent.9 percent. The slowdown in growth in deposits can be explained by unattractive card / deposit rates and continued high inflation rate that lowered the real rate of return on term deposits. Further. when we look at the figures for non-food credit.when nominal GDP growth was of the order of 15 to 16 percent.4 percent. banks started facing a tight liquidity situation. Our analysis shows that while in 2006-07 and 2007-08. Good performance of the equity market in the first half of 2010-11 also contributed to slowdown in deposit growth. the high growth in money supply was powered by rapid expansion in net bank credit to the government.2 percent as compared to 17. banks were forced to increase the card rates. 1 lakh crore mark. Data on interest rates in the call money market show that borrowing / lending rates started moving up in the second half of 2010-11.8 percent.1 percent seen in the previous year. Growth in bank credit in the year 2009-10 was of the order of 16. although bank credit to the commercial sector picked up pace in 2010-11. This move has helped bank garner more deposits in the last quarter of 2010-11. Growth in deposits in 2010-11 has not only lagged growth seen in overall bank credit and nonfood credit but it also falls behind the growth in deposits seen in 2009-10. Data on credit flows shows that in the financial year 2010-11 total bank credit registered a growth of 21. in 2009-10 aggregate deposits had registered a growth of 17. While in 2010-11. with time as credit growth gathered pace. However. This is also the period when liquidity injection by the central bank under the LAF / Repo window increased and on occasions crossed the Rs. picked up pace with hikes being particularly aggressive from December 2010 onwards.

5 80.1 9.1 17.299 38.8 Bank Credit Non Food Credit Aggregate Deposits Mar. Non-tax revenues have also shown a sizable increase of over 109 percent during April to February 2010-11 due to the large payments received by the government of account of 3G / BWA spectrum auctions.8 21.6 78.5 37.9 17.1 28.44.4 21.7 95.0 86.1 17.2 21.1 percent and totaled Rs.Table 17 – Credit and Deposit Growth (Rs. tax revenues (net) registered a growth of 28.2 15.6 63.on .74.376 44.5 77.3 83.38.5 69.659 31.6 83.7 116.0 Revenue Receipts Tax Revenues (Net) Non Tax Non-Debt Capital Receipts Recovery of Loans Other Receipts Total Receipts Non-Plan Expenditure On Revenue Account Interest Payments On Capital Account Plan Expenditure On Revenue Account On Capital Account Total Expenditure 682212 534094 148118 45129 5129 40000 727341 783833 563685 220148 31745 9001 22744 815578 735657 821552 643599 726729 248664 240757 92058 94803 373092 395024 315125 326928 57967 68096 1108749 1216576 31 | P a g e .86.4 109.6 80.4 11.2 15.7 100.6 78.788 39.04.2 18.4 percent over the same period of 200910.2 21.9 17. 33. 26 Mar.Year far 2009-10 2010-11 2010 2011 16.0 13.4 21.4 Actuals Apr-Feb 2010 458752 358641 100091 18672 5886 12786 477404 601198 557414 177257 43784 257107 217191 39916 858305 Growth in 2011 over 2010 46. Non-debt capital receipts of the government have also increased by 78.574 52.96. Crore) BE 2010-11 RE 2010-11 Actuals Apr-Feb 2011 670336 460624 209742 33251 10506 22745 703617 668140 607814 201169 60326 310565 263259 47306 978705 Percent of Actuals to Revised Estimates 85.3 104.9 47. 25 32.8 16.5 14.5 81.703 Source – Reserve Bank of India Fiscal Situation Data on the fiscal position of the government shows that during the period April to February 2010-11. Crore) Item Outstanding as on 2010 2011 Variation over Financial year so Year .251 crore during April to February 2010-11.1 78.8 20. Table 18 – Trends in Central Government Finances: April – February 2011 (Rs.3 81.

Revenue from corporation tax is expected to show an increase of 21.80. industrial production would get a leg up and this will translate into higher tax collections. the government.705 during April to February 2010-11 was about 14 percent higher compared to the same period in the previous year. Coming to collections under excise.5 percent.000 to Rs. the government is banking on strong growth in the economy. It may also be noted that the small increase affected in the MAT rate from 18 percent to 18. 1.1 percent during the period under review. Further. total government expenditure at Rs. while presenting the budget for 2011-12. Strong tax revenue collections. Government of India As regards expenditure. On the whole.000. income tax collections are expected to go up. latest figures show that while non-plan expenditure has shown an increase of 11.5 -63. The 32 | P a g e . Looking at the figures for government receipts for the year 2011-12 as given in the next table. FICCI had aggressively worked for maintaining the excise rate at this level. in its bid to provide some relief to people from high and rising inflation. plan expenditure has gone up by 20. good corporate performance and a rise in wages and salaries to translate into this growth in tax collections. This shows that there is a clear expectation on part of the government that the corporate sector would see high growth in the current year.78.5 percent in the last budget would also bring in more revenue under this head in 2011-12. However. fiscal deficit of the central government totaled 69 percent of the revised estimates and showed a fall of nearly 28 percent over the same period of the previous fiscal. 9. With regard to income tax collections. With no major tax changes announced in the budget for 2011-12. despite this revenue depressing move. the Finance Minister announced that fiscal deficit in the year 2010-11 will be scaled down from 5. 3G / BWA spectrum windfall and moderation in growth of overall expenditure have helped the government rein in the fiscal deficit in 2010-11. During April to February 2010-11.4 46.Fiscal Deficit Revenue Deficit Primary Deficit 381408 276512 132744 400998 269844 160241 275088 200707 73919 68.1 380901 315873 203644 -27. we saw that in the budget the Finance Minister desisted calls for complete roll back of the stimulus measures and accordingly held the central excise duty rate constant at 10 percent. we see the government projecting an increase of 16. We had urged the Finance Minister that by keeping rates constant. had increased the exemption limit for individual income tax payers from Rs.1 percent.7 Source – Controller General of Accounts. 1. It may be recalled that in the last budget.5 percent in 2011-12.8 percent during the same time period.2 percent.60.6 74.8 -36.5 percent as projected earlier to 5. we see that the gross tax revenues are budgeted to grow by a healthy 18.

9 -3.5 16.government accepted FICCI’s argument and left the excise rate untouched.8 17. It is banking on high industrial growth to lead to a growth of 19.8 -12.0 0.2 18.3 0. it is the increasing quantum of imports resulting from an uptick in domestic economic activity that is likely to yield revenues to the tune of Rs. Table 19 – Central government’s revenue and capital receipts – 2011-12 in Rs Crore 2010-11 2011-12 (RE) (BE) 1231576 1237728 783833 789892 563685 664457 786888 932440 137263 163550 131800 151700 296377 359990 141566 164526 69400 82000 1910 1973 8572 8701 3900 4525 219303 263458 220149 125435 19728 19578 48727 42624 2756 2173 147795 59891 1143 1169 447743 447836 9001 15020 355414 343000 22264 14500 22744 40000 17781 24182 10000 10000 10539 1134 Growth 0.0 -89.9 75. Government of India .700 crore.5 2.5 16.5 19.2 percent.5 -34.2 Total receipts Revenue receipts Tax revenue (net) Gross tax revenue Excise duties Customs duty Corporation tax Taxes on income Service tax Tax on UTs Other taxes Transfer to NCCF States' share Non-tax revenue Interest receipts Dividends and profits External grants Other non-tax revenue UT's without legislature Capital receipts Recovery of loan (net) Net market borrowings External assistance (net) Disinvestment Small savings (net) State provident funds Others 33 | P a g e Source – Ministry of Finance. The increasing share of services sector in the economy and extension of the service tax net are the two reasons that lie behind this projected growth in tax collections.5 -21.2 percent in excise collections. on service tax collections the budgeted figures show an increase of 18.0 20.0 66.9 36.2 15.3 1.2 3.9 18. Finally.5 0.51.1 21.2 -59.1 percent. 1.1 -43. the projected increase in collections in 2011-12 is to the tune of 15. On customs.0 -0. Again with the peak rate of customs duty remaining unchanged at 10 percent.

Moving on to non-debt capital receipts we see that inflows on account of recovery of loans are expected to register an increase of 67 percent in 2011-12. 22.38 Source – Ministry of Finance. Table 20 – Central government’s expenditure – 2011-12 in Rs Crore Plan Expenditure 2010-11 RE 2011-12 BE 395024 441547 Non-Plan Expenditure 821552 816182 Total Expenditure 1216576 1257729 Plan Expenditure % change 30. allocations for sectors 34 | P a g e . defence services and pensions.While gross tax revenues are projected to grow by 18. proceeds from disinvestment. we again see a moderation in growth in 2011-12 as plan expenditure had shown an increase of over 20 percent in four of the five preceding years.744 crore. non-tax revenues would show a decline in 201112. in 2011-12. spending on capital outlay and fertilizer subsidy and this would in turn balance the increase seen under heads such as interest payments. the government sees its overall expenditure going down significantly under heads such as petroleum subsidy. As regards plan expenditure.93 -0.000 crore from disinvestment.65 Total Expenditure % change 18. the actual amount realized by the end of the fiscal year 2011 was only about Rs. which are pegged at Rs.5 percent in 2011-12. It is hoped that these units would undergo the disinvestment process in 2011-12. Further.4 percent in its overall expenditure in 2011-12 over 2010-11. 40. This increase has been on account of factors like higher spending on food and fertilizer subsidies. It may be noted that even in 2010-11 the government had targeted an amount of Rs. However. However. Non-plan expenditure of the central government has been growing at a fast clip since 2006-07 with its growth rate ranging between 13 percent to 23 percent. implementation of the sixth pay commission award and debt waiver for the farmers. non-tax revenues are projected to show a decline by 43 percent. However.78 Non-Plan Expenditure % change 13. There are several cases of PSUs where disinvestment was planned in 2010-11 but which could not completed on time. 40. Government of India Figures for central government’s expenditure for the year 2011-12 show that the government has budgeted a very small increase of 3.65 percent. within the overall expense head. Further. while plan expenditure is expected to show an increase of 11.75 3. despite this moderation in overall plan expenditure growth. would mark an increase of 76 percent in 2011-12. This is understandable as the strong growth seen under this head in 2010-11 was on account of the large payments received due to 3G / BWA auctions.20 11. Since this was a one off event.000 crore. non-plan expenditure will see a compression to the tune of 0.8 percent in 2011-12.

79 1.37 6. This will be difficult to maintain as higher procurement will call for higher storage and carrying costs. 35. Table 21 – Fiscal Indicators of Central Government (as a percentage of GDP) Tax-GDP ratio 2006-07 2007-08 2008-09 2009-10 2010-11 11. Another imponderable is the introduction of the Food Security Bill]. a few of these initial estimates look somewhat ambitious to achieve.58 1. This looks difficult given the outlook for international oil prices]. Some of the heads where the government is likely to overshoot its budget estimates in 2011-12 are MGNREGA [Wages under MGNREGA have been increased and are now linked to CPI-AL].05 percent in 2006-07 to almost 12 percent in 2007-08. As the table given above shows. 35 | P a g e . Since.86 10. women and child development have seen a substantial jump in 2011-12 – a trend which underlines the government’s commitment to achieving inclusive growth through emphasis on the social sectors.95 1. As mentioned earlier.20 Custom Duty to GDP ratio 2. the Finance Minister had based the budget projections for 2011-12 taking a growth of 9 percent.10 1.27 1. 60. Indian Public Finance Statistics and Budget Documents (various years) In the context of central government finances.6 percent in 2011-12 will be a challenging task. 20. education.50 1. food subsidy [BE at Rs. petroleum subsidy [BE 2011-12 shows a fall to Rs.31 5. If the revenues fall short of the anticipated amounts and the expenditure overshoots the targeted amounts.67 Union Excise to GDP ratio 2. This decline can be explained by the huge moderation that was seen in the growth of gross tax revenues in these two years.02 2.000 crore from Rs.75 2. achieving this growth target itself is now doubtful. the tax to GDP ratio came down to 10. in the subsequent years. there is reason to believe that the revenue projections of the government may also suffer.75 Source – Reserve Bank of India CSO.05 11. However. the tax to GDP ratio for the central government increased from 11. fertilizer subsidy [Again rising international prices of fertilizers would make any large scale reduction difficult].16 10.86 percent (2008-09) and 10.99 10. While the budgeted estimates for various heads under plan and non-plan expenditure reflect commitment on part of the government to usher in fiscal discipline and bring government finances back on track in line with the FRBM targets. then meeting the fiscal deficit target of 4.000 crore in 201011.99 6. it is interesting to note the movement in the tax to GDP ratio over time.21 health.16 percent (2009-10).77 Direct Tax to GDP ratio 5.572 crore in 2011-12 is slightly lower than RE for 2010-11.

41 15.73 2007 11. It is hoped that with the introduction of the GST and the DTC.79 15.42 12. As part of these measures. As the data in the following table shows tax to GDP ratio in India is lower when compared with some of the other emerging economies. the government also introduced a calibrated exit strategy from the fiscal stimulus measures in the budget for 2010-11. overall gross tax collections went up by 26 percent in 2010-11.92 16.While in 2008-09.27 13.24 2006 11.46 9. gross tax revenues grew by 3.15 India Brazil China Indonesia Russian Federation South Africa Thailand Source – World Bank 36 | P a g e .86 17.86 16.77 percent from 10.43 16.86 25. As the economy gained traction and growth started moving back to the pre-crisis trajectory.93 12. This highlights the need to continue moving ahead on the path towards tax reforms and simultaneously widen the tax base within the country.03 16.90 16. Crore) 2005 9. While this improvement is noteworthy.81 16.46 2009 9.81 9.71 8.50 26.57 28.76 27.25 16. it may be mentioned from a global perspective. the excise rates were cut in two phases and as a result we saw a dip in excise collection and which is also reflected in the downtrend seen in union excise to GDP ratio. Further. the tax to GDP ratio in India would move up.64 11. the tax to GDP ratio in India is still on the lower side. Customs duty collections also improved on the back of pick up in imports and higher duty on crude and petroleum products. Table 22 – Comparison of Tax Revenue (as a percentage of GDP) with other emerging countries (Rs. gross tax revenues of the central government grew by 2.05 percent.68 12. in 200910.16 percent in 2009-10.19 12.55 28.72 10.18 percent.38 16. It may be recalled that this period corresponds with the global financial and economic crisis and the government had introduced a series of fiscal stimulus measures to support economic activity. The excise rate cut introduced earlier was partially rolled back and this led to an increase in excise collections.03 15. This also lifted that tax to GDP ratio in 2010-11 to 10. With direct taxes collections also going up sharply in 2010-11.20 16.11 2008 11. slowdown in domestic economy also limited import growth and this in turn led to a decline in customs duty collections.

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