Indian economy

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Current State of Indian Economy June 2011

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Current State of Indian Economy – June 20111

EXECUTIVE SUMMARY

GDP growth

GDP growth figures for Q4, 2010-11, highlight an unmistakable downward trend. While in Q1, 2010-11, GDP grew by 9.3 percent, in Q4, 2010-11, GDP growth came down to 7.8 percent.

Sectors like manufacturing and mining & quarrying have seen considerable erosion of growth momentum over the last one year.

While consumption demand is still holding, a sharp decline in growth of investments is seen. Growth in Gross Fixed Capital Formation [GFCF] has dipped from 17.4 percent in Q1, 2010-11 to 0.4 percent in Q4, 2010-11.

Given the evolving situation, growth in 2011-12 is likely to be close to the 8 percent mark.

Industrial Production

Weakness in industrial production trend continues. In April 2011, IIP registered a growth of 6.3 percent. In April 2010, growth in IIP was to the tune of 13.1 percent.

Amongst the use based industrial groups, a similar streak of weakness is seen with growth in the capital goods segment, intermediate goods segment and consumer goods segment slowing down from 35.5 percent, 11.9 percent and 13.8 percent respectively in April 2010 to 14.5 percent, 3.4 percent and 2.9 percent in April 2011.

1 This report has been prepared by the Economic Affairs and Research Division, FICCI

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2010

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Q2

2010

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Q3

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Q4

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Quarterly Growth in GDP (2004-05 prices)

Mining and quarrying Manufacturing GDP at factor cost

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IIP growth and Repo rate

IIP Repo rate

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Core Sector

Data for April 2011 shows a perceptible decline in performance of the core sector with growth dipping from 8.5 percent in April 2010 to 4.6 percent in April 2011. Sectors like natural gas, fertilizers, cement and steel are largely responsible for this poor performance. Growth in the coal sector however moved from (-) 2.9 percent in April 2010 to 2.8 percent in April 2011.

Inflation

The inflation situation in the economy continues to be a cause for concern. Despite large scale tightening of the monetary policy by the RBI and other steps taken by the government, inflation continues to remain close to the double digit mark.

In May 2011, WPI based headline inflation stood at 9.1 percent. This is higher than 8.7 percent inflation recorded in April 2011. Core inflation too has moved up from 8 percent in April 2011 to 8.6 percent in May 2011.

Near term outlook for inflation is not too encouraging and there are chances that we may see inflation jump to the double digit territory on a few occasions.

High international oil prices, likely decontrol of diesel prices, high global food prices and hike in Minimum Support Prices for the upcoming agriculture season are some of the factors that constitute the upside risks to inflation.

Foreign Trade

The strong momentum in exports, seen particularly during the second half of 2010-11, has continued in the year 2011-12 as well.

In April 2011 exports totaled US$ 23.8 billion and represented a growth of 34.4 percent over the same month of the previous year when exports totaled US$ 17.7 billion.

While this strong start in 2011-12 is encouraging, there are indications that this high growth will not be sustained in the months ahead.

Rising interest rates, rising raw materials costs and oil prices, withdrawal of incentive schemes like DEPB and likely slowdown in Asian economies are some of the reason that have tempered the outlook for exports.

In April 2011, our imports totaled US$ 32.8 billion and registered a growth of 14.1 percent over the same month of the previous year when imports amounted to US$ 28.8 billion.

With developments in the Middle East and North Africa region showing no signs of a let up and with OPEC resisting any upward revision in daily oil production quota, oil prices are likely to remain firm in the near term. This will continue to put pressure on India’s overall oil import bill.

As regards non-oil imports, while a slowdown in the domestic economy could lead to some moderation in the non-oil import bill, any large respite here can be ruled as prices of commodities other than oil are also firming up.

Foreign Investments

In 2010-11, foreign investment flows into India saw a dip of about 17 percent over the previous year. Further, this dip is largely on account of a slowdown seen in case of FDI.

In 2009-10, FDI inflows into India totaled US$ 37.7 billion. In 2010-11, this figure came down to US$ 27 billion. Data also shows that of out of the top 25 sectors, 15 sectors have seen a dip in FDI flows during April – Feb

2010-11 compared to the same period in 2009-10. Sectors like services, construction, housing and real estate, telecommunication and agricultural services are the ones where investment flows have slowed down considerably.

In 2010-11, portfolio flows totaled US$ 31.5 billion and were only a tad below US$ 32.4 billion received in 2009-10.

The outlook for portfolio flows in the current year is not too encouraging. Global fund managers are particularly concerned over the evolving macro-economic situation with inflation showing limited signs of abatement and growth slowing down at a fast clip.

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The re-emergence and intensification of the sovereign debt crisis in Europe and the expected halt of quantitative easing policy in the US by the end of June 2011 are also downside factors for portfolio flows for emerging markets including India.

Forex Reserves

In April 2011, India’s foreign exchange reserves totaled US$ 313 billion. The increasing size of our foreign exchange reserves has drawn attention of the policymakers. Just some time

back, Dr. Kaushik Basu, Chief Economic Advisor, Ministry of Finance, had raised the question of India to consider having a Sovereign Wealth Fund. In more recent times, a few independent analysts have opined that a part of these huge reserves be deployed to import commodities which are or could be in short supply in the economy.

Money and Banking

The year on year growth in money supply in the period up to May 21, 2011 was 16.8 percent. Growth in the corresponding period [up to May 22, 2010] in the previous year was 15.1 percent.

The year on year growth in non-food credit in the period up to May 21, 2011 has been almost 22.1 percent. This is higher than the credit growth target of 19 percent set by the RBI for the current year. Growth in deposits in the period up to May 21, 2011 has been of the order of 17.4 percent and is in line with RBI target growth of 17 percent for the current year.

These numbers indicate that the trend seen in the previous year – of deposit growth lagging credit growth – continues in the current financial year. The growth rate in deposits has picked up in recent months and to that extent eased some pressure on the banks as they worked hard to maintain their margins.

Fiscal Situation

The provisional estimates for 2010-11 for various fiscal variables show a definite improvement over the revised estimates (RE), with a more than anticipated rise in revenue collection and reduction in expenditure. The striking feature of the new estimates is the reduction in fiscal deficit [4.7 percent] number compared to the revised estimate [5.1 percent] given during presentation of the union budget.

Though the fiscal deficit numbers for 2010-11 are encouraging, maintaining fiscal discipline in 2011-12 is looking increasingly difficult.

Corporate Sector Performance – Q4, 2010-11

In the fourth quarter of fiscal 2010-11, corporate India turned out a good performance both in terms of sales and profits. Such a performance is particularly noteworthy as it came at a time when overall expenses are going up at a fast clip.

Net sales of ‘All Industries’ in the fourth quarter of 2010-11 registered a growth of 23.5 percent. This is the highest growth in net sales that we have seen in the last eight quarters.

Further, while firms from the manufacturing sector saw an increase of 22.26 percent in net sales in the last quarter of 2010-11, companies from the services (other than financial) sector saw sales going up by 27.46 percent.

Within the manufacturing sector, growth in sales has been particularly strong in sectors such as textiles, cement, steel and transport equipment. Performance of the food and beverages sector and the chemicals sector lagged the average growth for the manufacturing sector as a whole.

Total expenses for ‘All Industries’ went up by 23.52 percent in Q4, 2010-11. This growth is the highest seen in last four quarters.

Further, while the manufacturing sector saw total expenses rise by 21.68 percent in Q4, 2010-11, services (other than financial) saw an increase of 31.29 percent.

Within the manufacturing sector, the increase in total expenses in the quarter under review was particularly high in sectors such as cement [48.12 percent] and steel [30.06 percent].

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Growth in Net Sales (%) Growth in Total Expenses (%)

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All industriesManufacturingServices (other than financial)

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INDEX

MACRO ECONOMY 7 GDP Growth 7 Industrial Production 9 Core Sector 13 Inflation 15 Foreign Trade 18 Foreign Investments 20 Forex Reserves 23 Exchange Rate 24 Money and Banking 25 Fiscal Situation 27 CORPORATE SECTOR PERFORMANCE – Q4, 2010-11 31 All industries 31 Textiles 33 Cement 34 Steel 35 Chemicals 36 Transportation 37 Food and Beverages 38 ROUND UP OF KEY DEVELOPMENTS 39 Draft National Manufacturing Policy 39 RBI’s Financial Stability Report 39 CHARTS 40

Industrial Production 40 Inflation 42 Foreign Trade and Foreign Investments 43 DATA ON INTEREST RATES 44

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GDP Growth

The Central Statistical Organisation (CSO) has released the revised estimates for GDP for 2010-11. Alongside, it also released the quarterly estimates for GDP for the fourth quarter of 2010-11.

According to the latest numbers made available by CSO, India’s GDP at factor cost at constant prices registered an increase of 8.5 percent in the year 2010-11. This revised estimate of 8.5 percent growth for GDP in 2010-11 is only a shade below the advance estimates that had pegged GDP growth for 2010-11 at 8.6 percent.

This slight dip in overall GDP growth can be attributed to weaker performance in sectors such as ‘mining and quarrying’, ‘manufacturing’, ‘trade, hotels, transport and communication’ and ‘financing, insurance, real estate and business services’ than anticipated earlier.

In case of the agriculture and allied activities sector, we find that the revised estimates have pegged growth in 2010-11 at 6.6 percent, which is much higher compared to the advance estimates that had put growth at 5.4 percent.

In this context it is important to note that the third advance estimates of crop production released by the Ministry of Agriculture have shown a significant upward revision as compared to second advance estimates in the production of wheat [84.27 million tonnes from 81.47 million tonnes], pulses [17.29 million tonnes from 16.51 million tonnes], oilseeds [302.51 lakh tonnes from 278.48 lakh tonnes] and sugarcane [340.54 million tonnes from 336.70 million tonnes]. These revisions are responsible for lifting the GDP growth rate for agriculture and allied activities sector.

Another sector where we see a substantial upward revision in growth rate between the advance and revised estimates is the ‘community, social and personal services’ sector. While in its advance estimate, CSO had indicated a growth of 5.7 percent for this sector, in the revised estimates this figure has been moved up to 7.0 percent. This revision comes on the back of a larger increase in total expenditure of the central government than anticipated earlier.

The moderation in the expected pace of expansion of the ‘mining’ and ‘manufacturing’ sectors can be related to certain adverse policy developments as well as hardening of the interest rates in the economy. Further, as performance of the ‘financing, insurance, real estate and business services’ sector is closely related to performance of the manufacturing sector, this sector too has seen a slippage in growth between advance and revised estimates.

Table 1 – Growth in GDP at factor cost by economic activity (2004-05 prices)

2008-09

2009-10 (QE)

2010-11 (AE)

2010-11 (RE)

1 Agriculture, forestry and fishing -0.1 0.4 5.4 6.6 2 Mining and quarrying 1.3 6.9 6.2 5.8 3 Manufacturing 4.2 8.8 8.8 8.3 4 Electricity, gas and water supply 4.9 6.4 5.1 5.7 5 Construction 5.4 7.0 8.0 8.1 6 Trade, hotels, transport and communication 7.6 9.7 11.0 10.3 7 Financing, insurance, real estate and business services 12.5 9.2 10.6 9.9 8 Community, social and personal services 12.7 11.8 5.7 7.0 9 GDP at factor cost 6.8 8.0 8.6 8.5

QE: Quick Estimates AE: Advance Estimates RE: Revised Estimates Source – CSO, MOSPI, Govt. of India

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Moving on to the quarterly estimates for GDP growth for the fourth quarter of 2010-11, we see that although the economy’s performance is still decent at 7.8 percent, an unmistakable downward trend is visible. Quarterly growth estimates show that GDP growth has come down from 9.3 percent in Q1, 2010-11 to 8.9 percent in Q2, 2010-11 to 8.3 percent in Q3, 2010-11 and further down to 7.8 percent in Q4, 2010-11.

Amongst sectors, the ones that have seen a considerable erosion of growth momentum over the last one year are ‘mining and quarrying’ and ‘manufacturing’. While in case of the former, the growth figures have come down from 7.1 percent in Q1, 2010-11 to 1.7 percent in Q4, 2010-11, in case of the latter, growth has moderated from 12.7 percent in Q1, 2010-11 to 5.5 percent in Q4, 2010-11.

The performance of the ‘agriculture and allied activities’ sector in the fourth quarter has been particularly strong at 7.5 percent. The other sectors that have registered strong growth in Q4, 2010-11 are ‘electricity, gas and water supply’ [7.8 percent], construction [8.2 percent], ‘trade, hotels, transport and communication’ [9.3 percent] and ‘financing, insurance, real estate and business services’ [9.0 percent].

Table 2 – Growth in GDP at factor cost by economic activity (2004-05 prices) – Quarterly numbers

Q1 2010-11

Q2 2010-11

Q3 2010-11

Q4 2010-11

1 Agriculture, forestry and fishing 2.4 5.4 9.9 7.5 2 Mining and quarrying 7.1 8.2 6.9 1.7 3 Manufacturing 12.7 10.0 6.0 5.5 4 Electricity, gas and water supply 5.6 2.8 6.4 7.8 5 Construction 7.7 6.7 9.7 8.2 6 Trade, hotels, transport and communication 12.6 10.9 8.6 9.3 7 Financing, insurance, real estate and business services 9.8 10.0 10.8 9.0 8 Community, social and personal services 8.2 7.9 5.1 7.0 9 GDP at factor cost 9.3 8.9 8.3 7.8

Source – CSO, MOSPI, Govt. of India

A look at quarterly GDP figures by expenditure class shows that growth in private final consumption expenditure is maintained at a robust 8 percent even in the fourth quarter of the fiscal 2010-11.

However, what is worrisome is the trend in the growth numbers for gross fixed capital formation, which shows that year on year growth has tapered from 17.4 percent in Q1, 2010-11 to just about 0.4 percent in Q4, 2010-11. This is a clear indication of weakness in the investment activity level in the economy and does not bode well for growth in the current year.

Table 3 – Growth in GDP at market prices by expenditure (2004-05 prices) – Quarterly numbers

Q1 2010-11

Q2 2010-11

Q3 2010-11

Q4 2010-11

1 Private Final Consumption Expenditure 8.9 8.9 8.6 8.0 2 Government Final Consumption Expenditure 6.7 6.4 1.9 4.9 3 Gross Fixed Capital Formation 17.4 11.9 7.8 0.4 4 Change in Stocks 11.7 9.0 5.1 4.6 5 Valuables 28.0 21.2 18.5 32.3 6 Exports 10.0 10.7 24.8 25.0 7 Imports 15.5 11.6 0.4 10.3 8 GDP at Market Prices 9.4 9.1 9.2 7.7

Source – FICCI computations based on data provided by CSO, MOSPI, Govt. of India

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With regard to GDP growth in the year 2011-12, it was noted even in our earlier report that the initial guidance provided by Ministry of Finance of 9 percent growth is looking increasingly difficult to achieve. With time even the government has come around this view and growth projection for the year 2011-12 has been lowered to 8 to 8.5 percent.

It is interesting to note that in FICCI’s most recent Economic Outlook Survey, results of which were released in May 2011, the median forecast for GDP growth in the current year comes to 8 percent.

The inputs and projections provided by various participating economists in this survey show that while the agriculture and allied activities sector is projected to grow by 3.7 percent this year, industry and services sector are poised to grow by 8 percent and 9.2 percent respectively.

The key risks to growth in India in the current year are the negative impact of continuous tightening of monetary policy by RBI and a slowdown in global growth due to high international oil prices. Further, although the Indian Meteorological Department has projected a normal monsoon this year, we will have to wait for more updates to get a clearer picture on the spatial distribution of the monsoon.

Projected GDP growth [India] in 2011-12

Organisation Projection in %

Morgan Stanley 7.7

IMF 7.8

FICCI 8.0

Nomura 8.0

DBS 8.0

CARE 8.0

Standard Chartered 8.1

Indicus 8.7

Dun and Bradstreet 8.8

ADB 8.8

Source – FICCI Compilation Source – FICCI Economic Outlook Survey, May 2011

Industrial Production

The Central Statistical Organisation (CSO) has revised the base year for the industrial production data series from 1993-94 to 2004-05. The new series also incorporates a much larger set of items2 that reflect the contemporary production activity in the country and is expected to offer a better gauge of the country’s industrial activity. The weighting diagram of the three major sectors under two digit level indices and four different goods sectors under use – based classification has also changed to capture the changing structure of economy effectively. The new set of weights that would now be followed is given in the following table.

2 Some of the items included in the new series are mobile phones, digital cameras, fruit juices, laptops, new chemical items and

processed food.

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GDP Agriculture and allied activities

Industry Services

Projected growth [Sectors] in 2011-12

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Table 4 – Comparison of weights assigned in the Old and New series of IIP Indices

Sectors Old series New series

1993-94 Base Year 2004-05 Base Year Two-digit level Indices

Mining 10.47 14.16 Manufacturing 79.36 75.53 Electricity 10.17 10.32 General Index 100.00 100.00

Use- based Index Basic goods 35.57 45.68 Capital goods 9.26 8.83 Intermediate goods 26.51 15.69 Consumer goods 28.66 29.81 Durables 5.37 8.46 Non durables 23.30 21.35 General Index 100.00 100.00


As the above table shows, in the new series, while the weight of the mining sector has gone up that of the manufacturing sector has gone down. Amongst the use based segments, while basic goods have seen their weight go up substantially, intermediate goods have seen a reduction in the weight assigned for construction of the index.

Even before data as per the new series for industrial production was brought out by CSO, economic analysts had predicted that data as per the new series would provide an upward bias to growth as it would incorporate ‘new fast growing sectors’ of the economy.

The new numbers have confirmed this and we see a substantial change in growth performance in 2010-11 when we compare the results of the new series with the results based on the old series. It is also interesting to note that the adverse impact on industrial production in the period following the global slowdown is also accentuated as per the new series and this is reflected in the numbers for 2009-10.

As the data given in the next table shows, overall industrial production [as per the new series] registered a growth of 8.2 percent in 2010-11. And this is much better than the 5.3 percent growth clocked in 2009-10. Further, a good part of industrial growth in 2010-11 was driven by the manufacturing sector, which recorded a growth of 8.9 percent compared to a growth of 4.8 percent in 2009-10. The other two sectors, mining and manufacturing, however saw their performance going down in 2010-11 compared to 2009-10.

Coming to the use-based classification, we see that all sectors, barring consumer durables, saw an improvement in performance in 2010-11 over 2009-10. And among the sectors that saw an improvement in performance, the capital goods sector stands out as its growth improved from 1 percent in 2009-10 to 15 percent in 2010-11.

As mentioned earlier, these numbers, based on the new industrial production series, reflect a much different and improved performance compared to results based on the old series.

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Table 5 – Trends in Industrial Production – YOY growth in percent

2009-10 2010-11 2010-Apr 2011-Apr

Old Series

New Series

Old Series

New Series

Old Series

New Series

Old Series

New Series

General Index 10.5 5.3 7.8 8.2 16.6 13.1 4.4 6.3 Mining 9.9 7.9 5.9 5.2 12.0 9.2 2.1 2.2 Manufacturing 11.0 4.8 8.2 8.9 18.0 14.5 4.4 6.9 Electricity 6.0 6.1 5.6 5.5 6.9 6.5 6.4 6.4

Use-based industrial groups Basic goods 7.2 4.7 6.3 6.0 9.1 6.7 5.6 7.3 Capital goods 20.9 1.0 9.5 15.0 64.1 35.5 2.5 14.5 Intermediate goods 13.6 6.0 8.8 7.2 10.8 11.9 2.4 3.4 Consumer goods 6.2 7.7 7.5 8.3 11.9 13.8 5.9 2.9 Durables 24.6 17.0 21.0 14.1 32.1 23.3 9.2 3.8 Non-durables 0.4 1.4 2.2 3.9 4.8 6.8 4.5 2.1


Coming now to the growth figures for the month of April 2011, we see that overall industrial production [as per the new series] registered a growth of 6.3 percent. This performance is much weaker compared to a growth of 13.1 percent registered in April 2010. Amongst other sectors a palpable slowdown is noticeable in sectors such as mining and manufacturing with growth slowing from 9.2 percent and 14.5 percent respectively in April 2010 to 2.2 percent and 6.9 percent respectively in April 2011.

Amongst the use based industrial groups, a similar streak of weakness is seen with growth in the capital goods segment, intermediate goods segment and consumer goods segment slowing down from 35.5 percent, 11.9 percent and 13.8 percent respectively in April 2010 to 14.5 percent, 3.4 percent and 2.9 percent in April 2011.

Table 6 – Trends in Industrial Production – YOY growth in percent [Old Series]

Month/ Year

Mining Mfg Electricity General IIP growth

Month/ Year


Dec'09 11.12 19.62 5.42 17.95 Dec'10 5.97 2.07 5.99 2.58 Jan'10 15.34 17.90 5.57 16.78 Jan'11 1.76 3.68 10.47 4.03 Feb'10 11.02 16.11 7.33 15.13 Feb'11 0.99 3.63 6.75 3.65 Mar'10 12.31 16.45 8.33 15.55 Mar'11 0.39 8.42 7.19 7.78 Apr'10 11.97 18.00 6.87 16.64 Apr'11 2.06 4.37 6.43 4.38


Table 7 – Trends in Industrial Production – YOY growth in percent [New Series]

Month/ Year


Month/ Year Mining Mfg Electricity General IIP growth

Dec'09 7.52 10.24 5.45 9.50 Dec'10 5.93 8.72 5.97 8.17 Jan'10 11.61 14.48 5.55 13.33 Jan'11 1.69 8.09 10.49 7.52 Feb'10 8.17 15.30 7.35 13.73 Feb'11 0.95 7.21 6.76 6.44 Mar'10 11.07 16.31 8.33 14.94 Mar'11 0.27 10.35 7.18 8.87 Apr'10 9.20 14.45 6.53 13.08 Apr'11 2.15 6.88 6.44 6.30


The slow growth of the industrial sector seen in the month of April 2011 is part of a longer trend visible since the close of 2010. As data given in the tables above show, industrial production numbers have been weak for some time now and this trend is confirmed irrespective of the data series that one

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chooses to evaluate. In fact, as per the old series, the slowdown in industrial growth is more accentuated with growth in IIP being under 5 percent in four of the last five months.

If we look at the numbers for the industrial production as per the use based classification, we again see a loss of momentum in industrial production in recent months. The only point of departure between data based on the old and the new series is in the reported performance of the capital goods sector. Using the old series, we see that capital goods production has registered negative growth in three of the last five months with growth in April 2011 still being an anemic 2.53 percent. However, as per the new series, capital goods production registered a growth of 15.4 percent and 14.5 percent in the months of March and April 2011.These figures, which are not all that weak, will have to be monitored going ahead to see if some trend is emerging here.

Table 8 – Trends in Industrial Production – Use Based / YOY growth in percent [Old Series]

Month/ Year Basic Capital Intermediate Consumer

Total Durable Non-durable

Dec'09 8.35 42.89 23.50 10.45 41.04 2.96 Jan'10 11.47 57.93 22.23 0.42 28.21 -7.02 Feb'10 8.53 46.68 15.85 6.27 29.09 -0.83 Mar'10 10.79 36.00 13.54 9.27 32.57 1.50 Apr'10 9.12 64.10 10.82 11.88 32.12 4.83


Table 9 – Trends in Industrial Production – Use Based / YOY growth in percent [Old Series]


Total Durable Non-durable Dec'10 6.10 -9.00 6.79 3.50 19.48 -1.89 Jan'11 7.57 -18.06 7.75 12.22 23.88 7.89 Feb'11 6.03 -18.15 8.61 11.04 23.46 6.00 Mar'11 4.39 13.56 6.14 8.16 12.74 6.15 Apr'11 5.63 2.53 2.37 5.92 9.19 4.47


Table 10 – Trends in Industrial Production – Use Based / YOY growth in percent [New Series]

Month/ Year Basic Capital Intermediate Consumer goods

Total Durable Non-durable Dec'09 5.81 4.84 12.44 15.08 46.45 0.20 Jan'10 8.74 14.28 14.19 18.61 57.40 0.01 Feb'10 5.61 39.41 10.34 16.61 28.89 8.73 Mar'10 7.35 48.60 10.97 12.62 12.96 12.36 Apr'10 6.66 35.48 11.89 13.82 23.28 6.75


Table 11 – Trends in Industrial Production – Use Based / YOY growth in percent [New Series]


Total Durable Non-durable Dec'10 7.80 20.16 8.08 3.57 7.78 0.65 Jan'11 7.68 5.35 7.39 8.23 12.49 5.02 Feb'11 5.58 -4.05 5.75 12.13 18.23 7.49 Mar'11 6.26 15.40 1.80 11.67 13.92 9.86 Apr'11 7.31 14.46 3.43 2.87 3.80 2.07


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It was mentioned even in our earlier report that the rising interest rates in the economy have started having a bearing on industrial activity. Recent news reports indicating increase in inventories with automobile dealers, decline in steel imports, slowdown in cement sales, fewer inquiries for purchase of commercial vehicles and build up of unsold stocks with real estate players are all symptomatic of a slowdown and highlight how consumption and investment demand are responding to the evolving interest rate scenario. Such developments have created a negative perception and depressed the confidence level of corporate India.

Table 12 – Projects under implementation stalled and new projects announced

Under Implementation Stalled New Projects

Qtr ending Nos Rs Crore Nos Rs Crore Jun 2009 257 281384 654 242061 Sep 2009 293 337359 760 382118 Dec 2009 308 311214 1047 458435 Mar 2010 330 318251 1169 572300 Jun 2010 338 305545 1178 708103 Sep 2010 376 272760 993 356784 Dec 2010 390 291816 982 292872 Mar 2011 389 274366 989 252912

Source – CMIE

In this context it may be mentioned that once the pace of investments, which is crucial for overall growth of the economy, loses momentum, it is difficult to bring it back. Unfortunately, we may just be standing at the tipping point of such a situation. The data on projects under implementation stalled and new projects announced provided by the Centre for Monitoring the Indian Economy (CMIE) confirms that the pace of investments has taken a beating. As the table given above shows while the total number of projects under implementation stalled has been slowly inching up over the last one year, the total number of new projects announced in a quarter has been falling during the same time.

When we view the trends in GDP growth and gross fixed capital formation presented in the earlier section along with the trends in industrial production and new investment intentions of corporate India, we reach the conclusion that the health of the economy is not in the best of states and that some urgent action is required to arrest this slowdown in investments.

In fact, in FICCI’s most recent Business Confidence Survey, members of corporate India had indicated the following five point strategy for the authorities to revitalize industrial and economic growth in the country –

Lower interest rates, particularly the cost of credit to SMEs. Fasten the pace of implementation of infrastructure projects. Check the incessant rise in price of industrial inputs and raw materials. Continue with incentives offered to exporters. Maintain fiscal discipline.

Core Sector

The composition of the core sector has also undergone a change with two new segments being added to the existing list of six industries. These two new segments are fertilizers and natural gas and with the addition of these segments the combined weight of core sector in IIP has increased from 27 percent to 37.9 percent. As part of this revision, weights of the existing sectors have also seen some change and

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base year has also been revised to 2004-05. The new expanded list of sectors that now make up the core sector along with the weights attached is presented in the following table.

Table 13 – Segments of the Core Sector

Segment Weight in the old series Weight in the new series

Overall Index 26.68 37.90 Coal 3.22 4.38 Crude Oil 4.17 5.21 Natural Gas - 1.71 Refinery Products 2.00 5.94 Fertilizers - 1.25 Steel 5.13 6.68 Cement 1.99 2.41 Electricity 10.17 10.32

Source – Office of Economic Adviser, MOC&I, Govt of India

If we look at the numbers for the core sector as per the new series, we see that this sector registered a growth of 5.7 percent during the year 2010-11. This growth was lower than the growth of 6.6 percent that was posted in the year 2009-10. At the disaggregated level, the sectors that saw a weaker performance in the year 2010-11 vis-à-vis 2009-10 are coal, natural gas, fertilizers, cement and electricity. The remaining sectors namely crude oil, refinery products and steel saw an improvement in performance in 2010-11 over 2009-10.

Table 14 – Growth in the core sector – New series


As the data given in the table above shows, performance of the coal sector nose-dived in 2010-11 with growth plummeting from 8.12 percent in 2009-10 to (–) 0.3 percent in 2010-11. The main reason why production in the coal sector remained almost flat in 2010-11 is the tough stance and stringent environmental norms with regard to coal mining adopted by the Ministry for Environment and Forests. Additionally, law and order problems in select mining areas of the country also had a bearing on overall coal production.

Just like coal, performance of the natural gas sector also deteriorated with growth slipping from a high of 44.6 percent in 2009-10 to just about 10 percent in 2010-11. This dip in growth of natural gas production can be ascribed to the fall in natural gas production in the KG D6 basin operated by Reliance.

The performance of the fertilizer sector has also been lackluster with growth slowing down dramatically from 12.69 percent in 2009-10 to a negative 0.02 percent in 2010-11. This poor state of affairs in the

2009-10 (Apr-March)

2010-11 (Apr-March)

April 2010 April 2011

Overall 6.64 5.72 8.50 4.62 Coal 8.12 -0.30 -2.96 2.84 Crude Oil 0.55 11.94 5.16 10.97 Natural Gas 44.59 9.97 54.11 -9.32 Refinery Products -0.45 2.98 5.34 6.62 Fertilizers 12.69 -0.02 7.83 -1.33 Steel 6.05 8.89 12.91 4.80 Cement 10.53 4.52 8.76 -1.06 Electricity 6.17 5.48 6.89 6.79

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fertilizer sector can be attributed to reported shortages in availability and supply of both coal and natural gas.

In case of the cement sector, the growth numbers show a drop from 10.53 percent in 2009-10 to 4.52 percent in 2010-11. As mentioned in our earlier report, this drop can be attributed to rising cost of raw materials (particularly coal) and difficulties in getting environmental clearances. Slowdown in the execution of government projects in recent months particularly in the five poll bound states has also had an impact on cement sector. Additionally, there are reports that the construction sector is facing shortages of labour and this has affected cement dispatches and production.

The slowdown in growth in the electricity sector from 6.17 percent in 2009-10 to 5.48 percent in 2010-11 can mainly be attributed to poor performance in the thermal power generation segment that accounts for nearly 65 percent of the total generation capacity in the country. Thermal power generation suffered a major setback during the last fiscal due to shortage of coal and delays in providing fuel linkages to thermal plants. A considerable number of power projects were said to get delayed because of uncertainty in the availability and supply of coal. The Ministry of Environment and Forest (MoE&F) categorized 203 coal blocks as 'no go' mining zones and this has also contributed to supply shortfalls. According to estimates given by Ministry of Coal, these 203 coal blocks could have generated around 1.3 lakh MW of power annually, thus, helping attain the yearly target for the year.

Amongst the sectors that saw an improvement in performance in 2010-11 over the previous year, crude oil stands out as growth in this sector jumped from 0.55 percent in 2009-10 to 11.94 percent in 2010-11. This growth was driven by companies in the private sector and the joint sector and their share in domestic oil production improved from 15.6 percent in 2009-10 to 25.7 percent in 2010-11. Reliance Industries and Cairn India showed exemplary performance and contributed the maximum to this increase in oil output during the year.

The latest numbers for the month of April 2011 show that there has been a perceptible decline in the performance of the core sector with growth dipping from 8.5 percent in April 2010 to 4.62 percent in April 2011. Sectors like natural gas, fertilizers, cement and steel are largely responsible for this poor performance. A positive take away from April 2011 numbers is the performance of the coal sector, which grew by 2.84 percent.

Inflation

The inflation situation in the economy continues to be a cause for concern. Despite large scale tightening of the monetary policy by the RBI and other steps taken by the government, inflation continues to remain close to the double digit mark.

Data shows that WPI based headline inflation stood at 10 percent in the year 2010-11. This is not only much higher compared to the average inflation rate of 3.6 percent seen in 2009-10 but also way above the 5 percent mark considered as the ‘growth promoting inflation level’ or the ‘normal inflation level’ by the RBI.

Latest numbers on inflation are available for the month of May 2011 and these show that headline inflation stood at 9.1 percent in May 2011. Although it is slightly lower than 10.5 percent inflation registered in May 2010, it is still too high as per RBI’s standards. Data on the month on month growth in WPI based inflation also shows that the underlying inflationary pressures in the economy are maintained. The month on month growth in inflation in May 2011 stood at 0.7 percent. In the previous two months – March and April – the corresponding figures stood at 0.9 percent and 0.7 percent respectively.

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Looking at inflation data at the disaggregated level throws up an interesting trend. For most part of the year 2010, it was the ‘Primary Articles’ segment which contributed substantially to overall inflation. Further, within the ‘Primary Articles’ segment, it was ‘Food Articles’ where inflation was at an uncomfortably high level throughout 2010. However, beginning 2011, we see that the contribution of the other two broad segments, namely ‘Fuel & Power’ and ‘Manufactured Goods’, to overall inflation has gone up swiftly while that of ‘Primary Articles’ has come down. It is however important to note that while inflation in case of ‘Food Articles’ may be trending down, it is still high for any comfort.

Further, while inflationary pressures seen in case ‘Fuel and Power’ can be attributed to the increase in prices of items like petrol and coal, the buildup of inflationary pressure in manufactured goods is largely the result of rising prices of raw materials and industrial inputs and which are being passed on by manufacturers in the final prices of their products.

With inflationary pressures slowly spreading to all the three broad segments of WPI, the RBI has also drawn attention towards inflation getting increasingly generalized.

In fact, if we look at the numbers for core inflation, which captures the non-volatile components of WPI, then we see that over time the gap between headline inflation and core inflation has been coming down. In fact in the month of May 2011, core inflation stood at 8.6 percent. This was not only higher compared to core inflation in the month of April 2011 (8.0 percent) but also close to overall inflation rate, which, as previously mentioned, stood at 9.1 percent in May 2011. Further, if we look at the numbers for month on month growth of core inflation, then we see that while in April 2011, the MOM growth stood at 0.1 percent, in May 2011, it went up to 0.5 percent.

Table 15 – WPI based Inflation – YOY growth in Percent

Apr 10

May 10

Jun 10

Jul 10

Aug 10

Sep 10

Oct 10

Nov 10

Dec 10

Jan 11

Feb 11

Mar 11

Apr 11

May 11

All Commodities 10.9 10.5 10.3 10.0 8.9 9.0 9.1 8.2 9.4 9.5 9.5 9.7 8.7 9.1 I Primary Articles 21.4 20.4 20.1 19.1 16.0 18.2 18.1 14.7 18.4 18.4 15.9 13.4 12.0 11.3 (A) Food Articles 20.5 21.4 21.0 18.5 15.0 16.3 14.6 10.1 15.1 16.7 11.0 9.4 8.7 8.4 a. Fruits and Veg 14.3 15.8 18.9 13.2 3.3 12.2 12.4 7.9 25.8 40.0 16.1 18.9 17.6 17.4 b. Milk 27.9 28.4 26.2 26.1 26.9 24.1 21.0 18.0 18.3 13.8 12.5 4.4 4.7 6.4 c. Eggs, meat, fish 38.6 45.5 39.0 31.4 27.0 29.5 27.4 18.9 19.4 15.7 12.7 13.5 10.7 6.4 d. Condiments and spices 35.4 36.1 39.7 43.5 39.9 32.5 30.2 23.8 37.7 37.7 30.8 20.4 16.6 16.1 (B) Non-food articles 18.1 14.8 15.8 15.3 15.8 20.8 25.7 25.5 25.4 26.6 34.4 27.3 27.3 22.3 a. Fibers 17.1 15.8 18.1 16.2 15.7 36.3 42.3 44.7 47.1 56.2 89.2 87.7 86.1 59.0 Raw cotton 16.2 14.5 17.3 13.2 13.1 35.3 43.7 46.6 47.5 59.6 101.4 103.0 101.2 68.4 Raw Jute 17.8 13.7 14.9 23.8 22.9 43.8 34.3 40.0 44.1 38.7 38.5 38.7 39.0 40.0 b. Oil seeds 6.5 2.3 2.1 2.2 2.5 4.7 7.5 3.1 3.3 3.5 7.9 10.9 10.0 12.2 (C) Minerals 34.6 25.3 22.1 31.6 23.8 26.8 29.4 29.5 30.6 16.1 17.7 15.2 7.4 11.9 a. Metallic minerals 36.4 29.9 43.7 63.3 59.8 55.1 64.2 69.9 63.7 24.6 23.6 25.8 13.0 13.1 II Fuel and power 13.6 14.4 13.9 13.3 12.5 11.1 11.0 10.3 11.3 11.4 12.4 12.5 13.3 12.3 (A) Coal 7.9 7.9 7.9 7.9 7.9 7.9 3.8 0.2 0.2 0.1 3.9 13.3 15.9 13.3 (B) Mineral oils 18.4 18.1 17.1 15.9 16.0 13.6 14.6 14.5 15.9 16.7 17.1 14.7 15.4 15.9 (C) Electricity 3.4 8.6 8.6 8.6 5.0 5.0 5.0 5.0 5.0 3.6 3.6 3.6 3.6 -1.3 III Manufactured products 6.4 5.9 5.6 5.8 5.2 5.0 5.1 5.0 5.4 5.3 6.3 7.4 6.2 7.3 (A) Food products 9.1 7.1 6.1 7.3 4.6 3.6 3.8 1.1 1.4 -0.1 0.0 2.4 5.7 7.3 (B) Beverages, tobacco 7.8 7.5 7.4 7.3 6.8 6.3 6.4 6.0 5.7 9.6 8.6 8.8 7.4 7.9 (C ) Textiles 11.3 11.3 10.2 10.1 10.4 9.8 10.1 11.7 12.3 13.2 15.6 18.3 14.1 15.9 (D) Wood and wood products 7.4 5.7 4.8 4.9 4.7 2.8 1.4 2.2 2.1 4.6 3.8 3.6 2.0 4.7 (E) Paper and paper products 5.1 3.7 3.4 4.6 5.1 5.3 5.4 5.7 4.6 5.7 7.1 8.4 6.0 7.0 (F) Leather and leather products -0.8 0.0 -1.2 0.0 0.1 -0.1 -1.4 -1.8 -1.4 -2.5 -1.2 -1.5 -1.2 -1.4 (G) Rubber and rubber products 4.9 4.7 5.2 5.0 4.6 4.7 6.2 7.5 7.8 9.2 9.6 10.6 9.2 8.7 (H) Chemicals and products 5.5 5.2 5.2 4.4 4.3 4.6 4.9 5.2 5.0 5.5 6.6 7.4 6.0 7.1 (I ) Non-metallic mineral products 3.1 3.9 2.1 3.1 2.1 1.6 2.5 2.1 3.0 2.5 2.5 3.7 3.2 3.0 (J) Basic metal, alloys 8.8 8.4 8.2 7.9 7.5 7.2 7.7 7.8 9.2 8.5 11.1 11.7 7.1 7.9

(K) Machinery and machine tools 2.2 2.0 2.2 2.3 2.4 3.4 3.1 2.9 3.5 3.3 3.4 3.2 2.6 3.2 (L) Transport, equpt and parts 2.7 2.9 2.9 3.8 2.9 2.9 3.0 2.7 2.7 2.9 3.0 3.6 2.2 4.0


Coming now to the segment wise analysis, we see that prices in the ‘Manufactured Goods’ category registered an increase of 6.3 percent in the year 2010-11. The corresponding figure in 2009-10 was 1.8

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percent. Further, as per the latest data available, ‘Manufactured Goods’ segment recorded an inflation of 7.3 percent in May 2011. Looking at the sub-categories within this broad group, we see that sectors like food products, beverages and tobacco, paper and paper products, rubber and plastic products, chemical and chemical products, and basic metals and metal products are seeing significant inflation. As already mentioned, the buildup in prices in many of these industries is largely due to increasing cost pressures which manufacturers are now finding difficult to absorb.

In case of the ‘Fuel and Power’, overall inflation in 2010-11 stood at 12.2 percent. The corresponding figure in 2009-10 was (-) 2.1 percent. Further, as per the latest data available, this segment recorded an inflation of 12.3 percent in May 2011. Inflation in this segment is being driven by high and rising prices of items like coal and mineral oils. One may recall that petrol prices in the country are now being regularly aligned with international prices following decontrol of the price mechanism and this is having a bearing on overall inflation in this broad category.

Finally, in case of the ‘Primary Articles’ category overall inflation in 2010-11 stood at 17.7 percent. The corresponding figure in 2009-10 was 12.7 percent. Further, in the month of May 2011, this segment recorded an inflation of 11.3 percent. Although over time inflation in this segment has been showing signs of moderation and which have come on the back of inflation going down in case of food articles, the non-food articles segment has seen a trend of rising inflation. In fact, in May 2011, inflation in the non-food articles segment stood at a high 22.3 percent. High and rising prices of fibers like raw cotton and raw jute are responsible for high inflation seen in case of non-food articles.

With regard to outlook for inflation in the months ahead, it may be mentioned that at least in the first half of the current year, overall inflation is likely to remain sticky at the present levels. In fact there are good chances that we may see a jump back to the double digit territory on a few occasions. And the factors that lie behind this prognosis are given below.

First, international crude oil prices continue to remain high. With developments in the Middle East and North Africa region showing no signs of abatement and with OPEC countries in their most recent meeting [June 8, 2011] failing to reach a consensus on increasing their daily oil production quota, there are limited chances of oil prices coming down in the near future. A slowdown in global growth in 2011 that is widely anticipated could put a lid to international oil prices but any large scale downward revision is being ruled out at this moment. As a result, we can expect inflationary pressures in the ‘Fuel and Power’ category to continue. Moreover, this pressure could further mount once the government announces decontrol of diesel and LPG prices.

Second, in the context of inflation in the ‘Fuel and Power’ segment, one must also take note of the rising prices of coal. Recent media reports show that coal production target for 2011-12 has been cut down primarily on account of rising concerns over environmental issues. Coal shortage of nearly 142 million tonnes is expected in 2011-12 and our imports this year could be as much as 114 million tonnes. Besides power generation, this situation of coal shortage does not augur well even for the price line in case of coal.

Third, global food prices are likely to remain firm in the near term. According to recent reports brought out by FAO, global food prices would continue to remain a concern in 2011. The FAO has warned that while the harvest this year would be critical, restoring market balances will take some time. Hence, we can expect upward pressures on food prices in the global markets to persist. As global food prices have a bearing on food prices in India, we have another element that is not likely to work in favour of bringing inflation down.

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Fourth, the government has recently announced a hike in the Minimum Support Prices [MSP] for goods like paddy, soybean and corn for the upcoming agricultural season. This increase in MSP will also have a bearing on the trend in food prices in the near term. There are chances that food inflation may accelerate once the new crop comes into the market in October 2011.

Given the above factors, we expect concerns on inflation to remain on the policy agenda through the year 2011. Further, with policy rate hikes by RBI having failed to deliver on the stated objective of reining in inflationary pressures and bringing down inflationary expectations, it is time that government actively pursues supply side measures to curtail inflation.

Foreign Trade

Financial year 2010-11 was exceptionally good for Indian exporters. With overall exports amounting to US$ 245.5 billion, the sector registered a growth of 37.7 percent in 2010-11 over the previous year. And this was a record growth witnessed in exports since independence.

Further, when we look at the monthly data for exports for the year 2010-11 as given in the table below, we see that growth in exports has been particularly strong since November 2010. While during the period April to October 2010, exports grew at an average rate of 26.8 percent, overall growth was much higher in the remaining part of the year. In fact, during November 2010 and March 2011, India’s exports grew at a whopping 44.3 percent on average.

The onset of recovery in the global economy, which was led by the emerging economies, coupled with continuation of export sops announced by the government as part of the fiscal packages offered during the crisis period gave the sector the much needed impetus. The support provided by the government in the form of measures such as interest subvention of 2 percent on pre and post shipment export credit was instrumental in reviving the badly hit labor intensive export oriented industries.

Table 16 – Exports and Imports in US$ billion / YOY growth in percent

Exports Imports Trade balance

Petroleum crude & products imports

Non-POL items

imports

Export growth

Import growth

2010-Apr 17.7 28.8 -11.0 9.5 19.3 42.2 48.9 2010-May 15.7 26.6 -10.9 8.6 18.0 27.57 32.61 2010-June 19.3 25.9 -6.7 7.8 18.1 41.5 12.4 2010-July 16.0 26.5 -10.5 8.2 18.3 11.7 22.0 2010-Aug 16.4 27.1 -10.6 6.9 20.2 21.0 20.6 2010-Sep 18.1 25.1 -7.0 7.5 17.6 23.9 16.7 2010-Oct 17.7 28.6 -11.0 8.1 20.6 19.4 10.4 2010-Nov 20.2 25.3 -5.2 7.4 17.9 35.0 1.4 2010-Dec 25.6 28.2 -2.6 8.4 19.7 55.2 -0.3 2011-Jan 21.4 31.4 -10.0 9.6 21.8 37.5 24.4 2011-Feb 23.6 31.7 -8.1 8.2 23.5 49.7 21.1 2011-Mar 29.1 34.7 -5.6 9.4 25.3 43.9 17.3 2011-Apr 23.8 32.8 -9.0 10.2 22.6 34.4 14.1

Source – CMIE

In addition, the strategy of the government to continue exploring new and diverse markets for India’s exports proved to be truly rewarding. Destination wise data available for the period April-December 2010 shows a significant increase in exports to regions like Latin America, Africa and other Asian countries. For a long time India’s exports had been concentrated in US and the European countries and the crisis provided a good opportunity to explore these other markets. India’s exports to Africa grew by

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44.9 percent, to Asia by 43 percent and to Middle East by 31 percent during April-December 2010 over the corresponding period in 2009-10.

Given this exemplary performance in exports, Commerce Minister, Mr. Anand Sharma, recently indicated that India should be able to achieve exports of US$ 500 billion by the year 2013-14. He also pointed out that sectors like engineering goods, petroleum products, gems and jewellery, drugs and pharmaceuticals have done particularly well during the year 2010-11. Engineering goods were India’s top exports in the year 2010-11 amounting to US$ 60 billion and registering a growth of over 80 percent vis-à-vis the previous year. Further, while readymade garments registered a growth of 42.9 percent in the year 2010-11 over 2009-10, gems and jewellery and pharmaceuticals both witnessed a growth of about 15 percent. Petroleum products recorded a growth of 50.5 percent in 2010-11.

The strong momentum in exports, seen particularly during the second half of 2010-11, has continued in the year 2011-12 as well. Latest numbers available for the month of April 2011 show that exports in this month amounted to US$ 23.8 billion and represented a growth of 34.4 percent over the same month of the previous year when exports totaled US$ 17.7 billion.

While this strong start in the year 2011-12 is encouraging, there are indications that this high growth may not be sustained in the months ahead. And there are both domestic and external reasons that make such a forecast likely. In fact in FICCI’s latest Survey on Exports, which was completed in the month of May 2011, exporters indicated that going ahead their performance could weaken on account of the following factors –

Firstly, the interest subvention of 2 percent on pre and post shipment credit announced to support the exporters during the slowdown owing to the crisis came to an end in March 2011. The exporters now have to pay a higher rate of interest to the banks for obtaining export credit. Further, this is happening at a time when the lending rates are already going up following the increase in the base rates of the banks and this would impact the production cost structure of the exporters.

Secondly, the DEPB scheme is finally coming to an end. As this is coming in quick succession following the withdrawal of interest subvention, the exporters are finding themselves under reasonable pressure to maintain competitiveness in the global market. Although most recent reports show that the government has agreed to an extension of the DEPB scheme by another three months i.e. till September 20113, a large section of the exporting community feel that India’s exports are still not robust enough and that such incentives should not be completely done away with. Exporters are hoping that during the intervening three month period, the government would evolve an alternate scheme that would support exporters.

Thirdly, off late there has been a significant increase in exports from India to Asian countries. However, with inflation emerging as concern in other Asian countries as well and the central banks responding by raising interest rates, the demand in this region is likely to face some moderation. This will certainly have some bearing on India’s exports to the Asian market.

Fourthly, rising raw material costs and oil prices is also having a bearing on the exporters. Almost three quarters of the respondents in FICCI’s latest Export Survey said that they are facing difficulty due to high raw material prices. The textile sector is facing the heat due to surging cotton and yarn prices, the chemical sector is being impacted due to increasing polymer prices, processed foods segment is facing the brunt of high fruit and vegetable prices and engineering goods are being affected by high steel

3 The DEPB scheme was to come to a close by end June 2011. However, the government has decided to extend it by another

three months.

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prices. It is also important to note that rising crude oil prices have increased the inland transportation cost and even the international ocean freight rates have moved up recently.

While the aforementioned factors are likely to dampen the buoyancy seen in exports in recent times, one must also take note of the state of the global economy as this has a bearing on the performance of India’s exports. Latest estimates provided by the IMF show that global growth is expected to moderate in the year 2011. According to the IMF, the global economy is expected to grow by 4.4 percent in the year 2011. In 2010, the global economy grew by 5.0 percent. The IMF has also indicated that the world trade volume is likely to grow by 7.4 percent in 2011 as against a growth of 12.4 percent seen in 2010. The general slowdown in the global economy and global trade volumes projected for 2011 is also a downside risk to India’s export performance in the current year.

Coming to imports next, we see that in the year 2010-11 our imports totaled US$ 350.4 billion. This represents an increase of about 21.8 percent over the previous year’s imports of about US$ 287.6 billion. During the year 2010-11, imports of both petroleum crude and products (POL) and non- petroleum crude and products (Non POL) went up. While POL imports amounted to US$ 101.7 billion in 2010-11 and posted a growth of 16.7 percent over the previous year, non-POL imports amounted to US$ 248.7 billion and registered a growth of 24.0 percent over the previous year.

Latest data available shows that in the month of April 2011 our imports totaled US$ 32.8 billion and registered a growth of 14.1 percent over the same month of the previous year when imports amounted to US$ 28.8 billion.

In the context of this rise in imports, it is important to take note of the rising international prices of oil, which have pushed our POL import bill upwards. Otherwise in terms of volume there hasn’t been a significant increase in POL imports. Price of oil in the international market has been moving up over the last year with the spot price for Brent crude ruling around US$ 113 a barrel – an increase of 45 percent over the previous year – in the last week of May 2011.

With developments in the Middle East and North Africa region showing no signs of a let up and with OPEC in its last meeting deciding not to hike the overall quota for oil production, oil prices are likely to remain firm in the near term. This will continue to put pressure on India’s overall oil import bill. As regards non-oil imports, while a slowdown in the domestic economy could lead to some moderation in the non-oil import bill, any large respite here can be ruled as prices of commodities other than oil are also firming up. Another point to take note of is the likely increase in imports of LNG in 2011 due to shortfall in RIL’s KG D6 block. This too would lead to an increase in India’s import bill as imported gas is nearly 3 times as costly compared to gas supplied by Reliance.

With exports likely to come under pressure and imports showing little signs of easing in the coming months, the trade balance in 2011-12 could widen.

Foreign Investments

Data on total foreign investment flows into the country shows that in 2010-11, foreign investment flows into India saw a dip of about 17 percent over the previous year. Further, when we look at the two main components of foreign investment, namely foreign direct investment and portfolio investment, we see that the dip is largely on account of a slowdown seen in case of FDI. As the table below shows, FDI flows into India in 2009-10 were to the tune of US$ 37.7 billion and in 2010-11 this figure came down to US$ 27 billion. Portfolio flows, which were to the tune of US$ 32.4 billion in 2009-10, saw a marginal dip to about US$ 31.5 billion in 2010-11.

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Table 17 – Foreign Investment Flows in US$ Million

Year FDI YoY Growth

Portfolio Investments

YoY Growth

FII* YoY Growth

Total Investment (FDI+ Portfolio)

YoY Growth

2000-01 4,029 2,760 1,847 6,789 2001-02 6,130 52.1 2,021 -26.8 1,505 -18.5 8,151 20.1 2002-03 5,035 -17.9 979 -51.6 377 -75.0 6,014 -26.2 2003-04 4,322 -14.2 11,377 1,062.1 10,918 2,796.0 15,699 161.0 2004-05 6,051 40.0 9,315 -18.1 8,686 -20.4 15,366 -2.1 2005-06 8,961 48.1 12,492 34.1 9,926 14.3 21,453 39.6 2006-07 22,826 154.7 7,003 -43.9 3,225 -67.5 29,829 39.0 2007-08 34,835 52.6 27,271 289.4 20,328 530.3 62,106 108.2 2008-09 37,838 8.6 -13,855 -150.8 -15,017 -173.9 23,983 -61.4

2009-10(P) 37,763 -0.2 32,376 -333.7 29,048 -293.4 70,139 192.5 2010-11(P) 27,024 -28.4 31,471 -2.8 29,422 1.3 58,495 -16.6

* FII is included in Portfolio Investment Source – Reserve Bank of India

If we look at the figures for FDI over the last few years, we see that the quantum received in 2010-11 was the lowest in the last four years. Quarterly numbers further highlight that FDI flows in the fourth quarter of 2010-11 were the lowest since the third quarter of 2007-08. This clear slowing down in the flow of FDI funds towards India should be a matter of concern for the authorities.

Further, data on sector wise FDI flows into India for the period April to February 2010-11 shows that out of a total of top 25 sectors, 15 sectors saw a dip in FDI flows in 2010-11 compared to flows in the previous year. And out of these 15 sectors, it is sectors like services, construction activities, housing and real estate, telecommunication and agricultural services that have taken the biggest hit in terms of inflows compared to corresponding period of the previous year i.e. 2009-10.

Table 18 – Sector Wise Foreign Direct Investment Flows in US$ Million

Sector 2010-11 (Apr- Feb)

US$ million

2009-10 (Apr- Feb)

US$ million

% change in 2010-11

vis-à-vis 2009-10

% to total FDI

Inflows (Apr- Feb 2010-11)

% to total FDI

Inflows (Apr- Feb 2009-10)

1 Services sector 3,274.02 4,184.64 -21.76 ↓ 17.84 17.02 2 Telecommunications 1,410.14 2,495.34 -43.49 ↓ 7.68 10.26 ↓ 3 Automobile 1,320.38 1,009.34 30.82 7.19 4.12 4 Power 1,236.76 1,335.70 -7.41 ↓ 6.74 5.48 5 Housing and real estate 1,109.33 2,703.50 -58.97 ↓ 6.04 11.01 ↓

6 Construction 1,071.64 2,810.18 -61.87 ↓ 5.84 11.29 ↓ 7 Metallurgical industries 1,044.37 372.83 180.12 5.69 1.51 8 Computer software / hardware 766.24 872.88 -12.22 ↓ 4.18 3.52 9 Cement and gypsum products 607.58 33.64 1,706.12 3.31 0.13

10 Petroleum and natural gas 562.38 223.43 151.70 3.06 0.94 11 Industrial machinery 553.49 246.27 124.75 3.02 0.99 12 Trading 473.39 560.23 -15.50 ↓ 2.58 2.27 13 Information and broadcasting 406.37 467.39 -13.06 ↓ 2.21 1.9 14 Chemicals other than fertilizers 383.69 346.19 10.83 2.09 1.39 15 Hotel and tourism 301.43 707.93 -57.42 ↓ 1.64 2.86 ↓ 16 Sea transport 290.46 275.21 5.54 1.58 1.1

17 Consultancy services 237.87 340.65 -30.17 ↓ 1.30 1.38 ↓ 18 Hospital and diagnostic centres 231.63 129.49 78.88 1.26 0.52

19 Drugs and pharmaceuticals 211.53 210.39 0.54 1.15 0.85 20 Non-conventional energy 181.94 497.91 -63.46 ↓ 0.99 1.96 ↓

21 Food processing 166.37 262.71 -36.67 ↓ 0.91 1.05 ↓

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22 Electrical equipments 154.36 641.41 -75.93 ↓ 0.84 2.61 ↓ 23 Textiles 108.46 139.03 -21.99 ↓ 0.59 0.56 24 Agricultural services 41.75 1,317.06 -96.83 ↓ 0.23 5.43 ↓ 25 Miscellaneous industries 1,323.01 1,003.14 31.89 7.24 4.03

Source – SIA Newsletter, DIPP

As this slowdown in FDI is happening at a time when the country is preparing plans to achieve a target growth of 9 to 9.5 percent over the 12th Plan Period, it becomes important to get to the core of this issue and take corrective action. FDI flows are an important source of funds for us and have in the past supplemented domestic resources for meeting investment requirements in a whole host of sectors.

FICCI’s interaction with economists, policy experts and analysts shows that the emergence of other competing economies, particularly in the Asian region, could be one of the factors that lie behind this slowdown in FDI flows towards India. While this proposition requires further research, economists and policy experts concur with the view that there are tangible factors linked to India which could also be responsible for making foreign investors a little wary for committing more funds. And amongst these domestic factors, two issues stand out.

First is the state of the macro-economy, which is far from comfortable. With inflation remaining stubbornly high, growth slowing down due to aggressive monetary tightening by RBI and the government throwing limited light on how the fiscal deficit target of 4.6 percent for the current year would be achieved, investors may have been prompted to get into a ‘wait and watch’ mode before the domestic situation improves.

Second set comprises factors such as environment sensitive policies being pursued with respect to certain sectors, slow movement on resolving the land acquisition problem and issues of governance and corruption that have been grabbing headlines and showing the country in poor light. As all of these issues have a bearing on the perception and confidence level of foreign investors, these may have limited FDI inflows into the country.

In this context, it may be reiterated that completion of the much awaited FDI policy reforms in sectors such as insurance, defence and multi-brand retail would also give a boost to overall FDI flows into the country.

Coming to portfolio investments, as already mentioned, in 2010-11 portfolio flows totaled US$ 31.5 billion and were only a tad below US$ 32.4 billion received in the previous year. FIIs, which form a major component of portfolio investments, were to the tune of US$ 29.4 billion in 2010-11 and saw little change from the figure for the previous year which was US$ 29 billion. While portfolio flows stood higher than FDI flows last year, the outlook for funds flows on portfolio account going ahead is also not too encouraging.

Given continuous monetary policy tightening by the central bank, interest rates are on an upswing. This coupled with rising prices of raw materials is likely to have an adverse impact on the profit margins of firms across sectors in the year ahead. As this would constrain the capacity of firms to distribute dividends, FIIs are likely to take a conservative view on India and Indian companies as they do their return on investment calculations. Signs of this are already emerging as in a recent survey [June 2011] conducted by the Bank of America Merrill Lynch amongst global fund managers, India was placed amongst the least favourite equity market by Asia-Pacific investors.

Additionally, with the RBI contemplating tightening of rules relating to exit of foreign investors and private equity funds who put their money in Indian firms, investors’ sentiments are expected to further

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weaken. The re-emergence and intensification of the sovereign debt crisis in Europe and the expected halt of quantitative easing policy in the US by the end of June 2011 are also downside factors for portfolio flows for emerging markets including India.

It may be mentioned that the Finance Minister of India, Pranab Mukherjee, tried to allay fears of fund managers and foreign institutions investors focused on India at recent conference. He urged FIIs to be optimistic about Indian growth story and to take a long term view on its performance rather getting disturbed with the short term developments and statistics.

As a measure of assurance, the Finance Minister told fund managers that the government would continue to take investor friendly policies and has already started the next generation financial sector reforms such as widening and deepening of the Indian securities markets, liberalizing the policy on foreign capital flows, strengthening the regulatory and other institutional architecture and reducing transaction cost in the securities markets.

These announcements however did little to reduce concerns amongst fund managers, who are looking for better management of the macro-economy and forward movement on crucial economic reforms.

Forex Reserves

India’s foreign exchange reserves increased as we moved ahead in fiscal 2010-11. As data given in the table below shows, while in April 2010, India’s foreign exchange reserves totaled US$ 279.6 billion, in September 2010 this figure had increased to US$ 292.9 billion. Most recent numbers show that the country’s foreign exchange reserves have shot up further crossing the US$ 300 billion mark. With this level of reserves, India is amongst the ten largest holders of foreign exchange reserves in the world.

Table 19 – Foreign Exchange Reserves in US$ Million

Forex Reserves

April 2010 279,633 May 2010 273,544 June 2010 275,710 July 2010 284,183 Aug 2010 283,142 Sept 2010 292,870 Oct 2010 297,956 Nov 2010 292,389 Dec 2010 297,334 Jan 2011 299,224 Feb 2011 301,592

March 2011 305,486 April 2011 313,671

Source – Reserve Bank of India

The increasing size of our foreign exchange reserves has drawn attention of the policymakers. As mentioned in our previous report, just some time back, Dr. Kaushik Basu, Chief Economic Advisor, Ministry of Finance, had raised the question of India to consider having a Sovereign Wealth Fund. In more recent times, a few independent analysts have opined that a part of these huge reserves be deployed to import commodities which are or could be in short supply in the economy. This last suggestion was made in context of managing the stubbornly high inflation by bridging the demand-supply mismatch.

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Exchange Rate

Most recent trends in the movement of the INR vis-à-vis major vehicle currencies show that the Indian Rupee has depreciated against all the major global currencies.

As the data given in the table below shows, the Rupee depreciated against the US$ by 1.2 percent between April 2011 and May 2011. During the same time period, while the value of the Rupee went down against the Pound Sterling by 1 percent, Rupee’s depreciation against the Japanese Yen was of a much larger magnitude – 3.8 percent. Against the Euro too we saw the Rupee becoming a little weak and depreciating by about 0.4 percent between April 2011 and May 2011.

Table 20 – Rupees per unit of foreign currency (Yearly/monthly average basis)

USD Pound Sterling Japanese Yen Euro

March, 2008 40.3561 80.8054 0.4009 62.6272 March, 2009 51.2287 72.9041 0.5251 66.9207 March, 2010 45.4965 68.4360 0.5018 61.7653

2010-11 April 2010 44.4995 68.2384 0.4763 59.6648 May 2010 45.7865 67.1747 0.4969 57.6553 June 2010 46.5443 68.6952 0.5122 56.9016 July 2010 46.8373 71.5150 0.5343 59.7636 Aug 2010 46.5679 72.9736 0.5465 59.9700 Sept 2010 46.0616 71.6578 0.5454 60.0592 Oct 2010 44.4583 70.3381 0.5428 61.7153 Nov 2010 45.0183 71.8498 0.5457 61.4981 Dec 2010 45.1568 70.4635 0.5425 59.6652 Jan 2011 45.3934 71.5394 0.5496 60.5178 Feb 2011 45.4538 73.2921 0.5503 62.0904 Mar 2011 44.9895 72.7033 0.5502 63.0314 April 2011 44.3681 72.7215 0.5334 64.2269 May 2011 44.9048 73.4310 0.5535 64.4829

MOM growth in May 2011

1.2 1.0 3.8 0.4

Source – Reserve Bank of India

One of the factors that affect the competitiveness of India’s exports vis-à-vis exports from other countries is the relative movement in the national exchange rates. In the following table, we provide the movement in the national currencies of select countries vis-à-vis the US$.

The data shows that between April 2011 and May 2011, majority of the currencies analyzed have depreciated against the US$. The only exception is the Indonesian Rupiah, which has appreciated against the US$ over the same time period. The Malaysian Ringgit did not see any movement against the US$ during the period under study.

Further, amongst all currencies that have weakened against the US$ during this period, it is the South African Rand that lost the most – a depreciation of almost 2.1 percent. This is followed by the Brazilian Real (depreciated by 1.3 percent) and the Indian Rupee (depreciated by 1.1 percent). Both the Pakistani Rupee and the Thai Baht have lost about 0.6 percent each against the US$ over the two month – April/May 2011 – period.

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Table 21 - Exchange rate vis-à-vis USD for selected countries (monthly average basis)

Brazilian Real

Indian Rupee

Indonesian Rupiah

Malaysian Ringgit

Pakistani Rupee South African Rand Thai Baht

2010-11

April 2010 1.76 44.50 9027.33 3.21 83.99 7.35 32.28 May 2010 1.80 45.77 9183.39 3.26 84.38 7.65 32.37 June 2010 1.81 46.56 9148.36 3.26 85.37 7.63 32.48 July 2010 1.77 46.87 9053.80 3.21 85.60 7.54 32.34 Aug 2010 1.76 46.57 8971.76 3.15 85.68 7.30 31.78 Sept 2010 1.72 46.04 8975.11 3.11 85.86 7.13 30.82 Oct 2010 1.68 44.42 8928.05 3.10 86.01 6.91 29.97 Nov 2010 1.71 44.88 8931.61 3.11 85.60 6.96 29.85 Dec 2010 1.70 45.17 9024.20 3.13 85.78 6.84 30.11 Jan 2011 1.67 45.38 9036.00 3.06 85.76 6.92 30.58 Feb 2011 1.67 45.46 8916.53 3.04 85.38 7.17 30.71 Mar 2011 1.66 44.99 8760.48 3.03 85.40 6.92 30.37 April 2011 1.59 44.39 8651.30 3.01 84.68 6.73 30.04 May 2011 1.61 44.90 8556.15 3.01 85.22 6.87 30.24

M-o-M growth in May 2011

1.3 1.1 -1.1 0.0 0.6 2.1 0.7

Source – International Monetary Fund

Regarding the outlook for the Indian Rupee against the US$ in the months ahead, the majority view amongst analysts and currency strategists is one of depreciation. This bearish view with regard to the Indian Rupee is based on two factors. First is the likely deterioration in the current account due to moderation in exports, continuous rise in imports and a possible slowdown in invisible receipts. Second is the expected slowdown in funds flows into India. While FDI flows into the Indian market are already on a slowdown mode, FII flows too are showing signs of anxiety over the evolving macro-economic situation with inflation remaining high and growth slowing down.

Money and Banking

Data on money supply growth shows that broad money (M3) registered a growth of 15.9 percent in the year 2010-11. This growth was only a tad lower when compared to a growth of 16.9 percent registered in the year 2009-10. However, it is important to note that growth in money supply in 2010-11 was considerably weak when compared to the growth of nominal GDP that stood at 19.1 percent.

Money supply growth in 2010-11 was driven by growth seen in bank credit to the commercial sector [20.6 percent]. The other important component of money supply, net foreign exchange of assets of the banking sector, registered a moderate growth of just about 7.4 percent in 2010-11.

Latest numbers available show that year on year growth in money supply in the period up to May 21, 2011 was 16.8 percent. Growth in the corresponding period [up to May 22, 2010] in the previous year was 15.1 percent.

Amongst sources of money supply, while bank credit to the commercial sector registered a growth of 21.3 percent in the period up to May 21, 2011, net bank credit to the government went up by 17.9 percent. Net foreign exchange assets of the banking sector registered a growth of 7.6 percent during the same time period.

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Table 22 - Sources of Money Supply (percentage change over previous year)

2009-10 2010-11 9-Apr-11 23-Apr-11 7-May-11 21-May-11

M3 16.9 15.9 17.0 17.6 16.9 16.8

Net Bank Credit to Government 30.7 18.2 15.2 17.2 17.4 17.9 Bank Credit to Commercial Sector 15.8 20.6 21.1 21.0 21.7 21.3

Net Foreign Exchange Assets of Banking Sector

-5.2 7.4 8.5 9.4 9.4 7.6

Government's currency liabilities to the public

12.1 11.7 11.7 10.4 10.4 9.4

Banking sectors net non-monetary liabilities other than time deposits

-1.1 26.9 17.9 18.9 26.6 23.3

Source – CMIE

A look at the components of money supply reveals that the year on year growth in the period up to May 21, 2011 in both demand deposits with banks and other deposits with RBI has been negative. Currency with the public and time deposits with banks – the two main components of money supply – however have seen a reasonable growth of 16.5 percent and 19.7 percent respectively.

Table 23 - Components of Money Supply (percentage change over previous period)

2009-10 2010-11 09-Apr-11 23-Apr-11 07-May-11 21-May-11

Currency with the public 15.33 19.11 18.5 18.61 17.62 16.52 Demand deposits with banks 21.96 -0.59 4.25 0.73 -0.32 -1.46

Time deposits with banks 16.36 18.15 18.8 19.99 19.47 19.69 Other deposits with RBI -31.08 -2.58 -55.25 -6.92 -18.62 -21.52

Source – CMIE

Coming now to trends in bank credit and deposit growth, we see that the year on year growth in non-food credit in the period up to May 21, 2011 has been almost 22.1 percent. This is higher than the credit growth target of 19 percent set by the RBI for the current year. Growth in deposits in the period up to May 21, 2011 has been of the order of 17.4 percent and is in line with RBI target growth of 17 percent for the current year. These numbers indicate that the trend seen in the previous year – of deposit growth lagging credit growth – continues in the current financial year. Of course the growth rate in deposits has picked up in recent months and to that extent eased some pressure on the banks as they worked hard to maintain their margins.

Given the present credit and deposit situation, banks have been complaining of a tight liquidity situation. There has also been an evident increase in the borrowing of banks under the LAF repo facility over the past few weeks. While the banks on average borrowed Rs. 20,742 crore everyday from RBI during the month of April 2011, the average borrowing amount per day went up to almost Rs. 50,000 crore in the month of May 2011. With advance tax payments for corporates due for the first quarter of fiscal 2011-12 and further tightening of monetary policy looking likely, banks have stepped up their efforts to raise more funds. This is getting reflected in the higher borrowings seen under the LAF repo facility and higher interest rates being offered for issuance of certificate of deposits [CDs].

Table 24 – Growth in Bank Credit and Deposits of SCBs (in percent)

2010-11 9-Apr-11 23-Apr-11 7-May-11 21-May-11

Bank Credit 21.4 21.97 21.89 22.5 22.28 Food Credit 32.6 3.69 -9.07 12.16 34.72 Non food credit 21.2 22.24 22.36 22.67 22.08 Aggregate Deposits 15.9 17.2 17.9 17.1 17.4

Source – CMIE

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The tightness in the loanable funds market however is expected to ease in the months ahead. And this is on account of both an expected slowdown in the credit growth rate and an improvement in the deposit growth rate.

With RBI continuing with its tight monetary policy stance, interest rates in the economy have been going up and have reached a stage where these have started hurting both investment and consumption demand. Already many corporates have indicated that it is becoming difficult to fund investment plans at current interest rates. Also, with demand for automobiles, commercial vehicles and realty moderating, one can expect credit growth to taper off in the coming months.

As regards deposits, in the year 2010-11 we saw that deposit growth was weak in the first half of the year and then it started going up as banks increased the card rates. Data available for the current year shows that the uptick in deposit growth continues and with deposit rates expected to remain at current levels and the outlook for the equity market being not too encouraging, banks should see greater mobilization of deposits.

Fiscal Situation

The provisional data for fiscal indicators of the central government for the year 2010-11 was released by the Controller General of Accounts during the first week of June 2011. These provisional estimates for various fiscal variables show a definite improvement over the revised estimates (RE), with a more than anticipated rise in revenue collection and reduction in expenditure during 2010-11. The striking feature of the new estimate is the reduction in fiscal deficit number compared to the revised estimate given during presentation of the union budget. This depicts the comfortable fiscal position the country enjoyed in the previous fiscal.

A look at receipt trends of the central government shows that the total receipts increased by almost 37 percent in 2010-11 over 2009-10. While revenue receipts, the major chunk under the receipts head, increased by 38.7 percent, non- debt capital receipts, the other component, showed only a marginal increase of 7 percent during 2010-11 over the previous year. Again, within revenue receipts, though non- tax revenue contributed less than tax revenue in absolute terms, the former showed a growth rate of a whopping 90.5 percent. This was due to the huge amount of money government raised through auction of 3G and BWA spectrum.

Table 25 - Trends in Receipt and Expenditure of Central Government: 2010-11 (Rs. Crore)

Fiscal Indicators BE 2010-11

RE 2010-11

Provisional 2010-11

Diff between Provisional and RE

Actuals 2009-10

Growth in 10-11 over 09-10

Revenue Receipts 682212 783833 794277 10444 572811 38.66

Tax Revenues (Net) 534094 563685 572790 9105 456536 25.46 Non Tax 148118 220148 221487 1339 116275 90.49 Non-Debt Capital Receipts 45129 31745 35599 3854 33194 7.25 Recovery of Loans 5129 9001 12752 3751 8613 48.06 Other Receipts 40000 22744 22847 103 24581 -7.05 Total Receipts 727341 815578 829876 14298 606005 36.94 Non-Plan Expenditure 735657 821552 821569 17 721096 13.93 On Revenue Account 643599 726729 726767 38 657925 10.46 Interest Payments 248664 240757 234739 -6018 213093 10.16 On Capital Account 92058 94803 94802 -1 63171 50.07 Plan Expenditure 373092 395024 377350 -17674 303391 24.38 On Revenue Account 315125 326928 312363 -14565 253884 23.03 On Capital Account 57967 68096 64987 -3109 49507 31.27 Total Expenditure 1108749 1216576 1198919 -17657 1024487 17.03

Source – Budget Documents and Controller General of Accounts, Government of India

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Further, within tax revenue, it is the customs duty which showed a robust collection of 63.29 percent in 2010-11 over 2009-10 followed by excise duty (33.54), corporation tax (22.35) and service tax (22.06).

Table 26 – Trends in Major Taxes of Central Government: 2010-11 (Rs. Crore)

Major Taxes BE 2010-11

RE 2010-11

Provisional 2010-11

Actuals 2009-10

Growth in 2010-11 over 2009-10

Tax revenue (net) 534094 563685 572790 456536 25.46 Excise duties 132000 137778 138372 103621 33.54 Customs duty 115000 131800 136058 83324 63.29 Corporation tax 301331 296377 299422 244725 22.35 Taxes on income 128066 149066 139148 132315 5.16 Service tax 68000 69400 71309 58422 22.06


Coming next to the trend in expenditure of central government, it may be noted that the total expenditure has grown by 17 percent in 2010-11 over 2009-10, much less than the 37 percent growth in receipts. Within overall expenditure, while the plan expenditure grew at 24.4 percent, non-plan expenditure showed an increase of 13.9 percent.

Excellent tax collection, buoyant non tax revenue and an effective cut down on expenditure growth helped the government to bring down the fiscal deficit for the year 2010-11 to 4.7 percent – a figure much lower than the revised estimate of 5.1 percent announced by the finance minister in his 2011-12 budget speech. This is again much lower than the budget estimate (BE) of 5.5 percent announced during the 2010-11 budget speech. The revenue deficit for the fiscal 2010-11 is 3.1 percent and the primary deficit for the same year is 1.7 percent. These are lower than the revised estimate of 3.4 percent and 2 percent respectively.

Table 27 – Deficit Indicators of Central Government: 2010-11 (Rs. Crore)

Deficit Indicators BE 2010-11

RE 2010-11

Provisional 2010-11

Difference between

Provisional and RE

RE as % of GDP Provisional as % of GDP

Fiscal Deficit 381408 400998 369043 -31955 5.1 4.7

Revenue Deficit 276512 269844 244853 -24991 3.4 3.1

Primary Deficit 132744 160241 134304 -25937 2.0 1.7


Though the deficit for 2010-11 gives a sense of relief as far as central government finance go, this moment of elation may just be short lived. Given the evolving economic situation, there is now a wide acceptance amongst economists and public finance experts that during the current year it will be a tough task for the government to rein in the fiscal deficit at the targeted budget estimate of 4.6 percent.

And if the figures for central government finances for the month of April 2011 are any indication, then the process of fiscal deterioration may well have started already. To get a better sense of the evolving fiscal situation we have compared the figures for April 2011 with the figures for April 2010.

As the data given in the following table shows, total expenditure of the central government in the month of April 2011 stood at Rs. 87,130 crore. In April 2010, total government expenditure was to the tune of Rs. 67,226 crore. Further, under the expenditure head, we see that it is the non-plan expenditure that has ballooned from Rs. 48,206 crore in April 2010 to Rs. 70,123 crore in April 2011.

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While the government has seen a surge in expenditure in April 2011, total receipts have shown a slip with large scale moderation noticeable in (net) tax receipts.

Table 28 – Receipt and Expenditure of Central Government: April 2011 and April 2010 (Rs. Crore)

Fiscal Indicators Apr-11 Apr-10 Difference between Apr 2011 and Apr 2010

Revenue Receipts 6880 12979 -6099 Tax Revenues (Net) 3774 10062 -6288 Non Tax 3106 2917 189 Non-Debt Capital Receipts 5589 254 5335 Total Receipts 12469 13233 -764 Non-Plan Expenditure 70123 48206 21917 On Revenue Account 53087 47496 5591 Interest Payments 15078 14134 944 On Capital Account 17036 710 16326 Plan Expenditure 17007 19020 -2013 On Revenue Account 14408 16121 -1713 On Capital Account 2599 2899 -300 Total Expenditure 87130 67226 19904

Source - Controller General of Accounts, Government of India

The early trends seen in the revenue – expenditure mix also find a reflection in the deficit position of the central government for the month of April 2011. The fiscal deficit for the month of April 2011 has overshot the figure for fiscal deficit of April 2010 by a huge margin. The same trend is seen in other deficit indicators also. It may also be noted that the fiscal deficit in April 2011 constituted about 18 percent of the total estimated fiscal deficit for the year 2011-12. The situation was better during the corresponding period of the previous fiscal. A similar difference is seen in case of revenue deficit and primary deficit.

Table 29 - Trends in Deficit Indicators of Central Government: April 2011 Vs April 2010 (Rs. Crore)

Deficit Indicators Apr-11 BE 2011-12 Apr-11 as % of BE

Apr-10 BE 2010-11 Apr-10 as % of BE

Fiscal Deficit 74661 412817 18.09 53993 381408 14.16 Revenue Deficit 60615 160417 37.79 50638 276512 18.31 Primary Deficit 59583 144831 41.14 39859 132744 30.03

Source- Controller General of Accounts, Government of India

If the fiscal trend seen in April 2011 continues – a likely situation – then as mentioned earlier, the government will face difficulties in keeping the deficit figures under control. The fiscal target for the year 2011-12 was pegged at 4.6 percent anticipating higher revenues and moderation in expenditure by the government.

However, possibilities of higher receipts in 2011-12 look increasingly ambitious. All the main components under the receipts head - tax, non-tax and non-debt capital receipt - may show a moderation in the current fiscal. With no major tax changes announced in the budget for 2011-12, the government was banking on strong growth in the economy and industry, good corporate performance and a rise in wages and salaries to translate into high growth in tax collections. Now that there are clear indications of an economic and industrial slowdown and fiscal strains building up in the corporate sector, even senior government functionaries have started doubting the feasibility of sticking to the budgeted targets for revenues.

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Union Finance Minister, Mr. Pranab Mukherjee, shared these concerns recently while addressing senior officials of the Central Board of Excise and Customs (CBEC). He warned that the task of meeting the revenue target is very challenging and will require sustained and strategic efforts throughout the financial year. Further, CBEC Chairman, SD Majumdar, also hinted that they will have to see if a mid-course revision in revenue targets is required. Earlier, Finance Secretary, Sunil Mitra had indicated that amidst slowdown in tax collections, the Finance Ministry may go slow on disbursal of pending income tax refunds.

While this is the case with tax collections, government’s other revenue raising sources like auction of the remaining 3G spectrum and disinvestment of select PSUs may also not fetch anticipated revenues as there may not be enough takers given the tough market conditions.

On the expenditure front, government has estimated a very small increase of 3.4 percent in its overall expenditure for the year 2011-12. In all probability this estimate will be exceeded in the current year mainly because of expenditures under the heads of MGNREGA, food, petroleum and fertilizer subsidy.

While increased wage rate will push up the MGNREGA expenditure, international price of oil and fertilizer will push up petroleum and fertilizer subsidy. Also, the food subsidy bill will see a rise with the introduction of Food Security Bill and the associated high cost that would have to be incurred for collecting and storing much larger amounts of foodgrains.

Considering this mismatch in revenue – expenditures, some analysts fear that the fiscal deficit this year may eventually go up to anywhere between 6 to 7 percent. The only way to rectify the expected dent in revenue collections is to improve efficiency in tax collections. The tax departments of the government should leverage information technology tools and evolve a process wherein refunds become automatic. Further, steps should be taken to widen the tax base in the country. Today, just about 3 percent of the people in the country file tax returns. Efforts of the government should be geared towards increasing this base of tax payers and curbing tax evasion. This would automatically lead to a jump in tax revenues. Further, the government should go ahead with reforms like decontrolling diesel and LPG prices to augment revenue.

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Performance of the Corporate Sector – Q4, 2010-11

Data made available by CMIE on corporate sector performance shows that in the fourth quarter of fiscal 2010-11, corporate India turned out a good performance both in terms of sales and profits. Such a performance is particularly noteworthy as it came at a time when overall expenses are going up at a fast clip.

As data given in the following table shows, net sales of ‘All Industries’ in the fourth quarter of 2010-11 registered a growth of 23.5 percent. This is the highest growth in net sales that we have seen in the last eight quarters. Further, while firms from the manufacturing sector saw an increase of 22.26 percent in net sales in the last quarter of 2010-11, companies from the services (other than financial) sector saw sales going up by 27.46 percent.

Further, within the manufacturing sector, growth in sales has been particularly strong in sectors such as textiles, cement, steel and transport equipment. Performance of the food and beverages sector and the chemicals sector lagged the average for the manufacturing sector as a whole with food and beverages sector seeing net sales going up by about 8.5 percent in Q4, 2010-11.

Table 1 – Performance of the Corporate Sector – Growth in Net Sales, Total Expenses and Profits (%)

2009-10 2010-11

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Net sales (%) All industries 0.03 -6.83 5.14 15.95 15.67 17.76 17.81 23.50 Manufacturing -8.83 -14.89 7.25 24.29 22.72 19.39 15.67 22.26 Food & beverages 6.83 -7.28 -3.23 58.30 31.79 41.16 23.59 8.49 Chemicals 13.68 -5.15 3.27 19.85 14.77 17.48 17.28 17.86 Textiles 15.94 13.51 13.84 17.61 13.39 7.05 22.78 24.65 Non-metallic mineral products 5.96 2.54 8.68 6.66 21.12 32.38 26.85 30.75 Cement 8.00 -12.06 -11.23 -4.88 -6.51 0.54 26.63 43.54 Metals & metal products -35.39 -31.62 -5.77 17.44 19.34 13.41 11.55 28.88 Steel -39.76 -36.87 -14.05 10.53 16.70 15.47 13.61 25.28 Transport equipment 16.96 -1.81 50.26 86.02 61.52 35.25 22.78 22.94 Services (other than financial) 10.75 3.25 3.70 3.67 10.44 19.51 21.80 27.46 Total expenses (%) All industries 2.98 -4.52 3.89 11.78 13.19 18.06 16.56 23.52 Manufacturing -6.81 -13.02 3.75 20.95 19.16 18.63 14.48 21.68 Food & beverages -2.14 -13.09 -8.60 49.67 42.32 36.85 23.76 8.55 Chemicals 7.61 -7.65 -0.34 5.16 15.02 30.87 18.39 21.27 Textiles 13.71 10.98 10.37 18.58 18.51 11.90 24.98 23.46 Non-metallic mineral products -6.97 -3.53 1.93 0.40 39.08 40.20 20.70 42.36 Cement -3.12 -15.66 -15.91 -3.60 5.00 8.79 59.19 48.12 Metals & metal products -30.85 -25.79 -2.49 11.26 15.30 6.82 8.42 32.68 Steel -35.42 -30.51 -10.28 5.25 12.58 3.83 9.09 30.06 Transport equipment 21.45 -3.90 33.65 91.72 45.70 26.01 19.22 17.88 Services (other than financial) 11.74 3.05 2.50 -1.60 12.15 21.39 24.92 31.29 PBDIT (%) All industries 4.04 -2.44 18.22 33.34 16.45 43.76 22.39 24.78 Manufacturing -26.52 -23.29 68.56 168.12 45.03 130.66 21.24 23.14 Food & beverages -23.43 -25.43 4.48 48.79 6.43 1.63 -10.08 19.02 Chemicals 6.68 25.89 28.42 149.36 9.54 283.30 40.54 14.56 Textiles 55.98 57.87 58.73 9.11 -18.36 -24.06 12.59 23.71 Non-metallic mineral products 46.11 12.57 22.18 8.64 -12.29 -23.02 6.97 31.71 Cement 45.23 11.07 14.50 -8.78 -31.22 -47.07 -39.46 35.30 Metals & metal products -60.51 -67.90 32.72 2407.02 114.6 129.44 10.64 32.93 Steel -68.98 -80.44 23.79 - 170.58 260.85 5.37 32.59 Transport equipment -18.04 237.97 - 145.81 201.70 130.60 59.49 15.31 Services (other than financial) 13.76 7.92 12.76 6.95 3.26 17.40 17.00 38.63

Source – Prowess Database, CMIE

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Looking at the numbers for total expenses, we see that expenses for ‘All Industries’ went up by 23.52 percent in Q4, 2010-11. This growth is again the highest seen in last four quarters. Further, while the manufacturing sector saw total expenses rise by 21.68 percent in Q4, 2010-11, services (other than financial) saw an increase of 31.29 percent.

Further, within the manufacturing sector, the increase in total expenses in the quarter under review was particularly high in sectors such as cement [48.12 percent] and steel [30.06 percent].

It the context of rise in total expenses for industry, it may be mentioned that while firms from the manufacturing sector are facing significant pressure on account of interest expenses, cost of power and price of industrial inputs, firms from the services (other than financial) are stressed on account of sizable increase in interest expenses as these registered an increase of 367 percent in the fourth quarter of 2010-11.

Table 2 – Performance of the Corporate Sector – Growth in Total Expenses (%)

Total expenses (%)

Raw materials, stores, spares & purchase of

finished goods (%)

Salaries and wages (%)

Power & fuel (%)

Interest expenses (%)

Mar-10 Mar-11 Mar-10 Mar-11 Mar-10 Mar-11 Mar-10 Mar-11 Mar-10 Mar-11 All industries 11.78 23.52 12.30 24.61 6.52 15.37 14.46 23.92 -14.29 30.63 Manufacturing 20.95 21.68 19.16 27.57 -1.37 12.78 4.59 23.01 -12.49 20.79 Services (other than financial) -1.60 31.29 -11.16 20.93 2.63 15.19 -0.55 -23.85 -70.86 366.19

Source – Prowess Database, CMIE

Despite the strong growth in total expenses, the overall profit levels of firms are holding. Using PBDIT as one of the indicators of profits, we see that for ‘All Industries’ PBDIT went up by 24.78 percent in the fourth quarter of 2010-11. Further, while for the manufacturing sector, the increase in PBDIT in Q4, 2010-11 was to the tune of 23.14 percent, for the services (other than financial), growth in PBDIT was much higher at 38.63 percent. It is also interesting to note that while overall expenses have gone up significantly in the case of cement and steel sectors, these sectors have managed to see a good fourth quarter in terms of profits.

Growth in Net Sales (%) Growth in Total Expenses (%)

-20

-10

0

10

20

30

Q1

09-1

0

Q2

09-1

0

Q3

09-1

0

Q4

09-1

0

Q1

10-1

1

Q2

10-1

1

Q3

10-1

1

Q4

10-1

1


-20

-10

0

10

20

30

40

Q1

09-1

0

Q2

09-1

0

Q3

09-1

0

Q4

09-1

0

Q1

10-1

1

Q2

10-1

1

Q3

10-1

1

Q4

10-1

1


Page | 33

Performance of the Textiles sector – Q4, 2010-11

Sector Updates

Textile park to come up in Punjab. A 1700 acre textile park is coming up in the Malwa region with world class facilties.

DEPB extended by three months. DEPB scheme has been extended by three months and will now be available till September 2011. In the interim government will work out an alternate duty neutralization scheme for exporters.

Government for greater FDI in specialty textiles. Government is contemplating steps to enhance FDI flows in segments like technical textiles.

Government allows additional cotton exports. Government has allowed exports of an additional one million bales of cotton in the current season.

0

5

10

15

20

25

30

Q1

09-1

0

Q2

09-1

0

Q3

09-1

0

Q4

09-1

0

Q1

10-1

1

Q2

10-1

1

Q3

10-1

1

Q4

10-1

1

Textiles: Growth in Net Sales and Total Income

Net Sales

Total income

-30

-20

-10

0

10

20

30

40

Total Expenses

Raw material Stores spares & purchase of finished goods

Salaries & wages

Power & Fuel Interest Expenses

Textiles: Growth in Total Expenses

Q409-10 Q410-11

11.6

8.67.4 7.4 6.7

5.46.9

9.1

0.02.04.06.08.0

10.012.014.0

Q1

09-1

0

Q2

09-1

0

Q3

09-1

0

Q4

09-1

0

Q1

10-1

1

Q2

10-1

1

Q3

10-1

1

Q4

2010

-11

Textiles: PAT / Total Income

PAT /Total Income

Net sales grew by 24.7 percent in Q4, 2010-11. In Q4, 2009-10, growth in net sales was of the order of 17.6 percent.

Export income to net sales ratio touched 5 percent in Q4, 2010-11. In Q4, 2009-10, this figure was close to 2.7 percent.

Cost pressures in the sector are building up.

Total expenses went up by 23.5 percent in Q4, 2010-11. In Q4, 2009-10, the increase in total expenses was of the order of 18.58 percent.

The increasing pressure on costs is led by expenses on power and fuel and expenses on other raw materials. Outlays on interest cost and wages and salaries have also jumped in Q4, 2010-11.

PAT grew by 48.4 percent in Q4, 2010-11.

Margins have improved in the last quarter of 2010-11.

Page | 34

Performance of the Cement sector – Q4, 2010-11

Sector Updates

Cement prices dip on weak demand, onset of monsoon. Top dealers have reported a decline in prices across regions in June 2011. Demand from infrastructure and realty sector expected to moderate.

Cement majors brace up for margin pressure. Steep increase in energy costs [coal] and higher freight costs to keep margin under pressure.

-20

-10

0

10

20

30

40

50

Q1

09-1

0

Q2

09-1

0

Q3

09-1

0

Q4

09-1

0

Q1

10-1

1

Q2

10-1

1

Q3

10-1

1

Q4

201

0-1

1

Cement: Growth in Net Sales and Total Income

Net Sales Total income

-60

-40

-20

0

20

40

60

80

100

Total Expenses Raw material Stores spares & purchase of finished goods

Salaries & wages


Cement: Growth in Total Expenses

Q409-10 Q410-11

15.418.3

12.614.3

12.6

5.93.1

12.5

0.02.04.06.08.0

10.012.014.016.018.020.0

Q1

09-1

0

Q2

09-1

0

Q3

09-1

0

Q4

09-1

0

Q1

10-1

1

Q2

10-1

1

Q3

10-1

1

Q4

2010

-11

Cement: PAT/Total Income

PAT/Total Income

Net sales have seen a strong performance in the second half of 2010-11

Net sales registered a growth of 43.5 percent in Q4, 2010-11. In Q4, 2009-10, net sales had dipped by 4.9 percent.

Overall expenses have shot up in Q4, 2010-11. The growth in total expenses in Q4, 2010-11 was to the tune of 48.1 percent. In Q4, 2009-10, total expenses had declined by 3.6 percent.

Evident increase in expenses across all segments. Interest costs and raw material expenses are hitting the industry hard.

PAT registered a growth of 26 percent in Q4, 2010-11.

Profit margin has shown an improvement in Q4, 2010-11. However, at these levels, margins are still low compared to what was seen in 2009-10.

Page | 35

Performance of the Steel sector – Q4, 2010-11

Sector Updates

Steel imports down 65 percent in April. Steel imports are slowing down. The fall is most visible in sectors that are hit by high interest costs – auto and construction.

Steel firms may have to pay more for coking coal imports. In the forthcoming renewal of quarterly contracts, prices for imported coking coal could go up.

JPC to monitor prices of raw materials. Steel ministry has asked the Joint Plant Committee to analyses prices of raw materials for steel manufacturing along with their impact on final steel prices.

-50

-40

-30

-20

-10

0

10

20

30

40

Q1

09-1

0

Q2

09-1

0

Q3

09-1

0

Q4

09-1

0

Q1

10-1

1

Q2

10-1

1

Q3

10-1

1

Q4

201

0-1

1

Steel: Growth in Net Sales and Total Income


-10

0

10

20

30

40

50

60

Total ExpensesRaw material Stores spares & purchase of finished goods

Salaries & wages


Steel: Growth in Total Expenses (%)

Q409-10 Q410-11

-2.8-4.6

5.2

10.88.7 8.3

5.9

12.3

-10.0

-5.0

0.0

5.0

10.0

15.0

Q1

09-1

0

Q2

09-1

0

Q3

09-1

0

Q4

09-1

0

Q1

10-1

1

Q2

10-1

1

Q3

10-1

1

Q4

201

0-1

1

Steel: PAT /Total Income

PAT/Total Income

Net sales registered a growth of 25.3 percent in Q4, 2010-11. In Q4, 2009-10, net sales had shown a growth of 10.5 percent.

Total expenses of companies from the steel sector registered a growth of 30.1 percent in Q4, 2010-11. In Q4, 2009-10, total expenses had gone up by a mere 5.25 percent.

Amongst different heads under total expenses, firms from the steel sector are feeling maximum pressure on account of rising prices of raw materials. In fact, expenses on raw materials registered a growth of more than 50 percent in Q4, 2010-11.

PAT for firms belonging to the steel sector has gone up by 47.9 percent in Q4, 2010-11.

Profit margin in Q4, 2010-11, has seen an improvement with a figure of 12.3 percent. In Q4, 2009-10, profit margin was to the tune of 10.8 percent.

Page | 36

Performance of the Chemicals sector – Q4, 2010-11

Sector Updates

Central panel clears mega petrochemical hub in Tamil Nadu. A PCPIR region has been cleared by an inter-ministerial group. It is expected to attract investments worth Rs. 1 lakh crore.

Oil ministry supports gas price pool for fertilizers. The recommendation made by Saumitra Chaudhuri Committee to implement ‘price pooling’ of natural gas for fertilizer sector has found petroleum ministry’s support.

-10

0

10

20

30

40

50

60

70

80

Q1

09-1

0

Q2

09-1

0

Q3

09-1

0

Q4

09-1

0

Q1

10-1

1

Q2

10-1

1

Q3

10-1

1

Q4

201

0-1

1

Chemical: Growth in Net Sales and Total Income


-50

-40

-30

-20

-10

0

10

20

30

40

Total Expenses Raw material Stores spares & purchase of finished goods

Salaries & wages


Chemical: Growth in Expenses (%)

Q409-10 Q410-11

9.5 10.78.4

11.4 10.7

31.3

10.9 11.7

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

Q1

09-1

0

Q2

09-1

0

Q3

09-1

0

Q4

09-1

0

Q1

10-1

1

Q2

10-1

1

Q3

10-1

1

Q4

201

0-1

1

Chemicals: PAT /Total Income

PAT/ Total Income

Net sales registered a growth of 17.8 percent in Q4, 2010-11.In Q4, 2009-10, net sales had shown a growth of 19.9 percent.

Ratio of exports to net sales has shown a decline from 7.2 percent in Q4, 2009-10 to 4.3 percent in Q4, 2010-11.

Total expenses have shown a growth of 21.3 percent in the fourth quarter of 2010-11. In Q4, 2009-10, total expenses had shown a growth of 5.1 percent.

Expenses on interest costs and raw materials have seen a sizable jump during the quarter under review.

PAT has increased by 20.9 percent in Q4, 2010-11.

The margins continue to be under pressure and stood at 11.7 percent in Q4, 2010-11.

Page | 37

Performance of the Transport equipment sector – Q4, 2010-11

Sector Updates

Car sales grow slowest in 24 months. Passenger car sales witnessed a growth of 7 percent in May 2011, which is the slowest in 24 months. Rising interest rates and fuel costs are beginning to take a toll on the automotive sector.

Truck sales slow as rising interest rates begin to bite. Truck fleet operators and financiers are reporting a decline in truck sales owing to rising interest rates.

-20

0

20

40

60

80

100

Q1

09-1

0

Q2

09-1

0

Q3

09-1

0

Q4

09-1

0

Q1

10-1

1

Q2

10-1

1

Q3

10-1

1

Q4

201

0-1

1

Transport Equipment: Growth in Net Sales and Total Income


-100

0

100

200

300

400

500

600

700

Total Expenses

Raw material Stores spares & purchase of finished goods

Salaries & wages


Transport Equipment: Growth in Total Expenses

Q409-10 Q410-11

-1.1

0.6

2.8

7.2 6.9 7.1 7.2 7.1

-2.0

0.0

2.0

4.0

6.0

8.0

Q1

09-1

0

Q2

09-1

0

Q3

09-1

0

Q4

09-1

0

Q1

10-1

1

Q2

10-1

1

Q3

10-1

1

Q4

201

0-1

1

Transport Equipment: PAT /Total Income

PAT /Total Income

Growth in net sales has been on a downtrend over the last one year.

In Q4, 2010-11, net sales registered a growth of 22.9 percent. In Q4, 2009-10, net sales had zoomed registering a growth of 86 percent on a year on year basis.

Growth in total expenses has moderated in Q4, 2010-11, compared to the growth seen in Q4, 2009-10.

While total expenses registered a growth of 17.9 percent in the quarter ending March 2011, total expenses had grown by 91.7 percent in the quarter ending March 2010.

PAT has registered a growth of 19.4 percent in Q4, 2010-11.

Not much change is seen in the profit margin levels over the last one year. These have been close to the 7 percent mark throughout 2010-11.

Page | 38

Performance of the Food and Beverages sector – Q4, 2010-11

Sector Updates

J&K to encourage investment in establishing food and horticulture processing units. J&K government said it will encourage local as well as outside investments to set up food processing units in the state.

New safety law to cost India over 15,000 crore. The implementation of the Food Safety and Standards Rule, 2011 is likely to cost Rs. 15,000 to 17,000 crore to the exchequer.

-20-10

010203040506070

Q1

09-1

0

Q2

09-1

0

Q3

09-1

0

Q4

09-1

0

Q1

10-1

1

Q2

10-1

1

Q3

10-1

1

Q4

10-1

1

Food and Beverages: Growth in Net Sales and Total Income

Total income Net sales

-20

0

20

40

60

80

100

120

140

Total expenses (%) Raw materials, stores, spares & purchase of

finished goods (%)

Salaries and wages (%) Power & fuel (%) Interest expenses (%)

Food and Beverages: Growth in Total Expenses

Q4 09-10 Q4 10-11

4.2

7.98.6

5.7

3.6 3.93.3

5.3

0123456789

10

Q1

09-1

0

Q2

09-1

0

Q3

09-1

0

Q4

09-1

0

Q1

10-1

1

Q2

10-1

1

Q3

10-1

1

Q4

10-1

1

Food and Beverages : PAT / Total income

PAT / Total income

Growth in net sales has been on a decline over the last few quarters.

In Q4, 2009-10, net sales had grown by 58.4 percent. In Q4, 2010-11, growth in net sales was down to just about 8.5 percent.

Growth in total expenses has also come down over the last one year.

In Q4, 2009-10, total expenses went up by 49.7 percent. In Q4, 2010-11, total expenses showed a growth of 8.5 percent.

The only segment where growth in expenses in Q4, 2010-11 was higher than growth seen in the corresponding period of the previous year is interest payments.

The margins of firms in this sector have been under pressure whole of last year.

In Q4, 2009-10, profit margin was about 5.7 percent. In Q4, 2010-11, this came down to 5.3 percent.

Page | 39

Round up of key developments

Draft National Manufacturing Policy

A high level committee chaired by Prime Minister Dr. Manmohan Singh has approved in principle the draft National Manufacturing Policy. The policy will be placed before the cabinet soon after environment and labour concerns are resolved through inter-ministerial discussions.

The salient features of the policy are:

To increase the share of manufacturing in the GDP from the current 16 percent to 25 percent by 2025 and in the process create an additional 100 million jobs.

To create National Investment and Manufacturing Zones (NIMZs) with world class infrastructure facilities. The proposed zones will enjoy special policy regime, tax concessions, less stringent labour and environment laws, and flexible compliance norms.

To set up a Manufacturing Industry Promotion Board (MIPB) at the level of Union Minister of Commerce and Industry to ensure coordination amongst Central Ministries and State Government and to ensure effective implementation of the policy.

To set up a Technology Acquisition and Development Fund to promote acquisition and development of appropriate (primarily green technologies) technologies.

To introduce policy measures to facilitate the expeditious redeployment of assets belonging to non- viable units, while giving full protection to the interests of employees. This will be done through appropriate Insurance Instrument and/or Sinking Fund.

Financial Stability Report by RBI

The Reserve Bank of India presented its assessment of the health of India’s financial sector in its Financial Stability Report, during second week of June. The highlights of the report are:

The global risk scenario has improved, though there are signs of a slowdown in growth during 2011 in most countries, including some developing economies in Asia.

Liquidity in the system remained in deficit mode given strong credit demand and high level of currency in circulation.

Banks in India will face many challenges as they migrate to the advanced approaches under Basel II and prepare for Basel III.

A series of stress testing in respect of credit, liquidity and interest rate risks showed that banks remained reasonably resilient though their profitability could be affected significantly.

Banks need to remain vigilant to the headwinds from the prevailing inflation and interest rate situation which may affect their asset quality as changes in interest rate were found to have the most significant (negative) impact on slippage ratio of the banks.

Greater access of domestic corporates to ECBs has resulted in increased currency mismatches. Many companies which have raised money through foreign currency convertible bonds could face

severe funding problems in the next two years due to lackluster equity markets. According to RBI, a very large proportion of these FCCBs may not get converted into equity thus requiring their refinancing at the much higher interest rates prevalent today.

Page | 40

Charts

-5.0

0.0

5.0

10.0

15.0

20.0

Ap

r'0

9

Jun

'09

Au

g'0

9

Oct

'09

Dec

'09

Feb

'10

Ap

r'1

0

Jun

'10

Au

g'1

0

Oct

,10

Dec

'10

Feb

'11

Ap

r'1

1

Growth in IIP

New Series Old Series

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

Ap

r'09

Jun

'09

Au

g'09

Oct

'09

Dec

'09

Feb

'10

Ap

r'10

Jun

'10

Au

g'10

Oct

,10

Dec

'10

Feb

'11

Ap

r'11

Growth in Mining Sector


-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

Ap

r'0

9

Jun

'09

Au

g'0

9

Oct

'09

Dec

'09

Feb

'10

Ap

r'1

0

Jun

'10

Au

g'1

0

Oct

,10

Dec

'10

Feb

'11

Ap

r'1

1

Growth in Manufacturing Sector


0.0

2.0

4.0

6.0

8.0

10.0

12.0

Ap

r'09

Jun

'09

Au

g'09

Oct

'09

Dec

'09

Feb

'10

Ap

r'10

Jun

'10

Au

g'10

Oct

,10

Dec

'10

Feb

'11

Ap

r'11

Growth in Electricity Sector


Page | 41

Charts

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Ap

r'0

9

Jun

'09

Au

g'0

9

Oct

'09

Dec

'09

Feb

'10

Ap

r'1

0

Jun

'10

Au

g'1

0

Oct

'10

Dec

'10

Feb

'11

Ap

r'1

1

Growth : Basic Goods Segment


-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

Ap

r'09

Jun

'09

Au

g'09

Oct

'09

Dec

'09

Feb

'10

Ap

r'10

Jun

'10

Au

g'10

Oct

'10

Dec

'10

Feb

'11

Ap

r'11

Growth: Capital Goods Segment


-5.0

0.0

5.0

10.0

15.0

20.0

25.0

Ap

r'0

9

Jun

'09

Au

g'0

9

Oct

'09

Dec

'09

Feb

'10

Ap

r'1

0

Jun

'10

Au

g'1

0

Oct

'10

Dec

'10

Feb

'11

Ap

r'1

1

Growth: Intermediate Goods Segment


-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

Ap

r'09

Jun

'09

Au

g'09

Oct

'09

Dec

'09

Feb

'10

Ap

r'10

Jun

'10

Au

g'10

Oct

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Dec

'10

Feb

'11

Ap

r'11

Growth: Consumer Goods Segment


Page | 42

Charts

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

12.0A

pr-

10

May

-10

Jun

-10

Jul-

10

Au

g-1

0

Sep

-10

Oct

-10

No

v-1

0

Dec

-10

Jan

-11

Feb

-11

Mar

-11

Ap

r-1

1

May

-11

Growth : Headline & Core Inflation

Headline Core

0.0

5.0

10.0

15.0

20.0

25.0

Ap

r-1

0

May

-10

Jun

-10

Jul-

10

Au

g-1

0

Sep

-10

Oct

-10

No

v-1

0

Dec

-10

Jan

-11

Feb

-11

Mar

-11

Ap

r-1

1

May

-11

Growth in Broad Segments of WPI

Primary Articles Fuel & Power Manufactured Products

Page | 43

Charts

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0A

pr-

09

May

-09

Jun

-09

Jul-

09

Au

g-0

9

Sep

-09

Oct

-09

No

v-0

9

Dec

-09

Jan

-10

Feb

-10

Mar

-10

Ap

r-1

0

May

-10

Jun

-10

Jul-

10

Au

g-1

0

Sep

-10

Oct

-10

No

v-1

0

Dec

-10

Jan

-11

Feb

-11

Mar

-11

Ap

r-1

1

India's Trade (US$ billion)

Export Import Trade Balance

-28,000

-18,000

-8,000

2,000

12,000

22,000

32,000

Ap

r-0

9

May

-09

Jun

-09

Jul-

09

Au

g-0

9

Sep

-09

Oct

-09

No

v-0

9

Dec

-09

Jan

-10

Feb

-10

Mar

-10

Ap

r-1

0

May

-10

Jun

-10

Jul-

10

Au

g-1

0

Sep

-10

Oct

-10

No

v-1

0

Dec

-10

Jan

-11

Feb

-11

Mar

-11

Foreign Investment Inflows (USS million)

Direct Investment Portfolio Investment Total

Page | 44

Data on Interest Rates

Bank PLR (%) Base Rate (%)

Mar Apr Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr

2011 2011 2010 2010 2010 2010 2010 2010 2011 2011 2011 2011

State Bank Of India 12.75 13.25 7.50 7.50 7.50 7.60 7.60 8.00 8.00 8.25 8.25 8.50

Punjab National Bank 12.50 12.50 8.00 8.00 8.00 8.50 8.50 9.00 9.00 9.50 9.50 9.50

Canara Bank 13.75 13.75 8.00 8.00 8.00 8.50 8.50 9.00 9.00 9.50 9.50 9.50

Bank Of Baroda 13.75 13.75 8.00 8.00 8.00 8.50 8.50 9.00 9.00 9.50 9.50 9.50

Bank Of India 13.50 13.50 8.00 8.00 8.00 8.50 8.50 9.00 9.00 9.00 9.50 9.50

Union Bank Of India 13.75 13.75 8.00 8.00 8.00 8.50 8.50 9.00 9.00 9.50 9.50 9.50

Indian Overseas Bank 13.75 13.00 8.25 8.25 8.25 8.50 8.50 8.50 8.50 9.50 9.50 9.50

Corporation Bank 13.60 13.60 7.75 7.75 7.75 7.75 8.25 8.25 8.90 9.40 9.40 9.40

Dena Bank 14.50 14.00 8.25 8.25 8.25 8.25 8.45 8.45 8.95 9.45 9.45 9.45

ICICI Bank 16.50 16.50 7.50 7.50 7.50 7.75 7.75 8.25 8.25 8.75 8.75 8.75

Axis Bank 16.50 16.50 7.50 7.50 7.50 7.75 7.75 8.00 8.25 8.75 8.75 9.00

HDFC Bank 17.25 17.25 7.25 7.25 7.50 7.50 7.50 7.75 7.75 8.20 8.70 8.70

Weighted Rate 14.00 14.07 7.82 7.85 7.85 8.14 8.16 8.58 8.63 9.05 9.12 9.17

Source – CMIE

Indian economy

Business

percent mark

high growth

iip growth

growth of investments

quarterly growth

growth dipping from8

exports totaled us

core inflation