1 Monthly Review of Indian Economy April 2011 Executive Summary

GDP Growth _ Initial guidance provided by Ministry of Finance indicated a growth of 9 percent in 2011-12. However, recent developments, particularly the loss of momentum in industrial growth, show that this could be a difficult target to _ achieve. tightening of monetary policy and further escalation in global oil prices are Continued the key risks to growth in 2011-12. downside _ Given the evolving situation, we expect GDP growth in 2011-12 to be in the range of 8 to 8.5 percent. Industrial Production _ Weakness in industrial production trend continues with IIP registering a growth of 7.8 duringpercent April-February 2010-11 as against a growth of 10.0 percent seen during April-February 2009- Performance of the mining and manufacturing sectors has been particularly 10. _ur weak. O forecasts show that growth in IIP is likely to weaken further from 3.6 percent in February 20111.4 percent in March 2011. to
Trends in IIP, WPI (YoY in Percent) and Monetary Policy Rates 8
7 6 5 4 3 2 1 0

20.0 15.0 10.0 5.0 0.0 9 9 9 -5.0 0 0 0 9 ' b ' 0 n ' r ' a e Ma r p J F A 9 0 ' y a M

9 0 ' n J

9 0 ' l J

9 0 ' g A

9 0 ' p e S

9 0 ' t c O

9 0 ' v o N

9 0 ' c e D

0 1 ' n a J

0 1 ' b e F

0 0 1 1 ' ' r l Ma i r p A

0 0 1 1 ' ' y e Ma n J

0 1 ' y l J

0 1 ' g A

0 1 ' p e S

0 1 ' t c O

0 1 ' v o N

0 1 ' c e D

1 1 ' n a J

1 1 ' b e F

1 1 ' r Ma

_Amongst use based industrial groups, capital goods sector again showed negative growth of 18.4 percent in February 2011. This comes on the back of similar performance in December 2010 (9.3 percent) and January 2011 (-18.8 percent). If the present trend continues, then in March 2011 goods sector would see another dip in growth to the extent of 15 percent. capital _ Consumer goods segment however has seen improvement in growth, which is being driven durables segment. Improving consumer sentiment, strengthening employment consumer by scenario and increasing disposable incomes have contributed towards growth of consumption. Core Sector _ he sector recorded an overall growth of 5.7 percent during April-February 2010-11. This is T better than 5.4 percent growth seen in April-February 2009-10. Growth has been powered by sectors like crude oil, steel and power. However, performance of the coal sector is a reason for worry.
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This report has been prepared by the Economic Affairs and Research Division, FICCI 2 | Page

Inflation _ Headline inflation in March 2011 increased to 8.98 percent from 8.31 percent in February 2011. The reading for January 2011 has also been revised upwards to 9.35 percent. _ oth core inflation and non-food manufactured products inflation are seeing an upward trend B gapand between these and headline index is narrowing. These trends are indicative of generalization of inflationary pressures spreading from primary products to manufactured inflation with goods.
Headline, Core and Non-Food Manufactured Products Inflation, YoY in Percent
12.00 11.00 10.00 9.00 8.00 7.00 6.00 5.00 4.00 0 1 r p A 0 1 y Ma 0 1 n J 0 1 l J 0 1 g A 0 1 p e S 0 1 t c O 0 1 v o N 0 1 c e D 1 1 n a J 1 1 b e F 1 1 r Ma

IIP WPI

_ W its eye on headline inflation and core inflation, RBI is likely to continue with its tight ith monetary policy stance. Such a move however is not warranted as core (final goods) inflation as represented without food and fuel components has come off its peak. Month on month by CPI-IW growth in deseasonalised series of core CPI-IW is showing a downward trend reflecting moderation in retail prices. RBIs policy since March 2010 seems to be having some impact on the demand side and it should therefore put a break on further monetary tightening.

Foreign Trade Reverse Repo _ ata for the full year 2010-11 shows that exports grew by 37.5 percent [fastest growth D since independence] and totaled US$ 246 billion. Imports also showed an increase of 21.2 percent and totaled US$ 350 billion. trong export growth performance over the last five months has helped bring the trade deficit _ S down more manageable levels. In 2010-11, Indias trade deficit was of the order of US$ 104 to billion. Apprehensions with regard to widening current account deficit have also been Commerce and Industry Ministry is now confident that the export target of US$ 450 billion by _ allayed. 2013- will be met. The final strategy paper for boosting Indias exports is expected to be out 14 soon. Foreign Investments _During the period April-February 2010-11, FDI flows into India totaled US$ 25.9 billion. Admittedly, in 2010-11 have seen a slowdown from the previous FDI flows _ year. in the year RBI had drawn attention to environment sensitive policies being pursued Earlier with regard to the mining sector, integrated township projects etc. which appear to have affected sentiments. investors _ Governments efforts to further for issue of FDI policy continue. While announcing convertible instruments, inclusion of fresh itemsliberalize theshares against non-cash considerations the third of the consolidated FDI policy, government proposed major changes related to edition pricing of
Repo

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eadline Inflation

H Non-Food Manufactured

Products Inflation Core Inflation

and removal of the condition of prior approval in case of existing joint ventures / technical collaborations in the same field [Press Note 1]. _ Portfolio flows have seen a reversal in recent months. FIIs are getting increasingly wary about theof inflation on the India growth impact story. Forex Reserves _ In April 2010, Indias forex reserves totaled US$ 279.6 billion. By April 15, 2011, this figure had increased to US$ 308 billion. _ T he Chief Economic Advisor, Dr. Kaushik Basu, has brought attention back on the issue of setting up a Sovereign Wealth Fund. Speaking at a recent seminar, Dr. Basu mentioned that it is time that India needs to seriously look at the issue of whether to set up a SWF. Money and Banking _ Up to March 25, 2011, M3 registered a growth of 16 percent as compared to a growth of 16.8 percent during the corresponding period of the previous year. With a nominal GDP growth of around 18 percent, this growth in M3 is relatively weak. In the previous four years, when nominal GDP growth was of the order of 15 to 16 percent, M3 growth was much higher around 20 percent. credit flows shows that during April-March 2010-11 total bank credit registered a Data on _ growth of 21.4 percent. Non-food credit also saw a similar increase of 21.2 percent. Deposit growth rate has lagged credit growth rate in 2010-11 as aggregate deposits grew by 15.8 _ percent. The slowdown in growth in deposits can be explained by unattractive card / deposit rates and continued high inflation rate that lowered the real rate of return on term deposits. Good performance of the equity market in the first half of 2010-11 also contributed to slowdown in deposit growth. Fiscal situation _ S trong tax revenue collections, 3G / BWA spectrum windfall and moderation in growth of overall expenditure have helped the government rein in fiscal deficit in 2010-11. According to revised estimates, fiscal deficit in 2010-11 is pegged at 5.1 percent of GDP and is down from 5.5 percent projected earlier.

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

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In this context, of Indian Economy April 2011 Monthly Reviewit may be mentioned that in the October December quarter of 200809, community, social and personal services sector had witnessed a very strong growth of GDP Growth 22.6 percent highlighting the stimulus measures undertaken by the government to support to the advance estimates provided quarters of 2010-11 saw this sector register economic activity. In comparison, the first three by the Central Statistics Office (CSO), GDP According afactor cost at constant prices is expected4.8 register a growth of 8.6 percent in the year at growth of 7.8 percent, 7.4 percent and to percent respectively. 2010-In the year 2009-10, GDP at factor cost at constant prices grew by 8.0 percent. 11. Chart 1 Growth in GDP (Quarterly figures), YoY in Percent Looking at numbers at the disaggregated level, we see that while agriculture and allied sector is projected to grow by 5.4 percent in 2010-11, industry and services sector are projected to 16 grow 8.1 percent and 9.6 percent respectively. by 14
12 10 Although the expected performance of the industry and services sector in 2010-11 is not very 8 from what was seen in 2009-10 when industry grew by 8.0 percent and services different grew 6 percent, it is the much improved performance of the agriculture sector in 2010-11 by 10.14 that is going to provide an uptick to overall GDP growth. It may be noted that growth in 2 agriculture sector in 2009-10 was muted at just about 0.4 0 and allied 9 9 9 1 1 1 -2 0 0 0 0 percent.9 0 0 0 0 1 1 1 1 1 1 1 8 8 8 8 0 0 9 9 9 9 -4 0 Table 0 Growth in GDP at factor cost 0 0 1 1 1 1 0 by economic activity (2004-05 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 2 2 2 2 2 2 1 prices) 2 3 4 1 2 3 1 2 3 4 Q Q Q Q Q Q Q Q Q Q Q 2008-09 2009-10 2010-11 (AE) (QE) Source Ministry of Finance, Government of 1 Agriculture, forestry and fishing India .4 -0.1 0.4 5 Industry 4.4 8.0 8.1 As regards2GDP growth in the year 2011-12, initial estimates provided by the Finance a Mining and quarrying 1.3 6.9 6.2 Ministry indicated that the economy would better its performance and touch the 9 percent mark. In b Manufacturin 8.8 8.8 fact Finance Minister had based his budget presentation4.2 2011-12 taking GDP growth the for g c Electricity, gas and water supply 4.9 6.4 5.1 for current year at 9Construction this d percent. However, as things stand today, meeting 7.0 target looks 5.4 8.0 increasingly 3 recent trends in industrial production [discussed in10.1 ahead] point difficult. Most Services detail 9.6 10.1 towards a a Trade, hotels, transport and particularly worrisome is9.7 negative growth slowdown in industrial activity. What is the 7.6 11.0 seen of the capital goods segment in the last three in b Financing, insurance, real estate and communication 12.5 9.2 10.6 case business services months. c Community, social and personal 12.7 11.8 5.7 If we look at the growth numbers for a longer period, then we see that while industrial services 4 GDP at factor cost 8.0 sector has been moderating since January 2010, 8.6 services sector has seen its growth the 6.8 QE: Quick Estimates AE: Advance Estimates Source Ministry of Finance, Government of growth coming down since the second quarter of 2009-10 [Chart 1]. This could be the beginning of India a downward phase in in economic cycle and growth figures from now decline seen in Another notable trendthegrowth rates at the sectoral level is the sharp on will have to the be carefully watched. ofcase community, social and personal services in 2010-11. While in 2008-09, this segment posted a of 12.7 percent, in 2009-10 growth, though lower, was still a robust 11.8 percent. growth With the RBI making it clear that it would maintain its anti-inflationary stance in the In the other policy stance, months major downside risk to GDP growth in 2011-12 is further escalation in trend is 2010-11, growth in this segment is expected to sharply go down to 5.7 percent. This ahead and with senior officials from the government agreeing that some amount of growth a reflection of modulation of additional expenditure that was undertaken by the will have to be sacrificed if inflation is to be brought under control in a more sustainable government during the period of the global crisis. As private sector demand and expenditure is manner, be prepared for a sub 9 percent growth in 2011-12. Besides the tight we should gaining strength, government has entered the fiscal consolidation mode and this has slowed the monetary pace of expansion of community, social and personal services. 7 Page 6 || Page

global oil prices. Given the evolving situation, we can expect GDP growth in 2011-12 to be in the range of 8 to 8.5 percent.
Chart 2 Trends in IIP, WPI (YoY in Percent) and Monetary Policy Rates
20.0

8 7

15.0

6 5 4

10.0

5.0 Agriculture, forestry and fishing Industry Services -5.0 0.0 9 0 ' n a J 9 0 ' b e F 9 0 9 ' r 0 Ma' r p A 9 0 ' y a M 9 0 ' n J 9 0 ' l J 9 0 ' g A 9 0 ' p e S 9 0 ' t c O 9 0 ' v o N 9 0 ' c e D 0 1 ' n a J 0 1 ' b e F 0 0 1 1 ' l r ' Mai r p A 0 0 1 1 ' ' y e Man J 0 1 ' y l J 0 1 ' g A 0 1 ' p e S 0 1 ' t c O 0 1 ' v o N 0 1 ' c e D 1 1 ' n a J 1 1 ' b e F

3 2
1 1 1 ' r GDP at factor cost Ma

India

Source Reserve Bank of

In context of monsoon it may be noted that the Indian Meteorological Department has come out with its first forecast for this year. According to this initial forecast, India is set to have South West monsoon, with rainfall during June-September 2011 forecast at 98 normal a percent Long Period Average of 893 mm for the country as a whole. This augurs well of the for agriculture sector performance in the current year. Industrial Production Latest numbers made available by the CSO show that weakness in industrial production trend continues with IIP posting growth of a mere 3.6 percent in February 2011. In February 2010, the general index for industrial production had registered a growth of 15.1 percent. In fact, due tothis good performance, industrial growth in the fourth quarter of 2009-10 was particularly at its peak. strong and Further, amongst the three broad sectors we see that growth in both the mining and manufacturing sectors has been particularly weak in the month of February 2011. While about 7.3 percent. the mining sector grew by 0.6 percent year on year in February 2011, the manufacturing sector in a performance of 3.5 percent in the same month. The corresponding figures turned for February 2010 stand at 11.0 percent and 16.1 percent respectively. The only silver lining in this otherwise discouraging performance in February 2011 is growth in the electricity sector which production go up by 6.7 percent. In February 2010, growth in the electricity sector saw was
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IIP WPI Repo

General Index Mining Manufacturing Electricit 6.7 y Basic goods Capital goods Intermediate goods Consumer goods Durables Non-durables

Table 2 Growth in Industrial Production 2009-10 2010-11 February 2010 February 2011 (Apr-Feb) (Apr-Feb) 10.0 7.8 15.1 3.6 9.6 6.5 11.0 0.6 10.4 8.1 16.1 3.5 5.8 5.4 7.3 Use-based industrial 6.8 groups 6.5 8.5 5.9 19.0 8.7 46.7 -18.4 13.7 9.1 15.9 8.4 5.9 7.5 6.3 11.1 23.8 21.8 29.1 23.4 Reverse Repo 0.3 1.9 -0.8 6.1
Source CSO, MOSPI, Government of India

Chart 3 Growth in IIP, YoY in Percent

20.0 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 9 0 0 2 ' r p A 9 0 0 2 ' y Ma 9 0 0 2 ' n J 9 0 0 2 ' l J 9 0 0 2 ' g A 9 0 0 2 ' p e S 9 0 0 2 ' t c O 9 0 0 2 ' v o N 9 0 0 2 ' c e D 0 1 0 2 ' n a J 0 1 0 2 ' b e F 0 1 0 2 ' r Ma 0 1 0 2 ' r p A 0 1 0 2 ' y Ma 0 1 0 2 ' e n J 0 1 0 2 ' y l J 0 1 0 2 ' g A 0 1 0 2 ' p e S 0 1 0 2 ' t c O 0 1 0 2 ' v o N 0 1 0 2 ' c e D 1 1 0 2 ' n a J 1 1 0 2 ' b e F

Source CSO, MOSPI, Government of India

The chart given above shows that growth in the general index for industrial production has been showing a declining trend since December 2009. When we de-seasonalise the growth data using the three month moving average (3MMA) and fit a linear trend to the same, we get a fit with an R-Square value of 0.959. Using the same trend and projecting good industrial production growth for March 2011, we get a value of 1.4 percent. This result indicates that we should be prepared to see another month of very low growth in industrial production.

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Mining Manufacturing Electricity General

Chart 5 Chart 4 Trend growth rate in IIP December 2009 to February 2011 Policy Performance of Capital Goods sector and Movement in Key Monetary Rates
70.0 60.0 50.0 40.0 Series1 30.0 20.0 10.0 0.0 20.00 18.00 16.00 14.00 12.00 10.00 8.00 6.00 4.00 9 0 ' y Ma 1 9 0 ' l J 2 9 0 ' p e S 3 9 0 0 1 ' ' n v o a N 5J 6 4 0 1 ' r Ma 7 0 1 ' y Ma 8 0 1 ' y l J9 8 7 6 5 4 3 2 0 0 1 1 1 1 1 1 ' ' ' ' p n h v o a c e N J S Ma 1 10 11 12 13r 0 Linear (Series1) y = -1.0897x + R 18.785= 0.9592

14

2.00 9 9 0 -10.0 0 0.00 ' ' n r Ma a J -20.0 -30.0

Source FICCI ResearchSource Reserve Bank of India

Moving on when we look at the use based industrial groups we see that growth in basic In fact when we project the growth for the capital goods sector using the 3MMA for growth goods, goods and intermediate goods segments has slowed down in February 2011 vis-capital and using a linear trend we see that growth in the month of March 2011 is expected to again dip vis performance in February 2010. In fact the performance of the capital goods segment byaround 15 percent in this sector. is particularly worrisome as this sector showed a negative growth of 18.4 percent in February comes on the back of similar performance registered in December 2010 (2011. This 6 Trend growth rate in IIP (Capital Goods) December 2009 to February 2011 Chart 9.3 percent) and January 2011 (- 18.8 percent) and portends weakening of the investment cycle in the economy. Wh a part of this dip can be explained by the high base effect, factors like rising lending ile rates and rising raw material prices that are affecting margins of firms are now having an impact on investments. In fact, the year on year growth in gross fixed capital formation has come down a robust 25.7 percent in Q1 of 2010-11 to just about 6 percent in Q3 of 2010-11 and from is expected to see a further slide in Q4, 2010-11. Feedback gathered by FICCI from industry as part of its regular Business Confidence Surveys and Manufacturing Sector Surveys shows that rising interest rates have started having a bearing on investment projects with greater impact being felt by units in the SME sector. Further, both the durables and the non-durables segments contributed to this growth. The only sector that saw an improvement in its performance in February 2011 vis-vis performance in February 2010 is the consumer goods sector. As data given in the table 2 shows consumer goods sector registered a growth of 11.1 percent in February 2011 as against 6.3 percent growth registered in the same month of previous year.
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Source FICCI Research

Growth in the durables goods segment has been robust through the year 2010-11 and the rise interest rates has not had any visible impact on the performance of this sector. in Improving consumer sentiment, strengthening employment scenario and increasing disposable incomes have contributed towards growth of consumption. he T non-durables segment however saw anemic growth for a good part of 2010-11 with Capital Goods growth Growth entering negative territory in the months of November and December 2010. It is only in Repo January and February 2011 that we see growth in this segment of the industry picking up pace Reverse Repo once again.
RR C

Chart 7 Growth in IIP Use based industrial groups, YoY in Percent

70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 9 -1 0.0 0 0 2 ' pr -2 0.0 A -3 0.0 9 0 0 2 ' y a M 9 9 0 0 0 0 2 2 '60 ' n l J J 50 40 30 eries1 9 0 0 2 ' Ag 9 0 0 2 p' e S 9 0 0 2 ' t c O 9 0 0 2 ' v o N 9 0 0 2 ' c e D 0 1 0 2 n' a J 0 1 0 2 b' e F 0 0 1 1 0 0 2 2 ' ' r pr Ma A 0 1 0 2 ' y a M 0 0 1 1 0 0 2 2 ' ' neyl J J 0 1 0 2 ' Ag 0 1 0 2 p' e S 0 1 0 2 ' t c O 0 1 0 2 ' v o N 0 1 0 2 ' c e D 1 1 0 2 n' a J 1 1 0 2 b' e F y = -4.7264x + R 60.596= 0.8678 S Linear (Series1)

Source CSO, MOSPI, Government of India

Core Sector20

14

10 T e core sector industries, which have a weight of about 27 percent in the index for h industrial 0 production, registered a growth of 5.7 percent during April to February 2010-11 as against 5.4 1 2 3 4 5 6 7 8 9 10 11 12 period of the previous year. Although at percent growth registered during the corresponding13 -10 an aggregate level there is not much change seen in performance during the reporting period -20 of 2010-11 vis--vis last year, significant variations are visible at individual sector level. wo industry segments that clearly stand out for weak performance in 2010-11 as compared T to 2009-10 are cement and coal. Further, while crude oil, petroleum products and steel segments an improvement in performance during the period April to February 2010-11 have shown vis--the same period last year, no significant change in performance is noticed in case of vis the power sector.

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asic goods Capital goods Intermediate goods

Consumer goods

Table 3 economy, as measured by the headline inflation rate, Wh the inflationary pressures in the Growth in Core Sector ile are showing no signs of a let up, what is perhaps more important is the gradual pick up in the 2009-10 2010-11 February 2010 February 2011 nonvolatile components of WPI. (Apr-Feb) (Apr-Feb) Overall 5.4 5.7 4.2 6.8 here are two ways in which one can look at and examine the non-volatile components of T Cement 10.8 4.3 7.9 6.5 WPI. is movement in non-food manufactured products inflation and the-5.7 is movement One other Coal 7.9 0.1 6.7 in Crude oil 0.3 11.9 4.0 12.2 core inflation. Core inflation is a broader concept as compared to non-food Power 6.0 5.4 6.9 7.2 manufactured products inflation and captures the price behavior in non-food articles and minerals in Petroleum products -0.4 2.5 0.7 3.2 addition to non-food manufactured products. The8.1 trends in these-0.2 indicators 11.5 two of inflation are Steel 5.2 shown Source Office of Economic Adviser, MOC&I, Government of in chart 8. Both these indicators have moved up over India time. Chart 8 Headline, Core February 2011 also confirm that while cement and Latest numbers available for and Non-Food Manufactured Products Inflation, YoY incoal sector Percent weaker growth this year as compared to the same month last year, crude have registered oil,12.00 petroleum products and steel sectors have seen an improvement in growth.
11.00

It may be mentioned that in the case of the coal sector, factors like non receipt of 10.00 statutory on time, environmental hurdles, difficulty in acquisition of land and law & clearances 9.00 order in major coal producing states like Jharkhand have hit production in recent times. problems 8.00 And case of the cement sector, production has suffered due to rising cost of raw in 7.00 materials particularly coal), difficulty in getting environmental clearances and moderation in ( 6.00 spending by the government on irrigation and housing projects particularly in South 5.00 India. 4.00 Regarding the near term prospects for these two sectors, it can be said that while the strong the construction sector in 0 0 1 is 1expected to lead to a turnaround of the 1 1 1 1 1 1 1 growth of 0 0 0 0 0 0 0 1 1 1 1 1 2011-12 b 1 p r l t c r y g v n p c Ma e Ma n o e a e O J A D A N J cement S related to environment would help the coal industry ramp F J sector, resolution of issues up production in the current year. Wh non-food manufactured products inflation has increased from 5.1 percent in ile As regards output in the in March 2011, core inflation has increased from 2010-11 (Apr-Feb) September 2010 to 7.1 percent crude oil sector, the strong performance seen in 6.7 percent in can be largely attributed to enhanced production by non-state companies like Cairn India, August 2010 to 8.9 percent in March 2011. The uptrend in non-food manufactured products which has significantly ramped capacity in the state of inflation inflation as well up its oil production the gap between these Rajasthan. and core as the narrowing of two inflation indicators and headline inflation shows that inflationary pressures in the economy are getting Inflation generalized. In other words, price pressures are spilling over from food articles to non-food articles and Latest numbers for WPI based inflation show that headline inflation in March 2011 stands nonfood manufactured products. at 8.98 percent. This is higher as compared to 8.31 percent registered in February 2011. It is A also closer look at the while releasing the the for March 2011, the figure for January 2011 important to note that inflation numbers atdata disaggregated level shows that within the food articles segment, prices of items like vegetables, fruits,This indicates that inflationary been was revised upwards from 8.23 percent to 9.35 percent. milk, egg, meat and fish have going up appreciably in recent months. This March 2011 could well be in double digitdemand for pressures and that final numbers for increase can be explained by the rising continue such products territory. and which has not been supported by a corresponding increase in supplies. have gripped theinflation rate fordistribution of highlights the continuous pressure the economy faces Annual the supply demand gap, another reason which explains the increase in prices of Apart marketing and 2010-11 also such products through the country. The from on prices thethese front. Overall inflation for for perishables like 9.4 percent and is much above what items [and this is particularly true 2010-11 stands at fruits and vegetables] is the rigidities theRB considers as the growth promoting inflation rate and which is about 5 I that percent.
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eadline Inflation

H Non-Food Manufactured Products

Inflation Core Inflation

episodic inflation that we saw in case of onions in the month of December 2010 is a classic of how even small disruptions in supply can have a large impact on prices in example our country due to inefficient supply chains. Moving on now to the non-food articles group, we see that here strong inflationary pressures from fibres such as cotton, jute and silk. Another segment within the are coming primary articles group that is contributing to overall inflation is minerals where prices are going up due higher global costs of copper and other base metals. to In the fuel category, petrol prices have increased appreciably over time. This is a direct result of petrol price decontrol introduced by the government and the pass through following hardening of international crude prices. Coal prices are also increasing at a fast clip and adding to overall inflationary pressures. In the manufactured products category too signs of a buildup in inflation have strengthened like edible oils, cotton textiles, manmade textiles, basic metal alloys, iron with segments and & rubber and plastic products seeing an appreciable increase in prices. This steel increase inbe related to the increase in input costs as manufacturers have crossed the prices can level beyond which holding price line is no longer a viable option. Finished textile companies have started passing on higher fibre costs to consumers. Metal products producers are raising prices following the higher global base metals and precious metals prices.
Table 4 WPI based inflation, YoY growth in Percent
Aug 10 8.82 Sep 10 8.93 Oct 10 9.12 Nov 10 8.08

All commodities (I) Primary articles Food articles Non-food articles Minerals (II) Fuel and power (III) Manufactured products Food products Beverages and tobacco Textiles Wood and wood products Paper and paper products Leather and leather products Rubber and plastic products

Apr May Jun Jul 10 10 10 10 11.00 10.60 10.28 10.02

Dec 10 9.41

Jan 11 9.35

Feb 11 11 9.40 8.31 10.65

Mar 11 8.98 9.47

2010-

21.45 20.45 20.14 19.09 15.96 20.49 21.37 20.97 18.48 14.96 18.08 14.76 15.83 15.30 15.81 34.60 6.43 9.09 7.78 7.44 5.06 -0.78 4.91 25.30 22.10 31.60 5.99 7.09 7.48 5. 3 7 3.66 0.00 4.68 5.24 3.87 5.65 6.13 7.39 4.78 3.39 -1.24 5.22 5.25 2.07 5.73 7.34 7.32 4.90 4.58 0.00 5.01 4.36 3.05 23.80 5.11 4.58 6.81 4.66 5.10 0.08 4.65 4.34 2.13 13.61 14.42 13.92 13.26 12.55

18.17 18.09 14.67 18.37 18.44 17.60 12.96 14.79 16.29 14.64 10.14 15.07 16.68 26.80 29.38 29.46 30.58 4.84 3.62 6.33 9.84 2.76 5.28 -0.08 4.73 4.60 1.56 4.99 3.75 6.41 1.43 5.37 -1.38 6.20 4.95 2.55 4.89 1.07 6.02 2.20 5.71 -1.84 7.46 5.20 2.13 5.27 1.41 5.69 2.12 4.58 -1.39 7.77 4.99 3.01 16.12 5.19 9.61 4.59 5.68 -2.53 9.15 5.53 15.60 20.75 25.74 25.50 25.45 26.60 21.80 25.88 29.80 16.78 12.22 24.40 4.94 7.89 2.75 .10 5.93 -1.12 6.40 8.26 5.43 6.21 2.40 7.32 3.21 7.20 -2.98 8.98 6.56 3.22 5.20 5.40 3 7.20 3.90 5 -1.10 11.06 11.02 10.32 11.26 11.41 12.20 12.92 11.49 -0.14 .70 -0.34

11.27 11.28 10.21 10.09 10.36

10.06 11.67 12.34 13.25 11.50 15.64 11.74

Chemicals and chemical products 5.51 Non-metallic mineral products 3.08

2.49 2.60 1.82

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Basic metals, alloys and metal 9.32 products Machinery and machine products 2.21 Transport, equipment and parts 2.74

8.67 2.04 2.91

8.53 2.21 2.91

7.69 2.29 3.79

7.23 2.37 2.93

6.28 3. 2 4 2.93

6.76 3. 7 0 3.01

7.03 2.89 2.75

8.59 3.48 2.74

7.49 3.29

8.00 8.61 2.70 2.95

9.31 2.43 3.30

2.88 2.90 2.37

India

Source Office of the Economic Advisor, MOC&I, Government of

On the whole, we see that inflation is getting generalized with a spillover from primary articles to manufactured products now being evident. The readings for March 2011 would give more to RBI to continue with the policy rate hikes in the months ahead. This will reason have a on the growth performance particularly industrial production, which, as bearing mentioned earlier, is already showing signs of moderation. In the context of RBIs monetary policy moves it may be mentioned that these moves are guided by the trend seen in headline inflation and core inflation measured on a year on year Perhaps a better indicator of inflationary pressures and certainly a more basis. forward input for policy moves is the month on month change in the index that is duly looking deseasonalised. Further, it may be mentioned that while the monetary policy tools have a bearing on inflation demand side, trends in WPI are a reflection of inflation emanating largely from from the the supply side. Therefore, the key indicator to follow from the perspective of demand side inflation management is movement in consumer prices. Globally, the central banks try to manage CPI inflation by affecting aggregate demand. The need to focus on CPI has become even more important today as the global commodity prices are onrise and these impact input price inflation far more than prices of final goods as measured a byCPI inflation. Against the above background let us take a look at movements in core inflation (WPI based) and core inflation (CPI based) and track the month on month movement using deseasonalisedFor the purpose of our analysis, we have used CPI-IW as this is a index values. reasonable consumer prices in India. indicator of
Table 5 Trends in Core Inflation, MOM growth based on 3MMA Period WPI CPI (IW)* Core Input Core Final Goods Inflation* Inflation Jan 2010 Feb 2010 March 2010 Apr 2010 May 2010 Jun 2010
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0.78 1.03 1.25 1.13 0.78 -0.05

1.96 1.93 0.22 0.21 0.11 1.14

Jul 2010 Aug 2010 Sep 2010 Oct 2010 Nov 2010 Dec 2010 Jan 2011 Feb 2011

0.09 0.19 0.49 0.60 0.76 1.02 0.89 1.12

1.08 1.22 0.26 0.39 0.29 1.19 -

Source FICCI Computations based on data sourced from CSO Note Core Inflation of WPI and CPI is calculated by removing the Food and Fuel components from the : respective General Index.

As the table above shows, the month on month movement in WPI based core inflation (core input inflation) is showing signs of an uptick in inflation. And with the RBIs focus being on this variable, a case for continuing monetary tightening is plausible. However, if we look at the numbers for CPI based core inflation (core final goods inflation) then we see that CPI-IW has on a downward trend after having peaked at 2 percent at the start of been 2010. If consumer prices have come off their peak and are now showing signs of moderation, thenmove by the RBI to further tighten monetary policy could prove counterproductive as any it would have a direct bearing on industrial and economic activity in the country. It may be added that a singular focus on WPI movement for deciding on monetary policy moves not be a correct approach. This is particularly true in an environment characterized may by rising commodity prices, as seen today, and which are likely to keep WPI based core inflation at elevated levels irrespective of large scale changes in the demand conditions. FICCIs analysis further shows that core final goods inflation which is what RBI should be targeting is expected to moderate from its value of 1.19 percent in December 2010 to 0.40 percent in September 2011 (when calculated on a 3MMA sequential basis). Given this situation, it is perhaps time that the RBI revisits is monetary policy stance and fine tunes the interest rate structure to stimulate growth.
Table 6 Projections for CPI (IW) Core Inflation MOM Growth Dec 2010 1.19 Jan 2011 0.67 Feb 2011 0.58 Mar 2011 0.55 Apr 2011 0.53 May 2011 0.50 June 2011 0.48
17 | Page

Month

cannot bring inflation level down in a sustainable manner.

July 2011 Aug 2011 Sep 2011

0.45 0.43 0.40

Source FICCI Research

It may be recalled that we have had a similar episode of tight monetary policy engineering a slowdown in growth in the late 1990s. At that time, interest rates were hiked to as much as 12 percent to counter inflation. This, along with the Asian financial crisis, had a deep impact on Indias growth trajectory and it took us almost five year to come back to the high growth trajectory (See chart 9 for details).
Chart 9 Movement in Industrial Production, WPI based Inflation and Monetary Variables (BR and CRR) Period April 1996 to March 2003
16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 6 9 ' r p A 6 9 ' l J 6 9 ' t c O 7 9 ' n a J 7 9 ' r p A 7 9 ' l J 7 9 ' t c O 8 9 ' n a J 8 9 ' r p A 8 9 ' l J 8 9 ' t c O 9 9 ' n a J 9 9 ' r p A 9 9 ' l J 9 9 ' t c O 0 0 0 2 ' n a J 0 0 0 2 ' r p A 0 0 0 2 ' l J 0 0 0 2 ' t c O 1 0 0 2 ' n a J 1 0 0 2 ' r p A 1 0 0 2 ' l J 1 0 0 2 ' t c O 2 0 0 2 ' n a J 2 0 0 2 ' r p A 2 0 0 2 ' l J 2 0 0 2 ' t c O 3 0 0 2 ' n a J

India

Source Reserve Bank of

Finally, it may be re-emphasized that for addressing the inflation situation it is important that the government looks at debottlenecking the supply side both in the agriculture sector and manufacturing sector. Unless we take steps to boost agriculture productivity and the in to improve the marketing and distribution of food products in the country and unless greater investments are made in enhancing supplies of critical industrial inputs and raw materials, we

18 | Page

IIP General PI All Commodities CRR Bank Rate W

In the context of the agriculture sector, steps like decentralizing procurement operations of FCI, meeting PDS requirements in states to the extent possible, offloading food stocks in smaller lots over multiple locations leveraging tools such as e-auctions, de-listing horticulture products from APMC Act, encouraging private players to come and invest in agri-infrastructure, easing cross border movement of food products and evolving a robust centralized monitoring system to track progress of weather and crop situation particularly for perishables require urgent attention of the government. All of these would in some measure help us tackle the food inflation problem. Likewise we need to step up capacities across industries to increase supplies. This calls for encouraging investments by addressing issues such as procedural hassles, restrictive environmental regulations, land acquisition etc. As hikes in interest rates have a direct bearing investment activity, further tightening of monetary policy is inadvisable as it on the would fresh capacities from coming on board. prevent Foreign Trade In March 2011, Indias exports posted a growth of nearly 44 percent and touched a high of US$ 29.1 billion. Our imports on the other hand grew by 17.3 percent and attained a total value of US$ 34.7 billion. With exports and imports at these levels, Indias overall trade balance stood at billion in March 2011. US$ 5.6 Looking at trade numbers on a sequential basis we see that while imports have moved up from about US$ 27.3 billion in April 2010 to US$ 34.7 billion in March 2011, our exports have increased at a faster pace going up from US$ 16.9 billion to US$ 29.1 billion during the same period. It is this strong performance in exports, particularly seen in the last five months, which has helped bring the otherwise burgeoning trade deficit down to more manageable levels. The strong performance of the export sector has also helped calm fears about the sustainability ofthe current account deficit. Annual figures for 2010-11 show that exports have touched an all time high of US$ 246 billion and mark a robust growth of 37.5 percent over US$ 179 billion achieved in 2009-10. This incidentally is also the fastest annual growth that we have seen in exports since independence. export performance in the year 2010-11 was fuelled by sectors such Indias strong as engineering products, oil, gems and jewellery, textiles and pharmaceuticals. Imports too registered a strong growth of 21.2 percent in 2010-11 and touched US$ 350.3 billion. ith total exports and imports at these levels, Indias total trade deficit in 2010-11 stood at W US$ billion. Further, these numbers translate into a total trade figure of almost US$ 600 104 billion, is about half the size of Indias GDP of US$ 1.2 trillion. which
19 | Page

Chart 5 figures Imports and Trade Balance in US$ countrys While releasing the exportExports, for the month of March 2011, theBillion Commerce Minister said that given this recent trend we are confident of attaining the export target of 40 US$ billion by 2013-14. In this context it may be pointed out that the Ministry for 450 Commerce and Industry had recently put out a draft strategy paper for doubling Indias exports to US$ 30 450 billion by 2013-14.
20 According to the draft strategy paper for exports released by the government, the export target of US$ 450 billion by 2013-14 will be driven by sectors like engineering goods (US$ 108 10 billion), and jewellery (US$ 64 billion), petroleum products (US$ 73 billion), textiles (US$ gems 36.5 and drugs and pharmaceuticals (US$ 22 billion). Further, in the proposed strategy billion) 0 for exports, while effort wouldg be made to v retain presence and market share in old y t n b e t c r y l p c Ma e i a l o n a e r O e D M A N J F p developed J S 1 A country markets, J government 0would simultaneously focus on opening up new vistas both 0 1 0 0 0 0 1 0 1 0 1 1 1 1 1 1 0 1 -1 0 1 1 0 1 0 0 0 0 0 0 1 0 0 2 0 2 2 2 2 2 in 2 including Asia,0Africa and Latin America. The 0 2 2 terms of markets 2 and products2 in regions 2 draft strategy paper also provides suggestions on creating infrastructure, easing -2 0 procedural and developing skill levels for continuous value addition in exports. bottlenecks on Consultations are now at an advanced Department of Commerce, MOC&I,paper is expected to this draft paper Source stage and the final strategy Government of India be released soon by the If we look at the trade data for the last few years, we see that while Indias total exports Ministry. have Table 7 Exports in 2003-04 in increased from US$ 66 billion and Imports to US$ Billion / YoYin 2009-10, Indias total 182 billion Growth in Percent imports same time period went up from US$ 80 billion in 2003-04 to US$ 299 billion in during the AprMay Jun JulAug Sep Oct- Nov Dec Jan Feb- Mar200910. The 10 rapid increase1in Indias imports relative 10 our exports over 1111period resulted to this 11 - 10 -0 -10 -10 -10 10 10 in widening of the overall trade Exports 16.9 16.1 17.7 16.2 16.6 18.0 17.9 18.9 22.5 20.6 23.6 29.1 deficit. As the Imports the data in 27.4following 29.2 shows, total trade deficit increased from 31.7.7 34 27.3 28.3 table 29.7 27.1 27.7 27.8 25.1 28.6 US$ 13 billion in to US$ 117 billion in 2009-10. Alongside this increase in the absolute value of 2003-04 Oil imports 8.8 8.4 7.7 7.8 7.5 8.4 7.7 6.9 7.9 8.2 trade 8.1 deficit, an increase in the trade deficit to GDP ratio was also seen. While in 2003-04, the trade deficit at 2.5 percent, by 19.7 19.3 20.1 18.2 20.7 23.5 Non-oil to GDP ratio stood19.9 21.5 21.9 2008-09, this figure had jumped to over 10 19.2 18.6 percent. In 2009-10, the trade deficit to GDP ratio came down to 9.5 imports percent. Table 8 -12.9 -13.0 and -9.7 Trade balance -10.4 -11.3 -10.6Exports, Imports -9.1 Trade Balance in US$ Million -8.1 -8.9 -2.6 -8.0 -5.6

Year 30.4Exports Imports 23.2 21.3 GDP Trade 35.1 13.2 22.5 26.5 Ratio 32.4 49.7.0 44 36.4 Balance US$ 43.3 38.5 23 34.3 32.2 26.1 6.8 million -11.1 13.1 21.2 11.2 17.3 2003-04 66285 80003 -13718 552377 -2.5 2004-05 85206 118908 Department 640485 -5.3 Source -33702 of Commerce, MOC&I, Government of India 2005-06 105152 157056 -51904 768538 -6.8 2006-07 128888 190670 -61782 870553 -7.1 2007-08 166162 257629 -91467 1128476 -8.1 2008-09 189001 307651 -118650 1138643 -10.4 2009-10 182163 299491 -117328 1237523 -9.5 ource Reserve Bank of India S Growth in Exports Growth in Imports 36.2
21 20 | Page

Exports ($ Bn) Imports ($ Bn) Trade balance ($ Bn)

T tread seen in the movement of countrys overall trade balance is also reflected in the he nonoil trade balance. Looking at the same reference period as considered earlier, we find that Indias non-oil exports increased from US$ 60 billion in 2003-04 to US$ 150 billion in 200910. non-oil imports over this same period went up from US$ 58 billion to almost US$ Our 200 billion. Following from these trends we see that Indias non-oil trade balance, which was in in 2003-04, turned into a large deficit of almost US$ 50 billion in 2009surplus 10. Wh the increase in the non-oil trade deficit is by itself large, it is interesting to note that ile over time the pressure exerted by the rising imports of oil and increasing global prices of oil on Indias external balance has steadily gone up. This can be appreciated better when we look share of Indias non-oil trade balance in its overall trade the at balance. Data shows that this share was about 15 percent in 2004-05, 26 in 2005-06 and about 34 percent in 2006-07. However, since then oil imports started hitting our external balance in a more severe manner with growth in the share of non-oil trade balance in overall trade balance getting moderated. It may be noted that in 2007-08 the share of non-oil trade balance in overall trade balance was 41 percent. This figure increased in the subsequent year but at a slower pace registering a value of 44 percent. In 2009-10, this upward trend was reversed and the share of non-oil trade balance in overall trade balance came down to 42 percent. Table 9 Non Oil Trade Flows in US$ Million Non Oil Non Oil Non Oil GDP Ratio Exports Imports Trade US$ Balance million 2003-04 60274 57580 2694 552377 0.49 2004-05 76547 81673 -5126 640485 -0.80 2005-06 91451 105203 -13752 768538 -1.79 2006-07 107779 128790 -21011 870553 -2.41 2007-08 134541 171795 -37254 1128476 -3.30 2008-09 157748 210025 -52277 1138643 -4.59 2009-10 150531 199702 -49171 1237523 -3.97 Source Reserve Bank of India Wh Indias trade account has been in a deficit, we have registered reasonably large ile surpluses on the invisibles account. This is largely due to the remittance inflows and receipts on account of services exports. As the table below shows, the balance on account of invisible flows has been in surplus throughout the period under consideration. It moved up from US$ 27.8 billion in 2003-04 to US$ 52.2 billion in 2006-07 and further to 78.9 billion in 2009-10. The corresponding increase in the invisibles balance to GDP ratio was 5 percent to 6 percent and further to 6.4 percent.

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Table 10 - Invisibles Balance Invisible GDP US$ Ratio s Balance million 2003-04 27801 552377 5.0 2004-05 31232 640485 4.9 2005-06 42002 768538 5.5 2006-07 52217 870553 6.0 2007-08 75731 1128476 6.7 2008-09 89923 1138643 7.9 2009-10 78917 1237523 6.4 Source Reserve Bank of India he surplus on the invisibles account has helped keep the overall current account deficit T down to manageable levels. We generally consider a CAD to GDP ratio of 2 to 2.5 percent [in deficit mode] as a comfortable level. Over the last seven years, this limit was breached only twice in 2008-09 and in 2009-10 when the CAD to GDP ratio touched (-) 2.5 percent and (-) 3.1 percent. In 2010-11, there was considerable concern expressed with regard to the movement in the CAD GDP ratio. For a long time, it was felt that given the evolving trends, the CAD to GDP to ratio would cross the 3.5 percent mark. What made matters worse was the fact that FDI flows had slowed down and a good part of the CAD was being financed by volatile flows like foreign institutional investments. However, the strong performance of the export sector in the third and more so in the fourth quarter of 2010-11 has helped bring the CAD level down and we now expect this to settle in the range of 2.5 to 2.7 percent. Table 11 - CAD as a percent of GDP CAD GDP US$ Ratio million 2003-04 14083 552376.5 2.5 2004-05 -2470 640485.42 -0.4 2005-06 -9902 768537.61 -1.3 2006-07 -9565 870553.22 -1.1 2007-08 -15737 1128475.9 -1.4 2008-09 -28728 1138643.3 -2.5 2009-10 -38411 1237522.6 -3.1 Source Reserve Bank of India

Foreign Investments Data on foreign investment flows shows that while FDI inflows in the country in the year 201011 have seen moderation as compared to inflows received during 2009-10, portfolio flows have been sizable, nearly matching the quantum received during the preceding year.
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As the table on the next page shows, FDI inflows into India during April 2010 to February 2011 totaled US$ 25.9 billion as against US$ 33.34 billion received during the same period in the previous year. With only a month to go before the close of fiscal 2011, total FDI flows are expected to fall much short of US$ 37.8 billion that were received during the year 200910. A look at the sector wise FDI inflows during the period April-January 2010-11 and comparing the same with inflows received during the corresponding period of 2009-10 shows that a sizable decline has taken place in sectors like services sector, telecommunications, construction, housing and real estate, electrical equipments and agricultural services. hisTslowdown in FDI flows is a matter of concern as FDI flows are of a more durable variety and often come with many tangible and intangible benefits. In fact given the importance of this issue, the central bank RBI has set up an internal group to look into this development and try and understand the reasons for working this slowdown. It may be mentioned that this dip in FDI flows into India has taken place at a time when FDI flows to some of the other emerging markets have gone up in 2010. This last finding was brought out earlier in a report released by UNCTAD. Table 12 Foreign Investment Flows in US$ Million FDI YOY Portfolio YOY FII* YOY Total Growth Investments Growth Growth (FDI+Portfolio) 2000-01 4 029 87.0 2,760 -8.8 1,847 -13.5 6,789 2001-02 6,130 52.1 2,021 -26.8 1,505 -18.5 8,151 2002-03 5 035 -17.9 979 -51.6 377 -75.0 6,014 2003-04 4 322 -14.2 11,377 1,062.1 10,918 2,796.0 15,699 2004-05 6,051 40.0 9,315 -18.1 8,686 -20.4 15,366 2005-06 8,961 48.1 12,492 34.1 9,926 14.3 21,453 2006-07 22,826 154.7 7 003 -43.9 3 225 -67.5 29,829 2007-08 34 835 52.6 27,271 289.4 20,328 530.3 62,106 2008-09 37 838 8.6 -13,855 -150.8 -15,017 -173.9 23,983 2009-10(P) 37 763 -0.2 32,376 333.7 29,048 293.4 70,139 Apr-Feb 2010-1125,949 31,386 29,431 57 335
*FII is included in Portfolio Investments Sector

Table 13 Sector Wise Foreign Investment Flows in US$ Million

2010-11 2009-10 % change (Apr-Jan) (Apr-Jan) in 2010US$ US$ 11 visMillion Million vis 200910 2,995.19 3 876.66 1,331.69 2,461.40 1032.67 1,320.31 -22.74 -45.90 -21.79 % to total FDI Inflows (Apr-Jan 2010-11) 17.54 7.8 6.05

Source Reserve Bank of India % to total FDI Inflows (Apr-Jan 2009-10) 16.95 10.86 5.81

1 2 3
24 | Page

Services Sector Telecommunications Power

4 5 6 7 8 9 10 11 12

13 14 15 16 17 18 19 20 21 22 23 24

Metallurgical 1011.25 350.19 188.77 Industries Construction Activities 1006.02 2,316.43 -56.57 Housing & Real Estate 1048.1 2,648.82 -60.43 Computer Software & 707.83 676.39 4.65 Hardware Petroleum & Natural 540.5 222.46 142.97 Gas Industrial Machinery 539.75 179.17 201.25 Automobile 1191.43 1002.61 18.83 Industry Trading 447.1 492.86 -9.28 Information & 366.46 442.1 -17.11 Broadcasting (Including Print Media) Cement And Gypsum 606.89 31.37 1834.62 Products Chemicals (Other 382.21 287.61 32.89 Than Fertilizers) Hospital & Diagnostic Centres Drugs & Pharmaceuticals Consultancy Services Hotel & Tourism Sea Transport Air Transport (Including Air Freight) Electrical Equipments Agriculture Services Non- Conventional Energy Miscellaneous Industries 200.85 204.71 226.63 259.36 290.22 135.05 108.58 41.37 181.34 114.76 198.33 319.82 573.35 275.2 18.27 685.02 1,308.37 497.73 75.02 3.22 -29.14 -54.76 5.46 639.19 -84.15 -96.84 -63.57 43.77

5.92 5.89 6.14 4.14 3.16 3.16 6.98 2.62 2.15

1.53 10.03 11.57 2.95 1 0.78 4.39 2.15 1.93

3.55 2.24 1.18 1.2 1.33 1.52 1.7 0.79 0.64 0.24 1.06 7.72

0.13 1.24 0.5 0.86 1.39 2.49 1.18 0.08 2.77 5.78 2.1 3.96

1,318.05 916.79

Source SIA Newsletter, DIPP

While we wait for the findings of RBIs internal working group on this subject, it may be mentioned that in January this year RBI had alluded to the environment sensitive policies being pursued with regard to the mining sector, integrated township projects and construction of ports, and which appear to have affected investors sentiments. RBI had also raised issues to procedural delays, land acquisition and availability of quality infrastructure related and highlighted that if these are addressed expeditiously then Indias share in FDI flows to EMEs go up in the future. could Senior officials in the Industry Ministry have also expressed apprehension over slowing down of FDI and made a strong case for further liberalization of the FDI policy framework in the country. strong indication to foreign investors about Indias intent to further improve the In fact a policy framework for FDI was given recently when at the release of the third edition of the consolidated FDI policy, the government announced major changes related to pricing of
25 | Page

convertible instruments, inclusion of fresh items for issue of shares against noncash considerations and removal of the condition of prior approval in case of existing joint ventures / collaborations in the same field [Press Note technical 1]. While these announcements are welcome, the government should follow up now on policy reforms in areas like retail, insurance, defense and banking sector. Likewise emphasis on procedural reforms should continue to enhance the ease of doing business in India. Coming now to portfolio inflows we see that during the period April - February 2010-11 India received a total of US$ 31.4 billion in portfolio flows. Although this figure is encouraging, most trends show that portfolio investors have been net sellers in the Indian market. As recent the economic situation in US and Europe is improving slowly, there are opportunities emerging for FII investors in their home countries. Further, given the strong concerns institutional investors regard to the inflation situation in emerging markets including India, FII inflows have with could remain muted at least in the near term. he only positive in sight presently is the massive monetary expansion being undertaken by T the of Japan following the crisis [Tsunami / Earthquake / Nuclear Disaster] and the Bank continued Quantitative Easing in US. Both these developments could result in some money flowing towards Indian shores. It may however be added that this massive monetary expansion would also have a downside as it will continue to fan commodity prices and which would hurt us from inflation side. the Forex Reserves Indias foreign exchange reserves increased as we moved ahead in fiscal 2010-11. As data given the table below shows, while in April 2010, Indias foreign exchange reserves totaled in US$ billion, in September 2010 this figure had increased to US$ 292.9 billion. Most 279.6 recent numbers show that the countrys foreign exchange reserves have shot up further crossing the US$ 300 billion mark. With this level of reserves, India is the seventh largest holder of foreign exchange reserves in the world.
Table 13 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
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Jan 2011 Feb 2011

299,224 01,592 3

Source Reserve Bank of India

Although other countries with huge forex reserves have strengthened their external position on basis of positive or surplus trade and current account, in case of India this huge build up the of reserves is largely due to inflow of funds on the capital account. Nevertheless, this large holding of forex reserves has attracted a lot of attention and several options suggested on how to optimally utilize these reserves. In this context it is interesting to note that the countrys Chief Economic Advisor, Dr. Kaushik Basu, has once again brought the focus back on the question of India having its own Sovereign Wealth Fund. Speaking at a recent seminar, Dr. Basu mentioned time that India needs to seriously look at the issue of whether to set up a that it is Sovereign Wealth Fund. In context of Indias external situation and level of comfort with regard to forex reserves, an important variable to look at is the external debt position and particularly the movement debt over time. short term in Table 14 Indias External Debt in US$ Million / At End March 2006 2007 2008 2009 PR 2010 QE Dec 2010 QE Short term debt (1) 19,539 28,130 45738 43362 52,471 62,620 Long term debt (2) 119,575 144,230 178,669 181,153 208,983 234,891 Total external debt (3) 139,114 172,360 224,407 224,515 261,454 297,511 (1) / (3) (%) 14.0 16.3 20.4 19.3 20.1 21.0 Short term debt to 12.9 14.1 14.8 17.2 18.8 21.1 Forex Reserves (%) Total debt service 19,560 11,404 14,947 15,514 18,919 Debt service ratio 10.1 4.7 4.8 4.4 5.5 .9 3
Source Ministry of Finance, Government of India

Data shows that Indias short term debt has increased from US$ 43.4 billion in end March 2009 52.5 billion in end March 2010 and further to US$ 62.6 billion in end December 2010. to US$ As a percent of total external debt, the share of short term debt has gone up from 19.3 percent in end March 2001 to 20.1 percent in end March 2010 and further to 21.0 percent in December 2010. At these levels of short term debt, Indias external position can be said to be reasonably comfortable. Further, the fact that short term debt is about 21 percent of Indias foreign exchange reserves is also a comforting feature regarding Indias external situation. Data also shows that our debt service ratio has been declining over time [2009-10 being an exception when debt service increased on account of large ECB repayments] and stood at 3.9 percent at end December 2010.
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Exchange Rate Most recent trends in the movement of the INR vis--vis major vehicle currencies show that while the Indian Rupee has appreciated against the USD and Pound Sterling, it has depreciated Euro. No large variation was noted in INRs movement against the Japanese against the Yen. As data given in the table below shows the Rupee appreciated against the USD by 1 percent between February 2011 and March 2011. During the same time, the value of the Rupee moved up by about 0.8 percent against the Pound Sterling. Against the Euro, the Rupee weakened with value coming down by almost 1.5 percent between February 2011 and March 2011. its
Table 15 Rupees per unit of foreign currency (Yearly / monthly average basis) USD Pound Japanese Yen Euro Sterling 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 MOM growth -1.02 -0.80 -0.02 1.52 in Mar 2011
India Source Reserve Bank of

ne of the factors that affect the competiveness of Indias exports vis--vis exports from O 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--vis the US$. The data shows that between February 2011 and March 2011, all currencies analyzed have seen an appreciation against the US$. The only exception has been the Pakistani Rupee. Data further shows that while the Indian Rupee has seen greater appreciation against the USD compared tothe Brazilian Real and the Malaysian Ringgit, currencies like the Indonesian Rupiah, the South African Rand and the Thai Baht have gained more against the USD between February 2011 and March 2011.
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Table 16 Exchange rate vis--vis USD for selected countries (monthly basis) Brazilian Indian Indonesia Malaysian Pakistani South African Real Rupee n Rupiah Ringgit Rupee Rand 2010-11 April 2010 1.76 44.50 9027.33 3.21 83.99 7.35 May 2010 1.80 45.77 9183.39 3.26 84.38 7.65 June 2010 1.81 46.56 9148.36 3.26 85.37 7.63 July 2010 1.77 46.87 9053.80 3.21 85.60 7.54 Aug 2010 1.76 46.57 8971.76 3.15 85.68 7.30 Sept 2010 1.72 46.04 8975.11 3.11 85.86 7.13 Oct 2010 1.68 44.42 8928.05 3.10 86.01 6.91 Nov 2010 1.71 44.88 8931.61 3.11 85.60 6.96 Dec 2010 1.70 45.17 9024.20 3.13 85.78 6.84 Jan 2011 1.67 45.38 9036.00 3.06 85.76 6.92 Feb 2011 1.67 45.46 8916.53 3.04 85.38 7.17 Mar 2011 1.66 44.99 8760.48 3.03 85.40 6.92 M-o-M growth in -0.55 -1.02 -1.75 -0.26 0.02 -3.54 Mar 2011
Source International Monetary Fund

average Thai Baht 32.28 32.37 32.48 32.34 31.78 30.82 29.97 29.85 30.11 30.58 30.71 30.37 -1.12

Money and Banking Latest figures available from RBI show that broad money or M3 (up to March 25, 2011) registered an increase of 16 percent as compared to a growth of 16.8 percent during the corresponding period of the previous year. The year on year growth as on March 25, 2011 was also 16 percent as against 17.1 percent growth seen in the previous year. Amongst the key components of M3, currency held with the public saw an increase of 19.8 percent in the period up to March 25, 2011 (previous year growth being 15.9 percent) and time deposits with bank went up by 18.2 percent as against a growth of 16.3 percent witnessed during the same period in the previous year. Demand deposit held with banks however saw a marginal decline registering a negative growth of 0.6 percent as against a growth of 21.3 percent seen in the previous year. Looking at the sources of money supply growth (up to March 25, 2011) we see that while bank credit to the commercial sector went up by 20.6 percent, net bank credit to the government went up by 13.4 percent. Net foreign exchange assets of the banking sector have seen an increase of 6.9 percent during the same period. In the context of money supply growth it may be mentioned that with a nominal GDP growth of around 18 percent, this growth of 16 percent is relatively weak. In the previous four years,
29 | Page

when nominal GDP growth was of the order of 15 to 16 percent, M3 growth was much higher 20 percent. around Our analysis shows that while in 2006-07 and 2007-08, net foreign exchange assets of the banking sector and bank credit to the commercial sector grew at a relatively fast pace and contributed to overall money supply growth, in 2008-09 and 2009-10, the high growth in money supply was powered by rapid expansion in net bank credit to the government. In 201011, growth in net bank credit to the government and net foreign exchange assets of the banking slowed down considerably. Further, although bank credit to the commercial sector sector up pace in 2010-11, it is still below the expansion seen in 2006picked 07. Data on credit flows shows that in the financial year 2010-11 total bank credit registered21.4 percent. Growth in bank credit in the year 2009-10 was of the order of growth of a 16.9 percent. Further, when we look at the figures for non-food credit, we see that growth in 2010-11 has of the order of 21.2 percent as compared to 17.1 percent seen in the previous year. been Growth in deposits in 2010-11 has not only lagged growth seen in overall bank credit and non- credit but it also falls behind the growth in deposits seen in 2009-10. While in 2010food 11, aggregate deposits grew by 15.8 percent, in 2009-10 aggregate deposits had registered a growth of 17.2 percent. T slowdown in growth in deposits can be explained by unattractive card / deposit rates he and continued high inflation rate that lowered the real rate of return on term deposits. Good performance of the equity market in the first half of 2010-11 also contributed to slowdown in deposit growth. However, with time as credit growth gathered pace, banks started facing a tight liquidity situation. Data on interest rates in the call money market show that borrowing / lending rates started moving up in the second half of 2010-11. This is also the period when liquidity injection by the central bank under the LAF / Repo window increased and on occasions crossed the Rs. 1 lakh crore mark. As the liquidity situation tightened, banks were forced to increase the card rates. The inincrease card rates, which started in July 2010, picked up pace with hikes being particularly aggressive from December 2010 onwards. This move has helped bank garner more deposits in the last quarter of 2010-11.

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Table 17 Credit and Deposit Growth (Rs. Crore) Item Outstanding as on Variation over 2010 2011 Financial year Year - on - Year so far 2009-10 2010-11 2010 2011 Mar. 26 Mar. 25 32,44,78839,38,659 16.9 21.4 16.9 21.4 31,96,29938,74,376 17.1 21.2 17.1 21.2 4486,574 52,04,703 17.2 15.8 17.2 15.8
Source Reserve Bank of India

Bank Credit Non Food Credit Aggregate Deposits

Fiscal Situation Data on the fiscal position of the government shows that during the period April to February 2010-11, tax revenues (net) registered a growth of 28.4 percent over the same period of 2009- Non-tax revenues have also shown a sizable increase of over 109 percent during April 10. to February 2010-11 due to the large payments received by the government of account of 3G / spectrum auctions. Non-debt capital receipts of the government have also increased BW A by 78.1 percent and totaled Rs. 33,251 crore during April to February 201011. Table 18 Trends in Central Government Finances: April February 2011 (Rs. Crore) BE RE Actuals Percent of Actuals Growth 2010-11 2010-11 Apr-Feb Actuals to Apr-Feb in 2011 2011 Revised 2010 over Estimates 2010 Revenue Receipts 682212 783833 670336 85.5 458752 6.1 4 Tax Revenues (Net) 534094 563685 460624 81.7 358641 28.4 Non Tax 148118 220148 209742 95.3 100091 109.6 Non-Debt 45129 31745 33251 104.7 18672 8.1 7 Capital Receipts Recovery of Loans 5129 9001 10506 116.7 5886 78.5 Other Receipts 40000 22744 22745 100.0 12786 .977 Total Receipts 727341 815578 703617 86.3 477404 47.4
Non-Plan Expenditure 735657 821552 On Revenue 643599 726729 Account Interest Payments 248664 240757 On Capital 92058 94803 Account Plan Expenditure 373092 395024 On Revenue 315125 326928 Account On Capital Account 57967 68096 Total 11087491216576 Expenditure
31 | Page

668140 607814 201169 60326 310565 263259 47306 978705

81.3 83.6 83.6 63.6 78.6 80.5 69.5 80.4

601198 557414 177257 43784 257107 217191 39916 858305

11.1 9.0 13.5 .837 20.8 21.2 18.5 14.0

Fiscal Deficit Deficit Revenue Primary Deficit

381408 400998 275088 276512 269844 200707 132744 160241 73919

India

68.6 74.4 46.1

380901 -27.8 315873 -36.5 203644 -63.7

Source Controller General of Accounts, Government of

As regards expenditure, latest figures show that while non-plan expenditure has shown an increase of 11.1 percent during the period under review, plan expenditure has gone up by 20.8 percent during the same time period. On the whole, total government expenditure at Rs. 9,78,705 during April to February 2010-11 was about 14 percent higher compared to the same period in the previous year. Strong tax revenue collections, 3G / BWA spectrum windfall and moderation in growth of overall expenditure have helped the government rein in the fiscal deficit in 2010-11. During February 2010-11, fiscal deficit of the central government totaled 69 percent of April to the revised estimates and showed a fall of nearly 28 percent over the same period of the previous fiscal. Further, while presenting the budget for 2011-12, the Finance Minister announced that fiscal deficit in the year 2010-11 will be scaled down from 5.5 percent as projected earlier to 5.1 percent. Looking at the figures for government receipts for the year 2011-12 as given in the next table, we see that the gross tax revenues are budgeted to grow by a healthy 18.5 percent. With no major tax changes announced in the budget for 2011-12, the government is banking on strong growth in the economy, good corporate performance and a rise in wages and salaries to translate into this growth in tax collections. Revenue from corporation tax is expected to show an increase of 21.5 percent in 2011-12. This shows that there is a clear expectation on part of the government that the corporate sector would see high growth in the current year. It may also be noted that the small increase affected MAT rate from 18 percent to 18.5 percent in the last budget would also bring in in the more revenue under this head in 2011-12. With regard to income tax collections, we see the government projecting an increase of 16.2 percent. It may be recalled that in the last budget, the government, in its bid to provide some to people from high and rising inflation, had increased the exemption limit for relief individual income tax payers from Rs. 1,60,000 to Rs. 1,80,000. However, despite this revenue depressingincome tax collections are expected to go move, up. Coming to collections under excise, we saw that in the budget the Finance Minister desisted complete roll back of the stimulus measures and accordingly held the central calls for excise duty rate constant at 10 percent. FICCI had aggressively worked for maintaining the excise rate this level. We had urged the Finance Minister that by keeping rates constant, at industrial would get a leg up and this will translate into higher tax collections. production The 32 | Page

government accepted FICCIs argument and left the excise rate untouched. It is banking on high industrial growth to lead to a growth of 19.2 percent in excise collections. On customs, the projected increase in collections in 2011-12 is to the tune of 15.1 percent. Again with the peak rate of customs duty remaining unchanged at 10 percent, it is the increasing quantum of imports resulting from an uptick in domestic economic activity that is yield revenues to the tune of Rs. 1,51,700 likely to crore. Finally, on service tax collections the budgeted figures show an increase of 18.2 percent. The increasing share of services sector in the economy and extension of the service tax net are the two reasons that lie behind this projected growth in tax collections.
Table 19 Central governments revenue and capital receipts 2011-12 in Rs Crore 2010-11 2011-12 Growth (RE) (B E) Total receipts 12315761237728 0.5 Revenue 783833 789892 0.8 receipts revenue (net) Tax 563685 664457 17.9 Gross tax revenue 786888 932440 18.5 Excise duties 137263 163550 19.2 Customs duty 131800 151700 15.1 Corporation tax 296377 359990 21.5 Taxes on income 141566 164526 16.2 Service tax 69400 82000 18.2 Tax on UTs 1910 1973 3.3 Other taxes 8572 8701 1.5 Transfer to NCCF 3900 4525 16.0 States' share 219303 263458 20.1 Non-tax revenue 220149 125435 -43.0 Interest receipts 19728 19578 -0.8 Dividends and 48727 42624 -12.5 profits External grants 2756 2173 -21.2 Other non-tax revenue 147795 59891 -59.5 UT's without legislature 1143 1169 2.3 Capital 447743 447836 0.0 receipts Recovery of loan (net)9001 15020 66.9 Net market borrowings 355414 343000 -3.5 External assistance (net) 22264 14500 -34.9 Disinvestment 22744 40000 75.9 Small savings (net) 17781 24182 36.0 State provident funds 10000 10000 0.0 Others 10539 1134 -89.2
Source Ministry of Finance, Government of India
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Wh gross tax revenues are projected to grow by 18.5 percent in 2011-12, non-tax ile revenues are projected to show a decline by 43 percent. This is understandable as the strong growth seen under this head in 2010-11 was on account of the large payments received due to 3G /auctions. Since this was a one off event, non-tax revenues would show a decline in BW A 201112. Moving on to non-debt capital receipts we see that inflows on account of recovery of loans are expected to register an increase of 67 percent in 2011-12. Further, proceeds from disinvestment, which are pegged at Rs. 40,000 crore, would mark an increase of 76 percent in 2011-12. It may be noted that even in 2010-11 the government had targeted an amount of Rs. 0,000 crore from disinvestment. However, the actual amount realized by the end of the 4 fiscal 2011 was only about Rs. 22,744 crore. There are several cases of PSUs year where disinvestment was planned in 2010-11 but which could not completed on time. It is hoped that these units would undergo the disinvestment process in 201112. Table 20 Central governments expenditure 2011-12 in Rs Crore
Plan Non-Plan Total Plan Non-Plan Total ExpenditureExpenditureExpenditureExpenditureExpenditureExpenditure % change % change % change 2010-11 RE 395024 821552 1216576 30.20 13.93 18.75 2011-12 BE 441547 816182 1257729 11.78 -0.65 3.38
Source Ministry of Finance, Government of India

Figures for central governments expenditure for the year 2011-12 show that the government has budgeted a very small increase of 3.4 percent in its overall expenditure in 2011-12 over 2010-11. Further, within the overall expense head, while plan expenditure is expected to show an increase of 11.8 percent in 2011-12, non-plan expenditure will see a compression to the of 0.65 percent. tune Non-plan expenditure of the central government has been growing at a fast clip since 200607 with its growth rate ranging between 13 percent to 23 percent. This increase has been on account of factors like higher spending on food and fertilizer subsidies, implementation of the pay commission award and debt waiver for the sixth farmers. However, in 2011-12, the government sees its overall expenditure going down significantly under heads such as petroleum subsidy, spending on capital outlay and fertilizer subsidy and this would in turn balance the increase seen under heads such as interest payments, defence and pensions. services As regards plan expenditure, we again see a moderation in growth in 2011-12 as plan expenditure had shown an increase of over 20 percent in four of the five preceding years. However, despite this moderation in overall plan expenditure growth, allocations for sectors 34 | Page

like health, education, tax revenueschild development have seen a substantial jump in Wh in 2008-09, gross women and of the central government grew by 2.05 percent, in ile 2011-12 tax revenues grew by governments commitment to achieving inclusive 10,a trend which underlines the 3.18 percent. It may be recalled that this period 2009gross corresponds growth emphasis on the social sectors. with the through global financial and economic crisis and the government had introduced a series of fiscal stimulus measures to support economic activity. As part of these measures, the While excisethe budgeted estimates for various heads under plan and non-plan expenditure rates were cut in two phases and as a result we saw a dip in excise collection and which is reflect commitment on part of the government to usher in fiscal discipline and bring also reflected in the downtrend seen in union excise to GDP ratio. Further, slowdown in government on track in line with the FRBM targets, a few of these initial estimates finances back domestic also limited import growth and this in turn led to a decline in customs economy look somewhat ambitious to achieve. duty collections. Some of the heads where the government is likely to overshoot its budget estimates in 2011As the economy gained traction and growth started moving back to the pre-crisis trajectory, 12 MGNREGA have been increased the are MGNREGA [Wages under calibrated exit strategy from theand are now linked to CPI-in government also introduced a fiscal stimulus measures AL], petroleum subsidy [BE 2011-12 shows a fall to Rs. 20,000 crore from Rs. 35,000 crore in the budget for 2010-11. The excise rate cut introduced earlier was partially rolled back and this 2010- This looks difficult given the outlook for international oil prices], fertilizer subsidy 11. led to an increase in excise collections. Customs duty collections also improved on the back of [Againinternational prices of rising pick in imports and higher dutyfertilizers would make any large scale reduction difficult], up on crude and petroleum products. With direct taxes food subsidy [BE at Rs. 60,572 crore in 2011-12 is slightly lower than RE for 2010-11. collectionssharply in 2010-11, overall gross tax collections went up by 26 percent This will also going up in 2010be maintain as higher procurement will call 11. difficult to that tax to GDP ratio in 2010-11 to 10.77for higher storage and carrying 2009his T also lifted percent from 10.16 percent in costs. imponderable is the introduction of the Food Security Another 10. Bill]. this improvement is noteworthy, it may be mentioned from a global perspective, the Wh ile As mentioned earlier, the Finance Minister had based the budget projections for 2011-12 to tax ratio in India is still on the lower side. As the data in the following table shows GDP taking a growth of 9 percent. Since, achieving this growth target itself is now doubtful, there is tax to GDP ratio in India is lower when compared with some of the other emerging economies. reason to believe that the revenue projections of the government may also This highlights the need to continue moving ahead on the path towards tax reforms suffer. and simultaneously widen the of the anticipated amounts andis hoped that with the introduction If the revenues fall short tax base within the country. It the expenditure overshoots of GST and the DTC, the tax to GDP ratio in India would move the targeted amounts, then meeting the fiscal deficit target of 4.6 percent in 2011-12 will up. be a challenging task. Table 22 Comparison of Tax Revenue (as a percentage of GDP) with other emerging countries (Rs. Crore) Table 21 Fiscal Indicators of Central Government (as a percentage of GDP) 2005 2009 Tax-GDP ratio 2006 Tax to2007 Direct Custom Duty2008 Excise Union India 9.92 11.03 ratio 11.90 11.20 GDP to GDP ratio to GDP ratio9.79 Brazil 16.71 16.46 16.81 16.72 15.64 2006-07 11.05 5.37 2.02 2.75 China 8.68 9.19 9.93 10.27 2007-08 11.99 6.31 2.10 2.50 Indonesia 2008-09 12.50 12.25 12.43 13.03 11.42 10.86 5.99 1.79 1.95 Russian Federation - 10.16 16.57 16.55 15.76 12.86 2009-10 6.21 1.27 1.58 South Africa 26.86 28.38 28.86 27.81 25.41 2010-11 10.77 6.20 1.67 1.75 ThailandSource Reserve Bank of India CSO,16.73 Public Finance Statistics 16.46 17.24 16.11 15.15 Indian and Budget Documents (various
Bank In the context of central government finances, it is interesting to note the movement in the tax GDP ratio over time. As the table given above shows, the tax to GDP ratio for the to central government increased from 11.05 percent in 2006-07 to almost 12 percent in 200708. However, in the subsequent years, the tax to GDP ratio came down to 10.86 percent (200809) and 10.16 percent (2009-10). This decline can be explained by the huge moderation that was in the growth of gross tax revenues in these two years. seen
6 35 | Page

years)

Source World