Global Economic Prospects and Indian Economy - Updated Version Sept 19th, 2010

7/31/2019 Global Economic Prospects and Indian Economy - Updated Version Sept 19th, 2010

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Global Economic Prospects andthe Indian Economy

Usha Thorat

September 2010
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2

Broad Outline

Global economy and India recent trends

Concerns of Inflation; Fiscal Situation

Developments in real and external sectors

Investment Climate

Banking Sector scenario

Quick SWOT analysis India

RBIs latest assessment September 16, 2010


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Global Economy - Prospects

3

-5

0

5

10

15

20

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

World Advanced Economies Emerging & Developing Economies

Forecast for 2010 and 2011

Percent


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IMF's World Output Growth Forecast

4

2010 2011

World 4.6 4.3

Advanced Economies 2.6 2.4

Emerging and Developing

Economies 6.8 6.4

India 9.4 8.4

Source: IMF, WEO (Update) July-2010

(Per cent)


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Indian Economy - Growth Trajectory

5

Average GDP growth at 8.9 per cent during 2003-08

Real GDP grew at 8.8 per cent in 2010-11 (Q1) (6.0 per cent in 2009-10 (Q1))

RBI places real GDP growth forecast at 8.5 per cent for 2010-11

Pe

rcent

0.0

2.0

4.0

6.0

8.0

10.0

12.0


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66

High Domestic Saving & Investment Rates-

with Modest Current Account Deficit

15.0

20.0

25.0

30.0

35.0

40.0

Percentag

etoGDP

GDS GCF


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7

Inflation has increased significantly after being moderate during

first half of 2009-10

7

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

1990-91

1991-92

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

Percent

WPI Inflation (Annual Average)

-2.0

0.0

2.0

4.0

6.08.0

10.0

12.0

14.0

April

May

June

July

August

September

October

November

December

January

February

March

Percent

WPI Inflation (y-o-y)

2008-09 2009-10 2010-11


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8

Monetary and Inflation conditions

Inflation - WPI and CPI

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

Apr/08

Jul/08

Oct/08

Jan/09

Apr/09

Jul/09

Oct/09

Jan/10

Apr/10

Jul/10

y-o-yp

ercent

CPI-Industrial Workers CPI-Agricultural Labourers

WPI- All Commodities WPI-Essential Commodity Group

WPI-Food (Composite)


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Fiscal Situation: Key Indicators

Year Primary deficit Revenue deficit Gross Fiscal Deficit(1) (2) (3) (4)

Centre

2008-09 2.6 4.5 6.0

2009-10 RE 3.1 5.3 6.6

2010-11 BE 1.9 4.0 5.5

States

2008-09# 0.6 -0.2 2.4

2009-10 RE# 1.6 0.8 3.4

2010-11 BE# 1.0 0.4 2.9

Combined

2008-09 3.4 4.3 8.52009-10 RE 4.8 6.0 10.0

2010-11 BE 3.0 4.4 8.3

RE: Revised Estimates; BE: Budgeted Estimates.

# : data pertain to 27 State Governments.


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10

Current Trends - Real GDP Growth (Per Cent)

Item 1950-80 2005-06 2006-07 2007-08 2008-09 2009-10@ 2010-11 Q1

(Average)

1 2 3 4 5 6 7 8

1. Agriculture and Allied

Activities

2.1 5.2 3.7 4.7 1.6 0.2 2.8

(18.1) (17.2) (16.4) (15.7) (14.6) (14.0)

2. Industry 5.4 8.1 13.6 9.3 3.1 10.4 11.4

(20.0) (20.7) (20.7) (20.0) (20.5) (20.8)

2.1 Mining and Quarrying 4.6 1.3 8.7 3.9 1.6 10.6 8.9

2.2 Manufacturing 5.3 9.6 14.9 10.3 3.2 10.8 12.4

2.3 Electricity, Gas and

Water Supply 9.6 6.6 10.0 8.5 3.9 6.5 6.63. Services 4.5 11.3 10.2 10.4 9.3 8.3 9.4

(61.9) (62.2) (62.9) (64.4) (64.9) (65.2)3.1 Trade, Hotels, Transport

Storage and

Communication 5.1 12.1 11.7 10.7 7.6 9.3 12.2

3.2 Financing, Insurance,

Real Estate and Business

Services 3.5 12.8 14.5 13.2 10.1 9.7 8.0

3.3 Community, Social

and Personal Services 4.3 7.6 2.6 6.7 13.9 5.6 6.7

3.4 Construction 4.9 12.4 10.6 10.0 5.9 6.5 7.5

4. Real GDP at Factor Cost 3.5 9.5 9.7 9.2 6.7 7.4 8.8

(100) (100) (100) (100) (100) (100)

Figure in parenthesis are percentage share to GDP; @: Revised estimates

Source: Central Statistical Office


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Demand Side Drivers of Growth

11

(Percentage to GDP)

2008-09 2009-10 2009-10 Q1 2010-11 Q1

Share Contribution Share Contribution Share Contribution Share Contribution

PrivateConsumption 59.5 78.2 57.6 33.4 59.9 33.5 56.5 22.6

Government

Consumption 11.5 33.6 11.8 15.7 11.5 30.8 11.9 16.3

Gross Fixed

Investment 32.9 25.8 32.8 30.8 31.2 (-)4.4 30.5 23.7

Net Exports (-) 6.2 (-) 36.2 (-) 5.1 7.8 (-) 4.8 36.4 (-) 5.2 (-) 9.8

Source: CSO


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12

Growth in Index of Industrial Production (Y-o-Y)

During April-July 2010, the IIP growth increased to 11.4 per cent as

compared with 4.7 per cent last year.

Percent

6.2

4.4

5.4

6.4

1.7

6.0

0.1

2.5

-0.2

1.00.2 0.3

1.1

2.1

8.3

7.2

10.6

9.3

10.2

12.0

17.7

16.3

14.7 14.615.2

11.3

5.8

13.8

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0


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13

Growing Openness

Indias Trade Openness (% of GDP)

Exports Imports

Current

Account

Capital

Account

1990s 8.0 10.8 26.8 15.1

2000s 12.2 17.5 45.4 33.8

2009-10 13.9 22.8 55.2 48.3

Source: RBI


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Increased Tradability of Services

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

PercentagetoServicesGDP

Services Exports to Services GDP


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15

Current Account Balance & Capital Inflows

-4

-2

0

2

4

6

8

10

1990-91

1991-92

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

P

ercent

Current Account Balance as a pecentage of GDP Net Capital Flows as a percentage of GDP


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16

Capital FlowsUS $ billion

Item

2008-09 2009-10

Apr-Mar Apr-Mar

1. Inward FDI 35.2 31.7

2. FIIs -15.0 29.0

3. ECBs 7.9 2.5

4. NRI Deposits 4.3 2.9

5. Other Banking Capital -7.5 -0.8

6. Short-term Trade Credits -1.9 7.7Total 7.2 53.4

FII flows amounted to US$3.5 billion during April-June 2010-11 as against US

$ 8.3 billion during April-June 2009-10


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FDI Flows to India

Source: RBI

(US $ million)

2006-07 2007-08 2008-09 2009-10

April-July

2009-10

April-July

2010-11

Equity 16,394 26,757 27,807 22,908 10,381 7,557

Re-invested

Earnings 5,828 7,679 6,428 8,079

Other

Capital* 517 292 757 695

Total 22,739 34,728 34,992 31,682 10,381 7,557

* Inter company debt transactions of FDI entities


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FDI inflows as percentage of Gross Fixed Capital

Formation, 2007-2009 (Per cent)

18

2007 2008 2009Argentina 10.2 12.7 7.6Brazil 14.5 14.7 9.9

Chile 38.6 36.4 36.3

Mexico 11.9 9.2 6.1

China 6.0 5.3 4.0Hong Kong, China 130.3 138.9 110.2

Korea, Republic of 0.9 3.1 2.4

Taiwan Province of China 9.0 6.4 4.0

India 6.3 9.6 8.4

Indonesia 6.4 6.6 2.9

Malaysia 21.2 16.8 3.5

Philippines 13.8 6.3 8.2

Singapore 89.3 20.8 32.9

Thailand 17.4 11.4 9.2

World 16.9 12.6 9.1

Source: World Investment Report 2010


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Net FIIs Inflow and Exchange Rate Movement

41

42

43

44

45

46

47

48

49

50

51

-2,000

0

2,000

4,000

6,000

8,000

10,000

Apr/09

May/09

Jun/09

Jul/09

Aug/09

Sep/09

Oct/09

Nov/09

Dec/09

Jan/10

Feb/10

Mar/10

Apr/10

May/10

Jun/10

Jul/10

Aug/10

RupeeperUS$

US$Million

FII Inflows Exchange rate (Rt. Scale)


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20

Movement in NEER and REER(1993-94=100)(6-currency trade based weights)

50

75

100

125

NEER REER

Index


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21

Note: Reserves change on BoP basis are not available after Jan-Mar 2010 quarter.

Indias Foreign Exchange Reserves

(US$ billion)

175

195

215

235

255

275

295

315

335

-20

-15

-10

-5

0

5

10

15

20

25

30

Jan-Mar2007

Apr-Jun2007

Jul-Sep2007

Oct-Dec2007

Jan-Mar2008

Apr-Jun2008

Jul-Sep2008

Oct-Dec2008

Jan-Mar2009

Apr-Jun2009

Jul-Sep2009

Oct-Dec2009

Jan-Mar2010

Apr-Jun2010

Jul-Aug2010

US$bi

llion

US$bi

llion

Variation in Reserves (BoP basis) Outstanding Reserves (right scale)


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FDI Confidence Index:2010

22

0 0.5 1 1.5 2 2.5

China

United States

India

Brazil

Germany

Poland

Australia

Mexico

Canada

United Kingdom

Source: A.T Kearney Analysis


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Sovereign Credit Ratings of Top Ten Debtors amongst

Developing Countries

Year Standard & Poors Moody's Fitch's

Rating Outlook Rating Outlook Rating Outlook

China A+ Stable A1 Stable A+ Stable

Russia BBB Negative Baa1 Positive BBB Negative

Turkey BB- Negative Ba3 Stable BB- StableBrazil BBB- Stable Ba1 Stable BBB- Stable

India BBB- Stable Baa3 Positive BBB- Stable

Mexico BBB+ Stable Baa1 Stable BBB+ Negative

Indonesia BB- Stable Ba3 Stable BB Stable

Poland A- Stable A2 Stable A- Stable

Argentina B- Stable B3 Stable

Hungary BBB- Negative Baa1 Negative BBB Negative

Source: India's External Debt - A Status Report, 2009

Note: For India data are updated upto June 201023


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Indian Stock Markets

2500

2900

3300

3700

4100

4500

4900

5300

5700

6100

7500

8500

9500

10500

11500

12500

13500

14500

15500

16500

17500

18500

19500

20500

31-Dec-08

31-Jan-09

28-Feb-09

31-Mar-09

30-Apr-09

31-May-09

30-Jun-09

31-Jul-09

31-Aug-09

30-Sep-09

31-Oct-09

30-Nov-09

31-Dec-09

31-Jan-10

28-Feb-10

31-Mar-10

30-Apr-10

31-May-10

30-Jun-10

31-Jul-10

S&PCNXNifty

(Base:Nov.3,1995=

1000)

BSESensex

(Base:197

8-79=100)

SENSEX NIFTY

Equity Market revived indicating restoration of investor confidence.


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Global Stock Markets

Country/Index

Percentage Variation (year-on-year) Percentage Variation

End-March 2009 End-March 2010 Sept. 7, 2009 overMarch 31, 2009

Sept. 7, 2010 overMarch 31, 2010

1 2 3 4 5

Developed Markets

US (Dow Jones) -38.0 42.7 24.8* -4.8

US (NASDAQ) -32.9 56.9 33.3* -7.9

FTSE UK 100 -31.1 44.7 25.6 -4.8

Euro area (FTSE 100) -40.1 44.8 31.6 -2.3Japan (Nikkei 225) -35.3 36.8 27.3 -16.8

Hong Kong (Hang Seng) -40.6 56.4 52.0 0.8

Emerging Markets

Russia -66.4 128.0 58.5 -7.6

Brazil -32.9 71.9 41.4* -5.2 **

South Korea -29.2 40.3 33.4 5.6

Singapore -43.5 69.9 55.5 5.1

Argentina -46.5 110.8 60.7 1.9India -37.9 80.5 65.0 6.4

China -31.7 31.0 21.4 -13.2

Memo:

World (MSCI) -44.0 49.1 34.8 -6.4

EMEs (MSCI) -48.4 77.3 51.8 -0.4

* As on Sept. 8, 2009. ** As on Sept. 6, 2010.

Source: Bloomberg.


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Banking Sector Scenario

Indian banks continue to remain wellcapitalized as per Basel II requirements

NPAs at manageable level despite the

downturn

Significant liquidity buffers - CRR and SLR

prescriptions

Focus on CD ratio and SLR requirement helpin limiting leverage


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Select Financial Indicators - All Banks(per cent)

Mar-08 Mar-09 Mar-10 Jun-10

CRAR 13.01 13.98 14.54 14.35Core CRAR 9.06 9.57 10.13 9.99

Gross NPAs to Gross Advances 2.39 2.44 2.50 2.55

Net NPAs to Net Advances 1.08 1.13 1.13 1.10

Provision Coverage Ratio (PCR) 52.5 50.6 53.8 55.8

Interest spread 2.69 2.72 2.69 3.03*

Return on Total Assets 1.13 1.14 1.06 1.13*

Return on Equity 15.18 14.49 13.33 13.44*

Data on Capital Adequacy cover overseas operations; other data based on domestic operations onlyFigures on CRAR, Core CRAR are as per Basel II, except for Mar-08, which is as per Basel-I

* annualized

PCR (%) = Provisions For Credit Losses * 100/Gross NPAs

Interest spread = Net Interest Income * 100/ Avg. Total Assets

Return on Total Assets = Profit after Tax * 100 / Avg. Total Assets

Return on Equity = Profit after Tax * 100 / Avg. Total Assets


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Structural Reforms

Discussion paper on licensing New Private

Sector Banks issued in August 2010

Discussion paper on presence of foreign banksto be issued shortly

Working Group looking into Holding Companystructure


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Financial Stability and Development Council

GOI setting up Financial Stability and

Development Council (FSDC) for:

Achieving inter-regulatory coordination andoverseeing systemic risks and

laying down a macro-prudential overlay tofinancial sector regulation


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Focus on Financial Inclusion

Adoption of BC model entities eligible to act

as BCs enlarged to include even individuals

Inclusion of for profit companies as BCsunder consideration

Adoption of mobile- based and smart cardbased technologies


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Basel III

BCBS release Basel III norms on September 12, 2010 implementation in a phased manner

Capital adequacy of Indian banks will not be

impacted significantly they already have high CRARand Core CRAR

Leverage ratio will be around 6, much comfortable

than the Basel requirement of 3

Indian banks lagely follow retail model and therefore

liquidity is not an issue for them


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India's SWOT analysis

STRENGTHS

High savings/investment , forex reserves, quality talent andIT, broad based and growing entrepreneurial class, marketsize, macro economic and financial stability, language,democracy and political system stability

WEAKNESSES

Physical infrastructure, human development indicators,agriculture, shortage of skilled manpower

OPPORTUNITIES

Demographic dividend, knowledge based growth , increased

integration with world economy, urbanisationTHREATS

Global Uncertainty, fiscal deficit, climate change energyand food security, regional and social inequalities


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Macroeconomic situation

RBIs latest assessment on September 16, 2010

Global Scenario

Recovery slowing; global environment continues to be a cause for caution

Domestic Scenario

Recovery consolidating; economy rapidly converging to its trend rate of

growth. Agri. growth prospects boosted; sustained growth in service sector.

Inflation dominant concern; implications for real interest rates Fiscal deficit conforming to budget estimates

External front -export growth constrained by continuing sluggishness in

global economy; demand for imports increased due to strong domestic

recovery

Overall assessment - growth remains steady. Inflation appears to havestopped accelerating though the rate may remain high for some months.

Monetary Measures announced

Repo rate under LAF increased by 25 basis points from 5.75 % 6 %. Reverse

repo rate increased by 50 basis points from 4.5 % to 5.0 %

Global Economic Prospects and Indian Economy - Updated Version Sept 19th, 2010

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