THE REAL ECONOMY

April 2009
Preeti Gupta

Bajaj Capital Centre for Investment Research bccir@bajajcapital.com

India Growth Outlook weak in short term

Indias GDP will grow 6.5%, much lower than the advance estimate of 7.1%.
Montek Singh Ahluwalia, Deputy Chairman, Planning Commission

India may return to 8% plus GDP growth in medium term

CFSA

As Global economy deteriorates sharply, World Bank has projected a 4.0% growth for India in 2009 before accelerating to 7.0% in 2010

Indias GDP growth will dive to 5% in FY10 owing to the uncertain global environmentIt should speed up in FY11 with recovery in the global economy and lower domestic interest rates spurring private investment and manufacturing.

World Bank

ADB

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India - A hub of Opportunities in long-term

India is now truly a land of opportunity. I think it is still an incredible event that the Indian economy is expected to grow at 6.57 per cent.

Constraints in India can be a source of dramatic global innovation, such as Tata Nano and a host of other low-cost products.

John Redwood John Redwood Economic Economic Competitiveness Competitiveness Policy Group, UK Policy Group, UK

Dr.C.K.Prahlad Dr.C.K.Prahlad ,,Management Management Guru Guru

Ravi Ravi Venkatesan, Venkatesan, Chairman, Chairman, Microsoft India Microsoft India

We see India as the most attractive market in the region.

Robert Robert Morrice, Morrice, Chairman Chairman (Asia-Pacific), (Asia-Pacific), Barclays Plc Barclays Plc

The growth potential in India will remain strong in the long run compared to many of our other businesses in the world.

Andrew Moss, Andrew Moss, CEO, CEO, Aviva Global Aviva Global

Industrial growth remains weak, but the sharp fall has been arrested
IIP for Jan 09 declined -0.5% (YoY), second consecutive contraction Slide in industrial output led by manufacturing which fell by -0.8%, followed by mining output (-0.4%). Capital Goods & Consumer Durables however outperformed in manufacturing; Electricity output was up 1.8%. Outlook for Feb 09 remains weak amid falling exports; but a stable 2.2% growth in core sector makes room for a feeble recovery.
INDUSTRIAL GROWTH (%) Jan-09 Total industry output Mining Electricity Manufacturing output i. Basic good ii. Capital Goods iii. Intermediate Goods Consumer Goods i. Consumer Durables ii. Consumer non Durables -0.5 -0.4 1.8 -0.8 -1.0 15.4 -9.2 1.1 2.5 0.7 Jan-08 6.2 2.9 3.7 6.7 3.6 2.6 8.0 8.4 -0.5 11.1 Apr-Jan 2009 3.0 2.7 2.6 3.0 2.9 8.6 -2.5 5.3 3.5 5.9 Apr-Jan 2008 8.7 4.9 6.3 9.3 7.4 18.5
1.0 3.0 7.0 5.0 9.0 Jan' 09 Industrial Grow th rem ains negative...

9.4 6.1 -1.3 8.7

-1.0
J08 F- M - A - M 08 08 08 08 J- J08 08 A08 S08 O08 N- D08 08 J09

(Source: CSO)

Bajaj Capital Centre for Investment Research bccir@bajajcapital.com

Core Infra Showing early signs of revival

Core Infrastructure in Feb 09 grew at 2.2%, fastest pace in four months on the back of better performance of petroleum refinery and steel output Steel, cement and coal posted better than expected growth. Only crude oil remained in the negative territory while electricity output remained flat during Feb 09 During April-Feb 09, core infra growth expanded 3.0% against 5.8% a year ago
Grow th in Core Infrastructure slightly im proves.

Core Infra Growth (%)

7.2

Overall Steel Cement Electricity Co al P etro leum Crude Oil

0.5 0.3

2.2 7.0 3.6 2.3 8.3 12.8 9.8

6.2

5.2

4.2

3.2
6.0 11.6

A slight rebound

2.2
5.8

-6.2 2.3

1 .2
J08 F08 M08 A08 M08 J08 J08 A08 S08 O08 N08 D08 J09 F09

yo y gro wt h in %

Feb-08

Feb-09

(So urce: eaindustry.nic.in)

Bajaj Capital Centre for Investment Research bccir@bajajcapital.com

Inflation: heading to negative territory

WPI inflation for week ended March 21, at 0.31%; slight rebound from week ago reading of 0.27% The overall trend for prices continues to move downwards due to sharply lower commodity prices and weak demand CPI inflation still in double digits; yet to show any significant decline; normally follows WPI with a lag In the coming weeks, WPI Inflation is likely to enter negative territory; short term outlook for inflation remains benign
WPI Inflation near zero, likely to move in -ve territory in near term...
1 2 1 0 8 6 4 2 0 J F M A M J J A S O N D WPI Inflation 2008 WPI Inflation 2009

Source: www.eaindustry.nic.in

Bajaj Capital Centre for Investment Research bccir@bajajcapital.com

Foreign TradeGlobal slowdown drives down exports

Exports fell for the 5th consecutive month, declining by -21.7% in Feb 09; sharpest monthly fall at least since April 2001. Imports fell faster than exports, at -23.3% in Feb 09, for the second month in a row; fall in imports primarily due to cheaper oil imports Exports from sectors like textiles, handicrafts, leather, carpets, marine products and gems & jewellery continued to be hit. Trade deficit narrowed due to sharper drop in imports, contracted by -26.8% (YoY) FY09 exports might not even meet the revised export target of $175bn
Trade deficit narrows for the 2nd consecutive month...
30

25

USD bln

20

1 5

1 0
A-08 M -08 J-08 J-08 A-08 S-08 O-08 N-08 D-08 J-09 F-09

(So urce: www.co mmerce.nic.in)

Im po rt s E xpo rt s

Bajaj Capital Centre for Investment Research bccir@bajajcapital.com

Capital Flows FDI smart rebound

FDI equity inflows jump by 54.7% YoY in Jan 09,after consecutive YoY declines throughout Q3FY09; at twice the amount in Dec 2008 FDI equity inflows at $23.9bn in Apr-Jan 09 vs. $14.5bn in Apr-Jan 08, a growth of 65% Services, Telecommunication, Housing & Real Estate, Construction activities & Computer hardware & software attracted the highest amount of FDI equity inflows during Apr-Jan 2009.
4500 4000 3500 3000 2500 2000 1 500 1 000 500 0

Sharp jump in FDI Inflows in Jan '09...($ mn)

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec
FY08

Jan
FY09

So urce: www.dipp.nic.in

Bajaj Capital Centre for Investment Research bccir@bajajcapital.com

Capital Flows Portfolio flows

In Equities - FIIs were net sellers in 9 months out of 12 in FY09, having net sold equities worth ~Rs. 48000cr; Domestic Institutional investors (DIIs) were net buyers in FY09, having net bought a meager Rs. 6626cr Weakness in Indian rupee, higher fiscal deficit, fears of further rating downgrades and a global credit squeeze led to FII outflows in FY09. In Debt Both FIIs as well as DIIs remained net buyers to the tune of Rs. 2260cr and Rs. 81000cr respectively
FII Flows (Rs Cr.)
5000

21 000 1 5000 9000

DII Flows (Rs Cr.)

3000
-5000

-3000 -9000

-1 0000

-1 5000 -21 000

-1 5000

-27000

Equity

Debt

Equity

Debt

Bajaj Capital Centre for Investment Research bccir@bajajcapital.com

Foreign Exchange Reserves

Forex reserves at $253.8bn on 20 Mar, 2009; down 17% yoy and 20% from peak in June 08 Gained $5.1bn in the week; highest weekly rise since Feb08 mainly on account of a revaluation in global currencies and an inflow of foreign funds into the equity market. Reserves had dropped significantly in Q2 & Q3 FY09 due to RBIs intervention to support the INR
320

Forex Reserves find support after sharp fall ($ billion)

300

280

260

240
Apr-08 (Source: RBI) May-08 Jul-08 Aug-08 Oct-08 Dec-08 Jan-09 Feb-09

Bajaj Capital Centre for Investment Research bccir@bajajcapital.com

Credit & Deposit Growth

Total bank deposits rose by 21.2% YoY as on 13 March 09; well above the growth target of 19% for FY09. Bank credit rose by 18.1% YoY as on 13 March 09; Non Food credit (loans to industry and consumers) growth at 18.4%. Credit growth falls below deposit growth as risk aversion remains high among lenders and demand for credit weakens
Non-Food Credit & Deposit Grow th (%) 30.0 28.0 26.0 24.0 22.0 20.0 18.0 1/4/08 2/4/08 3/4/08 4/4/08 5/4/08 6/4/08 7/4/08 8/4/08 9/4/08 1/4/09 2/4/09 10/4/08 11/4/08 12/4/08 3/4/09

(So urce: RB I)

No n Fo o d Credit

To tal Deposits

Bajaj Capital Centre for Investment Research bccir@bajajcapital.com

Currency markets
Weak global markets lead to huge FII outflows putting downward pressure on the rupee Rising fiscal and trade deficits weaken rupee further Rupee fell approx 27% against dollar in FY09 as foreign currency inflows dried up Rupee likely to remain under pressure in near term; RBI intervention not enough to stem the fall
46.75

Rupee likely to fall further on the back of w orsening fiscal deficit and FII outflow s

47.75

48.75

49.75

50.75

51.75

1 6-Dec-08

5-Jan-09 ( S o urc e : N W18 )

25-Jan-09

1 4-Feb-09

6-M ar-09

26-M ar-

INR/US$

Bajaj Capital Centre for Investment Research bccir@bajajcapital.com

Fiscal Management
Falling revenues (tax collections) and rising government expenditure on the back of a global financial crisis induced slowdown in India leads to a ballooning fiscal deficit in FY09 Fiscal deficit during Apr-Jan 09 up 174% vis--vis Apr-Jan 08 FY09 fiscal deficit revised from 2.5% to 6% of GDP (excluding oil, food & fertilizer subsidies); FY10 fiscal deficit estimated at 5.5% of the GDP; can be much higher if the new government presents a populist budget post elections Total expenditures ahead of target in FY09; revenue collections during Apr-Jan 09 at 72% of FY09 target
Fiscal Deficit & Revenue Deficit (Rs Cr.)
300000 250000 200000 1 50000 1 00000
5,000 65,000 55,000 45,000 35,000 25,000 15,000

Fiscal & Revenue Deficit (Rs Cr)

50000 0 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 (till Jan) Fiscal Deficit Revenue Deficit

(5,000) (15,000) (25,000)

Fiscal Deficit

Revenue Deficit

Bajaj Capital Centre for Investment Research bccir@bajajcapital.com

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