AUTHOR: Rama Krishna Vadlamudi vrk_100@yahoo.co.

in
MUMBAI
December 8th, 2008
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 INDIA'S MACRO PICTURE

Stock markets in India have been following the global trends in the past one year.
The global financial crisis, credit crunch, collapse of large financial institutions in the US
and Europe, lack of business confidence and severe compression of global trade have
affected the Indian bourses hugely. Investors in India have been looking toward global
cues rather than domestic economic indicators. As a result, our markets have alsoshown
profound fall in stock prices since January 2008. The fall was more pronounced since
the middle of September 2008, after the collapse of Lehman Brothers Inc and bailing out
of AIG, Fannie Mae and Freddie Mac in the US. Central Banks the world over have been
battling recessionary pressures through a combination of fiscal incentives and infusion of
huge liquidity into commercial banks with a view to shoring up confidence among banks.

Even though Indian economy is driven more by domestic consumption rather

than exports, wild swings in foreign capital flows have been impacting the domestic
currency and other capital market flows. The Central Government has spent huge
amounts outside the Union Budgetwhich include Rs 25,000 crore released to banks as
part of the farm loan waiver package; Rs 39,000 on fertilizer subsidies; and Rs 10,000
crore paid to government employees as part of the Rs 25,000-crore salary hike on the
Sixth Pay Commission Award. The fiscal deficit was estimated to be at 2.5% of GDP at
the end of March 2009 at the time of presenting the Union Budget in February 2008.
However, due to the additional expenditure of off-balance sheet items, as mentioned
above, the fiscal deficit is estimated to shoot up to 6 to 6.5% by the end of this fiscal year
2008-09. The government has announced a further borrowing programme of Rs 45,000
crore between 1.12.08 and 31.03.09. All these measures are likely to put pressure on
the government’s finances and the government is sure to miss the FRBM targets of
2.5% fiscal deficit and 1% revenue deficit by March 2009.

INDIA'S EXPORTS AND GDP GROWTH

India’s exports in October 2008 fell by 12.1% in dollar terms to USD 12.8 billion
as compared to October 2007. However, exports grew by 8.2% in rupee terms due to
sharp depreciation of rupee against the dollar. India’s forex reserves have dipped by
20% in dollar terms to USD 248 billion. FIIs have withdrawn USD 13.5 billion (net)
between January and November 2008. India’s GDP grew by 7.6% during second quarter
of 2008-09, according to CSO. The economy expanded by 7.9% during the first quarter,
taking the first-half GDP growth to 7.8%. During the year 2007-08, the economy grew by
9 per cent. Tax collections have been showing signs of weakness of late. On the positive
side, Inflation rate based on Wholesale Price Index (WPI) has come down to 8.40% as
compared to 12.91% reached in the first week of August 2008. Crude oil also has fallen
by more than 70 per cent from its peak attained in July 2008 to the present USD 42 a
barrel (NYMEX). Other commodities prices have also fallen sharply. The country is
witnessing a healthy capital inflow through ECBs as well as Foreign Direct Investment.

Rama Krishna Vadlamudi, MUMBAI. vrk_100@yahoo.co.in. Dec. 8th, 2008 Page 2 of 3

 WHAT ARE THE PROSPECTS

Since the middle of September 2008, RBI has cut repo rate by 250 bp to 6.5%,
reverse repo rate by 100 bp to 5%, SLR by 100 bp to 24% and CRR by 350 bp to 5.5%.
All these liquidity and policy measures have infused additional liquidity of Rs 3,00,000
crore into the system. On the forex front also, RBI has announced a slew of measures to
boost dollar liquidity. However, monetary policy measures have a tendency to impact the
rates in the real economy in a slow and gradual manner. Because of certain distortions
in the interest rate mechanis in India, monetary policy transmission is weak. The
measures taken by RBI are going to have an impact in the next two to three months.
Petrol and Diesel prices have also been cut. This is expected to accelerate the fall in
inflation rate in the coming months.

To tackle the slowing economy, the Central Government had on December 7,

2008, announced certain fiscal measures to stimulate the economy. The package
includes: an additional expenditure of Rs 20,000 crore in the current year, Cenvat cut of
4% on all products other than petroleum, boost for housing sector and raising of Rs
10,000 crore tax-free bonds by Indian Infrastructure Finance Company Limited. The
stimulus package is expected to speed up highway projects worth over Rs 60,000 crore
under separate phases of national highway development programme. Coupled with the
RBI’s rate cuts in the last three months and government’s fuel price reduction, the fiscal
stimulus package is likely to have a positive impact on the economy. It is quite
reassuring for the markets to know that the government will take all policy steps
necessary to give a boost to the economy.

Picture and Design: By the author

Rama Krishna Vadlamudi, MUMBAI. vrk_100@yahoo.co.in. Dec. 8th, 2008 Page 3 of 3