Dconomic

India Economic Outlook, Issue 2 | August, 2011 | www.deloitte.com/in

The impending signs of Global uncertainty

Economic performance & regulatory announcements Overview of GDP growth, trade, monetary conditions Global trends & recent developments Global trends from IMF, weakest economies to Japans GDP Important industry news & developments Reports from various industries and other developments

Contents

Economic performance and Regulatory announcements Growth and Sectoral Performance Foreign Trade and Investments Inflation and monetary tightening Stock Market, Employment and Others Global trends & recent developments Growth Trade Inflation and monetary tightening Sovereign Risk Unemployment and Others Stock Markets Important industry news & developments Manufacturing Technology, Media and Telecom Energy and Resources Financial Services Consumer Business and Transportation The impending signs of Global uncertainty Current situation and background State of Other Economies Possible impact on the World Possible impact on India

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Dconomic August 2011

Economic performance and Regulatory announcements

Growth and Sectoral Performance Fiscal year 2011-12 has had a slightly bumpy start with GDP growth showing signs of moderation GDP growth for 2010-11 is revised down to 8.5% as compared to the earlier estimate of 8.6%. Agricultural sector grew by 6.6% during 2010-11 as compared to 0.4% in 2009-10. Growth in Industry moderated to 7.9% from 8.0%, while in services sector growth moderated to 9.4% in 2010-11 as compared to 10.1% a year ago. April-May 2011 Index of Industrial Production (IIP) declined to 5.7% as compared to 10.8% last year, on account of continued poor performance of mining and manufacturing sectors. Growth of 4.9% as compared to 10.5% last year in Consumer Goods shows a worrisome picture for the domestic consumer demand. Indias National Manufacturing Policy expects India to scale up the value added from manufacturing sector to 25% of the GDP in 15 years and targets to create 100 million new jobs by 2025. India expects to spend around USD 1 trillion on the development of infrastructure in next Five Year Plan beginning 2012. Foreign Trade and Investments Higher than expected performance of external sector despite gloomy situation across the globe Trade Exports during April-May 2011 were valued at USD 49.8 billion, registering a growth of 45.3% over the same period last year. Imports were valued at USD 73.7 billion, growing at the rate of 33.3%. Target for exports is to double from USD 246 billion in 2010-11 to USD 500 billion in 2013-14. India-Malaysia Comprehensive Economic Cooperation Agreement (CECA), effective from July 1, is expected to boost bilateral trade to USD 15 billion by 2015 from USD 10 billion in 2010-11. Indian investments in Africa touched USD 33 billion whereas bilateral trade crossed the USD 46 billion mark last year as compared to USD 3 billion at the turn of the century. FII inflows for 2010-11 remained almost at the same levels as 2009-10, FDI suffered a significant decline (USD 27 billion in 2010-11 as compared to USD 37.8 billion in 2009-10). FDI inflows grew 77% to USD 7.78 billion during April-May 2011, achieving highest monthly figures in May since August 2009. On the other hand, FII Figure 1: GDP growth rates (%) 8.60 6.30 9.40 7.30 9.30 8.90 8.30

7.80

Q1 2009-10

Q2

Q3 2010-11

Q4

Q1

Q2

Q3

Q4

Source: PIB Govt. of India

Figure 2 : Foreign exchange inflows 10,000 8,162 8,000 6,905 FDI (USD million) 6,000 4,000 2,000 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 FDI FII
Source: DIPP, RBI

20,000 7,785 5,574 4,968 5,772 5,233 5,034 3,390 15,000 10,000 5,000 0 AprMay 2011-12 -5,000 FII (USD million)

2009-10

2010-11

Figure 3: Inflation rates (%) 25% 20% 15% 10% 5% 0% Jul-10 Jun-10 Jan-11 Oct-10 Apr-10 Feb-11 Sep-10 Aug-10 Nov-10 Dec-10 May-10 Mar-11 Apr-11 May-11 Jun-11

Q4

All comodoties

Fuel & Power

Primary articles

Manufactured products

Source: Office of Economic Advisor, Ministry of Commerce & Industry

inflows showed a decline of 35% with six monthly lowest figures during May. Foreign Exchange Reserves as on 1 July 2011 stood at USD 315.7 billion as compared to USD 303.5 billion on 25 March 2011. Indias external debt as of 31 March 2011 recorded an increase of 17.2% over March 2010. DBRS, an international sovereign credit rating agency, for the first time upgraded the trend of Indias Long Term foreign and local currency debt ratings from BBB (low) negative to stable outlook. Inflation and monetary tightening Inflation levels remain stubbornly high with monetary policy not having its impact despite successive rate increases Inflation rate for primary articles moderated to 12.2% from 18.4% in January 2011, Fuel and Power inflation rate remained at consistent levels of around 12-13%, whereas manufactured product prices witnessed surge in recent months reaching 7.4% in June 2011 (see graph). By June end, the food inflation moderated to 8% mark from around 11% during April 2011, while non-food articles inflation declined drastically to 15% mark as compared to 27%. In the First Quarter Review of Monetary Policy 2011-12, RBI hiked policy rates by 50 basis points on July 26, reinforcing the commitment of monetary policy to controlling inflation. With this rise the Repo rate moved up to 8% totaling to a rise of 375 basis points since March 2010. Stock Market, Employment and Others Overall performance of other economic indicators indicates increased employment outlook in the short term and continued focus on infrastructure development Key Indian index plummeted to 17,500 mark during mid of June 2011; end of June and early July evidenced marginal recovery on account

of moderation in food inflation and stronger performances of stock markets across the world. Compared with March 2010 overall employment in quarter ending March 2011 rose by 9.79 lakh, with highest increase in IT/BPO (6.65 lakh), followed by 1.11 lakh in automobiles and 1.01 lakh in textiles. India and Asian Development Bank (ADB) signed two loan agreements - a USD 300 million loan for upgrading 1,000 km of state highways in Madhya Pradesh and a USD 132 million loan for strengthening Bihars power sector. The World Bank has approved USD 150 million loan for India to accelerate the implementation of its National e-Governance Plan, aimed at transforming the service delivery system across the country. Indias Provisional population according to the Census 2011 stands at 1.2 billion. In just nine months since the launch of the Aadhaar project in Maharashtra, UIDAI has issued one crore Aadhaar numbers.

Table1: Repo and reverse repo rate Series Repo Rate Reverse Repo
Source: RBI

Mar 2010 5.00% 3.50%

Apr 2010 5.25% 3.75%

July 2, 2010 5.50% 4.00%

July 27, 2010 5.75% 4.50%

Sep 2010 6.00% 5.00%

Nov 2010 6.25% 5.25%

Jan 2011 6.50% 5.50%

Mar 2011 6.75% 5.75%

May 2011 7.25% 6.25%

June 2011 7.50% 6.50%

July 2011 8.00% 7.00%

Dconomic August 2011

Global trends & recent developments

Growth IMF expects the global economy to grow at 4.3% in 2011. It also downgraded 2011 GDP growth forecasts for US and UK to 2.5% and 1.5% respectively. It expects the Euro area as a whole to grow at 2% and China to grow at 9.6% in 2011. Portugal, Ireland and Greece are expected to contract in 2011 to become the weakest economies of the world. Japans 2011 Q1 GDP fell by almost twice of expectation. The earthquake and tsunami caused destruction to the tune of USD 25 billion. Consequently, Bank of Japan slashed its growth forecasts for FY 2011-12 to 0.6% compared to 1.6% forecasted earlier. US GDP growth estimate for 2011 Q1 was revised upwards to 1.9%. Chinas first quarter GDP grew at 9.7% in 2011. Trade US trade deficit declined to USD 3.7 billion in April 2011. Euro zone trade deficit for April 2011 was EUR 4.1 billion as compared to EUR 0.7 billion surplus last year. China reported its first quarterly trade deficit of USD 1.2 billion since 2004. Imports jumped 32.6% to quarterly record of USD 400.7 billion because of stronger domestic demand and commodity prices. Inflation and monetary tightening Inflation rates over the world are showing a rising trend as during May, US and UK inflation rates increased to 3.6% and 4.5% respectively. Euro zone witnessed a 2.7% inflation rate for June 2011. Chinas inflation hit a 2 year high of 5.4% in March 2011. Singapores inflation rate decreased to 4.5% in April on account of currency strengthening. In April 2011, ECB and Peoples Bank of China raised their benchmark lending rates by 0.25%. China raised banks reserve requirement for the ninth time since October 2011 to 21.5% in June 2011. Lending in China declined to the slowest pace since 2008 indicating cooling of the economy. Sovereign Risk Moodys warned of a small but rising risk of default by US on its debt. Standard and Poors (S&P) downgraded its outlook on the US to negative in view of the high government debt and budget deficit.
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S&P cut Italys credit rating outlook while Fitch cut Belgiums and Japans rating outlook to negative. Portugal requested the EU for a financial bailout worth EUR 80 billion in view of its unsustainable borrowing cost of which EUR 78 billion was approved in May. With Greeces current sovereign condition, it is likely to require further bailout of around USD 140 billion. Table 2: Rating downgrades Number of notches of downgrade 1 5 3 1 2

Country Portugal Greece Greece Ireland Ireland

Source: CII

Agency S&P S&P Moodys S&P Moodys

Rating after downgrade BBBCCC Caa1 BBB+ Baa3

Unemployment and Others Employment levels in US rose at the slowest pace in 8 months in May 2011 as the unemployment rate stood at 9.1% in May, as compared to 9% in April. Unemployment rate in the Euro zone stood at 9.9% in May 2011 although German unemployment fell in April 2011 to the lowest in 19 years. Royal Bank of Scotland staff disposed of its stock worth GBP 140 million, triggering the biggest sale since its government bail-out. China overtook US to become the biggest car market in 2010 by selling 14 million passenger vehicles, as compared to 13 million sold in US. The second largest US car company, Ford, reported its highest quarterly profits in 13 years. BMW also quadrupled its Q1 profits, while GM more than tripled its Q1 net income. Germany has decided to shut down all its nuclear reactors by 2020. Stock Markets Major indices remained relatively stable over the quarter. In comparison to the period just after recession, the stock markets across the globe have shown varied range in performance.

Figure 4: Performance of major indices 100%

80%

60%

40%

20%

0% India BSE (INR) China SSEC Russia RTS Brazil US S&P 500 (CNY) Std (RUB) Bovespa (BRL) (USD) Quarterly Growth Japan Nikkei (JPY) UK FTSE 100 (GBP) Singapore STI (SGD) Hong Kong HSI (HKD)

-20%

Growth from Mar' 09 Quarterly Growth -3.08% -5.67% -8.46% -9.01% -0.39% 0.63% 0.62% 0.47% -4.80% Growth since Mar 09 94.12% 16.39% 81.03% 52.48% 65.52% 21.04% 51.44% 83.56% 64.98%

Index India BSE (INR) China SSEC (CNY) Russia RTS Std (RUB) Brazil - Bovespa (BRL) US S&P 500 (USD) Japan Nikkei (JPY) UK FTSE 100 (GBP) Singapore STI (SGD) Hong Kong - HSI (HKD)
** As on April 24, 2009.

30 June11 18,845.87 2,762.08 11,361.49 62,404.00 1,320.64 9,816.09 5,945.70 3,120.44 22,398.10

31 Mar11 19,445.22 2,928.11 12,411.57 68,587.00 1,325.83 9,755.10 5,908.80 3,105.85 23,527.52

31 Mar09 9,708.50 2,373.21 6,276.10** 40,926.00 797.87 8,109.53 3,926.10 1,699.99 13,576.02

Source: http://in.finance.yahoo.com/, http://www.rts.ru/en

Dconomic August 2011

Important industry news & developments

Manufacturing Automobile production in India increased by 20.28% and 18.4% in April and May 2011 respectively. Automobile sales growth forecast for FY 2011-12 was lowered to 11-13% from 12-15%, in view of higher interest rates and rising fuel prices. Passenger vehicles sales growth decreased to 8.8% in Q1 2011-12, as compared to 29% in Q1 2010-11. The Tata group plans to invest GBP 5 billion in its UK Jaguar subsidiary in the next 5 years. Indias exports of aerospace and defence equipment is expected to be USD 2 billion in 2011, with major importing nations like US, Germany, France, Singapore, UK and Russia etc. Continental AG, a German tyre maker, is set to enter the Indian market through purchase of Modi tyres. Despite 7% hike in output in 2010, India is worlds fourth largest steel producer behind China (627 million tons), Japan (109 million tons) and US (81 million tons) with production of 68 million tons. Technology, Media and Telecom According to TRAI, mobile number portability requests increase from 85.41 lakh subscribers at the end of April 2011 to 105.70 lakh subscribers at the end of May 2011. The overall tele-density in India reached 73.11 at the end of May 2011 from 72.08 of the previous month. Broadband subscription reached 12.12 million in May 2011 from 12.01 million in April 2011. Nokia is set to cut 300 jobs in India by 2012 on account of its collaboration with Accenture. Star and Zee merged their distribution channels to gain on account of subscription revenue. Figure 5: Market share as on 31 May 11

Aircel 7% Tata 11%

Others 7%

Bharti Airtel 20%

BSNL 11%

Reliance 17%

Idea 11%

Vodafone 16%

Source: Press Release No. 41 /2011, Telecom Regulatory Authority Of India

Energy and Resources SAIL predicts steel consumption in India to grow at over 10% in 2011-12. Public oil firms estimate to lose INR 177,500 crore in 2011-12 on account of government controlled prices. Oil marketing companies reduced the Aviation turbine fuel prices for the second sequential months leading to cumulative decline of 7.1% from 1 May 2011 to 1 July 2011. GVK Power and Infrastructure is set to purchase 2 Hancock Prospecting Pty Ltd thermal mines in Australia for USD 2.4 billion. UKs Cairn Energy Plcs proposed sale of a majority stake in its Indian business to London listed Vedanta Resources is approved by the Government. Power capacity addition scales new peak with a record addition of 12,160 MW achieved in 2010-11. Financial Services SBI raised lending and deposit rates by 75 bps and 225 bps respectively, along with 22 other banks. Reliance Industries is set to form JV with DE Shaw Group from US to provide financial services in India. IL&FS Financial Services Ltd to raise USD 10-15 billion in next 5 yrs to finance the infrastructure projects. Indias BPO market is estimated to grow at 23% to achieve USD 1.4 billion. Latest RBI guidelines on banks technology governance, information security, audit, outsourcing and cyber fraud could open up a USD 300 million opportunity for IT vendors and audit firms.

Consumer Business and Transportation Johnson and Johnson to acquire Synthes, a global manufacturer of orthopedic devices for USD 21.3 billion. With its brand more., Aditya Birla Retail is considering entering into specialty retail segment with an investment of around INR 300 crore. Intercontinental Group of hotels plans to increase its presence in India by targeting 150 hotels by 2020. FMCG companies planning on a rate hike to the tune of 3-5% due to increasing fuel prices. IndiGo closed its deal to buy 180 Airbus aircraft valued at about USD 15.6 billion. This includes 150 Airbus A-320 aircraft, which could be acquired at a premium of USD 900 million. India signed the biggest defense deal with US to procure aircrafts for USD 4.1 billion under which Boeing will set up facilities for hi-tech aeronautics engines for DRDO. Air passenger traffic increased by 11.5% on a y-o-y basis in 2011 Q1. Figure 6: Market share as on 31 May 11 30 25 20 15 10 5 0 Jet Airways and Jet Lite Kingsher Indigo Air India Spice Jet Go Air 20.00 19.90 13.20 14.20 26.10

6.60

Source: http://en.wikipedia.org/wiki/List_of_airlines_of_India

Dconomic August 2011

The impending signs of Global uncertainty

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Take a quick look across the global map and the economic climate is bound to cast a shade of gloom. The aftermath of the financial crisis has shaken economies in all regions of the world and the fiscal health of many nations is beginning to give rise to significant economic uncertainties. Leading the essence of this nervousness is the situation in the US where problems of reigning in their fiscal deficit has caused credit rating companies to announce a possible downgrading of the US treasury bonds an instrument considered to be the safest form of investment. Current situation and background It was during the month of April 2011, when for the first time since its inception in 1860, S&P considered downgrading the US AAA credit rating in absence of any clear path to slash the yawning federal budget deficit in near future. S&P assigns ratings to guide investors on the risks involved in buying debt instruments and hence, slapping a negative outlook on US credit rating and stating that theres at least a one-in-three chance that it could eventually cut the rating meant a possible erosion of the status of the US as the worlds most powerful economy and the dollars role as the dominant global currency. Losing the AAA rating would also mean higher interest rates for several stakeholders concerned as borrowing and lending rates are often pegged to the risk free rate which is the rate on US treasury bonds. Additionally, during the month of June 2011, International Monetary Fund (IMF) cut Figure 7: Deficit vs. total debt of US
12%

its forecast for US economic growth for 2011 from 2.8% to 2.5% and warned that the US and debt-ridden European countries are playing with fire unless they take immediate steps to reduce their budget deficits. As rightly addressed by the IMF, government debts and fiscal deficits have become major issues in the postfinancial crisis world. Governments around the globe were forced to increase public spending to prevent their economies from falling into depression and the same has left the economies with staggeringly high fiscal deficits and large debt burdens. Even the US - an economy which enjoyed budget surplus only a decade ago, has not proved to be an exception to this. The US had a budget surplus of USD 236 billion during 2000, which has turned into a budget deficit of USD 1.3 trillion by 2010. The annual budget deficit is the difference between actual cash collections and budgeted spending during a given fiscal year. Since 1970, the US Federal Government has run deficits for all but four years (19982001), contributing to a total debt of USD 14.5 trillion as of 29 June 2011, which approximates to 99% of its GDP. Many economists fear that such high debt levels indicate an unsustainable fiscal path for the US. Further, the US Constitution prescribes an aggregate limit or ceiling on the total amount of bonds that can be issued by the Treasury to fund government operations. As of July 2011, the US was effectively at the limit of

10.91% 9.91%

120%

10% Decit as % of GDP

8% 80% 6% 60% 4% 1.48% 3.39% 3.48% 2.52% 2% 1.86% 1.14% 20% 2001 -2% -1.24% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 (Jun) 0% 3.19% 40%

0%

Decit as % of GDP

Total Debt as % of GDP

Source: Historical tables - Budget of the U.S. government, GPO

Dconomic August 2011

11

Total Debt as % of GDP

8.82%

100%

the authorized debt as the ceiling was already hit on May 16, but the spending and accounting adjustments, as well as higher-than-expected tax receipts, helped the US to continue operating without an impact on government obligations. Finally, on 31 July 2011, the Democrats and the Republicans agreed to increase the US debt ceiling to USD 16.4 trillion, an increase of USD 2.1 trillion. The agreement was reached on the condition that the federal budget deficit will be decreased by USD 2.5 trillion over the next decade. Although the debt default, which would have had a significantly adverse impact on the global economy, was avoided with the revision of debt ceiling, it cannot be seen as a permanent solution to this conundrum. Major rating agencies have already claimed that the US AAA credit rating will not be protected even if US is able to secure its debt ceiling on time. Although the immediate crisis has been avoided, this one time ceiling raise will not be sufficient to contain the situation. Other consolidation plans are required to address the issue in the long run. An interesting fact in this regard is that China, Japan, and the United Kingdom own approximately 32% of the total debt. State of Other Economies Economic uncertainty is not restricted to the US alone. The European economy is also facing possible debt defaults with Greece, Spain, Portugal, Ireland and recently Italy exhibiting signs of serious fiscal stress. Greece is going to default on its debt obligations it is no longer a question of if but one of when. Portugal, Spain and Ireland have already made it to the hog list and are struggling to cope with the economic challenges with no sign of a recovery plan. Italy, with a debt burden at 120% of GDP, remains vulnerable with some economists questioning the long term sustainability of the euro as a stable currency. The health of the French economy is beginning to show signs of some worry. Germany is the lone front runner in this race for survival. And a recent Deloitte Survey of UK based CFOs indicate that the pessimism over the future

health of UK businesses has bounced back on the list of worrisome factors to watch out for. Enter China. Serious concerns about domestic inflation within China have caused the Chinese central bank to raise the banks reserve requirement for the ninth time since October 2011 to 21.5% in June 2011. Lending in China declined to the slowest pace since 2008 and the country reported its first quarterly trade deficit of USD 1.2 billion since 2004 in Q1 of 2011. Again, the sputtering of the growth engine in one of the fastest growing economies of the world is hard to ignore. The earthquake and tsunami in Japan caused destruction to the tune of USD 25 billion causing Japans 2011 Q1 GDP to fall by almost twice of what expectations were. Subsequently, Bank of Japan slashed its growth forecasts for FY 2011-12 to 0.6% compared to 1.6% forecasted earlier. Economic turmoil in Japan does not bode well for many of its trading partners China and US being the biggest ones. All this indicates that the global economy is beginning to show signs of economic uncertainty and much remains to unfold depending on the policies that are adopted in the interim to respond to these short term destabilizers. Possible impact on the World With the US still accounting for a quarter of the global economy, the US dollar being considered as the international reserve currency and international debt being mostly denominated in US dollars, the current precarious situation of debt and deficit in the US is bound to have a significant impact on the global economy. The global financial crisis would be the best illustration of the probable intensity of such an impact, given its origination in the US and how rapidly it engulfed the whole world into the whirlpool. With a high degree of global financial integration, any reduction in the US balance of trade will have negative

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All this indicates that the global economy is beginning to show signs of economic uncertainty and much remains to unfold depending on the policies that are adopted in the interim to respond to these short term destabilizers.
effects on many countries throughout the world. It is estimated that the US imports in 2010 were boosted by about USD 100 billion due to the fiscal stimulus, which indirectly benefited US partner countries growth rates. By this same token, a recession in the US will reduce the level of imports which, in turn, will lead to a contraction in the rest of the global economy. Slowing exports in various countries may also lead to increasing unemployment in the future. Further, as the US dollar is an international reserve currency, a depreciated dollar would diminish the value of reserves held by various countries like China, India etc. This will also impact import capabilities of various countries as their import appetite would be dependent on US dollar as well as the value of international reserves. Moreover, it is also true that the world has gotten increasingly dependent on US to retain the liquidity in their financial markets and to pay the external liabilities (in US dollars) with revenue from exports. Declining exports may therefore lead to a severe debtcrisis in those countries which have large scale liabilities denominated in US dollars. Possible impact on India Notwithstanding the sound banking system and relatively robust financial markets, India did feel the tremors of the financial crisis with a sudden stop and then the reversal of capital flows along with the global deleveraging process. The experience of financial crisis suggests that despite exposure of Indian banks to toxic assets being marginal and Indias focus on domestic demand driven growth, it was impacted by the crisis due to globalization. Along with global integration, the dependence of the Indian economy on the US is evident from the fact that the US has been the second favorite destination for Indian exporters and the third largest source of FDI inflows in India. With such deep interconnectedness

Dconomic August 2011

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through trade, finance and confidence channels, it would be nave to presume that India will be unaffected by the developments in the US economy. Similar to other economies, India is likely to suffer significant slowdown in exports, higher interest rates and instability in financial markets, increased unemployment as well as lower growth should the US fall into recessionary conditions. However, it is possible that the buoyancy in agricultural sector growth, major infrastructure investments, improvements in manufacturing sector yields and a robust service sector may help India weather the negative repercussions that may arise from the US. It is concerning that precious little is being done to improve Indias global competitiveness and other countries are effectively eating into Indias global share of world trade. This is something to take note of. The recently concluded trade and economic cooperation agreements with Singapore, Japan and Malaysia and the Free Trade Agreement with ASEAN are important steps for Indian businesses to capitalize upon and improve

their productivity so that the economy can continue to expand its productive capacity. But the tell tale signs are hard to ignore. There are clear signs that a hurricane or a tornado is taking shape in the distant horizon. It does not matter what the final form of the calamity is if it strikes the global economy, the result will be a phase of acute slowdown, far worse than the impact of the financial crisis that the world just witnessed. When the collapse of a global bank created a contagion that shook policy makers across the globe, it is hard to ignore the possible fallout of a nation defaulting on its debt obligation! It is okay to remain optimistic about economic prospects after all, building and restoring consumer confidence is critical to avoid a self fulfilling economic slowdown to manifest itself. But it will be a mistake to become complacent. Now is the time to frame policies to make India prepared to face the economic uncertainty that may be headed our way. Else, we will be left in a hole so deep that the abyss will be hard to fill for many decades in the future.

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Dconomic August 2011

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