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Global Economic Prospects and the Indian Economy Usha Thorat September 2010 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 • RBI’s latest assessment – September 16, 2010 2 Global Economy - Prospects 20 15 Per cent 10 5 0 2002 -5 2003 World 2004 2005 2006 Advanced Economies 2007 2008 2009 2010 2011 Emerging & Developing Economies Forecast for 2010 and 2011 3 IMF's World Output Growth Forecast (Per cent) 2010 2011 World 4.6 4.3 Advanced Economies Emerging and Developing Economies 2.6 2.4 6.8 6.4 India 9.4 8.4 Source: IMF, WEO (Update) July-2010 4 Indian Economy - Growth Trajectory 12.0 10.0 Per cent 8.0 6.0 4.0 2.0 0.0 •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 5 High Domestic Saving & Investment Rateswith Modest Current Account Deficit Percentage to GDP 40.0 35.0 30.0 25.0 20.0 15.0 GDS GCF 6 6 2008-09 2009-10 2010-11 March February January December November October September August 2009-10 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 2000-01 1999-00 1998-99 1997-98 1996-97 14.0 1995-96 1994-95 1993-94 1992-93 1991-92 1990-91 Per cent 16.0 July June May April Per cent Inflation has increased significantly after being moderate during first half of 2009-10 WPI Inflation (Annual Average) 12.0 10.0 8.0 6.0 4.0 2.0 0.0 WPI Inflation (y-o-y) 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 -2.0 7 7 Monetary and Inflation conditions Inflation - WPI and CPI 30.0 20.0 15.0 10.0 5.0 0.0 CPI-Industrial Workers WPI- All Commodities WPI-Food (Composite) Jul/10 Apr/10 Jan/10 Oct/09 Jul/09 Apr/09 Jan/09 Oct/08 Jul/08 -5.0 Apr/08 y-o-y per cent 25.0 CPI-Agricultural Labourers WPI-Essential Commodity Group 8 Fiscal Situation: Key Indicators Year (1) 2008-09 2009-10 RE 2010-11 BE Primary deficit (2) Revenue deficit (3) Centre 2.6 3.1 1.9 Gross Fiscal Deficit (4) 4.5 5.3 4.0 6.0 6.6 5.5 -0.2 0.8 0.4 2.4 3.4 2.9 4.3 6.0 4.4 8.5 10.0 8.3 States 2008-09# 2009-10 RE# 2010-11 BE# 0.6 1.6 1.0 Combined 2008-09 2009-10 RE 2010-11 BE 3.4 4.8 3.0 RE: Revised Estimates; BE: Budgeted Estimates. # : data pertain to 27 State Governments. Current Trends - Real GDP Growth (Per Cent) Item 1 1. Agriculture and Allied Activities 1950-80 (Average) 2 2.1 2006-07 2007-08 2008-09 3 4 5 6 2009-10@ 7 2010-11 Q1 8 5.2 3.7 4.7 1.6 0.2 2.8 (18.1) 8.1 (20.0) 1.3 9.6 (17.2) 13.6 (20.7) 8.7 14.9 (16.4) 9.3 (20.7) 3.9 10.3 (15.7) 3.1 (20.0) 1.6 3.2 (14.6) 10.4 (20.5) 10.6 10.8 (14.0) 11.4 (20.8) 8.9 12.4 9.6 4.5 6.6 11.3 (61.9) 10.0 10.2 (62.2) 8.5 10.4 (62.9) 3.9 9.3 (64.4) 6.5 8.3 (64.9) 6.6 9.4 (65.2) 5.1 12.1 11.7 10.7 7.6 9.3 12.2 3.5 12.8 14.5 13.2 10.1 9.7 8.0 4.3 4.9 3.5 7.6 12.4 9.5 (100) 2.6 10.6 9.7 (100) 6.7 10.0 9.2 (100) 13.9 5.9 6.7 (100) 5.6 6.5 7.4 (100) 6.7 7.5 8.8 (100) 2. Industry 5.4 2.1 Mining and Quarrying 2.2 Manufacturing 2.3 Electricity, Gas and Water Supply 3. Services 4.6 5.3 3.1 Trade, Hotels, Transport Storage and Communication 3.2 Financing, Insurance, Real Estate and Business Services 3.3 Community, Social and Personal Services 3.4 Construction 4. Real GDP at Factor Cost 2005-06 Figure in parenthesis are percentage share to GDP; @: Revised estimates Source: Central Statistical Office 10 Demand Side Drivers of Growth (Percentage to GDP) Private Consumption Government Consumption Gross Fixed Investment Net Exports 2008-09 2009-10 2009-10 Q1 Share Contribution Share Contribution 2010-11 Q1 Share Contribution Share Contribution 59.5 78.2 57.6 33.4 59.9 33.5 56.5 22.6 11.5 33.6 11.8 15.7 11.5 30.8 11.9 16.3 32.9 25.8 32.8 30.8 31.2 (-)4.4 30.5 23.7 (-) 6.2 (-) 36.2 (-) 5.1 7.8 (-) 4.8 36.4 (-) 5.2 (-) 9.8 Source: CSO 11 Growth in Index of Industrial Production (Y-o-Y) 20.0 17.7 18.0 16.3 16.0 14.7 14.6 15.2 13.8 14.0 12.0 12.0 10.6 11.3 10.2 9.3 10.0 Per cent 8.3 8.0 7.2 6.4 6.2 6.0 5.4 6.0 5.8 4.4 4.0 2.0 2.5 2.1 1.7 1.0 0.1 1.1 0.2 0.3 0.0 -0.2 -2.0 During April-July 2010, the IIP growth increased to 11.4 per cent as compared with 4.7 per cent last year. 12 Growing Openness India’s Trade Openness (% of GDP) 1990s 2000s 2009-10 Exports 8.0 12.2 Imports 10.8 17.5 13.9 22.8 Current Capital Account Account 26.8 15.1 45.4 33.8 55.2 48.3 Source: RBI 13 Increased Tradability of Services Services Exports to Services GDP 16.0 Percentage to Services GDP 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 -2 Current Account Balance as a pecentage of GDP 2009-10 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 2000-01 1999-00 1998-99 1997-98 1996-97 1995-96 1994-95 1993-94 1992-93 1991-92 1990-91 Per cent Current Account Balance & Capital Inflows 10 8 6 4 2 0 -4 Net Capital Flows as a percentage of GDP 15 Capital Flows US $ billion 2008-09 2009-10 Apr-Mar Apr-Mar 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 7.7 7.2 53.4 Item 1. Inward FDI Total FII flows amounted to US$3.5 billion during April-June 2010-11 as against US $ 8.3 billion during April-June 2009-10 16 FDI Flows to India (US $ million) Equity Re-invested Earnings Other Capital* Total April-July 2006-07 2007-08 2008-09 2009-10 2009-10 2010-11 16,394 26,757 27,807 22,908 10,381 7,557 5,828 7,679 6,428 8,079 517 292 757 695 22,739 34,728 34,992 31,682 10,381 7,557 * Inter company debt transactions of FDI entities Source: RBI April-July FDI inflows as percentage of Gross Fixed Capital Formation, 2007-2009 (Per cent) Argentina Brazil Chile Mexico China Hong Kong, China Korea, Republic of Taiwan Province of China India Indonesia Malaysia Philippines Singapore Thailand World Source: World Investment Report 2010 2007 2008 2009 10.2 14.5 38.6 11.9 6.0 130.3 0.9 9.0 6.3 6.4 21.2 13.8 89.3 17.4 16.9 12.7 14.7 36.4 9.2 5.3 138.9 3.1 6.4 9.6 6.6 16.8 6.3 20.8 11.4 12.6 7.6 9.9 36.3 6.1 4.0 110.2 2.4 4.0 8.4 2.9 3.5 8.2 32.9 9.2 9.1 18 Net FIIs Inflow and Exchange Rate Movement 10,000 51 50 48 6,000 47 4,000 46 45 2,000 44 43 FII Inflows Exchange rate (Rt. Scale) Aug/10 Jul/10 Jun/10 May/10 Apr/10 Mar/10 Feb/10 Jan/10 Dec/09 Nov/09 Oct/09 Sep/09 Aug/09 Jul/09 Jun/09 -2,000 May/09 0 42 41 Rupee per US$ 49 Apr/09 US $ Million 8,000 Movement in NEER and REER (1993-94=100)(6-currency trade based weights) 125 Index 100 75 50 NEER REER 20 India’s Foreign Exchange Reserves (US$ billion) 30 335 25 315 20 295 5 255 Jul-Aug 2010 Apr-Jun 2010 Jan-Mar 2010 Oct-Dec 2009 Jul-Sep 2009 Apr-Jun 2009 Jan-Mar 2009 Oct-Dec 2008 Jul-Sep 2008 Apr-Jun 2008 Jan-Mar 2008 -15 Oct-Dec 2007 -10 Jul-Sep 2007 -5 Apr-Jun 2007 0 -20 235 US$ billion 275 10 Jan-Mar 2007 US$ billion 15 215 195 175 Variation in Reserves (BoP basis) Outstanding Reserves (right scale) Note: Reserves change on BoP basis are not available after Jan-Mar 2010 quarter. 21 FDI Confidence Index:2010 United Kingdom Canada Mexico Australia Poland Germany Brazil India United States China 0 0.5 Source: A.T Kearney Analysis 1 1.5 2 2.5 22 Sovereign Credit Ratings of Top Ten Debtors amongst Developing Countries Year Standard & Poors Moody's Rating Outlook Rating Outlook China A+ Stable A1 Stable Russia BBB Negative Baa1 Positive Turkey BBNegative Ba3 Stable Brazil BBBStable Ba1 Stable India BBBStable Baa3 Positive Mexico BBB+ Stable Baa1 Stable Indonesia BBStable Ba3 Stable Poland AStable A2 Stable Argentina BStable B3 Stable Hungary BBBNegative Baa1 Negative Source: India's External Debt - A Status Report, 2009 Note: For India data are updated upto June 2010 Fitch's Rating Outlook A+ Stable BBB Negative BBStable BBBStable BBBStable BBB+ Negative BB Stable AStable BBB Negative 23 SENSEX 31-Aug-10 31-Jul-10 30-Jun-10 31-May-10 30-Apr-10 31-Mar-10 28-Feb-10 31-Jan-10 31-Dec-09 30-Nov-09 31-Oct-09 30-Sep-09 31-Aug-09 31-Jul-09 30-Jun-09 31-May-09 30-Apr-09 31-Mar-09 28-Feb-09 31-Jan-09 31-Dec-08 BSE Sensex (Base: 1978-79=100) 20500 19500 18500 17500 16500 15500 14500 13500 12500 11500 10500 9500 8500 7500 4900 4500 4100 3700 3300 2900 2500 NIFTY Equity Market revived indicating restoration of investor confidence. S&P CNX Nifty (Base: Nov. 3, 1995=1000) Indian Stock Markets 6100 5700 5300 Global Stock Markets Percentage Variation (year-on-year) Percentage Variation Country/Index 1 Developed Markets US (Dow Jones) US (NASDAQ) FTSE UK 100 Euro area (FTSE 100) Japan (Nikkei 225) Hong Kong (Hang Seng) Emerging Markets Russia Brazil South Korea Singapore Argentina India China Memo: World (MSCI) EMEs (MSCI) * As on Sept. 8, 2009. Source: Bloomberg. End-March 2009 End-March 2010 Sept. 7, 2009 over March 31, 2009 Sept. 7, 2010 over March 31, 2010 2 3 4 5 -38.0 -32.9 -31.1 -40.1 -35.3 -40.6 42.7 56.9 44.7 44.8 36.8 56.4 24.8* 33.3* 25.6 31.6 27.3 52.0 -4.8 -7.9 -4.8 -2.3 -16.8 0.8 -66.4 -32.9 -29.2 -43.5 -46.5 -37.9 -31.7 128.0 71.9 40.3 69.9 110.8 80.5 31.0 58.5 41.4* 33.4 55.5 60.7 65.0 21.4 -7.6 -5.2 ** 5.6 5.1 1.9 6.4 -13.2 -44.0 -48.4 49.1 77.3 34.8 51.8 -6.4 -0.4 ** As on Sept. 6, 2010. Banking Sector Scenario • Indian banks continue to remain well capitalized 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 help in limiting leverage Select Financial Indicators - All Banks (per cent) Mar-08 CRAR Mar-09 Mar-10 Jun-10 13.01 13.98 14.54 14.35 Core 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* 15.18 14.49 13.33 13.44* Return on Equity Data on Capital Adequacy cover overseas operations; other data based on domestic operations only Figures 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 Structural Reforms • Discussion paper on licensing New Private Sector Banks issued in August 2010 • Discussion paper on presence of foreign banks to be issued shortly • Working Group looking into Holding Company structure Financial Stability and Development Council GOI setting up Financial Stability and Development Council (FSDC) for: • Achieving inter-regulatory coordination and overseeing systemic risks and • laying down a macro-prudential overlay to financial sector regulation 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 BCs under consideration • Adoption of mobile- based and smart card based technologies 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 CRAR and 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 India's SWOT analysis STRENGTHS • High savings/investment , forex reserves, quality talent and IT, broad based and growing entrepreneurial class, market size, 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, urbanisation THREATS • Global Uncertainty, fiscal deficit, climate change – energy and food security, regional and social inequalities 32 Macroeconomic situation – RBI’s 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 have stopped 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 %