Download Section I: Global Economy - Prospects

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 %