global economic prospects and indian economy - updated version sept 19th, 2010
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7/31/2019 Global Economic Prospects and Indian Economy - Updated Version Sept 19th, 2010
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Global Economic Prospects andthe Indian Economy
Usha Thorat
September 2010
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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
RBIs latest assessment September 16, 2010
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Global Economy - Prospects
3
-5
0
5
10
15
20
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
World Advanced Economies Emerging & Developing Economies
Forecast for 2010 and 2011
Percent
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IMF's World Output Growth Forecast
4
2010 2011
World 4.6 4.3
Advanced Economies 2.6 2.4
Emerging and Developing
Economies 6.8 6.4
India 9.4 8.4
Source: IMF, WEO (Update) July-2010
(Per cent)
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Indian Economy - Growth Trajectory
5
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
Pe
rcent
0.0
2.0
4.0
6.0
8.0
10.0
12.0
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High Domestic Saving & Investment Rates-
with Modest Current Account Deficit
15.0
20.0
25.0
30.0
35.0
40.0
Percentag
etoGDP
GDS GCF
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Inflation has increased significantly after being moderate during
first half of 2009-10
7
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
Percent
WPI Inflation (Annual Average)
-2.0
0.0
2.0
4.0
6.08.0
10.0
12.0
14.0
April
May
June
July
August
September
October
November
December
January
February
March
Percent
WPI Inflation (y-o-y)
2008-09 2009-10 2010-11
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Monetary and Inflation conditions
Inflation - WPI and CPI
-5.0
0.0
5.0
10.0
15.0
20.0
25.0
30.0
Apr/08
Jul/08
Oct/08
Jan/09
Apr/09
Jul/09
Oct/09
Jan/10
Apr/10
Jul/10
y-o-yp
ercent
CPI-Industrial Workers CPI-Agricultural Labourers
WPI- All Commodities WPI-Essential Commodity Group
WPI-Food (Composite)
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Fiscal Situation: Key Indicators
Year Primary deficit Revenue deficit Gross Fiscal Deficit(1) (2) (3) (4)
Centre
2008-09 2.6 4.5 6.0
2009-10 RE 3.1 5.3 6.6
2010-11 BE 1.9 4.0 5.5
States
2008-09# 0.6 -0.2 2.4
2009-10 RE# 1.6 0.8 3.4
2010-11 BE# 1.0 0.4 2.9
Combined
2008-09 3.4 4.3 8.52009-10 RE 4.8 6.0 10.0
2010-11 BE 3.0 4.4 8.3
RE: Revised Estimates; BE: Budgeted Estimates.
# : data pertain to 27 State Governments.
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Current Trends - Real GDP Growth (Per Cent)
Item 1950-80 2005-06 2006-07 2007-08 2008-09 2009-10@ 2010-11 Q1
(Average)
1 2 3 4 5 6 7 8
1. Agriculture and Allied
Activities
2.1 5.2 3.7 4.7 1.6 0.2 2.8
(18.1) (17.2) (16.4) (15.7) (14.6) (14.0)
2. Industry 5.4 8.1 13.6 9.3 3.1 10.4 11.4
(20.0) (20.7) (20.7) (20.0) (20.5) (20.8)
2.1 Mining and Quarrying 4.6 1.3 8.7 3.9 1.6 10.6 8.9
2.2 Manufacturing 5.3 9.6 14.9 10.3 3.2 10.8 12.4
2.3 Electricity, Gas and
Water Supply 9.6 6.6 10.0 8.5 3.9 6.5 6.63. Services 4.5 11.3 10.2 10.4 9.3 8.3 9.4
(61.9) (62.2) (62.9) (64.4) (64.9) (65.2)3.1 Trade, Hotels, Transport
Storage and
Communication 5.1 12.1 11.7 10.7 7.6 9.3 12.2
3.2 Financing, Insurance,
Real Estate and Business
Services 3.5 12.8 14.5 13.2 10.1 9.7 8.0
3.3 Community, Social
and Personal Services 4.3 7.6 2.6 6.7 13.9 5.6 6.7
3.4 Construction 4.9 12.4 10.6 10.0 5.9 6.5 7.5
4. Real GDP at Factor Cost 3.5 9.5 9.7 9.2 6.7 7.4 8.8
(100) (100) (100) (100) (100) (100)
Figure in parenthesis are percentage share to GDP; @: Revised estimates
Source: Central Statistical Office
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Demand Side Drivers of Growth
11
(Percentage to GDP)
2008-09 2009-10 2009-10 Q1 2010-11 Q1
Share Contribution Share Contribution Share Contribution Share Contribution
PrivateConsumption 59.5 78.2 57.6 33.4 59.9 33.5 56.5 22.6
Government
Consumption 11.5 33.6 11.8 15.7 11.5 30.8 11.9 16.3
Gross Fixed
Investment 32.9 25.8 32.8 30.8 31.2 (-)4.4 30.5 23.7
Net Exports (-) 6.2 (-) 36.2 (-) 5.1 7.8 (-) 4.8 36.4 (-) 5.2 (-) 9.8
Source: CSO
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Growth in Index of Industrial Production (Y-o-Y)
During April-July 2010, the IIP growth increased to 11.4 per cent as
compared with 4.7 per cent last year.
Percent
6.2
4.4
5.4
6.4
1.7
6.0
0.1
2.5
-0.2
1.00.2 0.3
1.1
2.1
8.3
7.2
10.6
9.3
10.2
12.0
17.7
16.3
14.7 14.615.2
11.3
5.8
13.8
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
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Growing Openness
Indias Trade Openness (% of GDP)
Exports Imports
Current
Account
Capital
Account
1990s 8.0 10.8 26.8 15.1
2000s 12.2 17.5 45.4 33.8
2009-10 13.9 22.8 55.2 48.3
Source: RBI
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Increased Tradability of Services
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
PercentagetoServicesGDP
Services Exports to Services GDP
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Current Account Balance & Capital Inflows
-4
-2
0
2
4
6
8
10
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
P
ercent
Current Account Balance as a pecentage of GDP Net Capital Flows as a percentage of GDP
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Capital FlowsUS $ billion
Item
2008-09 2009-10
Apr-Mar Apr-Mar
1. Inward FDI 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 7.7Total 7.2 53.4
FII flows amounted to US$3.5 billion during April-June 2010-11 as against US
$ 8.3 billion during April-June 2009-10
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FDI Flows to India
Source: RBI
(US $ million)
2006-07 2007-08 2008-09 2009-10
April-July
2009-10
April-July
2010-11
Equity 16,394 26,757 27,807 22,908 10,381 7,557
Re-invested
Earnings 5,828 7,679 6,428 8,079
Other
Capital* 517 292 757 695
Total 22,739 34,728 34,992 31,682 10,381 7,557
* Inter company debt transactions of FDI entities
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FDI inflows as percentage of Gross Fixed Capital
Formation, 2007-2009 (Per cent)
18
2007 2008 2009Argentina 10.2 12.7 7.6Brazil 14.5 14.7 9.9
Chile 38.6 36.4 36.3
Mexico 11.9 9.2 6.1
China 6.0 5.3 4.0Hong Kong, China 130.3 138.9 110.2
Korea, Republic of 0.9 3.1 2.4
Taiwan Province of China 9.0 6.4 4.0
India 6.3 9.6 8.4
Indonesia 6.4 6.6 2.9
Malaysia 21.2 16.8 3.5
Philippines 13.8 6.3 8.2
Singapore 89.3 20.8 32.9
Thailand 17.4 11.4 9.2
World 16.9 12.6 9.1
Source: World Investment Report 2010
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Net FIIs Inflow and Exchange Rate Movement
41
42
43
44
45
46
47
48
49
50
51
-2,000
0
2,000
4,000
6,000
8,000
10,000
Apr/09
May/09
Jun/09
Jul/09
Aug/09
Sep/09
Oct/09
Nov/09
Dec/09
Jan/10
Feb/10
Mar/10
Apr/10
May/10
Jun/10
Jul/10
Aug/10
RupeeperUS$
US$Million
FII Inflows Exchange rate (Rt. Scale)
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20
Movement in NEER and REER(1993-94=100)(6-currency trade based weights)
50
75
100
125
NEER REER
Index
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Note: Reserves change on BoP basis are not available after Jan-Mar 2010 quarter.
Indias Foreign Exchange Reserves
(US$ billion)
175
195
215
235
255
275
295
315
335
-20
-15
-10
-5
0
5
10
15
20
25
30
Jan-Mar2007
Apr-Jun2007
Jul-Sep2007
Oct-Dec2007
Jan-Mar2008
Apr-Jun2008
Jul-Sep2008
Oct-Dec2008
Jan-Mar2009
Apr-Jun2009
Jul-Sep2009
Oct-Dec2009
Jan-Mar2010
Apr-Jun2010
Jul-Aug2010
US$bi
llion
US$bi
llion
Variation in Reserves (BoP basis) Outstanding Reserves (right scale)
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FDI Confidence Index:2010
22
0 0.5 1 1.5 2 2.5
China
United States
India
Brazil
Germany
Poland
Australia
Mexico
Canada
United Kingdom
Source: A.T Kearney Analysis
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Sovereign Credit Ratings of Top Ten Debtors amongst
Developing Countries
Year Standard & Poors Moody's Fitch's
Rating Outlook Rating Outlook Rating Outlook
China A+ Stable A1 Stable A+ Stable
Russia BBB Negative Baa1 Positive BBB Negative
Turkey BB- Negative Ba3 Stable BB- StableBrazil BBB- Stable Ba1 Stable BBB- Stable
India BBB- Stable Baa3 Positive BBB- Stable
Mexico BBB+ Stable Baa1 Stable BBB+ Negative
Indonesia BB- Stable Ba3 Stable BB Stable
Poland A- Stable A2 Stable A- Stable
Argentina B- Stable B3 Stable
Hungary BBB- Negative Baa1 Negative BBB Negative
Source: India's External Debt - A Status Report, 2009
Note: For India data are updated upto June 201023
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Indian Stock Markets
2500
2900
3300
3700
4100
4500
4900
5300
5700
6100
7500
8500
9500
10500
11500
12500
13500
14500
15500
16500
17500
18500
19500
20500
31-Dec-08
31-Jan-09
28-Feb-09
31-Mar-09
30-Apr-09
31-May-09
30-Jun-09
31-Jul-09
31-Aug-09
30-Sep-09
31-Oct-09
30-Nov-09
31-Dec-09
31-Jan-10
28-Feb-10
31-Mar-10
30-Apr-10
31-May-10
30-Jun-10
31-Jul-10
S&PCNXNifty
(Base:Nov.3,1995=
1000)
BSESensex
(Base:197
8-79=100)
SENSEX NIFTY
Equity Market revived indicating restoration of investor confidence.
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Global Stock Markets
Country/Index
Percentage Variation (year-on-year) Percentage Variation
End-March 2009 End-March 2010 Sept. 7, 2009 overMarch 31, 2009
Sept. 7, 2010 overMarch 31, 2010
1 2 3 4 5
Developed Markets
US (Dow Jones) -38.0 42.7 24.8* -4.8
US (NASDAQ) -32.9 56.9 33.3* -7.9
FTSE UK 100 -31.1 44.7 25.6 -4.8
Euro area (FTSE 100) -40.1 44.8 31.6 -2.3Japan (Nikkei 225) -35.3 36.8 27.3 -16.8
Hong Kong (Hang Seng) -40.6 56.4 52.0 0.8
Emerging Markets
Russia -66.4 128.0 58.5 -7.6
Brazil -32.9 71.9 41.4* -5.2 **
South Korea -29.2 40.3 33.4 5.6
Singapore -43.5 69.9 55.5 5.1
Argentina -46.5 110.8 60.7 1.9India -37.9 80.5 65.0 6.4
China -31.7 31.0 21.4 -13.2
Memo:
World (MSCI) -44.0 49.1 34.8 -6.4
EMEs (MSCI) -48.4 77.3 51.8 -0.4
* As on Sept. 8, 2009. ** As on Sept. 6, 2010.
Source: Bloomberg.
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Banking Sector Scenario
Indian banks continue to remain wellcapitalized 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 helpin limiting leverage
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Select Financial Indicators - All Banks(per cent)
Mar-08 Mar-09 Mar-10 Jun-10
CRAR 13.01 13.98 14.54 14.35Core 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*
Return on Equity 15.18 14.49 13.33 13.44*
Data on Capital Adequacy cover overseas operations; other data based on domestic operations onlyFigures 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
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Structural Reforms
Discussion paper on licensing New Private
Sector Banks issued in August 2010
Discussion paper on presence of foreign banksto be issued shortly
Working Group looking into Holding Companystructure
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Financial Stability and Development Council
GOI setting up Financial Stability and
Development Council (FSDC) for:
Achieving inter-regulatory coordination andoverseeing systemic risks and
laying down a macro-prudential overlay tofinancial sector regulation
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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 BCsunder consideration
Adoption of mobile- based and smart cardbased technologies
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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 CRARand 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
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India's SWOT analysis
STRENGTHS
High savings/investment , forex reserves, quality talent andIT, broad based and growing entrepreneurial class, marketsize, 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, urbanisationTHREATS
Global Uncertainty, fiscal deficit, climate change energyand food security, regional and social inequalities
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Macroeconomic situation
RBIs 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 havestopped 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 %
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