crisil economic view 25sep2011

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September 2011

CRISIL EcoView

EXECUTIVE SUMMARY ............................................................ 1

OUTLOOK .................................................................................... 2

QUARTERLY UPDATE: MONSOON ...................................... 5

......................................................... 6

INDUSTRIAL PRODUCTION ................................................. 13

THE EXTERNAL SECTOR ........................................................ 15

INFLATION .................................................................................. 16

MONEY AND BANKING ......................................................... 18

MARKETS ..................................................................................... 20

GLOBAL ECONOMIC OUTLOOK ......................................... 23

QUARTERLY UPDATE: GDP .................................................... 3

INDIA'S LINKAGES WITH THE WORLD ECONOMYAND ITS IMPLICATIONS



A monthly review and analysis of key macro-economic parameters along with outlooks on drivers of the economy,

presented by CRISIL's team of renowned economists. Periodic outlooks and views on key regulatory and policy

announcements, besides regular in-depth analysis of key themes also form part of this document, titled 'CRISIL

EcoView'.

Industry Research An annual service on 47 industries, our Industry Research Service offers a detailed analysis of the market, factors

impacting performance, players and outlooks on the performance and profitability of sectors.

Industry Risk ScoreCovering 139 industries, CRISIL Industry Risk Scores capture the influence of industry variables and the extent of

their impact on cash flows and debt repayment ability of companies in an industry over a short-to-medium term

horizon. These scores are accessed by a large numbers of banks and corporates to assess industry risks whileevaluating the performance of companies.

Economic Research



Contact Details:

Email: [email protected]

Mumbai: +91 (22) 3342 8000

Delhi: +91 (11) 4250 5100

Dharmakirti Joshi Chief Economist

Sunil K. Sinha Senior Economist

Vidya Mahambare Senior Economist

Parul Bhardwaj Economist

Dipti Saletore Economist

Sheetal Pincha Economist

Anuj Agarwal Economist

Aindrila Roy Chowdhury Economist

Overview

September 2011

Dharmakirti Joshi

Chief Economist, CRISIL

Navigating the global headwinds

India's GDP growth has been slowing since the third quarter of 2010-11. The first quarter data

for 2011-12 shows that interest rate hikes have tempered both household consumption and

investment demand. In this scenario, heightened risks of a double dip in advanced economies

create serious downside risks for India's growth. S&P has lowered the 2011 growth outlook

for the US economy to 1.7 per cent from 2.4 per cent. Growth in the EU is expected to slow

down to 1.7 per cent in 2011. Japan will remain in recession in 2011 due to the disastrous effects

of the Tsunami. These forecasts form the basis of external scenario for our India growth

outlook, which we have currently retained at 7.7- 8.0 per cent for 2011-12. Our growth forecast

assumes that growth in developed economies will slow sharply, but they will avoid another

recession. The big question is- what if the advanced economies slide into recession once again?

Our analysis using last 20-year data indicates that business cycles of Indian economy are not

decoupled from the business cycles of advanced economies like United States and Europe. But

the long run trend growth rates in India and developed countries are divergent- growth

trending up for India and trending down for advanced countries. Two conclusions can be

drawn from this - first, India will not emerge unscathed if advanced countries slide into

recession again; second, the divergent long-term trends imply that even if the medium term

growth potential of advanced economies is impaired, India's growth potential does not

necessarily decline too.

Some characteristics of the Indian economy provide buffer against global turbulence. India's

dependence on exports is low to begin with and in the last few years, it has also gained from

diversification away from the US and the EU and towards faster growing economies in Asia,

Africa, and Latin America. The share of India's exports to the African and Latin American

economies doubled in 2010 from that in 2000, while China's share in India's exports has

increased almost eight times in the same period. This, together with large share of domestic

consumption in its GDP, provides some resilience against the hit to exports that typically

happens when export destinations of advanced economies crumble. These strengths

notwithstanding, India remains exposed to the short-term pain of a possible double dip in

advanced countries which in addition to trade, manifests through investment and confidence

channels.

All eyes are now focused on the RBI's stance in its September 16 monetary policy meeting. The

July policy was quite hawkish in tone. But since then while the downside risks to growth have

increased, inflation continues to remain stubbornly high. The growth-inflation trade off in

India is clearly becoming more marked. Correctly timing a pause or reversal of the current

tight monetary stance will prove to be a tricky task. If you pause or cut interest rates too soon,

you risk inflation; if you do it too late, you risk a sharper-than-expected slowdown. We are

heading towards the end of the tight cycle and in our opinion a 25 basis points hike in repo rate

on September 16 could be the last one if growth in advanced economies flounders further.



Executive Summary

1

GDP growth slips to 7.7 per cent in Q1FY12

Below normal monsoon until August end

Industry growth rebounds to 8.8 per cent inJune 11

Merchandise exports grow at nearly 82 per cent

in July 11

Indian economy grew at its weakest pace in the firstquarter of 2011-12 in the last 6 quarters. Industrialgrowth dropped to 5.1 per cent from 9.1 per cent ayear earlier, primarily due to mining andconstruction growth declining sharply to 1.8 and 1.2per cent respectively. Private consumption growthdecelerated to 6.3 per cent from 9.5 per cent a yearearlier. We expect growth for 2011-12 to lie in therange of 7.7-8.0 per cent.

For the country as a whole, rainfall during this year'smonsoon was 0.4 per cent above the long periodaverage (LPA) as of August 31. While average rainfallhas been normal, the regional distribution of rainfallis not satisfactory. Gujarat (-53.0 per cent), Haryana (-31.7 per cent) and Assam (-30.4 per cent) havereceived deficient rainfall whereas Rajasthan (+27.8per cent) and Madhya Pradesh (+23.0 per cent) havereceived excess rains. In the states with deficientrainfall cotton, bajra and tur are relatively the worstaffected crops.

Industrial production grew at faster-than-expected8.8 per cent in June 2011 from 5.9 per cent in May withthe manufacturing sector growing at the double-digit rate. While capital goods growth rebounded to37.7 per cent, consumer goods growth, which is asign of consumer spending, plunged to 1.6 per cent.With overall economic growth slowing down,industrial output is expected to grow at 7.3 per centin 2011-12.

During July 2011, exports were recorded at US$29.3 billion, growing at 81.8 per cent. Imports expanded at51.5 per cent, reaching US$40.4 billion due to robustoil imports growth of 37 per cent and non-oil importsgrowth at 58.1 per cent. Export growth is unlikely tosustain in the second half of 2011-12 due touncertainty in the US and EU. Growth in imports isexpected to sustain given strong domestic demand

and high commodity prices.

Headline inflation remains above 9 per cent in

July 11

Credit growth touches 20 per cent in August 11

Rupee falls sharply in August led by foreign

capital outflow

Headline inflation continued to remain above 9 percent for the eighth consecutive month in July at 9.2 percent. It was 9.4 per cent in June. While inflation inprimary articles was 11.3 per cent in July 2011,manufacturing inflation remained high at 7.5 percent. CRISIL expects average WPI inflation in therange of 8.0-8.5 per cent for 2011-12 after taking intoaccount a rise in minimum support price for foodgrains & second round effects of fuel price hike.

Bank credit growth picked up to 20.3 per cent forfortnight ending August 12, 2011 relative to 19.4 percent a month earlier, largely driven by growth in non-food credit. Deposit growth picked up to 18.6 per centduring the same period. Bank credit to NBFC sectorcontinued to grow rapidly at over 50 per cent in July.Banking sector liquidity continued to be in the deficitin August. However, liquidity deficit fell with lowergovernment borrowing during the month comparedto July.

Rupee depreciated by 1.9 per cent in Augustcompared to a month earlier. By August-end, itsharply depreciated to 46.0 per US$, a decline of 4.2per cent over July-end with FII investment posting netoutflows of US$1.8 billion in August compared to aninflow of US$ 2.4 billion in the previous month. Rupeefell against all major currencies in August but moresharply against the Pound and Japanese Yen. Rupee

will remain weak in near future. However, strongergrowth in India vis-à-vis the West should settle therupee in the range of 43.0-44.0 per US$ by March 2012.

September 2011



Outlook

Growth Agriculture 2.7

Industry 7.3

Services 9.4

Total 7.7-8.0

Inflation WPI-Average 8.0-8.5

Interest rate 10-year G-Sec 8.1-8.3

(Year-end)

Exchange rate Re / US $ 43.0-44.0

(Year-end)

Fiscal deficit as a % of GDP 5.0

Rationale

Higher inflation pressure and rising interest rates are likely to affect

investment and consumption growth, thus impacting overall growth

in 2011-12. Impact of past rate hikes, pressure on profit margins, the

direct and indirect impact of elevated crude prices and global

economic uncertainty pose further downside risks to overall growth.

Despite a normal monsoon, agriculture growth would decline

because of a higher base.

Inflation has remained stubbornly high, at above 9 per cent, for the

last 6 months. Non-food manufacturing inflation remains firm due to

strong demand. The hike in MSP and second round effects of the

recent increase in fuel prices will put further upward pressure on

inflation.

The 10-year yields are primarily influenced by the size and timing of

government borrowings. With the government expected to complete

most of its market borrowings before the end of 2011-12, we expect the

yields to settle at 8.1-8.3 per cent by March-end.

The outlook for capital flows for the remaining part of 2011-12

remains uncertain, given the increased risks to global economy. We

expect the rupee to appreciate, albeit at a slower pace as compared to

2010-11.

CRISIL expects fiscal deficit in 2011-12 to settle at 5.0 per cent of the

GDP - a slippage of 40 basis points as compared to the government's

budgeted number of 4.6 per cent. This is mainly because the

government’s expenditure is likely to overshoot due to an increase in

subsidies on oil and fertilisers and the potential impact of the Food

Security Bill. This along with lower tax buoyancy and shortfall on the

disinvestment front will lead to higher fiscal deficit.

2011-12

2

CRISIL EcoView



September 2011

3

Quarterly update: GDP

Indian economy grew at 7.7 per cent in the firstquarter of 2011-12. Thisis its weakest pace insix quarters. In the firstquarter of the previousfiscal, the economygrew at 8.8 per cent (the revised figure; initialestimates were 9.3 per cent).

Agricultural GDP grew at 3.9 per cent in the firstquarter of 2011-12. Major crops - rice, wheat, pulsesand coarse cereals recorded output growth of 11.3,6.3, 4.9 and 0.7 per cent, respectively during the Rabi

season of agriculture year 2010-11.

Industrial GDP series was revised to incorporate thechanges necessitated by the revised IIP series.Consequently, industrial growth dropped to 5.1 percent in the reportingquarter, primarilyd u e t om a n u f a c t u r i n gs e c t o r g r o w t hdipping to 7.2 per cent from 10.6 per cent in the firstquarter of 2010-11. The sector breakdown pointed

towards the construction sector as one of the worst-performing sectors of the economy. Higher interestrates dampened the housing market and drew out adismal performance from the sector - grew at a rate of1.2 per cent in the first quarter of 2011-12, down from7.7 per cent a year earlier.

During the first quarter of 2011-12, the mining and

GGDP growth slips

to 7.7 per cent

Table 1: Supply side GDP growth (y-o-y,%)

Source: CSO Note: QE=Quick Estimates, RE=Revised Estimates

Weight Q1FY11

GDP at factor cost 100.0 8.8 7.7

Agriculture 13.6 2.4 3.9

Industry 28.0 9.1 5.1

Manufacturing 16.0 10.6 7.2

Construction 7.7 7.8 1.2

Services 58.4 10.4 10.0

Trade, Hotels, Transport

& Communication 27.6 12.1 12.8

Community, social &

personal services 12.5 8.2 5.6

Q1FY12

quarrying sector grew at just 1.8 per cent, as against7.4 per cent in the first quarter of the previous fiscal.

The slowdown in mining growth is worrying and itspersistence can adversely impact other sectorsparticularly manufacturing. Electricity, gas growthstood at 7.9 per cent in the quarter as against 5.6 percent in the same period last year.

In the first quarter of 2011-12, growth in the servicessector remained strong at 10.0 per cent as compared to10.4 per cent growth in the corresponding period lastyear. The robust consumption growth from relativelyhigh income households appears to have pushedtrade, hotels, transport and communications segment.Therefore, it registered a slightly better performancethan last fiscal growing at a rate of 12.8 per cent in thefirst quarter of 2011-12 as against 12.1 per cent in thesame quarter of 2010-11. In contrast, financing,insurance, real estate and business services grew by9.1 per cent in the first quarter of 2011-12, as comparedto 9.8 per cent in the corresponding period last year.Similarly, growth in community, social and personalservices declined to 5.6 per cent first in the first quarterof 2011-12 as compared to 8.2 per cent in the firstquarter of the previous year.

Estimates based on the expenditure side of the GDPalso point to a slowdown in GDP growth rate. GDP atmarket prices grew by 8.5 per cent in the first quarterof 2011-12, as against 9.1 per cent during the firstquarter of 2010-11. Among various components,private final consumption expenditure (PFCE)slowed down sharper-than-expected due to high base

CConstruction sector

worst hit

0.0

5.0

10.0

Q1FY11 Q1FY12 Q1FY11 Q1FY12 Q1FY11 Q1FY12

Industry Construction Mining

Source: CSO

Figure I: Growth rate (%)



Outlook

Given high inflationary pressure and the need for fiscalconsolidation, there is hardly any room available foreither monetary or fiscal support to the economy in thenear term, even if the external environment deteriorates

further. Therefore, we will continue to closely monitorour 2011-12 growth forecasts which we currentlymaintain at 7.7-8.0 per cent.

4

CRISIL EcoView

Table 2: Demand-side GDP growth, y-o-y %

Source: CSO

Weight Q1FY11

GGDP at market price 100.0 9.1 8.5

Private Consumption 60.5 9.5 6.3

Govt. Consumption 10.4 6.7 2.1

Fixed Investment 31.2 11.1 7.9

Change in Stocks 3.5 9.3 4.7

Exports 24.3 9.8 24.3

Imports 33.0 15.2 23.6

Q1FY12

and rising interest rates in the economy. It grew at 6.3

per cent the first quarter of 2011-12 vis-à-vis 9.5 percent in the first quarter last year. In addition to higherinterest rates, fading off of the fiscal stimulus alsoappears to have adversely impacted the PFCE.

Government Final Consumption Expenditure(GFCE) in first quarter of 2011-12 plummeted to 2.1per cent as against 6.7 per cent in the first quarter of2010-11. Growth in gross fixed capital formation( G F C F ) ,h o w e v e r ,w a s a

p o s i t i v es u r p r i s e .GFCF figureof Rs 4.11crore (at constant 2004-05 prices) for the first quartershows a year-on-year growth of 7.9 per cent.Although it is lower than 11.1 per cent in the firstquarter of last year, it is better than 0.4 per cent GFCFgrowth recorded in the last quarter of previous fiscal.

On the external-trade front, growth in exports andimports accelerated in the first quarter as compared

to first quarter of 2010-11. Exports grew sharply by24.3 per cent and imports by 23.6 per cent. Thecontribution of net trade to GDP was recorded at 1.7per cent.

SSlowdown in consumption

growth decelerated demandgrowth to 8.5 per centside

Source: CSO

Figure II: Growth Rate (%)

0.0

4.0

8.0

12.0

Q1FY11 Q1FY12 Q1FY11 Q1FY12 Q1FY11 Q1FY12

Private Consumption Fixed Investment Govt. Consumption



September 2011

5

Monsoon rains have been progressing normally over

June 1 to August 31, 2011. As per the latest data from

IMD (Indian Meteorological Department), rainfall in

India, from June 1 to August 31, was 0.4 per cent

higher than the Long Period Average (LPA), which is

the average rainfall in the past 50 years. Although

rains had slipped 8.0 per cent below normal in the

week from August 22 to August 26, its distribution is

now more important than quantity as crops are in the

growing stage and need rains at only regular

intervals.

The regional distribution of rainfall however, is not

satisfactory. The IMD data shows the skewed pattern

of rainfall deficient in North-east India (-14 per cent

deviation from the LPA)

whereas above normal in

the southern peninsula

(+5 per cent). North-west

India (+4per cent) and

central India (+6 per cent) received normal rainfall.

Among major states, Gujarat (-53.0 per cent),

Haryana (-31.7 per cent) and Assam (-30.4 per cent)

have received deficient rainfall whereas Rajasthan

(+27.8 per cent) and Madhya Pradesh (+23.0 per cent)have received excess rains.

CRISIL measures the impact of deficient rainfall on

agriculture using its proprietary index named

Deficient Rainfall Impact Parameter (DRIP). DRIP

takes rainfall deficiency and share of unirrigated area

Quarterly update: Monsoon

Source : IMD and CRISIL estimates Source : IMD and CRISIL estimates

Table I: Crop-wise DRIP scores

For the period from 1st June to30-Aug 29-Aug 3-Sep 2-Sep 1-Sep 31-Aug

2006 2007 2008 2009 2010Rice 3.5 2.1 1.9 6.4 4.8

Jowar 4.1 3.1 13.2 17.0 2.9

Bajra 9.8 15.1 11.6 31.0 8.9

Soyabean 0.1 5.1 11.3 15.1 5.3

Sugarcane 5.7 3.2 1.5 8.5 3.3

Tur 7.5 6.2 10.6 19.2 7.6

Groundnut 0.1 0.1 0.0 0.4 0.0

Maize 6.0 6.7 6.3 18.7 5.4

Cotton 10.1 11.8 21.9 25.0 11.4

All Crops 5.3 3.7 3.38 9.9 4.2

Food Grain DRIP 3.9 4.5 5.6 12.2 5.1

2011

2.6

1.3

8.7

0.2

0.7

5.1

0.0

3.0

15.6

2.0

2.8

Table II: State-wise DRIP scores

IIndia's monsoon

likely to be normal

into account to arrive at the index value. A higher

DRIP score indicates a more adverse impact of

deficient rainfall.

According to CRISIL's DRIP score, till August 31,

2011, deficient rainfall has adversely affected regions

such as Gujarat, Haryana and Orissa and cotton, bajra

and tur being relatively the worst affected crops.

For the period from 1st June to30-Aug 291-Aug 3-Sep 2-Sep 1-Sep 31-Aug

2006 2007 2008 2009 2010 Andhra Pradesh 2.8 0.0 0.0 8.6 0.0Bihar 8.5 0.0 0.0 10.9 9.9Gujarat 15.0 18.6 32.9 29.3 19.7Haryana 14.1 14.1 12.2 24.3 7.3Karnataka 3.6 0.0 2.6 0.0 0.0Madhya Pradesh 0.0 11.7 11.7 21.1 12.6Maharashtra 0.0 0.0 17.3 16.2 0.0Orissa 0.0 0.0 0.0 0.0 9.8Punjab 0.6 0.9 0.0 1.3 0.3Rajasthan 0.0 11.7 1.5 24.6 0.0Tamil Nadu 7.4 0.0 0.0 1.3 0.0Uttar Pradesh 7.7 7.6 0.0 14.8 8.0West Bengal 1.3 0.0 0.0 10.1 6.4

2011

0.00.7

27.417.2

0.00.00.49.30.60.00.01.50.0



European Union India United States

-6

-4

-2

0

2

4

6

8

10

12

1 9 9 0

1 9 9 3

1 9 9 6

1 9 9 9

2 0 0 2

2 0 0 5

2 0 0 8

2 0 1 0

Introduction

The financial crisis of 2008 led to significant fiscalstimulus by the advanced countries to offset the

downturn in private demand. Increased expenditure

and lower tax revenues, in turn, worsened their fiscal

positions calling in question short and medium termfiscal sustainability and elevated sovereign default

risk, especially in the United States and several

European countries. The fundamental reason for the

increased risk to global economy remains the sameescalated debt levels. The difference albeit this time

being that the debtors are governments rather than

households and financial institutions. The rising riskof sovereign defaults has undermined the prospects

for global economic recovery and financial stability,

especially of European financial markets. European

financial institutions hold large amounts ofcorporate and government bond from the PIIGS

economies, namely Portugal, Italy, Ireland, Greece

and Spain.

If advanced countries fall back into recession again,e m e r g i n geconomies

i n c l u d i n g

India would

not remainimmune to these adverse developments as witnessed

during the crisis of 2008. The business cycles of the

Indian economy are not decoupled from the

economic cycles of the United States and Europe (Fig

1.1), although in the long run, growth of India anddeveloped countries does show a divergent trend.

In this theme, we analyse India's linkages with the

global economy and the channels through whichIndia would get impacted, if global economic

recovery slows sharply. Subsequently, we analyse the

impact of fiscal and monetary loosening during the2008 crisis on the Indian economy; the monetary andfiscal space available to India currently and the

likelihood of another policy stimulus.

The immediate impact of global economic downturnon India is felt via the investment channel with

adverse impacts on capital flows. As confidence and

risk appetite of global investors declines given

increased economic uncertainty, foreign capital

begins to outflow from the emerging markets. Thisimpacts the foreign exchange markets, equity and

debt markets as well as the balance of payments

position. The crisis is also transmitted via the realchannel with its impact on India's exports and

imports amidst the global turmoil and in turn,

impacts the current account position. These adverse

Transmission channel

I. India's linkages with the world economy and its implications

6

CRISIL EcoView

Source: International Monetary Fund, World Economic Outlook Database, April 2011

Figure 1.1: Trends decoupled..Not economic cycles (GDP Growth rate) Figure 1.2: Transmission channel

IIndia not isolated from

adverse global developments

Trade Channel

Investment Channel

Currency Channel

Merchandise exports

Foreign DirectInvestment

ExportCompetitiveness

IT/TES exports

PortfolioInvestments

Profit Margins



developments lead to a lower demand for Indian

currency relative to its supply, thereby lowering itsvalue in the short term. In other words, the currency

tends to depreciate in the short term.

Merchandise exportsIndia's merchandise exports, which stood at nearly

$55 billion in 2000, surged close to $280 billion in

2010. This leap could have been higher if not for the

economic, financial and geo-political turmoil post

2008. Over the past decade, thep a t t e r n o f e x p o r t s h a s

undergone a change. The share

of exports to MENA (MiddleEast and Northern Africa)

countries and Asia has been

rising, where as the share of

developed regions like EU and the US has beendeclining over the years. In 2000, exports to MENA

countries and Asia formed nearly 10.9 per cent and

31.3 per cent of total exports 2010, their shares stood

at 17.2 per cent and 49.3 per cent respectively. For EU

and US, their shares in total exports were down to 23per cent and 17 per cent in 2005 from 26 per cent and

22 per cent in 2000; they further declined to 20 percent and 14 per cent respectively in 2010.

Over the period 2005 to 2010, the growth of exports

was as follows - to MENA countries by 191.6 per cent;

Trade channel

to Asia by 152.4 per cent; to EU by 90.8 per cent and to

the US by 87.6 per cent. Going forward in the event of

a double dip, exports to the developed economies areexpected to grow at a receding rate or might evendecline. The diversification of exports into Asia and

MENA regions and their robust demand from other

export destination would provide a transient bufferto India's exports in such a situation.

Considering the nature of commodities exported (Fig

1.3), manufactured exports increased to nearly $130 billion in 2010 from $26 billion in 2000. Fuel exports

surged to $32.7 billion in 2010 from $1.44 billion in

2000. Increase in fuel exports is attributable to

increase in the refining capacity of India, discovery offuel resources and rising export price for fuel-related

commodities. Looking at the share of MENA

countries in 2010, fuel exports to MENA countries

formed nearly a quarter of the total fuel exports in2010. For exports of primary commodities, MENA

countries formed nearly 17 per cent of the total

exports of primary commodities in 2010.

In addition to diversification of commodities anddestinations, in the aftermath of 2008 crisis and the

subsequent recovery, India's exports also got a boostdue to factors such as (1) favourable policy boost

extended in 2010 via schemes such as Focus MarketScheme (FMS), Focus Product Scheme (FPS), and

extension of DEPB (duty entitlement passbook

scheme); (2) rising petroleum and commodity prices

including gold have led to higher export prices for

September 2011

7

0

20

40

60

80

100

120

140

Primary

commodities

Ores and Metals Fuels Manufactured

Goods

MENA European Union (EU) Asia United States

Source: UNCTAD

Figure 1.4: Commodity wise exports, 2010 (USD bn)

SSlower export

growth to the

US and EU

amidst crisis

Source: UNCTAD

Figure 1.3: Commodity wise exports (USD bn)

0

50

100

150

200

250

300

2000 2005 2010

Primary commodities Ores and Metals Fuels Manufactured Goods



India's major exports. Oil prices have averaged

around $117 per barrel in the first quarter of this fiscal

as compared to an average of around $78.5 during the

same period last year. While exports surged by 51.9per cent in the first quarter of the current fiscal, as

compared to the first quarter of the last fiscal, surge in

the value of fuel exports is partly attributable to therise in global prices of oil.

There are several rapidly evolving factors in the

global arena. These, however, are likely to slowdownexport growth going forward. (1) Economic growth

in three out of top five destinations is projected to

register sharp slowdown (2) Government hasindicated withdrawal of export promotion policieswhich could hamper export growth (3) Mounting

input costs in terms of rising interest cost and wage

bill will put pressure on profits (4) Stiff competition

from other exporters like China, Vietnam andPakistan in sectors such as textiles. The fall in India's

ranking as a major exporter of textiles to the US and

EU comes in the aftermath of appreciating rupee, rise

in domestic prices and wages, and lack of newtechnology. Slowdown in merchandise exports

growth (comprising almost 56 per cent of overall

exports) is bound to impact GDP growth adversely.

IT Exports

Indian exports of services stood at $35.5 billion in thefourth quarter of 2010-11. Exports of software

services comprised nearly 48 per cent of this total.

Following the 2008 crisis, total exports of services fell

by 9.6 per cent in 2009-10 while exports of software

services grew only at around 7.0 per cent, half the rateat which they grew in the previous fiscal. Among themajor Indian software companies (Fig. 1.5), TCS'

revenues grew at 5.3 per cent in 2009-10, down from

6.7 per cent in 2008-09.

During the same period,Infosys posted only a 3.0

per cent growth in its

revenues during 2009-10

as compared to 11.7 percent in 2008-09. The

revenues from US also saw a declining trend. For both

Infosys and Tech Mahindra, revenues from the USgrew at half the rate during 2009-10 compared to theprevious fiscal. A similar trend was observed in

revenues from Europe. While revenue growth

increased sharply in 2010-11, considering the fact thatthe US and Europe are the largest markets for Indian

BPO and software exporters, another downturn in

these regions would negatively impact the industry,

especially given limited opportunities to diversifyinto newer markets.

Portfolio investment The pull out of FII investment into India after

September 2008 following the collapse of the LehmanBrothers was the first and immediate impact of the

2008 crisis on the Indian economy (Table 1.1). After

Investment channel

8

CRISIL EcoView

SServices exports

need to diversify

to sustain growth

momentum

Source: CRISIL Research

Figure 1.5: Revenues of the Indian IT companies

Source: RBI

Table 1.1: Growth of Foreign Investment Flows

Year FDI (%) Portfolio I FII (%) ECB(%)

2006-07 154.7 -43.9 -67.5 45.6

2007-08 52.6 289.4 530.3 45.1

2008-09 8.6 -150.8 -173.9 -49.7

2009-10(P) -0.2 -333.7 -293.4 -3.7

2010-11(P) -19.6 -2.8 1.3 13.10

1000

3000

5000

7000

9000

2007-08 2008-09 2009-10 2010-11

TCS Infosys Tech Mahindra



recording net portfolio inflows of US$27 billion in2007-08, a net outflow of nearly US$14 billion was

recorded in the following year, even when Indian

economy grew at a significantly faster rate than a

number of other emerging markets. Net portfolioflows rose to the tune of US$32.3 billion in 2009-10

after dipping marginally to about US$31.4 billion in

2010-11. FIIs, which form a major component ofportfolio investments, stood at US$29.4 billion in

2010-11, changing marginally from US$29.0 billion,

the figure for the previous year. However, in the first

quarter of 2011-12, FIIs declined by 30 per cent andstood at US$2.4 billion. In the case of further

intensification of the sovereign debt crisis in Europeand the weakening of growth in the US, FII

investment in India in the short term would beadversely impacted yet again due to rising risk

averseness, as witnessed recently (Fig 1.6).

Interest rates are on an upswing given the continuousmonetary tightening by the central bank. This

coupled with rising prices of raw materials is likely to

adversely impact profit margins of firms, thereby,

adversely affecting investor sentiments. Signs of thisare already emerging as India was placed amongst

the least desired equity market by Asia Pacificinvestors in the survey by the Bank of America Merrill

Lynch in June 2011. The investors' sentiments arelikely to weaken further, as the RBI is contemplating

tightening of rules relating to foreign investors and

private equity funds for those who put money inIndian firms.

Foreign Direct Investment (FDI)Following the liberalised FDI policy (2005), India

became a big lead in attracting FDI flows due to itsmacroeconomic stability coupled with a large potent

market, removal of restrictions on expansion and easy

access to technology. However, from 2008-09 FDIinflow slowed down before finally contracting by 19.6

per cent in 2010-11. This slowdown in FDI flows is a

matter of concern as FDI flows are of a more durable

variety and often come with many tangible andintangible benefits. In 2010-11, FDI inflows have been

the lowest in the last 4 years, and have moderated to

US$30.3 billion as compared to US$ 37.8 billion worth

of inflows received during 2009-10 (Fig. 1.7).

Further, data on sector wise FDI flows into India

shows that the real estate sector was hit the most,accounting for US$0.4 billion in 2010-11 as compared

to US$2.1 billion in 2009-10. Business services came in

second with US$0.5 billion in 2010-11 as compared to

US$1.5 billion in 2009-10, followed by theconstruction sector (US$1.5 billion in 2010-11 as

compared to US$3.5 billion in 2009-10). With the weak

growth in developed economies, a surge in global

liquidity created by quantitative easing and

continued expectations of resilient performance bythe Indian economy, FDI inflows could be impacted

positively. FDI inflows surging by 133 per cent in the

first quarter of 2011-12 to US$13.4 billion support thefact.

The potential of India as an attractive FDI destination

September 2011

9

Source: RBI

Figure 1.6: Net FII Inflows (USD bn)

-5

0

5

10

15

20

Q 3 F Y 0 9

Q 4 F Y 0 9

Q 1 F Y 1 0

Q 2 F Y 1 0

Q 3 F Y 1 0

Q 4 F Y 1 0

Q 1 F Y 1 1

Q 2 F Y 1 1

Q 3 F Y 1 1

Q 4 F Y 1 1

Q 1 F Y 1 2

Q 2 F Y 1 2

Source: RBI

Figure 1.7: Foreigh Investment Flows (USD bn)

FDI Portfolio Investments ECB

2005-06 2006-07 2007-08 2008-09 2009-10(P) 2010-11(P)

-20

-10

0

10

20

30

40

50



can materialise in effect provided that policy actionsare taken to ease barriers of entry and facilitate

business, which would attract FDI into the country.

For instance, long-standing issues like lack of

infrastructure, problems in land acquisition,procedural delays etc, limit FDI inflows into the

country. Moreover, foreign investors planning to

enter the retail space as well as banking in India orincreasing their stake in insurance ventures are

awaiting the required policy changes. Such

regulatory uncertainties have vitiated the investment

climate in the country. In order to keep theinvestment activity buoyant even in tough times,

India will have to be marketed as a promisinginvestment destination and progressive policy

reforms are imperative for the same.

External Commercial Borrowings (ECBs)ECBs of Indian corporation abroad contracted bynearly 50 per cent in 2008-09 after being hit sharply by

the global crisis. After recording a further marginal

decline in 2009-10, ECBs rose nearly 11 per cent in2010-11. In recent months, ECBs stood at $2.1 billion

in April 2011 and were up at $3.3 billion in June 2011.

ECBs by Indian corporations jumped by nearly 59 per

cent in the first quarter of the current fiscal vis-à-visthe last fiscal.

The rise in economic activity of Indian corporations

during economic upturn of the last decade was inpart funded by the FDI and external commercial

borrowings by Indian businesses. It was expensive for

Indian companies to raise money at high rates ofinterest; hence, they resorted to cheaper foreign debt.

Raising funds abroad via ECBs has been one of the

major ways of funding the global expansion plans by

Indian companies. On an average, companies avail adifferential of 3-4 per cent on borrowing costs, making

it more attractive to raise funds outside India,

especially if they are to be invested abroad. Stronger

rupee has also made borrowing abroad moreattractive. If another global downturn is to follow, the

cost of borrowing abroad for Indian companies will

rise and willingness to lend will decline in the face of

increased risk averseness.

The demand for and supply of currency determines

the value of rupee. The demand for rupee largelydepends upon the demand for India's goods and

services abroad. In addition, foreign investors'

demand for rupee rises when they increase theirinvestment in India. The supply of rupee depends

upon our demand for foreign goods and services as

well as Indian companies' investment abroad. As

discussed above, during the periods of higher globaleconomic uncertainty foreign investors', especially

FIIs demand for rupee declines sharply as they pull

down their investment out of India. As a result, the

currency tends to depreciate. The similar impact wasseen during the crisis of 2008. Most recent trends in

Currency channel

10

CRISIL EcoView

30

35

40

45

50

55

60 US$

Source: RBI

Figure 1.8: Rupees per unit of foreign currency (monthly average basis)

A p r - 0 8

A u g - 0 8

D e c - 0 8

A p r - 0 9

A u g - 0 9

D e c - 0 9

A p r - 1 0

A u g - 1 0

D e c - 1 0

A p r - 1 1

A u g - 1 1



the movement of the Indian rupee vis-à-vis major

currencies show that it has depreciated against all themajor global currencies. The rupee depreciated

against the USD by 1.9 per cent and 3.4 per cent

against the Pound Sterling between July 2011 and

August 2011(Fig. 1.8). A moderation in exportsgoods and services, constant rise in imports also

points to the depreciation of the currency. In spite of

the rupee depreciating in the short run, due to fairly

robust performance of the Indian economy amidstglobal uncertainty and slow growth, it is expected to

appreciate by March-end 2012, if global economy

does not slide back into a recession.

Stimulus packages in India were in place, in sync

with other countries, to tackle the downturn of 2008.

Although a large part of an increase in governmentexpenditure, namely implementation of the Sixth Pay

Commission recommendation in 2008-09 and 2009-

10 was planned ahead of the crisis, but timings of the

implementation happened to fall in line with thecrisis. In addition, the government reduced taxes and

duties and allowed the fiscal deficit to expand

beyond the targeted levels in 2008-09 and early 2009-10. Under the Sixth Pay Commission and in efforts to

boost social security programmes for the informal

sector and rural infrastructure spending under the

NREGS, private consumption received a boost. Thestimulus in various forms had a notable positive

impact on the economy.

Policy actions

Government consumption expenditure increased by15.7 per cent during 2007-08 and by 20.7 per cent on

2008-09. According to rough estimates, stipulating

that government expenditure rose in line with the

trend growth of 6.5 per cent in the previous 3 years,GDP growth (at market prices) would have been 4.6

per cent in 2008-09 and 8.1

per cent in 2009-10 instead

of the actual growth 4.9 percent and 9.1 per cent in the

respective years (Fig. 1.9).

While this reflects the directimpact of fiscal stimulus on the Indian economy, the

indirect impact was felt on sectors such as consumerdurables and automobiles, which saw a jump in their

demand following fiscal stimulus.

In addition to fiscal stimulus, the RBI reversed thetight stance of the monetary policy quickly and

sharply post September 2008. Between October 2008

and April 2009, the repo rate was reduced by 425 basis

points to 4.75 per cent, the reverse repo rate wasreduced by 275 basis points to 3.25 per cent, and the

cash reserve ratio (CRR) was reduced by a cumulative

400 basis points to 5.0 per cent (Table 1.2). This

resulted in provision of primary liquidity to the orderof nearly 10.5 per cent of GDP. The loose monetary

policy was aimed at reducing the cost of borrowing

and boosting the availability of credit in the economy.The RBI also took a number of conventional and

unconventional measures to augment domestic and

foreign exchange liquidity.

September 2011

11

SStimulus keept

he economy going

amidst crisis

t

Source: CRISIL Estimates

Figure 1.9: GDP growth with and without fiscal stimulus

0

2

4

6

8

10

12

2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

GDP growth without stimulus GDP growth with stimulus

Source: RBI

Table 1.2: Monetary Policy Rates

Instrument As at Extent of Reductio

Oct-08 Apr-09 (basis points)

Repo Rate 9.00% 4.75% 425

Reverse Repo 6.00% 3.25% 275

Cash Reserve Ratio

(Percentage of NDTL) 9.00% 5.00% 400



India tackled the 2008 crisis with fiscal stimulus and

monetary easing although this time Indianauthorities are not left with many policy options. Thecountry is already plagued by high fiscal deficit and

inflationary pressures. The fiscal deficit has risen to

7.3 per cent of the GDP in 2010-2011 from 4.1 per cent

of the GDP in 2007-08. The need for fiscalconsolidation and mounting inflation pressures

imply the fiscal policy loosening is not on cards in the

near future. Indeed, to fight sustained high level of

inflation, the RBI increased interest rates by 475 bpsover the past 17

months with scope

for further rise.D e s p i t e 1 1cumulative interest

rate hikes inflation,

e s p e c i a l l y c o r einflation (non-food manufacturing) continues to

remain high at 7.2 per cent in July 2011. The RBI itself

does not expect the WPI inflation to come down

below 7 per cent even by March 2012. Throughout2011-12, therefore, headline inflation will remain

above the RBI's comfort zone of 5.0 to 5.5 per cent.

CRISIL expects the average inflation to be in the range

of 8.0-8.5 per cent for 2011-12 (Fig. 1.10). Withinflation plaguing the economy, the RBI is left with no

room for monetary easing if the global economic

recovery slows any further. At the same time with

high fiscal deficit, the government cannot undertakeany further increases in expenditure.

Conclusion

The financial crisis of 2008 bears testimony to the fact

that India is not isolated from the global economy. It is

well linked and integrated to the world via differentchannels. Over the years, India's exports to EU and US

have fallen, while that to MENA countries and Asia is

on the rise. Indian services exports driven by software

exports and BPO are seeing a decline in the growth of business from EU and US. With global investors

moving their money into safe assets, portfolio

investment plunged as a direct result of the crisis. Inaddition, FDI activity also moderated. Indian

economy during the 2008 crisis had a stimuluspackage in terms of increased government spending

and loose monetary policy to its side. In the currentscenario, the economy is already battling with

inflation and high fiscal deficits; no stimulus either

from monetary and fiscal policy can be expected.

Instead, India will have to fast track several keyreforms in sectors such as manufacturing,

agriculture, and infrastructure and liberalise policies

to encourage durable foreign capital in the form of

FDI. Only then it will be able to maintain its current

growth rate in case of a double dip recession inadvanced countries.

12

CRISIL EcoView

IIndian authoritiesout of policy options

to tackle another crisis

Source: Ministry of Industry

Figure 1.10: Inflation

-2.00

0.00

2.00

4.00

6.00

8.00

10.00

12.00

A p r - 0 9

J u n - 0 9

A u g - 0 9

O c t - 0 9

D e c - 0 9

F e b - 1 0

A p r - 1 0

J u n - 1 0

A u g - 1 0

O c t - 1 0

D e c - 1 0

F e b - 1 1

A p r - 1 1

J u n - 1 1

A u g - 1 1

O c t - 1 1

D e c - 1 1

M a r - 1 2



II. Industrial Production

Source: CSO

Table 2.1: Sectoral Growth (y-o-y %)

April-June

WeightJune-10 June-11 2010-11

General 1000 7.5 8.8 9.6

Manufacturing 755.27 7.9 10.0 10.4

Mining 141.57 7.0 0.6 8.0

Electricity 103.16 3.6 7.9 5.4

Basic 355.7 3.8 7.5 5.5

Capital 92.6 3.7 37.7 17.2

Intermediates 265.1 8.6 1.8 10.7

Consumer Goods 286.6 13.3 1.6 11.5

-Durables 53.7 21.3 1.0 19.7

-Non durables 233.0 7.5 2.1 5.4

2011-12

6.8

7.5

1.1

8.2

7.2

16.8

2.2

4.2

3.3

4.9

Use Based Industry (%)

performers in manufacturing sector).

The mining segment, on the other hand, grew

moderately clocking a mere 0.6 per cent as against 1.3

per cent in the previous

m o n t h . T h e p o o r

performance of the sector

since the start of 2011 is

worrying and could be

attributed to regulatory

issues. In addition, the electricity sector also

witnessed some moderation in June 2011, posting a

growth of 7.9 per cent as against 10.3 per cent of the

previous month.

The capital goods sector, considered as the

barometer of investment activity in the economy,

grew sharply at 37.7 per cent in June 2011. On

excluding the capital goods sector, industrial output

for June 2011 would drop to 4.4 per cent. This facet

points towards the

sector's major role

i n t h e r o b u s t

i n d u s t r i a l

production data of June. As the growth

of capital goods sector has been highly volatile in the

recent past, sustainability of industrial growth

witnessed in June 2011 looks unsustainable.

Cumulatively for the first 3 months of the current

fiscal, growth in capital goods stood at 16.9 per cent

as compared to 17.2 per cent during the same period

Industrial output growth revived moderately and

reached 8.8 per cent in June 2011 as compared to 5.9per cent (revised) in May 2011. This revival can in

part be attributed to low base and to recovery in the

manufacturing sector. On a seasonally adjusted

monthly basis, the IIP

index was up 2 per cent as

compared to a decline of

1.5 per cent in the previous

month. On a 3-month

moving average basis,

industrial growth remained steady at an average of

6.8 per cent during the 3 months ending June 2011

albeit lower than previous averages- 7.0 per cent -average of 3 months ending May 2011 and 9.6 per

cent of the corresponding period last year. A near 7.0

per cent industrial growth, however, in the first

quarter of 2011-12, despite a fragile global scenario,

rising inflation and tightening monetary policy

indicates a fair amount of resilience in the Indian

economy.

Amongst the broad categories of industrial

production, the manufacturing sector improved

significantly by registering a growth of 10 per cent in June 2011, much higher than 6.1 per cent in the

previous month (Figure 2.1). Average growth for the

sector during the period April June 2011-12 stood at

7.5 per cent as compared to 10.3 per cent in the same

period last year. Amongst the 2-digit classification

of manufacturing, out of 22 industry groups, 15

groups showed positive growth (see Table 2.2 for the

IIndustrial output

growth rebounds

in June 2011

SSlowdown in

mining sector - a

worrying trend

September 2011

13

Source: CSO

Figure 2.1: Manufacturing Sector Growth (%)

FY12

4.8

9.0

7.9

5.0

10.0

15.0

0.0

Jun JunFY10 FY11 Nov

10.0

FY11

CCapital goods remain

volatile, surprises

on the upside



last year. Basic goods, on the other hand, have

continued to post steady growth rates since the start

of 2011. For June 2011, growth in basic goods stood

at 7.5 per cent as compared to 7.3 per cent last month.

Worryingly, though, intermediate goods used in the

production of final goods have remained sluggish

since last couple of months, with the first quarter

2011-12 average standing at an anaemic 2.2 per cent

as compared to a healthy 10.7 per cent in the same

period last year.

Growth in consumer goods, an indicator of

consumption demand, slowed down to 1.6 per cent

in June 2011, compared to 6.7 per in the previousmonth. With the rising interest rate and persistent

inflation eroding the purchasing power of

consumers, production of both consumer durables

and non-durables slowed to 1.0 and 2.1 per cent

respectively during the reporting month. It

indicates that consumption demand, which

constitutes around 58 per cent of the total demand, is

waning. Sluggish growth in private consumption

during the first quarter of 2011-12 also testifies this.

For the first quarter of 2011-12, consumer goods

grew at an average 4.2 per cent as compared to 11.5per cent in the same quarter of last fiscal.

Forward-looking indicators of the economy paint a

mixed picture about future growth prospects.

Cement production growth has remained sluggish

so far this fiscal, contracting in the first quarter. But a

positive surprise awaited in July 2011, as cement

Table 2.2: Performers in Manufacturing Sector (%)

Source: CSO Note - Please refer to Annex (Table 8.4) for full description of abbrev used in the text

Table 2.3: Laggards in Manufacturing Sector (%)

Outlook

Manufacturing sector rebounded in June 2011 mainlyaided by the capital goods sector. However, due to highvolatility in capital goods sector data lately, it has

become difficult to draw any meaningful conclusion from its movement. But the weakness in consumer goods growth points towards a declining consumption growth. Notwithstanding the resilience shown by the June 2011 IIP data, industrial output growth is likely toremain muted for few more months this fiscal. It,however, will recover thereafter mainly supported bylow base.

April-June

Weight June-10 June-11 2010-11

Office Eqp 3.1 -9.3 19.1 -10.0

Electronics 19.8 -23.0 88.9 -0.4

Motor Vehicles 40.6 39.3 14.5 42.3

Other transport 18.3 27.1 18.6 30.5

Metal Products 30.9 13.8 12.0 15.1

Basic metals 113.4 1.3 17.7 3.4

Food & Bev 72.8 16.4 6.7 15.9

Media 10.8 8.9 11.1 10.5

Medical 5.7 30.0 -10.3 18.4

Paper 10.0 4.2 6.2 3.8

Petroleum products 67.2 2.2 4.2 2.4

2011-12

29.6

24.1

20.2

19.0

14.9

14.8

11.8

10.9

8.4

8.1

6.0

April-June

Weight June-10 June-11 2010-11

Leather products 5.8 -7.2 15.7 7.5

Chemical 100.6 1.1 -1.0 -1.5

Tobacco 15.7 29.8 9.6 9.5

NMMP 43.1 4.0 3.2 6.8

Apparel 27.8 8.5 -5.5 4.0

Furniture 30.0 -9.8 10.3 -1.9

Mach. & Eqp 37.6 29.9 2.2 38.0

Rubber 20.3 13.9 -0.3 18.9

Communication 9.9 30.0 -10.1 19.5

Textiles 61.6 4.4 -4.3 4.8

Wood 10.5 -6.6 -0.3 9.3

2011-12

4.9

3.7

3.6

0.5

0.1

0.1

-1.6

-2.1

-3.5

-4.3

-7.6

production growth jumped to 9 per cent y-o-y

although mainly due to low base. Commercial

vehicles (CV) sales growth too showed an uptick in

the month, after performing lacklustrely so far this

fiscal. Year-on-year incremental credit to industry

moderated in June 2011, pointing a slowdown in

industrial growth going forward.

14

CRISIL EcoView



178.0

245.9

0.0

50.0

100.0

150.0

200.0

250.0

FY10 FY11 Apr May June Jul

FY12

III. External Sector

Exports 16.1 29.3 70.4

Imports 26.7 40.4 107.9

Oil Imports 8.4 11.4 34.2

Non-oil Imports 18.3 29.0 73.7

Trade Balance -10.5 -11.1 -37.5

Exports 12.6 81.8 34.5

Imports 22.8 51.5 29.1 Oil Imports 13.7 37.0 42.6

Non-oil Imports 27.5 58.1 23.6

Trade deficit 42.8 5.1 19.9

Merchandise (US$ billion)

108.3

151.0

42.0

109.1

-42.7 y-o-y %

54.0

40.0

22.7

48.0

13.8

Source: Ministry of Commerce

April-July

Table 3.1: Trade Performance

Source: Ministry of Commerce

Figure 3.1: Exports Performance (US$ bn)

July-10 July-11 2010-11 2011-12

Continuing with its strong performance since thestart of 2011, exports grew at a whopping 81.8 percent in July 2011, as compared to 46.4 per cent in theprevious month. A low base of last year mainly drovethis robust growth, as in level terms exports atUS$29.3 billion in

July 2011 remainedalmost unchangedfrom the previousmonth. Engineeringgoods, petroleumproducts and Gems & Jewellery were significantdrivers of the export performance in the reportingmonth. On a cumulative basis, exports growth for the

first 4 months of 2011-12 stood at 54.0 per cent ascompared to 34.5 per cent during the same period lastyear.

Imports too expanded at a healthy pace of 51.5 percent to reach US$40.4 billion in July 2011. In levelterms, however, imports outpaced exports;consequently, the trade deficit rose by almost 45 percent on monthly basis to reach US$11.1 billion in July2011 as compared to US$7.7 billion in the previousmonth.

Amongst the broad categories of imports, oil importsgrew at a robust pace of 37 per cent in July 2011 ascompared to a subdued 13.7 per cent in the samemonth last year. Even on a month-on-month basis, oilimports jumped by 12.4 per cent, reflecting the strongunderlying trend, as global crude oil prices remainedelevated. Non-oil imports growth too remained

Outlook

Exports have grown robustly in the first 4 months of 2011-12. But this strong growth is unlikely to sustain during the

second half of 2011-12 mainly due to persistentuncertainty in growth outlook of Europe and US.However, India's attempt to diversify its exportsdestinations is paying rich dividends and is likely to prevent a sharp fall in exports. Meanwhile, imports are growing due to sustained domestic demand and highcommodity prices. This is also putting upward pressure onthe trade deficit.

strong at 58.1 per cent in July 2011 as compared to 27.5per cent in July 2010 given buoyant domesticconsumption demand.

In rupee terms as well, exports posted a healthygrowth of 72.4 per cent and imports growth stood at43.7 per cent in the reporting month. Of late,heightened uncertainties arising from the fragileglobal scenario havec l o u d e d t h ep e r f o r m a n c e o fexports. However,owing to Indianexports diversifying

from US and EUtowards faster growing Asian economies, Africa andLatin America, exports growth have been shieldedfrom a sharp fall. The share of India's exports toAfrica and Latin American economies has doubled in2010 from its 2000 levels, while China's share hasincreased by almost 8 times for the same period.

HHelped by a low

base, exports grew at

81 per cent in July 2011

September 2011

15

DDiversification from

developed countries to

help India's exports



IV. Inflation

inflation during the month could be higher than in July 2011. During August 2011, weekly inflation inprimary articles has been higher at 12.6 per cent givenhigher food prices; fuel inflation stood at 12.8 per cent.Higher fuel inflation in August 2011 was expected onthe back of delayed impact of diesel, LPG andkerosene price hikes announced in June 2011. Thegovernment had raised prices of these items by 7.7 percent, 14.3 per cent and 16.5 per cent respectively.Going forward, second-round impact of these hikesare bound to get reflected in manufactured goods'inflation, besides the overall fuel basket.

In July 2011, inflation in primary articles declined to11.3 per cent from 12.2 per cent in the previous month,in response to a substantial slowdown in food andnon-food articles' inflation. Inflation in minerals alsodeclined; however, this category comprises a smallerweight in overal linflation. Inflation inprimary food articlesfell to 8.3 per cent in

July 2011 from 8.4 per

cent in the previous month. Similarly, inflation in non-food articles fell to 15.5 per cent compared to 18.6 percent over the same period. The declining trend in foodprices, as noted above, however, appears to havereversed in August 2011, due to the impact of sharprise in minimum support prices (MSP) and disruptionin supply of vegetables and fruits owing to rains insome parts of the country. Over the past few months,

Source: Ministry of Industry Source: Ministry of Industry & CRISIL Estimate

Table 4.1: Inflation in Major Product Groups

April-July

Weight Jul-10 Jul-11 2010-11

General 100.00 10.0 9.2 10.4

Primary 20.12 19.1 11.3 20.3

Fuel 14.91 13.3 12.0 13.8

Manufacturing 64.97 5.8 7.5 5.9

Primary - 44.8 31.1 44.9

Fuel - 20.2 20.4 19.8

Manufacturing - 35.5 48.0 35.3

2011-12

y-o-y %

9.5

12.9

12.6

7.3

Contribution to inflation

34.0

20.3

45.8

FFood inflation picks

up in August

Inflation declined to 9.2 per cent in July 2011,compared to 9.4 per cent in the previous month. Thiswas primarily led by some slowdown in foodinflation (both within primary articles and inmanufactured products).Non-food manufacturingi n f l a t i o n , h o w e v e r ,continued to rise and haskept inflation at elevatedlevels . Despi te so memoderation, fuel inflationremained high. Inflation forMay 2011 was revised substantially upwards to 9.6per cent, compared to 9.1 per cent released earlier.Such high revisions in data have continued to raiseconcerns.

The seasonally-adjusted inflation data also reflectspersistent price pressures in the economy. On amonth-on-month average basis, this index hasclimbed 0.7 per cent during January to July 2011.Consumer price inflation based on industrialworkers softened to 8.4 per cent in July 2011,

compared to 8.6 per cent in the previous month.During the first quarter of 2011-12, consumer priceinflation remained relatively unchanged from theprevious quarter, at about 8.9 per cent. Some respitein recent months seems to have come from a marginalslowdown in food price inflation.

However, the weekly trends in primary articles andfuel inflation during August 2011 suggest that overall

WWPI inflation

posts marginal

decline in

July 2011

3.8

9.6

0.0

6.0

12.0

FY10 Jul Jan Jul

WPI CPI-IW

FY12

10.0

8.4

11.3

9.2

Figure 4.1: Headline Inflation (y-o-y %)

FY11

FY11

16

CRISIL EcoView




Table 4.2: Inflation in Primary Articles (y-o-y %)

April-July


Cereals 3.37 8.3 5.3 7.7

Pulses 0.72 14.4 (7.4) 21.5

Fruits & Vegetables 3.84 13.2 11.7 15.5

Eggs,Meat & Fish 2.41 31.4 9.2 38.6

Fibres 0.88 16.2 29.7 16.8

Oilseeds 1.78 2.2 14.0 3.3

Metallic Minerals 0.49 63.3 6.3 43.3

Other Minerals 0.13 -1.2 9.4 0.1

2011-12

5.0

(8.2)

16.0

9.1

54.4

12.3

11.7

11.5

Table 4.3: Inflation in Manufactured Products (y-o-y %)

April-July


Chemicals 112.02 4.4 7.9 5.1

Food Products 9.97 7.3 7.6 7.4

Textiles 7.33 10.1 12.9 10.7

Machine Tools 8.93 2.3 2.7 2.2

Metal & Alloys 10.75 7.9 10.1 8.3

Transport Eqp. 5.21 3.8 2.9 3.1

NMMP 2.56 3.1 3.3 3.0

Rubber & Plastic 2.99 5.0 7.7 5.0

2011-12

7.4

7.5

15.1

2.9

8.7

2.1

3.7

8.3


inflation in food and vegetables had reported asustained decline. However, inflation in milk which

had been declining since March 2011, again entereddouble-digit growth in June 2011 and has continuedits surge, as per weekly data released for August 2011.Among non-food items, inflation in fibres fell to 29.7per cent in July 2011, compared to 43.8 per cent in theprevious month whereas inflation in oil seeds hasremained stubborn at around 14 per cent.

Fuel inflation was marginally lower in July 2011, at12.0 per cent compared to 12.8 per cent in theprevious month. On an m-o-m basis, however, theindex was 2.5 per cent higher compared to 0.7 per cent

increase recorded in the previous month. Higherpass-through of fuel price hikes announced in June2011 is now being reflected in the index.Consequently, inflation in administered pricecategories was higher on an m-o-m basis in July 2011.Inflation in kerosene stood at 13.1 per cent, while inwas 6.8 per cent for diesel.

Manufacturing inflation was slightly higher at 7.5 percent in July 2011, compared to 7.4 per cent in theprevious month. Upward pressures came fromhigher non-food manufacturing inflation, whichstood at 7.5 percent in July2 0 1 1 a scompared to7.2 per cent in

J u n e 2 0 1 1 .Manufacturing food inflation declined substantiallyto 7.6 per cent in July 2011 as compared to 8.5 per cent

September 2011

17

NNon-food manufacturing

inflation refuses to budge

Outlook

Inflation has remained stubborn in the range of 9.2 to 9.6 per cent. During August 2011 too, weekly trends show arenewed pickup in inflation. Recent hikes in fuel pricesand already elevated food prices are exerting continuous

pressure on headline inflation, while stubborn non-foodmanufacturing inflation has yet to witness a significantimpact of monetary tightening. We expect inflation tolower to some extent over the next few months, as impactof past rate hikes becomes more pronounced. We expectaverage inflation to be in the range of 8.0- 8.5 per centduring 2011-12.

in June 2011. Amongst non-food manufacturing,inflation in basic metals and alloys, chemical and

chemical products, wood and wood products, paperand leather products and transport equipmentpushed the index higher. On the other hand, inflationin textiles, non-metallic mineral products, machineryand machine tools and rubber and plastic productsposted some decline.

Although overall food index (both primary andmanufactured) declined to 8.0 per cent in July 2011,persistent increase in non-food manufacturinginflation has kept the headline inflation at elevatedlevels. The Central Bank is trying to tame this

inflation by tightening monetary policy. As the RBIapproaches closer to the end of its monetarytightening cycle, the stubborn non-food inflation maydecline slightly as the cumulative impact of past andrecent rate hikes comes into play.



Money supply (M3) growth showed a reversal of

trend in August 2011. Till July 2011, the growth rate

continued to fall which reversed this month. This

may have an adverse affect on inflation which is

already high and has led RBI to make several rate

hikes this year. The repo, reverse repo and the

marginal standing facility (MSF) rates stood at 8 per

cent, 7 per cent and 9 per cent respectively.

Bank credit growth picked up in August 2011 as

against last month. It grew at a rate of 20.3 per cent forfortnight ending 12th August, 2011, after a brief

period of moderation. It was 19.4 per cent during the

fortnight ending 15th July, 2011. For the period under

r e v i e w , f o o d

credit growth

was substantially

lower compared

t o J u l y . I t

dropped from

68.4 per cent for the fortnight ending 15th July, 2011 to

54.4 per cent for the fortnight ending 12th August,

2011. However, corresponding increase in non-food

credit was not witnessed. Non food credit growth,

though showed an upward trend for the fortnight

ending August 12, 2011 (19.8 per cent) vis-à-vis

fortnight ending 15th July, 2011 (18.7 per cent), it was

lower than last year's growth rate (20.6 per cent). As

per data on sectoral deployment of bank credit for

July 2011, credit to agriculture slowed to 11.76 per

cent as against 12.83 per cent in June 2011. Credit

growth to industry slowed down to 21.21 per cent in

July 2011, as compared to 22 per cent in the previous

month. Credit growth to the construction, consumer

durables and telecom industries saw a double digit

decline. Services sector, however, saw a slightly

higher credit growth in July 2011 (21.25 per cent) as

against 20.86 per cent in June 2011. The main growth

driver was the Non-Banking Financial Corporations

(NBFC) industry which showed 55.65 per centgrowth in July 2011 as against 44.52 per cent in June

2011. However, double digit dip in credit growth was

noticed in sectors like computer software and micro

credit.

Deposit growth showed a marginal increase over the

previous month. For the fortnight ending July 15th

2011, deposit growth was at 18 per cent. This

increased to 18.6 per cent for the fortnight ending

August 12th, 2011 and was also higher than the

deposit growth of 14.1 per cent for the same period

last year. For the fortnight under review, creditdeposit ratio declined to 73.7 per cent, from 74.1 per

cent in the previous month but is still higher than 72.6

per cent recorded for the same period last year.

Incremental credit deposit ratio continued to be lower

at 79.5 per cent compared to 98.3 per cent in the same

period last year.

Source: RBI, CRISIL Estimate Source: RBI

Table 5.1: Scheduled Commercial Banking Indicators (y-o-y%)

2010 2010-11 2011-12

Financial Year so far th

Outstanding as on 12 Aug

Figure 5.1: Money Supply Growth (%)

FY12

0.0

10.0

20.0

FY10 FY11 May Jan Aug

y-o-y19.3

16.0

FY11

V. Money and Banking

2011

CContrary to expectations,

credit growth actually

increased

Aggregate Deposits 14.1 18.6 3.1

Bank Credit 20.1 20.3 3.7

Food Credit -4.0 54.4 -3.2

Non-Food credit 20.6 19.8 3.8

Investments 8.1 16.1 4.9

Credit-Deposit Ratio 72.6 73.7 98.3*

4.1

2.8

12.7

2.6

12.4

79.5*

17.3

15.2

*Note: Incremental credit deposit ratio as on date

18

CRISIL EcoView



Source: CCIL & RBI

0.0

3.0

6.0

9.0

Figure 5.2: Liquidity Situation In India

Net LAF transactions Rs bn (LHS) Call rates Repo rate Reverse repo rate

M3 growth increased to 17.3 per cent as of fortnight

ending August 12, 2011, compared to 16.7 per cent

during the same period in July 2011. Bank credit to

commercial sector grew by 19.6 per cent in this

period, which was 19 per cent in the same period last

month. Growth rate of the net bank credit to the

government also showed an increase to 22.5 per cent

this month as against 21.8 per cent in the previous

month. Scheduled commercial banks (SCBs)

investments in securities stood at 15.9 per cent for the

fortnight ending August 12, 2011. However, total

investments in government securities fell marginally

to 30.7 per cent for the same period.

Government borrowed significantly lesser during

August 2011 as compared to last month. In August

2011, the amount borrowed via treasury bills was Rs.

40,000 crore, cash management bills was Rs. 14,000

crore and as state development loans was Rs. 14,100

crore compared to Rs. 63,000 crore, Rs. 20,000 crore

and Rs. 10,500

c r o r e i n t h e

previous month.

Tightening of

the monetarypolicy increased

the average call rates to around 7.8 per cent in August

2011. However, daily net transactions under the

liquidity adjustment facility (LAF) window on an

average basis stood at Rs. 391.5 billion in August 2011

which was Rs. 420.6 billion in the previous month.

FY11

-1500.0

-300.0

300.0

900.0

1500.0

2100.0

-900.0

-2100.0 Apr-10 Oct-10 Dec-10 Feb-11 Apr-11 Jan-11 Aug-11

Outlook

Out of the total of Rs. 1, 30, 000 crore that the

government aimed to raise from the market in the

quarter ending September 2011, 79 per cent has already

been borrowed in July and August 2011. This means

government borrowing is unlikely to put any pressure

on liquidity. However, sustained pressure on interest

rates is likely to impact credit growth adversely.

GGovernment borrowings

decline to Rs 68,100 crores

in August 2011

FY12

September 2011

19



-2.0

0.0

3.0

35.0

45.0

55.0

VI. Markets

Source: RBI

Table 6.1: Currency Movement (Averages)

Note: * As of 18th August, 2011

USD GBP Euro Yen

FY 10 47.4 75.9 67.1 51.1

FY 11 45.6 70.9 60.2 53.3

1H FY11 46.1 70.1 59.0 51.9

2H FY11 45.1 71.7 61.4 54.7

1Q FY12 44.7 73.0 64.4 54.9

July-11 44.4 71.7 63.5 55.9

1-month 2.1

6-months 3.1

Indian Rupee vis-à-vis

August-11 45.3 74.1 64.9 58.7

Forward premia*

Source: SEBI, RBI

Figure 6.1: Net FII Inflows and Exchange Rate

Currency

The Indian rupee slid sharply during August 2011. Itfell to 46.02 to a dollar from 44.2 to a dollar in theprevious month. Fresh concerns about worsening ofUS and Eurozone growth prospects, in addition touncertainty relating to sovereign crisis, led tooutflows from Indian markets. Steep losses indomestic equity markets during the month alsoweighed on foreigninvestor sentiments.

Higher dollar demandf r o m i m p o r t e r s i nresponse to elevatedcommodity prices andsettlement of dues with Iran over crude oil paymentspushed the US dollar higher and exerted downwardpressure on the rupee. Although crude oil prices fellduring most of August 2011 in response to weakerglobal cues, they increased sharply by the end of themonth. On an average basis, Brent crude fell toUS$109.9 per barrel during the month compared toUS$117.0 per barrel in the previous month. ByAugust-end, however, Brent crude touched US$115.6per barrel.

Buoyed by these developments, the rupee's volatilityincreased sharply and it traded in the range of 44.0 to46.1 to a dollar in August 2011. The rupee depreciated

by 1.9 per cent against the dollar on an average basisand by 4.2 per cent on a month end basis. Althoughthe rupee weakened against all major currencies

Jul-08 Dec-09May-09 Oct-10 Aug-11

FY09 FY10 FY11

Net Fll inflow US$ bn (LHS) R s per USD

FY12

RRupee nosedives

on weak global cues

20

CRISIL EcoView

August 2011 was bearish for the rupee and we expect this

sentiment to hold on for some more time until as some

clarity over the sovereign crisis in Eurozone emerges.

However, stronger growth prospects in India vis-à-vis

the developed economies are likely to bring back inflows

towards the end of this fiscal. We expect rupee to settle in

the range of 43.0 to 44.0 to a dollar by March-end 2012.

Outlook

during the month, it fell more sharply against the yenand pound. It fell by 4.9 per cent against the yen, 3.4per cent against the pound, and 2.3 per cent againstthe euro. The yen, which had been steadilystrengthening against the dollar, finally gave wayafter the Bank of Japan intervened in the foreignexchange market by selling it. The rise of the yen,primarily fuelled by dollar weakness, was hurting

Japanese exporters and weakening an economy stillrecovering from the natural disaster.

Bearish investor sentiments resulted in net foreigninvestments outflow of US$1.8 billion in August, 2011compared to an inflow of US$2.4 billion in theprevious month. During the current fiscal till date(April to August 2011) net portfolio inflows stood atUS$2.4 billion compared to US$12.2 billion in thesame period of 2010.



Debt

The month gone by witnessed the benchmark 10-

year yields softening as compared to the previousmonth because government borrowed significantly

lesser during August 2011 as compared to last month.

Although market was expecting a 25 basis point

policy rate hike in the RBI's first quarter review in

July 2011 but when RBIincreased the policy rate

by 50 basis point it

reacted sharply sending

bond yields highertowards the end of July 2011. However, the yields on

10 year G-sec began softening in the 1st week of

August 2011 and the yield on the 10 year G-sechovered in the range of 8.43 to 8.28 during the first

fortnight of August 2011. The yield on the

benchmark 7.80 maturing 2021 paper ended August

2011 at 8.3 per cent, almost 20 bps lower than July2011 levels.

Yields across the short-term 1-year government bond

rose during the month and stood at 8.2 per cent. The

yield curve, which is the spread between 10-year and

1-year bond became flat in August 2011 as comparedto the previous month indicating rising uncertainty

in the near term in the economy. FIIs outflow was to

the tune of US$ 1.8 billion in the reporting month ascompared to an inflow of US$ 2.4 billion in July 2011.

Outlook

With heightened inflationary pressure and the possibility of further monetary tightening by the RBI, weexpect some upward movement on the yields of both -short and long term papers in the near term. However,we expect these yields to remain relatively stable during

the remaining months of this fiscal due to relativelyorderly completion of the government's borrowing

program so far. Therefore, we expect 10-year G-sec yieldsto settle in the range of 8.1-8.3 per cent by end March2011-12.

Source : CCIL

Figure 6.2: 10-year G-sec yields, year-end and month-end (%)

Source: FIMMDA

Figure 6.3: Risk Premia, year end & month end (%)

Spread between AAA corporate & 10-yr G-sec

0.0

1.0

2.0

FY10 FY11

1.21.1

0.9

1.1

Aug Aug5.0

7.0

9.0

FY10 FY11

8.3

Aug Aug

7.8

FY11 FY12

Jan Jan

FY12 FY11

8.0

7.9

September 2011

21

In the near term much of the bond market dynamics is

expected to be guided by two factors- rate of inflation

and the quantum of government borrowing. Out of

the total of Rs. 1, 30, 000 crore that the government hasaimed to raise from the market in the quarter ending

September 2011, Rs. 1, 03, 000 crore has already been

borrowed in July and August 2011. This means

government borrowing is unlikely to put muchpressure on bond market. However, sustained

inflationary pressure and another rate hike by RBI

may put upward pressure on yields going forward.

Yield on the AAA corporate bond ended August 2011

at 9.4 per cent as against 9.5 per cent last month. Thespread between the 10-year corporate and

government bond rose by 10 bps in August 2011 ascompared to the last month.

YYield on 10-year

G-sec softens



Note : Returns are for the period of August 2011Source: NSE, BSE

Figure 6.4: Indian Equity Market Performance

Note : Returns are for the period of August 2011Source: Yahoo Finances

Figure 6.5: Global Equity Market Performance

Yearly returns Monthly returns

S&P CNX 500

CNX Mid Cap

S&P CNX Nifty

Sensex

Yearly returns Monthly returns

MSCI EME

S&P 500

MSCI WORLD

NIKKEI-225

8.6

-2.4

-7.9

-6.1

-20.1

-7.9

Equity

Indian equity markets followed a downward trend

during August 2011. The sensex was down to

16,676.8 on August 30, 2011 from 18,314.3 on August

1, 2011, indicating a fall of 8.9 per cent. As compared

to August 2010, on an average, the sensex was down

by 7.1 per cent.

Global economic growth concerns began

dampening the domestic sentiment during the first

week of August 2011. As a consequence sensex

began to slide and came down from 18,314 on

August 1, 2011 to 17,306 on August 5, 2011.Thereafter, sensex slipped further as S&P

downgraded the US government's AAA sovereign

credit rating. On August 8, sensex slipped further to

16,759, but recovered somewhat to 17,131 on

August 10, 2011 but closed the week at 16.840.

Even during the second fortnight of August 2011 the

roller coaster ride of sensex continued sometimes

due to the fears of RBI hiking key interest rates to

curb inflation, sometimes due to investors picking

up recently beaten fundamentally strong stocks and

sometimes due to the cues coming from the global

markets. With the news of GDP growth coming in at

7.7 per cent for the first quarter of 2011-12 as

compared to 8.8 per cent in the corresponding

period last fiscal, sensex ended the month at 16677.

In August 2011, there was a net outflow of FIIs to the

8.7

22

CRISIL EcoView

-4.7

-7.8

-9.0

-9.3

-9.3

-10.1

-7.1

-7.0

-20.4

tune of USD$1.8 billion. Outflows from the equity

market were US$2.4 billion. The P/E ratio, on anaverage fell to 18.4 in August 2011, down from 19.6 in

the last month and 21.6 in August 2010. Indian

companies have had a lower valuation amidst

expectations of interest rate hikes and high inflation.

Concerns about a slowdown in the Indian economy

also triggered a selloff in the local stock market.

For August 2011, the major global equity indices fell

on a monthly basis. Apart from S&P 500, they

showed a similar trend. S&P 500 fell 6.1 per cent on a

monthly basis; however, it rose by 8.6 per cent on an

annual basis during the month. S&P 500 averaged1,185.23, Nikkie-225 averaged 9,072.9, and MSCI

EME averaged 1,104.1 in August 2011.



VII. Global Economic Outlook

Source: Statistical Bureau, Respective Countries Note: * y-o-y %

Table 7.1: GDP Growth (q-o-q, annualised %)

Source: Statistical Bureau, Respective Countries

Table 7.2: Trade Balance (Billion, National Currency)

Jan-11 Feb-11 Mar-11 Apr-11 May-11

United States -46.9 -45.4 -46.8 -43.6 -50.2

United Kingdom -3.9 -2.4 -2.8 -3.2 -4.1

Euro Area -15.6 -3.0 1.6 -4.1 0.2

Japan -479.4 650.3 186.3 -464.8 -853.7

China (US$ billion) 6.5 -7.3 0.1 11.4 13.0

Jun-11

-53.0

-4.5

0.9

67.3

22.3

According to the second estimate, United Kingdom's

GDP grew at 0.8 per cent during

the second quarter of 2011, which is same as the

preliminary estimate released last month. UK's GDP

was driven by growth in construction and services

industries. Business services and real estate was the

biggest contributor to UK's GDP growth, followed by

transport, storage and communications. However,

output in production industries contracted at an

annualised rate of 6.4 per cent during the second

quarter of 2011, higher than 0.4 per cent contraction

seen in the last quarter. The construction and services

sector, both grew at an annualised rate of 2.0 per cent

during the second quarter. However, in the firstquarter, output in construction had fallen by 13.6 per

cent and services sector has grown by 3.6 per cent. UK

had registered a growth of 2.0 per cent in the first

quarter.

In Japan, production and exports have continued to

increase with the easing of supply-side constraints.

Business fixed investment also picked up, aided

partly by the restoration of disaster stricken facilities.

Despite these positive developments, Japanese GDP

growth has still not moved into positive territory; it

has contracted by 1.3 per cent in

the second quarter of 2011, as compared to a

contraction of 3.6 per cent in the first quarter. China

posted a GDP growth of 9.6 per cent in the second

quarter of 2011, only marginally lower than 9.7

recorded in the first quarter.

(q-o-q, annualised)

(q-o-q, annualised)

The recovery in the global economy observed since

the end of 2010 has slowed down lately due to a set of

transitory factors: in particular, Japanese earthquake,

debt crisis in EU area, slow recovery in US economy

and adverse impact on real incomes due to high

commodity prices. However, growth signals

emanating from several emerging economies

continue to be encouraging despite inflationary

pressures witnessed in these economies especially

owing to elevated food and commodity prices.

According to the second estimate released by the

Bureau of Economic Analysis, the US economy grew

at 1.0 per cent (q-o-q, annualised) during the secondquarter of 2011, a 0.3 per cent downward revision

from the advance estimate. Real GDP increased in the

second quarter of 2011,

mainly due to better

contributions from

e x p o r t s , n o n -

r e s i d e n t i a l f i x e d

investment, private

inventory investment, and federal government

spending. However, their gains were partly offset by

a negative contribution from state and local

government spending. Non residential fixed

investment increased at 9.9 per cent during the

second quarter of 2011, as compared to 2.1 per cent in

the previous quarter. Residential fixed investments

made an upturn, growing at 3.4 per cent in the second

quarter of 2011, in contrast to a contraction of 2.4 per

cent in the first quarter of 2011.

September 2011

23

2009 2010 Q2-10 Q3-10 Q4-10 Q1-11

United States -2.6 2.9 1.7 2.6 3.1 1.9

United Kingdom -4.9 1.3 4.4 2.8 -2.0 2.0

Euro Area -4.1 1.7 4.0 1.2 1.2 2.5

Japan -6.3 4.0 3.3 4.8 2.4 -3.6

China* 9.1 10.3 10.3 9.6 9.8 9.7

Q2-11

1.0

0.8

1.7

-1.3

9.6

DDownward revision

for US growth



According to the flash estimate by Eurostat, GDP in

the Euro area grew at 1.7 per cent in the second

quarter of 2011 as compared to 2.5 per cent in the firstquarter. Major economies - Germany and France

grew at 2.8 and 1.6 per cent respectively in the second

quarter of 2011.

For June 2011, US exports totaled $170.9 billion and

imports $223.9 billion. As a result, the US trade deficit

for June 2011 stood at $53 billion, up from $50 billion

(revised) last month. Exports and imports for June

2011 were $4.1 billion and $1.9 billion less, than May

2011, respectively. The decrease in exports of goods

was mainly on account of decreases in industrialsupplies and materials, capital goods, foods, feeds,

and beverages. An increase, however, occurred in

consumer goods. Automotive vehicles, parts, and

engines remained virtually unchanged. Looking at

imports, decrease occurred in industrial supplies and

automotive vehicles, parts, and engines; capital

goods and consumer goods; however, foods, feeds,

and beverages showed an increase. Imports and

exports of services remained mostly unchanged from

May to June with most of the changes being small and

offsetting. On an annual basis, exports were up 12.91

per cent and imports were up 12.97 per cent for June

2011.

UK's trade deficit in goods and services rose to £4.5

billion in June 2011 from £4.0 billion in May 2011. The

deficit in goods was up to £8.9 billion and the surplus

in services was £4.4 billion in June 2011, unchanged

from May 2011.

Japan's exports have been increasing with the easing

of supply-side constraints. Exports plunged in both

March and April this year on a month-on-month basis

due to supply-side constraints stemming from the

earthquake disaster, but they turned around in May

2011 on a month-on-month basis, with an increase of

4.5 per cent. Exports were also up sharply by 8.6 per

cent in June 2011, recovering close to pre-earthquake

level. Exports of motor vehicles and related goods and

also consumer goods increased rapidly in June 2011.

IT-related items and

capital goods and partsalso witnessed an upturn.

On the other hand, exports

of intermediate goods fell

for two months in a row,

notably among those to

emerging economies. Imports increased marginally.

On a month to month basis, imports were up by 0.3

per cent in the reporting month. The highest increase

was seen in imports of consumer goods, imports of

which grew at 11.1 per cent. Japan's trade balance

stood at ¥67.3 billion in June 2011. For China, trade

balance stood at $22.3 billion during the same period.

Chinese exports grew at 3.05 per cent in June 2011 in

relation to last month while imports fell at nearly the

same rate.

In June 2011, the trade surplus of the Euro area with

the rest of the world stood at €0.9 billion, up from €0.7


Table 7.3 Consumer Price Inflation (y-o-y %)


Table 7.4: Policy Interest Rate (End of Month %)

24

CRISIL EcoView

Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11

United States 1.6 2.1 2.7 3.2 3.6 3.6

United Kingdom 4.0 4.4 4.0 4.5 4.5 4.2

Euro Area 2.3 2.4 2.7 2.8 2.7 2.7

Japan 0.0 0.0 0.0 0.3 0.3 0.2

China 4.9 4.9 5.4 5.3 5.5 6.4

Jul-11

3.6

4.4

2.5

0.2

6.5

Mar-11 Apr-11 May-11 Jun-11 Jul-11

United States 0.0-0.250.0-0.25 0.0-0.25 0.0-0.250.0-0.25

United Kingdom 0.5 0.5 0.5 0.5 0.5

Euro Area 1.00 1.25 1.25 1.25 1.50

Japan 0-0.1 0-0.1 0-0.1 0-0.1 0.1

China 6.1 6.3 6.3 6.3 6.6

Aug-11

0.0-0.25

0.5

1.50

0.1

6.6

JJapanese exports

recover to

pre-quake levels



billion in June 2010 and €0.2 billion last month. In

relation to May 2011, exports fell by 4.7 per cent andimports by 4.1 per cent.

On an annual basis,

exports grew at 3 per

cent as compared to 21

per cent in May 2011;

imports grew at 3 per

cent as compared to

17per cent last month. Germany posted the highest

surplus of €65.9 billion during January-May 2011

period, whereas UK posted the highest deficit of

€46.7 billion during the same period.

Inflation in the US stood at 3.6 per cent for a third

month in a row. The food index rose by 0.4 per cent in

July 2011, up from 0.2 per cent in June 2011. After

declining in May and June, the energy index

increased by 2.8 per cent in July 2011. The index for all

items less food and energy rose by 0.2 per cent in July

2011 after increasing 0.3 per cent in both May and

June 2011. The change in the index for all items less

food and energy continued its upward trend, rising

by 1.8 per cent in July 2011, with the shelter and

apparel indexes being major contributors. Theenergy index stood at 19.0 per cent for July 2011.

In July 2011, inflation in UK stood at 4.4 per cent, up

from 4.2 per cent in the last month, though

marginally less than 4.5 per cent recorded in May

2011. The upward pressures to inflation mainly came

from financial services, clothing & footwear,

furniture, household equipment & maintenance and

housing rent and downward pressure came fromfood & non-alcoholic beverages. The CPI remained

unchanged between June and July this year compared

with a fall of 0.2 per cent a year ago. At an aggregate

level, prices for food and non-alcoholic beverages

rose by 0.3 per cent between June and July this year, as

compared to a 1.0 per cent rise during the same period

last year. The biggest push came from financial

services, where overall fees rose this year but fell last

year especially for arranging mortgages.

According to the flash estimate issues by Eurostat,

Euro area inflation in July 2011 stood at 2.5 per centand is expected to be the same for August 2011. The

inflation in July 2011 was lower than 2.7 per cent

recorded in the previous two months. Inflation in

Japan stood at 02 per cent in July 2011, same as the

previous month. Inflation in China reached 6.5 per

cent in July 2011. This is the highest inflation rate in

2011 so far, up from 6.4 per cent recorded in the

previous month.

Policy rates

The policy rates forAugust 2011 remained

u n c h a n g e d . T h e

European Central Bank

(ECB) maintained its

policy rate at 1.5 per

cent. The Bank of England maintained its bank rate at

Figure 7.2: Commodity Price Movements

Source: Energy Information Administration

Figure 7.1: Europe Brent (US$ per barrel)

m-o-m y-o-y

Wheat

Soya Oil*

Steel

Aluminium

7.5

1.3

-4.7

23.6

42.8

20.2

13.0

Source: Metal Bulletin, FAO

109.9

77.0

60.0

95.0

130.0

Augl-10 Dec-10 Apr-11 Aug-11

-4.2

*Note: Data is available only upto March 2011

September 2011

25

UUK has the highest

trade deficit in

the Euro area

PPolicy rates remain

unchanged for the

reporting countries



0.5 per cent. China maintained the base lending rate

at 6.6 per cent. Japan and the US maintained theirpolicy rates close to zero.

In August 2011, the monthly average price of crude

(Europe brent) was $109.92, down from $116.91 in the

previous month. On a month-on-month basis, crude

prices fell by 6 per cent; steel prices rose by 1.3 and

20.2 per cent on a monthly basis and annual basis

respectively. Aluminum prices in July 2011, however,

fell by 4.7 per cent on a monthly basis but rose by 13

per cent on an annual basis. Wheat prices in August2011 rose by 7.5 per cent on a monthly basis and by

23.6 per cent on an annual basis.

Commodity price movements

26

CRISIL EcoView



VIII. Annexure

Table 8.1: Annual Data Summary

1Real GDP growth at factor cost, 2004-05 base (y-o-y%)

1Index of Industrial Production (y-o-y%)

2External Variables (US$ bn)

Figures for FY12 are :1 2 3Apr-June, Apr-Jul, Apr-Mar (FY11)

Source: RBI, CSO, DGCIS

2

WPI Inflation, 2004-05 base (y-o-y%)

FY12FY08 FY09 FY10 FY11 FY12FY08 FY09 FY10 FY11 FY08FY08 FY12FY09 FY10 FY11

12.612.3

0.0

11.6

-2.1

7.3

5.7

4.9

6.2

2.2

Primary goods Fuel ManufacturingInflation

12.9

17.7

8.3

11.012.7

FY12FY08 FY09 FY10 FY11 FY12FY08 FY09 FY10 FY11

General Electricity Manufacturing Mining

6.8

8.2

7.5

1.1

15.5

2.5

5.3

8.2

6.4

2.8

5.66.1

18.4

2.5

9.0

4.8

4.6

2.6

5.2

7.9

ImportsExports3

Current account deficitMerchandise Trade Deficit

FY12FY08 FY09 FY10 FY11 FY08 FY09 FY10 FY11 FY12 FY08 FY09 FY10 FY11 FY12

108.3

245.9

176.6185.3

163.1

151.0

350.7

251.7

303.7278.7

44.3

9.8

15.7

28.738.4

42.7

104.8102.1118.4

88.5

FY07 FY08 FY09 FY10 FY11

September 2011

27

WPI CPI-IW

FY12FY08 FY09 FY10 FY11

9.1

9.610.4

4.8

8.0

3.8

6.2

12.4

9.58.8

FY12FY08 FY09 FY10 FY11 FY12FY08 FY09 FY10 FY11 FY12FY08 FY09 FY10 FY11

Total Agriculture Industry Services

3.9

2.3

4.5

1.91.7

5.1

11.0

7.0

5.0

9.1

10.010.7

10.28.2

10.4

7.7

FY12FY08 FY09 FY10 FY11 FY12FY08 FY09 FY10 FY11FY12FY08 FY09 FY10 FY11FY12FY08 FY09 FY10 FY11

9.7

7.9

6.2

8.8



Figures for FY12 are :4 5 6 7 8Avg of Apr-Aug, as on Aug 30, as on Aug 30, cumulative of April-Aug, for the fortnight ending Aug 12

Source: CCILINDIA, BSE, RBI and Ministry of Finance Note: RE-Revised estimates, BE-Budget estimates

8Money and Banking

4Interest Rates, year-end (%)

5Markets (year-end)

5Equity Market (year-end)

Government Finances

Table 8.2: Annual Data Summary

1-yr G-sec 10-yr G-sec5

Repo rate5

Reverse repo

28

CRISIL EcoView

8.2

6.2

7.67.4

4.2

7.00

5.75

3.50

6.00

3.50

8.37.97.9

7.67.1

8.006.75

5.00

7.75

5.00

FY11FY08 FY09 FY10 FY12 FY11FY08 FY09 FY10 FY12 FY11FY08 FY09 FY10 FY12 FY11FY08 FY09 FY10 FY12

2.4

32.230.3

16.0

-11.4

318.2303.5

277.0

309.2

252.3

INR/USD INR/EURO 7Net FII flows (US$ bn)

6Forex Reserves (US$ bn)

46.0 66.763.260.663.1

67.5

FY11FY08 FY09 FY10 FY12FY11FY08 FY09 FY10 FY12FY11FY08 FY09 FY10 FY12 FY11FY08 FY09 FY10 FY12

45.045.1

40.0

51.0

FY11FY08 FY09 FY10 FY12 FY11FY08 FY09 FY10 FY12 FY11FY08 FY09 FY10 FY12 FY11FY08 FY09 FY10 FY12

5001

58345249

4735

3021

1219

1169

798

1323

1169

18.421.221.3

20.1

13.7

Sensex P/ES&P 500S&P CNX NiftySensex

17528

19445

15644

9709

16677

M3 growth (%)Non-food credit growth (%)State Fiscal deficit (as % of GDP)Centre Fiscal Deficit (as % of GDP)

FY11FY08 FY09 FY10 FY12 FY11FY08 FY09 FY10 FY12

2.219.823.0

23.1

17.5

16.9

4.6

6.45.1

2.5

6.0

(RE) (BE)

FY12FY11FY10FY08 FY09

(RE) (BE)

FY12FY11FY10FY08 FY09

17.316.6

21.118.6

16.7

2.92.6

1.5

2.4



Table 8.3: Quarterly Growth rates

Real GDP - at 2004-05 prices (y-o-y%) GDP Deflator (%)

WPI Inflation - 2004-05 base (y-o-y%) CPI Inflation (y-o-y%) Commodity prices

Used-based classification of IIP (y-o-y%)Index of Industrial Production (y-o-y%)

Real GDP - at 2004-05 prices (y-o-y%)

September 2011

29

Source: CSO, Ministry of Industry and Energy Information Administration (EIA)

A g r i , f o r e s t r y &

f i s h i n g

M i n i n g & Q u a r r y i n g

M a n u f a c t u r i n g

E l e c t r i c i t y , g a s & w a t e r

C o n s t r u c t i o n

T r a d e h o t e l s , t r a n s p o r t a n d c o m m

1.8

8.2

5.2

7.4

6.9

8.9

Q1FY12

Q4FY11

Q3FY11

Q2FY11

Q1FY11

Q4FY10

Q3FY10

7.9

7.8

6.4

2.8

7.3

4.5

5.5

7.2

5.5

15.2

6.0

10.0

11.4

10.6

8.2

9.7

6.7

9.2

8.3

7.7

12.8

9.3

8.6

10.9

12.1

10.8

13.7

F i n a n c i n g ,

I n s u r a n c e & r e a l e s t a t e

C o m m u n i t y ,

s o c i a l

& p r s n l s e r v

9.0

10.8

10.0

9.8

6.3

8.5

9.1

7.0

5.1

7.9

8.2

8.3

7.6

5.63.9

7.5

9.9

5.4

-1.6

1.1

2.4

1.7

1.2

O v e r a l l A

g r i c u l t u r e

I n d u s t r y

S e r v i c e s

O v e r a l l

A g r i & a l l i e d s e r v i c e s

I n d u s t r y

S e r v i c e s

12.3

16.8

18.0

20.5

23.4

22.7

20.1

8.3

8.8

9.8

9.4

11.4

12.7

8.8

5.1

6.1

7.1

8.4

9.1

12.4

9.5

3.9

9.9

5.4

2.4

1.1

-1.6

7.57.8

8.3

8.9

8.8

9.4

7.3

7.7

Q4FY11

Q3FY11

Q2FY11

Q1FY11

Q4FY10

Q3FY10

Q1FY12 8.0

6.9

7.5

7.9

9.4

8.2

12.9

10.0

8.4

9.9

10.4

10.2

9.4

8.7

7.5

7.5

2.9

7.4

9.1

7.2

7.1

O v e r a l l

P r i m a r y

F u e l , p o w e r &

l u b r i c a n t s

M f i n g

S t e e l p r i c e s ( $ / t o n n e s )

C r u d e - E u r o p e B r e n t ( $ / b a r r e l )

A g r i c u l t u r a l L a b o u r s

I n d u s t r i a l w o r k e r s

Q1FY12

Q4FY11

Q3FY11

Q2FY11

Q4FY10

Q3FY10

Q1FY11

9.6

9.6

10.5

4.5

9.5

8.9

9.3

13.4

15.9

17.0

17.7

20.7

14.2

21.4

12.7

12.1

12.3

10.9

-1.3

14.0

10.2

7.2

6.3

5.3

5.2

6.0

2.7

5.3

8.9

9.0

10.3

9.2

13.7

13.3

15.3

9.4

8.8

7.9

9.9

13.9

16.6

15.5

117.0

105.0

87.0

78.0

76.0

75.0

77.0

516

693

743

619

663

581

594

Q4FY11

Q3FY11

Q2FY11

Q1FY11

Q4FY10

Q3FY10

Q1FY12

G e n e r a l

7.9

8.6

6.8

9.6

14.0

6.1

6.8

M a n u f a c t u r i n g

M i n i n g

8 .9

9.2

7.4

10.4

15.4

6.1

7.5

1.0

6.3

6.3

8.0

10.4

7.5

1.1

B a s i c g o o d s

7.8

3.9

5.5

7.2

5.0

6.6

E l e c t r i c i t y

8.2

6.5

2.2

5.4

3.8

7.1

8.2 C a p i t a l g o o d s

I n t e r m e d i a t e g o o d s

C o n s u m e r g o o d s

5.8

22.1

15.8

17.2

34.1

-2.4

16.8 4.2

11.6

4.4

6.6

11.5

15.9

10.5

2.2

5.5

7.4

6.3

10.7

11.8

8.8

7.2



Table 8.4: Full description of abbreviations used in the text

30

CRISIL EcoView

Sectors Abbreviation

Food products and beverages Food & Bev

Tobacco products Tobacco

Textiles Textiles

Wearing apparel; dressing and dyeing of fur Apparel

Luggage, handbags, saddlery, harness & footwear; tanning and dressing of leather products Leather products

Wood and products of wood & cork except furniture; articles of straw & plating materials Wood

Paper and paper products Paper

Publishing, printing & reproduction of recorded media Media

Coke, refined petroleum products & nuclear fuel Petroleum products

Chemicals and chemical products Chemical

Rubber and plastics products Rubber

Other non-metallic mineral products NMMPBasic metals Basic metals

Fabricated metal products, except machinery & equipment Metal Products

Machinery and equipment n.e.c. Mach. & Eqp

Office, accounting & computing machinery Office Eqp

Electrical machinery & apparatus n.e.c. Electronics

Radio, TV and communication equipment & apparatus Communication

Medical, precision & optical instruments, watches and clocks Medical

Motor vehicles, trailers & semi-trailers Motor Vehicles

Other transport equipment Other transport

Furniture; manufacturing n.e.c. Furniture



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