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Global Economic Prospects and the Indian Economy

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Title: Global Economic Prospects and the Indian Economy


1
Global Economic Prospects and the Indian Economy
Usha Thorat September 2010
2
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

3
Global Economy - Prospects
Per cent
Forecast for 2010 and 2011
4
IMF's World Output Growth Forecast
(Per cent)
  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 Source IMF, WEO (Update) July-2010 Source IMF, WEO (Update) July-2010
5
Indian Economy - Growth Trajectory
Per cent
  • 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

6
High Domestic Saving Investment Rates- with
Modest Current Account Deficit
6
7
Inflation has increased significantly after being
moderate during first half of 2009-10
7
8
Monetary and Inflation conditions Inflation - WPI
and CPI
9
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 8.5
2009-10 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.
10
Current Trends - Real GDP Growth (Per Cent)
Item 1950-80 2005-06 2006-07 2007-08 2008-09 2009-10_at_ 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 6.6
3. 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 _at_ Revised estimates Source Central Statistical Office Figure in parenthesis are percentage share to GDP _at_ Revised estimates Source Central Statistical Office Figure in parenthesis are percentage share to GDP _at_ Revised estimates Source Central Statistical Office Figure in parenthesis are percentage share to GDP _at_ Revised estimates Source Central Statistical Office Figure in parenthesis are percentage share to GDP _at_ Revised estimates Source Central Statistical Office Figure in parenthesis are percentage share to GDP _at_ Revised estimates Source Central Statistical Office Figure in parenthesis are percentage share to GDP _at_ Revised estimates Source Central Statistical Office Figure in parenthesis are percentage share to GDP _at_ Revised estimates Source Central Statistical Office
11
Demand Side Drivers of Growth
(Percentage to GDP)
  2008-09 2008-09 2009-10 2009-10 2009-10 Q1 2009-10 Q1 2010-11 Q1 2010-11 Q1
  Share Contribution Share Contribution Share Contribution Share Contribution
Private Consumption 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

11
12
Growth in Index of Industrial Production (Y-o-Y)
Per cent
During April-July 2010, the IIP growth increased
to 11.4 per cent as compared with 4.7 per cent
last year.
13
Growing Openness
Indias Trade Openness ( of GDP) Indias Trade Openness ( of GDP) Indias Trade Openness ( of GDP) Indias Trade Openness ( of GDP) 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
14
Increased Tradability of Services
15
Current Account Balance Capital Inflows
16
Capital Flows US billion
Item 2008-09 2009-10
Item 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 7.7
Total 7.2 53.4
FII flows amounted to US3.5 billion during
April-June 2010-11 as against US 8.3 billion
during April-June 2009-10
17
FDI Flows to India
(US million) (US million) (US million) (US million) (US million) (US million) (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 Inter company debt transactions of FDI entities Inter company debt transactions of FDI entities Inter company debt transactions of FDI entities Inter company debt transactions of FDI entities Inter company debt transactions of FDI entities Inter company debt transactions of FDI entities
Source RBI
18
FDI inflows as percentage of Gross Fixed
Capital Formation, 2007-2009 (Per cent)
  2007 2008 2009
Argentina 10.2 12.7 7.6
Brazil 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 4.0
Hong 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
19
Net FIIs Inflow and Exchange Rate Movement
20
Movement in NEER and REER (1993-94100)(6-curren
cy trade based weights)
Index
21
Indias Foreign Exchange Reserves (US billion)
Note Reserves change on BoP basis are not
available after Jan-Mar 2010 quarter.
22
FDI Confidence Index2010
23
Sovereign Credit Ratings of Top Ten Debtors
amongst Developing Countries
Year Standard Poors Standard Poors Moody's Moody's Fitch'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- Stable
Brazil 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 Source India's External Debt - A Status Report, 2009 Source India's External Debt - A Status Report, 2009 Source India's External Debt - A Status Report, 2009 Source India's External Debt - A Status Report, 2009    
Note For India data are updated upto June 2010 Note For India data are updated upto June 2010 Note For India data are updated upto June 2010 Note For India data are updated upto June 2010 Note For India data are updated upto June 2010    
24
Indian Stock Markets
Equity Market revived indicating restoration of
investor confidence.
25
Global Stock Markets
Country/Index Percentage Variation (year-on-year) Percentage Variation (year-on-year) Percentage Variation Percentage Variation
  End-March 2009 End-March 2010 Sept. 7, 2009 over March 31, 2009 Sept. 7, 2010 over March 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 -2.3
Japan (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 1.9
India -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. As on Sept. 8, 2009. As on Sept. 6, 2010. Source Bloomberg. As on Sept. 8, 2009. As on Sept. 6, 2010. Source Bloomberg.
26
Banking Sector Scenario
  • Indian banks continue to remain well capitalized
    as per Basel II requirements
  • NPAs at manageable level despite the downturn
  • Significant liquidity buffers - CRR and SLR
    prescriptions
  • Focus on CD ratio and SLR requirement help in
    limiting leverage

27
Select Financial Indicators - All Banks Select Financial Indicators - All Banks Select Financial Indicators - All Banks Select Financial Indicators - All Banks Select Financial Indicators - All Banks Select Financial Indicators - All Banks
        (per cent) (per cent)
Mar-08 Mar-08 Mar-09 Mar-10 Jun-10
CRAR 13.01 13.01 13.98 14.54 14.35
Core CRAR 9.06 9.06 9.57 10.13 9.99

Gross NPAs to Gross Advances 2.39 2.39 2.44 2.50 2.55
Net NPAs to Net Advances 1.08 1.08 1.13 1.13 1.10
Provision Coverage Ratio (PCR) 52.5  52.5  50.6   53.8 55.8 

Interest spread 2.69 2.69 2.72 2.69 3.03
Return on Total Assets 1.13 1.13 1.14 1.06 1.13
Return on Equity 15.18 15.18 14.49 13.33 13.44
Data on Capital Adequacy cover overseas operations other data based on domestic operations only Data on Capital Adequacy cover overseas operations other data based on domestic operations only Data on Capital Adequacy cover overseas operations other data based on domestic operations only Data on Capital Adequacy cover overseas operations other data based on domestic operations only Data on Capital Adequacy cover overseas operations other data based on domestic operations only Data on Capital Adequacy cover overseas operations other data based on domestic operations only
Figures on CRAR, Core CRAR are as per Basel II, except for Mar-08, which is as per Basel-I Figures on CRAR, Core CRAR are as per Basel II, except for Mar-08, which is as per Basel-I Figures on CRAR, Core CRAR are as per Basel II, except for Mar-08, which is as per Basel-I Figures on CRAR, Core CRAR are as per Basel II, except for Mar-08, which is as per Basel-I Figures on CRAR, Core CRAR are as per Basel II, except for Mar-08, which is as per Basel-I Figures on CRAR, Core CRAR are as per Basel II, except for Mar-08, which is as per Basel-I
annualized annualized  
PCR () Provisions For Credit Losses 100/Gross NPAs PCR () Provisions For Credit Losses 100/Gross NPAs PCR () Provisions For Credit Losses 100/Gross NPAs PCR () Provisions For Credit Losses 100/Gross NPAs  
Interest spread Net Interest Income 100/ Avg. Total Assets Interest spread Net Interest Income 100/ Avg. Total Assets Interest spread Net Interest Income 100/ Avg. Total Assets Interest spread Net Interest Income 100/ Avg. Total Assets Interest spread Net Interest Income 100/ Avg. Total Assets Interest spread Net Interest Income 100/ Avg. Total Assets
Return on Total Assets Profit after Tax 100 / Avg. Total Assets Return on Total Assets Profit after Tax 100 / Avg. Total Assets Return on Total Assets Profit after Tax 100 / Avg. Total Assets Return on Total Assets Profit after Tax 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 Return on Equity Profit after Tax 100 / Avg. Total Assets Return on Equity Profit after Tax 100 / Avg. Total Assets Return on Equity Profit after Tax 100 / Avg. Total Assets    
28
Structural Reforms
  • Discussion paper on licensing New Private Sector
    Banks issued in August 2010
  • Discussion paper on presence of foreign banks to
    be issued shortly
  • Working Group looking into Holding Company
    structure

29
Financial Stability and Development Council
  • GOI setting up Financial Stability and
    Development Council (FSDC) for
  • Achieving inter-regulatory coordination and
    overseeing systemic risks and
  • laying down a macro-prudential overlay to
    financial sector regulation

30
Focus on Financial Inclusion
  • Adoption of BC model entities eligible to act
    as BCs enlarged to include even individuals
  • Inclusion of for profit companies as BCs under
    consideration
  • Adoption of mobile- based and smart card based
    technologies

31
Basel III
  • BCBS release Basel III norms on September 12,
    2010 implementation in a phased manner
  • Capital adequacy of Indian banks will not be
    impacted significantly they already have high
    CRAR and Core CRAR
  • Leverage ratio will be around 6, much comfortable
    than the Basel requirement of 3
  • Indian banks lagely follow retail model and
    therefore liquidity is not an issue for them

32
India's SWOT analysis
  • STRENGTHS
  • High savings/investment , forex reserves, quality
    talent and IT, broad based and growing
    entrepreneurial class, market size, macro
    economic and financial stability, language,
    democracy and political system stability
  • WEAKNESSES
  • Physical infrastructure, human development
    indicators, agriculture, shortage of skilled
    manpower
  • OPPORTUNITIES
  • Demographic dividend, knowledge based growth ,
    increased integration with world economy,
    urbanisation
  • THREATS
  • Global Uncertainty, fiscal deficit, climate
    change energy and food security, regional and
    social inequalities

33
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 have stopped accelerating
    though the rate may remain high for some months.
  • Monetary Measures announced
  • Repo rate under LAF increased by 25 basis points
    from 5.75 6 . Reverse repo rate increased by
    50 basis points from 4.5 to 5.0
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