Current State of Indian Economy June 2011

Transcription

1 Current State of Indian Economy June 2011 Page 1

2 Apr' May' Jun' Jul' Aug' Sep' Oct, Nov' Dec' Jan'11 Feb'11 Mar'11 Apr'11 Q Q Q Q Current State of Indian Economy June EXECUTIVE SUMMARY GDP growth GDP growth figures for Q4, 20-11, highlight an unmistakable downward trend. While in Q1, 20-11, GDP grew by 9.3 percent, in Q4, 20-11, GDP growth came down to 7.8 percent. Sectors like manufacturing and mining & quarrying have seen considerable erosion of growth momentum over the last one year. While consumption demand is still holding, a sharp decline in growth of investments is seen. Growth in Gross Fixed Capital Formation [GFCF] has dipped from 17.4 percent in Q1, to 0.4 percent in Q4, Given the evolving situation, growth in is likely to be close to the 8 percent mark Quarterly Growth in GDP ( prices) Mining and quarrying Manufacturing GDP at factor cost Industrial Production Weakness in industrial production trend continues. In April 2011, IIP registered a growth of 6.3 percent. In April 20, growth in IIP was to the tune of 13.1 percent. Amongst the use based industrial groups, a similar streak of weakness is seen with growth in the capital goods segment, intermediate goods segment and consumer goods segment slowing down from 35.5 percent, 11.9 percent and 13.8 percent respectively in April 20 to 14.5 percent, 3.4 percent and 2.9 percent in April IIP growth and Repo rate IIP Repo rate 1 This report has been prepared by the Economic Affairs and Research Division, FICCI Page 2

3 Core Sector Data for April 2011 shows a perceptible decline in performance of the core sector with growth dipping from 8.5 percent in April 20 to 4.6 percent in April Sectors like natural gas, fertilizers, cement and steel are largely responsible for this poor performance. Growth in the coal sector however moved from (-) 2.9 percent in April 20 to 2.8 percent in April Inflation The inflation situation in the economy continues to be a cause for concern. Despite large scale tightening of the monetary policy by the RBI and other steps taken by the government, inflation continues to remain close to the double digit mark. In May 2011, WPI based headline inflation stood at 9.1 percent. This is higher than 8.7 percent inflation recorded in April Core inflation too has moved up from 8 percent in April 2011 to 8.6 percent in May Near term outlook for inflation is not too encouraging and there are chances that we may see inflation jump to the double digit territory on a few occasions. High international oil prices, likely decontrol of diesel prices, high global food prices and hike in Minimum Support Prices for the upcoming agriculture season are some of the factors that constitute the upside risks to inflation. Foreign Trade The strong momentum in exports, seen particularly during the second half of 20-11, has continued in the year as well. In April 2011 exports totaled US$ 23.8 billion and represented a growth of 34.4 percent over the same month of the previous year when exports totaled US$ 17.7 billion. While this strong start in is encouraging, there are indications that this high growth will not be sustained in the months ahead. Rising interest rates, rising raw materials costs and oil prices, withdrawal of incentive schemes like DEPB and likely slowdown in Asian economies are some of the reason that have tempered the outlook for exports. In April 2011, our imports totaled US$ 32.8 billion and registered a growth of 14.1 percent over the same month of the previous year when imports amounted to US$ 28.8 billion. With developments in the Middle East and North Africa region showing no signs of a let up and with OPEC resisting any upward revision in daily oil production quota, oil prices are likely to remain firm in the near term. This will continue to put pressure on India s overall oil import bill. As regards non-oil imports, while a slowdown in the domestic economy could lead to some moderation in the non-oil import bill, any large respite here can be ruled as prices of commodities other than oil are also firming up. Foreign Investments In 20-11, foreign investment flows into India saw a dip of about 17 percent over the previous year. Further, this dip is largely on account of a slowdown seen in case of FDI. In 2009-, FDI inflows into India totaled US$ 37.7 billion. In 20-11, this figure came down to US$ 27 billion. Data also shows that of out of the top 25 sectors, 15 sectors have seen a dip in FDI flows during April Feb compared to the same period in Sectors like services, construction, housing and real estate, telecommunication and agricultural services are the ones where investment flows have slowed down considerably. In 20-11, portfolio flows totaled US$ 31.5 billion and were only a tad below US$ 32.4 billion received in The outlook for portfolio flows in the current year is not too encouraging. Global fund managers are particularly concerned over the evolving macro-economic situation with inflation showing limited signs of abatement and growth slowing down at a fast clip. Page 3

4 The re-emergence and intensification of the sovereign debt crisis in Europe and the expected halt of quantitative easing policy in the US by the end of June 2011 are also downside factors for portfolio flows for emerging markets including India. Forex Reserves In April 2011, India s foreign exchange reserves totaled US$ 313 billion. The increasing size of our foreign exchange reserves has drawn attention of the policymakers. Just some time back, Dr. Kaushik Basu, Chief Economic Advisor, Ministry of Finance, had raised the question of India to consider having a Sovereign Wealth Fund. In more recent times, a few independent analysts have opined that a part of these huge reserves be deployed to import commodities which are or could be in short supply in the economy. Money and Banking The year on year growth in money supply in the period up to May 21, 2011 was 16.8 percent. Growth in the corresponding period [up to May 22, 20] in the previous year was 15.1 percent. The year on year growth in non-food credit in the period up to May 21, 2011 has been almost 22.1 percent. This is higher than the credit growth target of 19 percent set by the RBI for the current year. Growth in deposits in the period up to May 21, 2011 has been of the order of 17.4 percent and is in line with RBI target growth of 17 percent for the current year. These numbers indicate that the trend seen in the previous year of deposit growth lagging credit growth continues in the current financial year. The growth rate in deposits has picked up in recent months and to that extent eased some pressure on the banks as they worked hard to maintain their margins. Fiscal Situation The provisional estimates for for various fiscal variables show a definite improvement over the revised estimates (RE), with a more than anticipated rise in revenue collection and reduction in expenditure. The striking feature of the new estimates is the reduction in fiscal deficit [4.7 percent] number compared to the revised estimate [5.1 percent] given during presentation of the union budget. Though the fiscal deficit numbers for are encouraging, maintaining fiscal discipline in is looking increasingly difficult. Corporate Sector Performance Q4, In the fourth quarter of fiscal 20-11, corporate India turned out a good performance both in terms of sales and profits. Such a performance is particularly noteworthy as it came at a time when overall expenses are going up at a fast clip. Net sales of All Industries in the fourth quarter of registered a growth of 23.5 percent. This is the highest growth in net sales that we have seen in the last eight quarters. Further, while firms from the manufacturing sector saw an increase of percent in net sales in the last quarter of 20-11, companies from the services (other than financial) sector saw sales going up by percent. Within the manufacturing sector, growth in sales has been particularly strong in sectors such as textiles, cement, steel and transport equipment. Performance of the food and beverages sector and the chemicals sector lagged the average growth for the manufacturing sector as a whole. Total expenses for All Industries went up by percent in Q4, This growth is the highest seen in last four quarters. Further, while the manufacturing sector saw total expenses rise by percent in Q4, 20-11, services (other than financial) saw an increase of percent. Within the manufacturing sector, the increase in total expenses in the quarter under review was particularly high in sectors such as cement [48.12 percent] and steel [30.06 percent]. Page 4

5 Q1 09- Q2 09- Q3 09- Q4 09- Q1-11 Q2-11 Q3-11 Q4-11 Q1 09- Q2 09- Q3 09- Q4 09- Q1-11 Q2-11 Q3-11 Q4-11 Growth in Net Sales (%) Growth in Total Expenses (%) All industries Manufacturing Services (other than financial) All industries Manufacturing Services (other than financial) Page 5

6 Current State of Indian Economy June 2011 INDEX MACRO ECONOMY 7 GDP Growth 7 Industrial Production 9 Core Sector 13 Inflation 15 Foreign Trade 18 Foreign Investments 20 Forex Reserves 23 Exchange Rate 24 Money and Banking 25 Fiscal Situation 27 CORPORATE SECTOR PERFORMANCE Q4, All industries 31 Textiles 33 Cement 34 Steel 35 Chemicals 36 Transportation 37 Food and Beverages 38 ROUND UP OF KEY DEVELOPMENTS 39 Draft National Manufacturing Policy 39 RBI s Financial Stability Report 39 CHARTS 40 Industrial Production 40 Inflation 42 Foreign Trade and Foreign Investments 43 DATA ON INTEREST RATES 44

7 Current State of Indian Economy June 2011 GDP Growth The Central Statistical Organisation (CSO) has released the revised estimates for GDP for Alongside, it also released the quarterly estimates for GDP for the fourth quarter of According to the latest numbers made available by CSO, India s GDP at factor cost at constant prices registered an increase of 8.5 percent in the year This revised estimate of 8.5 percent growth for GDP in is only a shade below the advance estimates that had pegged GDP growth for at 8.6 percent. This slight dip in overall GDP growth can be attributed to weaker performance in sectors such as mining and quarrying, manufacturing, trade, hotels, transport and communication and financing, insurance, real estate and business services than anticipated earlier. In case of the agriculture and allied activities sector, we find that the revised estimates have pegged growth in at 6.6 percent, which is much higher compared to the advance estimates that had put growth at 5.4 percent. In this context it is important to note that the third advance estimates of crop production released by the Ministry of Agriculture have shown a significant upward revision as compared to second advance estimates in the production of wheat [84.27 million tonnes from million tonnes], pulses [17.29 million tonnes from million tonnes], oilseeds [ lakh tonnes from lakh tonnes] and sugarcane [ million tonnes from million tonnes]. These revisions are responsible for lifting the GDP growth rate for agriculture and allied activities sector. Another sector where we see a substantial upward revision in growth rate between the advance and revised estimates is the community, social and personal services sector. While in its advance estimate, CSO had indicated a growth of 5.7 percent for this sector, in the revised estimates this figure has been moved up to 7.0 percent. This revision comes on the back of a larger increase in total expenditure of the central government than anticipated earlier. The moderation in the expected pace of expansion of the mining and manufacturing sectors can be related to certain adverse policy developments as well as hardening of the interest rates in the economy. Further, as performance of the financing, insurance, real estate and business services sector is closely related to performance of the manufacturing sector, this sector too has seen a slippage in growth between advance and revised estimates. Table 1 Growth in GDP at factor cost by economic activity ( prices) (QE) (AE) (RE) 1 Agriculture, forestry and fishing Mining and quarrying Manufacturing Electricity, gas and water supply Construction Trade, hotels, transport and communication Financing, insurance, real estate and business services Community, social and personal services GDP at factor cost QE: Quick Estimates AE: Advance Estimates RE: Revised Estimates Source CSO, MOSPI, Govt. of India Page 7

8 Moving on to the quarterly estimates for GDP growth for the fourth quarter of 20-11, we see that although the economy s performance is still decent at 7.8 percent, an unmistakable downward trend is visible. Quarterly growth estimates show that GDP growth has come down from 9.3 percent in Q1, to 8.9 percent in Q2, to 8.3 percent in Q3, and further down to 7.8 percent in Q4, Amongst sectors, the ones that have seen a considerable erosion of growth momentum over the last one year are mining and quarrying and manufacturing. While in case of the former, the growth figures have come down from 7.1 percent in Q1, to 1.7 percent in Q4, 20-11, in case of the latter, growth has moderated from 12.7 percent in Q1, to 5.5 percent in Q4, The performance of the agriculture and allied activities sector in the fourth quarter has been particularly strong at 7.5 percent. The other sectors that have registered strong growth in Q4, are electricity, gas and water supply [7.8 percent], construction [8.2 percent], trade, hotels, transport and communication [9.3 percent] and financing, insurance, real estate and business services [9.0 percent]. Table 2 Growth in GDP at factor cost by economic activity ( prices) Quarterly numbers Q Q Q Q Agriculture, forestry and fishing Mining and quarrying Manufacturing Electricity, gas and water supply Construction Trade, hotels, transport and communication Financing, insurance, real estate and business services Community, social and personal services GDP at factor cost Source CSO, MOSPI, Govt. of India A look at quarterly GDP figures by expenditure class shows that growth in private final consumption expenditure is maintained at a robust 8 percent even in the fourth quarter of the fiscal However, what is worrisome is the trend in the growth numbers for gross fixed capital formation, which shows that year on year growth has tapered from 17.4 percent in Q1, to just about 0.4 percent in Q4, This is a clear indication of weakness in the investment activity level in the economy and does not bode well for growth in the current year. Table 3 Growth in GDP at market prices by expenditure ( prices) Quarterly numbers Q Q Q Q Private Final Consumption Expenditure Government Final Consumption Expenditure Gross Fixed Capital Formation Change in Stocks Valuables Exports Imports GDP at Market Prices Source FICCI computations based on data provided by CSO, MOSPI, Govt. of India Page 8

9 With regard to GDP growth in the year , it was noted even in our earlier report that the initial guidance provided by Ministry of Finance of 9 percent growth is looking increasingly difficult to achieve. With time even the government has come around this view and growth projection for the year has been lowered to 8 to 8.5 percent. It is interesting to note that in FICCI s most recent Economic Outlook Survey, results of which were released in May 2011, the median forecast for GDP growth in the current year comes to 8 percent. The inputs and projections provided by various participating economists in this survey show that while the agriculture and allied activities sector is projected to grow by 3.7 percent this year, industry and services sector are poised to grow by 8 percent and 9.2 percent respectively. The key risks to growth in India in the current year are the negative impact of continuous tightening of monetary policy by RBI and a slowdown in global growth due to high international oil prices. Further, although the Indian Meteorological Department has projected a normal monsoon this year, we will have to wait for more updates to get a clearer picture on the spatial distribution of the monsoon. Projected GDP growth [India] in Projected growth [Sectors] in Organisation Projection in % Morgan Stanley 7.7 IMF 7.8 FICCI 8.0 Nomura 8.0 DBS 8.0 CARE 8.0 Standard Chartered 8.1 Indicus 8.7 Dun and Bradstreet 8.8 ADB 8.8 Industrial Production Source FICCI Compilation Source FICCI Economic Outlook Survey, May 2011 The Central Statistical Organisation (CSO) has revised the base year for the industrial production data series from to The new series also incorporates a much larger set of items 2 that reflect the contemporary production activity in the country and is expected to offer a better gauge of the country s industrial activity. The weighting diagram of the three major sectors under two digit level indices and four different goods sectors under use based classification has also changed to capture the changing structure of economy effectively. The new set of weights that would now be followed is given in the following table GDP 3.7 Agriculture and allied activities 8 Industry 9.2 Services 2 Some of the items included in the new series are mobile phones, digital cameras, fruit juices, laptops, new chemical items and processed food. Page 9

10 Table 4 Comparison of weights assigned in the Old and New series of IIP Indices Sectors Old series New series Base Year Base Year Two-digit level Indices Mining Manufacturing Electricity General Index Use- based Index Basic goods Capital goods Intermediate goods Consumer goods Durables Non durables General Index Source CSO, MOSPI, Govt. of India As the above table shows, in the new series, while the weight of the mining sector has gone up that of the manufacturing sector has gone down. Amongst the use based segments, while basic goods have seen their weight go up substantially, intermediate goods have seen a reduction in the weight assigned for construction of the index. Even before data as per the new series for industrial production was brought out by CSO, economic analysts had predicted that data as per the new series would provide an upward bias to growth as it would incorporate new fast growing sectors of the economy. The new numbers have confirmed this and we see a substantial change in growth performance in when we compare the results of the new series with the results based on the old series. It is also interesting to note that the adverse impact on industrial production in the period following the global slowdown is also accentuated as per the new series and this is reflected in the numbers for As the data given in the next table shows, overall industrial production [as per the new series] registered a growth of 8.2 percent in And this is much better than the 5.3 percent growth clocked in Further, a good part of industrial growth in was driven by the manufacturing sector, which recorded a growth of 8.9 percent compared to a growth of 4.8 percent in The other two sectors, mining and manufacturing, however saw their performance going down in compared to Coming to the use-based classification, we see that all sectors, barring consumer durables, saw an improvement in performance in over And among the sectors that saw an improvement in performance, the capital goods sector stands out as its growth improved from 1 percent in to 15 percent in As mentioned earlier, these numbers, based on the new industrial production series, reflect a much different and improved performance compared to results based on the old series. Page

11 Table 5 Trends in Industrial Production YOY growth in percent Apr 2011-Apr Old Series New Series Old Series New Series Old Series New Series Old Series New Series General Index Mining Manufacturing Electricity Use-based industrial groups Basic goods Capital goods Intermediate goods Consumer goods Durables Non-durables Source CSO, MOSPI, Govt. of India Coming now to the growth figures for the month of April 2011, we see that overall industrial production [as per the new series] registered a growth of 6.3 percent. This performance is much weaker compared to a growth of 13.1 percent registered in April 20. Amongst other sectors a palpable slowdown is noticeable in sectors such as mining and manufacturing with growth slowing from 9.2 percent and 14.5 percent respectively in April 20 to 2.2 percent and 6.9 percent respectively in April Amongst the use based industrial groups, a similar streak of weakness is seen with growth in the capital goods segment, intermediate goods segment and consumer goods segment slowing down from 35.5 percent, 11.9 percent and 13.8 percent respectively in April 20 to 14.5 percent, 3.4 percent and 2.9 percent in April Table 6 Trends in Industrial Production YOY growth in percent [Old Series] Month/ Year Mining Mfg Electricity General IIP growth Month/ Year Mining Mfg Electricity General IIP growth Dec' Dec' Jan' Jan' Feb' Feb' Mar' Mar' Apr' Apr' Source CSO, MOSPI, Govt. of India Table 7 Trends in Industrial Production YOY growth in percent [New Series] Month/ Year Mining Mfg Electricity General IIP growth Month/ Year Mining Mfg Electricity General IIP growth Dec' Dec' Jan' Jan' Feb' Feb' Mar' Mar' Apr' Apr' Source CSO, MOSPI, Govt. of India The slow growth of the industrial sector seen in the month of April 2011 is part of a longer trend visible since the close of 20. As data given in the tables above show, industrial production numbers have been weak for some time now and this trend is confirmed irrespective of the data series that one Page 11

12 chooses to evaluate. In fact, as per the old series, the slowdown in industrial growth is more accentuated with growth in IIP being under 5 percent in four of the last five months. If we look at the numbers for the industrial production as per the use based classification, we again see a loss of momentum in industrial production in recent months. The only point of departure between data based on the old and the new series is in the reported performance of the capital goods sector. Using the old series, we see that capital goods production has registered negative growth in three of the last five months with growth in April 2011 still being an anemic 2.53 percent. However, as per the new series, capital goods production registered a growth of 15.4 percent and 14.5 percent in the months of March and April 2011.These figures, which are not all that weak, will have to be monitored going ahead to see if some trend is emerging here. Table 8 Trends in Industrial Production Use Based / YOY growth in percent [Old Series] Month/ Year Basic Capital Intermediate Consumer Total Durable Non-durable Dec' Jan' Feb' Mar' Apr' Source CSO, MOSPI, Govt. of India Table 9 Trends in Industrial Production Use Based / YOY growth in percent [Old Series] Month/ Year Basic Capital Intermediate Consumer Total Durable Non-durable Dec' Jan' Feb' Mar' Apr' Source CSO, MOSPI, Govt. of India Table Trends in Industrial Production Use Based / YOY growth in percent [New Series] Month/ Year Basic Capital Intermediate Consumer goods Total Durable Non-durable Dec' Jan' Feb' Mar' Apr' Source CSO, MOSPI, Govt. of India Table 11 Trends in Industrial Production Use Based / YOY growth in percent [New Series] Month/ Year Basic Capital Intermediate Consumer Total Durable Non-durable Dec' Jan' Feb' Mar' Apr' Source CSO, MOSPI, Govt. of India Page 12

13 It was mentioned even in our earlier report that the rising interest rates in the economy have started having a bearing on industrial activity. Recent news reports indicating increase in inventories with automobile dealers, decline in steel imports, slowdown in cement sales, fewer inquiries for purchase of commercial vehicles and build up of unsold stocks with real estate players are all symptomatic of a slowdown and highlight how consumption and investment demand are responding to the evolving interest rate scenario. Such developments have created a negative perception and depressed the confidence level of corporate India. Table 12 Projects under implementation stalled and new projects announced Under Implementation Stalled New Projects Qtr ending Nos Rs Crore Nos Rs Crore Jun Sep Dec Mar Jun Sep Dec Mar Source CMIE In this context it may be mentioned that once the pace of investments, which is crucial for overall growth of the economy, loses momentum, it is difficult to bring it back. Unfortunately, we may just be standing at the tipping point of such a situation. The data on projects under implementation stalled and new projects announced provided by the Centre for Monitoring the Indian Economy (CMIE) confirms that the pace of investments has taken a beating. As the table given above shows while the total number of projects under implementation stalled has been slowly inching up over the last one year, the total number of new projects announced in a quarter has been falling during the same time. When we view the trends in GDP growth and gross fixed capital formation presented in the earlier section along with the trends in industrial production and new investment intentions of corporate India, we reach the conclusion that the health of the economy is not in the best of states and that some urgent action is required to arrest this slowdown in investments. In fact, in FICCI s most recent Business Confidence Survey, members of corporate India had indicated the following five point strategy for the authorities to revitalize industrial and economic growth in the country Lower interest rates, particularly the cost of credit to SMEs. Fasten the pace of implementation of infrastructure projects. Check the incessant rise in price of industrial inputs and raw materials. Continue with incentives offered to exporters. Maintain fiscal discipline. Core Sector The composition of the core sector has also undergone a change with two new segments being added to the existing list of six industries. These two new segments are fertilizers and natural gas and with the addition of these segments the combined weight of core sector in IIP has increased from 27 percent to 37.9 percent. As part of this revision, weights of the existing sectors have also seen some change and Page 13

14 base year has also been revised to The new expanded list of sectors that now make up the core sector along with the weights attached is presented in the following table. Table 13 Segments of the Core Sector Segment Weight in the old series Weight in the new series Overall Index Coal Crude Oil Natural Gas Refinery Products Fertilizers Steel Cement Electricity Source Office of Economic Adviser, MOC&I, Govt of India If we look at the numbers for the core sector as per the new series, we see that this sector registered a growth of 5.7 percent during the year This growth was lower than the growth of 6.6 percent that was posted in the year At the disaggregated level, the sectors that saw a weaker performance in the year vis-à-vis are coal, natural gas, fertilizers, cement and electricity. The remaining sectors namely crude oil, refinery products and steel saw an improvement in performance in over Table 14 Growth in the core sector New series (Apr-March) (Apr-March) April 20 April 2011 Overall Coal Crude Oil Natural Gas Refinery Products Fertilizers Steel Cement Electricity Source Office of Economic Adviser, MOC&I, Govt of India As the data given in the table above shows, performance of the coal sector nose-dived in with growth plummeting from 8.12 percent in to ( ) 0.3 percent in The main reason why production in the coal sector remained almost flat in is the tough stance and stringent environmental norms with regard to coal mining adopted by the Ministry for Environment and Forests. Additionally, law and order problems in select mining areas of the country also had a bearing on overall coal production. Just like coal, performance of the natural gas sector also deteriorated with growth slipping from a high of 44.6 percent in to just about percent in This dip in growth of natural gas production can be ascribed to the fall in natural gas production in the KG D6 basin operated by Reliance. The performance of the fertilizer sector has also been lackluster with growth slowing down dramatically from percent in to a negative 0.02 percent in This poor state of affairs in the Page 14

15 fertilizer sector can be attributed to reported shortages in availability and supply of both coal and natural gas. In case of the cement sector, the growth numbers show a drop from.53 percent in to 4.52 percent in As mentioned in our earlier report, this drop can be attributed to rising cost of raw materials (particularly coal) and difficulties in getting environmental clearances. Slowdown in the execution of government projects in recent months particularly in the five poll bound states has also had an impact on cement sector. Additionally, there are reports that the construction sector is facing shortages of labour and this has affected cement dispatches and production. The slowdown in growth in the electricity sector from 6.17 percent in to 5.48 percent in can mainly be attributed to poor performance in the thermal power generation segment that accounts for nearly 65 percent of the total generation capacity in the country. Thermal power generation suffered a major setback during the last fiscal due to shortage of coal and delays in providing fuel linkages to thermal plants. A considerable number of power projects were said to get delayed because of uncertainty in the availability and supply of coal. The Ministry of Environment and Forest (MoE&F) categorized 203 coal blocks as 'no go' mining zones and this has also contributed to supply shortfalls. According to estimates given by Ministry of Coal, these 203 coal blocks could have generated around 1.3 lakh MW of power annually, thus, helping attain the yearly target for the year. Amongst the sectors that saw an improvement in performance in over the previous year, crude oil stands out as growth in this sector jumped from 0.55 percent in to percent in This growth was driven by companies in the private sector and the joint sector and their share in domestic oil production improved from 15.6 percent in to 25.7 percent in Reliance Industries and Cairn India showed exemplary performance and contributed the maximum to this increase in oil output during the year. The latest numbers for the month of April 2011 show that there has been a perceptible decline in the performance of the core sector with growth dipping from 8.5 percent in April 20 to 4.62 percent in April Sectors like natural gas, fertilizers, cement and steel are largely responsible for this poor performance. A positive take away from April 2011 numbers is the performance of the coal sector, which grew by 2.84 percent. Inflation The inflation situation in the economy continues to be a cause for concern. Despite large scale tightening of the monetary policy by the RBI and other steps taken by the government, inflation continues to remain close to the double digit mark. Data shows that WPI based headline inflation stood at percent in the year This is not only much higher compared to the average inflation rate of 3.6 percent seen in but also way above the 5 percent mark considered as the growth promoting inflation level or the normal inflation level by the RBI. Latest numbers on inflation are available for the month of May 2011 and these show that headline inflation stood at 9.1 percent in May Although it is slightly lower than.5 percent inflation registered in May 20, it is still too high as per RBI s standards. Data on the month on month growth in WPI based inflation also shows that the underlying inflationary pressures in the economy are maintained. The month on month growth in inflation in May 2011 stood at 0.7 percent. In the previous two months March and April the corresponding figures stood at 0.9 percent and 0.7 percent respectively. Page 15

16 Looking at inflation data at the disaggregated level throws up an interesting trend. For most part of the year 20, it was the Primary Articles segment which contributed substantially to overall inflation. Further, within the Primary Articles segment, it was Food Articles where inflation was at an uncomfortably high level throughout 20. However, beginning 2011, we see that the contribution of the other two broad segments, namely Fuel & Power and Manufactured Goods, to overall inflation has gone up swiftly while that of Primary Articles has come down. It is however important to note that while inflation in case of Food Articles may be trending down, it is still high for any comfort. Further, while inflationary pressures seen in case Fuel and Power can be attributed to the increase in prices of items like petrol and coal, the buildup of inflationary pressure in manufactured goods is largely the result of rising prices of raw materials and industrial inputs and which are being passed on by manufacturers in the final prices of their products. With inflationary pressures slowly spreading to all the three broad segments of WPI, the RBI has also drawn attention towards inflation getting increasingly generalized. In fact, if we look at the numbers for core inflation, which captures the non-volatile components of WPI, then we see that over time the gap between headline inflation and core inflation has been coming down. In fact in the month of May 2011, core inflation stood at 8.6 percent. This was not only higher compared to core inflation in the month of April 2011 (8.0 percent) but also close to overall inflation rate, which, as previously mentioned, stood at 9.1 percent in May Further, if we look at the numbers for month on month growth of core inflation, then we see that while in April 2011, the MOM growth stood at 0.1 percent, in May 2011, it went up to 0.5 percent. Table 15 WPI based Inflation YOY growth in Percent Apr May Jun Jul Aug All Commodities I Primary Articles (A) Food Articles a. Fruits and Veg b. Milk c. Eggs, meat, fish d. Condiments and spices (B) Non-food articles a. Fibers Raw cotton Raw Jute b. Oil seeds (C) Minerals a. Metallic minerals II Fuel and power (A) Coal (B) Mineral oils (C) Electricity III Manufactured products (A) Food products (B) Beverages, tobacco (C ) Textiles (D) Wood and wood products (E) Paper and paper products (F) Leather and leather products (G) Rubber and rubber products (H) Chemicals and products (I ) Non-metallic mineral products (J) Basic metal, alloys (K) Machinery and machine tools (L) Transport, equpt and parts Source Office of Economic Adviser, MOC&I, Govt of India Coming now to the segment wise analysis, we see that prices in the Manufactured Goods category registered an increase of 6.3 percent in the year The corresponding figure in was 1.8 Sep Oct Nov Dec Jan 11 Feb 11 Mar 11 Apr 11 Page 16 May 11

17 percent. Further, as per the latest data available, Manufactured Goods segment recorded an inflation of 7.3 percent in May Looking at the sub-categories within this broad group, we see that sectors like food products, beverages and tobacco, paper and paper products, rubber and plastic products, chemical and chemical products, and basic metals and metal products are seeing significant inflation. As already mentioned, the buildup in prices in many of these industries is largely due to increasing cost pressures which manufacturers are now finding difficult to absorb. In case of the Fuel and Power, overall inflation in stood at 12.2 percent. The corresponding figure in was (-) 2.1 percent. Further, as per the latest data available, this segment recorded an inflation of 12.3 percent in May Inflation in this segment is being driven by high and rising prices of items like coal and mineral oils. One may recall that petrol prices in the country are now being regularly aligned with international prices following decontrol of the price mechanism and this is having a bearing on overall inflation in this broad category. Finally, in case of the Primary Articles category overall inflation in stood at 17.7 percent. The corresponding figure in was 12.7 percent. Further, in the month of May 2011, this segment recorded an inflation of 11.3 percent. Although over time inflation in this segment has been showing signs of moderation and which have come on the back of inflation going down in case of food articles, the non-food articles segment has seen a trend of rising inflation. In fact, in May 2011, inflation in the non-food articles segment stood at a high 22.3 percent. High and rising prices of fibers like raw cotton and raw jute are responsible for high inflation seen in case of non-food articles. With regard to outlook for inflation in the months ahead, it may be mentioned that at least in the first half of the current year, overall inflation is likely to remain sticky at the present levels. In fact there are good chances that we may see a jump back to the double digit territory on a few occasions. And the factors that lie behind this prognosis are given below. First, international crude oil prices continue to remain high. With developments in the Middle East and North Africa region showing no signs of abatement and with OPEC countries in their most recent meeting [June 8, 2011] failing to reach a consensus on increasing their daily oil production quota, there are limited chances of oil prices coming down in the near future. A slowdown in global growth in 2011 that is widely anticipated could put a lid to international oil prices but any large scale downward revision is being ruled out at this moment. As a result, we can expect inflationary pressures in the Fuel and Power category to continue. Moreover, this pressure could further mount once the government announces decontrol of diesel and LPG prices. Second, in the context of inflation in the Fuel and Power segment, one must also take note of the rising prices of coal. Recent media reports show that coal production target for has been cut down primarily on account of rising concerns over environmental issues. Coal shortage of nearly 142 million tonnes is expected in and our imports this year could be as much as 114 million tonnes. Besides power generation, this situation of coal shortage does not augur well even for the price line in case of coal. Third, global food prices are likely to remain firm in the near term. According to recent reports brought out by FAO, global food prices would continue to remain a concern in The FAO has warned that while the harvest this year would be critical, restoring market balances will take some time. Hence, we can expect upward pressures on food prices in the global markets to persist. As global food prices have a bearing on food prices in India, we have another element that is not likely to work in favour of bringing inflation down. Page 17

18 Fourth, the government has recently announced a hike in the Minimum Support Prices [MSP] for goods like paddy, soybean and corn for the upcoming agricultural season. This increase in MSP will also have a bearing on the trend in food prices in the near term. There are chances that food inflation may accelerate once the new crop comes into the market in October Given the above factors, we expect concerns on inflation to remain on the policy agenda through the year Further, with policy rate hikes by RBI having failed to deliver on the stated objective of reining in inflationary pressures and bringing down inflationary expectations, it is time that government actively pursues supply side measures to curtail inflation. Foreign Trade Financial year was exceptionally good for Indian exporters. With overall exports amounting to US$ billion, the sector registered a growth of 37.7 percent in over the previous year. And this was a record growth witnessed in exports since independence. Further, when we look at the monthly data for exports for the year as given in the table below, we see that growth in exports has been particularly strong since November 20. While during the period April to October 20, exports grew at an average rate of 26.8 percent, overall growth was much higher in the remaining part of the year. In fact, during November 20 and March 2011, India s exports grew at a whopping 44.3 percent on average. The onset of recovery in the global economy, which was led by the emerging economies, coupled with continuation of export sops announced by the government as part of the fiscal packages offered during the crisis period gave the sector the much needed impetus. The support provided by the government in the form of measures such as interest subvention of 2 percent on pre and post shipment export credit was instrumental in reviving the badly hit labor intensive export oriented industries. Table 16 Exports and Imports in US$ billion / YOY growth in percent Exports Imports Trade balance Petroleum crude & products imports Non-POL items imports Export growth Import growth 20-Apr May June July Aug Sep Oct Nov Dec Jan Feb Mar Apr Source CMIE In addition, the strategy of the government to continue exploring new and diverse markets for India s exports proved to be truly rewarding. Destination wise data available for the period April-December 20 shows a significant increase in exports to regions like Latin America, Africa and other Asian countries. For a long time India s exports had been concentrated in US and the European countries and the crisis provided a good opportunity to explore these other markets. India s exports to Africa grew by Page 18

19 44.9 percent, to Asia by 43 percent and to Middle East by 31 percent during April-December 20 over the corresponding period in Given this exemplary performance in exports, Commerce Minister, Mr. Anand Sharma, recently indicated that India should be able to achieve exports of US$ 500 billion by the year He also pointed out that sectors like engineering goods, petroleum products, gems and jewellery, drugs and pharmaceuticals have done particularly well during the year Engineering goods were India s top exports in the year amounting to US$ 60 billion and registering a growth of over 80 percent vis-à-vis the previous year. Further, while readymade garments registered a growth of 42.9 percent in the year over 2009-, gems and jewellery and pharmaceuticals both witnessed a growth of about 15 percent. Petroleum products recorded a growth of 50.5 percent in The strong momentum in exports, seen particularly during the second half of 20-11, has continued in the year as well. Latest numbers available for the month of April 2011 show that exports in this month amounted to US$ 23.8 billion and represented a growth of 34.4 percent over the same month of the previous year when exports totaled US$ 17.7 billion. While this strong start in the year is encouraging, there are indications that this high growth may not be sustained in the months ahead. And there are both domestic and external reasons that make such a forecast likely. In fact in FICCI s latest Survey on Exports, which was completed in the month of May 2011, exporters indicated that going ahead their performance could weaken on account of the following factors Firstly, the interest subvention of 2 percent on pre and post shipment credit announced to support the exporters during the slowdown owing to the crisis came to an end in March The exporters now have to pay a higher rate of interest to the banks for obtaining export credit. Further, this is happening at a time when the lending rates are already going up following the increase in the base rates of the banks and this would impact the production cost structure of the exporters. Secondly, the DEPB scheme is finally coming to an end. As this is coming in quick succession following the withdrawal of interest subvention, the exporters are finding themselves under reasonable pressure to maintain competitiveness in the global market. Although most recent reports show that the government has agreed to an extension of the DEPB scheme by another three months i.e. till September , a large section of the exporting community feel that India s exports are still not robust enough and that such incentives should not be completely done away with. Exporters are hoping that during the intervening three month period, the government would evolve an alternate scheme that would support exporters. Thirdly, off late there has been a significant increase in exports from India to Asian countries. However, with inflation emerging as concern in other Asian countries as well and the central banks responding by raising interest rates, the demand in this region is likely to face some moderation. This will certainly have some bearing on India s exports to the Asian market. Fourthly, rising raw material costs and oil prices is also having a bearing on the exporters. Almost three quarters of the respondents in FICCI s latest Export Survey said that they are facing difficulty due to high raw material prices. The textile sector is facing the heat due to surging cotton and yarn prices, the chemical sector is being impacted due to increasing polymer prices, processed foods segment is facing the brunt of high fruit and vegetable prices and engineering goods are being affected by high steel 3 The DEPB scheme was to come to a close by end June However, the government has decided to extend it by another three months. Page 19

20 prices. It is also important to note that rising crude oil prices have increased the inland transportation cost and even the international ocean freight rates have moved up recently. While the aforementioned factors are likely to dampen the buoyancy seen in exports in recent times, one must also take note of the state of the global economy as this has a bearing on the performance of India s exports. Latest estimates provided by the IMF show that global growth is expected to moderate in the year According to the IMF, the global economy is expected to grow by 4.4 percent in the year In 20, the global economy grew by 5.0 percent. The IMF has also indicated that the world trade volume is likely to grow by 7.4 percent in 2011 as against a growth of 12.4 percent seen in 20. The general slowdown in the global economy and global trade volumes projected for 2011 is also a downside risk to India s export performance in the current year. Coming to imports next, we see that in the year our imports totaled US$ billion. This represents an increase of about 21.8 percent over the previous year s imports of about US$ billion. During the year 20-11, imports of both petroleum crude and products (POL) and nonpetroleum crude and products (Non POL) went up. While POL imports amounted to US$ 1.7 billion in and posted a growth of 16.7 percent over the previous year, non-pol imports amounted to US$ billion and registered a growth of 24.0 percent over the previous year. Latest data available shows that in the month of April 2011 our imports totaled US$ 32.8 billion and registered a growth of 14.1 percent over the same month of the previous year when imports amounted to US$ 28.8 billion. In the context of this rise in imports, it is important to take note of the rising international prices of oil, which have pushed our POL import bill upwards. Otherwise in terms of volume there hasn t been a significant increase in POL imports. Price of oil in the international market has been moving up over the last year with the spot price for Brent crude ruling around US$ 113 a barrel an increase of 45 percent over the previous year in the last week of May With developments in the Middle East and North Africa region showing no signs of a let up and with OPEC in its last meeting deciding not to hike the overall quota for oil production, oil prices are likely to remain firm in the near term. This will continue to put pressure on India s overall oil import bill. As regards non-oil imports, while a slowdown in the domestic economy could lead to some moderation in the non-oil import bill, any large respite here can be ruled as prices of commodities other than oil are also firming up. Another point to take note of is the likely increase in imports of LNG in 2011 due to shortfall in RIL s KG D6 block. This too would lead to an increase in India s import bill as imported gas is nearly 3 times as costly compared to gas supplied by Reliance. With exports likely to come under pressure and imports showing little signs of easing in the coming months, the trade balance in could widen. Foreign Investments Data on total foreign investment flows into the country shows that in 20-11, foreign investment flows into India saw a dip of about 17 percent over the previous year. Further, when we look at the two main components of foreign investment, namely foreign direct investment and portfolio investment, we see that the dip is largely on account of a slowdown seen in case of FDI. As the table below shows, FDI flows into India in were to the tune of US$ 37.7 billion and in this figure came down to US$ 27 billion. Portfolio flows, which were to the tune of US$ 32.4 billion in 2009-, saw a marginal dip to about US$ 31.5 billion in Page 20