India s Macro-Economic Picture Comparing 2013 and Internal Factors:

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1 Overall, India s relatively stronger macroeconomic fundamentals in terms of growth, inflation, current account and fiscal deficits provide a reasonable degree of resilience to Indian financial system in the event of spillover effects from global factors. However, with the continued uncertainty over global growth and in the absence of international monetary policy coordination, there can be no room for complacency. We have compared the macroeconomic picture of Indian economy in 2013 with the current situation as in 2013; rupee was highly vulnerable to the external shocks. Let us have a look at the internal factors: Internal Factors: A) Inflation: 2013: Inflation rate of India was the second highest among major economies after Venezuela. Food inflation accelerated for the second month in row to 9.74% in June : We have seen that the inflation has been easing consistently on account of easing food prices and a sharp decline in oil prices. Consumer price index (CPI) based inflation is expected to be pulled down by base effects till August and thereafter to increase to about 6 per cent by January The El- Nino phenomenon and a projected sub-normal monsoon may have a potential inflationary impact. B) GDP: 2013: The growth was weakening in 2013 amid collapsing business confidence under the weight of rapid rupee depreciation, rising energy costs, sharply tightening 1

2 financial conditions and policy paralysis. 2015: India s gross domestic product (GDP) grew at 7.5% during the January-March period, faster than China s 7% in the same period, mainly on account of improvement in services and manufacturing sectors. India's economy is on a cyclical upswing and forward-looking indicators suggest domestic demand is gathering momentum. India s growth seems at odds with low credit growth, relatively lower flow of resources to the commercial sector, low capacity utilization, subdued growth in the index of industrial production and muted corporate performance, among others. C) Index of Industrial Production: 2013: India s industrial production growth rate bounced back to 3.5 percent in March from as low as 0.6%, on better performance of manufacturing and power sectors coupled with higher output of capital goods. 2015: The recent data showed that the IIP grew at a two-month high of 4.1 per cent in April, primarily driven by the manufacturing sector. Industrial output grew 5 per cent during February, its strongest rise in three quarters, on back of strong growth in capital goods and consumer goods sectors. D) Forex Reserves: During end of 2013, India's foreign exchange reserves have dipped to $275.5 billion, a 39-month low, as Reserve Bank of India continued to sell dollars to support the battered local currency. 2015: India s forex reserves crossed $350-bn mark in May 2015 amid excessive dollar buying by the RBI. The foreign exchange reserves hit all-time high of $ billion for the week ended June 12. Recently, the RBI governor said that the reserves worth $350 billion provide a strong second line of defense to good macroeconomic policies if external markets turned significantly volatile. 2

3 E) Interest rate: 2013: The then RBI Governor D. Subbarao was seen cutting the key rate in May 2013 for the third straight month. However he had warned that the upside risk to inflation still exists amid demand supply imbalances. inflation. 2015: In this year so far, RBI has cut the key rates thrice amid stable Utilizing the policy space made available due to declining inflationary pressures against the backdrop of low capacity utilization, credit off-take and signs of weak production, the Reserve Bank frontloaded monetary accommodation by reducing the policy interest rate by 75 basis points during H1(Jan- Jun) of F) Rupee: 2013: Rupee was depreciating from around levels to close to levels during the period of Apr-June. During that time, the weakness was mainly attributed to central bank chief s comments on inflation still being high. 2015: The rupee has largely held its ground against a surging dollar so far, falling close to 4% since the start of the year even as the Reserve Bank of India cut interest rates three times in an effort to shore up the economy. Rupee is trading in the range of since past two months. Recently, rupee lost value to the US dollar slipping to 20 months low at 64-mark, as foreign portfolio investors sold Indian securities being concerned over the government's taxation policies, which threaten the FII investments into the country. 3

4 G) Fiscal deficit: 2013: With the Government s non- Plan expenditure continuing to rise, and further big ticket expenses due in the remaining seven months of the financial year, FM, Chidambaram was finding it tough to control the fiscal deficit at the targeted 4.8 per cent of GDP in the fiscal year : Despite an ambitious target, the Centre managed to contain its fiscal deficit at 4 per cent of the GDP in , overcoming a shortfall in tax collections. There is a reorientation in government expenditure in wherein capital expenditure is budgeted to be higher alongside a reduction in expenditure on major subsidies, which should improve the quality of government expenditure. H) FII Flows: 2013: Foreign investors made net inflows of a staggering amount $20 billion in stocks during It was partly amid expectations that BJPled government would be more pro-reform and speed up legislative steps. 2015: During May, 2015, the FII s emerged as net sellers in the Indian capital markets for the first time in 21 months amid volatility in global markets and MAT issue which fuelled FII s concerns and they rushed to withdraw money from the Indian markets. While foreign portfolio flows to India have been strong during the past year, unexpected changes in AE monetary policy stances may lead to slowdown/reversal of such flows with implications for segments of financial markets, though India is better prepared to deal with the volatility, as compared to the previous episodes. 4

5 External Factors Trade deficit: 2013: India s Exports for the full year were $300 billion, well below a $350 billion target but higher than expected. India s trade deficit was seen widening during May 2013, as gold imports rose and exports contracted. 2015: Persistent weakness in global demand and the lower value of oil products led India's merchandise exports to fall for the sixth straight month in May. While a decline in gold imports helped the trade deficit narrow to a three-month low. Imports recorded the fastest fall in 15 months, with non-oil and non-gold inbound shipments contracting for the first time in at least a year. Current Account Deficit: In 2013, the current account deficit emerged as a big weak spot in Asia's third largest economy since last year. From the alarming levels seen in 2013, it is seen easing now. 2015: India s current account deficit (CAD) in the last quarter of came in at $1.3 billion or 0.2% of gross domestic product (GDP), helped by a lower trade deficit. A fall in crude oil prices to less than $65 per barrel in the last few months helped India reduce its import bill at a time when exports have been stagnant on account of a weak global economy. Lower crude oil prices: IMF sees crude prices on average nearly 40 per cent lower on a year ago in 2015, rising 12 per cent in

6 External debt: 2013: The Reserve Bank of India (RBI) data showed the highest ratio of short-term external debt to currency reserves in more than a decade, raising alarm bells. India's total external debt rose 5.9 per cent to $426 bn as on December 31, 2013, against $402 bn as on September 30, The rise in external debt during the period was due to long-term debt, particularly NRI deposits. 2015: India s external debt at the end of December 2014 rose to $461.9 billion, up $15.5 billion from March On the positive end, while long-term debt continues to rise, short-term debt has stabilized and now makes less than a fifth of overall debt. India s short-term debt declined from $96.7 billion in March 2013 to $85.6 billion in December 2014, which indicates some easing of the refinancing pressure in the near term. 6