CRISIL EcoView

January 2012

GD P

Gr ow

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Economy

Growth to remain a challenge

CRISIL EcoView

Economic Research
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'.

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Economic Outlook

Growth: GDP is expected to grow at 7.0 per cent in 2012-13. This is on the assumption of a mild recession during early 2012 in Euro Zone and no significant progress on domestic policy reforms. The services sector, growing at 8.7 per cent will remain the key driver of growth. At 5.6 per cent, industrial growth would be relatively higher than preceding year due to RBI's supportive monetary stance. Inflation: We expect WPI based inflation to average at 5.8 per cent in 2012-13. Overall inflation will be lower than last year because (a) low pricing power of corporates and (b) high base of last year that will keep food inflation lower. Exchange rate: The rupee is expected to settle around Rs 46.5 per US dollar by March-end 2013. Although pressure on the current account would ease somewhat during 2012-13 as compared to 2011-12, it will remain on the higher side. However, we expect the situation in the capital account to improve on account of higher inflow of both FDI and FII which will support the rupee against US dollar. Fiscal deficit: The fiscal deficit for 2012-13 is estimated to be at 5.5 per cent of GDP. We expect government's revenue position to remain weak during 2012-13 in view of GDP growing at 7 per cent. In addition, we do not expect either a significant compression in government expenditure or in the subsidy burden due to higher food, fuel and fertilizer subsidies. Interest rate: Yield on bench mark 10 year G-sec will be in the range of 7.3 to 7.5 by the March-end 2013. Although government borrowing pressure would remain high during the year, crowding out of private sector investment is unlikely due to weak economic activity. Yields will soften due to (a) lower inflation expectations and (b) monetary easing by RBI.

2011-12

2012-13 3.0 5.6 8.7 7.0 5.8 46.5 5.5 7.3-7.5

CCER Team
Dharmakirti Joshi Sunil K Sinha Vidya Mahambare Parul Bhardwaj Dipti Saletore Anuj Agarwal Aindrila Roy Chowdhury Chief Economist Senior Economist Senior Economist Economist Economist Economist Economist

Growth (y-o-y, %)

Agriculture Industry Services Total WPI - Average (y-o-y, %) Re/US $ (year end) as a % of GDP 10- year G-Sec (year end, %)

3.8 4.5 8.9 7.0 9.2 48.0 5.5 8.5

Inflation Exchange rate Fiscal deficit Interest rate

Contact Details
Email : research@crisil.com Mumbai : +91(22)33428000 Delhi: +91(11)42505100

CRISIL EcoView

Index
Contents Pages

Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Quarterly update: Balance of Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 India Economy Outlook 2012-13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Industrial production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 External Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Money and banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Global economic outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

CRISIL EcoView

Overview
Ringing in a challenging year What a tumultuous year 2011 was. And the outlook for 2012 is far from comfortable. 2011 saw sovereign ratings of some of the most powerful nations getting downgraded. Europe is on the verge of slipping into a recession which many hope will be a mild and short one. But there is near consensus on the anaemic growth prospects for Europe in the foreseeable future. The alphabet 'L' could be a close proxy for the shape of recovery and long term prospects for Europe, bringing in memories of Japan's lost decade. The 'L' shaped path for Europe implies that Euro zone which underwent a severe recession in 2009 and is slipping into it again will not return to its trend rate of growth. US economy has sprung a bit of positive surprise on the growth front, but risks to its recovery remain. Given the fragility of recovery in advanced countries, it might not be amiss to say that chances of their sinking into recession once again, cannot be completely ruled out. The key risk is from a full blown crisis in Euro zone which can create global financial instability and also drag down the entire advanced world. For Asia, which has held up reasonably well, there is no escaping the pain of a hard landing in the advanced world, if that happens. To add to the woes, the murmurs of a hard landing in China, world's second largest economy and Asia's growth locomotive, are getting louder. In India, developments have been far from encouraging. Except the good performance of agriculture, in most other aspects - growth, currency, fiscal deficit, manufacturing output, investments or business confidence - matters have only worsened in 2011. The outlook has turned gloomier enough to trigger a debate on the sustainability of even 7 per cent growth in the coming year. Escalating risks in Euro Zone, demand-reducing impact of past interest rate hikes and emerging bottlenecks from slowed decision making in the government have cast a pall on the India outlook for 2012-13. This month's theme crystal gazes into 2012-13, whose outlook will be based on a variety of factors- some within our control and some outside our influence. External developments such as risk from a deep recession in Europe, movement in commodity and crude prices, are outside India's domain of influence. But some of the risks to growth are of our own making. Unaddressed bottlenecks in the mining sector via shortages of coal and iron ore are creating downside risks to industrial activity. Similarly uncertainty in land acquisition and environment clearances is depressing the investment climate. Slow decision in government is trimming the project pipeline. Although government has taken some steps to address these issues, a swift and stronger action is required particularly in today's environment of heightened global risks. Last but not the least, revival of the reform process, at this juncture, will not only give a boost to investor confidence but also provide some buffer against global headwinds in 2012. From a long term perspective, these steps will raise the economy's growth potential and also allow us to take advantage of global upturn whenever that happens.

Dharmakirti Joshi Chief Economist, CRISIL

January 2012

CRISIL EcoView

Executive Summary
High current account deficit persists in the second quarter of 2011-12
India's current account deficit (CAD) rose to $16.9 billion in the second quarter of 2011-12 from $15.8 billion in the previous quarter. While the surplus on the financial and capital accounts increased relative to the first quarter, the difference between this surplus and CAD narrowed. Merchandise trade deficit increased to $43.9 billion in the second quarter from $41.7 billion in the previous quarter. With rising merchandise trade deficit and moderation in net services exports, our CAD forecast now stands at 2.9 per cent of the GDP for 2011-12. November 2011, unchanged from the previous month. Food inflation is expected to fall further on account of a good harvest. However, the depreciating rupee is expected to exert pressure on the imported component of overall inflation.

Credit growth falls to around 17 per cent in December

Bank credit growth increased to 17.2 per cent for the fortnight ending December 16, 2011, from 16.4 per cent for the fortnight ending November 18, 2011. Deposit growth increased to 18.2 per cent. With liquidity deficit in the banking system increasing despite RBI's steps to inject liquidity, the interbank call money rates moved up in December.

Industrial output contracts by 5.1 per cent in October

A high base, coupled with the deterioration in both domestic and global demand, led to a 5.1 per cent contraction in the industrial output in October 2011. Growth in the mining sector continued to contract, by 7.2 per cent, hindered by regulatory hurdles, late monsoons and falling gas production, while manufacturing output contracted by 6.0 per cent. We expect the weakness in industrial growth to continue through the rest of this fiscal year.

Rupee touches record low of Rs 54.2 per dollar in December

Despite higher portfolio investment inflows, persistent dollar demand owing to high import payments and corporate debt repayment obligations saw the rupee fall by 3.6 per cent against the dollar in December 2011. With the easing of debt market norms, net FII inflows into the debt market totaled $4.2 billion in December. Assuming a mild recession in the EU and recovery thereafter, portfolio inflows into India should recover towards the end of the fourth quarter of 2011-12. We thus assign a 50 per cent probability to the rupee settling at 48.0 to a dollar by March end 2012.

Steep fall in export growth in November

Growth in merchandise exports fell to a mere 3.9 per cent in November 2011 as compared to 10.8 per cent growth in the previous month. Meanwhile, growth in imports rose by 24.5 per cent. The widening gap between export and import levels pushed up the monthly trade deficit to $13.6 billion in November 2011. Growth in exports is likely to remain subdued due to weak global outlook and an unfavorable base-effect. With buoyant oil imports, trade deficit is expected to widen significantly this year as compared to last year.

10-year G-sec yields rise to 8.7 per cent in December

The yield on the benchmark 10-year paper stood at an average of 8.7 per cent in December. CRISIL expects 10-year G-sec yields to be around 8.5 per cent by endMarch 2012, assuming RBI does not cut the repo rate before April 2012. This is because, while the government's market borrowing during the second half of 2011-12 will now be higher than announced earlier, RBI will be continuing with its open market operations to increase liquidity in the system.

Inflation remains firm despite easing food inflation

WPI inflation rose to 9.1 per cent in November 2011 as against 9.6 per cent a month earlier. However, primary food inflation has now fallen sharply to 0.1 per cent for the week ending December 24, 2011. Manufacturing inflation remained stubborn at 7.7 per cent during

Quarterly update: Balance of Payments

India's Balance of Payments (BoP) surplus shrank to $0.27 billion in the second-quarter of 2011-12 as against $5.4 billion in the previous quarter. The BoP surplus dipped sharply as the current account deficit (CAD) widened on account of the rise in trade deficit during the quarter. For the first-half of 2011-12, the cumulative surplus stands at $5.7 billion as compared to $7 billion in the same period last year. Under the Balance of Payments Manual (Sixth Edition) BPM6 classification that was adopted by the RBI during the last quarter, India's BoP is now divided into current, capital and financial accounts. The current account deficit stayed high at $16.9 billion (3.7 per cent of GDP) in the second-quarter of 2011-12 as compared to $15.8 billion (3.4 per cent of GDP) in the previous Current account quarter. Under the current deficit remains high account, trade deficit increased to $43.9 billion in the second-quarter of 201112 as compared to $41.7 billion in the previous quarter, as the gap between the absolute levels of exports and imports widened during the reporting quarter. But, in growth terms, exports of goods registered a growth of 47.2 per cent as compared to a growth of 35.4 per cent in goods imports. For the rest of this fiscal, trade deficit is expected to widen further as a weak rupee and firm commodity prices will keep the import bill high, while growth in exports is likely to remain subdued on the back of rising uncertainty in the global economy. Net secondary income that includes private transfers (remittances from Indian overseas) jumped by almost 10 per cent in the second quarter of 2011-12 over the previous quarter to stand at $16.2 billion. Under the new format, instead of invisibles, services have been added as a separate category. Net services remained flat for the reporting quarter. Net primary income continued to witness outflows during the second-quarter of 2011-12 as well, but in absolute terms, it increased, partly owing to increase in net outflows under investment income as higher interest rates in India leads to higher debt service payments as compared to receipts. Going forward, for the remaining two quarters of this fiscal, the outlook for the overall current account deficit remains bleak. The upward pressure on CAD will mainly come from higher merchandise trade deficit as we expect sluggishness in exports, but no reduction in oil prices, going forward. Also, net services exports are expected to remain under pressure due to weak growth prospects in the US and EU. Under the new format, capital account now includes mainly the official transfers, which witnessed a net inflow of $0.2 billion in the second-quarter of 2011-12 as against an outflow of $0.3 billion in the previous quarter. On the other hand, under the financial account, net financial flows increased to $17.9 billion (3.9 per cent of GDP) in the reporting quarter as against $17.4 billion (3.8 per cent of GDP) in the first quarter. Net financial

Figure I: Current Account Balance (US$ bn)

0.0

Table I: Current Account

FY10R FY11PR (US$ bn) FY12 1QPR 2QP -16.9 -43.9 15.5 -4.7 16.2 -3.7 -9.6 3.4 -1.0 3.6

-5.4 -10.1 -15.8 -16.9

Current Account balance Net Merchandise Net Services Net Primary Income Net Secondary Income Current Account balance Net Merchandise Net Services Net Primary Income Net Secondary Income

-38.4 -118.4 36.2 -8.0 51.8 -2.8 -8.6 2.6 -0.6 3.7

-38.4

-50.0

-46.0

FY10

FY11

FY10

3Q10

4Q10 FY10

1Q11

2Q11 FY11

-46.0 -15.8 -130.4 -41.7 48.7 15.4 -17.3 -4.4 53.1 14.8 % of GDP -2.7 -3.4 -7.5 -9.0 2.8 3.3 -1.0 -0.9 3.1 3.2

Source: RBI

Source: RBI

Note: P- Preliminary; PR-Partially revised

CRISIL EcoView

flows largely rose on account of other investments led by NRI deposits that rose to $2.8 billion in the secondquarter as against $1.2 billion in the first quarter. Trade credit remained healthy at $2.9 Global uncertainty billion. During the triggers net portfolio second quarter of outflows; net direct 2011-12, net loans investment flow halves declined by almost 27 per cent to $11.2 billion on a quarterly basis as an adverse global scenario discouraged the non-government and non-banking sectors (net external commercial borrowings) to borrow externally.

other emerging economies are likely to trigger much larger net portfolio outflows along with subdued direct investment flows.

Outlook
We expect the current account deficit to widen further in absolute terms in the remaining quarters of 201112, underpinned by the rise in merchandise trade deficit and moderation in net exports of services. In view of the rising risks on the external account front, we had revised our 2011-12 forecast for CAD upwards to 3.2 per cent of GDP from 2.9 per cent forecasted earlier. Moreover, due to heightened uncertainty in the global scenario, the consequent reduction in financial inflows and a weakening rupee, the vulnerability of India's BoP account too has risen.

Due to the ongoing Euro zone crisis, foreign inflows have reduced in recent months. Consequently, there was a net outflow to the tune of $1.4 billion recorded under portfolio flows in the second quarter of 2011-12 as against net inflows of $2.3 billion in the last quarter. Direct investment also slowed down with the second quarter of 2011-12 witnessing net FDI inflows of $4.4 billion as against $7.9 billion in the first quarter. For the remaining quarters of 2011-12 also, net portfolio flows are expected to remain subdued due to the deepening sovereign debt crisis in Europe and its adverse impact on the global financial markets. For the first half of 2011-12, financial account surplus stood at $35.3 billion as compared to $31.3 billion in the same period last year. Going forward, the surplus under the financial account is expected to remain modest, as the mild recession in the Euro zone and weakness in
Figure II: Financial Account Balance (US$ bn)
60.0

Table II: Capital Account

FY10R (US$ bn) FY11PR 1QPR 38.2 48.9 9.4 28.2 24.4 17.4 7.9 2.3 12.6 FY12 2QP 17.9 4.4 -1.4 15.2

48.9 38.2

Financial Account balance

Net Foreign Direct Investment (FDI) 18.0 Net Portfolio Investment Net Other Investments
17.4 9.4 6.2 17.9

29.1 4.6

% of GDP Financial Account balance Net Foreign Direct Investment (FDI) Net Portfolio Investment 2.8 1.3 2.1 0.3 2.8 0.5 1.6 1.4 3.8 1.7 0.5 2.7 3.9 1.0 -0.3 3.3

0.0

FY10

FY11

3Q10 FY11

4Q10

1Q11 2Q11 FY12

Net Other Investments

Source: RBI

Source: RBI

Note: P- Preliminary; PR-Partially revised

I. India Economy Outlook 2012-13

l

Economy to grow at 7 per cent in 2012-13 Inflation to ease to 5.8 per cent in 2012-13 as compared to 9.2 per cent in 2011-12 Fiscal deficit to remain high at 5.5 per cent of GDP in 2012-13

long term the road to 2012-13 looks quite uncertain. This month's Ecoview presents our forecasts of GDP growth and other macroeconomic variables for 2012-13 and also outlines potential risks to the economy.

GDP growth
The global economic landscape is uncertain; growth forecasts by several agencies, especially for the Euro zone, have GDP to grow at 7.0 been scaled down per cent in FY13 significantly for 2012. We expect the Euro zone to have a mild recession in early 2012 and status quo to continue on the domestic policy front.

When we had released our theme on India's economic growth outlook for 2011-12 last year, the general view was that India has not only emerged relatively unscathed from the 2008 global financial crisis, but also set to return to 8 per cent plus growth levels in 2011-12. However, as the year progressed, pressure points emerged both on the domestic front, due to stubborn inflation and a policy logjam, and on the global front, due to the Euro zone debt crisis. Consequently, market sentiments and economic growth took a beating. As per the Central Statistical Organisation (CSO) estimates, GDP grew at 7.3 per cent during the first half of 2011-12, as against 8.6 per cent during the same period in 201011. Given the growth in key macroeconomic indicators like IIP, exports/ imports, and non food credit offtake, GDP growth during the second half of 2011-12 is likely to be lower than the first half. CRISIL has therefore scaled down its GDP forecast for the whole of 2011-12 to 7 per cent from 7.6 per cent earlier). Though we believe that the economy's inherent strengths are more or less intact over the medium to
Figure 1.1: GDP (y-o-y, %)
10.0
9.5

Under this scenario, GDP is expected to grow at 7 per cent during 2012-13. The services sector is expected to remain the key driver of economic growth during 201213, growing at 8.7 per cent as against expected 8.9 per cent in the current fiscal. Growth in the industrial sector would be relatively better at 5.6 per cent, due to the Reserve Bank of India's (RBI) supportive monetary stance. However there are both upside and down side risk to our growth forecast. In case domestic policy scenario improves then we may get a higher GDP growth of 7.5 per cent. The improvement in policy scenario will
Figure 1.2: Inflation (y-o-y,%)
10.0
9.6 9.2

8.5

8.0
7.0 7.0

7.0

2012-13 F

2011-12 F

6.0

5.8

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

4.0

FY11

FY12E

FY13F

Source: CSO, CRISIL Research

Source : Ministry of Industry, CRISIL Research

CRISIL EcoView

encourage investments by lifting the sagging business confidence and create the upside to 7 per cent growth. In case the domestic policy logjam continues and Euro zone debt crisis escalates then we may get a lower GDP growth of 6.5 per cent.

Exchange rates
The rupee is expected to settle at around Rs 46.5 per US dollar by March end 2013. Although, pressure on the current account would ease somewhat during 2012-13 as compared to 2011-12, it will remain on the higher side. However, we expect the situation in the capital account to improve on account of higher inflow of both FDI and FII which will support the rupee Rupee to appreciate against US dollar. As from current levels financial markets are generally forwardlooking, capital inflows into India could begin even before the actual recovery in the Euro zone. Also a substantial part of FII money which withdraws from emerging market economies towards the end of the calendar year usually returns during the early part of new calendar year after the portfolio reallocation. We believe that with global risk aversion subsiding in 2012 and given attractive valuation of Indian equity market, capital inflows will pick up in 2012.

Inflation
Our baseline forecast for average inflation in 2012-13 is 5.8 per cent. So far in the current fiscaL, the overall inflation has yet not shown significant moderation and therefore our average inflation forecast for Inflation pressures 2011-12 stands at 9.2 per to ease cent. However, lately the food inflation has shown moderation and even turned negative. We believe that this trend is temporary and will reverse during 2012-13. Firstly, the current decline in the prices of fruits and vegetables is due to seasonal factors and therefore appear unsustainable. Secondly, the implementation of Food Security Bill is likely to keep up the demand-side pressure on food inflation. Yet, due to a very high base of last year and lower pricing power of corporate, we expect inflation to be much lower in 2012-13.

The risk to this projection, however, could emanate from two factors. If the GDP grows at higher rate of 7.5 per cent then underlying demand side pressure may push up the inflation to 6 per cent. If, however, GDP growth falls below 7 per cent and global oil/commodity prices decline sharply due to escalation of Euro zone crisis then inflation may fall to 4 per cent.
Figure 1.3: 10 year government security yield (March-end %)
8.9 8.5 8.2

The risk to this exchange rate outlook arises from a prolonged and deeper recession in Euro zone, which translates into sharp capital outflows and worsened export demand. This would place rupee above 50 per dollar.

Current account deficit

We expect current account deficit to settle at 3.0 per cent

Figure 1.4: Exchange rate (INR/USD)

51.0
%

48.0
8.0

47.0
7.5 7.3-7.5

46.5

44.6
6.8

43.0

FY11

FY12F

FY13F

FY11

FY12F

FY13F

Source : FIMMDA, CRISIL Research

Source: RBI, CRISIL Research

of GDP in 2012-13 as compared to 3.2 per cent expected during the current fiscal. The marginal downward pressure on the current account deficit in 2012-13 is expected mainly due to the improvement in exports of both goods and services towards the secondhalf of the year, aided by a modest recovery in the Euro zone. In addition, expected softness in global commodity prices due to the depressed global growth and likely appreciation of the Rupee vis--vis the US dollar next year, will exert downward pressure on the current account deficit. In the first-half of 2011-12, the current account deficit swelled to $32.7 billion (3.6 per cent of GDP) from $28.9 billion (3.7 per cent of GDP) in the same period last year. The growth was on the back of an almost 24 per cent rise in merchandise trade deficit over the comparable period. As per monthly data, exports displayed unexpected buoyancy in the first-half of 2011-12, growing strongly by 52 per cent as compared to a 31 per Fiscal situation cent growth in the same period to remain grim last year. However, after peaking in July 2011, exports began their downward momentum, with the latest reading for November 2011 coming in at 3.9 per cent. We believe that exports will continue to trend downward in the second-half of 2011-12.

GDP during 2012-13. For 2011-12 too, we had revised our fiscal deficit forecast to 5.5 per cent of GDP from 5.2 per cent earlier (released in October 2011). The government's budget estimate for 2011-12 meanwhile stands at 4.6 per cent. The deterioration in fiscal deficit numbers for 2011-12 is due to a substantial underbudgeting of subsidies such as oil, the government's difficulty in completing its disinvestment programme of Rs 400 billion and a sudden increase in the borrowing programme on two occasions, aggregating to Rs 928 billion We expect fiscal deficit to be at 5.5 per cent of GDP during 2012-13 due to the following factors: 1) Revenue position of the government is expected to remain fragile. a. During the current fiscal (April to November 2011), net tax revenue collections were at 48.2 per cent of the budgeted amount for the year, as compared to 52.6 per cent in the previous year. The situation is expected to be similar in the next fiscal as well. Of the Rs 400 billion of disinvestment revenue budgeted in 2011-12, only Rs 11.4 billion have been accrued this fiscal from stake sale in Power Finance Corporation. Given the track record of the government in earlier years it is unlikely that government would be able to garner substantial revenue for disinvestment even during 2012-13.

b.

Fiscal deficit
CRISIL expects fiscal deficit to settle at 5.5 per cent of

Figure 1.5: Current account balance (% of GDP)

-2.0

Figure 1.6: Fiscal Deficit (% of GDP)

6.0

5.5

5.5

-2.6
5.0

5.1

-3.2

-3.0

4.0

-4.0 FY11 FY12 F FY13 F

FY11

FY12F

FY13F

Source : RBI, CRISIL Research

Source: Budget documents, CRISIL Research

CRISIL EcoView

2.

For FY2011-12, several ministries have been advised to curtail expenditure to contain fiscal deficit from overshooting much beyond target. Much of these curtailed expenses could get spilled over to the next fiscal. Gsec yields to soften In addition, in 2012-13 overall subsidy burden due to continued food, fuel, fertilizer subsidy and various other social sector programs are likely to remain high. In addition, if the Food Security Bill is fully implemented, food subsidies will escalate.

The repo rate forms the floor for G-sec yields in the market. The rate cuts from RBI will lower this floor. We do not expect much upward pressure on G-sec yield from government borrowings as they are unlikely to compete with private requirement for funds in a weak growth scenario. . This will ease availability of credit for the government and thus keep its rate of the borrowing lower. The lower inflation and rate cuts from RBI will help to bring down yields from the current levels. We therefore expect interest rates on benchmark 10 year GSec to soften to around 7.3-7.5 per cent by March-end 2013. In case the government's borrowing programme rises substantially from the budgeted figure as it has in FY12, then interest rates on the benchmark 10-year G-Sec could be higher than 7.3-7.5 per cent or vice versa if the Euro zone crisis deepens further, lowering global commodity prices and thus lower government's subsidy bill.

Fiscal deficit to GDP could be lower in 2012-13 if (a) GDP growth exceeds 7.0 per cent which would yield higher tax as well as disinvestment revenues due to an improving investment climate, and (b) there is substantial pass-through of fuel prices which would alleviate the petroleum subsidy burden. A much higherthan-forecast fiscal deficit could emerge if GDP growth dips sub-7 per cent and there is inability to pass-through of petroleum subsidy burden.

Conclusion
CRISIL's macroeconomic forecasts set out here are based on our view of the domestic and global factors that shape up macroeconomic outcomes. However, we do recognize that our outlook on India's macroeconomic variables are strongly linked and dependent on the assumptions that we have made and can pan out differently if our assumptions do not turn out to be true. Domestically as well as globally, economic environment is much more uncertain and risky currently. Therefore, instead of a single growth outlook, we have tried to put forward scenarios for various macro-economic indicators based on our understanding of how they will evolve over the course of 2012-13.

Interest rate
With food inflation turning negative recently and GDP growth falling below 7.0 per cent in the second quarter of 2011-12, there is an expectation of an early reversal in RBI's monetary stance. The central bank's third quarter review of monetary policy is due on January 24, 2012. Although the RBI has indicated that in view of falling inflation, its focus is going to shift towards supporting growth, it is unlikely to cut key policy rates before the Q1 of 2012-13 unless it gets enough comfort on the inflation front.

II. Industrial Production

Industrial output contracted by a hefty 5.1 per cent in October 2011 as compared to 1.9 per cent growth in the previous month. A high base, coupled with deterioration in the domestic and global economic scenario, led to the sharp fall in the industrial growth. The industrial output growth has been sliding for Industrial growth the past few months. The slumps on broad underlying weakness has sectoral slowdown been quite aptly captured by the industrial output growth on a seasonally-adjusted m-o-m basis, which declined to the tune of 3.1 per cent in October 2011. Growth in all the sectors of IIP, except electricity, turned negative in October 2011. On a cumulative basis, industrial output for the first 7 (April-October) months of 2011-12 stood at an anaemic 3.5 per cent as compared to a healthy 8.7 per cent in the same period last year. industrial growth in this fiscal year. Manufacturing output contracted by 6.0 per cent in October 2011 as compared to a growth of 2.4 per cent in the previous month. The average growth for the manufacturing sector for the April-October2011 period stood at a dismal 3.7 per cent as compared to 9.4 per cent in the corresponding period in the previous year. At the 2-digit classification level, out of 22 of manufacturing groups, only 13 showed positive growth in October 2011. The mining sector continues to face challenges in this fiscal year. In October 2011, the sector's output contracted by 7.2 per cent, taking the cumulative fall in the first 7 months of 2011-12 to 2.2 per cent. The ban on mining iron ore in s o m e s ta t e s , l a t e Mining sector output monsoon (which contracts for the third c u r b e d c o a l consecutive month production) and falling gas production from the KG basin are some of the reasons why the mining sector took a beating so far this year. This weakness in growth in the mining sector is a matter of concern as it adversely impacts the manufacturing sector's output.

Mirroring the weakness in the overall industrial output, core sector growth also dipped sharply to 0.1 per cent in October 2011. This is the lowest level since July 2005. Barring electricity, cement and steel, all other core industry segments registered negative growth during the month. This is the fourth consecutive month of sluggish growth in industrial output and indicates that the downside risks for the domestic growth scenario have increased. A conjunction of factors such as high funding & input costs, policy inaction and risk aversion in global markets have continued to weigh on

Growth in capital goods contracted for the second consecutive month in October 2011 and slid sharply by 25.5 per cent. The sector's volatile and weak growth trajectory during this fiscal year reflects the weak
Table 2.1: Sectoral Growth (y-o-y %) Weight Oct-10 April-October 2011-12 Oct-11 2010-11 -5.1 -6.0 -7.2 8.7 9.4 6.9 3.5 3.7 -2.2 8.9 5.8 -0.3 0.6 3.7 4.5 2.9

Figure 2.1: Manufacturing Sector Growth (%)

14.0

12.4 9.0

General Manufacturing Mining Electricity

1000.0 755.3 141.6 103.2

11.4 12.4 6.1

7.0

4.8

0.0

Basic Capital Intermediates

-6.0

8.8 5.6 4.5 Use Based Industry (%) 355.7 9.8 -0.1 5.5 92.6 265.1 286.6 53.7 233.0 21.1 9.7 9.4 14.3 5.1 -25.5 -4.7 -0.8 -0.3 -1.3 17.1 8.6 9.1 15.7 3.9

-7.0

Consumer Goods -Durables -Non durables Source: CSO

FY10

FY11 Oct

Feb

FY11

Oct FY12

Source: CSO

CRISIL EcoView

investment scenario in the country. Cumulatively, for the first 7 months of this fiscal, output in the capital goods sector contracted by 0.3 per cent as compared with an impressive double-digit growth of 17.1 per cent during the same period last year. Basic goods output too slid into the negative territory after a gap of almost two-and-a-half years; it contracted by 0.1 per cent in October 2011 as compared to a healthy 9.8 per cent growth in the same month last year. The adverse impact of high interest rates and inflation continues to affect growth in the consumer goods sector. In October 2011, growth in consumer goods slid into the negative territory after a gap of more than 2 years. Growth in non-durables has remained in the red since the past 3 months. Consumer durables dipped into the negative territory (0.3 per cent) after a gap of Consumer goods two-and-a-half years. There have been early signs of this output declines decline with the fall in credit offtake in this sector. Rising inflation has hurt the sector's growth during this fiscal year. Persistent sluggishness in growth in intermediate goods reflects underlying weakness in the capital and consumer goods sector. Intermediate goods grew by a paltry 0.6 per cent in the first 7 months of the current fiscal year as compared to 8.6 per cent during the same period last year.

started to decelerate after displaying unexpected buoyancy in the first half of the current fiscal year. As per the provisional estimates, on a y-o-y basis, growth in exports plummeted to 4.2 per cent in November 2011. This downward trend is expected to continue for the remaining months of the fiscal year due to deterioration in the Eurozone growth prospects. Consequently, growth in the export-intensive sectors like textiles and leather products will slow down, going forward. In addition, sales growth prospects in the passenger vehicles and 2-wheelers segments remain bleak, despite marginal recovery lately due to the low base of last year. Rising funding and input costs will adversely impact this sector.

Outlook
The industrial sector has been besieged by several factors lately. On the domestic front, it has been severely hit by persistent inflation, the rising cost of capital, policy log-jam and unavailability of suitable workforce. On the global front, dwindling export demand, heightened risk aversion due to the EU's sovereign crisis and continued firmness in energy prices have only aggravated the situation. Although the extent of weakness in the IIP data during October 2011 surprised us as well, we expect the IIP growth to remain weak, but in the positive territory for the remaining months of this fiscal.

The forward-looking indicators also indicate worsening of both domestic and global conditions far more than anticipated earlier. The momentum of exports has now

Table 2.2: Performers in Manufacturing Sector (%) Weight Oct-10 Food & Bev Other transport Office Eqp Metal Products Basic metals Motor Vehicles Media Communication Leather products Paper Petroleum products Source: CSO 72.76 18.25 3.05 30.85 113.35 40.64 10.78 9.89 5.82 9.99 67.15 -3.7 43.7 10.4 18.2 18.5 27.2 19.2 12.2 11.5 16.5 -7.9 April-October Oct-11 2010-11 2011-12 14.7 1.9 18.4 6.2 2.9 -7.1 2.7 15.3 -2.1 2.1 -3.5 7.0 30.3 -4.7 14.8 6.4 36.3 12.0 15.8 6.4 7.8 -2.6 15.6 14.9 13.8 12.9 12.8 10.6 8.0 6.6 5.4 5.0 4.1

Table 2.3: Laggards in Manufacturing Sector (%) Weight Electronics Apparel Mach. & Eqp Textiles Rubber Wood Chemical Tobacco Furniture Medical NMMP 19.8 27.82 37.63 61.64 20.25 10.51 100.59 15.7 29.97 5.67 43.14 Oct-10 Oct-11 15.9 15.4 36.0 11.8 18.1 -7.7 3.3 9.8 -8.3 -9.1 11.5 -58.8 -5.7 -12.1 -11.0 -11.4 1.9 -6.7 0.8 0.3 30.8 2.7 April-October 2010-11 2011-12 3.3 5.9 34.1 6.8 16.9 1.9 -0.9 10.5 -6.3 9.5 6.1 -14.2 -6.8 -3.3 -3.1 -2.7 -2.7 -1.7 -0.8 0.3 2.1 2.6

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

10

III. Services
The latest GDP figures point to some decline, albeit robustness in services sector growth. During the second quarter of 2011-12, the services sector registered a growth of 9.3 per cent. The sector had registered a growth of 10.0 per cent during the previous quarter and 9.6 Services growth per cent during the second slows down quarter of 2010-11. Trade, hotels, transport and communications registered a growth of 9.9 per cent in the second quarter of 2011-12, down from 12.8 per cent in the previous quarter. However, financing, insurance, real estate and business services grew at 10.5 per cent in the second quarter of 2011-12, up from 9.1 per cent during the previous quarter. Similarly, community, social and personal services also fared well, growing at 6.6 per cent during the second quarter, up from 5.6 per cent in the first quarter. ports registered a decline for the third consecutive month in October 2011. Cargo handled at major ports recorded a decline of 3.7 per cent in October 2011 over the previous month. On an annual basis, there has been a decline in the cargo handled at these Cargo handled ports since the beginning at ports declines of the second quarter of this fiscal. On a y-o-y for 3rd consecutive basis, the cargo handled at month major ports registered a decline of 9.7 per cent in October 2011. Railway freight, on the other hand, showed an increase of 5.92 per cent on an annual basis. The railways carried 81.08 million tonnes of freight in November 2011. On a cumulative basis, since the beginning of this fiscal, freight carried by railways saw an increase of 4.1 per cent over the same period last year.

In November 2011, foreign tourist arrivals stood at 6.37 lakhs, which on a seasonally adjusted basis amounts to a contraction of 0.7 per cent over the previous month, but a 5.1 per cent growth over November 2010. Revenue from tourism was about 8.14 per cent higher than a year ago, totaling US$1.5 billion during November 2011. During the fiscal year so far revenue from tourism has risen by 21.82 per cent, over last year. The latest data available for port traffic shows a decline in domestic and international cargo handled at major ports. On a monthly basis, the cargo handled at major

As per the latest data, total air passenger traffic contracted by 3.3 per cent in July 2011, as opposed to a contraction of 2.5 per cent in the previous month. July 2011 saw domestic passenger traffic fall by 5.3 per cent over the previous month, while international passenger traffic registered a growth of 5.5 per cent. The data released by the Telecom Regulatory Authority of India (TRAI) pegs the total telecom subscriptions at 914.59 million in October 2011, up from 906.93 million in the previous month and 742.12 million a year ago. Wireless subscriptions stood at 881.40 million in
Figure 3.2: Credit flow to services (y-o-y %)
Services Trade', 'Tourism, Hotels & Restaurants', 'Transport Operators' NBFC', 'Real estate', 'Professional Services', 'Shipping' 45.0

Figure 3.1: Foreign Tourist Arrivals (FTA) , (%)

20.0
FTA (y-o-y) SA FTA (m-o-m)

17.7
14.0

35.0

8.6
8.0
25.0

4.4 2.8
2.0

3.0

5.1 -0.7
15.0

FY10 FY10 FY11 Apr

Jun

Aug FY12

Oct

Nov
5.0 Apr-10 Jan-11 Oct-11

Source: Ministry of Tourism

Source: RBI

11

CRISIL EcoView

October 2011, growing at 24.72 per cent over last year, while wired line subscriptions declined by 6.32 per cent over the previous year and stood at 33.19 million. Teledensity increased to 76.03 from 75.48 a month ago and 62.51 a year ago. At the end of October 2011, the share of PSU telecom players increased marginally to 12.19 per cent from 11.60 per cent a month ago. Credit offtake in the services sector continued to decline. Credit growth to services declined to 13.5 per cent in November 2011, down from 15.5 per cent in the last month and 19.3 per cent in September 2011. Growth in credit disbursements to trade however increased marginally 14.0 per cent in November 2011, from 13.0 per cent a month ago and 9.1 per cent during September 2011. Credit growth to commercial real estate has also been declining since the second quarter of this fiscal. It stood at 10.7 per cent in November 2011. Credit growth to transport operators and tourism was 13.9 per cent and 12.3 per cent, respectively, in November 2011.

Outlook
Persistent inflation and slowdown in the growth of personal consumption expenditure is expected to hit growth in the services sector adversely. Also, with the effect of the slowing industry spilling over onto the services sector, and a reduced demand for services, we expect the sector to grow at 8.9 per cent during 2011-12.

Figure 3.3: Cargo traffic 3-month MA (y-o-y %)

40.0
Cargo Handled: Domestic Cargo Handled: International

3 month MA (yoy%)

20.0

0.0 -10.0 Apr-10 Jan-11 Oct-11

Source: Airport Authority of India

12

IV. External Sector

Against the backdrop of an uncertain and uneven global economy, growth in India's exports moderated further to 3.9 per cent in N o v e m b e r 2 0 11 a s Growth in exports compared to 10.8 per remains sluggish cent in the previous month. However, on a seasonally-adjusted month-on-month (m-o-m) basis, growth in exports declined marginally by 0.2 per cent, taking the absolute number to $22.3 billion. rupee, which is inflating the import bill (India imports almost 75 per cent of its crude oil requirements). Nonoil imports also remained firm at 21.7 per cent in November 2011, Trade deficit despite weak domestic demand. remains high The gap between exports and imports levels continued to rise, thereby pushing up the monthly trade deficit to $13.6 billion in November 2011.

The Ministry of Commerce, conceded to the overestimation in the export numbers in the current fiscal. These numbers were neither adequately supported by macroeconomic indicators, like industrial output growth, nor were they in sync with the global slowdown. The Ministry admitted to the numbers being inflated by $9 billion in the April-November period of the current fiscal, with the error being attributed to doublecounting and problems in computer software, etc. After accounting for all these data revisions, the cumulative exports for the first 8 months now stand at $192.7 billion. Meanwhile, growth in imports rose by 24.5 per cent and stood at $35.9 billion in November 2011. After revisions, cumulative imports for April-November 2011 stand at $309.5 billion as compared to $237.7 billion over the same period last year. In November 2011, healthy growth in both, oil and non-oil imports, spurred the growth in imports. Growth in oil imports accelerated sharply to 32.3 per cent supported by a weakened
Figure 4.1: Exports Performance (US$ bn)
250.0 200.0 150.0 100.0 50.0 0.0 FY10 FY11 Apr May Jun Jul Aug Sep Oct Nov FY12 178.0 237.9

Going forward, growth in exports is likely to remain subdued on account of the weak global outlook, but the rising oil imports bill will keep growth in imports firm. Trade deficit is also likely to remain high this fiscal, as unlike in the previous global crisis period, commodity prices have not fallen sharply this time around. Hence, while exports have moderated, imports have not fallen at the same rate.

Outlook
Going forward, growth in exports is likely to remain subdued due to the weak global outlook and an unfavourable base effect. Continued high oil imports will keep the overall imports bill firm, while declining non-oil imports (due to slackening domestic demand) will prevent imports from rising at a fast pace. But overall, trade deficit will widen significantly this year as compared to the last year.

Table 4.1: Trade Performance Nov-10 Nov-11 Exports Imports Oil Imports Non-oil Imports Trade Balance Exports Imports Oil Imports Non-oil Imports Trade deficit 21.5 28.8 7.8 21.1 -7.4 26.5 11.2 2.3 15.0 -11.6 April-November 2010-11 2011-12

Merchandise (US$ billion) 192.7 22.3 144.7 309.5 35.9 237.7 94.1 10.3 66.0 215.4 25.6 171.7 -116.8 -13.6 -93.0 y-o-y % 33.2 3.9 29.4 30.2 24.5 28.3 40.8 32.3 25.4 25.5 21.7 29.5 25.6 85.0 26.4

Source: Ministry of Commerce

Source: Ministry of Commerce

13

CRISIL EcoView

V. Inflation
WPI rose by 9.1 per cent in November 2011 as against 9.6 per cent a month earlier. Inflation for September 2011 was revised upward to 10.0 per cent from 9.7 reported earlier. During the month, food inflation (primary and manufactured) declined sharply, bringing down overall inflation. But, fuel inflation surged higher while core inflation (non-food manufacturing) too remained firm. Despite domestic demand weakening during the first two quarters of the current fiscal, WPI inflation has remained high and stubborn reflecting price stickiness as well as impact of continued depreciation in rupee. Recent weakness in the currency has pushed up the cost of imports of edible oil, fuels and metals despite some decline in their international prices. The fall in rupee and its adverse impact on inflation prompted us to make an upward revision to CRISIL Research's average inflation forecast for 2011-12. It now stands at 9.2 per cent as compared to 9.1 per cent forecasted earlier. The month-on-month seasonally adjusted inflation series moderated for the second consecutive month, after a spike in September 2 0 11 . O n a m o n t h l y average basis, the index Inflation remains rose by 0.46 per cent during firm despite easing April to November 2011, food inflation compared to 0.52 per cent in the same period of 2010. Consumer price inflation (for industrial workers) declined marginally to 9.3 per cent in November 2011, from 9.4 per cent in the previous month. Inflation in the fiscal year so far (April to November 2011) stands at 9.1 per cent compared to 9.6 per cent during the same period of 2010. During November 2011, there was sharp deceleration in primary articles' inflation. Inflation in this category fell to 8.5 per cent from 11.4 per cent in the previous month. This was due to a steep fall in primary food inflation (especially in fruits, vegetables and poultry) to 8.5 per cent from 11.1 per cent in the previous month. Normal monsoons and a good harvest have kept food inflation in check. Non-food inflation (especially fibres) has also declined substantially as it came down to 3.2 per cent in November 2011, compared to 7.7 per cent in the previous month. Weekly trends in inflation data depict that primary articles' inflation has almost halved during December 2011, compared to the previous month. With food inflation at 0.8 per cent average, primary articles' Food inflation at inflation is seen at 3.0 per nearly zero cent. Fuel inflation is expected in December at 14.9 per cent average during December. Most of the decline in food inflation is due to fall in prices of fruits & vegetables, condiment & spices, and lower inflation in eggs, meat and fish.

During November 2011, fuel inflation rose to 15.5 per

Table 5.1: Inflation in Major Product Groups Weight Nov-10 Nov-11 April-November 2010-11 2011-12

Figure 5.1: Headline Inflation (y-o-y %)

12.0 9.6 9.7 9.1 9.3 9.1 WPI CPI-IW

y-o-y % General Primary Fuel 100.00 20.12 14.91 64.97 8.2 14.7 10.3 12.0 43.7 19.0 37.0 9.1 8.5 15.5 7.7 24.3 26.2 49.6 9.6 18.4 12.5 5.5 45.2 19.6 35.3 9.6 11.9 13.4 7.6 31.4 21.6 47.1

6.0 3.8

Manufacturing Primary

Contribution to inflation
0.0 FY10 FY11 Oct FY11 May Nov FY12

Fuel Manufacturing

Source: Ministry of Industry

Source: Ministry of Industry & CRISIL Estimate

14

cent compared to 14.8 per cent in the previous month, due to sustained increase in prices of aviation turbine fuel, naptha, bitumen and furnace prices of which are internationally linked. An extended period of sharp rupee depreciation is influencing the imported components of inflation. For instance, while the Core inflation rises global crude oil prices to 7.9 per cent rose by nearly 20.0 per in December cent in November 2011 compared to a year earlier, the rupee price of oil shot up by around 40.0 per cent due to currency depreciation. On a month-onmonth basis, the fuel index rose 0.9 per cent in November 2011, compared to 1.0 per cent in the previous month.

Outlook
Looking ahead, inflation will fall further as food inflation declines due to good harvest and slowing demand. The pace of fuel inflation will depend on the response of oil/commodity prices to global slowdown, the extent of pass-through into domestic market and the Rupee-USD equation as the recent depreciation of the rupee has pushed up the imported component of inflation. We believe that WPI inflation will fall around RBI's projection of 7.0 per cent by March 2012. Nonetheless, it will remain above the RBI's tolerance limit of 5 per cent for some months even in the next fiscal.

Manufacturing inflation remained stubborn at 7.7 per cent during November 2011, unchanged from the previous month. Manufactured food inflation decelerated to 6.6 per cent compared to 7.6 per cent in October 2011. Despite slowing growth, core (non-food manufacturing) inflation is still showing no signs of decline. Non-food inflation rose further to 7.9 per cent from 7.7 per cent in the previous month. Within nonfood manufacturing, inflation in paper, leather, chemicals, metals, machine tools & transport equipment stayed firm, while beverages & tobacco products, textiles, & rubber and plastics saw some moderation.

Table 5.2: Inflation in Primary Articles (y-o-y %) April-November 2011-12 Weight Nov-10 Nov-11 2010-11 Cereals Pulses Fruits & Vegetables Eggs,Meat & Fish Fibres Oilseeds Metallic Minerals Other Minerals 3.37 0.72 3.84 2.41 0.88 1.78 0.49 0.13 3.2 -10.0 7.9 18.9 44.7 3.1 69.9 7.9 2.4 13.9 9.6 11.9 1.6 11.3 -2.2 1.8 6.7 10.0 12.0 31.5 26.0 3.9 52.0 2.7 4.6 -1.5 14.9 10.5 34.1 12.7 6.9 9.0

Table 5.3: Inflation in Manufactured Products (y-o-y %) Weight Nov-10 Chemicals Food Products Textiles Machine Tools Metal & Alloys Transport Eqp. NMMP Rubber & Plastic 12.02 9.97 7.33 8.93 10.75 5.21 2.56 2.99 5.2 1.1 11.7 2.9 7.8 2.7 2.1 7.5 April-November Nov-11 2010-11 2011-12 9.5 6.8 6.6 3.5 13.0 4.6 6.1 5.1 4.9 5.3 10.6 2.6 7.9 3.0 2.6 5.4 8.4 7.7 11.3 3.2 10.6 3.5 4.3 7.6

Source: Ministry of Industry

Source: Ministry of Industry

15

CRISIL EcoView

VI. Money and Banking

A tight interbank liquidity situation prompted the RBI to conduct four open market operations (OMOs purchase of government securities) in December 2011. These were conducted, on December 1, 8, 22 and 29, in 2011 and it infused Rs 57.82 billion, Rs 90.92 billion, Rs 87.90 billion and Rs 81.09 billion, respectively into the banking system. Together, a total of five such OMOs have been conducted since November 2011. During the month, the average net liquidity in the banking system (repo less reverse repo balance) remained above Rs 1 trillion. Despite multiple injections of liquidity by the RBI, the interbank liquidity situation continues to be strained, because the increased money supply is sucked up by the auction of G-sec issues, which closely follows the OMOs. With the recent announcement by the government to raise further debt, more such OMOs are likely to happen as the liquidity in the banking system will remain stretched. Policy rates are at high levels of 8.5 for repo, 7.5 for reverse repo and 9.5 per cent for Marginal Standing Facility. Growth in bank credit increased to 17.2 per cent for the fortnight ending December 16, 2011, from 16.4 per cent for the Credit growth f o r t n i g h t e n d i n g slows to 17 per cent November 18, 2011. Nonin December 2011 food credit growth also fell to 17.0 per cent from 17.4 per cent last month. Credit to deposit ratio increased to 75.2 per cent as against 74.2 per cent last month. This takes the credit deposit ratio to the levels of last year. As per data on sectoral deployment of bank credit, which is available for November 2011, overall non-food credit growth declined from 18.2 per cent in October to 16.8 per cent in November 2011. Credit growth in the manufacturing sector declined marginally from 14.48 per cent to 13.54 per cent in the reporting month. Industrial credit growth also showed a declining trend and reached 20.86 per cent as against 23.07 per cent in October, 2011. Though mining and quarrying credit growth showed a declining trend among industries, it continued to remain at a high level of 41.2 per cent. Credit offtake to the services sector for November 2011 was 16.94 per cent as against 22.53 per cent last year. Credit growth in the housing sector dipped further to reach 1.91 per cent as against 3.51 in October 2011. However, credit growth in exports increased further and reached 39.4 per cent in November 2011. This can be explained by the increased cost of the inputs needed to manufacture India's basket of exports. Also, since India is substantially dependent on imports for most of its raw materials, a depreciating currency has hit the cost of production of the exporters, thereby increasing their need for credit. But export-related industries like gems & jewellery, textiles, chemicals & chemical products witnessed a slowdown in the credit growth in November 2011 as against October 2011 on account of weaker demand from Europe. Credit growth to the consumer durables sector contracted further and

Figure 6.1: Money Supply Growth (%)

20.0 19.3 16.0 15.5 y-o-y 16.5

Table 6.1: Scheduled Commercial Banking Indicators (y-o-y%) Outstanding as on 16th Dec Financial Year so far 2010-11 2011-12 2010 2011 Aggregate Deposits Bank Credit 14.7 23.7 38.8 23.5 6.9 75.8 18.2 17.2 32.6 17.0 16.3 75.2 6.8 12.2 28.9 11.9 4.2 113.3* 9.0 8.3 29.0 8.0 11.9 71.9*

10.0

Food Credit Non-Food credit Investments

0.0 FY10 FY11 Sep FY11 May FY12 Dec

Credit-Deposit Ratio Source: RBI

Source: RBI

*Note: Incremental credit deposit ratio as on date

16

reached -8.51 per cent, the lowest level in the last 23 months. This has been one of the hardest hit sectors in the past few months because of the hike in interest rates by the RBI. Deposit growth increased marginally and reached 18.2 per cent for the fortnight ending December 16, 2011. Increasing deposit growth and slow credit growth pushed the incremental credit-todeposit ratio to 71.9 in December as against 77.6 per cent last month. Having shown a declining trend in the past few months, money supply (M3 ) growth increased to 16.5 per cent (y-o-y) for the fortnight ending December 16, 2011. Money supply During the reporting period, growth in bank credit to the growth moves up commercial sector dropped in December 2011 further to 16.4 per cent from 17.7 per cent last month. Growth in net bank credit to the government remained at around 22 per cent for the fortnight ending December 16, 2011. However, banks' investments in government securities declined further to 16.14 per cent for the fortnight ending December 16, 2011. The total investment of banks in government securities as a percentage of total deposits remained at around 29 per cent, almost the same level as last year.

treasury bills, Rs 120. 97 billion via state development loans, Rs 520 billion via dated securities and Rs High government 150 billion via cash borrowings keep management bills. The liquidity under continued increase in the pressure government's long-term borrowing had pushed the average 10-year G-sec yield to 9.1 per cent in November 2011 from an average of 8.9 per cent in October 2011.

Average call rates for December 2011 increased further to around 8.9 per cent. Daily net transactions under the liquidity adjustment facility (LAF) window increased to Rs 1.16 trillion this month, indicating a liquidity crunch in the system. Following the increase in government borrowings, and the severe liquidity crunch in the system, further OMOs were carried out during the month.Continued tight monetary policy and severe shortage of inter-bank liquidity pushed average call rates to 8.5 per cent in November 2011. Daily net transactions under the liquidity adjustment facility (LAF) window increased to Rs 928 billion this month, showing severe liquidity crisis in the system.

Outlook
The Union Government announced that it would increase its borrowing by Rs 400 billion in December 2011. This will take the total gross borrowing by the government to 5.1 trillion and exert further pressure on both, liquidity and bond yields. Likelihood of further OMOs remains high.

Government borrowings slowed somewhat in December 2011 vis--vis the last month. It borrowed Rs 420 billion via treasury bills, Rs 134.59 billion came from state development loans and Rs 400 billion from dated securities. As compared to this, the government had borrowed Rs 320 billion in November 2011 via
Figure 6.2: Liquidity Situation In India
1800.0 1200.0 600.0 0.0 -600.0 -1200.0 -1800.0

Net LAF transactions, Rs bn (LHS)

Call rates

Repo rate Reverse repo rate

Marginal Standing Facility

% 10.0

6.5

3.5

Dec-10 FY11

Feb-11

Apr -11

Jun-11

Aug-11 FY12

Sep-11

Nov-11

0.5

Source: CCIL & RBI

17

CRISIL EcoView

VII. Markets
Currency
The rupee continued to decline against all major currencies in December 2011. On a monthly average basis, it fell by 3.6 per cent against the dollar, as compared to 3.2 per cent in the previous month. On the supply-side, a mix of factors such as weak growth prospects in the Euro zone, increased speculation of a credit freeze, slowing domestic GDP growth in the second quarter of the fiscal year and a contraction in industrial growth during October 2011 caused foreign investors to shy away from Indian markets. This reduced the supply of dollars. There was some respite due to RBI's decision to raise the limits on foreign investment in government and corporate debt market. On the demand-side, persistent demand for the dollar to make import payments and to address the huge foreign loan repayment obligations of corporate India, kept the currency at record lows. The sharp fall in the rupee saw the RBI intervening in the currency market on a few occasions. RBI also issued directives to reduce the speculative element and hence, volatility in the currency market. During the month, global crude oil prices fell by 2.6 per cent on a month-on-month basis. In the forward market, the one month premium rose by 37.1 per cent, while the 6-month premium rose by 65.8 per cent. The rupee touched a record low of 54.2 to a dollar in December 2011, much beyond than the previous record low of 52.1 in March 2009. Volatility in the rupee was high as the currency hovered between 51.4 and
Figure 7.1: Net FII Inflows and Exchange Rate
Net Fll inflow US$ bn (LHS) Rs per USD

54.2 per dollar. The rupee also continued its downward movement against all other currencies, although the decline against the pound and the euro were lower than the previous months. It fell 2.3 per cent against the pound and 0.6 per cent against the Rupee touches record euro in December low of Rs 54.2 per dollar 2 0 1 1 , a s compared to 3.6 in December 2011 per cent and 2.1 per cent in the previous month. On a monthly average basis, it posted a sharper fall of 3.1 per cent against the yen in December 2011, in comparison with 2.3 per cent in the previous month.

In December 2011, foreign institutional investment (FII) gathered some pace mainly due to relaxation of investment in debt securities. For the month, net FII inflows were recorded at $4.2 billion as compared to net outflows of $0.6 billion in November 2011. Almost all the money pumped in went into debt instruments.

Outlook
Although a mild recession in the first half of 2012 in the Euro zone and recovery thereafter is now a possibility, given the forward-looking nature of financial markets, we expect portfolio inflows to recover somewhat by March 2012 relative to the current levels. Therefore, CRISIL Research expects the rupee to settle at around Rs 48 per dollar by endMarch 2012 and assigns a 50 per cent probability to this event.

Table 7.1: Currency Movement (Monthly Averages)

54.0

3.0

USD FY 11 H1 FY11 H2 FY11 H1 FY12 Q3 FY12 November-11 December-11 1--month 6-months Source: RBI 45.6 46.1 45.1 45.3 51.0 50.8 52.7 8.7 6.5

GBP 70.9 70.1 71.7 73.3 80.1 80.3 82.1

Euro 60.2 59.0 61.4 64.5 68.6 68.9 69.3

Yen 53.3 51.9 54.7 56.9 65.9 65.6 67.7

Indian Rupee vis--vis

49.0 0.0

Forward premia*
-2.0 May-08 FY09 44.0
Oct-09 FY10 Jan-11 FY11 Dec-11 FY12

Source: SEBI, RBI

Note: * As of 23rd December, 2011

18

Debt
The benchmark 10-year G-sec yields cooled slightly in December 2011 as against last month. This can be attributed to the lower government borrowing and repeated OMOs (open market operations - purchase of government securities) undertaken by the RBI during the month, which infused the required liquidity into the system. The Government borrowed Rs 400 billion in December 2011 as compared to Rs 520 billion in the previous month via dated securities. In December 2011, the government announced an additional borrowing of Rs 400 billion via dated securities, taking the total gross borrowing by the government in this fiscal year to Rs 5.1 trillion on a gross basis. The yield on the benchmark 10-year paper stood at an average of 8.7 per cent in December 2011. It reached 8.5 per cent during the month, the lowest since September 2011. On a month-end basis, yields were higher by 42 bps in D e c e m b e r 2 0 11 a s Yield curve flattens compared to November further, in 2011. Yields of the shortDecember 2011 term 1-year government bond also showed a similar trend and averaged at 8.6 per cent in December 2011, 29 bps lower than last month. Despite lowering yields, the yield curve, defined as the spread between the 10-year and 1-year bond yield, continued to become flat. Net FII inflows to the tune of $4.2 billion into the debt market were recorded in December 2011 in comparison

with $0.2 billion in November 2011. The spike in net FII inflows into the debt market was because of the increase in the FII investment limit in government securities to $15 billion as against $10 billion earlier. Yield on the long-term 'AAA' corporate bonds dropped during the reporting month. The corporate bond yield came down to 9.4 per cent by end-December, from 9.7 per cent as of end-November 2011. The spread between the 'AAA' corporate bond and the 10-year government bond fell by 10 bps over November 2011 levels.

Outlook
The Government's borrowings from the market during the second half of 2011-12 have now gone up to Rs 2.6 trillion instead of the Rs 2.2 trillion announced earlier. On the other hand, the RBI has been undertaking OMOs to ease liquidity pressure While the RBI is mulling over reversing its policy stance, it has not made it clear about the timing of such a move. Therefore, we expect the 10-year G-sec yields to be around 8.5 per cent by March end 2012.

Figure 7.2: 10-year G-sec yields, year-end and month-end (%)

10.0

Figure 7.3: Risk Premia, year end & month end (%)
2.0
Spread between AAA corporate & 10-yr G-sec

8.7 7.8
7.5

8.1 8.1

1.1 1.0

1.2 0.9

0.7

5.0 FY10 FY11 Dec FY11 May FY12 Dec

0.0
FY10 FY11 Dec FY11

May
FY12

Dec

Source : CCIL

Source: FIMMDA

19

CRISIL EcoView

Equity
The Indian equity markets surged during the first week of December 2011 as global stocks climbed on a renewed optimism that European officials were poised to arrive at a solution to the economic crisis that is wreaking havoc in the euro zone. Investors pumped in money into the equity markets amidst India's weak second-quarter GDP data and expectations of lower inflation and that the Reserve Bank of India (RBI) may pause its aggressive monetary stance to prop up growth. During the second week of the month, the market tumbled on concerns over the government's inability to continue with policy reforms as it suspended plans to allow foreign direct investment (FDI) in India's multib r a n d r e t a i l s e c t o r. Concerns over the Policy log-jam outcome of the European weighs down Union's summit also market sentiment spooked investors. Though the US and the European markets held up well in anticipation of a positive outcome from the EU summit, the Indian markets underperformed and ended the week on a negative note on the back of negative domestic news. The Government's inability to implement the policy reforms, high fiscal deficit and the cut in the GDP forecast for 2011-12 increased concerns in the minds of the investors. During the week ended December 16, 2011, the key benchmark indices fell and hit their lowest level in more than 2 years after the RBI kept the cash reserve ratio (CRR) unchanged, despite tight

liquidity in the system. Towards the end of December 2011, bearish sentiments gripped the market as the investors' focus shifted towards the upcoming corporate results for the third quarter. The Sensex stood at 15454.9 as on December 30, 2011, down from 16123.5 a month ago and 20389.1 a year ago. During the month, the benchmark index gave negative monthly and yearly returns of 4.2 per cent and 19.9 per cent, respectively. Amidst the policy log-jam, the valuation of Indian companies continued to suffer with the P/E ratio falling to 16.9 in December 2011 from 17.6 in November 2011. NSE India VIX stood at 27.11 as on December 30, 2011, up from 25.02 at the beginning of the month, hinting towards expectations of increased volatility in the short term. Net FII inflows during December 2011 turned positive and stood at $4.2 billion, of which, there were nil net FII inflows into the equity markets during the month. The last month saw a net FII outflow of $0.6 billion. In December 2011, S&P 500 yielded monthly and yearly returns of 6.2 per cent and 0.1 per cent, respectively. NIKKEI 225 gave negative returns of 17.0 per cent on a yearly basis, but provided positive returns of 10.0 per cent on a monthly basis.

Figure 7.4: Indian Equity Market Performance

Yearly returns Monthly returns

Figure 7.5: Global Equity Market Performance

Yearly returns Monthly returns

-19.9 -4.4 -19.9 -4.2 -22.5 -5.7 -27.0 -7.1

S&P CNX Nifty

-17.0 10.0 -7.1 1.8 0.1

NIKKEI-225

Sensex

MSCI WORLD

S&P CNX 500 -16.7 -1.0

6.2

S&P 500

CNX Mid Cap

Note : Returns are for the period of December 2011

MSCI EME
Note : Returns are for the period of December 2011

Source: NSE, BSE

Source: Yahoo Finances

20

VIII. Global Economic Outlook

In recent months, the global economy has witnessed further loss in growth momentum. Against the background of heightened uncertainty and rising stress in financial markets, the global business and consumer s e n t i m e n t h a s d e t e r i o r a t e d f u r t h e r. T h e s e developments have affected the positive impetus that was visible due to the clearing of supply-chain disruptions that had been triggered by the Japanese earthquake. The recent moderation in growth should help to alleviate overheating pressures in emerging economies, while the advanced economies face significant structural headwinds. The third estimate, released by the US Bureau of Economic Analysis, pegs real GDP growth for the US at 1.8 per cent for the third quarter of 2011. US growth for the third quarter of 2011 US growth revised has been revised downwards again downwards from 2.0 per cent as pegged earlier by the second estimate. The increase in real GDP primarily reflects positive contributions from personal consumption expenditure, non-residential fixed investment, exports, and federal government spending. But, they were partly offset by negative contributions from private inventory investment and state and local government spending. Real personal consumption expenditures increased by 1.7 per cent (down from 2.3 per cent in the previous estimate) in the third quarter, compared to an increase of 0.7 per cent in the second quarter. During the same period, Non-residential fixed investment increased by 15.7 per cent (up from 14.8 per cent in the previous estimate) as compared to an increase of 10.3 per cent in the second quarter. Real federal government consumption expenditures and gross investment rose by 2.1 per cent in the third quarter. According to the third estimate released by the Office for National Statistics, UK's economy grew at 2.4 per cent in the third quarter of 2011, up from 2.0 per cent as estimated previously. The UK had recorded a similar growth in the third quarter of 2010. The output of the agriculture, forestry and fishing sector increased by 2.0 per cent in the third quarter of 2011 as compared with a decrease of 4.4 per cent in the second quarter of 2011. The output of the production industries rose by 0.8 per cent in the third quarter of 2011. Output in the services sector went up by 2.8 per cent in the third quarter of 2011 as compared to an increase of 0.4 per cent in the previous quarter. The second estimate released by Eurostat pegs the Euro area growth at 0.8 per cent for the third quarter of 2011, unchanged from the flash estimate. Germany grew at 2.0 per cent, France registered a growth of 1.6 per cent, the Spanish economy remained stagnant and Portugal contracted by 1.6 per cent.
Table 8.2: Trade Balance (Billion, National Currency) Q3-11 1.8 2.4 0.8 -0.1 9.4 United States United Kingdom Euro Area Japan Jun-11 -51.6 -4.5 0.1 67.3 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 -44.8 -2.3 2.5 -44.9 -2.7 -4.4 -44.2 -4.3 2.7 -43.5 -1.6 1.1 -687.6 14.5

Table 8.1: GDP Growth (q-o-q, annualised %) 2010 United States United Kingdom Euro Area Japan* China* 2.9 1.3 1.7 4.0 10.3 Q3-10 2.6 2.8 1.2 5.2 10.7 Q4-10 Q1-11 Q2-11 3.1 -2.0 1.2 2.3 10.4 1.9 2.0 2.5 -1.0 9.7 1.3 0.4 0.8 -1.1 9.6

67.9 -779.6 293.9 -281.8 31.5 17.8 14.5 17.0

China (US$ billion) 22.3

Source: Statistical Bureau, Respective Countries

Note: * y-o-y %

Source: Statistical Bureau, Respective Countries

21

CRISIL EcoView

Among the Asian economies, China's GDP expanded at 9.4 per cent in the third quarter of 2011, down from 9.6 per cent during the second quarter of 2011. This is the slowest pace of GDP growth in China since early 2009. Japan's economic activity has been picking up, albeit moderately mainly due to effects of a slowdown in the overseas economies. Japan's economy showed some improvement by contracting at only 0.1 per cent in the third quarter of 2011. It had previously contracted at 1.1 per cent during the second quarter of 2011. According to the US Census Bureau and the US Bureau of Economic Analysis, exports for October 2011 stood at $179.2 billion, while imports were at $222.6 billion. This resulted in a goods and services deficit of $43.5 billion, down from $44.2 billion (revised) in September 2011. In October 2011, the goods deficit decreased by $0.7 billion from the September 2011 level, while the services surplus remained virtually unchanged at $15.3 billion in October. The fall in exports of goods reflected decreases in industrial supplies and materials, consumer goods, foods, feeds, beverages, automotive vehicles, parts, and engines. Imports of capital goods, consumer goods, foods, feeds, and beverages registered an increase. With regard to services, increases in royalties and license fees and other private services (which include items such as business, professional and technical services, insurance services, and financial services) were mostly offset by decreases in travel, other transportation, and passenger fares. The UK's deficit in trade in goods and services stood at

1.6 billion in October 2011 as compared to a deficit of 4.3 billion in September. The deficit in seasonallyadjusted trade in goods was 7.6 billion in October 2011, compared with the deficit of 10.2 billion in September 2011. The surplus in seasonally-adjusted trade in services was estimated at 6.0 billion in October 2011, compared with the surplus of 5.9 billion in September 2011. The increase in total exports was driven by higher levels of exports of chemicals, medical products, capital, telecommunications equipment and silver. Imports of oil increased, while that of consumer goods registered a decline. In Japan, trade balance fell to a deficit of 687.6 billion in November 2011 from a deficit of 281.8 billion last month. Japan had posted a surplus of 293.9 billion in September 2011. On a monthly basis, Japanese Japan's trade deficit exports fell by 5.6 per widens sharply cent, but imports grew at 1.6 per cent in November 2011. China posted a surplus of $14.5 billion in November 2011, down from a surplus of $17 billion in the last month, but same as in September 2011. On a monthly basis, China's exports and imports registered a growth of 10.8 per cent and 13.9 per cent, respectively.

Eurostat's estimate for the Euro area's trade with the rest of the world stood at a surplus of 1.1 billion in October 2011. In September 2011, the balance was 2.7 billion. On a seasonally-adjusted basis, in October, exports fell by 1.9 per cent and imports by 0.7 per cent, in

Table 8.3 Consumer Price Inflation (y-o-y %) Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 United States United Kingdom Euro Area Japan China 3.6 4.2 2.7 0.2 6.4 3.6 4.4 2.5 0.2 6.5 3.8 4.5 2.5 0.2 6.2 3.9 5.2 3.0 0.1 6.1 3.6 5 3 -0.2 5.5 Nov-11 3.4 4.8 3.0 -0.5 4.2

Table 8.4: Policy Interest Rate (End of Month %) Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11

United States 0.0-0.25 0.0-0.25 0.0-0.25 0.0-0.25 0.0-0.25 United Kingdom Euro Area Japan China 0.5 1.50 0.1 6.6 0.5 1.50 0.1 6.6 0.5 1.50 0.1 6.6 0.5 1.50 0.1 6.6 0.5 1.00 0.0 6.6

0.0-0.25 0.5 1.00 0.0 6.56

Source: Statistical Bureau, Respective Countries

Source: Statistical Bureau, Respective Countries

22

comparison with September 2011. According to the Bureau of Labour Statistics, inflation in the US fell marginally to 3.4 per cent in November 2011 from 3.6 per cent in October 2011. The energy index declined for the second month in a row. As in October 2011, the gasoline index fell sharply and the index for household energy declined as well. The index for all items (excluding food and energy) increased by 0.2 per cent in November 2011, following an increase of 0.1 per cent in the previous 2 months. The y-o-y change in the food index also declined slightly, from 4.7 per cent in October 2011 to 4.6 per cent in November 2011. Inflation in the UK fell to 4.8 per cent in November 2011, from 5.0 per cent in the last month. The downward pressures to inflation came from food, petrol, clothing and furniture, household equipment and maintenance. But these were offset by upward pressures from domestic heating and off sales of alcohol. Prices of food and non-alcoholic beverages rose by 4.0 per cent. Gas and electricity charges rose by 25.3 per cent and 15.5 per cent, respectively. In November 2011, the Euro area's annual inflation was 3.0 per cent. Inflation has stood at 3.0 per cent in the Euro area since September 2011. The main components with the highest inflation in November 2011 were transport, housing, alcohol and tobacco, while the lowest inflation was observed in communications, recreation, culture and education. As compared with October 2011, annual inflation fell in fourteen member

states, remained stable in three and rose in ten. Among Asian economies, inflation in China eased to 4.2 per cent in November 2011, from 5.5 per cent last month. This is the lowest inflation figure for China since the beginning of 2011. Inflation in Japan remained in the negative territory in November 2011 and stood at -0.5 per cent. Policy rates The European Central Bank (ECB) reduced its policy rate to 1.0 per cent from 1.25 per cent, with effect China might opt for from December 14, reduction in reserve 2011. The Bank of ratio England maintained its bank rate at 0.5 per cent. China maintained the base lending rate at 6.56 per cent. Japan and the US maintained their policy rates close to zero.

Commodity price movements

Commodity prices are easing in the wake of the global slowdown. December 2011 witnessed a fall in crude oil prices. During the month, crude oil prices Commodity prices fall averaged $107.9 per barrel, down from $110.7 per barrel in the previous month. On a m-o-m basis, crude prices fell by 2.54 per cent. As per the latest

Figure 8.1: Europe Brent (US$ per barrel)

130.0

Figure 8.2: Commodity Price Movements

m-o-m y-o-y

-13.6 -3.9
107.9 95.0 91.4

Aluminium

-4.0 -4.5

Steel

-2.4 -0.2

Soya Oil*

60.0

-8.3
Dec-10 Apr-11 Aug-11 Dec-11

-4.1

Wheat

Source: Energy Information Administration

Source: Metal Bulletin, FAO

*Note: Data is available only upto November 2011

23

CRISIL EcoView

data, soya oil prices fell by 0.2 per cent and 2.4 per cent on a monthly and yearly basis, respectively, in November 2011. Steel and aluminum prices fell by 4.5 per cent and 3.9 per cent, respectively, on a monthly basis. Both steel and aluminum prices declined on an annual basis too. On a y-o-y basis, steel prices fell by 4.0 per cent, while aluminum fell by 13.6 per cent. Wheat prices fell both, on a monthly and yearly basis, by 4.1 per cent and 8.3 per cent, respectively.

24

IX. Annexure
Table 9.1: Annual Data Summary Real GDP growth at factor cost, 2004-05 base (y-o-y%)1
Total
9.2 8.0 6.9 8.3 7.3 4.7 3.6 2.2 0.4
4.4

Agriculture
9.5

Industry
10.5 9.7 8.5 6.6 7.3

Services
9.8 9.2 9.6

4.2

FY08 FY09 FY10 FY11 FY12

FY08 FY09 FY10 FY11 FY12

FY08 FY09 FY10 FY11 FY12

FY08 FY09 FY10 FY11 FY12

WPI Inflation, 2004-05 base (y-o-y%)2

Inflation
12.4 10.4 8.0 6.2 4.8 3.8 9.1 9.6 9.6 9.1

Primary goods
17.7 11.0 8.3 12.7 11.9 11.6

Fuel
12.3 13.4

Manufacturing

7.6 6.2 4.9 0.0 2.2 -2.1 5.7

FY08 FY09 WPI

FY10 FY11 FY12 CPI-IW

FY08 FY09 FY10 FY11 FY12

FY08 FY09 FY10 FY11 FY12

FY08 FY09 FY10 FY11 FY12

Index of Industrial Production (y-o-y%)3

General
15.5 8.8 8.2 3.5 5.3 2.5 2.8 6.4 6.1 5.5 4.8 2.5 -2.2 FY08 FY09 FY10 FY11 FY12
9.0

Electricity
18.4

Manufacturing

Mining
7.9 5.2 4.6 3.7 2.6

FY08 FY09 FY10 FY11 FY12

FY08 FY09 FY10 FY11 FY12

FY08 FY09 FY10 FY11 FY12

External Variables (US$ bn)2

Exports
303.7 245.9 185.3 176.6 163.1 192.7 251.7 278.7

Imports
350.7 309.5

Merchandise Trade Deficit

118.4 88.5 102.1 104.8 116.8

Current account deficit1

44.3 38.4 32.7 28.7 15.7

FY08 FY09 FY10 FY11 FY12

FY08 FY09 FY10 FY11 FY12

FY08 FY09 FY10 FY11 FY12

FY07 FY08 FY09 FY10 FY11

Figures for FY 12 are: Apr-Sept, 2 Apr-Nov, 3 Apr-Oct Source : RBI, CSO, DGCIS
1

26

25

CRISIL EcoView

Table 9.2: Annual Data Summary

Interest Rates, year-end (%)4
1-yr G-sec
8.3 7.6 7.2 6.6 4.7 7.9 7.6 7.3 5.00 5.00

10-yr G-sec
7.9 8.4 7.75

Repo rate5
8.50 6.75 6.00

Reverse repo5
7.50 5.75

3.50

3.50

FY08 FY09 FY10 FY11

FY12

FY08 FY09 FY10 FY11 FY12

FY08 FY09 FY10 FY11 FY12

FY08 FY09 FY10 FY11 FY12

Markets (year-end)5
INR/USD
51.0 40.0 45.1 45.0 53.3 63.1

INR/EURO
67.5 60.6 63.2 69.5

Forex Reserves (US$ bn)6

309.2 252.3 277.0 303.5
300.9

Net FII flows (US$ bn)7

30.3 32.2

16.0 6.30

-11.4
FY08 FY09 FY10 FY11 FY12 FY08 FY09 FY10 FY11 FY12 FY08 FY09 FY10 FY11 FY12 FY08 FY09 FY10 FY11 FY12

Equity Market (year-end)5

Sensex
19445 17528 15644 9709 3021 15455 4735 5249

S&P CNX Nifty

5834 1323 4624 798

S&P 500
20.1 1169 1169 1258

Sensex P/E
21.3 21.2 16.4 13.7

FY08 FY09 FY10 FY11 FY12

FY08 FY09 FY10 FY11 FY12

FY08 FY09 FY10 FY11 FY12

FY08 FY09 FY10 FY11 FY12

Government Finances
Centre Fiscal Deficit (as % of GDP) State Fiscal deficit (as % of GDP)
2.9 6.0 6.4 5.1 4.6 2.5 1.5 2.4 2.6 2.2

Money and Banking8

Non-food credit growth (%) M3 growth (%)

23.1 17.5
16.9

23.0 17.0

21.1 18.6 16.7 16.6 16.5

FY08 FY09 FY10 FY11 FY12 (RE) (BE)

FY08 FY09 FY10 FY11 FY12 (RE) (BE)

FY08 FY09 FY10 FY11 FY12

FY08 FY09 FY10 FY11 FY12

Figures for FY12 are :4

Avg of Apr-Dec, 5 as on Dec 31, 6 as on Dec 23, 7 Cumulative of Apr-Dec, 8 for the fortnight ending Dec 16 Source : CCIL INDIA, BSE, RBI and Ministry of Finance Note: RE-Revised estimates, BE-Budget estimates

26

Table 9.3: Quarterly Growth rates

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

Trade hotels, transport and comm

Financing, Insurance & real estate

Electricity, gas & water

Agri, forestry& fishing

Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12

2.4 5.4 9.9 7.5 3.9 3.2

7.4

10.6

5.5

7.7

Community, social & prsnl serv

Q4FY10

1.1

8.9

15.2

7.3

9.2

13.7 12.1 10.9 8.6 9.3 12.8 9.9

6.3 9.8 10.0 10.8 9.0 9.1 10.5

8.3 8.2 7.9 5.1 7.0 5.6 6.6

Mining & Quarrying

Manufacturing

Construction

8.0 6.9 1.7 1.8

7.8 6.0 5.5 7.2 2.7

2.8 6.4 7.8 7.9 9.8

6.7 9.7 8.2 1.2 4.3

-2.9

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

Q4FY10 Q1FY11 Q2FY11
9.4 8.8

GDP Deflator (%)

12.4 9.1

1.1 2.4

10.2 10.4

12.7

22.7

7.3 9.1 9.4

12.9

Industry

Agriculture

Services

8.4

Industry

Overall

Overall

7.1

9.6 8.4 8.7 10.0 9.3

20.5 18.0 16.8 12.3 12.3

Q3FY11 Q4FY11 Q1FY12 Q2FY10

8.3 7.8 7.7 6.9

9.9 7.5 3.9 3.2

Services

5.4

9.0 9.8 8.8 8.3 9.0

Agri & allied services

11.4

23.4

7.5 7.5 7.4 7.1 8.2

7.9 7.5 6.9 8.0 8.1

7.1 6.1 5.1 3.2

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

Q4FY10 Q1FY11 Q2FY11 9.5 10.5 9.3 21.4 10.2
5.3

CPI Inflation (y-o-y%)

15.3 16.6

Commodity prices
76.0 78.0 77.0 87.0 105.0 581 663 594 619 743 693 712

Crude-Europe Brent($/barrel)

Fuel, power& lubricants

Agricultural Labours

Industrial workers

20.7 17.7

14.0 12.3 10.9 12.1 12.7 13.0

6.0 5.3

13.7 10.3 9.2 9.0 8.9 9.2

13.9 9.9 7.9 8.8 9.4 9.3

Q3FY11 Q4FY11 Q1FY12 Q2FY12

8.9 9.6 9.6 9.7

17.0 15.9 13.1 12.1

5.2 6.3 7.4 7.9

117.0 113.0

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

10.4 8.0 7.1 5.4

Used-based classification of IIP (y-o-y%)

11.8
15.9 11.5

Q4FY10 Q1FY11 9.6

14.0

15.4 10.4

7.2 5.5

34.1

Intermediate goods

17.2

10.7

Capital goods

Consumer goods

Manufacturing

Steel prices ($/tonnes)

Primary

Overall

Mfing

Basic goods

Electricity

General

Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12

6.8 8.6 7.9 7.0 3.1

7.4

6.3

2.2 6.5 8.2 8.2

Mining

3.9 7.8 6.6 7.5 6.4

15.8 22.1 5.8 17.0

6.3 7.4 5.5 1.8 1.0

6.6 4.4 11.6 4.5 4.4

9.2 8 .9 7.7 3.2 -3.4

6.3 1.0 0.7

10.5

-5.9

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

27

CRISIL EcoView

Table 9.4: Full description of abbreviations used in the text Sectors Food products and beverages Tobacco products Textiles Wearing apparel; dressing and dyeing of fur Luggage, handbags, saddlery, harness & footwear; tanning and dressing of leather products Wood and products of wood & cork except furniture; articles of straw & plating materials Paper and paper products Publishing, printing & reproduction of recorded media Coke, refined petroleum products & nuclear fuel Chemicals and chemical products Rubber and plastics products Other non-metallic mineral products Basic metals Fabricated metal products, except machinery & equipment Machinery and equipment n.e.c. Office, accounting & computing machinery Electrical machinery & apparatus n.e.c. Radio, TV and communication equipment & apparatus Medical, precision & optical instruments, watches and clocks Motor vehicles, trailers & semi-trailers Other transport equipment Furniture; manufacturing n.e.c. Abbreviation Food & Bev Tobacco Textiles Apparel Leather products Wood Paper Media Petroleum products Chemical Rubber NMMP Basic metals Metal Products Mach. & Eqp Office Eqp Electronics Communication Medical Motor Vehicles Other transport Furniture

28

CRISIL EcoView

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