Global Economic Prospects and the Indian Economy

Usha ThoratSeptember 2010

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Broad Outline

• Global economy and India – recent trends

• Concerns of Inflation; Fiscal Situation

• Developments in real and external sectors

• Investment Climate

• Banking Sector scenario

• Quick SWOT analysis – India

• RBI’s latest assessment – September 16, 2010

Global Economy - Prospects

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Forecast for 2010 and 2011

Per

cen

t

IMF's World Output Growth Forecast

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  2010 2011

World 4.6 4.3

Advanced Economies 2.6 2.4Emerging and Developing Economies 6.8 6.4

India 9.4 8.4

Source: IMF, WEO (Update) July-2010

(Per cent)

Indian Economy - Growth Trajectory

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•Average GDP growth at 8.9 per cent during 2003-08•Real GDP grew at 8.8 per cent in 2010-11 (Q1) (6.0 per cent in 2009-10 (Q1))•RBI places real GDP growth forecast at 8.5 per cent for 2010-11

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High Domestic Saving & Investment Rates- with Modest Current Account Deficit

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Inflation has increased significantly after being moderate during first half of 2009-10

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Monetary and Inflation conditionsInflation - WPI and CPI

Fiscal Situation: Key Indicators

Year Primary deficit Revenue deficit Gross Fiscal Deficit(1) (2) (3) (4)

Centre 2008-09 2.6 4.5 6.02009-10 RE 3.1 5.3 6.62010-11 BE 1.9 4.0 5.5 States 2008-09# 0.6 -0.2 2.42009-10 RE# 1.6 0.8 3.42010-11 BE# 1.0 0.4 2.9 Combined 2008-09 3.4 4.3 8.52009-10 RE 4.8 6.0 10.02010-11 BE 3.0 4.4 8.3

RE: Revised Estimates; BE: Budgeted Estimates.# : data pertain to 27 State Governments.

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Current Trends - Real GDP Growth (Per Cent) Item 1950-80 2005-06 2006-07 2007-08 2008-09 2009-10@ 2010-11 Q1

(Average)1 2 3 4 5 6 7 8

1. Agriculture and Allied Activities

2.1 5.2 3.7 4.7 1.6 0.2 2.8

(18.1) (17.2) (16.4) (15.7) (14.6) (14.0)2. Industry 5.4 8.1 13.6 9.3 3.1 10.4 11.4

(20.0) (20.7) (20.7) (20.0) (20.5) (20.8)2.1 Mining and Quarrying 4.6 1.3 8.7 3.9 1.6 10.6 8.92.2 Manufacturing 5.3 9.6 14.9 10.3 3.2 10.8 12.42.3 Electricity, Gas and Water Supply 9.6 6.6 10.0 8.5 3.9 6.5 6.6

3. Services 4.5 11.3 10.2 10.4 9.3 8.3 9.4(61.9) (62.2) (62.9) (64.4) (64.9) (65.2)

3.1 Trade, Hotels, Transport Storage and Communication 5.1 12.1 11.7 10.7 7.6 9.3 12.23.2 Financing, Insurance, Real Estate and Business Services 3.5 12.8 14.5 13.2 10.1 9.7 8.03.3 Community, Social and Personal Services 4.3 7.6 2.6 6.7 13.9 5.6 6.73.4 Construction 4.9 12.4 10.6 10.0 5.9 6.5 7.5

4. Real GDP at Factor Cost 3.5 9.5 9.7 9.2 6.7 7.4 8.8(100) (100) (100) (100) (100) (100)

Figure in parenthesis are percentage share to GDP; @: Revised estimates Source: Central Statistical Office

Demand Side Drivers of Growth

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(Percentage to GDP)

2008-09 2009-10 2009-10 Q1 2010-11 Q1

Share Contribution Share Contribution Share Contribution Share Contribution

Private Consumption 59.5 78.2 57.6 33.4 59.9 33.5 56.5 22.6Government Consumption 11.5 33.6 11.8 15.7 11.5 30.8 11.9 16.3Gross Fixed Investment 32.9 25.8 32.8 30.8 31.2 (-)4.4 30.5 23.7

Net Exports (-) 6.2 (-) 36.2 (-) 5.1 7.8 (-) 4.8 36.4 (-) 5.2 (-) 9.8

Source: CSO

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Growth in Index of Industrial Production (Y-o-Y)

During April-July 2010, the IIP growth increased to 11.4 per cent as compared with 4.7 per cent last year.

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Growing Openness

India’s Trade Openness (% of GDP)

Exports ImportsCurrent Account

Capital Account

1990s 8.0 10.8 26.8 15.12000s 12.2 17.5 45.4 33.8

2009-10 13.9 22.8 55.2 48.3

Source: RBI

Increased Tradability of Services

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Current Account Balance & Capital Inflows

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Capital FlowsUS $ billion

Item

2008-09 2009-10

Apr-Mar Apr-Mar

1. Inward FDI 35.2 31.7

2. FIIs -15.0 29.0

3. ECBs 7.9 2.5

4.  NRI Deposits 4.3 2.9

5.  Other Banking Capital -7.5 -0.8

6.  Short-term Trade Credits -1.9 7.7

Total 7.2 53.4

FII flows amounted to US$3.5 billion during April-June 2010-11 as against US $ 8.3 billion during April-June 2009-10

FDI Flows to India

Source: RBI

(US $ million)

2006-07 2007-08 2008-09 2009-10

April-July

2009-10

April-July

2010-11

Equity 16,394 26,757 27,807 22,908 10,381 7,557

Re-invested Earnings 5,828 7,679 6,428 8,079

Other Capital* 517 292 757 695

Total 22,739 34,728 34,992 31,682 10,381 7,557

* Inter company debt transactions of FDI entities

FDI inflows as percentage of Gross Fixed Capital Formation, 2007-2009 (Per cent)

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  2007 2008 2009Argentina 10.2 12.7 7.6Brazil 14.5 14.7 9.9Chile 38.6 36.4 36.3Mexico 11.9 9.2 6.1China 6.0 5.3 4.0Hong Kong, China 130.3 138.9 110.2Korea, Republic of 0.9 3.1 2.4Taiwan Province of China 9.0 6.4 4.0India 6.3 9.6 8.4Indonesia 6.4 6.6 2.9Malaysia 21.2 16.8 3.5Philippines 13.8 6.3 8.2Singapore 89.3 20.8 32.9Thailand 17.4 11.4 9.2World 16.9 12.6 9.1

Source: World Investment Report 2010

Net FIIs Inflow and Exchange Rate Movement

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Movement in NEER and REER (1993-94=100)(6-currency trade based weights)

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Note: Reserves change on BoP basis are not available after Jan-Mar 2010 quarter.

India’s Foreign Exchange Reserves(US$ billion)

FDI Confidence Index:2010

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Sovereign Credit Ratings of Top Ten Debtors amongst Developing Countries

Year Standard & Poors Moody's Fitch's Rating Outlook Rating Outlook Rating OutlookChina A+ Stable A1 Stable A+ StableRussia BBB Negative Baa1 Positive BBB NegativeTurkey BB- Negative Ba3 Stable BB- StableBrazil BBB- Stable Ba1 Stable BBB- StableIndia BBB- Stable Baa3 Positive BBB- StableMexico BBB+ Stable Baa1 Stable BBB+ NegativeIndonesia BB- Stable Ba3 Stable BB StablePoland A- Stable A2 Stable A- StableArgentina B- Stable B3 Stable Hungary BBB- Negative Baa1 Negative BBB NegativeSource: India's External Debt - A Status Report, 2009 Note: For India data are updated upto June 2010

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Indian Stock Markets

Equity Market revived indicating restoration of investor confidence.

Global Stock MarketsCountry/Index

Percentage Variation (year-on-year) Percentage Variation

End-March 2009 End-March 2010 Sept. 7, 2009 over March 31, 2009

Sept. 7, 2010 over March 31, 2010

1 2 3 4 5Developed MarketsUS (Dow Jones) -38.0 42.7 24.8* -4.8US (NASDAQ) -32.9 56.9 33.3* -7.9FTSE UK 100 -31.1 44.7 25.6 -4.8Euro area (FTSE 100) -40.1 44.8 31.6 -2.3Japan (Nikkei 225) -35.3 36.8 27.3 -16.8Hong Kong (Hang Seng) -40.6 56.4 52.0 0.8Emerging MarketsRussia -66.4 128.0 58.5 -7.6Brazil -32.9 71.9 41.4* -5.2 **South Korea -29.2 40.3 33.4 5.6Singapore -43.5 69.9 55.5 5.1Argentina -46.5 110.8 60.7 1.9India -37.9 80.5 65.0 6.4China -31.7 31.0 21.4 -13.2Memo:World (MSCI) -44.0 49.1 34.8 -6.4EMEs (MSCI) -48.4 77.3 51.8 -0.4

* As on Sept. 8, 2009. ** As on Sept. 6, 2010. Source: Bloomberg.

Banking Sector Scenario

• Indian banks continue to remain well capitalized as per Basel II requirements

• NPAs at manageable level despite the downturn

• Significant liquidity buffers - CRR and SLR prescriptions

• Focus on CD ratio and SLR requirement help in limiting leverage

Select Financial Indicators - All Banks (per cent)

Mar-08 Mar-09 Mar-10 Jun-10

CRAR 13.01 13.98 14.54 14.35Core CRAR 9.06 9.57 10.13 9.99

Gross NPAs to Gross Advances 2.39 2.44 2.50 2.55

Net NPAs to Net Advances 1.08 1.13 1.13 1.10Provision Coverage Ratio (PCR) 52.5 50.6 53.8 55.8

Interest spread 2.69 2.72 2.69 3.03*Return on Total Assets 1.13 1.14 1.06 1.13*Return on Equity 15.18 14.49 13.33 13.44*Data on Capital Adequacy cover overseas operations; other data based on domestic operations onlyFigures on CRAR, Core CRAR are as per Basel – II, except for Mar-08, which is as per Basel-I

* annualized PCR (%) = Provisions For Credit Losses * 100/Gross NPAs Interest spread = Net Interest Income * 100/ Avg. Total Assets

Return on Total Assets = Profit after Tax * 100 / Avg. Total Assets Return on Equity = Profit after Tax * 100 / Avg. Total Assets

Structural Reforms

• Discussion paper on licensing New Private Sector Banks issued in August 2010

• Discussion paper on presence of foreign banks to be issued shortly

• Working Group looking into Holding Company structure

Financial Stability and Development Council

GOI setting up Financial Stability and Development Council (FSDC) for:

• Achieving inter-regulatory coordination and overseeing systemic risks and

• laying down a macro-prudential overlay to financial sector regulation

Focus on Financial Inclusion

• Adoption of BC model – entities eligible to act as BCs enlarged to include even individuals

• Inclusion of ‘for profit companies’ as BCs under consideration

• Adoption of mobile- based and smart card based technologies

Basel III

• BCBS release Basel III norms on September 12, 2010 – implementation in a phased manner

• Capital adequacy of Indian banks will not be impacted significantly – they already have high CRAR and Core CRAR

• Leverage ratio will be around 6, much comfortable than the Basel requirement of 3

• Indian banks lagely follow retail model and therefore liquidity is not an issue for them

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India's SWOT analysisSTRENGTHS

• High savings/investment , forex reserves, quality talent and IT, broad based and growing entrepreneurial class, market size, macro economic and financial stability, language, democracy and political system stability

WEAKNESSES• Physical infrastructure, human development indicators,

agriculture, shortage of skilled manpower

OPPORTUNITIES • Demographic dividend, knowledge based growth , increased

integration with world economy, urbanisation

THREATS • Global Uncertainty, fiscal deficit, climate change – energy

and food security, regional and social inequalities

Macroeconomic situation – RBI’s latest assessment on September 16, 2010

Global Scenario• Recovery slowing; global environment continues to be a cause for cautionDomestic Scenario• Recovery consolidating; economy rapidly converging to its trend rate of

growth. Agri. growth prospects boosted; sustained growth in service sector.

• Inflation dominant concern; implications for real interest rates • Fiscal deficit conforming to budget estimates • External front -export growth constrained by continuing sluggishness in

global economy; demand for imports increased due to strong domestic recovery

• Overall assessment - growth remains steady. Inflation appears to have stopped accelerating though the rate may remain high for some months.

Monetary Measures announced • Repo rate under LAF increased by 25 basis points from 5.75 % 6 %. Reverse

repo rate increased by 50 basis points from 4.5 % to 5.0 %