econmomic environment of business. economic environment-major constituents 1.global environment...
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ECONMOMIC ENVIRONMENT OF BUSINESS Slide 2 Economic environment-major constituents 1.Global environment 2.Domestic environment Global environment: This involves scanning global scenario in terms of performance of U.S, European Union, China and Japanese economy. Major variables such as GDP growth, inflation rate, employment scenario are the determinants. Domestic environment Overall growth, growth in index of industrial production, fiscal and monetary policies, inflation (CPI and WPI) are the major determinants. Political developments and policies after the new dispensation also important. Slide 3 Key variables- Major global economies-April 2014 GDP growth Industry growth Current a/c balance(%) Unemploy ment rate% 10 yr Govt bond Stock mkt index U.S1.54.3-126.96.36.1996986 Japan3.00.82.63.50.5515303 U.K3.02.2-4.06.62.986718 Euro area0.91.42.511.61.21045 BRICS Brazil1.9-3.1-3.74.912.0953635 Russia0.92.81.34.98.551404 India5.5 (Q1) 3.4-188.8.131.5226300(BSE) China184.108.40.206.13.92134 South Africa4.0-11.85.6-51402 Indonesia5.22.5-3.55.7-5025 China followed by India & Indonesia highest growth economies. Red indicates current a/c surplus economies. Euro Zone scores low on growth and unemployment, a source of worry for our corporates with export potential. Slide 4 Global scenario-other factors Geo political factors such as tension in Ukraine, Iraq etc. This has the potential to adversely affect commodity prices like oil. Regulations in overseas jurisdictions also matter.-Australian Govt decision capping coal exports overseas-adversely affecting major importers like India. Factors like tapering of quantitative easing in the U.S, theior immigration policies etc. Slide 5 Domestic economy-composition of GDP Particulars FY 13FY 14 12MQ1Q2Q3Q412M Agriculture forestry & fishing1.422.704.603.606.304.7 Mining and quarrying-2.16-2.80-0.40-1.60-0.40-1.4 Manufacturing1.14-1.201.00-1.90-1.400.7 Electricity, gas and water supply2.263.707.705.007.205.9 Construction1.112.804.300.600.701.6 Trade, hotels, transport5.073.904.004.303.903.0 Financing, insurance, real estate10.928.9010.0012.5012.4012.9 Community, social personal service5.319.404.207.003.305.6 Total4.474.404.804.704.604.7 Stagnant share of manufacturing in GDP is a key concern. FY 14 GDP is just a tad higher than FY 13. However, FY 15 growth expected at 5.5%. Slide 6 Components of GDP-by expenditure Particulars FY 13FY 14FY 13FY 14 Share in GDP YOY growth Private consumption expenditure57.1 12.2612.35 Govt consumption expenditure11.8 15.2112.80 Gross fixed capital formation30.428.37.364.54 Exports24.024.812.8616.11 Imports30.728.414.203.79 The worrying aspect is the declining share of capital formation, both as a share in GDP and in growth terms. Govt expenditure alos declined, which is a reason for slow GDP growth. This also proves that fiscal deficit was managed by expenditure compression rather than revenue maximization. Low capital formation ot GDP shows policy paralysis Slide 7 Our external environment ExportImportOil importNon oil import Trade deficit Jan-14 26.836.813.223.6-9.9 Feb-14 25.733.813.720.1-8.1 Mar-14 29.640.115.824.3-10.5 Apr-14 25.635.712.922.8-10.1 May-1428.039.214.524.8-11.2 Jun-1426.538.213.324.9-11.7 Trade deficit widening since April as non oil imports are widening. This is due to gradual relaxation of gold import restrictions. There are allegations that the relaxation has favored big units. Meanwhile CAD declined to 1.7% by March 2014. it may widen further. Slide 8 WPI inflation volatile, but CPI declining WPICPI Jan-14 5.058.79 Feb-14 4.688.03 Mar-14 5.708.31 Apr-14 5.208.59 May-146.018.28 Jun-145.437.31 CPI is below the glide path suggested by Urjit patel Committee. However, the target is 6% by January 2016. Hence RBI has not cut repo rate during the recent Bi-Monthly policy. WPI, hopwever, remains volatile. Slide 9 Exchange rate effect: USD/INR, FII flows and trade deficit ($ billion) MonthExportImportTrade balance Net FII flows USD/INR April1324.2042.00-17.801.9954.38 June1323.8036.00-12.20-7.5457.98 Sep1327.7034.40-6.801.1563.75 Dec1326.236.5-10.3 Mar14 29.640.1 -10.561.5 June1426.538.2-11.760.1 July14 Exchange rates stabilized and INR appreciated since September due to various RBI measures-FCNR(B) swaps etc. FII flows (debt + equity) are also seen increasing since January 2014. Slide 10 India Inc overseas borrowings ($billion)Jan14Feb14Mar14Apr1 4 May1 4 Automatic Route 220.127.116.11.70.5 Approval route 0.53.61.41.50.9 Total18.104.22.168.21.4 Avg. maturity (in yrs) 6.354.34.026.66.4 Wt. rate over 6M LIBOR 2.231.72.022.082.73 Approximately $ 14 billion worth ECBs accumulated during the first 2 months of the FY. This will raise our external vulnerability as measured by external debt. If not unhedged, ECBs pose a significant risk. Hedging costs are also high. Slide 11 FX reserves and USD/INR As FX reserves increased, INR appreciated and has attained stability. However, RBI continues to mop up Dollars. Slide 12 Measures announced by RBI to reverse Rupee slide RBI announced various measures. They include: 1.Deregulation of interest rates on NRE deposits. 2.Banks allowed to offer interest rates upto LIBOR/SWAP + 400 bps on FCNR(B) deposits till Jan 31, 2014. Also exempted from CRR/SLR. 3.FCNR(B) deposits of >3 yr maturity allowed to be swapped with RBI at fixed swap rate of 3.5% p.a with a lock in of one year. Swap with RBI only in USD. 4.Banks allowed to swap Tier 1 capital raised abroad with RBI at 1% below market rate for those with 12% CRAR. 5.Special USD swap window for oil marketing companies. Slide 13 Other measures 1.Attempting to limit rupee trade in the NDF market. NDF (Non Deliverable Forward) is the market for Rupee trade offshore- active is in Singapore and Dubai. Arbitrage between domestic and offshore INR market leads to volatility. 2.Attempt to get Indian bonds listed in JP Morgan Bond indices. If India gets 10% weight in the index, we would be able to attract $ 25 billion and add to reserves. Addition to FX reserves is necessary to improve import cover (7 months) and to prevent further slide in Rupee. Slide 14 Growth in overall bank credit & to industry MonthBank credit (Rs.Lac Cr) Bank credit growth YOY Credit to industry YOY growth April1352.914.522.315.5 June1354.213.719.917.3 Sep1356.217.923.217.6 Dec1357.614.524.214.1 Mar14 60.114.3 25.213.1 June1461.213.322.810.3 July1461.313.7-- Credit to industry on a declining trend. Shows lack of demand due to slow growth. ECBs at lower cost is also one reason. IIP growth also substantiates this aspect. Slide 15 Fund raising by corporates Public issueQIPsDebt issuesSensexGDP growth Amnt (Rs.Cr) NoAmnt (Rs.Cr) NoAmnt (Rs.Cr) No 2006-07249938549632500130729.6 2007-085221990257703810001156449.3 2008-09203421189215001100486.7 2009-104694144439686725003175288.6 2010-1146182572455047943110194458.9 2011-1223982361713113561120174046.7 2012-13343134410818141698220188364.5 2013-141523482940264238335223864.7 2014-15*5989164311137351025991- *till July The amount raised through public issues(FPOs, IPOs, etc), QIPs and debt issues has little correlation with domestic growth. In 2008-09, the fall was sharpest due to global crisis. The correlation with Sensex movements is much stronger except 2013-14 due to political uncertainty. Slide 16 How Various policies by Govt and regulators impact business environment Retrospective taxation rules and GAAR provisions adversely affected business sentiment Rigid rules set by MoEF during previous dispensation contributed Restrictions on mining adversely impacted steel majors, NPAs in banking sector increased. Mining restrictions also led to higher coal imports. Standoff between Govt and RIL-BP combine ovr gas pricing leading to costly LNG imports. Infrastructure sector in general suffered from policy paralysis. In the parameter ease of doing business, India slipped in rankings. RBI measure to curb INR fall by restricting access to LAF window did not help. It adversely affected bank margins. Slide 17 CDR cell (corporate debt restructuring cell) references NoIndustryNo of casesAgg.debt (Rs.Cr)Debt (%) 1Infrastructure265790623.01 2Iron & Steel524078316.21 3Textiles46219908.74 4Power16202538.00 5Ship buildiing4167926.67 6Construction10160626.38 7telecom5107854.29 8Pharma1192493.68 9NBFC569762.77 10Engineering756682.25 11Others994514718.01 Total281251611*100.00 * Net of cases withdrawn and successfully exited. Top 4 sectors account for more than 50% cases referred to CDR by amount. These are the stressed sectors and the most leveraged. They account for bulk of NPAs. Slide 18 RBI surveys-what they reveal For the ensuing periods, expectations are on a high level. Slide 19 Key takeaways from the survey Expectation Index (BEI), shows improvement for Q2:2014-15 (114.7) as compared to previous quarter (111.1) and the corresponding quarter of previous year (112.7). The improvement in BEI for the expectation quarter is due to optimism on overall business situation, production, order books, capacity utilization, imports, etc. Reduced pessimism on cost of finance, cost of raw material and the profit margin is another reason. For Q2:2014-15, the proportion of respondents who expected increase in production and at the same time decline in employment (indicating jobless growth) turns out to be around two per cent. This has been consistent throughout past ten rounds of the survey. Slide 20 Assessment and expectation on capacity utilization paramete r OptionAssessment(in %)Expectation (in %) Capacity utilisation Q1 2013 -14 Q2 201 3-14 Q3 201 3-14 Q4 2013 -14 Q1 2014 -15 Q1 2013- 14 Q3 2013- 14 Q34 2013- 14 Q4 2014- 14 Q2 2014- 15 Increase22.620.7 24.922.327.526.827.223.829.5 No change 57.158.659.960.161.360.960.661.963.660.4 Decreas e 20.320.719.415.016.311.612.610.912.610.1 Net respons 2.30.01.39.96.015.914.216.311.219.4 Level of CU vis-- vis last 4 yr avg Above normal 22.214.171.1240.110.39.8 11.19.710.6 Normal71.070.769.772.27