india econ may04

India Economy Panorama

May 2004

Gaurav KapurGaurav KapurEconomistEconomistABN AMRO Bank, IndiaABN AMRO Bank, India

0Economy Panorama India / Economics

Contents

Bird’s Eye ViewBird’s Eye View

The First Decade of ReformsThe First Decade of Reforms

Macro Balance-SheetMacro Balance-Sheet

OutlookOutlook


Largest Democracy, 2nd Largest Muslim population

DemographicsLocation: South AsiaNeighbouring Countries: China & PakistanPopulation (2001): 1027 m, 54% of which are below25 yearsArea: 3.3 m sq. kmNo of States and UTs: 35No. of Dominant Languages: 18Dominant Religions: Hindu (82%), Muslim (12%),Sikh & Christian (2% each)

Securities MarketLeading Stock Exchanges: NSE & BSENo of listed companies: Nearly 6000Market Capitalisation (FY03): $120 bnSettlement Cycle: T+2Market Cap/ GDP: 25%Net FII investment: $24 bn since 1993Debt Market: total outstanding debt $180 bn, largelydominated by G-Sec

Political SystemGained independence in 1947Largest democracy in the worldHas a federal structure with each state having its ownlegislative assemblyNational elections held every 5 years, next in 2004No of national political parties: 7Currently a coalition led by BJP is in power, National govtled by Hon Mr. Atal Bihari Vajpai

Macro-economic PerspectiveGDP : $525bnGrowth Rate : 6%GDP (PPP adjusted): $2.9 trGDP shares - Agri 22.1% Ind 21.8%, Services 56.1%Trade - Exports: $62 bn Imports: $75 bnCurrent a/c Balance (% of GDP): 0.8Forex Reserves: $117.9 bn


PPP Adjusted GDP for 2002 (in $ tr)

9.8

5.13.2 2.9 2.1 1.4 1.4 1.4

02468

1012

US

Chi

na

Japa

n

Indi

a

Ger

man

y

Italy UK

Fran

ce


Bird’s Eye View

• 23 member coalition (5 yrs) government

• forex management practices “amongst the best ” - IMF

• 220 of Fortune 500 outsource their work to India

• world’s largest irrigated area, conducive climate

• lowest cost producer of aluminium, steel, copper, cement

• largest milk and tea producer, consumer in the world

• world's largest manufacturer of two-wheelers, CD-ROMs

• consumes a fifth of world’s gold output


Bird’s Eye View (contd.)

• largest number of pharma plants outside USA

• 90% of world’s diamonds polished (80% by caratage)

• railways- largest employer (1.7m), largest network (63m m)

• 70,000 bank branches, deposits 60% of GDP

• 150,000 post office branches

• ranked 6th in satellite launches

• 800 movies per year, overshadows Hollywood

• currently world’s largest single highway project (13,000 km)





OutlookOutlook


Then and Now

Then NowGDP Growth (yoy %) 1.3* 6.0+

Industrial Growth (yoy %) -1.3 6.7

Inflation (%) 16 5.3

Export Growth (%) negative 15

Foreign Currency Reserve ($ bn) 5.8 117.9

Current Account Deficit (% of GDP) 3.1 -0.8

External Debt ($ bn) 83.6 112.1

Debt Service Ratio 35.3 16

Fiscal Deficit (% of GDP) 7.8 4.8

Foreign Direct Investment negligible 4-5 bn*The figure refers to FY92


GDP Growth

-6

-4

-2

0

2

4

6

8

10

12

FY04FY52

Among the Top 10 fastest growing economies over the past 20 years


Household savings Household savings (as % of GDP)(as % of GDP)

0

3

6

9

12

15

18

21

24

FY51 FY03


0102030405060708090

100110120

Mar-90 Dec-03

Foreign Exchange Reserves External Debt

Reserves and Foreign Debt ($ Reserves and Foreign Debt ($ bnbn))


6.9

5.75.1 4.9

5.86.4

5.6 5.7 6.1 5.9

0.41

1.71.2 1.4 1 1.1

0.5-0.2

-0.78

-2-1012345678

FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03

fiscal

current account

The Twin Deficits - Yin and Yang


First decade of reforms

• mainly about industry, trade, banking, insurance

• privatisation coupled with private/foreign entry

• reduced subsidies and price fixation, more market play

• labour, agriculture untouched

• infrastructure opened up





OutlookOutlook


Current Strengths and Weaknesses

Growth

Trade

External Debt

Demography

Knowledge base

Fiscal Situation

Debt

Inter-state Disparity

Poverty


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Agriculture Industry Services GDP

CY2003 growth - near top amongpeers...

GDP components…agriculture volatile,services steady


1990-91

Services44%

Agriculture31%

Industry25%

2002-03 Agriculture22%

Industry22%

Services56%

services share 56% - leapfrogging past industrial phase?


But, industry showing broad based recovery

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8Mining Manufacturing Electricity IIP (rhs)


Industry Growth Snapshot

Third Quarter Corporate Sector Performance

Sector (figs in %) Sales growth Profitgrowth

Engineering 22.4 51.2Pharmaceuticals 11.9 -2.4Automobiles 26.3 47.0Oil & Gas 10.4 36.0IT, Telecom, Media 8.5 19.9Banks & Financial Institutions 0.7 20.0Commodity 23.5 166.1Power 10.4 132.4Textiles 9.2 24.2FMCG & Durables 7.2 19.7Miscellaneous 36.7 57.3Total 14.0 40.0


3.83.5 3.6

5.4

6.35.6

5.0

1950s 1960s 1970s 1980s 1990s FY02 FY035

10

15

20

25

30

35

40

45

GDP Growth

Trade to GDP ratio (rhs)Trade ratio has risendramatically in last twentyyears… more openness

Exports (sans IT)clipping over 10%growth …

-5000

5001000150020002500

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Trade Deficit ($ m) (lhs)Exports growth (%) (rhs)Imports growth (%) (rhs)


Exports are diversifying...

(figures in $bn) FY93 FY02 % change

Ores and Minerals 0.7 1.2 75

Leather and Goods 1.2 1.9 59

Chemicals 1.2 4.3 250

Agriculture and Allied 3.0 5.9 99

Engineering 2.3 6.9 196

Garments and Textiles 4.7 10.1 114

Other Manufacturing 3.7 10.0 169

A major component of Chemicals is drugs and pharma

The fastest growth was in Engineering and in Drugs and Pharma


Up 2.7% in FY03

9.4% in FY04

Others have gainedmuch more againstthe dollar

Rupee’s U turn AgainstDollar

43.343.844.344.845.345.846.346.847.347.848.348.849.301-Jan-02 30-Apr-04

7981838587899193959799

101103105

02-Jan-03 30-Apr-04

GBP/USD EUR/USD JPY/USD INR/USD

Currency


Currency volatility

Annual Volatility (in %)

2000 2001 2002 2003 2004(Jan-Apr)

INR/USD 2.4 2.1 1.6 1.7 4.9

USD/EUR 12.4 11.9 9.1 9.9 13.0

JPY/USD 10.0 10.4 9.9 8.8 9.5

INR/EUR 13.6 12.5 9.7 10.0 13.5

INR/USD least volatile


0102030405060708090

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1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 20030

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40Long term Short term Debt service ratio (%, rhs)

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1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 20020

10

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40

50

60

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80Contingent liabilitiesTotal domestic liabilities (rhs)

Debt service has declined

Contingent liabilitiesrising, and quality ofdebt deteriorating

Foreign debt constant for adecade

Domestic debt ballooning

Debt


-5

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FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03

Public SavingsHousehold SavingsPrivate Corporate

15.315.7

15.3

14.214.6 14.7 14.6

14.3

13.4

14.314.6 14.4

15.1

FY91

FY92

FY93

FY94

FY95

FY96

FY97

FY98

FY99

FY00

FY01

FY02

FY03

Households save, but thegovernment dis-saves

Tax receipts stagnant at15% of GDP

Brazil - 31%, Korea - 27%,Turkey - 33%, Czech Republic- 40%


Gross Debt (%of GDP)

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reserves/imports(months)

Debt and reserves comparison


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Trend line

FY04, WPI averaged at5.3%…inflation undercontrol…

Core inflation picking up…both by cost push anddemand-pull factors...

Inflation

-40-20

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Primary articles EnergyManf. pdts Overall Inflation (rhs)


Declining interest rates onmoney market instruments...

soft interest rates… inflationslightly picking up...

Interest rates

4.5

5.5

6.5

7.5

8.5

9.5

10.5

11.5

12.5

02-Jan-99 17-Apr-041

2

3

4

5

6

7

8

9Yield on GOI paper 10 yr Mat

Inflation (yoy variation inWPI) (right-axis)

4.04.55.05.56.06.57.07.5

01-Feb-03 16-Sep-03 30-Apr-04

364-day 91-day Bank rate Repo rate Mibor





OutlookOutlook


Economy numbers

Indicators FY02Actuals

FY03Actuals

FY04Provisional

FY05Forecasts

Real GDP growth rate 5.6 4.0 8.1 6.5

Inflation (year-average) 3.6 3.4 5.3 4.5

Interest (year-end) 7.3 6.1 5.15 5.8

Rupee-US$ rate (year-end) 48.8 47.5 43.39 42.5

Exports ($ bn) 44.9 53.0 61.0 67.0

Imports ($ bn) 57.6 65.5 82.5 95.0

Forex Reserve ($ bn) 54.0 74.8 112.7 130.0

Fiscal Deficit (% of GDP) 6.1 5.9 5.0 5.5Current account balance(% of GDP) 0.2 0.78 0.5 -0.6


Outlook

• Improvement in Indo-Pak relations

• India’s role post Cancun

• Elections 2004 (followed by bold decisions?)

• An assertive, and more productive industry

• Capacity to digest huge forex inflows?

• Will fiscal stress spill out to a currency crisis?

• Outsourcing trend to continue

india econ may04

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