2.1.

ECONOMIC ANALYSIS:
Economic analysis is the analysis of forces operating the overall economy a country. It is
a process whereby strengths and weaknesses of an economy are analyzed and is important in
order to understand exact condition of an economy. The various factors considered are:

The Economic Cycle

Countries go through the business or economic cycle and the stage of the cycle at
which a country is in has a direct impact both on industry and individual companies. It affects
investment decisions, employment, demand and the profitability of companies. It is very
important to determine the stage of the cycle into which the economy is passing through. The
four stages of economic cycle are depression, recovery, boom and recession.

BOOM
DEPRESSION
RECESSION
RECOVERY
DISINVEST
INVEST
 Investors should attempt to determine the stage of the economic cycle the country is in.
They should invest at the end of a depression when the economy begins to recover, and at the
end of a recession. Investors should disinvest either just before or during the boom, or at the
worst, just after the boom. Investment and disinvestments made at these times will earn the
investor the greatest benefits.

The Political Equation

A stable political environment is necessary for steady, balanced growth. If a country is

ruled by a stable government which takes decisions for the long-term development of the
country, industry and companies will prosper.

Foreign Exchange Reserves

A country needs foreign exchange reserves to meet its commitments, pay for its imports
and service foreign debts. If the reserves are not managed properly it may pose foreign
exchange risks.

Foreign Debt and the Balance of Trade

Foreign debt, especially if it is very large, can be a tremendous burden on an economy.

India pays around $ 5 billion a year in principal repayments and interest payments.

Inflation

Inflation has an enormous effect in the economy. Within the country it erodes
purchasing power. As a consequence, demand falls. If the rate of inflation in the country from
which a company imports is high then the cost of production in that country will
automatically go up.

Interest Rates

A low interest rate stimulates investment and industry. Conversely, high interest rates
result in higher cost of production and lower consumption.
Taxation

The level of taxation in a country has a direct effect on the economy. If tax rates are
low, people have more disposable income.

Government Policy

Government policy has a direct impact on the economy. A government that is perceived
to be pro-industry will attract investment.

1. Indian Economic Analysis

The Indian economy is one of the largest economies in the world. Presently India stands
in the 13th position in the world in terms of Gross Domestic Product (GDP). According to the
estimates of the World Bank the India GDP is worth 1217 billion USD or 1.96% of the world
GDP. According to a report published by domestic broking major Edelweiss Capital in March
2010, India's GDP is set to quadruple over the next ten years and the country is likely to be a
US$ 4 trillion economy by 2020. India will overtake China to become the world's fastest
growing economy by 2018.

(Figure 1)

In the Figure 1 we can see that India’s Gross Domestic Product (GDP) expanded 7.90%
over the last 4 quarters. Its diverse economy encompasses traditional village farming, modern
agriculture, handicrafts, a wide range of modern industries, and a multitude of services. The
economy has posted an average growth rate of more than 7% in the decade since 1997.

The Indian economy faced significant slowdown in growth momentum in 2008-09, driven
by a severe downturn in the global economy. The key shock to India’s growth has come from
external sources, largely by way of lower exports and a marked reduction in inflow of foreign
capital. The industrial sector has been the largest casualty of the marked slowdown in both
investment and imports, slowing from a growth rate of 8.5% in the year ended March 31,
2008 to around 6% in the year ended March 31, 2009. Even during the economic slowdown
some of the sectors including the automobile industry have recorded a positive growth while
many nations had experienced a negative growth rate.

For example, According to data released by Society of Indian Automobile Manufacturers,

the cumulative production data for April 2009-February 2010 shows production growth of
24.34 per cent over same period last year. Passenger vehicles production crossed 2 million
and two wheelers production touched almost 9.5 million.

With the help of strong financial policies and balanced stimulus packages the economy
could recover from the global slowdown in a faster pace when compared with many
developed nations which is a sign of political stability in the country. This made India as one
of the promising nations in the world for FDIs and FIIs.

Foreign institutional investors (FIIs) were net investors of US$ 4.54 billion in equity and
US$ 4.71 billion in debt instruments during January- March 2010, according to the data
released by Securities and Exchange Board of India. India received FDI worth US$ 20.92
billion during April-December 2009, taking the cumulative amount of FDI inflows from
August 1991 to December 2009 to US$ 127.46 billion.

As on March 26, 2010, India's foreign exchange reserves totaled US$ 277.04 billion, an
increase of US$ 24.71 billion over the same period last year according to RBI.

Of the more than 200 companies from over 50 countries that form part of the World
Economic Forum's Global Growth Companies (GGC) Community, India today has the
second largest representation, with a total of 18 GGCs with a strong representation from
almost every sector.
 According to data from RBI, loan disbursement by scheduled commercial banks,
including regional rural banks, recorded 16.04 per cent growth at the end of March 12, 2010,
on a year-on-year basis which is above RBI prediction of 16%.

The recovery of the Indian economy, as was broadly expected, worked well for the
advance tax figures. The all India direct tax collection between April and December 2009,
which includes corporate and personal taxes, increased 8.1 per cent to US$ 48.39 billion,
according to figures that are currently with the income-tax (I-T) department.

Exports from India were worth US$ 16.09 billion in February 2010, 34.8 per cent higher
than the level in February 2009, according to the Ministry of Commerce and Industry. India's
imports during February 2010 were valued at US$ 25.05 billion representing a growth of 66.4
per cent over February 2009.

1.2. Automobile Exports:

According to Society of Indian Automobile Manufacturers (SIAM), automobile exports
increased by 17.90% from 1.53 million units in 2008-09 to 1.80 million units in 2009-10. At
a time when many major global auto markets witnessed declines, the automobile exports
from the country registering a robust 33.23 per cent growth in the last fiscal. The exports
from various segments of the industry are shown in the Figure 3.