Crisil Economic Outlook

CRISIL EcoView
EXECUTIVE SUMMARY ............................................................ 1 OUTLOOK .................................................................................... 2
QUARTERLY UPDATE: BOP .....................................................
INDIAN ECONOMY OUTLOOK 2011-12 ..............................
INDUSTRIAL PRODUCTION ................................................. 10
THE EXTERNAL SECTOR ........................................................ 12
INFLATION .................................................................................. 13
MONEY AND BANKING ......................................................... 15
MARKETS ..................................................................................... 17
GLOBAL ECONOMIC OUTLOOK ......................................... 20
January 2011
E I I
conomic 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'.
ndustry Research
An annual service on 47 industries, our Industry Research Service offers a detailed analysis of the market, factors impacting performance, players and outlooks on the performance and profitability of sectors.
ndustry Risk Score

Covering 135 industries, CRISIL Industry Risk Scores capture the influence of industry variables and the extent of their impact on cash flows and debt repayment ability of companies in an industry over a short-to-medium term horizon. These scores are accessed by a large numbers of banks and corporates to assess industry risks while evaluating the performance of companies.
Overview
Rising risks
A few months back, we had raised our growth expectation for the Indian economy to 8.6 per cent from 8.2 per cent for 2010-11 in view of the economy's strong performance in the first half of the year. We believe growth will moderate to 8.3 per cent in the next financial year (2011-12). The rising cost of credit will slow down industrial growth to 8.2 per cent. But despite a normal monsoon, agriculture growth is likely to decline to 2.7 per cent due to a higher base of 2010-11. The service sector, with a likely growth of 9.6 per cent, will remain the key driver of economic growth in 2011-12. The rising interest rates will slow down demand. We expect investment growth to moderate to 8.1 per cent in 2011-12 from 13.1 per cent in 2010-11. Private financial consumption expenditure growth too is expected to decelerate due to costly loans. A strong growth rebound in 2010-11 notwithstanding, risks to the economy have heightened and will challenge the growth prospects for 2011-12. The first and foremost risk is that of inflation, which surprised policy makers and market participants throughout 2010. Food inflation, which has been the most stubborn component of inflation, will require fast tracking of agricultural productivity enhancing measures. This will need to be complemented with steps to improve efficiency in storage, cut retail margins and thwart player strategies to keep agricultural prices high. The risk to food prices in 2011 has also heightened due to agricultural shock in some major food producers like Australia. Persistently high food inflation can transmit into other sectors via the wage price spiral. Inflation also faces risks from a spike in global oil and commodity prices due to the easy monetary policy stance being followed in advanced economies. The monetary policy is not very effective in dealing with the inflationary pressure arising from supply shocks, but will have to remain tight to ensure that supply shocks do not morph into generalised inflation. So further rate hikes from the RBI appear to be in the offing. The rising current account deficit does not pose a problem right now, as India continues to attract capital inflows due to favourable interest rate differentials and better growth prospects vis--vis advanced economies. But it does expose India to sharp currency fluctuations in case of a capital flight. The recently released RBI's Financial Stability Report points towards the
Dharmakirti Joshi Sunil K. Sinha Vidya Mahambare Poonam Munjal Parul Bhardwaj Dipti Saletore Vishal Belsare
Chief Economist, CRISIL Senior Economist, CRISIL Senior Economist, CRISIL Economist, CRISIL Economist, CRISIL Economist, CRISIL Economist, CRISIL
worsening of external sector ratios, particularly the rising dominance of portfolio and debt flows in comparison to more stable investment flows. The rising external risks will, therefore, need careful monitoring.
Contact Details:
Email: research@crisil.com Mumbai: +91 (22) 3342 8000 Delhi: +91 (11) 4250 5100
Dharmakirti Joshi
Chief Economist, CRISIL
January 2011
Executive Summary
Current account deficit to GDP crosses 4 per cent in second quarter of 2010-11
While the current account deficit widened to US$ 15.8 billion in the second quarter of 2010-11 (4.1 per cent of GDP) due to higher trade deficit, the capital account posted a surplus of US$ 20.5 billion, backed by buoyant net portfolio investment. As a result, the overall balance of payments, excluding the valuation effect, remained in surplus in the second quarter of 2010-11, with US$3.3 billion net accretion to foreign exchange reserves. The current account deficit as a percentage of GDP is expected to be 3.3 per cent in 2010-11 owing to higher trade deficit and lower invisible surplus. However, the recent weekly inflation data for midDecember shows that food inflation has once again accelerated to 14.4 per cent. Core (non-food manufacturing) inflation also accelerated for the second consecutive month to 5.4 per cent in Nov 2010. On balance, we expect annual average inflation to settle in the range of 8.0-8.5 per cent for 2010-11.
Credit growth continues to pick up

Non-food credit growth, for the fortnight ending December 17, 2010, rose by 180 bps m-o-m to 23.7 per cent. During the same fortnight, deposit growth remained at 14.7 per cent the same as in the previous month, and lower than the 17.9 per cent recorded in the same fortnight previous year. Deposit growth has remained sluggish despite higher rates offered by banks over the past few months. During December, the advance tax outflows and faster pick-up in bank credit as compared to deposit growth exerted additional strain on liquidity for banks, even as the RBI continued with its liquidity enhancing measures
Industrial growth surges in October 2010

Industrial output growth rose from 4.4 per cent in September to 10.8 per cent in October 2010 on low base and acceleration in month-on-month (m-o-m) momentum. While capital goods output rose sharply by 22.0 per cent, led by around 40 per cent growth in transport equipment & parts, consumer durables too posted a strong growth of 31.0 per cent in October 2010. The double-digit growth in industrial production is unlikely to continue for the remaining months of the fiscal due to the high base. Overall, we expect average industrial growth to be around 9.0 per cent in 2010-11.
Rupee appreciates in December 2010

Against a marked depreciation in November, the rupee appreciated in December 2010 by close to 3 per cent against the US$ on a m-o-m basis. During 2010, the Rupee appreciated by around 4 per cent against the US$. Going forward, the rising interest rate differentials between India and West are expected to drive strong FII inflows into India, thus pushing the Rupee upwards. However, a widening current account deficit is expected to exert downward pressure. On balance, the Rupee is expected to settle in the range of 43.5-44.0 per US$ by March-end 2011.
Trade deficit narrows further in November 2010

India's merchandise exports (in US$ terms) grew at 26.5 per cent in November 2010 as compared with 21.3 per cent in the preceding month. Imports growth (in US$ terms) accelerated to 11.2 per cent in November 2010 compared with 6.8 per cent in October. Lower growth in imports as compared to exports led to the narrowing of the trade deficit to US$ 8.9 billion in November 2010.
10-year G-sec yield drops in December 2010

The yield on the benchmark 10-year G-sec dropped by 20 bps to 7.9 per cent by the end of December 2010 end as compared to the previous month's closing. Slowing inflation and the RBI's decision to repurchase bonds during the month helped to reduce the yield on the benchmark 10-year bond. Given the possibility of another rate hike by the RBI in view of the rising food inflation, we expect the 10-year benchmark yield to firm up in comparison to the temporary easing in the last week of December 2010. On balance, the yield on the 10-year G-sec is expected to end 2010-11 at around 8.1-8.3 per cent.
WPI inflation moderates in November 2010

Headline inflation based on WPI moderated to a 11month low of 7.5 per cent in November 2010 as compared to 8.6 per cent in the previous month, mainly due to the base effect. Primary articles inflation slipped to a 1-year low of 13 per cent as primary food inflation slipped into single-digits.
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Outlook
2010-11
2010-11 Growth Agriculture Industry Services Total 5.0 8.6 9.4 8.6
2011-12 2.7 8.2 9.6 8.3
Rationale CRISIL expects GDP to grow by 8.6% in FY11 driven by normal monsoon, strong consumption and investment demand, and buoyancy in services sector. We expect GDP growth to slow down to 8.3% in FY12. Industrial growth will slow owing to rising interest rates. Agriculture growth, despite a normal monsoon, would decline due to a higher base. Services will remain the main driver of growth.
Inflation
WPI-Average
8.0-8.5
5.8
Although rising food and commodity prices will peg inflation at 8.08.5% in FY11, stability in global commodity prices could help in containing supply-side pressures going forward. Food inflation would remain a worry even with normal monsoon. RBI, via monetary tightening, would keep demand-side pressures in check. We therefore expect inflation to average 5.8 per cent in FY12..
Interest rate
10-year G-Sec (Year-end)
8.1-8.3
7.9-8.2
Concerns over rising inflation and tight liquidity are likely to stabilise the yield on 10-year G-sec at 8.1-8.3% by end-March 2011. We expect the 10-year yield to remain at 7.9-8.2% by end-March 2012 with the likelihood of reduced inflation, improved liquidity given rising capital inflows, and the monetary policy stance turning from tight to neutral towards end-FY12.
Exchange rate
Re / US $ (Year-end)
43.5-44.0
4.5-43.0
Increased capital inflows owing to interest rate differential helped the Indian Rupee to continue appreciating in FY11. We expect the Rupee to appreciate further in FY12 given a likely robust GDP growth and an increasing interest rate differential with RBI's tight monetary policy.
Fiscal deficit
As a % of GDP
5.0
5.5
India's fiscal deficit is likely to be a lower-than-budgeted 5.0% of GDP in FY11 owing to a likely increase in tax revenue collection, windfall gains from wireless communication spectrum sales, and decreased subsidy bill. Revenue growth is unlikely to be as buoyant in FY12 due to a high base, absence of 'one-off' revenue gains such as those from the wireless spectrum auction, an increase in states' share in central revenue as recommended by 13th finance commission, and a slowdown in nominal GDP growth. CRISIL therefore expects fiscal deficit to increase to 5.5 per cent of GDP inFY12.
Quarterly update: BoP

India's overall balance of payments remained positive during the second quarter of 2010-11, but its current account deficit widened to US$15.8 billion due to the growing trade deficit, while the net invisibles surplus remained unchanged at US$19.6 billion. At US$15.8 billion, current account deficit in the second quarter of 2010-11 is nearly 72 per cent higher over the same period last year. Current account deficit , therefore, swelled by 109 per cent yo-y to US$27.8 billion during the first half of 2010-11. On the other hand, capital account witnessed net inflows of US$20.5 billion (excluding errors and omissions). Thus, the overall balance of payments (BoP) shrank to US $3.3 billion in the July-September 2010 quarter from US $9.4 billion in the same quarter of last year. Buoyed by the global recovery, merchandise exports grew by 25 per cent y-o-y and were valued at US$54.3 billion in the second quarter of 2010-11. Imports, on the other hand, grew at slightly lower rate of 22.8 per cent. In absolute terms, however, incremental imports were higher than Current account deficit incremental widens further on rising exports, thus trade deficit during widening the trade deficit by second quarter of 2010-11 19.6 per cent yo-y to US$ 35.4 billion for the quarter ending September 2010. Cumulative trade deficit rose to US$66.9 billion in the first half of 2010-11 from US$55.9 billion in the same period last year, with total exports at US$110.5 billion and imports at US$177.5 billion. During the second quarter of 2010-11 services exports increased by 39.6 per cent y-o-y, led by travel, transportation, software and business services. Services exports had declined by 26.3 per cent during the corresponding period of last year. Imports of services too grew by an impressive 40.7 per cent y-o-y. Transfers, a major component within the invisibles, decelerated marginally by nearly 6 per cent y-o-y in the second quarter of 2010-11 in line with a fall in remittances from Indians working abroad. Net investment income also fell by a staggering 299 per cent y-o-y for the comparable period. Consequently, net invisibles receipts declined by 3.9 per cent to US$19.6 billion during the second quarter of 2010-11. During the second quarter of 2010-11, capital inflows (excluding errors & omissions) were at US$20.5 billion as compared to US$19.3 billion during the same period last year. Mirroring the sound macro economic fundamentals, stable policy environment, Net FII inflows interest rate differentials boost capital and attractive returns in the account surplus India equity market, the net portfolio investments nearly doubled to US$19.2 billion in the quarter ending September 2010 from US$9.7 billion during the same quarter last year. Net foreign direct investment (FDI), however, fell by US$5 billion to US$2.5 billion in the second-quarter of 2010-
Figure I: Current Account Balance (US$ bn)

0.0
Table I: Current Account deficit widens further (US$ bn)

Current Account balance Net Merchandise Net Invisibles Net Software Services Net Transfers Current Account balance Net Merchandise Net Invisibles Net Software Services Transfers
FY10 3QPR 4QPR 1QPR

-12.2 -31.1 18.9 12.9 13.0 -3.4 -8.8 5.3 3.6 3.7 -13.0 -31.5 18.5 14.0 12.6 -12.1 -31.6 19.4 12.1 13.1
FY11 2QP
-15.8 -35.4 19.6 12.2 13.0 -4.1 -9.2 5.1 3.2 3.4
H1 -27.9 -66.9 39.1 24.3 26.1 -3.6 -8.7 5.1 3.2 3.4
-12.2
-13.0
-12.1 -15.8
-27.9
-40.0 FY09
-38.4 FY10 3Q10 4Q10 1Q11 2Q11
% of GDP -3.4 -3.2 -8.2 -8.3 4.8 5.1 3.6 3.2 3.3 3.4
Source: RBI
Source: RBI
Note: P- Preliminary; PR-Partially revised
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11, mainly on account of lower FDI inflows into construction, real estate, business and financial services. Country-wise, there was a significant decline in FDI from Mauritius and Singapore. FDI inflows have slowed down because of the recent dip in the risk-appetite of global investors. Short-term credit and external commercial borrowings rose sharply in the reporting period. External commercial borrowings (ECBs) increased to US$3.7 billion during the quarter ended September 2010 from US$1.2 billion during the same period last year due to higher disbursements of commercial loans to India. Banking capital, which is generally a volatile and unpredictable component, recorded net inflows of US$3.2 billion during the quarter (as against US$4.4 billion last year) because of the buildup in foreign assets of commercial banks. Shortterm credit too jumped sharply by nearly 112 per cent y-o-y to US$2.6 billion during the quarter. With capital account surplus exceeding the current account deficit, the overall balance of payment remained in surplus during the second quarter of 2010-11, with US$3.3 billion net accretion to foreign exchange reserves (excluding the valuation effect). In nominal terms (including valuation effects), foreign exchange reserves increased by US$17.2 billion during the quarter, reflecting the depreciation of the US dollar against major international currencies.
Outlook
Current account deficit as a percentage of GDP is expected to be 3.3 per cent in 2010-11 owing to the rising trade deficit and lower invisible surplus. However, higher CAD has helped in slowing down the pace of rupee appreciation vis--vis the dollar despite the sudden rise in capital inflows during this fiscal. A higher surplus in capital account than the deficit in current account is expected to result in positive BoP during the fiscal.
Figure II: Capital Account Balance (US$ bn)

60.0 53.6
Table II: Current Account deficit widens further

(US$ bn) Capital Account balance Net Foreign Direct Investment (FDI) Net Portfolio Investment Net ECB Net Short Term Credit Capital Account balance Net Foreign Direct Investment (FDI) Net Portfolio Investment Net ECB Net Short Term Credit FY10 3QPR 4QPR 1QPR 14.7 3.9 5.7 1.7 3.3 4.2 1.1 1.6 0.5 0.9 16.1 16.2 FY11 2QP 20.5 2.5 19.2 3.7 2.6 5.3 0.6 5.0 1.0 0.7 H1 36.7 5.3 23.8 6.0 6.7 4.8 0.7 3.1 0.8 0.9
20.5 14.7 7.2 16.1 16.2
3.2 2.8 8.8 4.6 0.1 2.3 5.0 4.2 % of GDP 4.2 4.3 0.8 2.3 0.0 1.3 0.7 1.2 0.6 1.1
0.0 FY09 FY10 3Q10 4Q10 1Q11 2Q11
Source: RBI
Source: RBI
Note: P-Preliminary; PR-Partially revised
I. Indian Economy Outlook: 2011-12

India not only emerged relatively unscathed from the global crisis, but is also set to return to its trend growth path during 2010-11. As per the CSO estimate, the GDP grew at 8.9 per cent during the first half of 2010-11. Driven by the inherent strength of its domestic demand, which was suitably complemented by Reserve Bank of India's monetary management and the Central government's fiscal stimulus, India's GDP is expected to grow at 8.6 per cent in 2010-11. This will again place the country amongst the fastest growing economies in the world. As 8.5-9.0 per cent average annual GDP growth has now become a new benchmark for India to assess its growth performance, the theme of this month's Ecoview presents CRISIL's forecasts of GDP growth and other macroeconomic variables for 2011-12 and also outlines some potential risks to economy. Even trade, finance and communication are expected to do well, although growth in this segment during 2011-12 will be slightly lower than that in 2010-11. On the demand side, domestic and export demand are likely to provide sustained support to future business prospects, and in turn, to investments demand. However, investment activity would slow down somewhat, as gross fixed capital formation is expected to grow at 8.1 per cent in 2011-12 as compared to 13.1 per cent in 2010-11. With input/wage costs rising, corporate profits will come under pressure unless these costs are passed on or productivity improves. Also, the cost of capital has gone up due to the monetary tightening by the RBI over the past one year. Thus, in 2011-12, companies would find it difficult to maintain a bottomline as healthy as that in 2010-11. On the other hand, with personal disposable income rising, we expect private consumption expenditure to grow at 8.1 per cent in 2011-12, marginally lower than the estimated 8.4 per cent in 2010-11.
GDP growth
The GDP is expected to grow at 8.3 per cent in 201112, as the rising cost of credit would slow industrial growth to 8.2 per cent and agriculture growth, despite a normal monsoon, would decline due to a higher base. The service sector, with a likely GDP to grow at 8.3 growth of 9.6 per cent, per cent in FY12. will remain the key d r i ve r o f e c o n o m i c growth in 2011-12. A further pick-up in financing, insurance, real estate and business services, given a resurgent economy, will drive the growth in services.
Industrial growth
Driven by rising disposable The current momentum income, soft in industrial growth interest rate to continue regime and i n c r e a s e d government spending on various social schemes,
Figure 1.1: Industrial growth (y-o-y %)

10.0
Figure 1.2 : WPI Inflation (y-o-y %)

10.0 8.0-8.5
9.3
9.0
8.6 8.2
6.0
5.8
8.0
3.6
7.0 FY10 FY11 F FY12 F
2.0 FY10 FY11 F FY12 F
Source:CSO and CRISIL
Source: Ministry of Industry and CRISIL
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industrial activity remained largely buoyant during 2010-11 and is expected to clock a growth of 8.6 per cent. However, IIP growth across the months became volatile due to uneven growth in the capital goods sector. Nevertheless, capital goods sector grew by 24 per cent during April-October 2010, indicating continued robustness of investment demand. The consumer durables sector has also been performing consistently. The sector has been growing by over 20 per cent since July 2009, with the exception of September 2010, when its growth declined to 10.9 per cent. During April-October 2010, this sector posted a growth of 24.4 per cent. We expect the current momentum in industrial growth to continue and be at 8.2 per cent in 2011-12.
income. And agricultural production has yet to adequately respond to these structural changes in the demand pattern. It is, therefore, unsurprising that we have been witnessing double digit food inflation for nearly 2 years now. Another supply side issue with regard to inflation is escalating global commodity prices. However, if monsoons remain normal in 2011 and oil prices stabilise at US$ 85-90 per barrel, average WPIbased inflation is expected to settle at around 5.8 per cent in 2011-12. But any supply shock from commodity prices due to the quantitative easing by central banks in advanced countries can aggravate the inflation build up. Therefore, the risk of inflation going beyond our projected figure of 5.8 per cent remains.
Inflation Interest rate

As greater macroeconomic stability and improving consumer sentiment will continue to drive consumption and investment growth in 2011-12, demand-side pressures on inflation is likely to continue. However, we expect the RBI's monetary Inflation remains policy to rein in demanda cause of worry side pressures on inflation. On the supply side, food inflation has been a major cause of worry in 2010-11, and is unlikely to come down any time soon despite good monsoon in 2010. Besides the decline in per capita food grain production, there has been a change in the dietary habits of the people due to rising Although the RBI had indicated in its second quarter review that the likelihood of further rate hike in the immediate future is relatively low, much G-sec interest rates would depend on how the growth and inflation to soften in FY12 pans out in the near term. While GDP growth appears to be on track, inflation continues to be a cause of concern. Thus, the interest rate outlook for 2010-11 would depend largely on three things rate of inflation, quantum of government borrowing and private credit demand.
Figure 1.3: 10-year g-sec yields, year end (%)

9.0 8.1-8.3 8.0 7.8 7.9-8.2
Figure 1.4: Indian Rs-US$ exchange rate, year-end
47.0
45.1 44.5 43.5-44.0
7.0
42.5-43.0
6.0 FY10 FY11 F FY12 F
42.0 FY10
Source: RBI and CRISIL
FY11 F
FY12 F
In addition to inflation worries, the bond yield is also being driven by the tight liquidity conditions in the market. Indian banks borrowed an average of Rs 923 billion a day from the Reserve Bank of India during the last quarter of 2010, the most since 2000, as they struggled to meet the rising demand for loans. To ease the liquidity situation, the RBI cut the Statutory Liquidity Ratio and conducted Open Market Operations. However, liquidity is likely to remain tight up to March 2011, and ease considerably thereafter. Between April-September 2011, liquidity should remain easy. Going ahead, we envisage relatively less upward pressure on the yield owing to the projected fiscal deficit of the government remaining at 5.5 per cent level for 2011-12, the enhanced cap on FII participation in the G-sec market, and inflation projections remaining lower in 2011-12 than in 201011 despite uncertainties. Overall, we expect the yields on the benchmark 10- year G-sec to end 2011-12 at around 7.9-8.2 per cent, with interest rates in between going beyond this level. Most of the upward move in the G-sec rate is likely to come in the first quarter of 2011-12, when the government frontloads its borrowing.
India, wherein the growth outlook is strong. With the exception of a brief period of May- August 2010, when Rupee depreciated against US$, due to the European debt Rupee on a crisis, the pressure this fiscal has appreciating been on rupee to appreciate. However, increased demand for trend dollars from oil importers, rising prices of other imports, and demand from corporates to pay back the previous external commercial borrowings had exerted an opposite pressure on the Rupee.
Going forward also, we expect the following factors to exert upward pressure on the Rupee a) Capital flows are expected to remain robust due to the slow economic recovery in other parts of the world. Net FII inflows amounted to US$ 19.3 billion in the first half of the current fiscal as compared to US$ 14.4 billion during same period last year; b) The rising interest-rate differential in the wake of the RBI's monetary tightening will encourage debt flows, and Weak US$ due to ultra-low US interest rates and weakness in the economy.
c)
Exchange rate
With the US and other developed economies gradually recovering from the recession, and risk appetite returning amongst global investors, we expect heavy dollar inflows into economies like
Figure 1.5: Fiscal Deficit as a percentage of GDP
8.0
However, a rising current account deficit is expected to put downward pressure on the Rupee. In fact, a wider current account deficit during 2010-11 has slowed rupee appreciation vis--vis the US dollar, as
Figure 1.6: Current Account Balance (as per cent to GDP)
-2.0
6.7
-2.6
5.5 5.0 5.5
-3.3 -3.5
3.0 FY10 FY11 F FY12 F
-4.0 FY10 FY11 F FY12 F
Source: Budget Documents and CRISIL
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the country used most of the capital inflows to fund the deficit. On balance, we expect the Rupee to trade in the range of Rs 42.5-43.0 per US$ by March-end 2012. However, the margin of error for the exchange rate forecast remains high in view of the fickle nature of FII inflows.
up disinvestment, much would become known on this front when the 2011-12 budget would be presented. Thus, CRISIL expects the fiscal deficit in 2011-12 to be around 5.5 per cent of GDP.
Trade and current account deficit

Despite uneven global recovery, merchandise exports during the first 8 months of 2010-11 stood at US$ 140.3 billion as compared to US $ 110.7 billion during the corresponding period last year. Given the export performance so far, India would not only meet but may even exceed its exports target Growing export demand of US$ 200 billion and rising inflow of for 2010-11. For composition of invisibles to trim down m e r c h a n d i s e the current account deficit exports, data is available only for the first quarter of 2010-11. It shows that, at 85 per cent, petroleum and crude products were the fastest growing exports items, followed by ores and minerals at 56 per cent.
Fiscal deficit
On the fiscal front, improved economic performance in 2010-11 coupled with better-than-expected revenues garnered via auction of the 3G and broadband spectrum is likely to result in a situation wherein the revised estimate of fiscal deficit is going to be much lower than the budgeted estimate. The a u c t i o n s g e n e r a t e d Fiscal deficit to rise revenues of Rs 1,070 to 5.5 per cent of billion (around 1 per cent GDP in FY12 of GDP) as compared to the budgeted amount of Rs 350 billion. Thus, we expect the fiscal deficit to GDP ratio to settle at around 5 per cent in 2010-11.
Going forward, however, the government's balancesheet is expected to deteriorate. In 2011-12, the revenue growth is unlikely to be as buoyant as it was in 2010-11, firstly due to the base effect and secondly due to a marginal slowdown in the GDP growth. Also, the one-off gains, such as revenue from the 3-G and broadband spectrum auction, will be absent. To reduce fiscal deficit further, the government can step
Table 1.1: Annual growth (year-on-year)
For the financial year so far (April-November 2010), imports stand at US $ 222.0 billion as against US $ 179.1 billion during the same period last year. The cumulative trade deficit, therefore, for the fiscal year 2010-11 so far works out to be US$ 81.7 billion. This is 20 per cent higher than the deficit of US$ 68.4 billion during the same period last year.
2009-10 GDP factor cost Supply-side Agriculture Industry Services Hotels,trade, transport and communication Finance Community and social Demand-side Private consumption Government consumption Fixed investment Source: CSO, CRISIL 7.4 0.2 9.3 8.5 9.3 9.7 5.6 4.3 10.5 7.2
2010-11F 8.6 5.0 8.6 9.4 11.2 8.7 6.9 8.4 9.7 13.1
2011-12F 8.3 2.7 8.2 9.6 10.8 9.2 7.8 8.1 9.1 8.1
Note: F- CRISIL forecast
But the capital account has been witnessing sustained inflows; it received US$36.7 billion during April September 2010. However, the composition of the inflows is posing a cause for concern, since it is mainly driven by portfolio inflows. Cumulative FDI inflows dropped by 40 per cent y-o-y to stand at US$ 12.4 billion during AprilOctober 2010. With the capital account surplus exceeding the current account deficit, the overall balance of payment has remained positive so far in 2010-11, and we expect it to remain so for the remaining period of this fiscal as well. However, a higher trade deficit and lower invisibles surplus is expected to push current account deficit to 3.3 per cent of the GDP in 2010-11. But we expect the situation to improve during 201112 on account of rising inflow of invisibles - as advanced economies recover - and growing export demand. Thus, the current account deficit is expected to be around 2.6 per cent of the GDP in 2011-12.
Summary
The CRISIL macroeconomic forecasts presented here are based firmly on our view of the fundamentals. We recognize that the outlook on India's macroeconomic variables can alter depending on any significant and unanticipated changes in both the global and domestic economy. On the domestic front, any unanticipated sharp rise in inflation could result in speedier tightening of the monetary policy. This, in turn, would raise market interest rates, and hence, slow down domestic economic growth, although the probability of such a situation remains low. Similarly, any bad news from the European debt crisis could impact the economy via changes in capital inflows and exchange rate.
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II. Industrial Production

Industrial output growth surged to 10.8 per cent in October 2010, backed by a low base and a strong month-on-month momentum. The spurt in October came after industrial growth Industrial output growth hit a 16-month surged to 10.8 per cent in low of 4.4 per cent October 2010 in the previous month. The index of industrial production (IIP), based on seasonally adjusted series, grew by 3.6 per cent in October, as compared with a decline of 1.1 per cent in September and a 6.6 per cent fall in August. The above growth trend indicates that industrial growth has become quite volatile. sector, capital goods sector growth continues to be highly volatile. As compared to a consistently good performance in the first five months of 2010, its growth has become highly volatile and its 3-month moving average shows a downward trend. Capital goods grows Although the index of by 22.0 per cent in capital goods dropped October 2010 by 1.5 per cent on m-om basis in October 2010, a very low base led to a y-o-y growth of 22.0 per cent in October 2010. As compared to this, capital goods' output recorded a contraction of 4.1 per cent in previous month.
Manufacturing output grew by 11.3 per cent in October 2010, as compared to a growth of 4.6 per cent in September and 10.8 per cent a year ago. During April-October 2010, the manufacturing segment grew by 11 per cent as compared to 6.8 per cent in the same period last year. Mining and electricity, the other two major industrial segments, grew by 6.5 per cent and 8.8 per cent, respectively, in October 2010, as compared with a 4.9 per cent and 1.7 per cent growth in September. On a year-on-year basis, however, growth in the mining segment was lower than October 2009 levels of 9.1 per cent. Among the use-based categories of manufacturing
Figure 2.1: Manufacturing Sector Growth (%)
20.0
Meanwhile, the consumer durable goods segment continues to be a key driver of industrial growth; it grew by 31 per cent in October 2010. The sector has been growing by over 20 per cent since July 2009, with the exception of September 2010, when its growth declined to 10.9 per cent. Thus, investment demand (as captured by the volatile trend in the capital goods segment) looks uneven, but private consumption demand (as captured by the growth in consumer durable goods sector) appears to be robust and sustained. Growth in the basic goods segment more than doubled to 7.7 per cent in October 2010 from 3.4 per cent in September and 4 per cent a year ago. But
Table 2.1: Sectoral Growth (y-o-y %) Weight Oct-09 April-Oct Oct-10 2009-10 2010-11 10.8 11.3 6.5 6.8 6.8 8.1 10.3 11.0 8.3 4.6 5.8 24.0 10.4 8.2 24.4 1.7
15.0
General Manufacturing
10.9 11.3 10.8
1000.0 793.6 104.7 101.7 355.7 92.6 265.1 286.6 53.7 233.0
10.1 10.8 9.1
Mining Electricity Basic
10.0
4.0 8.8 6.2 Use Based Industry (%) 4.0 7.7 5.8 10.9 15.4 11.4 18.3 8.6 22.0 9.5 9.6 31.0 0.1 6.0 10.1 5.5 18.6 1.0
5.0
2.7
0.0
Capital Intermediates Consumer Goods

Apr Oct FY11
FY09 FY10 Oct
-Durables -Non durables Source: CSO
FY10
Source: CSO
growth in the intermediates slipped to 9.5 per cent in October from 10.9 per cent in September and 15.4 per cent a year ago. The consumer non-durable segment continues to stay weak, posting a growth of just 0.1 per cent in October 2010. In October 2010, 15 of the 17 industries within the manufacturing sector posted positive growth. During April-October 2010, the top five industries were transport equipment and parts (29.2 per cent growth), metal products and parts (25.5 per cent), other manufacturing industries (24.3 per cent), machinery and equipment (18.4 per cent) and rubber, plastic, petroleum & coal products (13.6 per cent). Industries that recorded negative growth during April-October 2010 were beverages, tobacco 15 of 17 industries & related products (-1.2 witnessed positive per cent) and wood & growth in October wood products (-11.6 2010 per cent).
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in the economy, has been growing consistently by around 20 per cent for the most part of current fiscal year. For the fortnight ended December 17, 2010, nonfood credit grew by 23.7 per cent as compared to 11.8 per cent in the same period last year. On Most lead indicators the trade front, both report healthy growth exports and imports posted a strong annual growth in November 2010 as compared to the previous month. Exports grew by a healthy 26.5 per cent and imports increased by 11.2 per cent in November 2010 as compared with the previous month's growth of 21.3 per cent and 6.8 per cent, respectively. The performance of these indicators points towards growing consumption and investment demand, which augurs well for the manufacturing sector, and hence, for the overall economy.
Outlook
For October 2010, a low base together with a pick-up in month-on-month momentum led to a surge in industrial output. However, this trend is unlikely to continue as the high base will keep industrial growth at moderate levels in the remaining months of 2010-11. On balance, average industrial growth in 2010-11 is expected to be about 9 per cent.
Among the forward looking indicators, cement production rose in October 2010 on a month-onmonth basis, after having declined during the past 6 months. Production increased by 0.2 per cent m-o-m in October 2010, with annual growth surging to 17.8 per cent. This is also reflected in the Ministry of Industry and Commerce's data on infrastructure industrial production, which shows a growth of 16.8 per cent in cement output in October 2010. Non-food credit growth, an indicator of manufacturing activity
Table 2.2: Performers in Manufacturing Sector (%) Weight Oct-09 39.8 16.9 28.1 25.6 95.7 57.3 90.8 5.9 55.2 11.4 -4.0 6.9 15.9 14.3 2.6 -15.5 12.3 8.2 April-Oct Oct-10 2009-10 2010-11 29.2 39.5 8.5 19.5 24.6 15.9 1.3 9.1 -0.5 13.0 26.0 -2.4 8.9 12.1 12.7 -9.9 -17.1 2.8 1.8 25.5 24.3 18.4 13.6 12.6 10.7 10.3 9.3
Table 2.3: Laggards in Manufacturing Sector (%) Weight Oct-09 Paper NMMP Metal and Alloy Textile products Chemical Wool Beverages Wood 26.5 44.0 74.5 25.4 140.0 22.6 23.8 27.0 0.6 6.0 -1.1 16.9 18.9 18.0 0.2 19.5 April-Oct Oct-10 2009-10 2010-11 11.3 14.0 8.8 10.3 1.1 2.7 3.1 -25.7 1.3 7.6 4.1 10.5 9.2 13.2 -2.0 9.1 7.9 7.7 6.4 4.6 3.2 0.4 -1.2 -11.6
Transport Eqp Metal Products Oth. Manufacturing Mach. & Eqp Rubber Food products Jute Cotton textiles Peather Source: CSO
Note - Please refer to Annex (Table 8.4) for full description of abbrev used in the text
January 2011
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III. External Sector

India's exports grew at an annual rate of 26.5 per cent (in US$ terms) in November 2010, after decelerating to 21.3 per cent in the previous month. The export growth was mainly driven by a low base. In absolute terms, exports were valued at Exports grew at an annual US$ 18.9 billion rate of 26.5 per cent in November as compared to US$ 18.0 billion in October 2010. During the same period, imports also grew at a rapid 11.2 per cent as against 6.8 per cent. On a monthly basis, imports were up by 0.4 per cent. A higher month-on-month growth in exports vis--vis imports narrowed the trade deficit to US$ 8.9 billion in November from US$ 9.7 billion in October. The trade deficit in November 2009 had been much higher at US$ 10.1 billion. November 2010), exports stood at US$ 140.3 billion as compared to US$ 110.7 billion for the same period last year. This has raised hopes of exports not only meeting but even exceeding the target of US$ 200 billion for 2010-11. From April to November 2010, the cumulative imports were at US$ 222.0 billion as compared to US$ 179.1 billion for the same period last year. Hence, the cumulative trade deficit for the fiscal year so far works out at US$ 81.7 billion. This is 20 per cent higher than the trade deficit of US$ 68.4 billion for the same period last year. In rupee terms as well, exports grew at a faster pace of 22.3 per cent in November 2010 as compared to 15.3 per cent in October 2010. This is the fastest annual growth in 5 months. In absolute terms, exports were valued at Rs 850.6 billion. Imports recorded a growth of 7.5 per cent in November 2010as compared with 1.5 per cent during the previous month. As a result, the trade deficit in rupee terms reduced to Rs 400.7 billion in November 2010 from Rs 432.1 billion in the previous month and Rs 468.7 billion a year ago.
Among the broad categories of imports, oil imports recorded a shortfall of US$ 0.7 billion in November as compared to the previous month. However, oil imports increased by 2.3 per cent y-o-y (US$ 0.2 billion) to US$ 7.7 billion during November. As compared to this, non-oil imports grew at an annual rate of 15.0 per cent in November after it had slowed to 9.9 per cent in the previous month. At US$ 20.1 billion, non-oil imports accounted for over 72 per cent of total imports in November. For the current financial year so far (April to
Figure 3.1: Exports Performance (US$ bn)
200.0 162.9 168.7 176.6 140.3
Outlook
Going forward, exports are likely to not only meet but exceed the government's annual target of US$ 200 billion. However, a rising import bill due to strong import demand and rising crude oil prices is expected to widen the trade deficit.
Table 3.1: Trade Performance Nov-09 Nov-10 Exports Imports Oil Imports Non-oil Imports Trade Balance Exports Imports Oil Imports Non-oil Imports Trade deficit April-Nov 2009-10 2010-11
0.0 FY08 FY09 FY10 Apr May June July Aug Sep Oct Nov FY11
Merchandise (US$ billion) 140.3 14.9 18.9 110.7 222.0 25.0 27.8 179.1 64.9 7.6 7.7 53.4 157.1 17.4 20.1 125.6 -81.7 -10.1 -8.9 -68.4 y-o-y % 26.7 33.8 26.5 -4.6 24.0 6.4 11.2 -10.5 21.4 26.8 2.3 -24.1 25.0 -0.5 15.0 -3.1 19.5 -18.3 -11.6 -18.6
Source: Ministry of Commerce
Source: Ministry of Commerce
IV. Inflation
Headline inflation based on WPI moderated to 7.5 per cent in November 2010 from 8.6 per cent and 8.9 per cent (revised) in October 2010 and September 2010, respectively. The deceleration in headline inflation on year -on-year basis happened due to both base effect and softening of prices across all major categories. However, on a month-on-month Headline inflation seasonally-adjusted eases to 11-month basis, inflation low on base accelerated by 0.7 per cent in November 2010 effect as compared to 0.3 per cent in the previous month. In line with inflation based on WPI, the same based on Consumer Price Index Industrial Workers (CPI-IW) also saw a sharp decline in November 2010 when it slowed to 8.3 per cent from 9.7 per cent in previous month. The decline was led by moderation in prices of food items which carry a significant weight in CPI basket of goods. that food inflation has once again accelerated to double-digits, indicating that the pressure exerted by the food inflation has not subsided yet. This coupled with rising domestic demand and higher global commodity prices has complicated the monetary management process for Reserve Bank of India (RBI) as inflation continues to remain above the central bank's comfort level. Primary articles inflation slipped to 13 per cent in November 2010 from 16.7 per cent in the previous month, as primary food inflation dropped to singledigits after a gap of 17 months. Primary food inflation dropped to 9.4 per cent in November 2010 from 14.1 per Primary articles cent in the previous month, inflation slips mainly on account of the base to 1-year low effect (primary food inflation was 16.7 per cent in November 2009). Within the food basket, prices dropped across the board on year-on-year basis. Inflation in food grains, led by pulses, turned negative (-0.75 per cent) in November 2010. However, despite some moderation, inflation in milk, eggs, meat and fish remained at high double-digits levels (Table 4.2). Inflation in fruits and vegetables declined for the second consecutive month to 6.7 per cent in November 2010 from 9.5 per cent in the previous month.
In an important development, food inflation (primary and manufacturing) slid into single digits after remaining in double-digit territory for 17 consecutive months. It stood at 6.1 per cent in November 2010 as compared to 10.0 per cent in the previous month as supply of kharif food grains and winter vegetables hit the market. Among food items, inflation in cereals and pulses witnessed a sharper inflation as compared to protein-related food items such as egg, fish, meat and milk etc, reflecting the structural nature of food inflation. However, weekly data for the week-ending December 11, 2010, shows
Figure 4.1: Headline Inflation (y-o-y %)
18.0
But, as per the weekly data available for the week ending December 11, 2010, inflation in onion rose to 33.5 per cent from 29.9 per cent in the previous week.
Table 4.1: Inflation in Major Product Groups April-Nov Weight Nov-09 Nov-10 2009-10 2010-11 y-o-y %
WPI
CPI
14.0
13.5 8.3 4.5 3.6 7.5
General Primary Fuel Manufacturing
100.00 20.12 14.91 64.97
4.5 14.3 -1.1 2.3
7.5 13.0 10.3 4.6
1.0 8.8 -7.0 0.4
9.4 18.0 12.5 5.4
10.0
8.0
6.0
Contribution to inflation Primary 71.3 -3.9 31.9 42.7 20.9 36.8 191.2 -114.0 22.8 45.0 20.0 35.0
Nov FY11
2.0
FY09 FY10 Nov
May FY10
-2.0
Fuel Manufacturing
Source: Ministry of Industry
January 2011
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Onion prices have risen abruptly due to untimely rain in Maharastra, Gujarat and other Southern states, which has destroyed the crop. The subsequent weeks would reflect the full impact of the failed crops on prices. Persistent high inflation in non-food primary articles remains an area of concern. It stood at 23.2 per cent in November 2010, the third consecutive month in which it has stood above 20 per cent. The rise was fuelled by prices of logs & timber and flowers, all of which increased by 35 per cent each. Meanwhile, inflation in minerals moderated for the second consecutive month to 21.5 per cent in November 2010 from 25.4 per cent in the previous month. Fuel price inflation moderated to 10.3 per cent in November 2010 from 11.0 per cent in the previous month. Inflation in coal mining decelerated sharply to 0.2 per cent in November 2010 from 3.8 per cent a month ago. Both coking and non-coking coal contributed to this decline. In the mineral group, inflation in petrol accelerated to 18.2 per cent in November 2010 from 16.6 per cent in the preceding month. Inflation in kerosene remained unchanged from last month, while inflation in aviation turbine fuel (ATF) and naptha decelerated. Rising global crude prices pose a significant risk to fuel inflation, going forward. Manufacturing inflation softened marginally to 4.6 per cent in November 2010 from 4.7 per cent in the previous month. This is the third consecutive month
Table 4.2: Inflation in Primary Articles (y-o-y %) April-Nov Weight Nov-09 Nov-10 2009-10 2010-11 Cereals Pulses Fruits & Vegetables Eggs,Meat & Fish Fibres Oilseeds Metallic Minerals Other Minerals 3.4 0.7 3.8 2.4 0.9 1.78 0.5 0.1 14.3 29.1 5.1 27.6 2.5 -0.4 -16.9 2.9 1.2 -8.4 6.7 20.0 36.2 7.4 57.6 2.6 12.1 18.2 7.7 14.8 -3.8 0.1 -11.1 1.4 6.4 10.5 11.5 31.8 24.2 4.0 49.9 1.1
of sub-5 per cent manufacturing inflation, indicating that the RBI's monetary tightening measures have succeeded in reining in demand-side pressures on inflation. Inflation in manufactured food items dropped sharply to 0.6 per cent in November 2010 Manufacturing from 3.0 per cent in the inflation softens previous month. However, c o r e ( n o n - f o o d marginally manufacturing) inflation accelerated for the second consecutive month to 5.4 per cent in November 2010, driven by inflation in chemical and chemical products and basic metal alloys and metal products. However, inflation in transport equipments and parts decelerated marginally during the month. Inflation in rubber and plastic products and textiles remained high and sticky (Table 4.3). Going forward, rising input costs pose a risk to the manufacturing sector inflation.
Outlook
Headline inflation for November 2010 has moderated in line with expectations. High base along with good kharif harvests is expected to further ease inflation, going forward. However, the structural nature of food inflation coupled with rising global commodity prices continue to pose an upward risk to inflation. On balance, we expect annual average inflation to settle in the range of 8.0-8.5 per cent for 2010-11, and drop to around 6 per cent by the end of March 2011.
Table 4.3: Inflation in Manufactured Products (y-o-y %) April-Nov Weight Nov-09 Nov-10 2009-10 2010-11 Chemicals Food Products Textiles Machine Tools Metal & Alloys Transport Eqp. NMMP Rubber & Plastic 12.0 10.0 7.3 8.9 10.7 5.2 2.6 3.0 -0.9 17.9 2.9 -0.3 -7.4 3.3 7.2 0.2 4.9 0.6 10.3 2.8 7.1 2.7 2.6 6.0 -1.7 11.3 1.6 0.4 -11.6 3.8 8.3 -0.3 4.9 5.1 10.4 2.5 7.6 3.0 2.6 5.1
V. Money and Banking

To ensure efficient liquidity management without signaling any course reversal, the Reserve Bank of India (RBI), in its second mid-quarter review of the monetary policy, on December 16, 2010, retained repo and reverse repo rate at 6.25 per cent and 5.25 per cent, respectively, and the cash reserve ratio at 6 per cent. However, it reduced the statutory liquidity ratio (SLR) of scheduled commercial banks (SCBs) by 100 basis points (bps) to 24 per cent. It also announced the conduct of open market operations (OMOs) auctions for the purchase of government securities for an aggregate amount of Rs 48,000 crore between December 2010 and January 2011. Both these measures were directed towards infusing primary liquidity into the system. With investment demand remaining strong, demand for funds from the banking system has received a fillip; bank credit growth surged to 23.7 per cent during the fortnight ending December 17, 2010. During the same period, non-food RBI announces steps on credit growth primary liquidity easing also rose by 180 measures bps m-o-m to 23.7 per cent. Food credit growth for this fortnight in December 2010 rose to 38.8 per cent against a decline of 13.6 per cent in the corresponding fortnight of the previous year. funds with banks, and this is reflected in the low deposit growth rate. For the fortnight ending December 17, 2010, deposit growth stayed at 14.7 per cent same as in the previous month and lower than the 17.9 per cent recorded in the Non-food credit same fortnight last year. growth surges Deposit growth has to 23.7 per cent remained sluggish despite higher rates offered by banks over the past few months. During the fortnight ending December 17, 2010, credit deposit ratio rose by 240 bps m-o-m to 75.8 per cent. For the fortnight ending December 17, 2010, incremental credit deposit ratio rose by 128.7 per cent, depicting a faster pick-up in new credit disbursed vis--vis fresh deposits collected.
Meanwhile, among other factors, high inflation has continued to dissuade investors from parking their
Figure 5.1: Money Supply Growth (%)
30.0 y-o-y SA m-o-m annualised
With liquidity remaining tight, money supply grew by 15 per cent as on fortnight ending December 17, 2010, compared to 18 per cent during the same fortnight a year ago. Among the sources of money supply, bank credit to commercial sector rose to 22.4 per cent during the fortnight, from 21.0 per cent in the previous month. Net foreign exchange assets posted a marginal increase during this period. Meanwhile, growth in net bank credit to government was lower at 18.7 per cent during the fortnight ended December 17, 2010, as compared to 22.9 per cent in the same period of the previous month. Growth in SCBs' investments in government securities fell further to 6.9 per cent in the fortnight ending December 17, 2010, compared to
Table 5.1: Scheduled Commercial Banking Indicators (y-o-y%) Outstanding as on 17th Dec Financial Year so far 2009-10 2010-11 2009 2010 Aggregate Deposits 17.9 11.3 -13.6 11.8 24.6 70.3 14.7 23.7 38.8 23.7 6.9 75.8 9.1 6.0 -2.5 6.2 15.7 47.6 6.8 12.2 28.9 11.9 4.2 128.7
20.0
20.7 18.9 16.8 16.0 16.5
Bank Credit Food Credit
10.0
11.5
Non-Food credit Investments

0.0 FY09 FY10 Jun Sep Feb FY10 Jul Nov FY11
Credit-Deposit Ratio Source: RBI
Source: RBI, CRISIL Estimate
January 2011
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8.7 per cent in the previous month. Total investments by SCBs in government securities stayed at around 30 per cent. During December 2010, apart from advance tax outflows, faster pick-up in bank credit as compared to deposit growth also exerted strain on liquidity with banks. During the month, average net transactions under the Liquidity Adjustment Facility (LAF) window rose to Rs 1,184 billion from Rs 1,004 billion in Call rates touch a November 2010. The lower peak of 6.97 large borrowing by per cent on a monthbanks from the on-month basis overnight LAF window in the past few weeks clearly signals the fast growing demand for funds from an active economy. In addition, continued buildup in government cash balances with the RBI and increase in currency with public are exerting pressures on the liquidity in the system. During December 2010, call rates peaked to 6.97 per cent (lower than the previous month's peak at 7.35 per cent). Apart from the announcement on conducting additional open market operations, the reduction of government borrowing to Rs 6,000 crores from Rs 11,000 crores per week is a welcome step towards alleviating liquidity pressures.
Outlook
The RBI will continue its active liquidity management stance, though facilitating growth and anchoring inflation expectations will be a tough balancing act for the Central Bank. Going forward, the liquidity situation will remain under pressure, as credit growth is likely to surpass deposit growth. However, the situation might ease somewhat, as large government spending is likely to kick in.
Figure 5.2: Liquidity Situation In India

2100.0 1500.0 900.0 300.0 4.0 -300.0 -900.0 -1500.0 -2100.0
Net LAF transactions Rs bn (LHS) Call rates Repo rate Reverse repo rate
8.0
Jul-09
Sep-09
Dec-09 FY10
May - 10
Jul-10
Oct-10 FY11
Dec-10
0.0
Source: CCIL & RBI
VI. Markets
Currency
December 2010 witnessed a reversal in Indian rupee movement. After having depreciated sharply in November due to debt woes in Euro economies, uncertainties around monetary tightening in China and tensions in Korea, the Indian rupee started strengthening in December. By December-end 2010, rupee appreciated by close to 3 per cent on monthly basis against the US$ despite massive FII selling during the month. On a net basis, FII inflows in debt and equity markets stood at US$ 0.7 billion in Dec 2010 as compared to US$ 4.8 billion in November 2010. December is usually characterised by relatively higher FII outflows as investors square off positions to book profits (or loss) on their balance sheets before the end of the year. During the month, the rupee traded in the range of 45.70-44.81 against the US$. On a monthly average basis, the INR per USD remained fairly Rupee regains its unchanged at about 45.2. In lost trajectory the forward premia market, the premiums moved down (especially on the 6 month forward contract) as exporters continued to buy forward dollars. During 2010, on a cumulative basis, net buying by FIIs stood at US$ 39.5 billion as against US$ 17.9 billion in 2009. Against this, the India rupee appreciated by 4 per cent (against the US$) in December 2010-end Net FII at US$ 39.5 over December 2009-end billion in 2010 levels. During the year, portfolio inflows remained strong (at US$ 29.4 billion in 2010 against US$ 12.7 billion in 2009). In addition, robust overseas borrowing by corporates kept the rupee at elevated levels.
Outlook
The rupee is expected to continue on its upward trajectory for the remaining months of the current fiscal. Meanwhile, rising interest rate differentials between India and the West are expected to drive strong foreign flows into Indian the markets, pushing the rupee upwards. But a widening current account deficit is expected to weigh on the pace of rupee appreciation. On balance, we expect the rupee to trade in the range of 43.544.0 per US$ by March-end 2011.
Apart from the US dollar, the rupee gained by about 3.2 per cent against the Pound Sterling, and by 0.9 per cent against the Euro (on a monthly average basis).
Figure 6.1: Net FII Inflows and Exchange Rate

2.0
Table 6.1: Currency Movement (Averages)

52.0
Net Fill inflow US$ bn (LHS) Rs per USD
USD
GBP
Euro
Yen
Indian Rupee vis--vis FY09 FY10 1H FY10 2H FY10 3QFY11 November-10 December-10 1-month 6-months Source: RBI 45.9 47.4 48.5 46.3 44.9 45.0 45.2 6.8 6.5
Note: * As of 24th Dec 2010
0.0
43.0
78.5 75.9 77.7 74.0 70.9 71.8 70.5
65.1 67.1 67.8 66.3 60.9 61.5 59.7
46.0 51.1 50.9 51.3 54.4 54.6 54.2
-2.0 Apr-08
Nov-08 FY09
Jun-09
Jan-10
Jul-10 FY10
38.0 Dec-10 FY11
Forward premia*
Source: SEBI, RBI
January 2011
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Debt
The yield on the 10-year benchmark bond stood at 7.9 per cent at the end of 2010, while the 10-year corporate AAA yield closed the Continued liquidity pressure year at 8.95 and upside risk to inflation per cent. expectations; 10-year During G-Sec to firm up by December 2010, the March-end 2011 spread between borrowing costs for companies with top rating on a 10-year bond and 10-year government yields increased on a month-on-month basis.
mandatorily required to invest in government bonds, to 24 percent from 25 percent. The liquidity situation may stabilize in January as government spending picks up and also with redemption of government securities. However, the food price index rose in the year to December 25, its highest in recent months, while the fuel prices climbed 11.63 percent. Food prices makes up about 24 percent of the benchmark index. Another policy rate hike by the central bank is also likely given the persistence of an 'upside risk' to inflation. Therefore, we expect the 10-year benchmark yield to firm up as compared to the temporary easing seen in weeks of December 2010, which was mainly on speculation on bond buybacks by the central bank easing the liquidity deficit.
Indian corporations raised relatively less debt in the domestic market during the quarter ending December as borrowing costs rose. Net FII investments in Indian debt in December declined as compared to the preceding month. In recent weeks, slowing inflation and the Central Bank's announcement to repurchase bonds helped reduce the yield on benchmark 10-year bond. On December 16, 2010, the 10-year government bond yield dropped to a six-week low, as the central bank said it would repurchase Rs 480 billion of debt over four weeks to ease liquidity. The Central Bank also slashed the Statutory Liquidity Ratio (SLR), the percentage of deposits which lenders are
Outlook
Given the continued pressure on liquidity and an upside risk to inflation expectations, we maintain our outlook on the 10-year benchmark G-Sec at 8.1-8.3 per cent by March-end 2011.
Figure 6.2: 10-year G-sec yields, year-end and month-end (%)

8.5
Figure 6.3: Risk Premia, year end & month end (%)
4.0
Spread between AAA corporate & 10-yr G-sec
7.8
7.9
2.1
7.5
2.1
2.0
7.0 6.7
1.1
1.1
6.5 FY09 FY10 May FY10 Feb Dec FY11
0.0
FY09 FY10 May FY10
Feb
FY11
Dec
Source: CCIL
Source: FIMMDA
Equity
The benchmark Nifty index rose by 17 per cent in 2010, placing it amongst the leading performers in global equity markets. The CNX Positive year end for Midcap index Indian equity; amongst yielded 19 per the leading performers cent return in 2 0 1 0 , w h i l e in global equity markets CNX500 gave a return of 14 percent, indicating a broad-based appreciation across the universe of Indian equities.
took approximately a year and half longer than emerging markets to regain pre-Lehman bankruptcy levels, with much of the resurgence happening after the Federal Reserve's steps to stimulate recovery. The recovery in global equity continued over the year but at a much slower pace compared to 2009.The MSCI all-country world investable market index, combining 24 developed and 22 emerging markets across capitalization segments rose 11 percent in 2010 in contrast to 31 percent in 2009. Within developed markets, the Europe underperformed the broader US indices. Europe's relatively poor performance was explained mainly by the sovereign debt crisis that affected countries such as Greece, Spain and Ireland. Going forward, inflationary pressures are heightening the likelihood of monetary policy tightening, a situation made more likely by the jump in industrial production numbers, which will weigh negatively on market sentiment.
A rise in the combined advance tax payment by the top-100 corporate taxpayers, in third quarter of December 2010 relative to same period last year, indicating sustained growth in corporate earnings, lent support to the market. Advance tax is paid by Indian firms every quarter based on their earnings projections. However, the number cannot be used as a clear indicator for a company's earning estimates. Nifty Volatility Index (VIX) dropped to 16 towards the end of December 2010, compared with a high of 24 in the previous month. Net FII investment in Indian equities dropped to Rs 2,049 crores in December 2010 from Rs 18,293 crores in the previous month. Strong global manufacturing data lifted equities worldwide. Globally, stocks in developed markets
Figure 6.4: Indian Equity Market Performance
Yearly returns Monthly returns 17.1 -1.4 S&P CNX Nifty
Figure 6.5: Global Equity Market Performance

Yearly returns Monthly returns
0.8 15.1
NIKKIE-225
16.6 -1.0
Sensex 4.4
11.4
MSCI WORLD
14.1 -3.2
S&P CNX 500 8.5 19.8
11.8
S&P 500
-6.6
CNX Mid Cap 5.4
17.1
MSCI EME
Source: NSE, BSE
Note : Returns are for the period of December 2010
Source: Yahoo Finances
Note : Returns are for the period of December 2010
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VII. Global Economic Outlook

The latest releases across countries on the thirdquarter GDP growth data paint a mixed picture. While US and Japan are estimated to have grown faster during the quarter, beating previous estimates, UK's and Euro area's GDP growth numbers have been revised downwards. International trade is performing much better as compared with last year but the month-on-month momentum remains uneven. While rising food and energy prices are posing an inflationary threat to some emerging economies, weak consumer demand is keeping inflation at moderate levels in developed economies. Clearly, global recovery, as a whole, still looks fragile and uneven. The US's third-quarter GDP number has been revised further upwards to 2.6 per cent from the previous estimate of 2.5 per cent and from US third-quarter growth the advance revised upwards to estimate of 2.0 per 2.6 per cent c e n t . A s compared to the 1.7 per cent annualised GDP growth in the second quarter, a higher growth in the third quarter came due to the acceleration in personal consumption expenditure of both consumer durable and nondurable goods. Consumption of durable goods grew by 7.6 per cent in the third quarter as against 6.8 per cent in the previous quarter. Non-durables grew by 2.5 per cent in the third quarter as against 1.9 per cent in the second quarter. A slower growth in imports (16.8 per cent in the third quarter as compared to 33.5 per cent in the previous quarter) also helped in improving the overall GDP growth , as imports are a subtraction in the calculation of GDP. According to the second estimates of Eurostat, the statistical office of European Union, GDP is expected to grow by an annualised 1.2 per cent in the third quarter of 2010. This is slower than the earlier estimate of 1.6 per cent and much slower than the estimated growth of 4.0 per cent in the second quarter. The economies with the largest revisions in the second estimates which led to an overall downward revision in the area's GDP were Greece and Finland. Greece is now expected to contract by an annualised 5.2 per cent in the third quarter compared with the earlier estimate of 4.4 per cent and Finland is expected to grow by an annualised 2.0 per cent in the third quarter against 5.2 per cent, estimated earlier. The overall slowdown in the third quarter GDP vis--vis strong growth in second quarter resulted from the deceleration in the growth of household expenditure and exports, further substantiated by the contraction in fixed investment. These were partly offset by a higher government expenditure and decline in imports.
Table 7.1: GDP Growth (q-o-q, annualised %) 2008 2009 Q4-09 Q1-10 United States United Kingdom Euro Area Japan China* 0.4 0.7 0.8 -1.2 9.1 -2.4 -5.0 -4.1 -5.2 8.7 5.0 2.0 0.8 5.7 10.7 3.7 1.2 1.2 6.8 11.9 Q2-10 Q3-10 1.7 4.4 4.0 3.0 10.3 2.6 2.8 1.2 4.5 9.6
Table 7.2: Trade Balance (Billion, National Currency) Jul-10 Aug-10 Sep-10 United States United Kingdom Euro Area Japan China (US$ billion) -42.6 -4.6 6.6 799.2 28.7 -46.5 -4.4 -5.0 84.0 20.0 -44.6 -3.8 2.6 788.5 16.9 Oct-10 Nov-10 -38.7 -3.9 5.2 818.5 27.1 161.1 22.9
Source: Statistical Bureau, Respective Countries
Note: * y-o-y %
Japan's GDP growth for the third quarter was also revised upwards to 4.5 per cent from 3.9 per cent reported earlier. Private consumption grew by 4.8 per cent as compared to the previously estimated 4.7 per cent. The same had increased by 1.2 per cent (revised) in the previous quarter. Growth in government spending was revised upwards to 0.9 per cent from 0.5 per cent. Meanwhile, growth in private residential investment was revised downwards to 5.0 per cent from the earlier estimate of 5.4 per cent. Private residential investment is showing growth after witnessing a contraction of 3.1 per cent in the previous quarter. On the other hand, the UK's Office for National Statistics revised third quarter GDP growth numbers downwards to 2.8 per cent, as compared to the earlier estimate of 3.2 per cent. All the output components declined in the third quarter as compared to the previous quarter. Agricultural output shrank by 0.3 per cent in the third quarter as compared to a healthy 2.9 per cent growth in the previous quarter. Industrial output growth too decelerated to 0.5 per cent from 1.1 per cent. This decline was led by slower manufacturing and mining growth. Construction output grew by 3.9 per cent, but this too was slower than the 7.0 per cent growth witnessed in the previous quarter. Services output grew by 0.5 per cent, slightly below the 0.6 per cent growth recorded in the second quarter. The US's trade deficit in goods and services narrowed
Table 7.3 Consumer Price Inflation (y-o-y %) Jul-10 Aug-10 Sep-10 United States United Kingdom Euro Area Japan China 1.2 3.1 1.7 -0.9 3.3 1.1 3.1 1.6 -0.9 3.5 1.1 3.1 1.8 -0.6 3.6 Oct-10 Nov-10 1.2 3.2 1.9 0.2 4.4 1.1 3.3 1.9 0.1 5.1
sharply to a 9-month low of $38.7 billion in October 2010 from $44.6 billion (revised) in September 2010. The trade deficit in goods decreased to $51.4 billion in October 2010 from $57.1 billion in September 2010, owing to a 4.2 per cent increase in exports and a 0.7 per cent decline in imports during September and October. Surplus in services increased to $12.7 billion in October 2010 from $12.5 billion in September 2010. On an annual basis, the US's exports were up by 14.9 per cent and imports by 15.9 per cent in October 2010. The UK's trade deficit in goods and services rose slightly to 3.9 billion in October 2010 from 3.8 billion in the previous month, while the surplus in services remained unchanged at 4.6 billion. The performance of UK's goods trade with EU and nonEU countries showed a marked difference. With respect to EU countries, its trade deficit declined to 3.5 billion in October 2010 from 3.8 billion in September 2010, as EU exports grew at 12.5 per cent, while imports grew at 7.3 per cent. UK's trade deficit with non-EU countries, on the other hand, widened to 5.0 billion in October 2010 from 4.5 billion in September 2010. Exports to non-EU countries too fell by 4.6 per cent and imports were down by 0.2 per cent. Trade balance in the Euro Area posted a surplus of 5.2 billion in October 2010 as compared to 2.6 billion (revised) in the previous month. Both exports and imports declined in October 2010 over the previous month's level. But imports saw a larger decline of 1.3 per cent than exports which fell by 0.1 per cent. On an
Table 7.4: Policy Interest Rate (End of Month %) Aug-10 United States United Kingdom Euro Area Japan China Sep-10 Oct-10 Nov-10 Dec-10
0.0-0.25 0.0-0.25 0.0-0.25 0.0-0.25 0.0-0.25 0.5 1.00 0.1 5.3 0.5 1.00 0.1 5.3 0.5 1.00 0-0.1 5.6 0.5 1.00 0-0.1 5.6 0.5 1.00 0-0.1 5.8
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annual basis, however, EU exports grew by 20 per cent, while imports by 21 per cent in October 2010. China's trade performance registered an impressive m-o-m growth in November 2010. However, as the growth in imports (by 19.8 per cent) exceeded the growth in exports (12.8 per cent), the Chinese trade surplus country's trade shrinks in November surplus shrunk to 2010 $22.9 billion in November 2010 from $27.1 billion in October 2010. On an annual basis, exports grew by 34.9 per cent and imports by 37.9 per cent.
year. Core inflation, excluding food and energy, stood at 0.8 per cent in November 2010. Core inflation stepped up for the first time since December 2009, when it had stood at 1.8 per cent. Since then and till October 2010, it had either been declining or had stayed unchanged. Inflation in the UK rose further to 3.3 per cent in November 2010 from 3.2 per cent in the previous month. This rise was driven by food and nonalcoholic beverages, the prices of which rose by 1.6 per cent during October and November 2010. This is their largest increase on record between two months. Inflation in clothing and footwear and 'furniture, household equipment and maintenance' also increased by 2.0 per cent and 1.6 per cent, respectively during October and November. Headline inflation in the Euro Area stood unchanged at previous month's 1.9 per cent in November 2010. Among the main items, inflation in the food group accelerated to 1.8 per cent in November 2010 Euro area inflation from 1.7 per cent in October 2010, driven by remains unchanged the 1.4 per cent rise in food prices. For the same period, inflation in the energy group slowed to 7.9 per cent from 8.5 per cent. Core inflation (excluding food and energy) stood unchanged at 1.1 per cent.
Japanese exports, on the other hand, contracted for the second consecutive month in November 2010 on a m-o-m basis. However, imports picked up for the first time after declining for three months in a row. Between October and November 2010, Japanese exports fell by 5.0 per cent and imports rose by 7.6 per cent. Consequently, the trade balance fell sharply to 161.1 billion in November 2010 from 818.5 billion (revised) in the previous month. On an annual basis, exports grew by 9.1 per cent and imports by 14.2 per cent. Inflation in the US slightly moderated to 1.1 per cent in November 2010 as compared to 1.2 per cent in the previous month. Food prices rose by 1.5 per cent while energy prices increased by 3.9 per cent in a
Figure 7.1: Europe Brent (US$ per barrel)
100.0 91.3
Among EU countries, Greece continues to record the

Figure 7.2: Commodity Price Movements
m-o-m y-o-y
6.6 -0.3 21.4
Aluminium
80.0
-2.8 29.0 11.0 42.4
Steel
74.5
Soya Oil
60.0
Dec-09
Apr-10
Aug-10
Dec-10
8.3
Wheat
Source: Energy Information Administration
Source: Metal Bulletin, FAO
highest increase in prices. However, inflation in the country decelerated for the second consecutive month to 4.8 per cent in November 2010 from 5.2 per cent in October. Inflation in Germany, the largest economy in Euro Area, rose to 1.6 per cent from 1.3 per cent in the previous month. Ireland's inflation still remains in negative territory at -0.8 per cent as of November 2010. Inflation in China surged to a 28-month high of 5.1 per cent in November 2010. This surge was driven by a 11.7 per cent inflation in food items and 1.9 per cent in non-food items. Within food items, prices of fresh vegetables soared by 21.3 per cent and that of fresh fruits rose by 28.1 per cent. Among non-food items, the index for residential areas China's inflation rose saw an annual variation of 5.8 per further to 5.1 per cent in November 2010 cent, and healthcare grew by 4.0 per cent. These increases, however, were offset by a decline of 0.7 per cent each in the clothing and transportation indices. China has been grappling with high inflation over the past few months despite its monetary tightening measures, possibly because of both bad weather and hefty stimulus packages.
have also been raised twice this year. After a 25 bps hike in October 2010, these rates were hiked by yet another 25 bps each on December 24, 2010. China raises required With this hike, the reserve ratio by benchmark 1-year lending and deposit another 25 bps rates now stand at 5.81 per cent and 2.75 per cent, respectively. Meanwhile, concerns of a property bubble led the Chinese central bank to raise the mortgage rates by 25 bps to 4.3 per cent for loans longer than 5 years, and to 3.75 per cent for loans of up to 5 years and shorter.
Concerns of a weak economic recovery, amid a high unemployment rate, modest income growth and a tight credit situation, have prompted the US Federal Reserve to keep its interest rates unchanged for an extended period. The European Central bank (ECB) also left its policy rate unchanged at 1.0 per cent but extended its long-term refinancing operation or emergency liquidity measures till March 2011. The UK's and Japan's central banks too continued with their neutral policy stance.
Commodity Price Movement

Crude oil prices crossed $90 per barrel in the beginning of December 2010 but dropped thereafter for a brief period. Prices again shot up to reach a monthly high of $93.6 per barrel on December 23, 2010. The monthly average for December 2010 stands at $91.3 per barrel, 7.1 per cent higher than $85.3 per barrel in the previous month and 22.6 per cent higher than $74.5 per barrel in December 2009. This price rise was driven both by cold weather and an expected increase in gasoline demand ahead of Christmas holidays. Among metals, aluminium prices dropped by 0.3 per cent on a monthly basis and grew by 6.6 per cent on an annual basis in December 2010. Steel prices rose in both monthly and annual terms by 2.8 per cent and 21.4 per cent, respectively. Among agricultural commodities, wheat prices increased by 8.3 per cent m-o-m and by 42.4 per cent y-o-y in December. Soya oil prices too rose by 11.0 per cent m-o-m and 29.0 per cent y-o-y as per the latest available data as of October 2010.
Inflation in Japan slowed to 0.1 per cent in November 2010, after recording positive inflation (0.2 per cent) for the first time in 20 months in October 2010. Food inflation stood at 1.5 per cent and core inflation (excluding food and energy) at -0.9 per cent in November 2010, as compared with 1.6 per cent and 0.8 per cent, respectively, in October 2010. Inflation of utility items (fuel, light and water charges) declined to 3.0 per cent in November 2010 from 3.5 per cent in October 2010. A sustained increase in food prices has pushed the inflation well beyond the comfort zone of 3 per cent in China. With inflation reaching 5.1 per cent in November 2010, the People's Bank of China has resorted to aggressive monetary tightening measures to tame inflation. The bank raised the required reserve ratio (RRR) six times in 2010 to a record level of 18.5 per cent. In addition, the conventional policy rates, benchmark 1-year lending and deposit rates
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VIII. Annexure
Table 8.1: Annual Data Summary Real GDP growth at factor cost, 2004-05 base (y-o-y%)1
Total
9.7 9.2 6.7 7.4 4.7 3.7 3.4 1.6 0.2 FY07 FY08 FY09 FY10 FY11 FY07 FY08 FY09 FY10 FY11 FY07 FY08 FY09 FY10 FY11 FY07 FY08 FY09 FY10 FY11 3.9 8.9
Agriculture
12.7
Industry
10.2 10.5 10.1 9.5 9.3
Services
9.8 8.5 9.5
WPI Inflation, 2004-05 base (y-o-y%)2

Inflation
12.3 8.0 6.5 5.7 6.2 4.8 3.6 9.1 11.2 9.7
Primary goods
12.7
18.0
Fuel
11.6 12.5
Manufacturing
11.0 9.6 8.3
6.6 5.6 0.0 4.9
6.1
5.4
1.8 -2.1 FY07 FY08 FY09 FY10 FY11 WPI CPI-IW FY07 FY08 FY09 FY10 FY11 FY07 FY08 FY09 FY10 FY11 FY07 FY08 FY09 FY10 FY11
Index of Industrial Production (y-o-y%)3

General
10.3 11.5 10.5 8.5 6.7 2.8 7.3 6.3 6.0 4.6 9.0 7.4 12.5 11.0
11.0
Electricity
Manufacturing
Mining
9.9 8.3 5.3 5.1 2.6
FY07 FY08 FY09 FY10 FY11
External Variables (US$ bn)2

Exports
251.7 163.1 126.4 222.0 9.8 140.3 185.3 173.5 185.7
59.4
Imports
303.7 278.6
Merchandise Trade Deficit

118.4 105.2 88.5 81.7
Current account deficit4

38.4 28.7 27.9 15.7
Figures for FY11 are : 1 Apr-Sept, 2 Apr-Nov, 3 Apr-Oct, 4 Apr-Sep Source: RBI, CSO, DGCIS
Table 8.2: Annual Data Summary

Interest Rates, year-end (%)5
1-yr G-sec
7.9 7.6 6.6 5.9 4.2 7.9
10-yr G-sec
7.9 7.1
Repo rate6
7.50 7.75 5.00 5.00 6.25
Reverse repo6
6.00 6.00 5.25 3.50 3.50
7.8
7.8
Markets (year-end)6
INR/USD
51.0 43.6 40.0 45.1 44.8 58.1
INR/EURO
63.1 67.5 67.1 59.8
Forex Reserves (US$ bn)7

309.2 252.3 199.2 6.7 277.0 295.0
Net FII flows (US$ bn)8

30.3 30.2
16.0
-11.4
FY07 FY08 FY09 FY10 FY11 FY07 FY08 FY09 FY10 FY11 FY07 FY08 FY09 FY10 FY11 FY07 FY08 FY09 FY10 FY11
Equity Market (year-end)6

Sensex
15644 13072 9709 17528 20509 4735 3822 3021
S&P CNX Nifty

6135 5249 1421 1323
S&P 500
1169 1258 20.3
Sensex P/E
20.1 21.3 23.6
798
13.7
Government Finances
Centre Fiscal Deficit (as % of GDP)
6.7 6.0 5.5 3.4 3.5 2.5 2.5 1.9 1.5 2.4
Money and Banking9

State Fiscal deficit (as % of GDP) Non-food credit growth (%) M3 growth (%)
28.4 23.1 17.5

16.9
23.7
20.7 21.1 18.6 16.7 15.8
FY07 FY08 FY09 FY10 FY11 (RE) (BE)
FY06 FY07 FY08 FY09 FY10 (RE)
FY07 FY08 FY09 FY10
FY11
Figures for FY11 are :

5
Avg of Apr-Dec, 6 as on Dec 31 2010, 7 as on Dec 24 2010, 8 cumulative of Apr-Dec, 9 for the fortnight ending Dec 17 2010 Source: CCILINDIA, BSE, RBI and MoF Note: RE-Revised estimates, BE-Budget estimates
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Table 8.3: Quarterly Growth rates
Real GDP - at 2004-05 prices (y-o-y%)

Financing, Insurance & real estate Trade hotels, transport and comm
Agri, forestry& fishing
Q4FY09 Q1FY10 Q2FY10
1.9
8.2
3.8 8.4 13.8 16.3 13.0 9.8
Electricity, gas & water
6.4
8.4
5.6 8.2 10.2 12.4 10.9 12.1
11.7 11.3 7.9 7.9 7.9 8.3
Community, social & prsnl serv
3.3
-0.3
0.6
4.1
5.7
5.7
12.3
8.8 7.6 14.0 0.8 1.6 7.9 7.3
Mining & Quarrying
Manufacturing
Construction
0.9
10.1 9.6
7.7 4.7 7.1 6.2 3.4
8.3 8.1 8.7 10.3 8.8
Q3FY10 -1.8 Q4FY10 Q1FY11 Q2FY11

0.7 2.5 4.4
14.0 8.4 8.0
Real GDP - at 2004-05 prices (y-o-y%)

Q4FY09 Q1FY10 Q2FY10
5.8 6.3 8.7
GDP Deflator (%)

8.3 7.9 3.2 7.0
1.9
2.1
2.0 1.8
2.9 0.5 0.7
Industry
Overall
Overall
Q3FY10 Q4FY10 Q1FY11 Q2FY11
6.5 8.6 8.9 8.9
11.1
7.2 8.4 9.3 9.8
5.8 9.7 11.0 9.0
13.6 16.5 23.5
2.9 7.3 6.9 6.1
Services
-1.8 0.7 2.5
Industry
8.4
10.5
1.8
Agri & allied services
Agriculture
0.9
5.7
1.7
6.4 8.8
Services
1.3
4.9 9.2 9.9 8.2
13.3 11.3
4.4
8.9
20.1
WPI Inflation - 2004-05 base (y-o-y%)

Q4FY09 3.6 8.7 6.4 -7.1 -8.9 -1.3 0.0
2.8
CPI Inflation (y-o-y%)

10.2 11.1
Commodity prices
58.3 585
Mfing
Crude-WTI($/barrel)
Primary
Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11
0.3 4.3 9.5
8.7 14.2
-0.3 2.2
Industrial workers
Overall
Q1FY10
Steel prices ($/tonnes)
Fuel, power& lubricants
Agricultural Labours
0.5
0.3
9.4 8.9 11.8 13.3 15.3 10.3
10.6 10.3 13.0 15.5 16.6 9.9
42.9 59.4 68.2 76.1 78.6 76.8
385 390 587 508 579 587
21.4 20.7 17.5
10.2 14.0 12.3
5.1 6.0
5.1
10.6 9.1
Index of Industrial Production (y-o-y%)
Used-based classification of IIP (y-o-y%)

1.1 7.0
Intermediate goods
Q4FY09 Q1FY10
5.3 4.0
5.8 3.6
0.9 6.8
3.0 5.8
0.4 6.3
24.6
4.9 -0.3
Capital goods
3.5 6.7 22.7 45.7 31.9 18.1
Electricity
General
Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11
8.6 13.3 15.8 11.9 8.7
8.7
Basic goods
9.0
7.4 3.8 7.1 5.6 2.1
5.9 6.1
11.6 19.4 17.0 10.5 10.6
Consumer goods
Manufacturing
9.7 10.6 5.2 9.2 6.8
Mining
14.4 16.8 12.6 9.5
10.3 12.9 10.2 7.0
10.3 6.8 4.1
Source: CSO
Table 8.4: Full description of abbreviations used in the text Sectors Beverages, tobacco and related products Wool, silk and man-made fibre textiles Jute and other vegetable fibre textiles Wood and wood products Paper and paper products Leather and leather & fur products Basic chemicals and chemical products Rubber, plastic, petroleum and coal products Non-metallic mineral products Basic metal and alloy industries Metal products and parts Machinery and equipment Transport equipment and parts Other manufacturing industries Abbreviation Beverages Wool Jute Wood Paper Leather Chemical Rubber NMMP Metal and Alloy Metal Products Mach. & Eqp Transport Eqp Oth. Manufacturing
Table 8.5: Comparative picture between old base (1993-94) and new base (2004-05) Weight 1993-94 All commodities Primary Articles - Food Articles - Non-Food Articles Fuel & power Manufactured Products - Food Products Source: Ministry of Industry 100 22.0 15.4 6.1 14.2 63.8 11.5 2004-05 100 20.1 14.3 4.3 14.9 65.0 10.0 No. of Commodities 1993-94 435 98 54 25 19 318 41 2004-05 676 102 55 29 19 555 57 No. of price quotations 1993-94 1918 455 340 96 72 1391 406 2004-05 5482 579 431 108 72 4831 168
January 2011
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Note
Note
Note
Disclaimer: CRISIL Limited has taken due care and caution in preparing this Report. Information has been obtained by CRISIL from sources, which it considers reliable. However, CRISIL does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. CRISIL Limited has no financial liability whatsoever to the subscribers / users / transmitters / distributors of this Report. The Centre for Economic Research, CRISIL (C-CER) operates independently of and does not have access to information obtained by CRISIL's Ratings Division, which may in its regular operations obtain information of a confidential nature that is not available to C-CER. No part of this Report may be published / reproduced in any form without CRISIL's prior written approval.
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Crisil Economic Outlook

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EXECUTIVE SUMMARY ............................................................ 1 OUTLOOK .................................................................................... 2

QUARTERLY UPDATE: BOP .....................................................

INDIAN ECONOMY OUTLOOK 2011-12 ..............................

INDUSTRIAL PRODUCTION ................................................. 10

THE EXTERNAL SECTOR ........................................................ 12

MONEY AND BANKING ......................................................... 15

GLOBAL ECONOMIC OUTLOOK ......................................... 20

ndustry Risk Score

Chief Economist, CRISIL

Credit growth continues to pick up

Industrial growth surges in October 2010

Rupee appreciates in December 2010

Trade deficit narrows further in November 2010

10-year G-sec yield drops in December 2010

WPI inflation moderates in November 2010

2011-12 2.7 8.2 9.6 8.3

10-year G-Sec (Year-end)

Quarterly update: BoP

Figure I: Current Account Balance (US$ bn)

Table I: Current Account deficit widens further (US$ bn)

FY10 3QPR 4QPR 1QPR

-38.4 FY10 3Q10 4Q10 1Q11 2Q11

Note: P- Preliminary; PR-Partially revised

Figure II: Capital Account Balance (US$ bn)

Table II: Current Account deficit widens further

20.5 14.7 7.2 16.1 16.2

0.0 FY09 FY10 3Q10 4Q10 1Q11 2Q11

Note: P-Preliminary; PR-Partially revised

I. Indian Economy Outlook: 2011-12

Figure 1.1: Industrial growth (y-o-y %)

Figure 1.2 : WPI Inflation (y-o-y %)

2.0 FY10 FY11 F FY12 F

Source:CSO and CRISIL

Source: Ministry of Industry and CRISIL

Inflation Interest rate

Figure 1.3: 10-year g-sec yields, year end (%)

Figure 1.4: Indian Rs-US$ exchange rate, year-end

45.1 44.5 43.5-44.0

Source: RBI and CRISIL

-4.0 FY10 FY11 F FY12 F

Source: Budget Documents and CRISIL

Source: RBI and CRISIL

Trade and current account deficit

II. Industrial Production

10.1 10.8 9.1

Mining Electricity Basic

Capital Intermediates Consumer Goods

FY09 FY10 Oct

-Durables -Non durables Source: CSO

III. External Sector

Source: Ministry of Commerce

Source: Ministry of Commerce

13.5 8.3 4.5 3.6 7.5

General Primary Fuel Manufacturing

100.00 20.12 14.91 64.97

4.5 14.3 -1.1 2.3

7.5 13.0 10.3 4.6

1.0 8.8 -7.0 0.4

9.4 18.0 12.5 5.4

Source: Ministry of Industry

Source: Ministry of Industry