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Political
Political Structure Federal State Parliamentary Democracy President Pratibha Patil Prime Minister Manmohan Singh, Indian National Congress National Legislative Bodies Lok Sabha (Lower House) 545 members (chosen through direct election) Rajya Sabha (represents interests of Indian states) 245 members (233 elected, 12 appointed by President) Major Parties Indian National Congress (INC) Bharatiya Janata Party (BJP) Samajwadi Party Bahujan Samaj Party Communist Party of IndiaMarxist (CPI-M) Last Elections April/May 2009 Next Elections April/May 2014 Press Freedom Survey: 2010 Score: 33 - partly free (0: Free; 100: Not Free) freedomhouse.org Control of Corruption Index: 2009 Score: -0.33 (-2.5: Worst; +2.5: Best) worldbank.org
Political Outlook The present political scene in India is quite exceptional due to the relatively strong position of the ruling Congress-led UPA coalition; the governing coalition continues to maintain its majority in parliament. At the same time, the governments standing among voters has been somewhat tarnished due to some very high profile corruption cases. The Government is likely to refrain from pursuing unpopular reforms throughout much of 2011 due to upcoming state assembly elections. The security environment is dominated by the threats posed by the Islamic militants and Naxalite insurgent activities.
INDIA
March 2011 ECONOMICS
Economic
Credit Agencies: Moodys: Baa3 S&P: BBBFitch: BBBNominal GDP (2009): USD 1,285 billions Population (2009): 1,166 millions Total Trade / GDP (2009): 48% Currency: Indian rupee Exchange regime: Managed float Merchandise imports from Canada (2009) CAD 1,712 millions Main sources of Foreign Exchange (excl. FDI): Remittances Software services Main Merchandise Export Destination: US (17 %) Main imports: Mineral fuels (37%) Industrial M&E (16%) Precious met. & gems (11%) Risks to the Outlook Greater than expected FDI Faster G3 recovery Ingrained inflation; balance of payment vulnerable; lack of fiscal consolidation
MARKET SPOTLIGHT: GDP growth remained slowed to 8.2% y/y in Q4, largely as a result of the slowdown in government spending and private investment. The pace of import growth has slowed markedly in recent months, in line with weaker industrial activity. The FY2011/2012 central government budget is soft on fiscal consolidation efforts, but reinforces the commitment to infrastructure and education. With inflation remaining above target and an acceleration of bank, the central bank has returned to a tightening stance by raising interest rates early in the year and is expected to do so again in coming months. Recent performance: Real GDP growth slowed to 8.2% y/y in Q4-10, bringing overall growth in 2010 to 8.6%. On a seasonally adjusted basis however, real GDP fell 2.1% an annualized rate from 15.5% in Q3. Despite a greater contribution from net trade, a decline in government spending and a sharp slowdown in investment took the momentum out of the Indian economy. Across sectors, the slowdown was widespread, with only agriculture and finance showing a pick-up in growth. Industrial activity stood at a near standstill in Q4, rising 0.2% q/q, as spending on capital goods and intermediate goods fell. Consumption spending rose slightly but remains well below potential, expanding 0.4% q/q. Fiscal policy: Plagued by various scandals, the government presented a budget for FY2011/2012 that is weak on reforms and consolidation. At the same time, the government has maintained or increased a number of populist measures, such as price subsidies on sensitive items as well as the rural workers guaranteed employment program. The forecasted improvements over the next 2 years rely on optimistic growth assumptions and improvements in tax collection, as well as the capacity to contain spending within the allocated budget. On the positive side, the budget reinforces the governments commitment to infrastructure and education development and highlights some progress in key changes in the tax systems (direct and consumer taxes), both of which are impediments to unlocking Indias growth potential. As a share of GDP, the central government deficit is expected to reach 4.6% of GDP in FY2011/2012 (excluding off-budget food, fuel and fertilizer price subsidies and the deficits of state governments), from 5.1% in FY2010/2011. Monetary policy: After a lull in Q4, inflationary pressures picked up again early in 2011, pushing the Reserve Bank of India (RBI, the central bank) to return to a tightening stance, raising interest rates by 25 basis points for the repo and reverse repo early in 2011. The move was prompted not only by resilient inflation pressures, with inflation remaining stubbornly high at 8.2% for both the CPI and WPI in January, but also strong demand for credit, which accelerated to 22.5% y/y in December from 18.2% in November. While the increase in prices is partly driven by food shortages, the ramping up of M2 growth and non-food inflation since are also of concerns. As such, additional tightening is expected early in the year. External sector: Despite strong export growth and remittances inflows, the current account balance continued to expand as a share of GDP in Q3, rising to 4.3%. In Q4 however, the trade surplus shrank to US$21.3 billion in Q4, after averaging over US$30 billion in the first 3 quarters of the year, driven by resurging exports, up 28.4% y/y, and a sharp slowdown in imports, up 1.8% y/y, a sign of the slowing economy. With rising oil prices and the capital account vulnerable to outflows, the balance of payment and rupee are expected to weaken in 2011. However, the level of foreign exchange reserves remains stable at US$274 billion, up from US$254 billion in May 2010, and sufficient to cover 7 months of current account debit. Outlook: The lagged impact of monetary tightening and the pullout of fiscal stimulus will slow real GDP growth to 8.2% in 2011 from 8.6% last year. While infrastructure spending will accelerate, tighter credit conditions will result in a slowdown of private sector activity. Of concern for the medium-long term business environment are the current corruption scandals, such as those of the Commonwealth Games and the 2G licences, that have engulfed the Indian Parliament, putting the reform agenda on the sideline for the moment. Slowdownunderway
2011 8.2 5.4 -5.4 10.5 10.5 -2.7 6.7 13.3 7.8 46.9 2012 8.0 4.9 -5.3 10.5 10.5 -2.7 6.1 12.4 7.1 48.0
Economic Indicators
GDP (% growth, real) Inflation (%, year-end) Fiscal Balance (% of GDP) Exports (% growth) Imports (% growth) Current Account (% of GDP) Reserves (month of imports) External Debt (% of GDP) Debt Service ratio Currency (per USD, year-end) Source: EIU, EDC Economics 05-09 avg 8.5 7.2 -4.5 18.1 22.9 -1.5 8.8 16.4 10.16 44.5 2010 8.6 12.0 -5.0 30.4 26.9 -2.6 7.4 14.7 8.1 45.7