D&B ECONOMY

Issue 69 January 2013

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The year 2013 began with weak macroeconomic indicators. GDP had recorded a below 6% growth for three quarters in a row, investment demand continues to remain subdued and industrial production as indicated by the Index of Industrial Production (IIP) remains highly volatile. While the services sector also witnessed moderation as the year passed by, the agricultural sector performance was impacted by the vagaries of the monsoon. High inflationary pressures persisted during 2012 with both the WPI and CPI inflation remained elevated. In fact WPI Inflation has remained in the range of 7-11% for almost three years. Domestic demand which had remained resilient during the starting of 2012 weakened considerably towards the end. Even external demand conditions deteriorated with exports growth declining for eight months in a row. As a result of widening trade deficit and slowdown in the services export, the current account deficit remained uncomfortably high at around 5.4% during Q3 CY12. Besides, the slowdown in the domestic growth has also made it difficult for the government to rein in the fiscal deficit. The government has thus revised its budgeted fiscal deficit target from 5.1% to 5.3%. However, it was the severe slowdown in the industrial activity which dragged down the overall growth and posed hurdles to the recovery process. Further, the industrial production data also remained highly volatile which made it difficult to gauge the trend and make future estimates. Thus not only IIP, India's GDP growth forecast for the year was considerably revised on a regular basis as the year progressed. As per the recent data, IIP once again plunged into the negative territory during Nov-12, after posting a strong growth during Oct-12. The data reveals that while the mining and manufacturing segment had been in doldrums during the current fiscal, the electricity sector which has been resilient so far have also slowed down considerably. However, the deseasonalised data shows that excluding the value for Oct-12, the index value of the IIP during Nov-12 stands at a level higher than that recorded since Mar-12. With the government taking policy initiatives to boost the business sentiment and propel the investment activity the economic scenario is expected to improve going ahead. Further, the headline inflation is showing signs of easing and the RBI has indicated of further easing the policy rates. This along with the fact that the global economy is showing signs of stabilization is likely to support the recovery in growth. However, the momentum in growth is expected to remain subdued in the near term as domestic economic activity consolidates. Moreover, the prevalence of upside risks is likely to contribute to a weaker rebound in the economic activity.

Macro Scan
Real Sector Price Scenario Money & Finance External Sector
Page 2

Economy Outlook
Page 3

Special Article
Page 4

Macro Scan
Real Sector
Impact of Manufacturing Sector on Overall Industrial Production
% 10.0 8.0 6.0 4.0 2.0 0.0 Apr'12 -2.0 -4.0 Source: CSO IIP:Manufacturing IIP:Over All May'12 Jun'12 Jul'12 Aug'12 Sept'12 Oct'12 Nov'12

* IIP declined by 0.1% (y-o-y) during Nov-12 as against the growth of

6.0% (y-o-y) during Nov-11 and 8.3% (y-o-y) in Oct-12.

* The manufacturing and electricity sector witnessed moderation in

growth. The manufacturing and electricity sectors grew by 0.3% (y-o-y) and 2.4% (y-o-y) respectively in Nov-12 after registering a growth of 9.8% and 5.5% in Oct-12.
* goods sector and intermediate goods sector contracted by 7.7% Capital

(y-o-y) and 1.1% (y-o-y) respectively in Nov-12 as compared to a high growth of 7.5% and 9.3% during Oct-12.
* The consumer durables sector and consumer non-durables sector

recorded a modest growth of 1.9% (y-o-y) and 0.3% (y-o-y) during Nov-12 as against the growth of 10.4% (y-o-y) and 15.0% (y-o-y) in same period a year ago.

Price Scenario
Gradual Decline in Overall WPI Inflation
% 8.30

The WPI * inflation for the month of Dec-12 rose to 7.2% as against 7.7% during Dec-11. Inflation * in primary articles rose to 10.6% in Dec-12 as compared to 9.4% Nov-12 and 3.6% a year ago. The inflation for food articles rose to 11.2% (y-o-y) in Dec-12 as * compared to 0.8% (y-o-y) during Dec-11, whereas inflation in non-food articles grew by 13.2% (y-o-y) in Dec-12 as against 1.8% (y-o-y) during Dec-11. Inflation * in fuel segment moderated to 9.4% (y-o-y) during Dec-12 as against 10.0% (y-o-y) in Nov-12. Inflation in manufactured items also moderated, although slightly to 5.0% in Dec-12 from 5.4% in Nov-12 and 7.6% in Dec-11. CPI-IW * for the month of Nov-12 rose to 9.6% as compared to 9.3% in the corresponding period a year ago.

7.80

7.30

6.80 Aug'12 Sept'12 Oct'12 Nov'12 Dec'12

Source: Ministry of Commerce and Industry

Money & Finance

Movement in Money Supply
% 15.0

Growth * in bank credit moderated to 15.1% (y-o-y) as on 28-Dec-12 as against a growth of 16.0% in the previous year. During * Nov-12 deployment of bank credit in agricultural sector, priority sector and personal loan segment increased by 24.4%, 15.3% and 16.3% respectively against the growth of 7.3%, 9.4% and 13.3% on a y-o-y basis. Whereas bank credit to industrial and services segment registered a decline in growth. Aggregate deposits growth moderated sharply by 11.0% (y-o-y) as on * 28-Dec-12 as against the growth of 17.0% in the year ago period. Money * supply moderated significantly end-Dec-12; on week ended 28-Dec-12, it grew by 11.1% as against the growth of 16% in the same period previous year.

14.0

13.0

12.0

11.0 13 Jul 27 Jul 10 Aug 24 Aug 07 Sep 21 Sep 05 Oct 19 Oct 02 Nov 16 Nov 30 Nov 14 Dec 28 Dec 2012 2012 2012 2012 2012 2012 2012 2012 2012 2012 2012 2012 2012 Source: RBI

External Sector
CAD% to GDP
% 0.0 -1.0 -2.0 -3.0 -3.8 -4.0 -5.0 -6.0 2011-12Q1 Source: RBI 2011-12Q2 2011-12Q3 2011-12Q4 2012-13Q1 2012-13Q2 -4.2 -4.4 -4.5 -5.4 -3.9

*export continued to contract for the eight month in a row. Exports India's declined by 1.9% (y-o-y) to US$ 24.9 bn during Dec-12, while imports grew by 6.3% (y-o-y) to US$ 42.5 bn leading to a trade deficit of around US$ 17.7 bn. * the first half of FY13, current account balance registered a deficit During of US$ 38.7 bn as compared to US$ 36.3 bn in the same period of the previous year. As a proportion of GDP, CAD in Q2 of FY13 stood at 5.4% of GDP as against 4.2% during Q2 FY12. * Net inflows under the financial account were lower during Apr-Sept 2012 over the corresponding period of previous year mainly due to decline in FDI, external commercial borrowings (ECBs) and banking capital. * April-Oct 2012, FDI in equity inflows stood at US$ 14.8 bn in During comparison to inflows of US$ 25.4 bn during April-Oct 2011.

Economy Outlook
Dun & Bradstreet's Macro Economic Forecasts
Forecast Inflation W.P.I 6.8% - 7.0% Jan-13 Latest Period 7.18% Dec-12 D&B's Comments Inflationary pressures are likely to ease going ahead as demand continues to moderate and global crude oil prices stabilise. However, upside risks persists in case the government decides to raise the price of the regulated fuels. Given that the headline inflation is showing signs of moderation, the RBI is likely to cut the repo rate during fourth quarter of FY13. Inflation C.P.I (I.W) 9.5% - 9.7% Dec-12 9.55 Nov-12

Exchange Rate INR v/s US$

54.50 - 54.70 Jan-13

54.65 Dec-12

The rupee is expected to remain at the level witnessed during Dec-12. While dollar demand from importers will continue to exert an downward pressure, FII inflows will lead the rupee to appreciate.

I.I.P Growth

2.0% - 3.0% Dec-12

-0.12 Nov-12

The IIP is expected to remain in the positive territory during Dec-12 primarily due to the base effect. However, the IIP growth is expected to remain subdued during the next five to six months as the industrial activity consolidates. The IIP is expected to display volatility in the forthcoming period.

GDP Growth

6.0% Q3 FY13

5.28% Q2 FY13

15-91 days T-Bills

8.0% - 8.2% Jan-13

8.16% Dec-12

Yields in the G-sec market are expected to remain at the current levels with a downward bias as the RBI is expected to ease the interest rates in the near future. Bank credit is expected to remain subdued as demand conditions still remain muted.

10 year G-Sec Yield

8.1% - 8.3% Jan-13

8.30% Dec-12

Bank Credit*

15.8% - 16.0% Jan-13

15.15% Dec-12

All figures are monthly average * Refers to End Period

Special Article
Industrial scenario in organised manufacturing sector
Overall growth has slowed down considerably dragged down by the dismal performance in the industrial sector. The slowdown in growth had started from FY12 as during FY11, GDP had grown robustly at around 8.4% on the back of a strong industrial production and near double digit growth in the services sector. The industrial activity during that period was however, marked by volatility. The Index of Industrial Production (IIP) had grown by 8.2% during FY11. However, as per the data on GFCF, i.e. the investment demand had turned volatile since FY11 and started falling since Q2 FY12. The slowdown in investment activity which had started since then still continues to prevail. It was the deceleration in the investment activity which had in turn led to a severe slowdown in the industrial production during FY12. The Central Statistics Office has recently released the Annual Survey of Industries (ASI) which throws light on the performance of the organized manufacturing industries during FY11. The sample size of the survey was 61,573 which represented 27% of workforce in all the industries registered under Factories Act, 1948, and Bidi and Cigar Workers (Conditions & Employment) Act, 1966. According to the ASI report, the output growth stood at a four year high of 25.5% during FY11. Productivity of Indian organized manufacturing industries also improved during this period. Indicators like net value added and the capital output ratio, witnessed an improvement in FY11 from a year before. The net value added grew by 20.4% in FY11, as compared to a growth of 12.2% in FY10 and 9.6% in FY09. The report also showed that the capital output ratio which is a measure of the capital required to produce one unit of net output (net value added) decreased marginally from 2.28 in FY10 to 2.26 in FY11. Despite the marginal decrease during FY11, the capital output ratio had remained higher than the levels achieved during the period FY04 to FY09. Capital was most efficiently utilized during FY08, when the capital output ratio stood at 1.76. The capital required to produce one unit of gross output had also marginally decreased from 0.36 in FY10 to 0.34 in FY11. While this reflected the fact that less amount of capital was required to produce a unit of output, the other set of data also indicated that factors of production other than capital was less efficient. The output-input ratio declined to the lowest level in at least 10 years at 1.22 in FY11, which points out to the fact that output required more inputs. In-between the period FY02 to FY11, output-input ratio had stood at the highest level of 1.25 during FY08. Although productivity improved and capital turned out to be more efficient during FY11, investment activity had turned dismal during FY11. According to the ASI data, net capital formation contracted marginally by 0.06% in FY11 as compared to a robust growth of 14.63% during FY10 and 33.6% during FY09. Both the net and the gross capital formation stood at their lowest level since FY03. Besides, while the fixed capital recorded a three year low growth of 18.9% (28.1% in FY10 and 24.1% during FY09), the invested capital also witnessed a growth of 23.88%, lower than 25.52% in FY10. The data also showed that employment in FY11 increased by 8.18% compared with 4.34% in the previous year. However, the average number of employees working per factory decreased from 74 in FY10 to 60 in FY11. The data holds significance as the draft report on the 12th five year plan (2012-13 to 2016-17) showed that over 5 million jobs were lost during FY05 to FY10. The report also revealed that wages in current prices (without adjusting for inflation) rose 24.8% over the period while in real terms, it increased by 18.1%. As per the survey, the cost of doing business had also gone up during FY11. Interest costs rose 20% in FY11, as against 6.75% in FY10. After cutting the interests rates during Apr12, the RBI has indicated that it will again start easing its policy rates from Jan-13. Expectations are that this would further boost the business sentiment and help revive the industrial activity. However, the recovery in the industrial production is not only contingent to an easing in lending rates. Growth in industrial activity had been quite strong during the pre-crisis period when the lending rates were much above the current prevailing level. Besides, easing of the interest rates, upheaval in infrastructure, faster implementation of the policy initiatives and fiscal consolidation are required to uplift the industrial activity. Unless measures are taken on priority, it would become increasingly difficult to revive the industrial activity and ensure its growth on a sustainable basis.

Principal Characterstics by Major Industry Group in ASI FY11 (Provisional)

Description ALL INDIA BASIC METALS CHEMICALS AND CHEMICAL PRODUCTS FOOD PRODUCTS MACHINERY AND EQUIPMENT N.E.C. TEXTILES OTHER NON-METALLIC MINERAL PRODUCTS Factories 211660 11249 11202 34023 11889 18584 22873 Fixed Productive Invested Total Workers Capital Capital Capital Emoluments 16078 3485 1245 1013 518 1086 1094 22283 4743 1766 1662 943 1344 1389 23947 4678 1728 2240 954 1659 1361 9907347 767968 466915 1199727 462517 1242655 739553 400780 1834 205 125 142 153 140 91 65 Total Input 38520 5463 2802 4882 1721 2239 1039 1212 Total Net Value Rent Interest Output Added Paid Paid 46852 6479 3541 5437 2222 2720 1464 1579 7126 841 618 474 456 379 344 324 135 11 10 11 8 4 12 4 880 165 70 113 35 80 46 31

RUBBER AND PLASTICS PRODUCTS 11852 471 649 683 Source: Annual Survey of Industries Arranged in descending order of net value added (Value Figures in Rs. bn & Others in Numbers)

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