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CRISIL EcoView
EXECUTIVE SUMMARY ............................................................ 1

OUTLOOK .................................................................................... 2

QUARTERLY UPDATE: GDP .................................................... 3

QUARTERLY UPDATE: MONSOON ..................................... 5

INDIAN DEMOGRAPHICS: A DOUBLE-EDGED SWORD 6

INDUSTRIAL PRODUCTION ................................................. 11

THE EXTERNAL SECTOR ........................................................ 13

INFLATION .................................................................................. 14

MONEY AND BANKING ......................................................... 16

MARKETS ..................................................................................... 18

GLOBAL ECONOMIC OUTLOOK ......................................... 21 September 2010

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E 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'.

I 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.

Industry 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.

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Overview

Challenges of a Young Population

The bulging population of youth in India is a key strength. And, among the various likely
growth drivers for India in the coming decades, the availability of people in the working age
group of 15-64 years is a certainty. In the next 10 years, India will add 136 million people to its
workforce, almost six times the increase in working age population in China during the same
period. The size and increase in India's youth is even more striking compared to mature
economies such as Japan and Europe where the workforce is set to shrink. India thus has an
opportunity to fill the workforce void left by countries with an ageing population and
consolidate its growing prominence in the global economics.

This month's theme argues that while a large and growing young population is an exceptional
strength in the global context, it throws up challenges as well. Although the young population
can enable India to lift its production as well as consumption, if job creation does not keep pace
what looks like a demographic dividend today could easily morph into a liability and cause
social instability.

The diversity in demographics in India's states evokes some discomfort since half the increase
in the working age population in the next decade will come from four poor states - Uttar
Pradesh, Bihar, Madhya Pradesh and Rajasthan. Since they offer poor employment potential,
these states would not be able to absorb their burgeoning workforce. At present India has over
250 million people in the age group of 15-29 but 90 per cent of them do not have skills that the
job market requires. Therefore, despite the availability of manpower, there is a severe shortage
of employable people for many of India's high-growth sectors. India needs to prepare its
workforce for gainful employment if it has to sustain economic growth in a non-disruptive
way. Else, the government will have to transfer more funds to unemployed youth through
schemes such as NREGA (National Rural Employment Guarantee Act) to reduce social
tensions. This will not only be a sub-optimal way of tackling unemployment but can also
create a permanent fiscal burden that will crowd out investment in critical areas such as health,
education and infrastructure.

In other economic developments CSO (Central Statistical Organisation) has estimated that
India's GDP grew at an impressive 8.8 per cent in the first quarter of FY11. The demand side
estimate of GDP was revised to 10.3 per cent from 3.7 per cent within a day of data release. The
Dharmakirti Joshi Chief Economist, CRISIL supply side estimates were unchanged at 8.8 per cent. Though the demand- and supply-side
Sunil K. Sinha Senior Economist, CRISIL estimates of GDP seldom match, it was hard to reconcile such a wide discrepancy. An error in
Vidya Mahambare Senior Economist, CRISIL the price deflators was behind the discrepancy in the first data release which was subsequently
Poonam Munjal Economist, CRISIL corrected in the corrigendum issued by CSO. The one off error notwithstanding, this incident
Parul Bhardwaj Economist, CRISIL has highlighted the need to strengthen the demand side estimates of GDP which CSO had
Dipti Saletore Economist, CRISIL started releasing on quarterly basis two years back. Even in the revised estimates, the
Hriday Kant Economist, CRISIL discrepancies account for 4.4 per cent points of the demand side estimate of GDP growth.

Contact Details:
Email: research@crisil.com

Mumbai: +91 (22) 3342 8000

Dharmakirti Joshi
Delhi: +91 (11) 4250 5100

Chief Economist, CRISIL

September 2010

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Executive Summary
Indian economy grows 8.8 per cent in Q1 2010-
11
GDP at factor cost grew at 8.8 per cent in the first
quarter of 2010-11 compared to 8.6 per cent in the
previous quarter and 6.0 per cent during the first
quarter 2009-10. The agriculture sector grew by 2.8
per cent, its fastest pace in the past 5 quarters,
whereas growth in industry and services was more
moderate as compared to the previous quarter. On
the demand-side, private consumption expanded at
3.8 per cent while government consumption rose by
14.2 per cent. Investment growth was 7.6 per cent. We
expect GDP to grow at 8.0 per cent in 2010-11.
Industrial production growth slows to single
digit
Industrial output grew by 7.1 per cent in June, its
lowest growth in 11 months, after a double-digit
growth in the previous eight months. Although
growth decelerated in capital goods, the sector still
grew by 9.7 per cent in June as against 34.2 per cent a
month earlier. The consumer durables sector
expanded by 27.4 per cent whereas growth in non-
durables remained sluggish. We expect an average
IIP (Index of industrial production) growth of about
9.0 per cent in 2010-11.
Highest trade deficit since September 2008
Exports rose at a moderate 13.2 per cent (in US$
terms) in July, in sharp contrast to the over 30 per cent
growth in the previous six months. Imports,
however, continued to grow robustly by 34.3 per cent
(in US$ terms) reflecting increased domestic
production. With imports growing at a greater rate
than exports, trade deficit widened to US$12.9 billion
in July, its highest point since September 2008.
Growing concerns on whether the recovery in
developed countries will be sustained would keep
export growth moderate whereas imports will
continue to grow strongly.
Inflation declines
Headline inflation (WPI) declined to 9.97 per cent in
July from 10.6 per cent in June. Inflation in primary
and fuel group reduced marginally to 14.9 per cent
and 14.3 per cent. Non-food manufacturing, a proxy
for core inflation, grew at 6.7 per cent in July
compared to 7.3 per cent in the previous month.
During the rest of the year, a high base would have a
moderating influence on headline inflation. We
expect average WPI inflation for 2010-11 at 8.5-9.0 per
cent
Pressure eases on banking sector liquidity
Credit off-take grew by 20.1 per cent during the
fortnight ending 13th August as compared to 14.9 per
cent in the same period of last year. Non-food credit
grew by 20.5 per cent. Although liquidity pressures
eased significantly in August vis-à-vis June and July
2010, the banking sector's liquidity remained in
deficit. Call rates averaged at 5.19 per cent during the
month.
Amidst volatility, the Rupee appreciates
marginally
The Rupee rose to a 2-month high of 46.02 per US$ on
August 6, 2010, before dropping to the month's low of
47.08 per US$ on the last day of August. The Rupee
however lost 2 per cent against the Pound Sterling and
Japanese Yen while it slipped marginally by 0.6 per
cent against the Euro. The Rupee is likely to remain
volatile in the short-term but would continue to
appreciate as foreign investments are likely to remain
robust in 2010-11 given an increasing global risk
appetite. We expect the Rupee to settle at 43.5-44.0 per
US$ by end-March 2011.
The 10-year G-sec yield begins to rise
The yield on the 10-year benchmark government
bond rose by a marginal 13 basis points in August
over that in the previous month, to end the month at
7.9 per cent. The yield on the AAA corporate bond
was 8.8 per cent at the end of August 2010, the same as
in the preceding month. In the remaining part of the
year, tighter liquidity conditions would tend to push
the 10-year G-sec yield up. However, easing of
inflationary pressure should exert the opposite
pressure. We expect the yield on the 10-year G-sec to
be 8.3-8.5 per cent at the end of 2010-11.
September 2010
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Outlook
2010-11

2010-11 Rationale

Growth Agriculture 5.5 With private demand expected to pick up in FY11, industrial

Industry 8.6 production growth should remain buoyant. Under the assumption of
normal monsoon, agriculture would grow at a rate higher than its
Services 8.4
trend due to the low base of FY10. The service sector would continue
Total 8.0
to grow robustly, albeit with marginal slowdown due to a significant
reduction in government expenditure reflected in a decline in growth
rate of personal and community services.

Inflation WPI-Average 8.5-9.0 The headline inflation has remained high during the first half of FY11
due to low base and the recent fuel price hike. Besides a direct impact,
the spillover effect of fuel price hike would lead to higher freight costs
and higher prices of essential commodities.

Interest rate 10-year G-Sec 8.3-8.5 The pressure on the 10-year G-sec yields would arise from expected
(Year-end) tightening by the RBI this fiscal. However, the significant revenue
generated from the spectrum sales could reduce government
borrowings and hence exert downward pressure on yields.

Exchange rate Re / US $ 43.5-44.0 Foreign investments are expected to remain robust in FY11, thereby
(Year-end) increasing the supply of US$ relative to the demand. This should
enable the currency to continue on its fundamental trend of
appreciation.

Fiscal deficit as a % of GDP 5.0 The partial roll-back of fiscal stimulus and a sustained economic
(Incl off-budget liabilities) recovery is expected to significantly improve the government tax
revenue during FY11. This along with the expected revenues from
disinvestment and the revenue garnered from the spectrum sales
would bring the fiscal deficit down.

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Quarterly update: GDP

Gross Domestic Product (GDP) grew at 8.8 per cent in the previous year. The strong industrial growth was
the first quarter of 2010-11, compared to 6.0 per cent driven by a 12.4 per cent growth in manufacturing
in the same quarter GDP in the first quarter. Although the growth in
of the previous
year. Although the A
As expected, GDP grew
manufacturing has decelerated from 16.3 per cent in
the previous quarter, it was still remarkable
first-quarter by 8.8 per cent in the compared to the 3.8 per cent growth in manufacturing
growth is only first quarter of 2010-11 in the first quarter of the previous year.
slightly better than
the 8.6 per cent Mining and quarrying grew by 8.9 per cent in the first
growth in the previous quarter, it is the highest quarter, compared to 14.0 per cent in the previous
growth rate since the third quarter of 2007-08 when quarter and 8.2 per cent in the first quarter of the
the economy grew at 9.7 per cent. previous year. Electricity output went up by 6.6 per
cent, maintaining its growth rate in the first quarter of
Led by an upswing in rabi production, particularly in 2009-10. Construction grew by a healthy 7.5 per cent
pulses and cotton, farm output grew by 2.8 per cent in in the first quarter, compared to 4.6 per cent in the
the first quarter of the year, as against 1.9 per cent in previous year's first quarter.
the first quarter of 2009-10. CRISIL expects the
agriculture sector to maintain its growth momentum The services sector also contributed significantly to
in the remaining quarters of the year, due to low-base economic growth, growing by 9.7 per cent in the first
effect and the normal monsoons. The resultant quarter as against 8.4 per cent in the previous quarter
positive impact on rural income will boost consumer and 7.9 per cent in the first quarter of 2009-10. Trade,
demand during the rest of the year. hotels, transport and communication, which grew by
12.2 per cent in the first quarter as compared to 5.5 per
As reflected by the 11.5 per cent growth in IIP (Index cent in the previous year's first quarter, drove the
of Industrial Production), growth in services. In contrast, financing and
growth in the industrial S
Strong industrial insurance and community and social services
sector of GDP climbed to performance leads restrained the growth in services. Financing,
10.3 per cent in the first insurance, real estate and business services grew by
overall growth
quarter of 2010-11, 8.0 per cent in the first quarter compared to 11.8 per
compared to a weak 4.6 per cent in the first quarter of cent in the first quarter of 2009-10. Similarly, growth in

Figure I: GDP Growth (y-o-y, %) Table I: Quarterly Growth Performance (y-o-y, %)

Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11
10.0
9.3 GDP at factor cost 6.0 8.6 6.5 8.6 8.8

9.0 8.8 Agriculture 1.9 0.9 -1.8 0.7 2.8

Industry 4.6 7.8 11.1 13.3 10.3
8.0 Services 7.9 10.7 7.2 8.4 9.7
7.4
Trade, Hotels, Trans & Comm. 5.5 8.5 10.2 12.4 12.2
7.0 6.7
Finance 11.8 11.5 7.9 7.9 8.0
Community and social 7.6 14.0 0.8 1.6 6.7
6.0
GDP at market price 5.2 6.4 7.3 11.2 10.0
5.0 Private Consumption 2.9 6.4 5.3 2.6 3.8
FY09 FY10 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Govt. Consumption 15.3 30.5 2.5 2.1 14.2
FY08 FY09 FY10 FY11 Fixed Investment -0.7 1.6 8.8 17.7 7.6

Source: CSO Source: CSO

September 2010

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CRISIL EcoView
community, social and personal services declined to
6.7 per cent compared to 7.6 per cent in the first
quarter of the previous year, as the government
gradually rolled back stimulus measures during the
year.
GDP at market prices, calculated on its demand-side
components, grew by 10.0 per cent in the first quarter,
as against 5.2 per
cent during the
first quarter of P
Pick-up in investment
2009-10. Among and external trade drove
the components, demand side growth
private final
to 10.0 per cent
consumption
expenditure (PFCE) grew by 3.8 per cent vis-à-vis 2.9
per cent in the first quarter of the previous year,
driven by strong growth in automobile sales, cellular
phone subscriptions, and volume of freight and
cargo handled. The contribution of PFCE to GDP,
however, came down to 56.5 per cent in the first
quarter of 2010-11 from 59.9 per cent in the first
quarter of 2009-10.
Government final consumption expenditure (GFCE)
grew by 14.2 per cent in the first quarter of 2010-11 as
compared to 15.3 per cent in the first quarter of the
previous year. Government expenditure, at constant
prices, had surged to Rs 1.6 lakh crore in the third
quarter of 2009-10, owing to its large spending to
stimulate the economy. As the government phased
out stimulus measures, its expenditure slowed to Rs
1.4 lakh crore in the first quarter of 2010-11.
Gross fixed capital formation (GFCF) grew by 7.6 per
cent in the first quarter of 2010-11, way higher than its
contraction of 0.7 per cent in the first quarter of 2009-
10, but much lower than its 17.7 per cent growth in the
previous quarter. This is broadly in line with the
growth in the capital goods segment of IIP, which was
a more moderate 34 per cent in the first quarter
compared to 42 per cent in the previous quarter.
On the external-trade front, growth in exports and
imports accelerated in the first quarter compared to
that in the first quarter of 2009-10, when the global
financial turmoil dried up export demand. Exports
grew by 5.3 per cent in the first quarter as against a
drop of 16.1 per cent in the first quarter of 2009-10.
Imports grew by 8.0 per cent in the first quarter as
against a contraction of 14.0 per cent in the first
quarter of the previous year.
Outlook
Although industrial production is likely to grow at a
modest rate for the rest of 2010-11, the agricultural
sector will boost the economy, owing to low-base effect as
well as normal monsoons. The growth momentum in the
services sector is likely to continue. On balance, we
expect the GDP to grow at 8.0 per cent in 2010-11.
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Quarterly update: Monsoon

The normal monsoons over June 1 to September 1, Pradesh has a relatively lower DRIP score since more
2010, and improved sowing have raised hopes of a than 75 per cent of its arable area has irrigation
good agricultural harvest in 2010-11. As per the latest coverage.
data from IMD (Indian Meteorological Department),
the rainfall in India, from June 1 to September 1, was In spite of deficient rainfall in certain regions, sowing
only 0.6 per cent lower than the Long Period Average activity in India progressed well until September
(LPA), the average rainfall in the past 50 years. 2010. The total area under cultivation is 9.9 per cent
higher than in the previous year, according to the
The regional distribution of rainfall is however not latest data from the Ministry of Agriculture. Notably,
satisfactory. IMD data shows that North-east India (- the area under pulses and sugarcane has increased by
21 per cent deviation from the LPA) witnessed 20.1 per cent and 14.1 per cent.
deficient rainfall whereas rainfall was above normal
in the southern peninsula (+20 per cent). North-west Although September rainfall has less impact on kharif
India (+6 per cent) and central India (+2 per cent) output, normal rainfall in this month augurs well for
received normal rainfall. Among the states, Uttar rabi crops, since it
Pradesh (-25 per cent), Bihar (-22 per cent), gives sufficient A
As on August 20, sowing
Chhattisgarh (-20 per cent) and Jharkhand (-46 per moisture to the for kharif season is 9.9
cent), which together account for almost 28 per cent soil. A bumper per cent higher than
of India's agriculture output, received deficient agricultural
in the previous year.
rainfall. output will enable
India to rein
CRISIL measures the impact of deficient rainfall on inflation, which is in double digit after the previous
agriculture using its proprietary index named year's drought.
Deficient Rainfall Impact Parameter (DRIP). DRIP
takes rainfall deficiency and share of unirrigated area
into account to arrive at the index value. A higher
DRIP score indicates a more adverse impact of
deficient rainfall. Based on their DRIP score, Madhya
Pradesh, Bihar and Orissa are the worst-affected
states. Although it received deficient rainfall, Uttar

Table II: State-wise DRIP scores Table III: Progress of sowing

For the period from 1st June to Million Ha, Area covered As on August As on August YoY%
31-Aug 30-Aug 29-Aug 3-Sep 2-Sep 1-Sep during full season 20,2010 20,2009
2005 2006 2007 2008 2009 2010
Total foodgrains 72.5 60.1 54.2 10.8
Andhra Pradesh 0.0 4.2 0.0 0.0 13.1 0.0
Bihar 4.6 8.5 0.0 0.0 10.9 9.9 Rice 39.5 29.8 27.7 7.5
Gujarat 0.0 0.0 0.0 11.5 0.0 0.0
Haryana 3.1 6.5 5.5 3.0 10.2 0.0 Coarse Cereals 22.2 19.7 17.7 11.3
Karnataka 0.0 4.6 0.0 3.3 0.0 0.0
Madhya Pradesh 0.0 0.0 15.6 15.6 28.0 16.7 Pulses 10.8 10.6 8.8 20.1
Maharashtra 0.0 0.0 0.0 18.1 16.9 0.0
Oilseeds 17.6 16.1 15.3 5.4
Orissa 5.4 0.0 0.0 0.0 0.0 9.9
Punjab 0.4 0.3 0.5 0.0 0.7 0.2 Sugarcane 4.5 4.8 4.2 14.1
Rajasthan 20.2 0.0 12.6 1.6 26.3 0.0
Tamil Nadu 4.3 11.8 0.0 0.0 2.1 0.0 Cotton 9.1 10.6 9.6 10.5
Uttar Pradesh 6.2 7.9 7.8 0.0 15.2 8.2
West Bengal 3.9 1.3 0.0 0.0 10.1 6.4 All Crops 104.5 92.3 84.0 9.9

Source: IMD Data and CRISIL Estimates Source: Ministry of Agriculture

September 2010

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I. Indian demographics: A double-edged sword

With more than half of India's population less than 25
years of age, India is among the youngest nation today.
India has a large work force with 64 per cent of the
populations in the working age group of 15-64 years and is
poised to be the largest contributor to the global workforce
over the next few decades. This hands India an exceptional
advantage over the western countries whose population is
ageing rapidly and China whose population is expected to
age earlier due to its pursuit of a one-child policy. A
swelling youth population gives India the potential to
become a global production hub as well as a large consumer
of goods and services. This is India's demographic
dividend.
Although the favourable demographics position India to
address the void left by countries with an ageing
population, India needs to overcome a mismatch between
the demand and supply of its workforce that has in turn
created a skill mismatch at the high-end and low-end of
employment opportunities. India is thus saddled with a
large unemployable workforce that needs the support of
government employment schemes. This could prove
unsustainable in the long run.
India will hence have to address the more fundamental yet
critical issues of generating employment opportunities
and preparing the youth to participate in economic growth
opportunities. The manner in which India fronts these
challenges will determine whether it will reap its
demographic dividend. If the current trends in employment
continue India will have to bear the fiscal burden of its
young population by transferring more funds to
employment generation schemes. These transfers could
create a permanent fiscal burden that threatens to eat into
India's expenditures on education, healthcare and
infrastructure.
The United Nation's population database estimated
India's population at 1.2 billion in 2010, about 150
million less than
China's population of
1.35 billion. Since A
A youth-dominated
India's population is population is India's
growing at 1.2 per demographic dividend
c e n t e v e r y y e a r,
higher than China's population growth rate of 0.5 per
cent per year, India will outpace China to become the
world's most populated country by 2030.
More significantly, India will also have the largest
population of youth. At present, half of India's
population is below the age of 25 years, and 64 per
cent of its population is in the working age group of
15-64 years. As the proportion of working age
population in its total population is poised to increase
over the next few decades, India will add 136 million
to its workforce between 2010 and 2020. In contrast,
China will add only 23 million to its workforce,

Figure 1.1: India: Working Age Bulge Figure 1.2: Increment in Working Age Population (15-64 years)
Population 200 2020 over 2010
Age Group
(millions) 162
0-14 15-64 65+
1200
150 136
1000

800 100
Millions

600
50
23
400 11
-21
200 0
-8
0
Africa India China USA Japan Europe
2010 2020 2030 2040 2050 -50

Source: UN world Population Prospects, The 2008 Revision Source: UN world Population Prospects, The 2008 Revision

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whereas the working age population in Europe and will increase by 50 per cent in Uttar Pradesh, Bihar,
Japan will decrease during the period. India will thus Madhya Pradesh and Rajasthan between 2011 and
account for 26 per cent of the total increase in the 2021, at 2 per cent per year. In contrast, the working
global workforce over the next 10 years. age population in Kerala and Tamil Nadu, whose
demographics are becoming similar to those of
India's dependency ratio, the ratio of children and mature economies, will grow at about 0.5 per cent per
old aged to working age population, will continue to year. As a result, migration pressure from states with
fall over the next few decades. This implies its lesser growth and job opportunities will increase. The
working age population would have to shoulder a centre would hence have to transfer more money to
lesser fiscal burden of supporting children and the these states to fund schemes to generate employment.
elderly. India's population in the age group of 45-60,
the key contributor to household savings, is poised to A more significant challenge is that even though India
increase sharply in the next three decades. Owing to has 780 million people in the working age group, it
this structural shift, India's savings rate, which has a shortage of qualified manpower. This shortage,
increased to over 35 per cent of GDP in the past which was most apparent between 2004 and 2007
decade, will get a further thrust. when the economy grew by almost 9 per cent,
triggered a sharp increase in wages in certain sectors.
Although the favourable demographics clearly The shortage of qualified manpower stems from a
unique combination of factors that cause a mismatch
hand India an
opportunity to Shortage of qualified S between demand and supply of labour in India.
address the void manpower creates
left by countries a skill mismatch Demand-side factors
with an ageing
population, challenges abound. A structural deficiency in the pattern of India's
economic growth, rigid labour laws and the sudden,
India will have to contend with spatial challenges rapid rise of the services sector have contributed to
due to a remarkable diversity in the demographics of the mismatch in demand for labour.
its states. For instance, the working age population in l Structural deficiency- India's pattern of
India will increase the maximum in states that are the economic growth has been quite different from
poorest and offer the lowest in employment the conventional pattern. In the conventional
opportunity. According to the Census of India's pattern, the share of agriculture is high during
population projections, the working age population the initial stages of economic development, then

Figure 1.3: Increase in Working Age Population (2021 over 2011)

30.0

25.0

20.0
Millions

15.0

10.0

5.0

0.0
Haryana
Maharashtra
Pradesh

Bihar

Pradesh

Pradesh

Chhattisgarh
Rajasthan

Orissa

Punjab

Kerala
Jharkhand

Jammu and
Karnataka

Uttarakhand
Madhya

Tamil Nadu
Benga

Pradesh
Andhra

Himacha
Gujara
West
Uttar

Kashmir

Source: Population Projections for India & States, 2001 - 2026, Census of India

September 2010

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the share of industry increases, and eventually
services account for a dominant share of the
GDP. Labour is thus transferred from agriculture
to industry and finally to services. Although
economic growth in India initially followed this
pattern, the share of industry in India's GDP
started stagnating in the nineties while that of
services started rising sharply, which was
unique for a country in an early stage of
development. As per NSSO (National Sample
Survey Organisation) data, while agriculture
accounted for 18.9 per cent of GDP in 2004-05 it
employed 56 per cent of the workforce, whereas
industry with a share of 28 per cent of GDP
employed 19 per cent of the workforce, and
services which accounted for 53.1 per cent of
GDP employed only 25 per cent of the
workforce. Thus, while the share of agriculture
in GDP shrank gradually, the number of people
who depended on agriculture remained high.
This happened because industry, which has the
highest employment intensity, did not grow at a
rate high enough, and services could not absorb
the excess labour in agriculture.
l Rigid labour laws - Industry could not absorb
labour to its fullest potential owing partly to
India's rigid labour laws that discourage
employment by the organised sector. For
instance, labour laws restrict units that employ
more than 100 workers from firing employees.
The restrictive labour laws impact employment
Figure 1.4: Trends in the ratios of working age to total population
0.70 India China
0.65
Value of Ratio
0.60
0.55
0.50
0.45
1940 1960 1980 2000 2020 2040 2060
Years
Source: UN world Population Prospects, The 2008 Revision
in two ways i) industry tries to substitute labour
with capital, thereby reducing the employment
intensity of industrial production - an
undesirable outcome in a labour-surplus
economy; ii) industry tries to avoid being subject
to the labour laws by outsourcing work to the
informal sector. It is therefore of little surprise
that despite an accelerated GDP growth,
employment by the organised sector has
decreased during the past few years.
l Discontinuity in pattern of growth - The
emergence of IT-ITeS and financial services
industries was a major discontinuity that added
to the shortage of skilled manpower in
technology and finance-related activities.
Spurred by the rapid growth in IT-ITeS, which
currently provides direct employment to over 2.5
million skilled workers, the demand for
qualified workers increased sharply, which the
supply system could not meet. This exerted a
pressure on wages.
Supply-side factors
Lack of access to formal vocational training, over-
regulation in higher education, and the poor quality
of teachers and students in educational institutions
have constrained the supply of qualified manpower.
l Lack of access to vocational training - A critical
deficiency in the supply of labour relates to the
Figure 1.5: Trends in the Savings Age Populations of China and India
400 India China
Number of people (in Millions)
300
200
100
0
1960 1980 2000 2020 2040 2060
Years
Source: UN world Population Prospects, The 2008 Revision
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lack of vocational training in India. Of the 255
million people in the age group of 15-29 in 2004-
05, only 11 per cent had received any vocational
training. Among the vocationally-trained
people in this group, only 32 per cent had
received formal vocational training. The rest had
acquired skills informally training.
l Over-regulation in higher education - The
supply of labour in India also suffers from over-
regulation and a lack of focus on higher
education. A multi-regulatory system that India
follows in higher education has led to lack of co-
ordination among the statutory bodies, in
aspects such as approval and accreditation
processes. This creates conflicts in the
educational system. The government is framing
new regulations to address the shortcoming in
regulation of higher education.
l Quality issues - Last but not the least is the poor
quality of teachers, and students who graduate
from higher-education institutions. A shortage
of teachers and the inability of educational
institutions to attract teaching talent have
contributed to the poor quality of students in
Figure 1.6: Indian Labour Market: Demand Supply Framework
Supply of labour/skills
Related to education
Quality issues
- Overregulation and lack of focus
- Lack of vocatikonal training
Lack of trained professionals
Market Outcome
- Skill mismatch at the high end: Transition to a knowledge-based economy requires a new generation of educated and skilled people
- Skill mismatch at the low levels too: Opportunities in Infra, construction, mining health care (technicians-welders, fitters, paramedics)
- Unemployable Army of labor
- High wages, attrition in sectors with skill-mismatch
Source: CRISIL
India's higher-education institutions, excepting
those from premier educational institutions.
Skill mismatch in high-end and low-end
employment opportunities
The mismatch between labour demand and supply
has created a skill mismatch at the high-end and low-
end of the employment spectrum. India thus has a
large unemployable workforce that needs to be
supported by government employment schemes,
thereby increasing the country's fiscal burden.
The mismatch between labour demand and supply
has resulted in:
l Skill mismatch at the high end - As the financial
sector is set to expand briskly, there will be a
shortage of manpower suitable for this sector, in
a business-as-usual scenario. A new generation
of educated and skilled people, who are in short
supply, are required to spearhead the transition
to a knowledge-based economy. There is hence a
need to prepare the workforce for opportunities
in knowledge-based sectors such as
biotechnology and pharmaceuticals.
Demand for labour/skills
Cyclical Issues
- GDP Growth/Economy cycles
Structural / Policy Issue
- Legislation (Indian labour law promote information
and capital intensive modes of production)
- Structure of the economy
Discontinuities
- IT-ITES
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CRISIL EcoView
l Skill mismatch at the low-end too -
Opportunities in infrastructure, construction,
mining and health care have increased the
demand for vocationally-trained workers such
as technicians, welders, fitters and paramedics.
As vocational training has not been widespread,
skilled workers to meet the rising demand from
these sectors are in short supply
There is hence a large unemployable army of labour
which is unable to meaningfully plug into the
existing economic activity. Consequently, wages
have risen sharply and attrition has increased in
sectors that face skill mismatch.
Fiscal burden of a young population
The fiscal burden of the aging population in western
countries, where deficit and debt are at record high
levels, has made these economies fiscally fragile. The
government has to spend more on social security,
health care and welfare programs to sustain the aging
population. An aging society therefore imposes fiscal
burden on the economy, and implies declining
growth prospects and mounting fiscal pressures.
In India, unlike in the West, the growth prospects are
brighter and the population is much younger.
However, the youth-dominated Indian society will
yield economic dividend only if the youth are able to
find gainful employment. If they do not, the economy
will be fraught with social tensions and instability.
India is currently addressing this issue through
schemes for generating employment such as
NREGA, which is at best a 'band aid' solution. If the
status quo persists, economic growth will soon hit a
speed breaker. Although an increased rate of savings
and investment is essential for ensuring a rapid pace
of economic growth, an educated workforce along
with employment opportunities are critical for
sustaining the growth over the long term, and for
realising the demographic dividend.
If the Indian economy is unable to generate
employment for a swelling working-age population
in the next decade, the government will need to
transfer more funds to the unemployed through
schemes like NREGA (National Rural Employment
Guarantee Act) to stem social unrest. The likely
increased transfers to employment generating
schemes will create a permanent fiscal burden and eat
into India's expenditures on education, healthcare
and infrastructure.
Conclusion
India has clearly earned itself a sweet spot today, first
by growing by near nine per cent in the five years
preceding the global financial crisis and then by
demonstrating its resilience to it. It is very likely to
continue in the 8 per cent plus growth trajectory in the
next five years. But this should not lead to 'hubris' as
proactive policy action is required in a number of
areas (infrastructure, health etc.) to sustain high
growth over the long run. One such critical area is
dealing with the bulging young population. India
needs to step up its efforts on creating skills as well as
job opportunities to reap the demographic dividend
and not be burdened with a demographic nightmare
in decades ahead
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II. Industrial Production

The Index of Industrial Production (IIP-General) a year ago.
grew at 7.1 per cent in June 2010. This is a sharp
deceleration as compared to the double-digit growth
Among the use-based categories, with the exception
experienced during the
previous 8 months.
Also, this is the slowest
I
Industrial output
of consumer durable goods, all other categories
experienced a decline in growth owing to a high base.
growth slows down The consumer durable goods' output has been
growth in the last 11
to single-digit growing consistently at
months. The industrial
output grew at 11.3 per
a robust rate for over a
year now making it the
GConsumer durables
cent a month ago and 8.3 per cent a year ago. This is growth continue
key driver of overall
the first time in a year that IIP growth of a month is to be strong
manufacturing growth.
lower than that attained during the same month in
Despite a high base,
the previous year.
consumer durable segment grew by an impressive
27.4 per cent in June 2010 as compared to 23.7 per cent
The manufacturing output grew at 7.3 per cent in
in May 2010. Clearly, consumption demand continues
June 2010 and was mainly responsible for the
to be strong and is benefiting consumer durable
deceleration in overall industrial growth.
sector.
Manufacturing had shown a growth of 12.0 per cent
in May 2010 and 17.9 per cent in April 2010. Part of the
On the other hand, capital goods suffered a sharp
decline in manufacturing growth could be attributed
deceleration in growth mainly on account of high
to the rising base.
base and its growth fell to a modest level of 9.7 per
cent. This segment had witnessed exceptionally high
The other two sectors, electricity and mining &
growth in the past few months due to both base effect
quarrying, also recorded a deceleration in y-o-y
and increased investment demand. It had clocked a
growth, again on high base. Electricity grew by 3.5
growth of 34.2 per cent in May 2010 and 69.9 per cent
per cent in June 2010, slower than 6.4 per cent
in April 2010 .
recorded during the previous month and 8.0 per cent
recorded in June 2009. Mining & quarrying also grew
Basic goods registered a growth of 3.4 per cent in June
at a slower rate but managed to register the highest
2010, as compared to 7.9 per cent in May 2010 and 10.7
growth among the three sectors. It grew by 9.5 per
per cent in June 2009. The growth in this segment
cent in June 2010, compared to 10.1 per cent in the
decelerated for the fourth consecutive month.
previous month and 14.2 per cent in the same month
Growth in intermediate goods slowed down to be at

Figure 2.1: Manufacturing Sector Growth (y-o-y %) Table 2.1: Sectoral Growth (y-o-y %)
20.0 April-June
Weight June-09 June-10 2009-10 2010-11
General 1000.0 8.3 7.1 3.8 11.5
15.0
10.9
Manufacturing 793.6 8.0 7.3 3.4 12.2
Mining 104.7 14.2 9.5 6.8 10.4
10.0 Electricity 101.7 8.0 3.5 5.8 5.6
8.0
Use Based Industry (%)
7.3 Basic 355.7 10.7 3.4 6.3 6.7
5.0
2.7
Capital 92.6 13.4 9.7 2.0 34.0
Intermediates 265.1 7.9 8.7 7.4 9.8
Consumer Goods 286.6 4.4 8.3 -0.5 9.4
0.0
FY09 FY10 Jun Dec Jun -Durables 53.7 16.2 27.4 15.6 27.9
FY10 FY11 -Non durables 233.0 0.7 1.3 -5.3 2.8
Source: CSO Source: CSO

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CRISIL EcoView

8.7 per cent after recording double-digit growth for
ten months. Growth in consumer non-durables
continues to remain weak and stood at 1.3 per cent in
June 2010 as compared to 0.7 per cent during the
same month last year.
Out of the 17 manufacturing industries, 13 posted
positive growth in June 2010 as against 15 in May
2010. In June 2009 also, this number stood at 13. The
top five performing industries in June 2010 were
metal products (62.1 per cent), jute and other
vegetable fibre (30.0 per cent), transport equipment
and parts (24.6 per cent), rubber, plastic, petroleum
and coal products (12.6 per cent) and other
manufacturing
industries (11.8 per
cent). All the 13
13 out of 17 industries
remaining eight in June 2010 witnessed
industries that positive growth
p o s t e d p o s i t i ve
growth, however,
witnessed single-digit growth in June 2010.
Industries that performed poorly and recorded a
contraction during June 2010 were wood and wood
products (-9.2 per cent) and beverages, tobacco and
related products (-2.4 per cent).
Among the forward-looking indicators, cement
production touched 13.74 million tones (MT) in June
2010 as against 13.18 million tonnes in June 2009.
However, in terms of y-o-y variation, cement
production slowed down to 4.3 per cent in June 2010
as against 9.0 per cent in May 2010 and 14.9 per cent in
June 2009. Commercial vehicle sales continue to be
strong registering an annual growth of 40.2 per cent in
July 2010 as compared to 5.1 per cent a year ago. The
non-food credit grew
at 20.5 per cent during
the fortnight ended
Forward-looking F
August 13, 2010 indicators point
touching the RBI's towards a sustained
target level of 20 per expansion in demand
cent for the current
fiscal year. The credit growth has been steadily rising
since November 2009 reflecting consistent rise in
demand of funds by the private corporates. On the
trade front, exports growth slowed down to 13.2 per
cent in July 2010 but the demand of imported goods
continued to be robust as imports grew by 34.3 per
cent.
Outlook
A shift in base from low to high has led to a sharp
deceleration in industrial growth in June 2010. Hereon,
the high base will remain operative till the end of the
current fiscal year. Therefore, going forward the
industrial growth is likely to remain in single digit. On
an average, we expect industrial growth in 2010-11 to be
around 9.0 per cent.

Table 2.2: Performers in Manufacturing Sector (%) Table 2.3: Laggards in Manufacturing Sector (%)
April-June April-June
Weight June-09 June-10 2009-10 2010-11 Weight June-09 June-10 2009-10 2010-11
Metal Products 28.1 -7.5 62.1 -4.8 44.7 Metal and Alloy 74.5 12.8 -0.5 7.7 6.4
Mach. & Eqp 95.7 12.9 9.5 7.2 27.7
Cotton textiles 55.2 -1.9 6.7 -1.7 5.5
Transport Eqp 39.8 12.3 24.6 6.9 27.6
NMMP 44.0 9.4 3.0 8.3 3.7
Oth. Manufacturing 25.6 32.6 11.8 14.9 22.7
Leather 11.4 11.0 -9.9 -3.5 1.7
Jute 5.9 -31.1 30.0 -16.2 17.1
Wool 22.6 5.2 0.1 4.8 0.4
Rubber 57.3 7.6 12.6 10.6 15.8
Food products 90.8 0.1 7.9 -17.2 12.7 Textile products 25.4 8.7 5.6 8.2 0.3

Chemical 140.0 4.8 3.8 2.0 6.7 Beverages 23.8 -3.4 -2.2 -6.2 -2.4

Paper 26.5 12.9 3.0 3.6 6.6 Wood 27.0 6.4 -7.0 14.7 -9.2

Source: CSO Note - Please refer to Annex (Table 8.4) for full description of abbrev used in the text

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III. External Sector

Averaging over 30 per cent over January to June 2010, the same period last year. Since imports are likely to
export growth declined steeply in July 2010 to 13.2 outpace exports, CRISIL expects trade deficit to
per cent. increase further in 2010-11.
E x p o r t
growth has
decelerated
AA robust growth in imports Exports and imports grew in rupee value in July 2010,
and a moderate growth in with the growth in imports higher than in exports.
owing to Exports increased by 9.4 per cent to Rs 760.6 billion
exports widened the trade
fragile global over those in July 2009, whereas imports grew by 29.7
demand since deficit to US$ 12.9 billion
per cent to Rs 1,366.3 billion.
t h e in July 2010.
sustainability
Outlook
of the on-going global economic recovery is
shrouded in uncertainty. Exports were estimated at a As concerns arise about the sustainability of economic
moderately lesser US$ 16.2 billion in July 2010 as recovery in the developed countries, export growth is
against US$ 17.8 billion in June 2010, though they likely to remain under pressure. Imports, however, will
were 13.3 per cent higher than in July 2009. grow robustly as domestic production is rising.

Imports, however, continued to grow at 34.3 per cent

reflecting robustness in domestic production.
Imports increased to US$ 29.2 billion in July 2010, the
highest in the past 21 months, from US$ 28.3 billion in
June 2010. Oil imports grew by a meagre 4.4 per cent
to US$ 7.7 billion, whereas non-oil imports rose
sharply by 49.6 per cent to US$ 21.5 billion in July
2010 reflecting a surge in industrial production as
well as domestic demand.

Due to the strong import growth and moderate

export growth, trade deficit widened further in July
2010 to US$ 12.9 billion, its highest point since
September 2008. Trade deficit grew by 38.7 per cent to
US$ 43.6 billion during April to July 2010 over that in

Figure 3.1: Exports Performance (US$ bn) Table 3.1: Trade Performance
200.0 April-July
176.6
162.9 168.7 July-09 July-10 2009-10 2010-11
Merchandise (US$ billion)
Exports 14.3 16.2 52.7 68.6
Imports 21.7 29.2 84.2 112.2
Oil Imports 7.3 7.7 24.0 32.9
68.6
Non-oil Imports 14.4 21.5 60.2 79.3
Trade Balance -7.4 -12.9 -31.4 -43.6
y-o-y %
Exports -24.7 13.2 -22.9 30.1
0.0 Imports -30.3 34.3 -23.2 33.3
FY08 FY09 FY10 Apr May June July Oil Imports -42.1 4.4 -42.9 37.3
Non-oil Imports -22.3 49.6 -10.9 31.8
FY11
Trade deficit -37.1 75.1 -23.1 38.7
Source: Ministry of Commerce Source: Ministry of Commerce

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CRISIL EcoView IV. Inflation

Headline inflation (WPI) decelerated to 9.97 per cent
in July 2010 from 10.6 per cent in June 2010 and 11.1
per cent (revised upwards from 10.2 per cent earlier)
in May 2010. However,
on a month-on-month
(m-o-m) basis, the index
H
Headline inflation
slides marginally
s h o we d a m a r g i n a l
increase of 1.0 per cent, in July 2010
reaching 262.50 in July
2010 from 259.80 in June 2010. The index of all major
categories showed moderation on a y-o-y basis due to
high base effect, despite an increase on m-o-m basis
Inflation based on Consumer Price Index for
Industrial Workers ( CPI-IW) moderated for the
fourth consecutive month to 11.3 per cent in July 2010
from 13.7 per cent in June 2010.
Food inflation (primary and manufacturing)
decelerated to 7.9 per cent in July 2010 from 10.4 per
cent in June 2010 and 12.4 per cent a year ago. Non-
food manufacturing, a proxy for core inflation, too
moderated in July 2010. This can not however, be
interpreted as waning of the demand-side pressures
in the economy as the up tick in the index is still
continuing. The Reserve Bank of India (RBI) is
therefore expected to remain vigilant with regard to
inflationary pressures and take suitable action to
anchor the same in case of need.
month to 14.9 per cent. The major driver behind the y-
o-y moderation was the softening of food inflation to
10.3 per cent in July 2010 from 14.6 per cent last
month. Amongst food products, food grains (cereals
and pulses), fruits & vegetables and eggs, meat & fish
were the main
items whose
prices moderated. P
Primary articles inflation
In fact, inflation in continues to moderate
f r u i t s &
vegetables declined to 4.3 per cent in July 2010 from
4.9 per cent in June 2010. Amongst pulses, inflation in
Arhar dal fell to single-digits (6.8 per cent) for the first
time since January 2009. Inflation in Moong and Urad
dal , while still very high, has softened as compared to
previous month. Inflation in milk came down for the
second consecutive month in July 2010, although the
pace of moderation has slowed down.
On the other hand, non-food inflation accelerated to
21 per cent in July 2010 from 18.6 per cent in June 2010
led by increase in the prices of oilseeds and other non-
food articles. Among oilseeds, groundnut seeds was
mainly responsible for price increase, and among
other non-food articles, raw rubber drove the price
increase. Inflation in the broad group of minerals rose
sharply to 52.7 per cent in July 2010 as inflation in iron
ore surged to 70 per cent.

In July 2010, inflation in the primary articles group The fuel price index registered a sharp m-o-m
increased by 1.9 per cent on m-o-m basis, but on a y-o- increase of 3.2 per cent, led by the recent fuel price
y basis, it moderated for the second consecutive increase. However, the annual variation in July 2010

Figure 4.1: Headline Inflation (y-o-y %) Table 4.1: Inflation in Major Product Groups
April-July
18.0 WPI CPI Weight Jul-09 Jul-10 2009-10 2010-11
11.3 y-o-y %
14.0
General 100.0 -0.5 10.0 0.3 10.7
10.0
10.0 8.4
8.6
Primary 22.0 7.6 14.9 6.8 16.7
Fuel 14.2 -10.4 14.3 -8.8 14.0
6.0 3.8 Manufacturing 63.8 0.1 6.2 1.2 7.0
Contribution to inflation
1.4
2.0
Primary - -321.9 37.0 583.7 37.9
FY09 FY10 May Sep May Fuel - 427.9 28.9 -724.4 25.9
-2.0
FY10 FY11 Manufacturing - -9.8 34.0 240.6 36.2
Source: Ministry of Industry Source: Ministry of Industry

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remained at the previous month's level of 14.3 per Amongst the non-food categories, other than machine
cent. Amongst the mineral group category, inflation & machinery tools and rubber & plastic products, all
in liquefied petroleum gas (LPG) and kerosene the major categories witnessed a dip in inflation July
increased sharply to 15.3 per cent and 35.4 per cent 2010. In fact, inflation in non-metallic metal products
respectively in July 2010, from 6.7 per cent and 8.9 per declined for the second consecutive month in July
cent respectively in June 2010. Inflation in both petrol 2010. Inflation in chemical & chemical products,
and diesel moderated to 15.3 per cent and 14.7 per which carries the maximum weight in manufacturing
cent in July 2010 (from 20.3 per cent and 17.4 per cent index, softened to 4.9 per cent in July 2010 from 5.8 per
in June 2010), but the rise on m-o-m basis mirrored cent in June 2010.
the full impact of the fuel hike. Inflation in naphtha,
aviation turbine fuel (ATF) and bitumen continued to Overall, although the moderation (y-o-y) in non-food
decelerate, with inflation in naphtha slipping to manufacturing bodes well for the economy, it is
single-digits (5.3 per cent). attributable mainly due to the base effect. Thus the
numbers cannot be perceived as reduction in
Inflation in manufactured products moderated for inflationary pressures in the economy.
the third consecutive month and reached 6.2 per cent
in July 2010. However, at a disaggregate level, the
inflation in chemical & chemical products and non- Outlook
metallic mineral
Inflation, which was negative from June to August 2009,
products increased,
although inflation in
B
Both manufacturing turned positive in September 2009 and rose sharply
thereafter to double digits in February 2010. This high
both manufactured food and non-food
base will continue to have a moderating effect on
food and non-food category inflation headline inflation until the end of 2010-11, in spite of
products categories moderate rising demand. We expect average WPI inflation to
softened. Inflation in hover around 8.5 to 9.0 per cent in 2010-11.
manufactured food products fell marginally to 4.1
per cent in July 2010 from 4.3 per cent in June 2010
mainly due to lower inflation in its largest sub-
category of sugar, khandsari & gur, at 14.2 per cent
against 17.4 per cent in June 2010. Non-food
manufacturing inflation stood at 6.7 per cent in July
2010 as compared to 7.3 per cent in June 2010.

Table 4.2: Inflation in Primary Articles (y-o-y %) Table 4.3: Inflation in Manufactured Products (y-o-y %)
April-July April-July
Weight Jul-09 Jul-10 2009-10 2010-11 Weight Jul-09 Jul-10 2009-10 2010-11

Cereals 4.4 12.5 6.2 12.9 6.7 Chemicals 11.9 3.2 4.9 3.3 5.8

Pulses 0.6 23.0 22.0 18.0 29.9 Food Products 11.5 9.7 4.1 11.9 5.4

Fruits & Vegetables 2.9 16.9 -4.3 12.2 3.3 Textiles 9.8 2.1 13.8 6.3 15.0

Eggs,Meat & Fish 2.2 20.5 14.9 7.1 28.4 Machine Tools 8.4 -2.2 4.2 -1.3 4.1

Fibres 1.5 -8.9 14.4 -3.0 16.7 Metal & Alloys 8.3 -15.2 11.9 -14.2 12.2

Oilseeds 2.7 -3.5 7.5 0.2 5.4 Transport Eqp. 4.3 0.6 2.3 0.7 2.5

Metallic Minerals 0.3 -14.0 57.2 -5.8 30.4 NMMP 2.5 5.2 -4.8 3.3 -0.1

Other Minerals 0.2 -13.7 4.9 -12.3 5.2 Rubber & Plastic 2.4 2.5 7.0 3.1 6.2

Source: Ministry of Industry Note - Please refer to Annex (Table 8.4) for full description of abbrev used in the text

September 2010

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V. Money and Banking

Money market in August 2010 remained active as
market participants struggled under tight liquidity
conditions and continued demand for credit from
corporate sector and banking system. The liquidity
conditions witnessed considerable turnarounds in
June and July 2010 due to large increase in
government's cash balances with the Reserve Bank of
India (RBI).
Bank credit continued to remain robust during the
fortnight ending August 13, 2010, on the back of
heightened money market activity that began in mid-
July 2010. Credit off-take grew by 20.1 per cent
during the fortnight ending August 13, 2010 as
compared to 14.9 per cent in
the corresponding period of
the previous year. Non-food
C
Credit off-take
stays firm at
credit that accounts for 99 per
cent of the credit lending also 20 per cent
grew at 20.5 per cent during
the fortnight. During the past few weeks, non-food
credit growth has breached RBI's indicative
projection of 20 per cent for the year-end. Although,
the next few months are expected to experience some
drop in corporate borrowing as the temporary surge
in it is expected to narrow down. However, overall
non-food credit growth hereon is expected to largely
hover around RBI's projected trajectory due to
sustained domestic economic activity. Food credit
continued to decline and posted a fall of 4 per cent
during the fortnight ending August 13, 2010.
Aggregate deposits grew by 14.1 per cent during the
fortnight ending August 13, 2010, much lower than
21.8 per cent recorded in the corresponding period
previous year. The credit-deposit ratio rose to 72.6 per
cent as compared to 69.0 per cent recorded during the
corresponding fortnight of the previous year. The
incremental credit-deposit ratio, which is the ratio of
new credit disbursement and fresh deposit collected,
was lower at 85.6 per cent, as
compared to 116.9 per cent
in the same period of the
C
Call rates soften
previous month, but above
the 11.7 per cent growth recorded in the previous
year. Unlike previous months, August was the only
month when the markets did not experience any RBI
action. During the past few months, RBI had been
indicating its intention to anchor inflation
expectations and maintain tighter liquidity
conditions. Consequently, during July 2010, RBI had
reduced the policy interest rate corridor to make the
overnight inter-bank call rates less volatile.
As liquidity continued to remain tight, money supply
grew by 14.8 per cent in the fortnight ending August
13, 2010 lower than the growth of 20.7 per cent during

Figure 5.1: Money Supply Growth (%) Table 5.1: Scheduled Commercial Banking Indicators (y-o-y%)
th
30.0 y-o-y SA m-o-m annualised Outstanding as on 13 August Financial Year so far
2009 2010 2009-10 2010-11

Aggregate Deposits 21.8 14.1 5.9 3.2

20.0 18.9 21.3
16.8 Bank Credit 14.9 20.1 1.0 3.8

15.3 Food Credit 10.9 -4.0 5.8 -3.2

10.0
Non-Food credit 15.0 20.5 0.9 3.9

Investments 35.1 7.9 15.4 5.0

0.0
FY09 FY10 Apr Aug Dec Mar Jul
Credit-Deposit Ratio 69.0 72.6 11.7 85.6
FY10 FY11

Source: RBI, CRISIL Estimate Source: RBI

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the corresponding period previous year. Among the 4.5 per cent. The call rates had peaked to almost 5.88
sources of money supply, bank credit to commercial per cent in July 2010.
sector grew by 18.8 per cent during the fortnight
ending August 13, 2010 against 14.6 per cent during
Outlook
the same period last year. Meanwhile, net bank credit
to government remained firm at 23 per cent. Net Going forward, the borrowing pressures are expected to
foreign exchange assets posted a decline of 1.4 per soften as banks begin to pass on higher interest rates to
cent during the fortnight ending August 13, 2010 as customers. Some banks have even raised deposits rates to
compared to 5 per cent growth a year ago. Continued mobilize funds. Clearly, these developments are
demand for credit by corporate sector brought down indicative of transmission of monetary policy in the
scheduled commercial banks' (SCBs) investments in economy. In the forthcoming weeks, we expect liquidity
government securities (G-secs). Investments posted a conditions to ease and non food credit growth to stay
much slower growth of 7.9 per cent during the around the 20 per cent mark.
fortnight ending August 13, 2010 as compared to 35.1
per cent during the corresponding period previous
year. According to our study, the total investment of
scheduled commercial banks' in G-secs and other
approved paper stands at 31.4 per cent.

Liquidity pressures, briefly eased in the last fortnight

of August 2010 vis-à-vis June and July 2010, set off by
government's payment of subsidy to public sector oil
retailers. However, liquidity
continued to remain in the
deficit mode. Net L
Liquidity woes
transactions under the repo briefly ease
window of liquidity
adjustment facility (LAF) averaged at Rs 8.9 billion
during August 2010 as compared to Rs 460 billion in
the preceding month. The call rates were lower at 5.19
per cent average during August 2010 and
occasionally hovered close to the reverse repo rate of

Figure 5.2: Liquidity Situation In India

2000.0 20.0
Net LAF transactions Rs bn (LHS) Call rates Repo rate Reverse repo rate

2100.0
16.0

1500.0
12.0
900.0
8.0
300.0

4.0
-300.0

-900.0 0.0
Apr-09 May-09 Jun-09 Aug-09 Sep-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10
FY10 FY11

Source: CCIL & RBI

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Currency against the Pound Sterling and Japanese Yen; while

against the Euro it weakened marginally by 0.6 per
The rupee traded in a narrow range against the US cent.
dollar (US$) in August 2010, albeit strengthening
marginally for the first time since the last couple of As the global economic and financial environment
months. After strengthening the first half of the continues to remain uncertain, we expect volatility in
month, rupee the rupee movement to continue in the short-term. By
weakened in the
last week of R
Rupee trades in a narrow
March 2011, however,

August 2010. range against the US$

Rupee rose to a 2- in August 2010
months high of
46.02 per US$ on
August 6, 2010, before hitting a low of 47.08 per US$
on the last day of the month. On a monthly average
basis, it was 46.57 per US$ in August 2010 compared
to 46.84 in the previous month.
The rupee movement against the US$ broadly
followed the steady pattern in the net inflow of
foreign investments (FII) worth US$ 3.2 billion
during the month. The first half of the month saw
some weak US economic data which weighed on the
dollar. However, month-end dollar demand coupled
with defence import related payments weighed on
the rupee in the last week of the month. Both 6-
months and 1-month premia came down marginally
in the last week of the month after rising sharply in
the first two weeks.
The downward pressure on rupee against all the
other major currencies apart from the US dollar
continued in August 2010. It lost 2 per cent each
we expect rupee to
strengthen due to the VVolatility in the rupee
rising interest-rate to continue in the
differential in the short-term
wake of RBI's
monetary tightening will encourage debt flows and a
slow economic recovery in the other parts of the
world would encourage capital inflows into the
economy which will be more than enough to finance
the current account deficit.
Outlook
Apart from marginal strengthening against the US$, the
rupee exhibited weakness against all the other major
global currencies in August 2010. Weak set of US
economic data weighed on the dollar in the month. Going
forward, we expect volatility in the rupee to continue due
to increased uncertainty in the global economic and
financial environment. Though, it is likely to strengthen
from the present levels mainly due to the rising interest
rate differential and expectations of robust FII inflows.
On balance, we expect rupee to settle between 43.5 and
44.0 per US$ by end-March 2011.

Figure 6.1: Net FII Inflows and Exchange Rate Table 6.1: Currency Movement (Averages)

2.0 Net FII inflow US$ bn (LHS) Rs per USD 55.0 USD GBP Euro Yen

Indian Rupee vis-à-vis

FY09 45.9 78.5 65.1 46.0
FY10 47.4 75.9 67.1 51.1
H1FY10 48.5 77.7 67.8 50.9
0.0 45.0 H2FY10 46.3 74.0 66.3 51.3
1QFY11 45.7 68.0 58.0 49.6
July-10 46.8 71.5 59.8 53.4
August-10 46.6 73.0 60.1 54.5
Forward premia*
-2.0 35.0 1-month 5.7
Apr-08 Jul-08 Oct-08 Feb-09 May-09 Dec-09 Mar-10 Jul-10
FY09 FY10 FY11 6-months 4.9
Source: SEBI, RBI Source: RBI Note: * As of 20th Aug 2010

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Debt August 2010. However, as gilt yields rose, credit

spreads moved down by about 17 bps. The yield on
The 10-year benchmark government bond closed the AAA corporate bond by the end of August 2010
almost flat with yields, rising by a marginal 13 basis stood at the same levels of the previous month at 8.8
points (bps) of August-end 2010 compared to that in per cent. All through the month, tight liquidity
the previous month. After two consecutive policy conditions and somewhat anchored inflation
rates hikes in June and July 2010, bond yields in expectations kept interest rates at the longer-end of
August 2010 remained less the curve from escalating further. On the other hand,
volatile as there were no
fresh triggers. However,
Y
Yields on 10-year
the shorter-end of the curve has already started
witnessing upward pressures from monetary policy
benchmark rise rate hikes and liquidity tightness.
high inflation, rising
marginally
interest rates at the shorter
end of the curve, huge
Outlook
supply of government paper and sustained liquidity
pressures in the market kept the benchmark yield at
Going further, even as tighter liquidity conditions exert
elevated levels. Also, weaker global macroeconomic upward pressures on the 10-year G-sec yield, conclusion
data coming in towards the end of the month brought of a large portion of the government's borrowing
in brief FII selling in debt instruments, thereby programme and lower inflation expectations are
firming up yields. expected to extend some comfort. Also, as transmission
of RBI's policy actions come into play, money market
By the end of August 2010, yield on the 10-year instruments and corporate bonds at the shorter-end of
benchmark stood at 7.9 per cent as compared to 7.8 the curve are likely to see yields move up. On balance,
per cent in the previous month. During the month, yield on the 10-year G-sec is expected to end 2010-11 at
net FII was lower at US$ 649 million against US$ 1.73 around 8.3-8.5 per cent.
billion in the previous month. Meanwhile, as weaker
data on the global front, especially US, brought back
concerns regarding the strength of the recovery, yield
on the 10-year benchmark witnessed a surge in the
last two weeks of the month and traded in the range
of 7.82 - 8.02 per cent.

Corporate bond yields remained sticky all through

Figure 6.2: 10-year G-sec yields, year end & month end (%) Figure 6.3: Risk Premia, year end & month end (%)
Spread between AAA corporate & 10-yr G-sec
9.0 4.0

7.8 7.9

2.1 2.1
7.0
7.0 2.0

6.7 1.1

0.9

5.0 0.0
FY09 FY10 May Dec Aug FY09 FY10 May Dec Aug
FY10 FY11 FY10 FY11
Source: CCIL Source: FIMMDA

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Equity
The key indices in the Indian equity market were
firm in August 2010, compared to previous month's
levels. Significant surge in the indices at the
beginning of the month kept the Sensex high in
August, despite experiencing lower terrains during
the latter part of the month. The BSE Sensex closed at
17,971.1 at the end of the month, higher than that in
July 2010 which was at 17,868.3. Weaker sentiments
from the global front were led by slower growth in
US and softening of lead indicators in China and
Europe. However, stronger growth in India in the
first quarter of 2010-11 and lower inflation during
July extended strong support to sentiments despite
the slower growth in industrial production.
FIIs continued to be the net buyers even though
flows into equity were slightly lower at US$ 2.5
billion in August 2010, against US$ 3.6 billion in the
previous month. The market traded at an average
price-to-earnings
multiple of 21.6 per
cent against 21.2 per I
Indian equity indices
cent in July 2010. remain firm in August
August 2010. NIFTY breached the 5,400 level for most
of the days in August 2010, occasionally touching the
5,500 level. The index registered a monthly gain of 1.8
per cent, while S&P CNX 500 recorded a monthly gain
of 2.4 per cent. Annual returns were however, slightly
lower than that in the previous month when indices
had been characterized by first quarter robust
corporate results and much stronger FII buying.
Overall, Indian indices gained strongly, with some
occasional setbacks coming in from global
macroeconomic indicators. Most of the positive drive
came from strong domestic performance. Smooth
conduct of Reserve Bank of India's (RBI) huge
government borrowing programme, despite the tight
liquidity conditions further buoyed sentiments.
Most global indices declined during August 2010 on
the back of weaker data coming in from advanced
economies. NIKKIE-225 index of Japan faced a sharp
decline of 2 per cent, which was lower than the 3.4 per
cent return recorded in
July 2010. MSCI World
index too witnessed
M
Most global indices
lower negative returns
of 0.3 per cent in
trade lower in August

Though, the sensex August 2010, compared to 3 per cent in the preceding
witnessed slight
2010 driven by strong month. On the other hand, returns from S&P 500
volatility during the domestic growth turned positive to 0.7 per cent after recording negative
month, it managed to monthly returns in the past couple of months.
have a gain of 1.8 per cent by the end of August 2010. However, annual returns were lower than in the
The CNX midcap index continued to outperform the previous months on most global indices.
sensex and increased 4.8 per cent in the month of

Figure 6.4: Indian Equity Market Performance Figure 6.5: Global Equity Market Performance
Yearly returns Monthly returns Yearly returns Monthly returns
19.4
S&P CNX Nifty -11.1 NIKKIE-225
1.8 -2.0

17.9 Sensex 9.1

MSCI WORLD
1.8 -0.3

22.4 7.7
S&P CNX 500 S&P 500
2.4 0.7

47.5 17.7
CNX Mid Cap MSCI EME
4.8 0.7

Source: NSE, BSE Note : Returns are for the period of August 2010 Source: Yahoo Finances Note : Returns are for the period of August 2010

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VII. Global Economic Outlook

Recent data on the global economy has raised new
concerns about how sustainable the ongoing global
economic recovery is. The downward revision in the
US GDP growth and the lower-than-expected
second-quarter growth in Japan are indicating
weaker global economic recovery as the effects of
stimulus are dissipating. However, the recent data
also show relatively better economic prospects in
China and the Euro area.
The US revised its annualised real GDP growth
estimate to 1.6 per cent for the second quarter of 2010
from its preliminary estimate of 2.4 per cent. The US
economy had grown at 3.7 per cent during the first
quarter. The GDP growth decelerated in the second
quarter mainly
because real
private inventory U
US GDP growth for
investment second quarter revised
slowed sharply.
downward to 1.6 per cent
Change in private
inventories, which
from 2.4 per cent.
accounted for 71
per cent of the GDP growth in the first quarter,
contributed 42 per cent to real GDP growth in the
second quarter. As imports are deducted in GDP
calculation, the sharp 32.4 per cent growth in imports
dragged GDP growth. However, an upturn in
residential fixed investment, acceleration in non-
residential fixed investment, and an increase in
government spending partly offset the negative
effects of the strong rise in imports.
Annualised GDP growth in the Euro area accelerated
to 1.7 per cent in the second quarter from 0.6 per cent
in the first quarter. However, the GDP growth in the
member countries of the euro zone varied widely.
Export-oriented countries had strong economic
growth due to a weaker currency whereas countries
that depended on their domestic market for growth
were in economic doldrums since domestic
consumption remained weak in these countries.
While Germany's GDP grew by 3.7 per cent in the
second quarter of 2010, the Greek and Latvian
economies contracted.
In contrast to its 4.4 per cent growth in the first
quarter, Japan's GDP gained by a marginal
seasonally-adjusted annualised rate of 0.4 per cent in
the second quarter of 2010, which was lower than
expected. This has raised concerns about how
sustainable Japan's economic recovery is. A decline in
private residential and public investments has led to
the sharp deceleration of the Japanese economy.
Decreased personal and residential consumption has
also slowed down Japan's economic growth.
US' trade deficit in goods and services widened from
US$ 27.1 billion for June 2009, to a revised US$ 42.0
billion for May 2010, and further to US$ 49.9 billion
for June 2010, its highest point in the past 21 months.
In June 2010, exports were estimated at US$ 150.5
billion whereas imports were US$ 200.3 billion.
The trade deficit has widened over the year as
imports grew at 29.2 per cent whereas exports rose by

Table 7.1: GDP Growth (q-o-q, annualised %) Table 7.2: Trade Balance (Billion, National Currency)

2008 2009 Q3-09 Q4-09 Q1-10 Q2-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10

United States 0.4 -2.4 2.2 5.6 3.7 1.6 United States -40.0 -40.3 -42.0 -49.9 -

United Kingdom 0.7 -4.9 -0.6 1.6 1.2 4.4 United Kingdom -3.2 -3.3 -3.8 -3.3 -

Euro Area 0.8 -4.1 1.6 0.0 0.8 1.7 Euro Area 3.8 0.3 -3.3 2.4 -

Japan -1.2 -5.2 -0.6 4.2 4.4 0.4 Japan 949.9 734.9 316.0 686.0 804.2

China* 9.1 8.7 9.1 10.7 11.9 10.3 China (US$ billion) -7.2 1.7 19.5 20.0 28.7

Source: Statistical Bureau, Respective Countries Note: * y-o-y % Source: Statistical Bureau, Respective Countries

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CRISIL EcoView

17.6 per cent.
In Europe, however, trade balance improved for UK
as well as Euro area. Owing to accelerated exports
growth, trade deficit in UK decreased to £ 3.3 billion
for June 2010, from £ 3.8 billion in May 2010. The
adjusted deficit on trade in goods narrowed to £7.4
billion in June 2010, from £8.0 billion in May 2010.
The surplus on trade in services was £4.1 billion in
June 2010 compared to £4.2 billion in May 2010. In the
Euro zone, after a trade deficit of EUR 3.3 billion in
May 2010, there was a trade surplus of EUR 2.4 billion
in June 2010, narrowing from the surplus of EUR 5.2
billion in June 2009. The surplus narrowed over the
past year since exports grew by 27 per cent whereas
imports went up by 31 per cent.
A sharp slowdown in import growth and a buoyant
export growth enlarged China's trade surplus from
US$ 20.0 billion in June 2010 to US$ 28.7 billion in July
2010, its highest in the past 18 months. Growth in
China's imports slowed sharply to 22.7 per cent for
July 2010 from 34.1 per cent in June 2010. The decline
in China's exports growth was less sharp, from 43.9
per cent in June to 38.1 per cent in July 2010. The
swelling trade surplus will exert more pressure on
China to appreciate its currency to address the global
imbalance.
Japan also had a trade surplus as its exports for July
2010, estimated at JPY 5,982.8 billion, increased by
23.5 per cent. Japan's imports grew at 15.7 per cent to
JPY 5,178.6 billion, increasing its trade surplus to JPY
804.2 billion in July 2010, more than twice the
previous year's level. Japan's export growth has
accelerated since its machinery exports, which
accounts for 20 per cent of Japan's exports, grew by
53.1 per cent over the year.
The annual CPI-
based inflation in the
C
China's trade surplus
widens to US$ 28.7
US increased
marginally in July billion in July 2010.
2010 to 1.2 per cent,
after sliding from 2.0 per cent in May 2010 to 1.1 per
cent in June 2010. Energy prices which rose by 5.2 per
cent in July 2010 remained the major contributor to
inflation. Prices of food items rose by 0.9 per cent.
Core inflation, which excludes volatile energy and
food articles prices, was 0.9 per cent. The month-on-
month seasonally-adjusted CPI inflation, which
captures the momentum of inflation, was 0.3 per cent
for July 2010.
In UK, inflation eased marginally to 3.1 in July 2010,
from 3.2 per cent in June. Transport (1.26 percentage
points) remained the major contributor to the annual
inflation followed by restaurants and hotels (0.38
percentage points) and food and non-alcoholic
beverages (0.37 percentage points). The sub-
component clothing and footwear (-0.18 percentage
point) restrained the inflation rate. Another measure
of inflation based on the Retail Price Index (RTI) also
showed signs of moderation in July 2010. All the items

Table 7.3 Consumer Price Inflation (y-o-y %) Table 7.4: Policy Interest Rate (End of Month %)
Mar-10 Apr-10 May-10 Jun-10 Jul-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10

United States 2.3 2.2 2.0 1.1 1.2 Uited States 0.0-0.25 0.0-0.25 0.0-0.25 0.0-0.25 0.0-0.25

United Kingdom 3.4 3.7 3.4 3.2 3.1 United Kingdom 0.5 0.5 0.5 0.5 0.5

Euro Area 1.4 1.5 1.6 1.4 1.7 Euro Area 1.00 1.00 1.00 1.00 1.00

Japan -1.1 -1.2 -0.9 -0.7 -0.9 Japan 0.1 0.1 0.1 0.1 0.1

China 2.4 2.8 3.1 2.9 3.3 China 5.3 5.3 5.3 5.3 5.3

Source: Statistical Bureau, Respective Countries Source: Statistical Bureau, Respective Countries

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in RPI stood at 4.8 per cent, down from 5.0 per cent in
June 2010.
In contrast, CPI-based inflation in Euro zone
increased to 1.7 per cent in July 2010 as against 1.4 per
cent in June 2010 and -0.6 per cent in June 2009.
Transport (4.5 per cent), alcohol and tobacco (3.3 per
cent) and housing (2.7 per cent) had the highest
annual inflation rates in July 2010. Communications
(-0.8%), recreation and culture (-0.3 per cent) and
household equipment (0.5 per cent) had the lowest
annual inflation rates. Core inflation (excluding
energy and food prices) was at 1.0 per cent. Among
the members of euro zone, Greece had the highest
inflation of 5.5 per cent whereas Ireland at -1.2 per
cent continued to record deflation.
per cent) were the main contributors.
In the monetary-policy front, all the major economies
kept their policy rates unchanged in August 2010. US
Federal Reserve (Fed) kept the target range for the
federal funds rate at 0.0 to 0.25 per cent. However, in
its latest monetary policy committee meeting, the Fed
acknowledged that the pace of recovery in output and
employment had slowed in the recent months. In
order to support economic recovery, the Fed decided
to maintain its holdings of securities at their current
level by reinvesting principal payments from agency
debt and agency mortgage-backed securities in
longer-term treasury securities. Fed has also kept the
option of further monetary stimulus open, if the
economic condition deteriorates further.

Among Asian economies, inflation in China inched Although GDP numbers have been encouraging and
from 2.9 per cent in June to 3.3 per cent in July 2010, its inflation has been declining, Bank of England kept its
highest level of inflation this year, well above the bank rate unchanged at 0.5 per cent. It also decided to
Chinese government's official annual target of 3 per maintain the stock of asset purchases financed by
cent. Higher food prices, resulting from floods in issuance of central
many Chinese provinces, have been the chief
contributor to the inflation. As food prices have
bank reserves at £
200 billion. With
I
If economic conditions
increased in the global market, domestic prices in economic recovery warrant, the US Fed is
China are expected to remain high in the coming across the 16- open for further
months. In contrast, prices in Japan went down country region monetary easing.
further in July 2010 for the seventeenth month in a r e m a i n i n g we a k
row. Japan's inflation rate slipped from -0.7 per cent and inflationary pressures firmly under control,
in June to -0.9 per cent in July. Core inflation European Central Bank (ECB) has decided to keep the
(excluding fresh food) in July 2010 at -1.1 per cent, policy rate unchanged at 1.0 per cent in its August
education (- 13.0 per cent) and household goods (-4.5 2010 meeting.

Figure 7.1: Europe Brent (US$ per barrel) Figure 7.2: Commodity Price Movements
m-o-m y-o-y
90.0
10.4
Aluminium
7.4

76.8 5.4
Steel
75.0 6.7
72.5
-3.0
Soya Oil
5.6

60.0 23.0
Aug-09 Dec-09 Apr-10 Aug-10 Wheat
30.9

Source: Energy Information Administration Source: Metal Bulletin, FAO

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Among Asian countries, Japan maintained its
benchmark overnight borrowing rate at 0.1 per cent
amid signs of moderating recovery. In an
unscheduled Monetary Policy Meeting held on
September 1, 2010, the Policy Board of the Bank of
Japan introduced a new six-month term in the fixed-
rate funds-supplying operation against pooled
collateral. It also substantially increased the amount
of funds to be provided through the operation. These
unconventional steps have been taken in order to
support the economy amid growing concerns about
the strength of global recovery. In China too, the
People's Bank of China did not increase the policy
rates even though inflation is higher than the central
bank's target.
In August 2010, the monthly average crude price was
US$ 76.8 per barrel (bbl), about 1.7 per cent higher
than in July 2010. Crude oil price remained quite
volatile throughout the month with daily prices
fluctuating between US$ 70.6 and 83.8 per bbl. After
peaking at US$ 83.8 in the first week of August 2010,
the price fell thereafter as the outlook for US
economy deteriorated. Among metals, steel prices
increased by 6.7 per cent over that in the previous
month, after declining by 6.3 per cent in July 2010.
Aluminium prices also rose by 5.4 per cent in August
2010 after increasing by 3.2 per cent in the previous
month. Prices of agricultural commodities jumped in
August 2010 as Russia, the world's third-largest grain
exporter, imposed a ban on wheat exports after
drought and unprecedented heat waves in July and
August destroyed its crops. Prices of wheat hence
shot up by 30.9 per cent on a month on month basis to
US$ 907 per tonne. Wheat prices could increase
further as they are still much below their historic high
of over US$ 1,500 per tonne in June 2008. Prices of
agricultural commodities thus are likely to remain
elevated in the months ahead, as global demand for
the commodities is likely to remain higher than their
supply.

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VIII. Annexure

Table 8.1: Annual Data Summary

1
Real GDP growth at factor cost, 2004-05 base (y-o-y%)

Total Agriculture Industry Services

9.7 12.7 10.2 10.5
9.2 8.8 9.7
10.3 9.8
7.4 9.5
6.7 8.5
4.7 9.3
3.7

2.8 3.9
1.6

0.2

FY07 FY08 FY09 FY10 FY11 FY07 FY08 FY09 FY10 FY11 FY07 FY08 FY09 FY10 FY11 FY07 FY08 FY09 FY10 FY11

WPI Inflation (y-o-y%)2

Inflation Primary goods Fuel 14.0 Manufacturing

13.7
16.7
12.3
10.7 11.0 7.6 8.1
10.1
9.1
8.5
5.6 7.0
7.8 7.7
6.2 5.0
4.4
5.4 5.7 4.7 1.0
3.9 3.2

-1.9
FY07 FY08 FY09 FY10 FY11 FY07 FY08 FY09 FY10 FY11 FY07 FY08 FY09 FY10 FY11 FY07 FY08 FY09 FY10 FY11
WPI CPI-IW
3
Index of Industrial Production (y-o-y%)

General Electricity Manufacturing Mining

11.7 10.4
11.5 12.5 12.4 9.8
10.3 7.3
8.6 10.8
9.1
6.4 6.0
5.5 5.3 5.2

2.7 2.9 2.6

2.8

FY07 FY08 FY09 FY10 FY11 FY07 FY08 FY09 FY10 FY11 FY07 FY08 FY09 FY10 FY11 FY07 FY08 FY09 FY10 FY11

External Variables (US$ bn)2

Exports Imports Merchandise Trade Deficit Current account deficit

303.7 118.4
38.4
251.7 278.7 102.1
88.5 28.7
185.3 185.7
163.1 176.6
126.4 59.4
112.2 15.7
43.6
9.9 9.8
68.6

FY07 FY08 FY09 FY10 FY11 FY07 FY08 FY09 FY10 FY11 FY07 FY08 FY09 FY10 FY11 FY06 FY07 FY08 FY09 FY10

Figures for FY11 are:

1 2 3
Apr-Jun, Apr-July, Apr-Jun
Source: RBI, CSO, DGCIS

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Table 8.2: Annual Data Summary

Interest Rates, year-end (%)4

1-yr G-sec 10-yr G-sec Repo rate5 Reverse repo5

7.9 7.9 7.9

7.6 7.7 7.50 7.75
7.6 6.00 6.00
6.6
7.2
5.4 5.75 4.50
5.00 5.00
3.50
4.2 3.50

FY07 FY08 FY09 FY10 FY11 FY07 FY08 FY09 FY10 FY11 FY07 FY08 FY09 FY10 FY11 FY07 FY08 FY09 FY10 FY11

Markets (year-end)4

INR/USD INR/EURO Forex Reserves (US$ bn)6 Net FII flows (US$ bn)7
30.3
51.0 67.1 309.2
67.5 282.5
47.4 63.1 277.0
43.6 46.1 58.1 252.3 16.0
40.0 58.8
199.2 12.2
6.7

-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)5

Sensex S&P CNX Nifty S&P 500 Sensex P/E
17528 17971 5249 5402
15644 4735 1421 20.3 20.1 21.3 21.4
1323 1169
13072 3822
1049
9709 3021 13.7
798

FY07 FY08 FY09 FY10 FY11 FY07 FY08 FY09 FY10 FY11 FY07 FY08 FY09 FY10 FY11 FY07 FY08 FY09 FY10 FY11

Government Finances Money and Banking8

Centre Fiscal Deficit (as % of GDP) State Fiscal deficit (as % of GDP) Non-food credit growth (%) M3 growth (%)

6.6
6.0 28.4
5.5 20.7 21.1
23.1 18.6
3.6 20.5 16.7
2.4 17.5 14.8
3.5 2.5
2.5 1.9 16.9

1.5

FY07 FY08 FY09 FY10 FY11 FY06 FY07 FY08 FY09 FY10 FY07 FY08 FY09 FY10 FY11 FY07 FY08 FY09 FY10 FY11
(RE) (BE) (RE)

Figures for FY11 are :-

4 5 st 6 th 7 8 th
Avg of Apr-Aug, as on Aug 31 2010, as on Aug 20 2010, cumulative of Apr-Aug, for the fortnight ending Aug 13 , 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
Q3FY09 -1.4 2.7 1.3 4.0 1.1 4.4 10.2 28.7

Manufacturing

Electricity, gas & water

Community, social & prsnl serv

Agri, forestry& fishing

Q4FY09 3.3 -0.3 0.6 4.1 5.7 5.7 12.3 8.8

Mining & Quarrying

Construction
Q1FY10 1.9 8.2 3.8 6.6 4.6 5.5 11.8 7.6

Q2FY10 0.9 10.1 9.1 7.7 4.7 8.5 11.5 14.0

Q3FY10 -1.8 9.6 13.8 4.7 8.1 10.2 7.9 0.8

Q4FY10 0.7 14.0 16.3 7.1 8.7 12.4 7.9 1.6

Q1FY11 2.8 8.9 12.4 6.6 7.5 12.2 8.0 6.7

Real GDP - at 2004-05 prices (y-o-y%) GDP Deflator (%)

Q3FY09 6.1 -1.4 1.6 11.4 8.7 10.0 9.3 8.4

Q4FY09 5.8 3.3 2.1 8.3 3.2 7.0 2.0

Agriculture

2.9

Agri & allied services

Q1FY10 6.0 1.9 4.6 7.9 0.9 6.0 -0.5 0.3
Services
Industry
Overall

Overall

Services
8.6 0.9 10.7 0.7 -1.5 0.3
Q2FY10 7.8 8.6

Q3FY10 6.5 -1.8 11.1 7.2 5.8 13.6 2.9 4.9

Industry
Q4FY10 8.6 0.7 13.3 8.4 9.7 16.5 7.3 9.2

Q1FY11 8.8 2.8 10.3 9.7 11.8 9.6 5.9 15.9

WPI Inflation (y-o-y%) CPI Inflation (y-o-y%) Commodity prices

Q3FY09 8.6 11.9 6.7 7.9 10.2 11.1 58.3 585

Steel prices ($/tonnes)

Agricultural Labours

Q4FY09 3.2 7.6 -3.7 4.1 9.4 10.6 42.9 385

Crude-WTI($/barrel)
Industrial workers
Overall

Q1FY10 0.6 6.5 -8.1 1.5 8.9 10.3 59.4 390

Mfing
Primary

Fuel, power&
lubricants

Q2FY10 -0.1 8.0 0.2 11.8 13.0 68.2 587

-9.3
Q3FY10 5.0 12.9 -0.5 3.8 13.3 15.5 76.1 508

Q4FY10 10.2 16.6 10.4 7.4 15.3 16.6 78.6 579

Q1FY11 11.0 17.3 13.9 7.2 13.7 13.9 77.8 663

Index of Industrial Production (y-o-y%) Used-based classification of IIP (y-o-y%)

Q3FY09 0.8 0.5 2.0 2.9 2.4 3.8 -5.7 3.4

Q4FY09 0.5 0.3 0.8 2.9 0.4 7.1 -2.8 1.2

Manufacturing

Capital goods

6.3 7.5
Basic goods

3.8 3.4 7.0 6.1 1.3 -0.4

Intermediate goods

Q1FY10
Electricity
General

Mining

Q2FY10 9.0 9.2 9.0 7.4 5.9 8.2 11.7 10.1

Consumer goods

Q3FY10 13.3 14.5 10.3 3.8 6.1 20.0 19.3 12.5

Q4FY10 15.2 16.1 12.4 7.1 10.3 42.8 16.7 7.5

Q1FY11 11.7 12.4 10.4 5.5 6.9 37.9 9.8 9.2

Source: CSO

September 2010

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CRISIL EcoView

Table 8.4: Full description of abbreviations used in the text

Sectors Abbreviation
Beverages, tobacco and related products Beverages
Wool, silk and man-made fibre textiles Wool
Jute and other vegetable fibre textiles Jute
Wood and wood products Wood
Paper and paper products Paper
Leather and leather & fur products Leather
Basic chemicals and chemical products Chemical
Rubber, plastic, petroleum and coal products Rubber
Non-metallic mineral products NMMP
Basic metal and alloy industries Metal and Alloy
Metal products and parts Metal Products
Machinery and equipment Mach. & Eqp
Transport equipment and parts Transport Eqp
Other manufacturing industries Oth. Manufacturing

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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 /
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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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