INDIA

3 May 2010

Economy
Macro theme

The fragility of the rural growth

Indias rural growth is pivoted on farm sector policy interventions, including aggressive procurement & minimum support prices (MSP), input subsidies and massive credit infusion. But is this strategy sustainable? We foresee inconsistencies leading to a decline in the farm sectors terms of trade, volatility in farm incomes, credit concerns and aggravation of the fiscal burden. Ironically, the food subsidy policy may have hurt consumption. Food shortages did not cause inflation: We believe the steep rise in food inflation was not caused by inadequate supplies, or even a cyclical burst of inflation. Rather, it was a manifestation of policies favouring price escalation. High MSP not sustainable: The elevation of the farm sectors terms of trade (TOT) to a 30-year high would create structural limitations. Normalization would require either a 12-14% fall in food grain prices, or 1516% rise in manufactured products prices. Ensuring remunerative prices for the farm sector would be a challenge, going forward. Is the rising food subsidy helping? The food subsidy bill has been expanding, but cereal consumption has been falling. This inconsistency has been aggravated due to aggressive MSP increases. While benefiting a relatively small number of producers, high food prices has hurt aggregate consumption & encouraged inconsistent cropping patterns. Rising leverage and risk of renewed defaults: Institutional lending to the farm sector has risen to 91% of Agri GDP and could rise further to 170%. Ironically, however, farm sector growth has declined. Policy interventions may have created moral hazard problem for both lender and borrowers. We foresee NPA ratios rising to 10-15%, with an upside bias. Themes to play: Based on our assessment and possible policy responses, we believe the agri-driven story would sober a little. Consumption-led demand recovery would be oriented towards non-durables, but the volatility in food grain procurement-related flows would slow growth for durables and autos. Concerns on credit risk would have implications for PSU banks. The big worry is on the fiscal health.

Indias food grain buffer ( 000 tonnes)

600 500 400 300 200 100 0 May-04 Sep-04 May-05 Sep-05 May-06 Sep-06 May-07 Sep-07 May-08 Sep-08 May-09 Sep-09 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

Source: Economic Survey, Centrum Research

Dhananjay Sinha dhananjay.sinha@centrum.co.in +91 22 4215 9619 Komal Taparia komal.taparia@centrum.co.in +9 1 22 4215 9195

Exhibit 1: Agri sector ToT at a 30 year high

170 160 150 140 130 120 110 100 90 Apr-82 Apr-84 Apr-86 Apr-88 Apr-90 Apr-92 Apr-94 Apr-96 Apr-98 Apr-00 Apr-02 Apr-04 Apr-06 Apr-08 Apr-10 WPI Terms of trade (ToT) w.r.t manufacturing sector Trend lines

Exhibit 2: Rising agri debt leveraging, but weak growth

100 90 80 70 60 50 40 30 20 10 0 FY71 FY74 FY77 FY80 FY83 FY86 FY89 FY92 FY95 FY98 Estimated 20 15 10 5 (5) (10) (15) FY01 FY04 FY07 FY10E 5 Yr MA

Food grain/Manufactured Poly. (Primary food/Manufactured)

Primary food/Manufactured Poly. (Food grain/Manufactured)

Total Credit/Agri GDP (% lhs)

Agri GDP Real (%YoY, rhs)

Source: CSO, Centrum Research

Source: CSO, RBI & Centrum Research estimates

Please refer to important disclosures/disclaimers in Appendix A

Summary: The fragility of the rural growth

Indias rural growth story is structured around policy interventions in the farm sector. While there is an attempt to improve long-term productivity, through higher public spent on rural infrastructure, the emphasis continues to be centred on the cereal sector rather than rural industrialization. Interventions in the farm sector are mainly in the form of high support prices for food grains; demand support by creating abnormally high buffer stocks; cost-side support through various subsidies (mainly power and fertilizer), and massive infusion of institutional credit. The question is how sustainable is this strategy? We highlight some of the inconsistencies the correction of which would lead to decline in the farm sectors terms of trade (ToT) and result in volatile rural incomes. Elevated indebtedness increases the risk of renewed defaults, eventually aggravating the fiscal burden. We are of the view that food subsidy policy has harmed consumption. The expected correction in food grain prices would gradually reverse this adversity. Food shortage did not cause inflation: We believe the steep rise in food inflation has been not caused by supply shortage, or even a cyclical burst of inflation. Rather it a manifestation of policies favouring price escalation. The cumulative rise in MSP since FY06 has been the steepest since 1970s. The buffer stock of food grains has remained in excess since April 2008. Steep rise in MSP not sustainable: The farm sectors ToT has risen to 30-year high, thereby creating structural limitations. Normalization would either require a 12-14% decline in food grain prices or 15-16% rise in prices of manufacturing products. Hence, the fundamental reason for the fall in market prices is unlikely to be measures taken to curb inflation. It will rather be driven by misalignment in prices, supply burden arising from excess buffer and supply response in the next season and term of trade adjustments. The moderation in cereal prices since Jan 2010 (-1.6% for cereal WPI till Mar 2010 and 3.7% for wheat) is likely to accelerate going forward. Volatile prices, elevated cost would be a burden: The long-term impact of higher food prices on productivity is weak as overtime, the MSP benefits contribute to escalation of cost. The combination of downward inelastic cost side and volatile market prices can create volatility in farm income and hence, engender renewed credit default concerns. Food subsidy policy plagued by inconsistency: The inverse trend of structural decline in cereal consumption and expansion in the food subsidy bill is a glaring inconsistency, largely resulting from aggressive increase in MSP. While the policy benefits relatively less number of producers, the price effect of the rising subsidy bill in absence of productivity growth, is ironically hurting cereal consumption. It is also creating mismatch between changing consumption pattern which is deemphasising cereal consumption and cropping pattern which encourages it. Rising indebtedness a recipe for more defaults: Policy thrust have resulted in an eight-fold rise in institutional lending to the agri sector over FY00, or 91% of agri sector GDP and could rise to 170% by FY18 (as per our simulation). Ironically, however, farm sector growth has slowed. Apart from the high level indebtedness, the risk of renewed default is elevated due to the moral hazard problem engendered by frequent debt restructuring & waiver programs and changes in NPA norms: While lenders are induced to treat Agri lending as quasi-sovereign, such initiatives also encourage poor repayment culture. Is the income effect of higher procurement prices broad-based? The glaring divergence between booming consumer durable & vehicle sales and declining growth for non-durables, suggests expenditure inequality. A broad-based spill-over impact of higher MSPs on rural income is not evident. On the contrary, by elevating food prices it may be hurting three-fourth of the rural population and most of the urban population. High negative price elasticity for food grains (-0.6) during FY05-09 suggest that demand conditions may have worsened in FY10. Private final consumption expenditure (PCE) grew modestly at 3.5% YoY during Q1-Q3 FY10. Possible policy options: De-linking from MSP-based procurement Moratorium on raising MSP and temporary suspension of official procurement of food grains Promoting exports (but that would depend on global food prices) Increase issue prices for public distribution

Economy

Key takeaways
Elevation in NPAs for public sector banks
Expected rise in agri-credit NPA ratio to 10-15% will be a concern for the public sector banks. While overall share of agri-credit to overall credit is still lower than the targeted 18%, sustenance of NPA ratios at these levels can impair their asset quality. Policy interventions in the past viz. loan waivers and change in NPA norms, does provide comfort, banks would still have face the burden as policy responses typically lag. Given the capital constrains arising from 51% government holding, a weakening in loan quality may not be beneficial. Biggest concern on fiscal health We believe strains on fiscal condition will arise from multiple factors: Expected enlargement of central governments food subsidy bill by 35-24% over FY10 estimate (depending on whether PDS is made universal or not) due to addition to number of BPL families (implication from the Tendulkar Committee Recommendation, 2009). FY11 Union Budget has earmarked lower food subsidy at Rs556bn (Rs560bn in FY10). The consolidated fiscal impact may be lower if state governments respond by lowering their food subsidy budgets. The new poverty line estimate will also require higher public spending on health services and medicine, and free education those that qualify as BPL. Food management itself can result in higher burden for several reasons a) reluctance to increase PDS issue price, b) rising carrying cost for high food buffer and c) possible export subsidy. Potential burden from rising farm loan defaults: If NPA level rises to 10-15%, the eventual fiscal burden for the next waiver scheme large-around Rs650-800bn per year, with upside bias. Actual burden can be larger if the fiscal response is delayed (Rs716bn debt waiver/relief package 2007 was 30% of FY06 direct institutional credit balance). Taking into consideration the near-term concerns of expected under-recovery of oil PSU companies at Rs900bn, the additional food subsidy burden, and medium term possibility of renewed debt waiver, we believe constrains on fiscal management can be significant. While expected tax reforms viz. GST and DTC can provide comfort, strong cyclicality in Tax/GDP ratio during 2000s suggest that rise in structural expenditure can still upset the fiscal balance.

Decline in food prices will help, but a steep decline is required for bigger gains
The expected correction in food grain prices should benefit overall consumption spending. But given the steep rise in food prices since FY07, we believe a serious recovery would require sharp correction (>15%). Decline in food prices should also benefit FMCG companies from the cost side. A 41% expansion in number of households under the BPL category will help reduce cost of cereal consumption for the additional BPL households in the rural area and can potentially boost overall consumption, particularly FMCG. The relaxation in income tax slabs (Union Budget FY11) is positive on monthly disposable incomes. However, the relaxation would impact only 2% of households.

Volatility in farm income could impact demand for durables

In the past cycle, increase in MSPs and market prices benefited the rural rich. For these sections, positive income elasticity is higher than the absolute negative price elasticity. Hence, the fall in food grain prices would be negative for their income flows. This could impact demand for durables and vehicles. To the extent that upsurge in rural credit was feeding into demand for durables and autos, expected slowdown in agri credit growth in response to credit concerns can impact demand for these sectors. Tractors: Aided by increase in food grain prices and boost to credit flows resulted in a 24% YoY growth in tractor sales in FY10, ahead of the typical 7 year demand cycle. The growth upsurge in FY10 is significantly higher than the 6% long term average. Volatile in farm income can slow volume growth.

Economy

Are supply shortages the real cause of high food inflation?

Contrary to the common view1, we believe the steep rise in food inflation is not caused by supply shortage (except pulses) or drought conditions in FY10, or even a cyclical burst of inflation2. Rather, it is largely a manifestation of policies favouring price escalation. The cumulative rise in MSPs since FY06 has been the steepest since 1970s. Inflationary impulses have also been aided by aggressive government consumption spending. But contrastingly, food grain buffer has remained in excess since April 2008 and is currently at 8 year high. We believe food inflation beyond the threshold inflation of 4-5% is inconsistent from demand-supply perspective. 1) Long-term data refute arguments that droughts necessarily result in a sustained rise in food prices. The steepest fall in food grain production in FY03 was not accompanied by escalation of food prices. Out of the three big episodes of sustained rise in food grain prices (including FY0710), the earlier two (FY90-92 and FY98-00) occurred when food grain production was rising. But all three episodes were characterised by steep rise in MSPs (Exhibit 12). However, the short-term impact of drought on price expectation cannot be entirely ruled out. 2) Recent steep rise in CPI and food inflation has been caused by sustained increase in MSPs. The MSP for wheat increased 69% during FY06-10, paddy 72% and pulses 60-80% (Exhibits 4 and 5). Exhibit 3: Production shortfalls have seldom caused price rise
300
FY88: Production: -6.1%

Unlike the consensus view, we believe the steep rise in food inflation has not been caused by drought like conditions in FY11

Key factors behind the consistent rise in food prices are consistent rise in MSPs across most food grains and boost in government consumption spending

WPI: Rice

FY10: Production: -11.7%

250
FY98-00: Production: 4%

MSP for paddy has increased to 72% over FY06 but wholesale price index for rice rose lesser at 42%

200
FY83: Production: -11.5% FY90-92: Production: 2%

150

100
FY03: Production: -11.5% FY05: Production: -6.1%

50

FY96: Production: -11.5%

0 Aug-91 Aug-02 Apr-84 Apr-95 Feb-86 Feb-97 Apr-06 Jun-82 Jun-93 Jun-04 Dec-87 Dec-98 Feb-08 Dec-09 Oct-89 Oct-00

Updated till March 2010; Red boxes denote rise in production of paddy and grey boxes denote periods of significant fall Source: CMIE, Centrum Research

Exhibit 4: Steepest rise in MSPs for cereals during FY07-FY10

1,200 1,000 800 600 400 200 0 FY76 FY78 FY80 FY82 FY84 FY86 FY88 FY90 FY92 FY94 FY96 FY98 FY00 FY02 FY04 FY06 FY08 FY10
MSP for various crops (Rs / quintal)

Exhibit 5: Highest ever rise in MSPs for pulses

3,000 2,500 2,000 1,500 1,000 500 0 FY76 FY78 FY80 FY82 FY84 FY86 FY88 FY90 FY92 FY94 FY96 FY98 FY00 FY02 FY04 FY06 FY08 FY10
MSP for various pulses (Rs / quintal)

Paddy (common)

Coarse cereals

Wheat

Gram

Arhar(Tur)

Moong

Source: RBI, CCEA, Centrum Research

Source: RBI, CCEA, Centrum Research

1 Budget speech FY11: Momentum in food prices due to flare-up of global commodity prices preceding the financial crisis in 2008. It was expected that food inflation will cool off during the agriculture season beginning June 2009. However, the erratic monsoons and drought like conditions reinforced the supply side bottlenecks. 2 Prime Minister Feb 6, 2010: This is, however, not the first time we are facing high rates of inflation in food articles. We had a similar upsurge in 1998. Food prices are subject to cyclical bursts of inflation. Procurement prices of have been increased significantly in recent years deliberately to provide an adequate incentive for farmers to produce more food.

Economy

3)

Per capita availability (including change in food grain buffer with FCI) of food grains is 5% higher than FY05. Buffer stock of food grains has been higher than the minimum norm since April 2008 and is currently at 3.5x the norm (Exhibit 8). This implies procurement interventions have helped constrain supplies and fuelled market prices. Exhibit 7: Improved food grain availability (including change in buffer stock)
(MT) 220 200 180 160 140
4 2 0

Exhibit 6: Unlike FY10 earlier production shortfalls and drought in FY03 did not cause runaway CPI inflation
(% YoY) 25 20 15 10 5 (5) (10) (15) (20) FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 (% YoY) 14 12 10 8 6

(kgs p.a) 190 180 170 160 ` 150 140 130 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10E

120 100

Food grain production (LHS)

Industrial CPI inflation

Rural CPI

Net availability

Percapita availability(RHS)

Source: Bloomberg, RBI, Centrum Research

Source: Depart of Agri, Centrum Research Estimates

Exhibit 8: Indias food grain buffer stock is 3.5x the minimum norm
('000 tons)

600 500 400

Indias buffer of total food grains has been consistently higher than the norm since Apr 2008

300 200 100 0

Source: Department of Food & Public Distribution, Centrum Research

4) Prolonged period of net negative imports of food grain implies that India is essentially a food surplus country. India was exporting even in FY03, when production fell 18%. In the past food grain export has been encouraged to support higher food domestic prices. 5) Structurally demand pressures also seem to be lacking given the 18.4% decline in per capita cereal consumption over the past two decades. Recent PCE data (FY05-09) also shows that real consumption expenditure on food has decreased to 28% from 34% (discussed later, Exhibit 16 & 53) Exhibit 9: India has been an exporter of food grains since FY96
(2)

Prolonged period of net negative imports of food grain indicate that India is essentially a food surplus country. We were exporting even in FY03 when production fell 18%. In the past exports have been encouraged support higher domestic prices

(10) Net imports (Mn T) (12) FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09

Source: RBI, Centrum Research

M 04 ay -0 Se 4 p0 Ja 4 nM 05 ay -0 Se 5 p0 Ja 5 nM 06 ay -0 Se 6 p0 Ja 6 nM 07 ay -0 Se 7 p0 Ja 7 nM 08 ay -0 Se 8 p0 Ja 8 nM 09 ay -0 Se 9 p0 Ja 9 n10
Minimum buffer norm Actual
(4) (6) (8)

Ja

n-

Economy

6) The correlation of CPI inflation with real government consumption spending is high CPI rural (82%, FY99-FY10) and CPI urban labour (69%). This high sensitivity indicates pressures arising from factors (Exhibit 11) like aggressive food grain procurement and spill over impact of huge rise in government consumption spending. Given that ToT for the farm sector vs manufacturing has risen to a 30-year high (next section), we believe increases in MSPs would be minimal or remain stagnant, going forward. While this may be touted as success of measures taken to curb inflation, the fundamental reasons for the fall in food grain prices would be supply responses and a glut in FCIs stocks. Assuming normal monsoon, supply response can be strong. Initial signs are already visible; cereal prices have softened since Jan 2010 (1.6% for cereal WPI till Mar 2010 and -3.7% for wheat). In future, the bigger challenge would be preventing market prices from falling sharply, curbing food subsidy bill and finding alternative means of to offload stocks viz. exports or larger allocation under public distribution system (PDS). Exhibit 10: Strong relation between inflation and real government consumption spending
25 20 15 10 6 5 (5) FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 4 2 0 14 12 10 8

Exhibit 11: Inflation correlation and impact from government consumption expenditure
Correlation 0.90 0.80 0.70 0.60 0.50 0.40 0.30 0.20 0.10 0.00 CPI rural Correlation CPI industrial WPI prim WPI Inflation impact of 100bp rise in real Govt. spending 9 0 36 28 52 40 30 20 10 (bps) 60 50

GFCE

Industrial CPI inflation

Rural CPI

Note: FY99-FY10

Source: Bloomberg, CSO, Centrum Research

Source: Bloomberg, CMIE, Centrum Research

Misaligned prices and supply responses could manifest in volatile farm incomes
Wholesale prices for food grain have not increased in line with MSPs indicating possibility of significant misalignments between MSPs, farm gate, wholesale, retail and import parity prices.

Phases of spikes in MSPs typically result in misalignments between harvest, wholesale, retail and import parity prices. Several studies highlighted this phenomenon during 1999-20033. Hence, its not surprising that we are witnessing similar conditions now (Prime Ministers statement, Feb 2010). Misalignments arise from inflationary expectation built up at different stages of distribution chain. Misalignments have also been caused by the fact that while procurement is concentrated in few states, off-take in many other states under PDS has been poor. These misalignments can cause sharp drop in market prices later due to lagged supply responses and prevailing large buffer stock. The ToT for the agriculture sector (vs manufacturing WPI) have spurted sharply to 30-year high (Exhibit 13). Normalization to the trend would either require manufacturing index rising by 15-16% or a 12-14% decline in primary food/food grain prices. The actual scenario may be somewhere mid-way and will also be a function of how services sector inflation responds. Exhibit 12: Phases of steep rise in MSPs are followed by high volatility in market prices
(% YoY) 35 30 25 20 15 10 5 (5) FY84 FY86 FY88 FY90 FY92 FY94 FY96 FY98 FY00 FY02 FY04 FY06 FY08 FY10

Recent official statements of linking procurement prices to free market pricing strengthens our argument for correction in primary food price going forward

Market driven prices could be volatile going ahead due to near term lagged supply responses

(10)

WPI Rice

MSP Paddy

Source: RBI, Centrum Research

3

Ashok Gulati 2003: Policy reforms & farm sector adjustments in India

Economy

Exhibit 13: Rise in MSPs have resulted in surge of ToT for farm sector, but likely to reverse
While steep in crease in MSP since FY07 helped elevate the terms of trade for the farm sector to a 30 year high, the next round of normalization will emanate from correction food prices and or rise in manufacturing sector inflation
170 160 150 140 130 120 110 100 90 Apr-82 Apr-84 Apr-86 Apr-88 Apr-90 Apr-92 Apr-94 Apr-96 Apr-98 Apr-00 Apr-02 Apr-04 Apr-06 Apr-08 Apr-10 WPI Terms of trade (ToT) w.r.t manufacturing sector Trend lines

Normalization of ToT takes a considerable period and characterized by prolonged relative stagnancy in farm sector prices

Food grain/Manufactured Poly. (Primary food/Manufactured)

Primary food/Manufactured Poly. (Food grain/Manufactured)

Terms of trade indexed at April 1982 levels; based on monthly WPI data Source: CSO, Centrum Research

Exhibit 14: Primary food inflation could fall into negative territory
30 25 20 15 10
WPI inflation

Steep rise in food inflation is typically followed by declines to negative territory

5 (5) (10) Apr-83 Apr-85 Apr-87 Apr-89 Apr-91 Apr-93 Apr-95 Apr-97 Apr-99 Apr-01 Apr-03 Apr-05 Apr-07 Apr-09

Food grains

Manufactured products

Source: CSO, Centrum Research

MSPs to remain unchanged for a while: The combination of weak aggregate consumption, adverse ToT for the non-farm sector and the fiscal constraints, would imply that MSPs for food grains would remain unchanged for a while. Phases of intervention-driven rise in cereal inflation are often followed by prolonged stagnancy as the normalization of ToT happens over several years (Exhibit 13).
Long term impact of increase in prices on productivity is weak as over time the MSP benefits contribute to escalation of cost. Downward inelastic cost side and volatile market prices can potentially create volatility in farm income and credit concerns

Farm income to witness volatility: Downward inelastic cost side and decline in market prices could create volatility in farm income as margin is typically narrow (10-15% for paddy). The long-term impact of higher food grain prices on productivity is weak as overtime the benefits of higher MSP contribute to escalation of costs (rentals, labour, management and other costs, Exhibit 15), while market prices can be volatile. The new nutrient-based fertilizer policy would likely induce upside pressure on production costs in the medium-term. Also there is some evidence that labour shortages induced by the rural employment guarantee scheme (NREGA) is increasing wage rate in the farm sector and in absence of productivity growth is increasing the cost of cultivation. Sustained lack of productivity growth is posing viability issues for the cereal sector. Exhibit 15: Labour and rental account for 60% of cost of cultivation (paddy: 6 major states)
% 120 100 80 Fixed cost % of total cost Other fixed Interest: fixed cap Rental Mis. WC Interest:WC Irrigation Insecticide 40 20 0 Cost of cultivation Value of output W orking capital Manure Fertiliser Seed Machine Labor

A large portion of non-labor working capital cost is subsidized, fertilizer, seeds and irrigation (including diesel)

60

Nearly 88% of rental cost is imputed rental value of owned land, the balance 22% is the actual rent paid Source: Fertilizers Statistics, 2006-07, Fertilizers Association of India, Centrum Research

Economy

Food subsidy bill rising, but cereal consumption declining

While real per capita consumption of cereals has declined by 20% over the past two decade food subsidy in FY10 has risen to about 25% of total consumption expenditure on cereals

The inverse relationship of falling cereal consumption and expanding food subsidy is incongruous. While the cereal consumption/capita has declined 18.4% since 1991, the central governments food subsidy bill (Rs582.3bn FY10) has risen to 23% of total expenditure on cereals (30% including subsidy from states). Exhibit 16: Falling cereal consumption and rising food subsidy
(Kg/ann) 160 155 150 145 140 135 130 125 120 115 110 FY91 FY92 FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10E (%) 25 20 15 10 5 0

Structural disparity in food policy reflects in inverse trends in expanding food subsidy and falling cereal consumption and rising food prices

Per capita cereal consumption

Food subsidy/cereal & breads consumption exp (rhs)

Note: Per capita cereal consumption represents NSS rounds 12 month ending Jul of every year Source: NSSO, CSO, Union Budgets and Centrum Research

Exhibit 17: Trend decline in per capita food grain consumption

Per capita consumption of food grain has been declining both in rural and urban areas kg/month Rice Wheat Coarse Cereals Cereals Pulses FY00 Rural 6.75 4.49 1.48 12.72 0.84 Urban 5.21 4.76 0.45 10.42 1.00 FY08 Rural 6.36 4.19 1.12 11.67 0.67 Urban 4.74 4.51 0.42 9.68 0.78

Source: 55th (1999-2000) and 64th (2007-2008) rounds of NSSO, Centrum Research

Three principal causes for the surge in food subsidy bill are: 1) Unchanged issue prices of food grains under the public distribution system (PDS) since 2002 2) Aggressive government interventions through massive increase procurement prices and aggressive procurement of food stock by FCI. Government has been consistently giving additional incentive bonus over MSPs for paddy since FY07 (Exhibit 18) 3) Increase in taxes and levies on procurement by surplus producing states Points 2 and 3 are more important factors contributing to rise in subsidy as they have caused significant increase economic cost4. Exhibit 18: Widening gap between procurement price and issue price
Rising economic cost of procurement and unchanged issue prices

Rs/quintal Season 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Procurement price MSP Wheat Paddy 620 a 630 640 650 b 750 d 1,000 1,080 1,100 530 a 550 560 570 580 c 645 e 850 f 1000 g

PDS issue price Economic cost Wheat Rice 884 1,165 919 1,236 1,019 1,304 1,032 1,351 1,178 1,391 1,353 1,564 1,393 1,790 1,403 1,894 APL 610 610 610 610 610 610 610 610 Wheat BPL 415 415 415 415 415 415 415 415 AAY 200 200 200 200 200 200 200 200 APL 795 795 795 795 795 795 795 795 Rice BPL 565 565 565 565 565 565 565 565 AAY 300 300 300 300 300 300 300 300

a One-time special drought relief of Rs20/ql & Rs 10/ql for paddy & wheat respectively; b Incentive bonus of Rs50/ql for wheat in 200607 c Bonus of Rs40/ql allowed for paddy in 2006-07 till Mar 07. Extended up to Sept 07 for Andhra Pradesh, Tamil Nadu, Orissa, West Bengal and Chhattisgarh & to Mar 07 for Bihar and Kerala. d Bonus of Rs 100/ql given for wheat procured in 2007-08. e Bonus of Rs 100/ql for paddy/rice in the entire 2007-08. Rs50/ql allowed for paddy for 2008-09. g Bonus of Rs50/ql for paddy for 2009-10 in Oct 2010. APL: above poverty line, BPL: below poverty line and AAY: Antodaya Anna Yojna Source: Economic Survey FY10, Centrum Research

Economic cost of food grains includes MSP (and bonus), procurement incidentals and the cost of distribution. The FCI is reimbursed the difference between the economic cost and the issue price creates food subsidy. High incidence of taxes and levies of over 10% on the procurement of food-grains in Punjab, Haryana and Andhra Pradesh increases the economic costs.

Economy

The pursuit of benefiting food grain sector through aggressive increase in MSPs and build up of buffers in the backdrop of declining per capita food grain consumption is fundamentally inconsistent. The disparity is discernable given that India is a food grain surplus country, exporting food grains

While the move benefiting relatively fewer number of people (nearly one-fifth of rice and wheat grain producers in surplus states of Punjab, Haryana, Uttar Pradesh, Madhya Pradesh, Andhra Pradesh and Chhattisgarh benefited from MSP), a large part of the population is adversely impacted due to rising inflation. Other related issues are: Mismatch between subsidy policy and consumption pattern. Aggressive increase in MSPs incentives misaligned cropping pattern (including associated ecological damage) and prevents allocation for much-needed crop diversification. The surplus buffer stock with the FCI and rising economic cost leading to fiscal burden constraining FCIs ability to procure food grains in the subsequent seasons.

What are the possible government responses?

De-linking food grain prices from MSP: Shifting to market price-based procurements as recommended by the Planning Commission is an indication that MSP would lose relevance. Reliance on free market prices, in the current context, could imply reduction in realisation prices for producers. Moratorium on raising MSP: The government could put a moratorium on MSP and temporarily suspend official procurement, rollback bonuses. Promoting exports: This would depend on global food prices. The softening of global wheat prices would make exports difficult without substantial subsidy. A 34% jump in the combined harvests of Australia and Russia over two years is creating the biggest wheat glut since 2002 (Bloomberg). Increase issue price: The government could hike the issue for both below poverty line (BPL) and above poverty line (APL) categories to cover a part of the holding costs. New poverty line: The Tendulkar Committee (2009) recommendation adds 26.5mn (or 40% more) households (largely rural) to the below poverty line (BPL) category, which might increase the food subsidy bill of the central government by 35-24% of FY10 estimate to Rs700-750bn (depending on whether PDS is made universal or not).

Economy

Agriculture credit: Is there a debt sustainability issue?

Agriculture debt-to-GDP ratio could grow to over 170%
The policy thrust5 towards increased rural lending (largely agriculture credit) and directives to banks to grow farm credit 30% annually has resulted in an eight-fold rise in institutional Agri lending (including direct & indirect lending; excluding food credit) over the past decade. Contrastingly, however, the contribution of agriculture sector to overall GDP has fallen: 36% FY81, 29% FY91, 22% FY01 and 18% currently. Exhibit 19: Build up of institutional credit to Agri sector
(Rsbn) 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 FY90 FY91 FY92 FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09

Exhibit 20: Increasing contribution of banks in Agri credit

Outstanding credit (Rs bn) FY00 420 334 60 814 674 130 122 925 1739 FY08 957 2254 332 3543 1480 934 386 2800 6344 8154 7826 FY09E* 1056 2818 421 4294 1624 1121 507 3252 7547 8984 8618

Direct
Co-operatives SCBs RRBs Total direct Indirect Co-operatives SCBs REC Total indirect Total direct+ indirect

Agri GDP: Nominal

New^ Old* 4465

SCBs

Co-operatives

RRBs

REC

SCB-schedule commercial banks, RRB-Regional rural banks, REC-Rural electrification corporation; Source: RBI, Centrum Research At 91% Agri GDP leverage in FY10 is higher than the credit leverage of the entire economy at 55%. The ratio could close to 140% if informal lending is included

Partly estimated, ^ New GDP series base FY04; * base year FY00 Source: RBI, Centrum Research

Ironically, the steep rise in lending has not been matched by surge in the agriculture real GDP growth, suggesting declining productivity of capital deployed. The sector grew 2.3% during 2000s (including 4.6% during FY06-08) lower than 3.2% in 1990s, when credit availability was poor. Multiplying credit balance may be feeding into escalating inflation for inputs and output or household consumption without enhancing productivity. The proportion of debt going into productive purpose has been declining (62.9% 2002 from 71.6% in 1981, NSSO). At 91% of Agri GDP, the current credit-to-GDP ratio (both nominal values, FY10E) is higher than that of the entire economy at 55%. Assuming a moderate 30% share of farm lending from informal sources (42.4% in FY09, NSSO) this ratio could closer to 140%. Our simulations indicate that in the base case (Exhibit 22), the institutional credit/GDP for the sector can rise to 170% by 2018 (assuming agri GDP growth at 3% and inflation at 5%). The risk of enlargement is high in the near-term as we expect food grain prices to correct or remain stagnant. For an unchanged debt-to-GDP ratio at 91%, nominal agri GDP growth will have to sustain at 21%. Such a scenario is unlikely given the structural decline in per capita food consumption. Exhibit 21: Steep rise in agri debt leveraging and falling real growth
100 90 80 70 60 50 40 30 20 10 0 FY71 FY74 FY77 FY80 FY83 FY86 FY89 FY92 FY95 FY98 Estimated 20 15 10 5 (5) (10) (15) FY01 FY04 FY07 FY10E 5 Yr MA

Institutional credit to Agri sector has rising eight fold in the last decade but ironically its growth has declined over the previous decade

The key risk is that debt/GDP ratio for the sector will continue to enlarge Leveraging in the Agri sector has been fasted than the overall economy. But falling real growth exposes the sector to debt sustainability issues which can lead to aggravating defaults unless food inflation is allowed to keep escalating. This could be a tight spot for the economy

Total Credit/Agri GDP (% lhs)

Agri GDP Real (%YoY, rhs)

Note: Total credit includes direct and indirect outstanding balance from all sources, including Banks, Cooperative banks, RRBs & REC Source: RBI, Centrum Research

RBI initiated policy measures in pursuance to the Union Budget FY05 to achieve enhanced credit flow to agriculture. Banks were advised to grow agricultural credit flow at 30% per year. Direct credit: Lending to farmers for agricultural purposes, largely short-term loans for raising crops. Also includes medium to long-term loans for agricultural implements. Indirect credit: finance provided by banks to through other agencies

10

Economy

Exhibit 22: Simulated projections for debt/GDP ratio for agriculture sector
(% Agri GDP) 250 200
Debt/GDP ratio for agriculture sector could rise to over 170%

Projections

228

171

150 100 50 0 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
FY99

91 91 24

FY17
FY01

Scenario 1

Scenario 2

Scenario 3

Note: Projections based on Debt/Agri GDP=91% in FY10, Rate of interest= 8%, Incremental debt less interest/Agri GDP=10%p.aand assumptions on real & nominal GDP growth for the sector. Scenario1: Real GDP=3% & zero Agri sector inflation Scenario 2: Real GDP=3% & Agri sector inflation=5% Scenario 3: Agri GDP growth = 21% (16% real+5% inflation) if Agri sector Debt/GDP has to remain unchanged at FY10 level Source: RBI, Centrum Research Estimates

We see multiple implications arising from the current situation increased debt defaults, impairment of banks asset quality, leading to larger debt waiver schemes, extenuating fiscal problem, constraining capital formation in agri sector. Volatility in agriculture production and market prices of food grains can be major reasons for impairment of repaying capacity of the farmers. Though MSP mechanism aims to provide some protection, it has limitations of spatial coverage. Inability to control cost of cultivation, lack of productivity growth and volatility in output increases the probability of financial distress. Going by past experience of directed Agri lending in the 1970s and 1980s and the subsequent debt and relief scheme in 1990, a relapse of farm sector debt defaults could slow lending to the agri sector. If credit-to-GDP has to fall by 10% from the current level over the next four years (as it did between FY88-92), aggregate institutional credit growth would have to fall 5-6% from the average of 23% recorded during FY05-10 (31% for banks). Agri credit has been rising over the past two decades (including 1990s) as a share of both the value of inputs and output. Long-term credit/private investment has also been rising. But the steep rise in credit is not feeding into investments. Farm sector capital formation/credit ratio declined to 25% in FY09. The rising credit intensity could, ironically, lead to greater credit risk6. Exhibit 23: Institutional lending is largely direct loans, and rising in proportion since FY00
100% 80% 60% 40%

Exhibit 24: Capital formation in agri sector has not matched the pace of growth of credit
85 75 65 55 45 Agri gross capital formation/Direct agri credit (%)

20% 0%

35
FY90 FY91 FY92 FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09

25 FY73 FY75 FY77 FY79 FY81 FY83 FY85 FY87 FY89 FY91 FY93 FY95 FY97 FY03 FY05 FY07 FY09

Total: Direct lending

Total: Indirect lending

Source: RBI, Centrum Research

Source: RBI, Centrum Research

Rakesh Mohan 2004: Agricultural Credit in India: Status, Issues and Future Agenda

11

FY18

Economy

Pattern bank farm lending: Continued focus on southern states

The rapid growth in agriculture credit (30% CAGR over FY04-08 in 13 select states, Exhibit 25) has been associated with the steep rise in average size of credit (17% CAGR over FY04-08). However, the strong growth in the number of accounts also indicates increasing spread. The share of lending to farmers up to 2.5 acres increased to 26% in FY07 (all-India) from 24% in FY00. Both SBI and other schedule commercial banks (SCBs) have aggressively increased direct lending. Currently, direct credit accounts for over 80% of total agri credit. Exhibit 25: More than half of bank credit expansion contributed by growth in average credit size (Rsbn)
Distribution of direct credit: Schedule commercial banks
35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Direct:No.of acc ('000) Nationalised banks RRBs Direct: Credit outstanding (Rs bn.) SBI+ Other SCBs 32% CAGR:FY08-FY04 16% CAGR:FY08-FY04 FY08

Share in direct credit

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Direct:No.of acc ('000) Nationalised banks RRBs FY08

Direct: Credit outstanding (Rs bn.) SBI+ Other SCBs

Represents select states: Haryana, Punjab, Bihar, Orissa, West Bengal, Chhattisgarh, MP, UP, Gujarat, Maharashtra, Andhra, Karnataka and Tamil Nadu; SBI+ stands for SBI and associates Source: RBI, Centrum Research Distribution of direct credit indicates that notwithstanding the strong growth in less serviced states the highly indebted southern states have continued to dominate. If we club Maharashtra along with the southern states, allocation to these states would be above 62% of the total

Distribution of direct credit, however, indicate that notwithstanding strong growth in lessserviced states like Bihar, Assam, Rajasthan, Orissa and West Bengal, the highly indebted southern states (Tamil Nadu, Karnataka and Andhra Pradesh) continue to dominate (Exhibit 26). If we club Maharashtra with the southern states, allocation to these states would be above 62% of the total. The only exception is Gujarat which has shown steep rise in its share of direct credit. Taking into account the more active cooperative and informal lending, particularly in Andhra Pradesh and Tamil Nadu, their share of agricultural credit would be even higher. Most of these states, except for Andhra Pradesh, have shown less-than-average agriculture GDP growth (Exhibit 27). The low share in bank credit in the western region could be explained by dominant role of informal lending (50% of lending business in Punjab) and cooperatives. It is notable that the rural stress in recent years has been concentrated in the southern region. Irrespective of the level of formal lending or the purpose of borrowing, high level of indebtedness in states like Maharashtra, Andhra Pradesh, Karnataka, Punjab and Kerala was the most important factor for distress7. Exhibit 27: Gujarat and Andhra Pradesh are the only states showing rapid Agri sector growth
12 10 8 6 4 2 Guj MP UP Maha Andhra Chhat

Exhibit 26: Credit flows dominated by cereal surplus states

18 16 14 12 10 8 6 4 2 0 Pun Har Bih Ori % share in 13 states

Agri real GDP growth % yoy (avg FY00-FY09)

WB

Kar

TN

(2) Guj MP UP Andhra Maha India WB Pun TN Har Kar

FY08
Source: RBI, Centrum Research

FY04

Source: RBI, Centrum Research

IGIDR: Expert Group on Agriculture Debt 2007

12

Economy

Exhibit 28: SBI group: Above average growth, specially in the east, Gujarat and Tamil Nadu
60 50 40 30 20 10 0 Maha Guj MP UP Andhra Ori WB Chhat Pun Har Bih Kar TN All 13 SBI+: Direct credit (%CAGR FY04-FY08)

Exhibit 29: Nationalised banks: Broad-based expansion

40 35 30 25 20 15 10 5 0 Pun Har Nat Banks: Direct credit (%CAGR FY04-FY08)

Andhra

Chhat

Maha

Guj

Bih

MP

UP

WB

Kar

Ori

TN

No. of acc.
Source: RBI, Centrum Research

Credit outstanding

No. of acc.

Credit outstanding

Exhibit 30: RRBs: Uniform growth but less aggressive

45 40 35 30 25 20 15 10 5 0 Pun Bih Har RRBs: Direct credit (%CAGR FY04-FY08)

Exhibit 31: All SCBs: Stronger growth in Bihar, Orissa & WB, But Gujarat leads
60 50 40 30 20 10 0 MP UP Guj Chhat Maha Andhra Pun WB Bih Har All SCBs: Direct credit (%CAGR FY04-FY08)

Andhra

Chhat

Maha

Kar

WB

Guj

Ori

Kar

MP

Ori

TN

UP

TN

All 13

No. of acc.

Credit outstanding

All SCBsNo of A/c

All SCBsOutstanding

Source: RBI, Centrum Research

Why default risk can rise?

Agriculture credit NPA ratio for all PSU banks declined from 17.2% in FY03 to 2% in FY09 and has possibly fallen even lower subsequently (Exhibit 32). But we believe the trend would likely reverse. Based on our assessment of structural and regulatory factors, we believe NPA ratios are likely to rise to 10-15% in the coming years. In view of the poor realisation rate in the 1990s (averaging of 60% for banks), the bias on NPA ratio is on the higher side. We believe NPA levels may have been on the rise in H2FY10. The announcement in the Union Budget extending interest repayments for restructured loans by another 6 months to June 2010 corroborates our hypothesis.
We believe that NPA ratios are likely to rise to 10-15% in the coming years, somewhat lower than the peak of FY03. Given poor realisation rate in the 1990s (averaging at 60%) the bias on NPA ratio is on the higher side. The NPA levels may have been rising in H2FY10

Exhibit 32: Regulatory changes and policy support have helped improve recovery performance
20 18 16 14 12 10 8 6 4 2 0
FY03 FY04
Agri NPA FY09% total Agri credit: Trailing

FY05

FY06

FY07

FY08

FY09

FY03-FY06

Public Sector Banks

Source: RBI and Centrum Research estimate

Nationalised Banks

13

Average

Economy

All 13

All 13

Factors contributing to the fall in NPA ratio during FY03-10 are: (1) Changes in NPA norms; (2) restructuring of loans initiated after March 2004; (3) debt waiver scheme which proposed to write off or restructure a massive Rs716bn of bad loans; and (4) supportive food policies, including steep elevation in MSPs and aggressive government procurements. Reasons why we think the trend could reverse: Loan restructuring on account of droughts and natural calamities in 2003-2004 resulted in the clubbing of overdue interest and principal outstanding. The amount was payable within 5 years with a moratorium of two years. The fact that termination of the restructuring scheme was followed by loan waiver scheme (implemented during FY09-11) suggests persistence of recovery problems notwithstanding the fall in NPA ratios. These programs were supplemented by new NPA norms, which allows banks longer NPA recognition period for direct credit to two cropping season for short-duration crops and one cropping season for long-duration crops. Removal of earlier restriction of not exceeding two half years has effectively extended the NPA recognition period beyond one year. Hence, the real impact of NPA will be seen with a lag. While the above two factors enabled scope for fresh loans for the farmers, the enormous policy thrust to grow direct credit seems to have compressed the NPA ratios. With a major portion of debt waiver scheme over by FY10 and debt restructuring program coming to an end, we believe the overdue ratio will see an upward trend. In our assessment, the repayment culture may have been weakened due to successive restructuring and loan waiver programs. Volatile cereal prices, concentration of lending in food-grain surplus states, fast pace of credit expansion in the past and liberal collateral requirements will increase in default rates. Structural decline in land holding have increased the proportion of small and marginal farmers (0-2 hectares) who have highly vulnerable to risk factors. Mid level farmers (2-5 hectares) do not enjoy strong banking relationship. Credit comfort is high for large farmer (>5 hectares) as they enjoy better banking relationship and are better equipped to withstand the risks. Given this structural backdrop and the fact that banks, being competed out of equipment financing, are increasing crop lending portfolio increase prospects of default risk.

In our assessment, the repayment culture may have been weakened due to successive restructuring and loan waiver programs. Volatile cereal prices, concentration of lending in food-grain surplus states, fast pace of credit expansion in the past and liberal collateral requirements will increase in default rates

Exhibit 33: Public sector banks: NPA ratio likely rise after a secular decline from FY03 peaks
60 50 40 30 20 10 0 BoI SBI PSU Banks Nat Banks SBMys SBPat SBBJ UCO Bnk P&S Bnk Union Bnk United Bnk Can Bnk Cent Bnk Dena Bnk Ind Bnk Synd Bnk Andhra Bnk Vijaya Bnk Allha Bnk Corp Bnk IDBI Bnk BoMah SBI grp SBTrav SBHyd SBInd SBSau OBC PNB BoB IOB NPA ratio %: Trailing

NPA FY09% total cre

Average: FY03-FY09

FY09

FY03-FY06

Source: RBI and Centrum Research Estimates

14

Economy

Private consumption: Price shocks hurting endogenous demand

In contrast to the consensus view that steep rise in food prices shocks would benefit the rural economy through positive income effect, and is a sign of rising overall private consumption, both historical data and near-term trends indicate otherwise. While the positive income effect on agri income is evident, it may not be broad based enough to compensate for the adverse price effect.
Negative elasticity for broad categories of food, clothing and furnishing during FY05-FY09, suggest that high inflation may have worsened demand conditions during FY10

With CPI inflation rising to 16% (dominated by food prices, 14.9% for Mar 2010), aggregate consumption demand is impacted adversely. Long-term data (Exhibit 34) suggest that low inflation (PCE based) of 4-5% is most beneficial for consumption (+ve correlation during FY00FY04). At higher inflation the impact on real consumption (and income) is adverse (-ve correlation). CPI inflation has been rising since FY05. This period has also exhibited high inverse correlation (78%) and elasticity between inflation and PCE growth. As a result, consumption spending growth fell dramatically since early 2009 from over 10% to sub 2%.

Exhibit 34: High inflation adversely impact real private consumption expenditure (PCE)
Old series (Base FY00)

Exhibit 35: CPI inflation and real private consumption expenditure (PCE, quarterly)
14

12
New series (Base FY04)

(% YoY) 16 14 12 10 8

10 8 6

12 10 8 6

6 4 2 0 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Jun-09 Dec-09

4 2 0 FY90 FY91

4
High inflation Correl = -70% Lowering inflation Correl = +62% Low inflation Correl = +74% Rising inflation Correl = -78%

2 0 FY09

FY92

FY93

FY94

FY95

FY96

FY97

FY98

FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

PCE real (% LHS)

PCE inflation (% RHS)

CPI (3m avg)

Pvt consumption

Source: RBI, Centrum Research

Source: Bloomberg, CSO, Centrum Research

The period FY05-09 (Exhibit 46 and 47) exhibited high negative price elasticity for broad categories of food, clothing and furnishing. This suggests that with higher inflation demand conditions during FY10 may have worsened. Private consumption grew modestly at 3.5% in FY10 (till Dec 09). However, the positive elasticity for hotel & restaurants, education and miscellaneous goods (luxury and health care items), which together contribute 19% of PCE, imply that some segments are positively impacted even with rising inflation. Long-term estimates show the uncompensated elasticity of demand for food (representing changes in the quantity demanded as a result of changes in prices, capturing both price and income effects) is negative for both rural and urban India. Exhibit 36: Own-price elasticity of demand for major food groups in India
Estimates show the combined response to rise food prices on demand, including both price and income effects is negative for both rural and urban India Groups Uncompensated own-price elasticity Cereals Pulses V&F Milk Edible oil Sugar MFE Compensated own-price elasticity Cereals Pulses V&F Milk Edible oil Sugar MFE Rural Urban All-India

(0.50) (0.77) (0.97) (0.73) (0.78) (0.73) (2.38) (0.46) (0.74) (0.92) (0.62 ) (0.76) (0.72 ) (-2.33)

(0.44) (0.77) (0.98) (0.84) (0.81) (0.72) (2.13) (0.43) (0.75) (0.93) (0.74) (0.79) (0.70) (2.09)

(0.48) (0.77) (0.98) (0.78) (0.80) (0.73) (2.26) (0.45) (0.75) (0.92) (0.68) (0.78) (0.71) (2.22)

Note: V&F=Vegetables and fruits; MFE= Meat, fish and eggs. The uncompensated elasticity of demand represents changes in the quantity demanded as a result of changes in prices, capturing both price effect and income effect. Compensated elasticity of demand refers to the portion of change in quantity demand, which captures only the price effect Source: Structural Shift in Demand for Food: Projections for 2020, ICRIER, 2006

15

Economy

Studies show that given nominal incomes, a 10% increase in cereal price reduces the money metric value of the rural bottom decile by 3.7% and that of the rural top decile by 1.1%; and of the urban bottom decile by 2.2% and urban top decile by 0.5%. There is clear evidence that an increase in cereal price would hurt the poor the most and aggravate income inequality. If price effect on income is incorporated, the relative position of bottom deciles will be further worsened since the existing PDS only partially compensate the income loss experienced by the poor whereas incomes of non-poor are likely to be indexed for inflation and, moreover, some food producers and food traders may as well benefit from food inflation8. Decline in cereal consumption and nutritional intake across rural & urban areas; trend more pronounced in rural areas Exhibit 37: Growth in food and cereal expenditure at 1993-94 prices and per capita calorie intake
(% per ann)
Bottom 30% Per capita cereal expenditure 1970-1980 0.1 1990-2005 (1.3) 1970-2005 (0.6) Per capita food expenditure 1970-1980 1.2 1990-2005 1970-2005* 0.6 Per capita calorie intake 1970-1990 0.2 1990-1998 (1.0) 1990-2000** (0.4) **Includes NSS 55th round; Source: Ravi (2007) Middle 40% Rural Top 30% All classes

(% per ann)

Bottom 30%

Middle 40% Urban

Top 30%

All classes

(0.5) (1.9) (1.2) 0.9 (0.2) 0.3 0.2 (1.6) (0.9)

(1.2) (1.6) (1.6) 0.7 0.1 0.4 (1.8) (1.4)

(0.6) (1.6) (1.2) 0.8 (0.1) 0.3 0.2 (1.5) (1.4)

1970-1980 1990-2005 1970-2005 1970-1980 1990-2005 1970-2005 1970-1990 1990-1998 1990-2000*

0.1 (0.9) (0.4) 1.2 0.4 0.8 0.3 (0.6) 0.1

(0.3) (0.9) (0.6) 1.1 0.3 0.8 0.1 (0.7) 0.1

(0.1) (0.6) (0.4) 0.4 0.3 0.5 0.3 (0.1) 0.2

(0.1) (0.8) (0.5) 1.0 0.3 0.7 0.2 (0.4) 0.1

Diverging consumption trend indicate inequality

The spectacular growth in consumer durable and vehicle sales during FY10 (which together contributes about 5% of PCE) and the contrasting decline in non-durables suggest expenditure inequality. NSSO data indicate that only the top 10 fractile consumers have high propensity for consumer durables in both rural and urban areas (Exhibits 40 and 41). Exhibit 38: Spurt in consumer durable growth
(YoY %) 50 40 30 20 10 0 (10) (20) Feb-95 Feb-96 Feb-97 Feb-98 Consumer durable: 5.4% of IIP

Exhibit 39: Slowing growth in non-durables

(YoY %) 30 25 20 15 10 5 0 (5) (10) (15)
Feb-07 Feb-08 Feb-09 Feb-10

Consumer non-durable: 23.2% of IIP

Feb-99

Feb-00

Feb-01

Feb-02

Feb-03

Feb-04

Feb-05

Feb-06

Feb-95

Feb-96

Feb-97

Feb-98

Feb-99

Feb-00

Feb-01

Feb-02

Feb-03

Feb-04

Feb-05

Feb-06

Feb-07

Feb-08

Feb-09
High 90 100

Source: CSO, Centrum Research

Source: CSO, Centrum Research

Exhibit 40: Top 10% percentile spends on durables

9 8 7 6 5 4 3 2 1 0 0 10 10 20 20 30 30 40 40 50 50 60 60 70 70 80 80 90 90 100 Fractile of monthly private consumption expenditure Low High Rural Urabn Durables/Total expenditure

Exhibit 41: High allocation to food at lower percentile

65 60 55 50 45 40 35 30 25 20 0 10 10 20 20 30 30 40 40 50 50 60 60 70 70 80 80 90 Low Rural Urabn (rhs) Food/Total expenditure (%)

Fractile of monthly private consumptio n expenditure

Includes furniture and fixtures, good of recreation ,transport vehicles, personal goods & residential building related items Source: NSS 64th Round 07/2007-07/2008, Centrum Research
8

Source: NSS 64th Round 07/2007-07/2008, Centrum Research

Radhakrishana (2008): Economic Well Being and Deprivations in India

16

Feb-10

Economy

Evidence across the world indicates that food shocks induce more vulnerability among the urban poor vs rural poor. However, rural poor, landless, and net buyers are in no better position9. NSSO data corroborates this as the bottom 20 factile consumer spends heavily on food and urban poor spends as high as rural poor (Exhibit 41). A majority of about of the rural population is net buyers of food grains and they are the small & marginal farmers, agricultural labourers and other casual labourers.

Structural change rural consumption

The increasing share of spending on education, rentals and medical cares possibly reflects improvement in living standard. Share of food essentials like cereal, milk & milk products and edible oil has declined. While these may suggest presence of Engles Law10, the reduction in calories intake hints at vulnerability (Exhibit 37). The worrisome part is the decline in per capita calorie intake (16001700 kcal/day) of the bottom 30% which falls short of FAOs minimum norm of 1800 calorie for India.
While structural changes in rural consumption patter suggests presence of Engles Law , the reduction in calories intake hints at vulnerability

Overall spending pattern indicates: Declining share of food consumption vs non-food. Declining share of cereals, pulses, milk & milk products, edible oil and pulses. This is a structural trend and attributable to changes in consumer tastes and preference from food to non-food items, and within the food group from cereals to non-cereal food items and from coarse to fine cereals. Research11 shows that the decline in cereal consumption has been greater in the rural areas, where improvement in rural infrastructure made other food and non-food items available. It has also been contributed by reduction in manual work in agriculture due to farm mechanization and expansion of informal services sector. Significant rise in share of miscellaneous expenditure including education, medical care, rents and taxes. Surge in allocation for beverages. Exhibit 43: Steady decline in cereal budget
30 25 20 15 10 5 Cereals/Total expenditure %

Exhibit 42: Declining share of food consumption (%)

100 80 60 40 20 0 FY88 FY94 FY00 FY05 FY06 FY07 FY08

0 FY88 FY94 FY00 FY05 FY06 FY07 FY08

Food items
Source: NSSO various rounds, Centrum Research

Non-food items

Source: NSSO various rounds, Centrum Research

Exhibit 44: Non-cereal food consumption expenditure

10 8 6 4 2 0 FY88 FY94 FY00 FY05 Vegetables Beverages FY06 FY07 Edible oil Fruits FY08 Milk & milk pdts Pulses % of total expenditure

Exhibit 45: Non-food expenditure: Major items

30 25 20 15 10 5 0 FY88 FY94 FY00 FY05 FY06 FY07 FY08 Durable % of total expenditure

Misc. goods & ser*

Fuel & light

Clothing

Source: NSSO various rounds, Centrum Research

*Includes education, medical care, rents and taxes Source: NSSO various rounds, Centrum Research

9 Ruel, Garrett, Hawkes and Cohen (Jan 2010): The Food, Fuel, and Financial Crises Affect the Urban and Rural Poor Disproportionately: A Review of the Evidence 10 Ernst Engel (1857): The proportion of expenditure spent on food decreases with income, assuming unchanged prices 11 Rao Hanumanta. (2000), Declining Demand for Foodgrains in Rural India: Causes and Implications

17

Economy

Exhibit 46: High inverse correlation across consumption items (FY06-FY09)

Real PCE (% YoY) Real PCE by item (domestic market) 1 Food, beverages & tobacco 1.1 food 1.1.1 cereals & bread 1.1.2 pulses 1.1.3 sugar & gur 1.1.4 oils & oilseeds 1.1.5 fruits & vegetables 1.1.6 potato & other tubers 1.1.7 milk & milk products 1.1.8 meat, egg & fish 1.1.9 coffee, tea & cocoa 1.1.10 spices & other food 1.2 beverages, pan & intoxicants 1.3 tobacco & its products 1.4 hotel & restaurants 2 Clothing & footwear 2.1 clothing 2.2 footwear 3 Gross rent, fuel & power 3.1 gross rent & water charges 3.2 fuel & power 4Furniture, furnishings, appliances & services 4.1 furniture, furnishings & household equipment etc. 4.2 services 5 Medical care & health services 6 Transport & communication 6.1 personal transport equipment 6.2 operation of personal transport equipment 6.3 purchase of transport services 6.4 communication 7 Recreation, education & cultural services 7.1 education 7.2 others 8 Miscellaneous goods & services 9 Private final consumption expenditure FY06 7.5 6.6 6.9 4.6 2.1 -4.2 9.8 -0.7 6.8 4.3 -1.2 18.5 12.8 8.0 17.5 24.0 25.5 15.8 3.4 3.1 4.2 14.1 15.6 6.9 5.8 5.0 -11.2 4.9 5.8 19.4 8.9 5.4 14.6 15.9 8.6 FY07 3.8 1.5 2.5 4.1 4.5 -10.8 2.0 -6.5 2.0 5.8 -1.9 -3.3 19.2 1.9 25.8 23.2 23.9 18.6 4.0 3.0 6.0 15.9 17.5 7.0 4.5 7.6 15.5 4.8 6.2 18.1 7.0 2.7 13.5 21.2 8.3 FY08 7.2 6.6 3.5 8.4 13.1 5.9 12.6 25.1 1.5 5.6 1.7 1.2 23.3 -8.2 12.9 8.1 4.1 33.8 4.8 3.4 7.5 14.6 15.9 7.1 2.5 8.8 5.7 5.1 5.3 39.1 13.2 10.5 17.0 25.6 9.6 FY09 2.7 0.3 1.7 -0.7 -36.0 10.2 2.2 4.8 1.4 6.5 -1.5 -6.7 16.2 2.3 17.5 -0.6 0.9 -8.1 3.4 3.5 3.2 3.7 3.2 7.2 8.1 12.3 2.0 6.6 6.0 55.0 5.4 7.3 2.9 19.3 6.8 FY06 3.9 3.9 4.3 15.9 9.2 -7.1 6.0 17.1 0.4 6.0 -0.2 -2.7 3.7 2.6 4.9 -4.8 -6.8 7.1 6.8 7.0 6.5 3.1 3.0 4.1 4.1 5.3 3.3 10.3 3.5 -0.9 3.1 4.2 1.5 -2.6 3.2 PCE inflation (% YoY) FY07 7.1 7.5 10.0 21.6 0.4 5.1 3.2 14.7 6.3 8.1 2.7 18.1 5.9 3.9 5.9 1.5 2.6 -4.4 8.1 9.3 5.8 5.4 5.1 7.0 5.4 6.1 1.7 8.9 6.3 -0.2 5.5 7.0 3.6 4.8 6.0 FY08 5.4 5.2 6.1 -0.3 -11.8 19.9 3.0 10.0 8.4 6.2 -11.9 5.1 4.3 11.2 4.5 -0.4 -1.6 4.2 9.0 13.1 1.0 4.2 3.8 6.6 7.5 0.5 2.5 -1.7 4.1 -5.8 4.5 6.4 2.0 3.3 4.1 Price FY09 Correl (%) elasticity 7.5 -95 -1.4 7.3 -93 -1.8 6.3 -64 -0.6 5.1 -15 -0.1 11.8 -74 -1.5 10.2 59 0.5 10.0 -44 -0.7 -11.6 -16 -0.2 7.6 -99 -0.7 3.2 -39 -0.2 2.4 -99 -0.2 10.0 -84 -1.1 7.1 1 0.0 12.4 -64 -0.9 7.9 27 1.0 5.9 -74 -2.0 7.1 -56 -1.2 1.1 17 0.6 12.8 -18 0.0 18.2 92 0.0 0.9 -11 -0.1 5.4 -43 -2.2 4.8 -28 -1.9 9.2 95 0.1 1.9 -100 -1.0 3.8 -37 -0.5 5.1 -50 -3.8 7.8 2 0.0 7.2 70 0.1 -9.0 -100 -4.2 7.5 -62 -1.2 9.2 13 0.2 4.6 -85 -3.7 8.2 41 0.4 7.0 -77 -0.5

Source: CSO, Centrum Research

Exhibit 47: High allocation to food but real allocation falling; Real Misc. spending rising faster than nominal
PCE by item (domestic market) 1 Food, beverages & tobacco 1.1 food 1.1.1 cereals & bread 1.1.2 pulses 1.1.3 sugar & gur 1.1.4 oils & oilseeds 1.1.5 fruits & vegetables 1.1.6 potato & other tubers 1.1.7 milk & milk products 1.1.8 meat, egg & fish 1.1.9 coffee, tea & cocoa 1.1.10 spices & other food 1.2 beverages, pan & intoxicants 1.3 tobacco & its products 1.4 hotel & restaurants 2 Clothing & footwear 2.1 clothing 2.2 footwear 3 Gross rent, fuel & power 3.1 gross rent & water charges 3.2 fuel & power 4Furniture, furnishings, appliances & services 4.1 furniture, furnishings & household equipment etc. 4.2 services 5 Medical care & health services 6 Transport & communication 6.1 personal transport equipment 6.2 operation of personal transport equipment 6.3 purchase of transport services 6.4 communication 7 Recreation, education & cultural services 7.1 education 7.2 others 8 Miscellaneous goods & services 9 Private final consumption expenditure Private final consumption expenditure (Rs bn) FY05 39.6 33.5 8.4 0.8 1.7 2.0 7.9 0.9 6.9 3.2 0.3 1.4 1.9 2.2 2.1 6.6 5.6 1.0 13.0 8.7 4.3 3.4 2.8 0.6 5.0 19.6 1.9 6.5 9.6 1.6 3.4 2.1 1.3 9.4 100.0 19269 Real PCE (% Share) FY06 FY07 FY08 39.2 37.6 36.8 32.9 30.8 30.0 8.2 7.8 7.4 0.8 0.7 0.7 1.6 1.5 1.6 1.7 1.4 1.4 8.0 7.5 7.7 0.8 0.7 0.8 6.8 6.4 5.9 3.1 3.0 2.9 0.3 0.3 0.3 1.5 1.4 1.3 1.9 2.1 2.4 2.1 2.0 1.7 2.3 2.6 2.7 7.6 8.6 8.5 6.5 7.4 7.1 1.1 1.2 1.4 12.4 11.9 11.4 8.3 7.9 7.4 4.1 4.1 4.0 3.5 3.8 4.0 3.0 3.2 3.4 0.6 0.5 0.5 4.8 4.7 4.4 19.0 18.9 18.7 1.5 1.6 1.6 6.3 6.1 5.9 9.4 9.2 8.8 1.8 1.9 2.5 3.4 3.4 3.5 2.1 1.9 2.0 1.3 1.4 1.5 10.0 11.2 12.8 100.0 100.0 100.0 20916 22657 24834 FY09 35.3 28.1 7.0 0.7 0.9 1.4 7.4 0.8 5.6 2.9 0.2 1.1 2.6 1.6 3.0 7.9 6.7 1.2 11.0 7.2 3.8 3.9 3.3 0.5 4.4 19.7 1.5 5.8 8.8 3.6 3.4 2.0 1.5 14.4 100.0 26518 FY05 39.6 33.5 8.4 0.8 1.7 2.0 7.9 0.9 6.9 3.2 0.3 1.4 1.9 2.2 2.1 6.6 5.6 1.0 13.0 8.7 4.3 3.4 2.8 0.6 5.0 19.6 1.9 6.5 9.6 1.6 3.4 2.1 1.3 9.4 100.0 19269 Nominal PCE (% Share) FY06 FY07 FY08 39.5 38.3 37.9 33.1 31.5 31.0 8.3 8.2 7.9 0.9 1.0 0.9 1.7 1.5 1.3 1.6 1.3 1.4 8.2 7.5 7.7 0.9 0.9 1.1 6.6 6.2 6.0 3.2 3.2 3.1 0.3 0.3 0.2 1.5 1.5 1.4 1.9 2.1 2.4 2.1 2.0 1.8 2.3 2.7 2.8 7.0 7.6 7.2 5.9 6.5 5.8 1.1 1.1 1.3 12.8 12.6 12.6 8.6 8.4 8.6 4.3 4.2 4.0 3.5 3.8 3.9 3.0 3.2 3.4 0.6 0.6 0.6 4.9 4.7 4.5 19.4 19.3 18.5 1.5 1.6 1.5 6.7 6.7 6.1 9.4 9.3 8.9 1.7 1.8 2.0 3.4 3.3 3.5 2.1 2.0 2.0 1.3 1.4 1.4 9.5 10.5 11.9 100.0 100.0 100.0 21583 24772 28254 FY09 36.6 29.2 7.5 0.8 0.8 1.5 7.5 0.9 5.7 3.0 0.2 1.2 2.6 1.8 3.1 6.6 5.5 1.1 12.9 9.2 3.6 3.8 3.2 0.6 4.4 18.8 1.4 6.1 8.9 2.5 3.4 2.1 1.3 13.5 100.0 32268

Source: CSO, Centrum Research

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Economy

Manufacturing sector Next round of inflationary pressure

Key factor driving up the manufacturing sector inflation is the intensifying margin pressure and the need to pass on increase production costs, at least partially.

The key factors driving up manufacturing sector inflation are: The feedback impact of high CPI inflation over the past year averaging at 12% and adverse terms of trade vs the agriculture sector. As mentioned earlier, the normalization process provides a structural upside bias for manufacturing sector price index. Pass through of increased production costs: Several sectors are experiencing raw material contracts renewed at higher levels in response to rise in commodity prices. Positive output gap: Spurt in IIP growth of 16% against the long term average of 6.7% (30 year average). The increase in excise duty (200bp increase announced in the budget), increase in railway freight charges and hike in fuel prices (following the budget announcement). Possibility of further fuel price hikes as oil sector under recovery is estimated at Rs900bn for FY11.

On top of these other factors impacting inflation will be increase in excise duty, increase in railway freight charges and hike in fuel prices

Recent developments
Steel prices expected to increase 15-20%: Steel prices are expected to increase 15-20% as we move further into FY11 on the back of rising raw material cost. With the gap between spot iron ore and contracted prices widening, contracts for FY11 would be 50% higher. Coking coal spot prices coal prices are also expected to rise further, taking the cumulative rise to 35% from their Jan 2010 levels. Aluminum prices are also slated to go up on similar grounds. Cascading impact on other sectors: The increase in steel and aluminium prices is also having a similar impact on other sectors. For instance, we expect auto makers to hike prices in FY11 as margins get squeezed. For auto ancillaries and two wheelers, margins have peaked. Cross elasticity impact: Sectors exposed to high competition (for example, premium brands in the FMCG sector) whose demand is also exposed to cross prices elasticity impact of elevated food prices are facing intense pricing pressure. Fuel prices: Indications that under-recovery for oil companies could be higher at Rs900bn (FY11) is increasing the possibility of further hikes in fuel prices. Taking all these factors into account, we believe manufacturing sector inflation would rise to over 11% from the current level of 7.5%, notwithstanding the correction in food prices. However, a lot will depend also on global commodity price outlook. Sustained hardening of crude and metal prices can aggravate the scenario. But we are of the view that commodity prices can undergo a correction in H2FY11 in response to expected slowdown in economic growth, excess capacities worldwide and significant inventory build-up globally, especially in China. Overall WPI inflation is likely to peak at 1213% around by mid FY11. Exhibit 48: Iron ore contract price likely to go up 50%
(INR/Tn) 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 2004 2005 Avg spot price 2006 2007 2008 2009 2010
2,000 Jan 10 Feb 10 Mar 10 Apr 10E 6,000 4,000 10,000 8,000

Exhibit 49: Coking coal spot prices rise by 35% YTD

14,000 12,000

Coking coal (Australia FoB, INR/Tn) up 35%

Long term contract price

Source: SSB, Centrum Research

Source: SSB, Centrum Research

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Economy

Exhibit 50: Steep prices can potentially rise 15-20% in response to higher raw material cost
(INR/Tn) 60,000 50,000 40,000 30,000 20,000 10,000 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Jun-10 Expected to increase 25% over Mar 10

Exhibit 51: Margin pressure and escalating cost to see price actions
( 20 18 16 14 12 10 8 6 4 2 Feb-06 Feb-07 Jun-05 Jun-06 Jun-07 Oct-05 Oct-06 Oct-07 Auto sector margins are on a downhill
PBDIT Margin

Flat HRC price

Scrap price

Comm Veh 2&3Wheelers

Passenger cars Automobile Ancil

Feb-08

Tyres & Tubes

Source: SSB, Centrum Research

Source: CMIE, Centrum Research

Exhibit 52: Rising commodity prices

330 280 230 180 130 80 Jan-09 Nov-08 Nov-09 Jan-08 Jan-10 Jul-08 Jul-09 Mar-08 Mar-09 May-08 May-09 Mar-10 Sep-08 Sep-09 Index as on Feb 09

Exhibit 53: Will induce further margins stress

(%) 56 54 52 50 48 46 Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 (%) 30 28 26 24 22 20

Brent

Aluminium

Copper

RM/Net sales (%)

Source: Bloomberg, Centrum Research

PBDIT/Total income (% RHS)

Source: Bloomberg , Centrum Research

Exhibit 54: Spill-over impact of fuel price hike will be visible Exhibit 55: Manufacturing sector inflation will rise to over 11% after a lag; further hikes in petro product prices expected
(% YoY) 20 15 10 5 (5) (10) (15) Sep-03 Mar-03 Mar-04 Fuel inflation: Monthly average
(% YoY) 14 12 10 8 6 4 2 0 Mar-03 Mar-04 Sep-03 Sep-04 Manufactured products inflation Expected to peak at

Mar-05

Mar-06

Mar-07

Mar-08

Feb-09

Jun-08

Mar-09

Jun-09

Oct-08

Oct-09

Sep-04

Sep-05

Sep-06

Sep-07

Sep-08

Mar-05

Mar-06

Mar-07

Mar-08

Mar-09

Sep-09

Source: Bloomberg, CMIE, , Centrum Research

Mar-10

Source: Bloomberg, Centrum Research

20

Economy

Mar-10

Sep-05

Sep-06

Sep-07

Sep-08

Sep-09

Appendix A
Disclaimer
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Our Company and Group companies and their officers, directors and employees, including the analysts and others involved in the preparation or issuance of this material and their dependants, may on the date of this report or from, time to time have "long" or "short" positions in, act as principal in, and buy or sell the securities or derivatives thereof of companies mentioned herein. Centrum or its affiliates do not own 1% or more in the equity of this company Our sales people, dealers, traders and other professionals may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. We may have earlier issued or may issue in future reports on the companies covered herein with recommendations/ information inconsistent or different those made in this report. In reviewing this document, you should be aware that any or all of the foregoing, among other things, may give rise to or potential conflicts of interest. We and our Group may rely on information barriers, such as "Chinese Walls" to control the flow of information contained in one or more areas within us, or other areas, units, groups or affiliates of Centrum. Centrum or its affiliates do not make a market in the security of the company for which this report or any report was written. Further, Centrum or its affiliates did not make a market in the subject companys securities at the time that the research report was published. 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Similarly, this document does not have regard to the specific investment objectives, financial situation/circumstances and the particular needs of any specific person who may receive this document. The securities discussed in this report may not be suitable for all investors. The securities described herein may not be eligible for sale in all jurisdictions or to all categories of investors. The countries in which the companies mentioned in this report are organized may have restrictions on investments, voting rights or dealings in securities by nationals of other countries. The appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives. Persons who may receive this document should consider and independently evaluate whether it is suitable for his/ her/their particular circumstances and, if necessary, seek professional/financial advice. Any such person shall be responsible for conducting his/her/their own investigation and analysis of the information contained or referred to in this document and of evaluating the merits and risks involved in the securities forming the subject matter of this document. The projections and forecasts described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. Projections and forecasts are necessarily speculative in nature, and it can be expected that one or more of the estimates on which the projections and forecasts were based will not materialize or will vary significantly from actual results, and such variances will likely increase over time. All projections and forecasts described in this report have been prepared solely by the authors of this report independently of the Company. 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This report or recommendations or information contained herein do/does not constitute or purport to constitute investment advice in publicly accessible media and should not be reproduced, transmitted or published by the recipient. The report is for the use and consumption of the recipient only. This publication may not be distributed to the public used by the public media without the express written consent of Centrum. This report or any portion hereof may not be printed, sold or distributed without the written consent of Centrum. This report has not been prepared by Centrum Securities LLC. However, Centrum Securities LLC has reviewed the report and, in so far as it includes current or historical information, it is believed to be reliable, although its accuracy and completeness cannot be guaranteed. The distribution of this document in other jurisdictions may be restricted by law, and persons into whose possession this document comes should inform themselves about, and observe, any such restrictions. Neither Centrum nor its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. This document does not constitute an offer or invitation to subscribe for or purchase or deal in any securities and neither this document nor anything contained herein shall form the basis of any contract or commitment whatsoever. This document is strictly confidential and is being furnished to you solely for your information, may not be distributed to the press or other media and may not be reproduced or redistributed to any other person. The distribution of this report in other jurisdictions may be restricted by law and persons into whose possession this report comes should inform themselves about, and observe any such restrictions. By accepting this report, you agree to be bound by the fore going limitations. No representation is made that this report is accurate or complete. The opinions and projections expressed herein are entirely those of the author and are given as part of the normal research activity of Centrum Broking and are given as of this date and are subject to change without notice. Any opinion estimate or projection herein constitutes a view as of the date of this report and there can be no assurance that future results or events will be consistent with any such opinions, estimate or projection. This document has not been prepared by or in conjunction with or on behalf of or at the instigation of, or by arrangement with the company or any of its directors or any other person. Information in this document must not be relied upon as having been authorized or approved by the company or its directors or any other person. Any opinions and projections contained herein are entirely those of the authors. None of the company or its directors or any other person accepts any liability whatsoever for any loss arising from any use of this document or its contents or otherwise arising in connection therewith. Centrum and its affiliates have not managed or co-managed a public offering for the subject company in the preceding twelve months. Centrum and affiliates have not received compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for service in respect of public offerings, corporate finance, debt restructuring, investment banking or other advisory services in a merger/acquisition or some other sort of specific transaction. 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Also, there may be regulatory, compliance or other reasons that may prevent Centrum from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or Centrum policies, in circumstances where Centrum is acting in an advisory capacity to this company, or any certain other circumstances

21

Economy

T. S. Baskaran

Managing Director & CEO

ts.baskaran@centrum.co.in

91-22-4215 9620/87

Research
Girish Pai
Dhananjay Sinha Abhishek Anand Adhidev Chattopadhyay Ankit Kedia Ajay Shethiya Madanagopal R Manish Kayal Pranshu Mittal Rajan Kumar Rohit Ahuja Siddhartha Khemka Sriram Rathi Abhishek Kumar Janhavi Prabhu Jatin Damania Komal Taparia Rahul Gaggar Rishabh Saraogi Sarika Dumbre Shweta Mane Vijay Nara Vishal Desai

HeadEquity Research Strategy & IT Services

Economist Analyst Analyst Analyst Analyst Analyst Analyst Analyst Analyst Analyst Analyst Analyst Associate Associate Associate Associate Associate Associate Associate Associate Associate Associate Economy & Strategy Telecom, Education Real Estate Media, FMCG Automobiles/Auto Ancillaries Power, Capital Goods Infrastructure Sugar & Retail Cement Oil & Gas Logistics, Shipping Pharmaceuticals IT Services Sugar, Retail Metals & Mining, Pipes Economy & Strategy Hotels, Healthcare Oil & Gas Telecom Banking & Financial Services Automobiles/Auto Ancillaries IT Services

girish.pai@centrum.co.in
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Key to Centrum Investment Rankings

Buy: Expected outperform Nifty by>15%, Accumulate: Expected to outperform Nifty by +5 to 15%, Hold: Expected to outperform Nifty by -5% to +5%, Reduce: Expected to underperform Nifty by 5 to 15%, Sell: Expected to underperform Nifty by>15%

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22

Economy