Global Economic Prospects and the Indian Economy Usha Thorat September 2010

2 Broad Outline Global economy and India – recent trends Concerns of Inflation; Fiscal Situation Developments in real and external sectors Investment Climate Banking Sector scenario Quick SWOT analysis – India RBI’s latest assessment – September 16, 2010

Global Economy - Prospects 3 Forecast for 2010 and 2011 Per cent

IMF's World Output Growth Forecast World Advanced Economies Emerging and Developing Economies India Source: IMF, WEO (Update) July-2010 (Per cent)

Indian Economy - Growth Trajectory 5 Average GDP growth at 8.9 per cent during Real GDP grew at 8.8 per cent in (Q1) (6.0 per cent in (Q1)) RBI places real GDP growth forecast at 8.5 per cent for Per cent

6 6 High Domestic Saving & Investment Rates- with Modest Current Account Deficit

7 Inflation has increased significantly after being moderate during first half of

8 Monetary and Inflation conditions Inflation - WPI and CPI

Fiscal Situation: Key Indicators YearPrimary deficitRevenue deficitGross Fiscal Deficit (1)(2)(3)(4) Centre RE BE States # RE# BE# Combined RE BE RE: Revised Estimates; BE: Budgeted Estimates. # : data pertain to 27 State Governments.

10 Current Trends - Real GDP Growth (Per Cent) Item Q1 (Average) Agriculture and Allied Activities (18.1)(17.2)(16.4)(15.7)(14.6)(14.0) 2.Industry (20.0)(20.7) (20.0)(20.5)(20.8) 2.1 Mining and Quarrying Manufacturing Electricity, Gas and Water Supply Services (61.9)(62.2)(62.9)(64.4)(64.9)(65.2) 3.1 Trade, Hotels, Transport Storage and Communication Financing, Insurance, Real Estate and Business Services Community, Social and Personal Services Construction Real GDP at Factor Cost (100) Figure in parenthesis are percentage share to Revised estimates Source: Central Statistical Office

Demand Side Drivers of Growth 11 (Percentage to GDP ) Q Q1 ShareContributionShareContributionShareContributionShareContribution Private Consumption Government Consumption Gross Fixed Investment (-) Net Exports(-) 6.2(-) 36.2(-) (-) (-) 5.2(-) 9.8 Source: CSO

12 Growth in Index of Industrial Production (Y-o-Y) During April-July 2010, the IIP growth increased to 11.4 per cent as compared with 4.7 per cent last year. Per cent

13 Growing Openness India’s Trade Openness (% of GDP) ExportsImports Current Account Capital Account 1990s s Source: RBI

Increased Tradability of Services

15 Current Account Balance & Capital Inflows

16 Capital Flows US $ billion Item Apr-Mar 1. Inward FDI FIIs ECBs NRI Deposits Other Banking Capital Short-term Trade Credits Total FII flows amounted to US$3.5 billion during April-June as against US $ 8.3 billion during April-June

FDI Flows to India Source: RBI (US $ million) April-July April-July Equity16,39426,75727,80722,90810,3817,557 Re-invested Earnings5,8287,6796,4288,079 Other Capital* Total22,73934,72834,99231,68210,3817,557 * Inter company debt transactions of FDI entities

FDI inflows as percentage of Gross Fixed Capital Formation, (Per cent) Argentina Brazil Chile Mexico China Hong Kong, China Korea, Republic of Taiwan Province of China India Indonesia Malaysia Philippines Singapore Thailand World Source: World Investment Report 2010

Net FIIs Inflow and Exchange Rate Movement

20 Movement in NEER and REER ( =100)(6-currency trade based weights) Index

21 Note: Reserves change on BoP basis are not available after Jan-Mar 2010 quarter. India’s Foreign Exchange Reserves (US$ billion)

FDI Confidence Index:

Sovereign Credit Ratings of Top Ten Debtors amongst Developing Countries YearStandard & PoorsMoody'sFitch's RatingOutlookRatingOutlookRatingOutlook ChinaA+StableA1StableA+Stable RussiaBBBNegativeBaa1PositiveBBBNegative TurkeyBB-NegativeBa3StableBB-Stable BrazilBBB-StableBa1StableBBB-Stable IndiaBBB-StableBaa3PositiveBBB-Stable MexicoBBB+StableBaa1StableBBB+Negative IndonesiaBB-StableBa3StableBBStable PolandA-StableA2StableA-Stable ArgentinaB-StableB3Stable HungaryBBB-NegativeBaa1NegativeBBBNegative Source: India's External Debt - A Status Report, 2009 Note: For India data are updated upto June

Indian Stock Markets Equity Market revived indicating restoration of investor confidence.

Global Stock Markets Country/Index Percentage Variation (year-on-year)Percentage Variation End-March 2009End-March 2010Sept. 7, 2009 over March 31, 2009 Sept. 7, 2010 over March 31, Developed Markets US (Dow Jones) *-4.8 US (NASDAQ) *-7.9 FTSE UK Euro area (FTSE 100) Japan (Nikkei 225) Hong Kong (Hang Seng) Emerging Markets Russia Brazil *-5.2 ** South Korea Singapore Argentina India China Memo: World (MSCI) EMEs (MSCI) * As on Sept. 8, ** As on Sept. 6, Source: Bloomberg.

Banking Sector Scenario Indian banks continue to remain well capitalized as per Basel II requirements NPAs at manageable level despite the downturn Significant liquidity buffers - CRR and SLR prescriptions Focus on CD ratio and SLR requirement help in limiting leverage

Select Financial Indicators - All Banks (per cent) Mar-08Mar-09Mar-10Jun-10 CRAR Core CRAR Gross NPAs to Gross Advances Net NPAs to Net Advances Provision Coverage Ratio (PCR) Interest spread * Return on Total Assets * Return on Equity * Data on Capital Adequacy cover overseas operations; other data based on domestic operations only Figures on CRAR, Core CRAR are as per Basel – II, except for Mar-08, which is as per Basel-I * annualized PCR (%) = Provisions For Credit Losses * 100/Gross NPAs Interest spread = Net Interest Income * 100/ Avg. Total Assets Return on Total Assets = Profit after Tax * 100 / Avg. Total Assets Return on Equity = Profit after Tax * 100 / Avg. Total Assets

Structural Reforms Discussion paper on licensing New Private Sector Banks issued in August 2010 Discussion paper on presence of foreign banks to be issued shortly Working Group looking into Holding Company structure

Financial Stability and Development Council GOI setting up Financial Stability and Development Council (FSDC) for: Achieving inter-regulatory coordination and overseeing systemic risks and laying down a macro-prudential overlay to financial sector regulation

Focus on Financial Inclusion Adoption of BC model – entities eligible to act as BCs enlarged to include even individuals Inclusion of ‘for profit companies’ as BCs under consideration Adoption of mobile- based and smart card based technologies

Basel III BCBS release Basel III norms on September 12, 2010 – implementation in a phased manner Capital adequacy of Indian banks will not be impacted significantly – they already have high CRAR and Core CRAR Leverage ratio will be around 6, much comfortable than the Basel requirement of 3 Indian banks lagely follow retail model and therefore liquidity is not an issue for them

32 India's SWOT analysis STRENGTHS High savings/investment, forex reserves, quality talent and IT, broad based and growing entrepreneurial class, market size, macro economic and financial stability, language, democracy and political system stability WEAKNESSES Physical infrastructure, human development indicators, agriculture, shortage of skilled manpower OPPORTUNITIES Demographic dividend, knowledge based growth, increased integration with world economy, urbanisation THREATS Global Uncertainty, fiscal deficit, climate change – energy and food security, regional and social inequalities

Macroeconomic situation – RBI’s latest assessment on September 16, 2010 Global Scenario Recovery slowing; global environment continues to be a cause for caution Domestic Scenario Recovery consolidating; economy rapidly converging to its trend rate of growth. Agri. growth prospects boosted; sustained growth in service sector. Inflation dominant concern; implications for real interest rates Fiscal deficit conforming to budget estimates External front -export growth constrained by continuing sluggishness in global economy; demand for imports increased due to strong domestic recovery Overall assessment - growth remains steady. Inflation appears to have stopped accelerating though the rate may remain high for some months. Monetary Measures announced Repo rate under LAF increased by 25 basis points from 5.75 % 6 %. Reverse repo rate increased by 50 basis points from 4.5 % to 5.0 %