Our Views on India and Global Economy

[ecofin]

Indian Financial System Found to be Broadly Robust
The Government of India, in consultation with the Reserve Bank, in September 2006 constituted the Committee on Financial Sector Assessment (CFSA) to undertake a comprehensive self- assessment of India’s financial sector (based on the principles of the FSAP of IMF & World Bank). The CFSA recently assessed financial stability and also compliance with all financial standards and codes so that a compact roadmap could evolve with a medium-term perspective for the entire financial sector. From this study, the Indian commercial banking system has shown itself to be sound. This is important because commercial banks are the dominant institutions with linkages to other segments in the Indian financial system, accounting for around 60 per cent of its total assets.

Apart from commercial banks the report also analyses NBFCs, HFCs, the insurance sector, as well as equity and debt markets. It also looks at the financial infrastructure, including regulatory and legal infrastructure.
Use the following link to read the entire report:
Reserve Bank of India

[Anshul Dave]

Indian Economy:-

India has been one of the best performers in the world economy in recent years, but rapidly rising inflation and the complexities of running the world’s biggest democracy are proving challenging.
India’s economy has been one of the stars of global economics in recent years, growing 9.2% in 2007 and 9.6% in 2006. Growth had been supported by markets reforms, huge inflows of FDI, rising foreign exchange reserves, both an IT and real estate boom, and a flourishing capital market.
Like most of the world, however, India is facing testing economic times in 2008. The Reserve Bank of India had set an inflation target of 4%, but by the middle of the year it was running at 11%, the highest level seen for a decade. The rising costs of oil, food and the resources needed for India’s construction boom are all playing a part.
India has to compete ever harder in the energy market place in particular and has not been as adept at securing new fossil fuel sources as the Chinese. The Indian Government is looking at alternatives, and has signed a wide-ranging nuclear treaty with the US, in part to gain access to nuclear power plant technology that can reduce its oil thirst. This has proved contentious though, leading to leftist members of the ruling coalition pulling out of the government.
As part of the fight against inflation a tighter monetary policy is expected, but this will help slow the growth of the Indian economy still further, as domestic demand will be dampened. External demand is also slowing, further adding to the downside risks.
The Indian stock market has fallen more than 40% in six months from its January 2008 high. $6b of foreign funds have flowed out of the country in that period, reacting both to slowing economic growth and perceptions that the market was over-valued.
It is not all doom and gloom, however. A growing number of investors feel that the market may now be undervalued and are seeing this as a buying opportunity. If their optimism about the long term health of the Indian economy is correct, then this will be a needed correction rather than a downtrend.
The Indian government certainly hopes that is the case. It views investment in the creaking infrastructure of the country as being a key requirement, and has ear-marked 23.8 trillion rupees, approximately $559 billion, for infrastructure upgrades during the 11th five year plan. It expects to fund 70% of project costs, with the other 30% being supplied by the private sector.
Ports, airports, roads and railways are all seen as vital for the Indian Economy and have been targeted for investment.
Further hope comes from the confidence of India’s home bred companies. As well as taking over the domestic reins, where they now account for most of the economic activity, they are also increasingly expanding abroad. India has contributed more new members to the Forbes Global 2000 than any other country in the last four years.

Recent Growth Trends in Indian Economy :-

India’s Economy has grown by more than 9% for three years running, and has seen a decade of 7%+ growth. This has reduced poverty by 10%, but with 60% of India’s 1.1 billion population living off agriculture and with droughts and floods increasing, poverty alleviation is still a major challenge.
The structural transformation that has been adopted by the national government in recent times has reduced growth constraints and contributed greatly to the overall growth and prosperity of the country. However there are still major issues around federal vs state bureaucracy, corruption and tariffs that require addressing. India’s public debt is 58% of GDP according to the CIA World Fact book, and this represents another challenge.
During this period of stable growth, the performance of the Indian service sector has been particularly significant. The growth rate of the service sector was 11.18% in 2007 and now contributes 53% of GDP. The industrial sector grew 10.63% in the same period and is now 29% of GDP. Agriculture is 17% of the Indian economy.
Growth in the manufacturing sector has also complemented the country’s excellent growth momentum. The growth rate of the manufacturing sector rose steadily from 8.98% in 2005, to 12% in 2006. The storage and communication sector also registered a significant growth rate of 16.64% in the same year.
Additional factors that have contributed to this robust environment are sustained in investment and high savings rates. As far as the percentage of gross capital formation in GDP is concerned, there has been a significant rise from 22.8% in the fiscal year 2001, to 35.9% in the fiscal year 2006. Further, the gross rate of savings as a proportion to GDP registered solid growth from 23.5% to 34.8% for the same period.

[ecofin]

Crisis and Investment
According to a report by Barclays the pace of global output shedding has exceeded the drop in demand by a large margin, to the point where output is now well below demand, a situation that tends to bring its own reversal relatively quickly and hence augurs well for global economic recovery.
The World Bank has warned that the recession may trigger curtailment in spending, but increasing investment in public infrastructure during a crisis is the key to growth for emerging economies like India, since, infrastructure projects often take years to prepare, but postponing them has a drastic knock-on effect for medium term growth. As for project investments in India, according to the survey by Projects Today, as of March 31, 2009, there were 29,628 projects worth Rs 42,35,484 crore, a rise of 37.4 per cent in terms of investment and 29 per cent increase in terms of number of projects over the year-ago period. Going forward Projects Today expects the public sector to continue its project investment activities during 2009-10 in the critical infrastructure sectors like roadways, water supply, electricity, irrigation and community services, the same cannot be vouched for the private sector, which appears to be waiting for some more concrete signs of revival. Given this situation, the pace of project investment is thus expected to remain moderate at least in the first half of 2009-10. The industry on the other hand is concerned over prime lending rates ruling well above 10 per cent even when inflation has reached near- zero level and a debate has been raging about the need to abolish sub-prime lending to bring down the PLRs.
Meanwhile, China has unveiled a $10 billion fund and liberal credit lines to help promote a range of infrastructure projects in Southeast Asian nations reeling from the global economic crisis. China has planned to establish a China-ASEAN investment cooperation fund totaling $10 billion, designed for cooperation on infrastructure construction, energy and resources, information and communications in member states like Thailand, Malaysia, the Philippines, Singapore, Laos, Myanmar, Cambodia, Brunei, Vietnam and Indonesia.