India’s Top 500 Companies 2008
  
   
 

Overview of the Indian Economy

Macroeconomic Update

In the past year, the Indian as well as the global economy witnessed substantial deceleration in growth consequent to the global, financial and economic turmoil. However, as the current fiscal year comes to close, the global economy is witnessing a faster recovery with the world output forecasted to grow by 3.9% in 2010 as compared with a decline of 0.8% in 2009, according to the IMF’s January 2010 forecasts. The outlook for the Indian economy has also turned positive given a sustained growth in the industrial production since last few months and the recuperating consumption and investment demand. Further, with improving business sentiment, the D&B’s Composite Business Optimism Index for the first quarter of 2010 witnessed an increase of as much as 43.4% as compared with the previous fiscal. Even as the Indian economy is set on a recovery path, mounting inflationary pressures in the economy pose a downside risk to the growth momentum.

In view of the wider inflationary pressures and their likely impact on margins, the year ahead will be challenging for the Indian corporate sector. While this publication seeks to provide significant insights into ‘India’s Top 500 Companies’, the performance of these companies cannot be analysed in isolation of the broad macroeconomic developments, which form the backdrop for these players - who in turn, have a role in determining the future economic dynamics. An “Overview of the Indian Economy” providing insights into the growth story is therefore apposite.

Indian economy is set on the recovery path in H1 FY10

The onset of the global financial crisis had an impact on India’s economic growth momentum during FY09, though the severity of the impact was considerably less when compared with most developed economies. India’s GDP moderated to 6.7% during FY09, significantly less when compared with 9.0% growth registered in FY08. The sluggish growth in India’s GDP was mainly due to subdued demand conditions in the domestic and international markets and high input costs during the first half of FY09. The pace of the slowdown in India’s GDP was high during Q3 FY09, but was halted in the last quarter of FY09 owing to positive growth in the agriculture sector.

A turnaround in India’s GDP growth took place in the first quarter of FY10, with the GDP registering growth of 6.1% (y-o-y) during the first quarter of FY10 as compared with 5.76% (y-o-y) during the fourth quarter of FY09. The rise in GDP growth, which is viewed as an incipient sign of recovery in the economy, can largely be attributed to the improved performance of industrial sector. Growth in the industrial sector stood at 5.0% (as against 1.4% during the fourth quarter of FY09) driven primarily by the significant increase in the growth of mining and quarrying and electricity sectors. The agriculture sector registered a growth of 2.4% (y-o-y) in the first quarter of FY10 as compared with 3.0% recorded in the corresponding quarter of the previous fiscal. The services sector also witnessed some moderation owing to the lagged impact of the earlier industrial slowdown on services demand.

With the pick up in the industrial activity, GDP registered an impressive growth of 7.87% during the second quarter of FY10. The strong performance of GDP in the second quarter of FY10 points toward the economic revival process that had started to gain ground. The various economic stimuli packages by the government played a major role in boosting the second quarter numbers. Besides, sustained and broad-based improvement in the industrial production provided support to the industrial activity in the economy. Growth in the industrial sector improved substantially to 8.30% during Q2 FY10 driven primarily by significant rise in the growth of manufacturing sector. Further, strong growth in ‘community, social and personal services’ and ‘trade, hotel, transport and communication’ services pushed the growth in services sector to 9.30% during Q2 FY10. The scenario in the agriculture sector, however, remained gloomy owing to deficient monsoon and flooding in certain states. The agriculture sector registered growth of 0.86% during Q2 FY10.

Despite a significant growth in the industrial sector, a decline in agriculture sector growth led to a moderation in overall GDP during Q3 FY10. GDP registered a growth of 6.0% during Q4 FY10 (at 2004-05 base). Among sectors, while agriculture sector registered a decline of 2.8% during the same quarter, industry and services sectors registered a growth of 11.6% and 6.3%, respectively.

A sustained and broad-based expansion in industry activity

The industrial production (as measured by the IIP), which witnessed substantial moderation during FY09, was another key indicator that felt the combined impact of a moderate cyclical downturn and the onset of the global financial and economic crisis. Growth in the IIP slowed down to 2.84% during FY09 as compared with 8.60% during FY08 owing to subdued demand conditions and high input costs during the first half of FY09. The sharp moderation in the pace of IIP growth is also visible from the fact that almost eight out of seventeen industrial groups, having a combined weight of nearly 30% in the overall IIP, registered a decline. Among use-based sectors, growth in the basic goods and capital goods witnessed a considerable slowdown owing to deferment of capacity expansion plans by Indian companies. Growth in consumer durables sector also remained low during FY09 due to deceleration in credit-funded consumption demand. Moreover, the intermediate goods sector registered a decline of 2.84% in FY09 as compared with a growth of 8.95% in FY08 on account of decline in the production of ‘leather and leather products’ and ‘rubber, plastic, petroleum and coal products’. This pulled down the overall IIP growth by almost 36.35%.

Growth in IIP averaged at 3.84% during Q1 FY10 as compared with 0.52% during Q4 FY09 supported by the sustained improvement in growth of intermediate goods and core infrastructure industries sectors. Further, some production activity, especially, mining which normally declines in June every year (start of monsoon in India), had continued owing to delay in monsoon; as a result, the mining sector registered a strong growth of 7% during Q1 FY10 as compared with 3.93% during Q1 FY09. Nonetheless, growth in capital goods sector continued to remain low at 1.29% during Q1 FY10, indicating subdued investment activity in the economy.

A notable improvement in the IIP came about in Q2 FY10, with growth in the industrial production averaging at 9.05%. While this strong performance of IIP can partly be attributed to the low base effect, the lagged impact of fiscal stimulus measures announced by the government in FY09 as well as the RBI’s accommodative monetary policy provided some support to the industrial activity. Moreover, restocking following the earlier cutbacks in factory output and drawdown of inventories as demand started to improve aided the industrial production in Q2 FY10. Growth in the manufacturing sector surged to an eightquarter high of 9.20% during Q2 FY10 from 3.39% during Q1 FY10. Given the increase in infrastructure spending by the government and some resumption in investment activity of the corporate sector, production in capital goods sector registered a growth of 8.16% during Q2 FY10 from merely 1.29% in the previous quarter. The consumer durables sector also witnessed an impressive growth on the back of recuperating domestic demand conditions. Growth in consumer durables sector averaged at 23.64% during Q2 FY10 as against 15.65%
during Q1 FY10..

The double-digit growth of 12.98% in IIP during Q3 FY10 is reflective of the improving consumer confidence and the impact of the government stimulus package on demand, even as the low base effect also continues to play a role. Further, the production of the consumer goods sector witnessed a sharp increase on the back of the revival in consumer demand consequent to tax concessions and easy availability of credit. The growth in capital goods sector also witnessed a sustained improvement during Q3 FY10 pointing towards restoration of investment activity.

Increase in government expenditure fuels overall consumption demand

One of the key drivers of India’s strong economic performance during the years preceding FY09 was robust domestic demand. However, the global financial and economic crisis put severe pressure on both consumption and investment demand. Private final consumption expenditure contracted sharply to 2.9% during FY09 as compared with 8.5% in FY08. In order to stimulate the domestic demand conditions, the government announced various fiscal measures during FY09, in turn, leading to significant rise in the government final consumption expenditure (GFCE) from 7.4% in FY08 to 20.2% in FY09.

Growth in private final consumption expenditure continued to remain low at 3.5% during Apr-December 2009. The government final consumption expenditure, however, remained high at 9.0% during Apr-Dec 09 due to increased expenditure of the government. The scenario, however, changed significantly in Q3 FY10, as the GFCE declined substantially by 10.3% indicating a gradual reduction in the government spending.

Resumption of domestic investment activity in Q2 FY10

The intensification of the global financial and economic crisis and consequent slowdown in the domestic industrial activities resulted in deferment of capacity expansion plans by corporates in India. This further led to a considerable moderation in investment growth as measured by Gross Fixed Capital Formation (GFCF) to 8.2% in FY09 as compared to 12.9% in the previous fiscal year.

Growth in GFCF declined to a low of 4.2% in Q1 FY10 as firms continued to postpone their expansion plans. An improvement in the sentiment came about from the second quarter of FY10, when demand for investment started to improve as the economy set on a recovery path. Growth in GFCF was at 7.3% during Q2 FY10, which further rose to 8.9% during Q3 FY10.

Prices of primary food articles remain high

The price scenario in India remained extremely volatile during FY09, with India’s headline inflation as measured by the Wholesale Price Index (WPI) spiraling upwards during the first half of FY09 and declining subsequently in the second half. During Apr-Aug 08, high international crude oil prices as well as high prices of commodities such as iron and steel, basic heavy inorganic chemicals, machinery and machine tools, oilseeds & oil cakes, raw cotton and textiles led to a significant rise in the WPI inflation. The WPI inflation peaked at 12.82% during Aug 08. From Aug 08 onwards, however, the WPI inflation reversed its trend and started moderating. The headline inflation eased to 1.20% during March 09 on account of declining international prices of crude oil, metals and food articles and the lagged effects of the monetary expansion measures.

The headline inflation continued to march southwards during Apr-May 09 and finally slipped into the negative zone in Jun 09, primarily due to the high statistical base. Inflation turned negative, -1.01% during Jun 09, for the first time in more than 30 years. Although, the WPI inflation had turned negative, there was no respite for the common man as prices of food items like fruits and vegetables, food grains and oil were higher than last year. The consumer price inflation for industrial workers remained elevated at 8.63% during May 09. After remaining in the negative territory for almost three months (Jun-Aug 09) the WPI inflation turned positive during Sep 09 (0.5%, y-o-y). Given the high food articles prices, expected lower kharif output during 2009-10, excess liquidity in the system and the waning base effect, the WPI inflation started to rear its head again since Sep 09. The headline inflation surged to 8.56% during Jan 10– far above the RBI’s tolerance level – owing to high prices of primary food articles and rise in the fuel group and manufactured products’ inflation.

RBI signals exit of accommodative monetary policy

The RBI’s monetary policy stance shifted significantly from monetary tightening on concerns related to inflation in the first half of FY09 to easing of monetary policy to maintain the financial stability and arrest growth in the second half. In the first half of FY09, high inflation and excess liquidity conditions in the system induced the RBI to tighten its monetary stance to rein in inflationary expectations and to decrease demand-side pressures on the inflation front. In addition to the hike in key policy rates, the RBI had resorted to auctions under the Market Stabilisation Scheme (MSS). Meanwhile, with increase in Cash Reserve Ratio (CRR) and increased absorption of liquidity through LAF and MSS, tight liquidity conditions were observed in the banking system. Call rates surged to 9.00% during Jul 08 and remained above this level for most part of Aug 08. Given the rise in policy interest rates, banks announced a hike in their lending rates.

However, as the global financial turmoil started to affect domestic liquidity conditions, the RBI’s monetary stance shifted from controlling inflationary expectations to maintaining financial stability and preventing a decline in the flow of liquidity. The RBI announced several conventional and unconventional measures towards monetary easing since Sep 08 to ensure that the flow of credit to the productive sectors of the economy did not get affected in light of the economic downturn. These mainly included reduction in repo and reverse repo rates as well liquidity augmentation measures such as availing liquidity under repo window, reduction in CRR and buyback of securities under the MSS. The actual/potential provision of primary liquidity was Rs 5.6 trillion, which accounted for almost 10.50% of the GDP. The earlier mentioned liquidity measures helped in easing liquidity pressures in the economy. Money supply (M3) was growing by 18.6% as at end-Mar 09, as against the RBI’s target of 17% for FY09. Further, with the reduction policy interest rates, banks lowered their lending rates. Call rates also eased significantly, indicating comfortable liquidity conditions.

The liquidity conditions in the economy continued to remain comfortable during Apr- Jan 10 as indicated by lower call rates and SCBs taking higher recourse to reverse repo window. Money supply (M3) grew by 17% (y-o-y) outstanding as on Jan-29-10. Given the comfortable liquidity conditions in the system and mounting inflationary expectations, the RBI reversed its stance of accommodative monetary policy to monetary tightening in the second quarter review of the monetary policy. The RBI did withdraw some unconventional liquidity augmentation measures announced as part of its monetary stimulus measures, thereby signaling towards the exit of expansionary monetary policy. With the headline inflation crossing the RBI’s tolerance level in Q3 FY10, the RBI announced a 75 basis point hike in CRR.

Growth in bank credit remains low

With the rising risk aversion among banks and low credit offtake consequent to slowing domestic economic activities, growth in non-food credit of scheduled commercial banks (SCBs) moderated to 17.5% as at end-March 2009 as compared with 23.0% a year ago. Food credit outstanding as on March 2009 grew by 4.08%.

Growth in the bank credit continued to moderate during the first half of FY10 owing to low demand for credit from the private sector. Credit offtake registered a growth of 12.6% outstanding as on 25-Sep-09 as against 24.8% during the year-ago period. Growth in bank credit, however, witnessed some improvement during Oct-Jan 10 on the back gradual revival in demand for bank credit across sectors as well as reduction in risk aversion on part of banks. Bank credit registered a growth of 14.8% as on 29-Jan-10 lower than the growth of 19.3% during the year-ago period. This can partly be attributed to the availability of credit from non-bank avenues such as own capital of corporates, capital markets, NBFCs and foreign capital investment.

Exports growth turns positive in Nov-09 after a gap of 13 months

The global economic slowdown in the latter half of FY09 had an adverse impact on India’s merchandise trade, with both exports and imports declining swiftly in tandem with the deepening of recession in developed economies. India’s merchandise exports during FY09 moderated significantly to 3.4% as against 29.0% in the previous year. This slowdown in exports could be attributed to the significant moderation in exports growth in petroleum and crude products, agriculture and allied products and ores and minerals, as global demand for India’s exports waned owing to the financial crisis. Given the significant moderation in exports, the government announced a slew of stimulus measures to help exporters improve their performance.

India’s merchandise imports also moderated considerably to 14.3% in FY09 from 35.5% a year ago owing to subdued domestic demand. A sharp decline in oil prices during the second half of FY09 led to a deceleration in India’s oil imports bill to 16.9% as compared with 40.0% in FY08. Non-oil imports growth also slowed down to 13.2% in FY09, mainly due to a moderation in import growth of capital goods, gold and silver. The trade deficit stood at US$ 119.1 bn as against US$ 88.5 bn in FY08.

The subdued global demand continued to affect India’s exports, with exports declining by 30.03% (y-o-y) in the first quarter of FY10. Imports also witnessed a decline of 35.05% (y-o-y) in the same quarter given the muted domestic demand, thereby resulting in a trade deficit of US$ 26 bn.

More concrete signs of stabilisation in the world economies and improvement in domestic demand came in Q2 FY10. While both exports and imports continued to decline in the second quarter when taken on a y-o-y basis, the pace of the decline was significantly less when compared on q-o-q basis. A recovery in global manufacturing activity, improving financial market conditions and resurgence in risk appetite in most global economies put a cap on the decline in exports, while a sustained improvement in domestic demand following the improvement in the domestic economic activity restricted the decline in imports. India’s exports declined by 21% (y-o-y) during Q2 FY10, while imports declined by 19.6% (y-o-y), leading to a trade deficit of US$ 32.2 bn.

After witnessing a decline for almost 13 months, exports registered a positive growth of 18.24% during Oct-09, thereby indicating stabilising external demand conditions. Exports grew by 6.95% during Q3 FY10 as against a decline of 3.82% during Q3 FY09. After witnessing a sustained decline for 11 months in a row imports also clocked a positive growth of 27% (y-o-y) during Dec 09, primarily due to high oil import bill. While the high growth rate on a y-o-y basis can partially be attributed to the low base, imports have witnessed a sizeable growth on a month on month basis, in absolute terms, indicating improving domestic demand conditions. Imports registered a growth of 3.23% during Q3 FY10 as compared with 14.18% during Q3 FY09, resulting in a trade deficit of US$ 28.64 bn.

With the widening merchandise trade deficit and a decline in net invisibles accrued during FY09, the current account deficit as a percentage of GDP for FY09 rose to 2.6% as against 1.5% in the previous fiscal. Net inflows under capital account also witnessed substantial moderation on account of FII outflows and significant decline in net banking capital. This led to overall Balance of Payment (BoP) deficit of US$ 20.08 bn during FY09 as against a surplus of US$ 92.16 bn in the previous fiscal. Despite lower mechandise trade deficit, the current account deficit increased to US$ 18.62 bn during H1 FY10 as against US$ 15.85 bn mainly on account of lower net invisibles surplus. A moderation in net invisibles surplus was primarily due to a decline in services exports, particularly non-software services. Net capital flows were, however, higher during the first half of FY10 owing to resumption in FII inflows. Foreign Institutional Investors’ (FII) investments rose significantly owing to a recovery in domestic stock markets and comparatively better growth prospects of India. Net FII inflows amounted to US$ 15.26 bn in the first half of FY10, turnaround from an outflow of US$ 6.61 bn in H1 FY09. NRI deposits also witnessed higher inflows during H1 FY10.

Moreover, foreign direct investment (FDI) into India remained high during H1 FY10, as the investment climate within the country improved and liberalisation measures related to FDI continued to make India an attractive investment destination. This led to overall Balance of Payment surplus of US$ 28.15 bn during H1 FY10. Further, higher capital inflows along with the allocations of SDRs by the IMF resulted in a rise in the forex reserves by US$ 9.5 bn on a BoP basis during H1 FY10.

In the forex market, the rupee depreciated significantly vis-à-vis US Dollar during FY09 owing to a rise in oil importer-led dollar demand, huge FII outflows, a bearish trend witnessed in the domestic stock markets and strengthening of the US dollar against major global currencies. The rupee witnessed a steep depreciation from 40.03 per US$ in Apr 08 to 51.23 per US$ in Mar 09. There was a reversal in the downward trend of the rupee during Apr-Jan 10 on the back of rise in foreign capital inflows and NRI deposits and weakening in the US Dollar in the international markets. The rupee appreciated to 45.96 per US$ in Jan 10 from 50.06 per US$ in Apr 09.

Fiscal deficit for FY10 remains high at 6.70% of GDP

The Central government finances came under significant pressure during FY09. Rising inflationary pressures prompted the government to introduce measures such as reduction in duties on petroleum products and increased subsidies on food and fertiliser. In addition to this, the stimulus measures were introduced in the form of tax cuts and increased government expenditure to counter the moderation in economic growth, which led to the significant widening of gross fiscal deficit and revenue deficit. The fiscal deficit as a percentage of GDP surged to 6.0% in FY09 as compared with 2.6% during FY08.

The continuation of fiscal expansion to boost aggregate demand led the fiscal deficit to remain high at 6.70% of GDP during FY10. In absolute terms, this implied a 22.86% (y-o-y) rise in the fiscal deficit, which is much higher than the GDP growth of 10.80% (in nominal terms as per the advance estimates) during FY10. The higher level of fiscal deficit during FY10 can largely be attributed to the tax cuts announced as a part of the fiscal stimulus packages in H2 FY09. Non-tax revenue was also low during FY10 as the auction for third generation (3-G) spectrum, which was expected to bring in significant proceeds, did not take place. On the expenditure side, while major food subsidies increased substantially, this was more than offset by a decline in fertiliser subsidies. Further, defence expenditure, interest payments, grants to states and Union Territories, planned expenditure, revenue expenditure and capital expenditure all witnessed a rise, thereby pushing up total expenditure.

Text Box: Highlights of the Union Budget for FY11

Source: Ministry of Finance

Future Outlook

A confluence of indicators such as industrial production (particularly consumer durables and capital goods), car sales, cement dispatches and exports have witnessed substantial improvement in recent months. Although robust growth rates of many of these indicators can partly be attributed to the low base of the previous year, the prospects of a stronger and quicker recovery appear bright. Further, the substantial growth in the industrial sector might offset some of the negative impact of the expected lower agriculture sector growth and support the overall GDP in second half of FY10. Nonetheless, a sustained improvement in private sector demand would be crucial in maintaining the growth momentum and mitigating the impact of expected reduction in the government spending. Besides, the current growth in the production of capital goods will need to continue on a sustained basis over the next few months, to support overall economic recovery.

Even as the economy is set on the recovery path, there exist certain downside risks to growth. One of the most urgent concerns is of mounting inflationary pressures in the economy. An unabated rise in the prices of primary food articles (particularly food grains) that could further spill over to manufactured products segment going forward, has raised concerns of a wider inflationary pressures in the economy. To add to this, if a hike in administered prices of petrol and diesel is done by the government given increase in the prices of crude oil in international markets, this will further fan inflationary pressures in the economy in the medium term. Further, the price rise across the sectors could translate into higher input costs and wage costs. Although the domestic demand conditions have witnessed some recovery, some downside risks still remain, and companies may feel pressure on their margins.

The rising inflationary concern calls for timely action by the RBI and the government. The RBI has already started to tighten its monetary policy stance through a hike in CRR in the third quarter review of monetary policy. Nonetheless, the RBI is likely to take further monetary measures in the near future to arrest the rapidly building inflationary expectations. The stimulus provided by the government in the form of duty cuts, tax benefits and increased government spending has been instrumental in supporting the economic activity in the current fiscal so far. Given that there has been enough confirmatory macroeconomic data that justify roll back of this fiscal stimulus, the government is expected to gradually phase out the fiscal stimulus in an attempt to consolidate the high fiscal deficit.