India Economics

Economic
Market Spotlight: The central bank continued to cut interest rates in April and the monetary policy easing
cycle is far from over. Sings of an economic slowdown are now in full swing, with weaker industrial
production growth, manufacturing and exports. Growth will falter further in 2009 as the lingering liquidity
crunch and the global slowdown drive down business confidence and personal spending. The newest
Credit Agencies:
terrorist attacks in Mumbai will only reinforce the downward trend. Real GDP growth eased to 7.4% in
Moody’s: Baa3 2008 and will slow further to 3.5% in 2009 from 9.2% in 2007.
S&P: BBB-
Recent performance: Real GDP growth slowed to 7.4% for the year after posting a growth of 5.3% for
Fitch: BBB- the final quarter of 2008 and will remain below trend over the next few quarters. The weak performance in
Nominal GDP (2007): the industrial and agriculture sectors and a sharp decline in gross investment levels heightened the growth
USD 1,131 billions decline in Q4-08. Impacted by the negative movement in exports, industrial activity continued to wane
dropping 1.2% y/y in February following a 0.4% y/y increase in January. This is a far cry from the double-
Population (2007):
digit growth rates seen in the second half of 2006 and first half of 2007.
1,110 millions
Fiscal policy: The budget for the 2008-2009 fiscal year projected continued improvements for the deficit,
Total Trade / GDP (2007): to 2.5% of GDP, and tax revenues, to 13% of GDP. However, higher prices for food, oil and fertilizers until
32.8% mid 2008 resulted in greater than expected off-budget spending for the government in the form of
Currency: subsidies, financed with bonds. Including the one-time USD 15 billion debt forgiveness scheme to small
farmers and back pay from the Sixth Pay Commission will bring the actual deficit closer to 7% of GDP.
Indian rupee
Much-needed infrastructure spending will see some improvements, with increase of 20% for power, road
Exchange regime: and rail, and 50% for ports. The debt to GDP ratio will continue to improve but remain high nonetheless,
Managed float reaching 70% by the end of the next fiscal year. India cannot join the bandwagon of substantial fiscal
Merchandise imports from
stimuli announcements since it does not have the room for sizeable supplemental spending. The
Canada (2008) announced stimulus will pressure the government’s fiscal situation further.
CAD 1,683 millions Monetary policy: The Reserve Bank of India (RBI) continued its monetary loosening in effect since
October and slashed the repo rate 25bps in April to 4.75%, but maintained reserve requirements at 5.0%.
Main sources of Foreign
Exchange (excl. FDI): Indian banks are heavily regulated and not exposed to the US bad assets, but there continues to be a
liquidity crunch in the economy and banks have been reluctant to lend to each other. Higher energy prices
Manufactured goods earlier in 2008 had forced the government to increase retail fuel prices, bringing the Wholesale Price
Remittances Index (WPI), the RBI’s target indicator for inflation, close to 12% in July. March WPI is however nearing
Main Merchandise Export zero at 0.7%, well below the 5% inflation target rate, on the dramatic decline in commodity prices together
Destination: with weak domestic demand. This coupled with the ongoing liquidity crunch may translate into future
US (17 %) monetary easing. CPI which captures food prices however so far has failed to decline as much.
Main imports: The external sector: The surge in oil prices since 2007 had boosted the import bill, resulting in record
trade deficits in the first half of 2008. The subsequent plunge in commodity prices failed to materialize into
Manufactured goods (31%)
current account gains for India since the rupee has depreciated considerably and export performance into
Mineral fuels (10%) 2009 has been dismal. The current account deficit deteriorated markedly in the last three quarters of 2008
Risks to the Outlook after improving in the first quarter on record services exports and remittances. While the overall balance of
payment figures for the first half of 2008 still showed a surplus, this no longer held for the second half of
the year. Net portfolio investments have turned negative for the year, thus pressuring the balance of
Higher government payments. Foreign reserves had declined in recent months, but remain sizeable at over USD 242 billion in
spending ahead of March, representing over 7.9 months of current account debit cover. The external debt is small at 13.7%
elections
of GDP supporting solvency. After appreciating 11% in 2007, the rupee depreciated in 2008, losing 20.7%
Weaker External demand against the USD. In 2009, the rupee regained some strength and so far depreciated only by 1.12%.
Trade deficit surge
Outlook: Tighter monetary policy and a depreciating rupee that has failed to bolster exports in light of
weaker global demand will continue to pressure growth. The most recent monetary easing will not offset
May 2009 the trend in the short term. Growth will slide to 3.5% in 2009 and 5.2% in 2010, while the medium term
Anne-Marie Shaker outlook remains favourable. With elections due, the push for substantial reforms is expected to be limited
ashaker@edc.ca until then. The move towards gradual liberalization and deregulation will continue under the next
government; but there seem to be little appetite at the moment to undergo major reforms. We expect
medium term growth to return to its current growth potential of 7-8% but not before 2011.
18 Industrial Production
Economic Indicators
(y/y % change)
03-07 avg. 2008 2009 2010 16
Industrial pro ductio n
GDP (% growth, real) 8.9 7.4 3.5 5.2 14 3-mo nth mo ving average
Inflation (%, year-end) 4.9 8.2 5.4 4.4 12
Fiscal Balance (% of GDP) -3.8 -6.0 7.0 -4.8
10
Exports (% growth) 24.3 20.1 -8.0 10.6
8
Imports (% growth) 30.7 33.1 -8.5 12.1
6
Current Account (% of GDP) -0.3 -3.6 -4.0 -3.9
Reserves (month of imports) 9.9 7.6 7.7 6.5 4
External Debt (% of GDP) 16.0 14.0 14.6 13.8 2
Debt Service ratio 10.5 6.2 7.1 6.5 0
Currency (per USD, year-end) 43.6 48.8 47.0 45.8 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09
Source: EIU, EDC Economics Source : Bloomberg
 India Economics
General Political Environment: The Indian National Congress (Congress) and its allies in the United
Progressive Alliance (UPA) have ruled since 2004 and recently was re-elected to a second five-year
Political
term in May 2009. The UPA coalition’s victory wasn’t overly surprising; however, the margin of its
victory was astonishing. The UPA secured 261 of the 543 seats available in the lower house of Political Structure
Federal State
parliament. The opposition coalition led by the Bharatiya Janata Party (BJP) finished a distant second
Parliamentary Democracy
with 158 seats.
President
The biggest surprise of the election was not the success of Congress, but more the stumbling of Pratibha Patil
several of the more prominent regional parties that contested the polls. In the lead-up to the elections,
there were plenty of predictions that the virtually uncontested reign of the national parties (i.e. Prime Minister
Congress and BJP) had come to an end and that the country’s political future lay with the plethora of Manmohan Singh, Indian
regional parties, if not as kings then at least as king-makers. While certain of these did succeed in National Congress (INC)
increasing their parliamentary seat-count, the majority of seats that changed hands went to Congress,
National Legislative Bodies
a party which has experienced increased success in each of the last three parliamentary elections. • Lok Sabha (Lower House)
545 members (chosen
The rise in prominence of regional parties (i.e. parties with a political presence in fewer than four through direct election)
states) in Indian national politics has been one of the most significant political developments to occur • Rajya Sabha (represents
in contemporary India, with over 30 political parties represented in Parliament. While this interests of Indian states)
phenomenon will continue in India, thereby requiring coalitions of parties to form governments, the 245 members (233 elected,
2009 election results reflect the continued prominence of national parties, namely Congress, on the 12 appointed by President)
political scene.
Major Parties
• Indian National Congress
Investment Environment: Despite India’s foreign investment policy allowing 100% FDI in most (INC)
sectors, India has thus far failed to reach its full potential as a destination for FDI. The government’s • Bharatiya Janata Party (BJP)
attempts at increasing FDI inflows have been hampered by the several impediments including • Samajwasi Party
pervasive corruption, an unwieldy bureaucracy, and a significant deficit in critical infrastructure. India • Bahujan Samaj Party
is known for diverse operating environments with regulations varying from state to state. • Communist Party of India-
Marxist (CPI-M)
Significant reform in investment-related matters, particularly regarding foreign investment, was
delayed over the past few years largely due to the UPA’s reliance on India’s communist parties for Last Elections
support in parliament. The ending of this support in 2008 enabled limited reforms to be passed. For April/May 2009
example, in February, the government initiated changes that further opened-up certain sectors such
Next Elections
as insurance, telecom and retail, to FDI. The government’s move didn’t alter the FDI caps in place in April/May 2012
these sectors but instead permitted foreign equity investments beyond the limit to occur indirectly.
Press Freedom Survey:
One expectation is that the re-elected UPA government, that no longer relies on India’s main leftist • 2008 Score: 35 - partly free
parties for support, will now be in a position to push through further economic and investment (0: Free; 100: Not Free)
reforms, many of which will provide opportunities for foreign investors. The reform agenda is likely to freedomhouse.org
be moved forward but probably at a gradual pace, particularly given the present state of the global
economy as well as the diversity of views on these issues, even within the Congress party itself. Control of Corruption Index:
• 2007 Score: -0.39
(-2.5: Worst; +2.5: Best)
Political Violence: Several terrorist attacks in 2007-2008, including bombings in Delhi, Ahmedabad, worldbank.org
Bangalore, Jaipur and Hyderabad have highlighted the threat posed by Islamist terror groups within
India. The latest and most devastating of these attacks occurred in Mumbai in November. Over a
period of three days, a dozen gunmen struck several targets, including two luxury hotels and a rail
terminus, killing over 180 people. Although the majority of the known victims were Indian nationals,
the attackers singled out foreigners during the hotel sieges, particularly UK and US nationals.
May 2009
Tensions with Pakistan have threatened regional stability since 1947. Several years of peace talks on
the Kashmir issue have resulted in little progress and the area witnessed considerable unrest in mid- Peter Whelan
2008 as anti-government demonstrations were met with force by security forces. The Mumbai attacks pwhelan@edc.ca
led to a deterioration in Indo-Pakistani relations as many of the attackers were Pakistani with the
Indian government claiming that Pakistani government agencies may have also been involved.

Other political violence issues include sporadic Hindu/Muslim communal violence, the ongoing Maoist
(Naxalite) insurgency in central and eastern India and ongoing separatist insurgencies in the
northeastern states, particularly Assam.

Political Outlook
Elections held in April/May 2009 provided the Congress-led UPA coalition with a strengthened mandate, which should ensure its
interrupted rule over the next five years. Its situation is much stronger than its previous term when it required significant support from
outside the coalition. Although political violence is a fairly common occurrence in India, the Mumbai attacks of November 2008 were
shocking due to the level of sophistication and the selection of targets, including the focus on foreigners. The Mumbai attacks
underscore the ongoing risk of terrorist attacks throughout the country, and also set Indo-Pakistani relations back several years.
Although outright war is unlikely, bilateral relations will be tense for the foreseeable future.