India. In pictures.

1. India. In pictures. A graphical representation of the Indian economy

2. India: Key facts & figures… INDIA, SHINING? Factors that play a very vital role in achieving our objective of a sustainable long-term growth in GDP. We still have a long way to go! Source: UNDP, Economist

3. Real GDP growth: 5-year average… 7.0 6.0 5.0 4.0 3.0 2.0 FY56 FY62 F68 FY74 FY80 FY86 FY92 FY98 FY04 Our view… What this graph means? Gross Domestic Product (GDP), in crude terms, is the output of an economy. Like a company has sales, an economy has GDP. This graph indicates the 5 year average real GDP growth (GDP net of inflation) over the last fifty years. The graph indicates that real GDP growth, as calculated on a 5-year moving average basis, has been on a constant rise. This clearly indicates that while there have been cycles, the run-rate of our economy’s growth has shown an improving trend. Source: RBI

4. Real GDP growth & Per capita GDP… Per capita GDP (Rs) Real GDP growth (RHS, %) 25,000 10.0 20,000 8.0 15,000 6.0 10,000 4.0 5,000 2.0 0 0.0 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 Our view… What this graph means? Apart from the growth in GDP, how this growth is shared is also important. If the population growth is higher, then GDP has to grow faster. This will increase income at the hands of the populace. While per capita GDP is a good factor, it does not clearly reflect the disparities in income levels While India boasts of as one of the fastest growing economies in the world, the slow growth in per capita GDP tells the other side of the story. Though we are among the top five economies in the world in terms of size, in terms of per-capita GDP, we are lagging way behind. Source: CMIE

5. Real GDP contributors (%)… Agriculture & allied Industry Services 60.0 50.0 40.0 30.0 20.0 10.0 1950s 1960s 1970s 1980s 1990s 2000-01 2001-02 2002-03 Our view… What this graph means? GDP basically comprises of output by agriculture, industrial and services sectors. If one were to break this up further, while agriculture includes allied activities, the industrial sector includes capital goods, mining, electricity and services includes housing, banking, transportation, utilities and tourism. As can be seen from the graph above, the contribution of the services sector has significantly outpaced the other two. While every economy goes through this transition, the Indian economy has missed the industrial transition. We are now a services led economy. But is services the answer? Source: RBI

6. GDP & its constituents (% growth)… Industry Services Agriculture GDP 14.0 10.0 6.0 2.0 -2.0 -6.0 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 Our view… What this graph means? Growth of an economy is a influenced by the performance of its constituents. Though it is important to understand what contributes to the GDP, it is also important to understand what proportion of the population is dependent on each of these constituents. One of the basic reasons of the underperformance of the Indian economy has been the volatile growth of the agricultural sector. Even when the contribution from this sector is around 25% of GDP, the fact that almost 70% of the population depends on it has affected our economic performance. Source: CMIE

7. Growth in agricultural production & GDP… Agricultural production (%) GDP (RHS, %) 30.0 9.0 20.0 8.0 10.0 7.0 0.0 6.0 -10.0 5.0 4.0 -20.0 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 Our view… What this graph means? The graph is indicative of a high level of co-relation between India’s GDP growth and growth of agricultural production. We have already mentioned in the previous slide about the large dependence of India’s GDP growth on the performance of the agricultural sector. This graph just proves our point. Can we continue to ignore this sector? Source: CMIE

8. Investments by the manufacturing sector… Gross fixed assets (% growth) Sales (% growth) 20.0 15.0 10.0 5.0 0.0 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 -5.0 Our view… What this graph means? Economy functions in cycles i.e. trough, recovery, peak and deceleration. Generally, close to the peak, investments in physical assets tend to be on the higher side and vice versa. Investments by the manufacturing sector is thus, a crucial factor to watch out for. The excess investments by the manufacturing sector in the mid-1990s seem to be drying out. Sales growth has continued to outpace investment in physical assets. Of course, consolidation has played a role. But how long can the sector grow sales without additional investments? Investment recovery in sight! Source: CMIE

9. Where the Rupee comes from… Other Capital Receipts (17.7%) Tax Revenue (42.0%) Borrowings (24.4%) Non-Tax Revenue (15.9%) Our view… What this graph means? The pie chart represents various sources of revenue for the Indian government. Tax revenue contributes the largest chunk (42%) followed by borrowings (24%) and other capital receipts (17.7%). Disinvestment receipts is 17.0% of other capital receipts. While tax revenue accounts for a larger portion of government’s total revenues, a sedate growth in this stream is a cause of concern. Also, the fact that borrowings make a large chunk is indicative of the government’s rising indebtedness. Source: RBI

10. Where the Rupee goes… Other Non-Plan Expenditure (18.4%) Plan Expenditure (27.6%) Subsidies (11.1%) Interest Payments (28.1%) Defense (14.9%) Our view… What this graph means? Any government, like a company, has to spend towards various aspects to improve competitiveness. This graph indicates the areas of expenditure of the Indian government. The central government’s expenditure can be broadly segregated into revenue and capital expenditure. The pie indicates that the government spends a big chunk of its total expenditure towards interest payments (unproductive). However, the plan expenditure, which includes spending towards infrastructure development, has a lower share. One of the major reasons for India’s slow rate of growth. Source: RBI

11. Constituents of tax receipts (% of GDP)… Direct Tax Indirect Tax Expenditure 20.0 16.0 12.0 8.0 4.0 0.0 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 Our view… What this graph means? The graph indicates the Central governments’ major sources of revenues – direct and indirect taxes – as a percent of GDP. Expenditure as percent of GDP indicates that receipts are not enough for the government to meet its expenditures. As we had mentioned in the previous slide, growth in tax revenues has been inadequate and this has been a concerning factor. Better tax administration and widening the tax net are some measures that could bridge the gap. Source: CMIE

12. Constituents of non-plan expenditure (%)… Subsidies Defense Interest payments 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 Our view… What this graph means? The graph shows various constituents of the government’s non-plan expenditure as a percent of the total non-plan expenditure. The biggest expense of 28.1% goes towards interest payments. Among the remaining two, while defense expenditure has been falling, that towards subsidies is on a rise. The high levels of interest payments, as shown in the chart above, are a result of the Indian government’s rising indebtedness (see the next slide). While subsidies, per se, are not bad, in most of the cases, it has failed to serve the purpose. Source: CMIE

13. Increasing debt burden of the government… Outstanding internal debt (Rs trillion) % of GDP (RHS) 12.0 44.0 9.0 38.0 6.0 32.0 3.0 26.0 0.0 20.0 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 Our view… What this graph means? The above graph indicates the Central government’s rising internal debt and the same as a percent of GDP. The graph is actually meant to indicate the rising burden on the Indian government towards making capital and interest repayments that is likely to hamper its development expenditure. As the previous slide indicated, the biggest burden on the Indian government is due to high interest expenses. The cause can be found out in the graph above. Though the government has benefited from the low interest regime, in absolute terms, debt burden has continued to increase. Source: CMIE

14. Major Deficit Indicators of Central Govt. (%)… Fiscal Deficit Revenue Deficit Primary Deficit 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 2001-02 2002-03 2003-04 (BE) Our view… What this graph means? Deficit simply means the excess of expenditure over receipts or the amount that the government borrows in a fiscal . This is a result especially of the government’s profligacy on various non-plan expenses like interest payments and subsidies. While deficits are unavoidable for a developing economy, as the govt. has to spend towards various initiatives from a long-term perspective, the case of India is different. The govt.’s largest expenses are towards non-development aspects (as shown in Slide 10), which is concerning. Source: RBI

15. Interest rate & Change in money supply… Interest Rate (%) Money Supply (RHS, %) 9.0 17.0 8.0 16.0 15.0 7.0 6.0 14.0 5.0 13.0 1999-00 2000-01 2001-02 2002-03 2003-04 Our view… What this graph means? In a market-based economy, the price of money (interest rate) is determined by the demand and supply of the same. The graph shows the effect of increased money supply in the economy on the interest rates. Despite the Indian government’s high deficit and consequently, rising borrowings, the liquidity or the supply of money in the Indian economy has been robust. One major reason for this is the consistent inflow of foreign capital. High liquidity is one factor that has supported the softer interest rate regime. Source: CMIE

16. Interest rate & GDP growth… Interest Rate (%) GDP Growth (RHS, %) 13.0 10.0 11.0 8.0 6.0 9.0 7.0 4.0 2.0 5.0 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 Our view… What this graph means? This graph shows the co-relation between interest rates and the GDP growth. Interest rate here means the bank rate or the rate at which the RBI lends money to commercial banks. Over the past few years, we have had a soft interest rate regime, mainly due to high liquidity (see Slide 15). As shown in the graph, the softer interest rate regime over the past few years has had a lag effect on the growth of the Indian economy. Lower interest rates, apart from helping companies to restructure their existing high-cost debt to low-cost ones, has also boosted retail demand for money. Source: CMIE

17. Interest rate & Inflation… Interest Rate (%) Inflation (RHS, %) 9.0 4.4 8.0 4.2 7.0 4.0 6.0 3.8 5.0 3.6 1999-00 2000-01 2001-02 2002-03 2003-04 Our view… What this graph means? This graph shows the relationship between interest rates and inflation. It all happens in a cycle. Across the world, the central bankers are concerned about inflation. If inflation goes beyond unacceptable levels, the central bank raises interest rates to slowdown growth. Despite rising fiscal deficit and strengthening of oil prices, inflation has remained under check in the last five years. This was due to low capacity utilisation and lack of significant credit demand from corporates. Adequate liquidity has prevented any upward pressure on interest rates. Source: CMIE, World Economic Outlook, 2003

18. Annual Consumer Price Inflation (%)… 20.0 15.0 10.0 5.0 0.0 US Japan EU China India -5.0 1995 1996 1997 1998 1999 2000 2001 2002 2003 Our view… What this graph means? Inflation has been a global phenomenon. And when it rises beyond a point, it becomes a menace. The above graph indicates that, when compared to some of the developed and developing economies over the past few years, inflation in India has been relatively higher. One key factor that impacts inflation globally is oil prices. Though inflation is country specific, in the last few years, crude prices have remained firm. The RBI, in its annual monetary policy, has projected inflation in India at 5% for FY05 (target for FY04 was 4.0% to 4.5%). Source: World Economic Outlook, 2003

19. Rs/US$ rate & Forex reserves… Forex Reserves (US$ bn) Rs/US$ rate (RHS) 120 49.0 48.0 100 47.0 80 46.0 45.0 60 44.0 40 43.0 42.0 20 41.0 0 40.0 1999-00 2000-01 2001-02 2002-03 2003-04 Our view… What this graph means? The graph indicates rising foreign exchange inflows into the Indian economy and the consequent effect on the exchange rate. Rupee has strengthened vis-à-vis the US dollar. The reason for this is that a large supply of the dollar has led to a fall in dollar value thus having a strengthening effect on the rupee. A large amount of these forex inflows have come in the form of remittances from NRIs. Increased inflow of FII money has also played its part. However, as Mr. Ajit Dayal says, India is a developing country and we need to borrow to invest in assets. In the long-term, rupee is likely to weaken. Source: CMIE

20. India: So, what’s the call? • The essence of democracy • Growing entrepreneurial culture • Changing population mix (rising middle- • class and younger population) • Low penetration levels across sectors • A robust financial sector • Large low cost talent pool • Lack of vision among policy makers • Bureaucratic hurdles • Poverty, illiteracy and inadequate • healthcare • Concerning fiscal situation India: So, what’s the call? Reasons to buy… Reasons not to buy…

21. Key terms… Fiscal Deficit is the excess of expenditure over government’s receipts in an accounting year. More simply, it equals the amount of borrowings made by the government in a year. FD = Total Expenditure – Revenue Receipts – Disinvestment Receipts – Recovery of loans Higher Fiscal Deficit leads to Increased Govt. Borrowing leads to Increased Spending leads to Greater Money Supply leads to Inflation leads to Demand for money exceeding supply leads to Higher Interest Rates Revenue Deficit is the excess of revenue expenditure over revenue receipts. Primary Deficit is measured by Fiscal Deficit less interest payments. Subsidies, as defined by the Economist, are payments, usually made by the government, to keep prices below what they would be in a free market, or to keep alive businesses that would otherwise go bust, or to make activities happen that otherwise would not take place. Subsidies can be a form of protectionism, by making domestic goods and services artificially competitive against imports. Inflation means rising prices. Inflation erodes the purchasing power of a unit of currency. More simply, since prices rise, Re 1 spent tomorrow will buy you lesser amount than what it can buy you today.

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