Indian Economy Outlook 2010-11

Dun & Bradstreet

Preface

By the end of FY09, the Indian economy was reeling under pressures emanated from the global economic crisis and the prospects for economic growth in FY10 were expected to remain muted. At D&B, we expected GDP growth to remain muted at 6.7% during FY10. However, we believed that the economy would begin to revive by H2 FY10 supported by a revival in consumption demand. Nonetheless, a gradual turnaround was visible from the second quarter itself backed by timely and aggressive policy responses by the Government and the RBI to tackle the crisis. Although the economy had taken a step toward recovery path supported by government spending in Q2 FY10, improvement in consumer as well as business sentiment was visible in the 2nd as expected.

While the economy had began to show signs of turnaround, it encountered a setback in the form of uneven monsoon, which was expected to put significant downside pressures on agriculture growth. D&B revised downwards its agriculture growth forecast for FY10 to -0.5% from earlier 2.9%. Prospects of better rabi output restrained us from revising it downwards significantly. Despite the downward revision in agriculture growth, we maintained the GDP forecast at 6.7% on account of a better than expected turnaround in industrial activity and increased spending by the Government. However, with the robust performance of industrial sector in the second half of FY10 we revised our GDP forecast for FY10 marginally upwards to 6.9% in Feb-10 from 6.7% in Feb-09.

GDP Growth

D&B expects economic growth prospects to improve significantly in FY11 as the private sector demand - both consumption as well as investment - begins to pick up. However, the government consumption demand is expected to moderate on account of fiscal consolidation plan and expected gradual withdrawal of stimulus packages announced earlier. Nonetheless, the focus of government spending on infrastructure sector would continue to support growth. Assuming a normal monsoon, we expect GDP growth to surge to 8.3% during FY11. This growth would largely be driven by the following factors:

▪	Robust industrial growth backed by improvement in consumption demand.
▪	Increase in infrastructure spending.
▪	Substantial growth in investment activity.
▪	Recuperating external demand conditions.
▪	Stability and improvement in financial markets.

 
The rebound in GDP growth is expected to be driven by a double-digit growth in the industrial component of GDP. D&B expects the industrial component of GDP to grow by around 10% during FY11 following an expected growth of 8.8% during FY10. The services sector growth is expected to have slowed down to 7.9% during FY10 as lagged effects of slowdown in the industrial sector on services intensified. D&B expects growth in services sector to increase to around 8.7% during FY11 following the revival in the industrial sector. Assuming a normal monsoon, the agriculture sector is expected to grow by around 3.1 % during FY11 after an expected decline of 0.5% during FY10.

Inflation

On the inflation front, D&B expects WPI inflation to touch double-digit level in March 2010 and remain at this high level during the first quarter of FY11. However, it might witness some moderation subsequently. Interest rates are also expected to rise from the current levels primarily due to monetary tightening by the RBI in an attempt to rein in inflationary pressures.

Fiscal Scenario

On the fiscal front, D&B expects the growth in indirect tax revenue to fall short of the budgeted increase of 28.5% thereby resulting in higher than budgeted fiscal deficit. On the external front, D&B expects growth in imports to be faster than exports thereby leading to high trade deficit. Further, the rupee is forecasted to appreciate from the current levels backed by expected foreign fund inflows and improvement in growth prospect of the Indian economy.

Industrial Production to Remain Robust

D&B expects Index of Industrial production to have surged by 10.2% during FY10 as compared to 2.8% in FY09. Improving domestic demand conditions and resumption in investment demand has supported the increase in industrial production. The surge in production during the latter part of FY10 could also in part be attributed to restocking by the companies in an attempt to restore the inventory levels which were cutback earlier in the wake of dwindling demand conditions. The IIP growth is expected to remain robust at 10.3% during FY11 on account of:

▪	Substantial improvement in domestic demand
▪	Recovery in demand for Indian exports
▪	Increase in investment activity
▪	Increased thrust of the government on infrastructure projects.

 
 
D&B expects the growth in industrial production to be broad based during FY11, The expected strong investment demand, especially during H1 FY11 is likely to drive the growth in production of capital goods. Moreover, improving consumer sentiment coupled with increased personal disposable income is likely to augment the demand for high-end consumer products thereby supporting the high growth in production of consumer durables going forward. The intermediate and basic goods production is expected to remain robust in FY11, given the substantial improvement in the industrial activity.

Savings Rate Expected to Improve Marginally

D&B expects savings rate to increase to 34.5% during FY10 as compared to 32"5% during FY09 backed by growing consumer confidence, some improvement in corporate profitability, increase in foreign exchange reserves etc. Improvement in value of physical and financial assets during FY10, which witnessed significant erosion during the crisis period, could in part be responsible for the uptick in the savings rate. Savings rate is expected to experience marginal improvement to 34.8% during FY11.

Investment Rate to Rebound

D&B expects investment rate to increase to 36.5% in FY10 and further to 37.3% in FY11 from 34.9% in FY09.

Expected increase in interest rates by the second half could lead to some moderation in investment demand.

Bank Credit Growth to Improve During FY11 but Remain Below Pre-Crisis levels

D&B expects the bank credit growth to moderate to around 16.5% by end of FY10 as compared to 17.5% by end of FY09. Significant moderation in demand coupled with increased risk aversion has contributed to decline in the growth rate of bank credit during last year. D&B forecasts growth in bank credit to improve to 20.0% by end of FY11.

Growth in bank credit is expected to remain below the pre-crisis growth levels of 24-25% as an anticipated increase in interest rates is likely to moderate demand for bank credit, especially in the second half.

Interest Rates Set to Harden

D&B expects Prime Lending Rate (PLR) to increase to around 12.50-13.50% by end of FY11 from an expected 11.00-12.00% by end FY10. PLR is likely to firm up during FY11 on account of increase in the policy interest rates. The lending rates are expected to surge as an after effect of anticipated monetary tightening by the RBI to rein in inflationary pressures. Further, monetary transmission mechanism is likely to improve as banks move to base rate methodology to calculate lending rates.

Inflation to Remain Elevated During FY11

D&B expects WPI inflation to remain elevated and average at 7.0% for FY11 as compared to 3.8% during FY10" D&B expects WPI inflation to touch double-digit level in March 2010. WPI Inflation is expected to remain elevated at a double digit level in the first quarter of the FY11 as factors such as augmenting consumption demand, increase in international commodity prices (especially crude oil), increase in input costs (which will induce increase of final product prices) and the low base effect comes into play. Assuming a normal monsoon, D&B however, expects WPI inflation to moderate in H2 FY11.

Also the lagged impact of expected tightening of monetary policy would help to rein in the inflationary pressures during this period.

Fiscal Deficit Expected to be Above Budgeted levels

D&B expects the fiscal deficit for FY11 to be around 6%, higher compared to 5.5% budgeted by the Government We believe that the growth in indirect tax revenue would fall short of the budgeted increase of 28.5%, thereby resulting in higher than budgeted fiscal deficit

Stress on External Balance Likely to Increase

D&B expects exports to be around US$ 163 bn in FY10, which is approximately US$ 22 bn lower than exports of US$ 185.3 bn in FY09, owing to economic downturn witnessed in India's key export markets. D&B, however, expects exports to increase by around 19.9% during FY11 as the revival in exports, set in during the second half of FY10 is expected to gain momentum, Imports, on the other hand, are expected to be around US$ 261 bn in FY10 and record a decline of around 14.2% compared to FY09. As consumption and investment demand improves, imports are expected to witness substantial improvement going forward. Imports are expected to grow by around 30% during FY11, on account of sustained improvement in economic activity as well as anticipated high commodity prices. D&B expects the trade deficit to increase to US$ 143.2 bn in FY11, as growth in imports is expected to be greater than exports. Further the current account deficit would surge to 2.5% of the GDP in FY11, due to a high trade deficit.

Rupee to Rally from the Current levels

D&B forecasts the rupee value to be around 44.5/US$ by the end of FY11. The appreciation in rupee in next fiscal would be on account of expected increase in FII inflows as India's economic activity improves substantially, in turn attracting foreign fund flows. An expected depreciation in dollar value is also likely to support rupee value going forward. Also, India-US interest rate differential is likely to increase slightly and might help the rupee to appreciate.

Sectoral Outlook 2010-11

In a dynamic economic environment, gauging the optimism of the business community also provides an assessment of the overall growth prospects of an economy. D&B's Sectoral outlook report is a survey-based analysis intended to provide insights into the sentiments prevalent amongst the corporate regarding their outlook of the business environment in FY11.

Automobile Sector

Key Highlights ▪  Automobile industry anticipates input prices to rise in FY11.   ▪  Per capita income would drive demand for vehicles.   ▪  Market competition will pose biggest challenge for companies.   ▪  New product launches will be the key area of focus of companies in automobile sector,

 
Performance Indicators

▪	Automobile manufacturers are optimistic on the growth prospects of the industry for the forthcoming fiscal. A whopping 96% of the respondents expect sales volume to grow during FY11. Only a marginal 4% expect to see no change in volumes. The resultant Optimism for Volume of Sales stands at 96%.
▪	On the back of higher sales, companies expect to earn higher profits, with as much as 85% of the respondents expecting to earn higher net profits in FY11. While 12% of the respondents anticipate a fall in net profits, a marginal 3% expect to witness no change in net profits. The resultant Optimism for Net Profits stands at 73%.
▪	All the respondents anticipate input prices to witness an upward movement in FY11.
▪	Notwithstanding the stiff competition in the automobile market, a significant 69% of the respondents expect selling prices to increase. While about 7% of them expect selling prices to decline, a noteworthy 24% of the respondents anticipate selling prices to remain unchanged. The resultant Optimism for Selling Prices stands at 62%.
▪	As much as 96% of the respondents expect increase in new orders during FY11 , while the balance 4% anticipates no change in new orders. The resultant Optimism for New Orders stands at 96%.
▪	Buoyed by the robust domestic demand and export prospects, auto companies are likely to step up capital expenditure, with close to 81 % of the respondents expecting to witness an increase in capital spending in FY11. While 12% seem cautious and expect capital spending to decrease, the remaining 7% of the respondents expect to see no change in their capital expenditure next year. The resultant Optimism for Capital Spending stands at 69%.
▪	Nearly 81 % of the respondents expect expansion in their employee strength during FY11, while a small 4% of them anticipate decrease in employee strength. About 15% of them do not expect to see any change in employee strength. The resultant Optimism for Employees stands at 77%.

 
Growth Drivers during FY11

Per capita income will be the single most important factor driving growth of automobile sales during FY11; 77% of the respondents feel that this will be a major growth driver in the coming year. With a score of 0.89, this factor has received the highest ranking among the key growth drivers.

 
Issues & Challenges during FY11

Entry of new players and launch of new models have increased market competition. Nearly 81 % of the respondents believe that competition will be the major challenge facing the industry in FY11. Competition has received the highest ranking with a score of 0.87. High input prices and demand conditions in the export markets were viewed as the other major challenges facing the sector.

 
Strategic Focus

New product launches drove growth of the industry in the recent couple of years. For FY11 as well, this is likely to be the key strategic focus of companies, with nearly 81% of the respondents confirming this trend. It had the highest ranking among various key strategies, with a score of 0.85. Geographical diversification, focus on rural market and risk management will be amongst other major focus area for the sector.

 
Auto Components

Key Highlights ▪  Companies expect employee strength to increase in FY11.   ▪  Domestic demand will drive industry's growth.   ▪  Input costs will be the biggest challenge facing the industry.   ▪  Cost control programmes will be the key thrust area for FY11.

 
Performance Indicators

▪	Auto components manufacturers are extremely positive on the prospects of demand in FY11. A massive 91% of the survey respondents expect sales volumes to increase in the coming fiscal, while only a negligible 1% anticipate fall in volumes. The resultant Optimism for Volume of Sales stands at 90%.
▪	On the profit front, a significant 72% of the respondents expect net profits to increase in FY11, although about 17% of respondents expect profits to remain unchanged. About 11% of respondents anticipate decline in net profits in the coming fiscal. The resultant Optimism for Net Profits stands at 61%.
▪	While 61% of the survey respondents anticipate input prices to rise, a marginal 12% expect a decline in input prices in FY11. Interestingly, a notable 27% of the respondents do not expect any change in input prices. The resultant optimism for Input Prices stands at 49%.
▪	A majority of the respondents (54%) expect increase movement in selling prices, although 6% of them anticipate a decrease in selling prices. Meanwhile, a substantial 40% of respondents expect to see no change in selling prices. The resultant optimism for Selling Prices stands at 48%.
▪	About 89% of the survey respondents expect new orders to increase in FY11, while a negligible 1% expects new orders to decline. The resultant optimism for New Orders stands at 88%.
▪	On the back of healthy demand outlook, component manufacturers are likely to increase spending on capital expenditure activities. About 71% of the respondents expect to see increase in capital spending, while only 5% of them anticipate capital expenditure to decline in FY 11. About 24 % of the respondents expect no change in capital spending. Thus, the resultant Optimism for Capital Spending stands at 66%.
▪	The survey revealed an encouraging outlook on the workforce front. As much as 72% of the respondents expected to see an expansion in their employee strength and no respondent expects cut down in number of employees. The resultant Optimism for Employees stands at 72%.

 
Growth drivers during FY11

Domestic demand for automobiles will be the most important factor driving growth in the industry. With a score of 0.82, domestic demand for automobiles had the highest ranking; 64% of the respondents attribute this as the major growth driver. Export orders received a relatively lower score of 0.58.

 
Issues & Challenges during FY11

Among the key challenges, power costs had the highest ranking, with a score of 0.76. Raw material cost came a close second with a score of 0.74; 57% of the respondents feel that raw material costs will be the major challenge facing the industry.

 
Strategic Focus

Cost management and risk management emerged as fundamental focus area for the auto component sector. Around 72% of the respondents revealed that cost control programmes would be the major thrust area, while 52% of the respondents considered Risk management to be a major strategic focus area for FY11.