Management Discussion and Analysis
1. GLOBAL ECONOMIC SCENARIO :
Global economic growth remains broadly unchanged and economic activity had strengthenedin H2 of 2013. On the current reckoning, global growth is likely to be in the vicinity of3 per cent in 2014, about a percentage point higher than in 2013. The expansion inglobal output is expected to be led by advanced economies (AEs), especially the US.However, downside risks to growth trajectory arise from ongoing tapering of quantitativeeasing (QE) in the US, continuing deflation concerns and weak balance sheets in the euroarea and, inflationary pressures in the emerging market and developing economies (EMDEs).Weakening growth and financial fragilities in China that have arisen from rapid credit inrecent years which pose a large risk to global trade and growth.
Global inflation remains benign with activity levels staying below potential in the AEsas well as in some large EMDEs and a softer bias for global commodity prices is continuinginto 2014. However, inflation in many EMDEs remains high, though actions in tighteningmonetary policy and slack in output are expected to help generate some disinflationarymomentum. The divergent trends in inflation between AEs and EMDEs pose an added risk toglobal growth.
After the unexpected shock from the May 2013 tapering indication by the US Fed, globalfinancial markets have weathered the initial dose of actual tapering of the quantitativeeasing (QE) quite well. However, the global interest rate cycle has just begun to turn.Moreover, a large part of the withdrawal of monetary accommodation by AEs remains to playout. Consequently, capital flows to EMDEs could remain volatile, even if they do notretrench. Also, with corporate leverage rising in many EMDEs, capital flow volatilitycould translate into liquidity shocks impacting asset prices.
According to IMF economic outlook, the projected growth in the United States is to be2.8 percent in 2014, increase from 1.9 percent in 2013. The euro area is turning thecorner from recession to recovery. Growth is projected to strengthen to 1 percent in 2014and 1.4 percent in 2015, but the recovery will be uneven. United Kingdom has been buoyedby easier credit conditions and increased confidence. Growth is expected to average 2percent in 201415, but economic slack will remain high. Japan, growth is nowexpected to slow more gradually as compared with October 2013. Annual growth is expectedto remain broadly unchanged at 1.7 percent in 2014, given carryover effects, beforemoderating to 1 percent in 2015. Overall, growth in emerging market and developingeconomies is expected to increase to 5.1 percent in 2014 and to 5.4 percent in 2015.Growth in China rebounded strongly in the second half of 2013, due to largely on accountof acceleration in investment. In sum, global growth is projected to increase from 3percent in 2013 to 3.7 percent in 2014 and 3.9 percent in 2015.
2. DOMESTIC ECONOMIC SCENARIO :
As per the Central Statistical Organizations Advance Estimate for the year2013-14 , Gross Domestic Product (GDP) at factor cost at constant (2004-05) prices in theyear 2013-14 is likely to attain a level of Rs. 57.5 lakh crore, as against the FirstRevised Estimate of GDP for the year 2012-13 of Rs. 54.8 lakh crore. The growth in GDPduring 2013-14 is estimated at 4.9 per cent as compared to the growth rate of 4.5 percentin 2012-13.
The agriculture, forestry and fishing sector is likely to show a growth of4.6 per cent in its GDP during 2013-14, as against the previous years growth rate of1.4 percent.
The estimated growth in the manufacturing mining and quarrying,electricity, gas and water supply, and construction is estimatedto be (-) 0.2 per cent, (-) 1.9 percent, 6.0 percent and 1.7 percent, respectively,during 2013-14 as compared to growth of 1.1 percent, (-) 2 percent, 2.3 percent and 1.1percent, respectively, in 2012-13. In the services sector, the estimated growth in GDP forthe trade, hotel, transport and communication sectors during 2013-14 is placed at 3.5percent as against of 5.1 percent in the previous year. The sector financing, insurance,real estate and business services is expected to show a growth rate of 11.2 percent during2013-14 as compared to growth rate of 10.9 percent in 2012-13, The growth rate ofcommunity, social and personal services during 2013-14 is estimated to be 7.4 percent.
Agriculture sector has witnessed record production. As per the Third advance estimates,the total food grains production in the 2013-14 is expected to be around 264 Milliontonnes, almost 2.8 percent more than 2012-13 .However, preliminary reports suggest thatthe unseasonal rains accompanied by hailstorm, and frost during early March 2014 invarious parts of the country has adversely affected rabi crops like wheat, mustard seeds,onions and jowar. The possible effects of El Nino on the monsoon also add to an additionalelement of uncertainty for future harvests.
Money and Banking
Broad money (M3) for 2013-14 (up to March 21, 2014) increased by 13.5 percent ascompared to 13.8 percent during the corresponding period of the last year. Theyear-on-year growth, as on March 21, 2014 was 13.5 percent vis--vis 13.8 percent in theprevious year. During the financial year 2013-14 (up to March 21, 2014), bank creditregistered a growth of 14.3 percent year-on-year, as compared to 14.1 percent during thecorresponding period last year. The aggregate deposits with Scheduled Commercial Banks(SCBs) increased by 14.6 percent (up to March 21, 2014), as compared to 14.2 percent inthe previous year. As on March 2014, Bank rate, Repo Rate and Reverse Repo rate stood at 9percent, 8 percent and 7 percent respectively.
During 2013-14 net average borrowings under the LAF (including term repos) havedeclined gradually from Rs. 1.2 trillion in March 2013 to Rs. 0.9 trillion in October andNovember 2013(up to November 13, 2013). Liquidity conditions eased gradually during Q1 of2013-14. In addition, the RBI conducted two OMO purchase auctions during the quarter,thereby injecting liquidity to the tune of Rs. 165 billion. The average net borrowingsunder LAF declined to Rs. 526 billion in July2013 from Rs. 827 billion in the firstquarter of 2013-14. The overall LAF deficit remained below 1 percent of NDTL and moneymarket rates also fell below the MSF rate.
Frictional pressures arising from elevated central government cash balances with theReserve Bank and a rise in currency in circulation contributed to tight liquidityconditions in the first half of February 2014. However, on the back of significantdrawdown in the governments cash balances post the Vote on Accountpresentation on February 17, 2014, and the injection of additional liquidity through termrepos, the strains on liquidity eased. This was reflected in the under- utilisation of thelimit under the overnight LAF and reduced borrowings under MSF. The daily recourse to LAF(including term repo and MSF) declined from around Rs. 1.3 trillion in Mid- February toRs. 0.9 trillion in early March 2014. Narrowing of the wedge between credit and depositgrowth also contributed to a reduction in the liquidity deficit. To manage evolvingliquidity pressures, the Reserve Bank injected liquidity of about Rs. 95 billion throughOMO outright purchase auction during Q4 of 2013-14, in addition to providing liquiditythrough overnight repo, MSF and term repos. However, liquidity conditions tightened frommid-March 2014 on the back of advance tax outflows. In order to address the anticipatedtightening in liquidity conditions and with a view to providing flexibility to the bankingsystem in its liquidity management towards end-March, the Reserve Bank announced termrepos of various tenors in March 2014. Besides, it extended the MSF facility on March 29and 31, 2014, both being holidays, to facilitate annual closing of accounts.
During 2013-14, net liquidity to the tune of about Rs. 520 billion has been injectedthrough outright OMOs, besides an average daily net liquidity injection of Rs 906 billionthrough LAF, MSF and term repos and Rs. 294 billion through export credit refinance (ECR).During Q4, an average Rs. 1.1 trillion has been injected on a daily basis via LAF,MSF and term repos and Rs 397 billion through ECR.
Gross borrowings raised by the Central Government during April-November 2013constituted 75.0 percent of budgeted gross borrowings, lower than 78.7 percent in thecorresponding period of the previous year. The borrowing programme of the Government,though continued to be front-loaded in line with repayment schedule of dated securities,was more evenly distributed across the year in view of the cash flow projections. Yieldson government securities began on a positive note this year due to policy easing by theRBI and a benign inflation outlook. The yields, however, began to rise in end-May due toapprehensions of tapering of quantitative easing by the US Federal Reserve which triggeredexit of FIIs from the Indian debt market. The resulting exchange rate pressure on Rupeeand monetary tightening by the RBI drove yields further up. The maturity of issuanceduring the year was elongated further in view of the flat/inverted yield curve, betterappetite for longer term debt and debt management considerations. The weighted averagematurity of securities issued (excluding inflation indexed bonds) during 2013-14 (up to 19November 2013) was 14.37 years as compared to 13.49 years in the corresponding period ofthe previous year. The weighted average yield during the same period was 8.31 percent ascompared to 8.42 percent in the corresponding period of the previous year.
Whole Sale Price Inflation
The average WPI inflation rate for the last 12 month (April2013-to March 2014) was 5.93percent as compared to 7.35 percent during the corresponding period in 2012-13. Head lineinflation increased during the year due to spike in vegetable prices and high inflation infuel group on account of depreciation of rupee led to rebound in headlines WPI inflation.Food inflation remained elevated, its drivers have been changing overtime. During the year2013-14, inflation remained elevated across the board for all major subgroups of foodincluding Cereals, Pulses, Vegetable, eggs, meat and fish, sugar and edible oils.Inflation in fuel group was the main contributor to elevated level of inflation. Inflationin non- food manufactured segment declined mainly backed by lower inflation in Metals,Chemicals and Machinery and Machine tools. Moderation in Metals, Organic Chemicals andFertiliser inflation was in line with the fall in International Prices of thesecommodities.
Slowdown in emerging and developing economies was one of the factors behind lowerinternational commodity prices during 2013. International commodity prices for metals, andfood declined, while energy prices have edged up. The recent bout of depreciation of therupee has slightly offset the impact of moderation in global commodities prices ondomestic headline WPI inflation in the second quarter. Metals prices have declined mainlyon account of continuing rise in metals mine supplies coupled with some signs of slowdownin the real estate sector in China (WEO, October 2013). Crude oil spot prices (Brent)remained above US$ 105 per barrel, reflecting various supply disruptions and renewed geopolitical concerns in Middle East and North Africa.
Retail price inflation, measured by the Consumer price Index, inched up to 8.3 percentin March 2014 from eight percent in the preceding month. Inflation has risen for the firsttime in the last four months. It had fallen from 11.2 per cent in November 2013 to eightper cent in February 2014.
Index of Industrial Production
The eight core industries - coal, crude oil, natural gas, refinery products,fertilisers, steel, cement and electricity - put up a lukewarm performance in 2013-14.Their aggregate output grew by a mere 2.7 percent, as compared to the 6.5 per cent growthclocked in 2012-13. The growth recorded in 2012-13 looks much better than 2013-14. But,this is largely due to a change in the sample size of the refinery products data.
The Indian industry ended the fiscal year 2013-14 on a negative note. Index ofIndustrial Production (IIP), the official measure of industrial activity in India,declined by 0.5 per cent in March 2014 compared to the year-ago month. IIP for the wholeyear covering period April March 2014 stood at a negative growth of 0.1 percent ascompared to 1.1 percent in corresponding period of last year. The main reason behind thisfall was the manufacturing sector. Continuing the trend seen in the past few months, themanufacturing sector registered a 1.2 percent fall in its output in March 2014. Likepreceding months, the fall in March was also led by the capital goods and consumerdurables sectors. Output of capital goods plummeted by 12.5 percent and that of consumerdurables by 11.8 percent.
The mining sector that had returned to growth in November 2013 also suffered a 0.4 percent fall in production in March 2014, compared to the year-ago month. The only mainsub-segment of the industry that reported a growth in March 2014 is electricity.Electricity generation grew by 5.4 percent compared to March 2013.The industrial activityremained weak during 2013-14. Production declined year-on-year in half of the months. Theaverage fall in production for the fiscal year was 0.1 percent. This is for the first timein the last three decades the output has shrunk. The fall in industrial production was acombination of supply constraints and a weakness in demand, both investment andconsumption.
Current Account Deficit (CAD)
The current account deficit (CAD) has improved, driven by declining imports.Indias exports began to improve in July Oct'13 helped by a depreciation ofthe rupee and gradual recovery in key partner economies. However, the growth in exportswas not sustainable. Export growth began to decelerate in Nov13 and turned negativein Feb14. Slowdown in exports in recent months can be attributed to certain sectorspecific issues and global factors. Imports registered significant contraction, decliningfor 9 successive month, primarily due to sharp moderation in gold imports sinceJuly13. Indias import bill for POL (Petroleum, Oil & Lubricants) alsoremained largely contained, reflecting broadly stable international crude oil prices andonly a marginal increase in the quantum of oil imports. During the year 2013-14,Indias exports stood at US $312.35 billion as compared to US $300.40 billion in2012-13 registering a growth of 3.98 percent in Dollar term and imports during the periodwas US $ 450.95 billion as against US $ 490.73 billion in the corresponding last year,showing a negative growth of 8.11 percent. Indias trade deficit at US$ 138.69billion during April-March FY14 was about 27 percent lower than that of April-March FY13at US $190.33 billion.
Contraction in trade deficit, coupled with a rise in net invisibles receipt, resultedin a reduction of CAD to US $32. 4 billion, which was 1.7 percent of GDP form during2013-14 as compared to US $87.8 billion which was 4.7 percent of GDP in 2012-13.
In the interim Union Budget for 2014-15, Government revised the fiscal deficit for2013-14 downwards. As per the revised estimates (RE) for 2013-14, fiscal deficit isexpected to touch Rs. 5.25 trillion as against a budgeted amount of Rs. 5.43 trillion. Asa proportion of GDP, it is expected to touch 4.6 percent as compared to 4.8 percentbudgeted for the year.
Exchange Rate of Rupee
The rupee exchange rate against major currencies remained volatile during 2012-13. Atthe beginning of the year, the rupee depreciated sharply amid concerns about the wideningcurrent account and fiscal deficits. Global uncertainties also added to the pressure. Onaverage, rupee depreciated by about 12 percent against US dollar in 2012-13. Wider tradedeficit and rising gold imports also put pressure on the rupee exchange rate. Inparticular, rupee depreciation was more pronounced after the US Feds indication onearly tapering of quantitative easing. Rupee depreciated by 17.7 percent against the USdollar during mid-May to end-August 2013. Recently Rupee appreciation can be mainlyattributed to improved market sentiments on the back of various policy measures announcedby the Reserve Bank and the government and the Feds decision later in the month tomaintain the pace of its Quantitative Easing. Furthermore, the opening of a forex swapwindow for the public sector oil marketing companies as well as special window under FCNR(B) has also played an important role in stabilising rupee. The rupee has also moved in anarrow range Rs. 60.10 to Rs. 62.99 per US dollar since end of Nov 2013 (upto March 28,2014). In fact, during this period the rupee fared better than most of other emergingmarket currencies.
Indian equity markets, in line with global trends, were affected by the expectation ofmarket participants in May, 2013 regarding the "tapering" of the monthly bondpurchase programme of US. A slew of investor-friendly measures taken by RBI and thegovernment over the last six months, the investors sentiment have got a fillip. As aresult, Indian markets have emerged as one of the better performing markets in the worldin the year 2013 .The Foreign Institutional Investors (FIIs) make investments in marketson the basis of their perceptions of the returns that such markets can yield. Theirperceptions are among other things influenced by many factors including the prevailingmacroeconomic environment, the growth potential of the economy and corporate performancein different countries. The net FII equity inflow in the year 2012 and 2013 (till October2013) has also been impressive with an inflow of US$ 24.37 billion and US$ 16.19 billion,respectively. The outflows in the FII debt segments during 2013 owe to global clues,particularly the yield in US . FII investments too have witnessed a sizeable increase overthe years. This segment is however prone to a higher degree of fluctuations. In FY14, thecountry witnessed a sudden and significant (net) outflow of funds, which led to a sharpdrop in FII inflows and consequently for the year as a whole the country saw a 66% declinein net FII inflows from that in the previous year. FII inflows into emerging marketeconomies such as India were severely hit in 2013 following the news of the winding downof the monetary stimulus of the US Federal Reserves and the stronger than expected growthin the US economy, which prompted investors to shift their asset holding from emergingeconomies to the US market.
The various measures undertaken by RBI since September, 2013 augured well for thecontinuation of capital inflows into the country. In addition, the RBIs swap windowsfor mobilization of FCNR deposits further aided to build up reserves during FY14.Consequently, forex reserves reached US$304 billion as on 28th, March 2014, with anaccretion of over US$12 billion over March 2013.