Management Discussion and Analysis
The global economy showed weak and sluggish growth in 2012 as a stifling effect ofsovereign debt crisis in Europe, weak recovery in developed economies and slowing economicgrowth in emerging economies.
During the first two quarters of 2012, persistent sovereign debt pressures amidstweakening economic activity in the euro area and decelerated growth in BRICS economiesposed significant downside risks to the global economy. However, global growth startedshowing moderate improvement from the third quarter of 2012, driven by performance inemerging market economies and in the United States. The global financial conditionsimproved furtherin thefourth quarterof 2012. According to International Monetary Fund(IMF), global economy witnessed a moderate growth of 3.2% in 2012, as compared with 4% in2011. While advanced economies grew by 1.2% in 2012 compared to 1.6% in 2011, emergingeconomies grew by 5.1% in 2012 compared to 6.4% in 2011.
India's GDP growth in 2012-13 has moderated sequentially over the quarters as acumulative impact of global uncertainties, past monetary policy tightening and weakinvestment demand. As per the advanced estimates released by the Central StatisticalOrganization (CSO), GDP growth for FY13 was estimated at 5% compared to 6.2% in FY12.Risks to growth have increased from lower global trade and domestic supply bottlenecks.Agriculture, Industry and Services sectors showed signs of moderation in 201213. DuringFY13, agriculture sector growth estimated at 1.8%, industrial sector growth at 3.1% andthe service sector growth at 6.6%.
Moderation in major macro economic indices and slowdown in investment demand hasresulted in lowering of business confidence and consumer sentiment in FY13. Savings andinvestments rates have declined in 2012-13 and are estimated at 35.8% and 30.8%respectively.
Headline inflation has trended down in 2012-13, though upside risks remains elevated.Though high food and fuel inflation remained a concern, core inflation pressures havereceded markedly. WPI inflation started with 7.5%, which was increased to over 8% inAugust 2012 before declining to 5.96% in March 2013. Weakening domestic demand and lowerglobal commodity prices were the major contributory factors to the softening of headlineinflation.
India's exports showed subdued performance in 2012-13 as a result of the adverse impactof low growth and uncertainties in the global markets. As per the provisional datareleased by the Directorate General of Commercial Intelligence and Statistics(DGCI&S), during April-March 2012-13 merchandise exports of India stood at US $ 301billion, lower than US $ 306 billion recorded last year.
The financial markets in India responded to the overall developments witnessed in theglobal and domestic front. Spillovers from global financial market uncertainties andwaning investor confidence amidst deteriorating macroeconomic conditions, kept domesticcurrency and equity markets under pressure. The rupee depreciated by nearly 10% during thefirst quarter of 2012-13, before staging some recovery in July 2012. The Indian Rupeeended at 54.38 against the US Dollar at the end of March 2013. Equity markets remainedrange bound during 2012-13.
Money supply (M3), which was 13.7% at the beginning of the financial year 2012-13,moderated during the course of the year to 13.3% by end-March 2013 as a result of slowdownin economic activity and lower credit demand.
The current account deficit (CAD) widened during 2013 and the CAD-GDP ratio estimatedat a historic high level of 5.1% in 2012-13. Fiscal Deficit during 2012-13 is estimated at5.2% of GDP.
As a result of subdued economic activity, the banking sector has witnessed decelerationin credit and deposit growth in 2012-13. Aggregate deposits of Scheduled Commercial Banksregistered 13.5% y-o-y growth in 2012-13 compared to 17.4% recorded last year. Non-foodcredit for Scheduled Commercial Banks (SCBs) registered a y-o-y growth of 13.8% in 2012-13compared to 17% recorded last year. With the y-o-y non-food credit outpacing depositgrowth in 2012-13, the credit-deposit (CD) ratio increased sharply to 77.95% as at endMarch 2013.
Monetary policy in 2012-13 has sought to balance the growth-inflation dynamics througha combination of steps for liquidity easing and policy rate cut. The RBI reduced cashreserve ratio (CRR) by 75 bps in 2012-13 and the statutory liquidity ratio (SLR) by 100bps to improve liquidity conditions and credit flows. To support growth, the RBI reducedrepo rate by 100 bps in 2012-13.
The banking sector in India remained healthy, resilient, and profitable and performedreasonably well during 2012- 13. However, the slowdown in macro economy has resulted indeterioration in asset quality and profitability of some banks.
Global growth prospects are moderately strengthening since the 3rd quarterof 2012, but downside risks remain elevated. Though the global recovery is expected tocontinue, growth is expected to be lower in 2013. The International Monetary Fund, in itslatest World Economic Outlook, projected global growth at 3.3% for 2013 and 4% for 2014.Emerging and Developing Economies will continue to lead global growth.
India's GDP growth is expected to improve in 2013-14 in view of the expansionarymonetary policy stance and improving domestic demand conditions. Improvement in saving andinvestment rate, favourable financial market conditions, higher capital flows, moderatinginflation and positive business outlook would help the economy to broad base the growthmomentum. On the domestic front, the major challenges in 2013-14 will be to address theissues of high fiscal and current account deficits, low industrial growth and lower exportgrowth. Notwithstanding the concerns, Indian economy would remain one of the fastestgrowing economies in the world.
The RBI in its Annual Monetary Policy Statement for 2013- 14 placed real GDP growth for2013-14 at 5.7%.
The annual policy endeavors to contain inflation at 5.5% in 2013-14. The RBI envisagesmoney supply (M3) growth at 13% in 2013-14, in consonance with the outlook on growth andinflation. SCBs growth in aggregate deposits and growth in adjusted non-food credit isprojected to grow by 14% and 15% respectively for 2013-14. Indian Banking sector isexpected to perform well in 2013-14 in view of the positive domestic outlook and favorablepolicy environment.