Widening gap between FDI, FII inflows

causing concern
PTI, Mar 21, 2011, 04.15pm IST
Tags:
• gdp|
• FII
NEW DELHI: With slowdown in FDI by 25 per cent, India's dependence on FII inflows,
considered as hot money for maintaining its current account, has increased this fiscal.
Moreover, the gap between the foreign direct investment (FDI) and the inflows from foreign
institutional investors (FIIs) mainly in the stock market, has grown to USD 14 billion in 2010-11,
according to the latest official data.
While, FIIs invested USD 31.03 billion during April- January 2010-11, India received FDI of
USD 17.08 billion during the same period, showing a gap of about 45 per cent between the two.

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In 2009-10, the difference between FII and FDI was only USD 1.9 billion.
However, in the previous years of 2007-08 and 2008-09, FDI inflows were way ahead of the
money coming through the share market.
Although the country's current account deficit (CAD) has been kept under check due to large
capital flows coming through the FII route, but the quality of the inflow remains an issue.
In its mid-quarterly policy review, the RBI had estimated the CAD for 2010-11 at around 2.5 per
cent of the country's Gross Domestic Product ( GDP).
"...it is necessary to focus on the quality of capital inflows with greater emphasis on attracting
long-term components, including FDI, so as to enhance the sustainability of the balance of
payments (BoP) over the medium-term," RBI had said while expressing concerns on the decline
in FDI.
The drop in FDI inflows to USD 17.08 billion during the ten months of the current fiscal from
USD 22.96 in the corresponding period (April-January) of the previous financial year is
attributed to the financial troubles in several European economies.
Germany, France, the Netherlands and UK are the main investors in India.

Widening gap between FDI, FII inflows

causing concern
PTI, Mar 21, 2011, 04.15pm IST
Tags:
• gdp|
 • FII
NEW DELHI: With slowdown in FDI by 25 per cent, India's dependence on FII inflows,
considered as hot money for maintaining its current account, has increased this fiscal.
Moreover, the gap between the foreign direct investment (FDI) and the inflows from foreign
institutional investors (FIIs) mainly in the stock market, has grown to USD 14 billion in 2010-11,
according to the latest official data.
While, FIIs invested USD 31.03 billion during April- January 2010-11, India received FDI of
USD 17.08 billion during the same period, showing a gap of about 45 per cent between the two.

Ads by Google
• 15 Reasons To Buy GoldHere's why we think gold should be on every investor's mind.
Wealthdaily.com/Gold_Report
In 2009-10, the difference between FII and FDI was only USD 1.9 billion.
However, in the previous years of 2007-08 and 2008-09, FDI inflows were way ahead of the
money coming through the share market.
Although the country's current account deficit (CAD) has been kept under check due to large
capital flows coming through the FII route, but the quality of the inflow remains an issue.
In its mid-quarterly policy review, the RBI had estimated the CAD for 2010-11 at around 2.5 per
cent of the country's Gross Domestic Product ( GDP).
"...it is necessary to focus on the quality of capital inflows with greater emphasis on attracting
long-term components, including FDI, so as to enhance the sustainability of the balance of
payments (BoP) over the medium-term," RBI had said while expressing concerns on the decline
in FDI.
The drop in FDI inflows to USD 17.08 billion during the ten months of the current fiscal from
USD 22.96 in the corresponding period (April-January) of the previous financial year is
attributed to the financial troubles in several European economies.
Germany, France, the Netherlands and UK are the main investors in India.

Question mark over BoP position

R. K. Pattnaik
Share · Comment · print · T+
It remains to be seen whether FDI and FII flows can plug a rising current account deficit. This
apart, there is room for more transparency in data on trade and invisibles.
The balance of payments (BoP) data for the third quarter was released by Reserve Bank of India
on March 31. The figures point to certain risk factors in India's external account, while also
raising issues of data transparency in certain areas.
Despite the improvement in net invisibles surplus, the current account deficit widened during
April-December 2010 to $38.9 billion ($25.5 billion a year ago) mainly due to a higher trade
deficit. At this level, the CAD works out to 3.1 per cent of GDP during April-December 2010.
Despite a significant increase in net capital inflows, accretion to reserves was marginally lower
in April-December 2010, compared with the like period in 2009.
DOWNSIDE RISKS
Against the backdrop of these the BoP developments, the downside risks to India's external
sector are: (a) higher current account deficit, (b) large debt component of capital flows, (c)
higher component of short-term credit as part of debt capital (d) deceleration in inward foreign
direct investment (FDI) and (e) higher flows under FII.
First, higher current account deficit could be a concern in the event of uncertainty in international
crude oil prices. The financing of the same is not a problem in the immediate future, but could be
a concern in view of the deceleration in FDI flows and uncertainty attached to FII flows.
Second, as is evident from the press release, the debt component of capital flows has increased in
terms of external commercial borrowings, NRI deposits and short-term credit. A part of FII
inflows is also invested in debt.
Third, a large component of short-term credit in the capital flows is a downside risk. Together
with ECB, NRI deposit, the residual maturity in the shorter end (less than one year) could be a
concern in the medium term.
Fourth, the deceleration of inward FDI could pose a risk in terms of financing a higher current
account deficit. Continuation of this trend will be a concern from a medium-term perspective.
Fifth, higher flows under FIIs were helpful in financing the large current account deficit. But the
FII flows are speculative in nature and are regarded as ‘hot money'. Whether our external sector
should depend more on FII flows or FDI flows to finance the current account is a policy issue.
DATA TRANSPARENCY
BoP data are released by RBI on quarterly basis with a lag of one quarter in financial year terms.
Over the years, the transparency in data dissemination has been enhanced. But it has been
observed that, contrary to the earlier practice, the central bank puts out a press release without
explaining all the data developments. Later, as a research article, it publishes a detailed version.
This renders the press release incomplete. There are at least three such discrepancies.
First, the discrepancy between import and export data published by the Ministry of Commerce
(Customs data) and RBI (banking channel data) are not reconciled. For example, April-
December imports are higher in the case of RBI than Customs by $28 billion. The evidence
suggests that Customs data are subject to very frequent revisions. It is important that, like the
RBI, the Ministry should have a revision policy. This is important for the sake of credibility.
The same holds true for export data, where the difference is about $10 billion. Conventional
wisdom suggests that in the case of imports the difference is on account of defence imports and,
in case of exports, it is on account of timing, coverage and valuation. But it is important that
persistent and large differences are explained in the press release and an attempt made to
reconcile these data.
Second, the “Other Capital” item in net capital flows as recorded in the press release amounted
to a net outflow of $12.7 billion. This nearly accounted for 40 per cent of the total net capital
flows. The RBI press release should have explained such net outflows.
Third, the RBI press release should have been more comprehensive with regard to items under
invisibles, such as non-software services and investment income details.
The RBI, being the sole data provider on BoP, has taken a conscious decision not to provide
detailed data in the press release, but instead publish the same in the RBI Bulletin in an article
form, with a time lag. The reasons for this are best known to the central bank.
The RBI may consider improving its coverage of the three items, so that its press release is self-
explanatory.
(The author is Professor of Economics at K.J. Somaiya Institute of Management Studies and
Research, Mumbai.)

Will Capital Inflows Continue to Finance

India's Current Account Deficit?
Appears in the Briefing: India: External Accounts, Macro View, India, South Asia, Current Account, External Balance

Apr 14, 2011

AAA Print

• Overview: On March 31, 2011, the Reserve Bank of India (RBI) announced that India’s current account
deficit in Q4 2010 moderating from a deficit of US$12.2 billion in Q4 2009 to US$9.68 billion. India’s
ministry of commerce said on February 2 that the trade deficit narrowed in December 2010 as improving
global growth boosted exports while suggested weakness in domestic activity reduced imports. Until Q3
2010, the current account deficit was widening as imports grew at a much faster rate than exports. In Q4
2010, India’s capital account expanded by just 1.7% y/y as steady FII inflows, external commercial
borrowings, and banking credit were offset by weak FDI inflows. With the capital account surplus
outweighing the current account deficit, India’s balance of payment position netted a surplus of US$4.0
billion in Q4 2010. On March 31, the government liberalized rules for inward FDI in order to boost investor
confidence after recent corruption scandals and overheating concerns hurt investor sentiment. While
some analysts warn that rising investment and private demand and higher oil prices will widen the trade
gap in the coming months, others argue that monetary tightening will slow imports and overall trade
balance. With bulk of the current account deficit being financed by hot inflows, any reversal of capital
could pose risk to the Indian rupee, forcing the RBI to run down its FX reserves.

Other Critical Issues In:India: External Accounts

• Currently Reading:Will Capital Inflows Continue to Finance India's Current Account Deficit?

• Does India Need to Restrict Capital Inflows to Reduce Overheating Risks?

• How Should India Manage Its Large Foreign Exchange Reserves?

Appears in the Briefing:India: External Accounts

• RGE View (Mar 15, 2011): We expect India's current account deficit to narrow to 2.4% of GDP in fiscal
year 2010-11 from 2.9% in 2009 due to improved exports and weaker imports later in the year. The deficit
will widen to 3.0% of GDP in 2011 owing to high oil prices (India imports 70% of its oil needs) even though
a slowdown in domestic demand (owing to monetary tightening) will weaken non-oil imports later in 2011.
Weaker global growth in 2011 could pose downside risks to India's exports. A slowdown in global IT
spending after strong pent-up demand in 2011 could weigh on India's software exports, though a weak
Indian rupee will provide some cushion.

Current Account
• On March 31, the RBI announced that at the end of Q4 2010 India's current account deficit moderated to
US$9.7 billion due mainly to a recovery of the invisibles account to 17.0% q/q compared with a decline of
19.0% q/q in Q4 2009, mainly driven by service exports and private transfer receipts. Software exports
recorded receipts of US$12.8 billion in Q4 2010, up from US$12.7 billion in the previous quarter. The RBI
reported that exports increased 39.8% y/y to US$66.0 billion in Q4 2010 while imports expanded 24.9%
y/y US$97.5 billion. With imports outpacing exports, the trade deficit narrowed to US$31.6 billion, down
from US$37.8 in Q3 2010 and similar to the level recorded in Q4 2009. Analysis Researve Bank of India
Mar 31, 2011 India's Balance of Payments during October-December 2010
 • India's Commerce Ministry reported on April 1, 2011 that exports rose by 50% to US$15.75 billion in
February 2011 led by strong prices and improving emerging market demand for Indian gems and
jewellery, engineering products, petroleum, garments and pharmaceuticals. Imports continued to grow at
a slower pace of 21% to US$31.7 billion led by a decline in oil imports, narrowing the trade deficit to
US$8.1 billion from US$10.4 billion in February 2010. During April to February, exports rose 31.4% while
import growth slowed to 18%, helping narrow the trade deficit to US$97 billion compared to US$100.2
billion in the same period in 2009. Analysis India Ministry of Commerce & Industry Apr 01, 2011 India's
Foreign Trade: February 2011

• The government expects exports to reach US$230-235 billion in fiscal year ending March 2011 led by
strong exports to emerging markets, while demand in EU remains weak. Imports are expected to reach
US$350 billion, leading to a trade deficit of US$105-115 billion in fiscal year 2010-11.

• The government has been offering tax and credit incentives for labour-intensive export sectors like tea,
handicrafts and readymade garments, given the slow recovery in exports and employment in these
sectors. India's garment industry employs seven million workers, half of whom are employed in the export
sector.

• In its March monetary policy meeting, the RBI said that strong exports will help narrow the current account
deficit to 2.5% of GDP in fiscal year 2010-11. The RBI has persistently expressed concerns that the
current account deficit is being financed by debt-creating hot inflows and suggested that India's need to
attarct longer-term inflows such as FDI to enhance balance of payments sustainability. FDI into India has
been declining on a year-on-year basis. As a result, 70% of the capital inflows since 2009 have been in
the form of non-FDI inflows, posing risk to the current account and the currency during times of global risk
aversion. However, India could draw on its large FX reserves to reduce external sector risks, like it did in
2008.

• In a April 4 India Marco Weekly, Citigroup analysts Rohini Malkani and Anushka Shah said they India’s
Balance of Payments remains vulnerable to oil prices and estimate that a US$1 per barrel increase in oil
price results in India’s trade deficit rising by US$800 million. Earlier, Malkani and Shah said they expected
India’s 2010 trade deficit to widen to US$145 billion representing 9% of GDP from US$118 billion in 2009.
The analysts expect India's current account deficit to expand 3.4% of GDP in 2011. Malkani and Shah add
that the sharp moderation in FDI inflows and increasing FII inflows are potentially problematic for India’s
balance of payments.

• On January 11, the Business Standard reported that India's software services companies are set to report
robust growth in quarterly earnings. The software companies are anticipating a strong outlook going
forward due to an expected increase in clients' technology budgets this year.

• On January 11, Mahesh Patil, head of equities and domestic assets at Birla Sun Life Asset Management,
said that the outlook for the IT firms, especially the larger ones, looks positive in the short term as volumes
are growing and the U.S. economy is performing better than expected. Patil expects that demand will
improve since companies have not been investing in technology in the past two years and would need to
increase investment in the near term to improve competitiveness.

Capital Account
• On March 31, 2011, the Reserve Bank of India announced that at the end of Q4 2010 India's capital
account surplus stood at US$15.0 billion, down 30.2% q/q and up just 1.7% y/y. Foreign institutional
investment, external commercial borrowings and banking capital inflows increased, helping finance the
current account deficit. For the period April to December 2010, inward FDI slowed sharply to US$18 billion
from US$27 billon in the same period the previous year. Analysis Researve Bank of India Mar 31, 2011
India's Balance of Payments during October-December 2010

• On March 31 the Economic Times reported that the Indian government has decided to relax its rules for
incoming foreign direct investment (FDI) buy allowing overseas firms to be issued equity against imported
capital goods and machinery. The government expects the liberalized rules will significantly improve the
prospects for foreign companies doing business in India by improving the conditions for converting non-
cash items into equity and will promote the competitiveness of India as an investment destination and
attract higher inflows of FDI and technology. Additionally, the government also liberalized rules for FDI in
production and developments of seeds and has abolished the condition of prior approval for existing joint
 ventures and technical collaborations in the 'same field'. Commerce and Industry Minister Anand Sharma
said that the newest Consolidated FDI Policy is a part of ongoing efforts to simplify and rationalize the FDI
process, which he expects “will go a long way in inspiring investor confidence.” News Economic Times
Mar 31, 2011 Govt liberalises FDI policy to boost inflows

• FDI inflows were down 25% y/y in the April 2010-January 2011 period. FDI inflows during April 2010-
January 2011 amounted to US$17.1 billion after inflows of US$22.9 billion in the same period of the
previous year. The service sector followed by IT, and telecom received the most FDI. Mauritius accounted
for over 42% of FDI inflows as a double-taxation agreement encourages foreign investors to direct
investment into India via Mauritius. Singapore, U.S and the UK are other leading FDI investors. Mumbai
and New Delhi received bulk of the FDI. Analysts argue that recent corruption scandals, high inflation,
slow FDI liberalization and red tape are hindering FDI inflows. On the other hand, some analysts suggest
that cuurent FDI inflows are near their longer term trend and shouldn't be compared to the 2007-08 highs
which was driven by global liquidity. Analysis Department of Industrial Policy & Promotion Apr 05, 2011
FACT SHEET ON FOREIGN DIRECT INVESTMENT - January 2011

• FDI investors have been reassessing FDI destinations on the basis of labor costs, shipping costs, taxation
and regulatory regimes and domestic demand base. The Indian government is taking baby steps in
reducing red tape in the FDI approval process, easing land, taxation and environmental rule hurdles, and
pushing to raise FDI limits in sectors like retail, defense, pension and insurance (which are politically
constrained). Analysts expect FDI inflows into India to accelerate in the medium-term as rising
urbanization strengthens domestic demand and the government reduces regulatory hurdles to attract
greenfield FDI.

• India’s red tape and poor governance is highlighted by the fact that the country is ranked 133—below
many African countries—in the World Bank's Ease of Doing Business Index. This is due to the obstacles
in starting and closing a business, contract enforcement, ease of obtaining permits and delayed land,
labor and tax reforms. The World Economic Forum's 2010 Global Competitiveness Index ranks India in
the 55th position. Besides legal and regulatory barriers, sectoral limits on foreign investment deter FDI,
and investors often prefer FDI via M&A rather than the greenfield route.

• Nevertheless, India figures among the top-five favored destinations for FDI, as investors increasingly
differentiate between domestic-demand versus export-driven economies. The UN Conference on Trade
and Development's September 2010 report, 'World investment prospects survey 2010-2012' ranked India
as the second-most-favored FDI destination after China by transnational corporations for 2010-12. The AT
Kearney’s global FDI Confidence Index published in September ranked India as the second-most-favored
destination for FDI after China. E&Y's 2010 European Attractiveness Survey in June put India as the
fourth-most-attractive FDI destination for 2010.

External Position
• On March 31, 2011, the Reserve Bank of India announced India’s Net International Investment Position
(NIIP) deteriorated by US$18.2 billion to US$211.1 billion in Q4 2010 from US$202.9 billion at the end of
the previous quarter driven by an increase in foreign direct investment (FDI) and portfolio investment net
inflows and external commercial borrowings. Total external financial liabilities increased by US$22.7 billion
over the previous quarter and stood at US$628.6 billion. FDI and portfolio investment accounted for 31.5%
and 27.3% of the total external financial liabilities, respectively while loans accounted for 23%. The share
of portfolio inflows in total liabilities increased comapred to Q4 2009. The share of non-debt liabilities to
total external liabilities increased slightly to 52.5% while that of debt liabilities declined to 47.5%.p>
Analysis Reserve Bank of India Apr 01, 2011 India’s Quarterly International Investment Position:
December 2010

• In Q4 2010, India's external debt stood at US$363.3 billion, having increased by 3.1% q/q and 17.7% y/y,
led by an increase in commercial borrowings, short-term trade credits and multilateral government
borrowings. Short-term external debt increased by 3.8% q/q and accounted for 21.0% of total external
debt, amounting to 21.1% of India’s FX reserves, up from 20.6% at the end of the previous quarter. India’s
foreign exchange reserves provided a cover of 99.9% of the external debt stock in Q4 2010. Sovereign
debt accounted for 25.5% of the total debt. The share of U.S. dollar denominated debt in total debt
increased to 53.7%, while that of Indian rupee (19.0%), SDR (9.7% ), and euro (3.5%) decreased slightly
and that of the yen (12.0%) remained the same. Analysis Ministry of Finance Mar 31, 2011 India's
External debt for the Quarter ended December 2010
Foreign Exchange Reserves
• The RBI reported on March 25, 2011 that India's FX reserves increased by US$18.3 billion in April-
December 2010 compared to US$31.5 billion during the same period the previous year. The incease was
driven by an increase in the balance of payments surplus of US$11.3 billion, driven by a pick up in the
capital external borrowings and portfolio inflows, FDI declined, banking capital remained weak and the
current account deficit widened. The rest of the US$7 billion increase in FX reserves was due to valuation
effects owing to changes in the Indian rupee value vis-a-vis the U.S. dollar, yen, euro and other reserve
currencies. Analysis Reserve Bank of India Mar 25, 2011 Report on Foreign Exchange Reserves : March
2011

• As of September 2010, the import cover stood at 10.3 months while the ratio of volatile capital flows
(defined to include cumulative portfolio inflows and short-term debt) to FX reserves increased to 68%.
Around 55% of FX assets were invested in securities, 48% were deposited at central banks, IMF and the
BIS, and the remaining were deposited at foreign commercial banks. "The rate of earnings on foreign
currency assets and gold, after accounting for depreciation, decreased from 4.16 per cent in July 2008 -
June 2009 to 2.09 in July 2009 to June 2010 reflecting the generally low global interest rate
environment," the RBI added in its March 25 report.

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Economic Outlook: India

Written by Scott Hazelton - 21 Apr 2011

Growth forecasts for major construction sectors in India

Over the next five years, India will offer the strongest growth of any major construction
economy, including Brazil and China. Although China will remain the global growth leader in
2011 and probably 2012, the expansion of its construction market will tail-off as the
Government's stimulus spending comes to an end. By contrast, India's already strong growth will
continue in the short term and strengthen in the coming years.
Key to the improving construction outlook is the evolution of India's economy. The GDP growth
trend has been around +8.0% for the last 20 years, compared to +3.5% to +5.5% in the mid
1980s and at the same time the volatility of economic growth has subsided.
The most recent complete annual data shows that by the end of 2009, India had a rapidly
expanding US$ 1.3 trillion economy - the third largest in Asia, after Japan and China. The
available evidence suggests that India's real GDP grew close to +9.0% in 2010. Yet, per capital
GDP remains fairly low by regional standards and is less than half of China's.
But there are considerable pockets of wealth, and India also enjoys a rich spread of natural
resources and has a large population that could be employed more productively to put economic
growth on an even higher path. However, key institutions such as the education system are not
yet up to the task.
Construction growth
Residential construction spending slowed with the global economic downturn, but is expected to
bounce back at a rate of +8.2% this year. Credit conditions remain tight, and growth is expected
to remain near +8.0% for the next two years before gradually increasing thereafter.
India is one of the least urbanised countries in the world, with less than 30% of its population
living in towns and cities. However, the urban population is expected to reach nearly 600 million
people in the next five years.
This will drive growth in the residential sector at an average of +8.5% to US$ 88 billion. The
next five years will see an acceleration to +10.5% average growth, taking the value of the sector
to US$ 145 billion.
The clear opportunity will be in the urban housing sector, and the demographics of migration
from rural to urban environments in other countries suggests that the largest share of the urban
opportunity will come from affordable housing.
Future spending in non-residential structures is forecast to grow from US$ 126 billion in 2010 to
US$ 205 billion in 2015, at an annual growth rate of +10%. By 2020 spending is expected to
reach US$ 308 billion driven by growth of +8.5% from 2015 to 2020.
Commercial construction is one of the more developed segments within the non-residential
segment - India is already thought to have some 600 shopping malls. However, the steady
growth of the middle class, along with rising incomes in general, suggests that the Indian
consumer market will quadruple by 2025, driving significant expansion in the construction of
retail space.
Similarly, India's strength in business services and IT has already created a substantial base of
office space, the demand continues to grow in the large and medium cities with three cities alone
- Mumbai, Delhi and Bangalore - projected to increase office space by 20 million ft2 (2 million
m2) per year to keep pace.
Continued industrial expansion, and the continued evolution toward higher value products will
drive new, expanded and upgraded manufacturing facilities. Increasing urbanisation will require
the construction of schools, health care facilities and government buildings to maintain and
improve upon the level of services.
Infrastructure construction will continue to be a key priority for India, and spending in this sector
is forecast to increase accordingly. Investment is expected to increase from US$ 84 billion in
2010 to US$ 129 billion in 2015, at a growth rate of +9.0%. Growth will slow slightly to +8.4%
in the 2015 to 2020 period, taking annual spending to US$ 189 billion in 2020.
Financing challenge
The challenge for achieving this remains financing as India deals with chronic fiscal imbalances.
Still, India has made extensive use of public-private partnerships to leverage government
investment, and the regulations governing such investments have been liberalised in recent years.
Indeed, rules governing foreign investment and ownership have been reformed throughout the
economy and foreign direct investment is likely to double over the next five years as a result.
With strong growth offering the potential for solid returns, money should be available for
projects with proven value and/or critical importance.
India, like many countries that engage in official five year plans, often falls short of what are
typically ambitious national goals. However even falling short on US$ 1 trillion plan suggests a
significant opportunity.
The outlook for India remains strong, and its potential is even greater. With opportunities across
virtually all segments of the construction market, and with the probability of sustained, world-
leading growth, construction companies need to have a strategy for this market.
 Sales
momentum continues, but profit
growth moderates

Profits of the 103

listed firms that have so far declared results grew 25.8% on the back of a 26.6% rise in net
sales

Pramit Bhattacharya & Ashwin Ramarathinam

•
Mumbai: Early results declared by Indian firms show that profit growth has moderated in the March quarter
even as the momentum in sales growth continues.

Also See | Earnings Scorcard (PDF)

Profits of 103 listed firms that have so far declared their earnings in the March quarter grew 25.8% on the
back of a 26.6% rise in net sales. While the earnings declared so far have largely been in line with
expectations, analysts say these are early days yet as most companies are yet to post their results.

Among the 30 firms on the benchmark Sensex index of the Bombay Stock Exchange, only five have declared
their earnings so far.

At least two Sensex firms—Infosys Technologies Ltd and India’s most valuable firm Reliance Industries Ltd
(RIL)—have disappointed the markets.

In the case of Infosys, guidance for earnings in fiscal 2012 was below Street expectations, and the stock has
been hammered down 12% since it declared its results on 15 April.

Its listed peer, Tata Consultancy Services Ltd (TCS) saw a 49% growth in profit, in line with expectations.
Infosys and TCS are India’s two largest software exporters.

The 14.1% profit growth of RIL missed Street consensus estimates, and operating margins in its
petrochemicals business fell below expectations.
Banks led by HDFC Bank Ltd, which posted a 33% growth in profit, have largely been in line with
expectations.

“These are still early days, and there is no secular trend. The results have been mixed,” said Harendra
Kumar, head of research at Elara Capital Plc. “While Infosys disappointed, other IT (information
technology) companies like TCS and HCL Technologies (Ltd) have done well.”

Typically, brokerages cover at most 200 of the biggest firms. Of the 103 firms that have declared earnings,
less than 15 are covered by analysts.

The earnings season is significant as it comes on the back of a pull-back in the stock market. After
underperforming its peers for over three months, Indian markets have bounced back in the past month.

The Sensex has moved up 9.8% in line with other Asian peers on the back of rising fund flows to emerging
markets. India has seen net foreign inflows of $1.3 billion (Rs. 5,579 crore) this year so far, higher than any
other equity market in Asia excluding Japan, according to Bloomberg data.

However, concerns on growth and earnings, which have brought down stocks since the start of the year, still
remain. The ability of companies to pass on increases in raw material, interest and wage costs will be keenly
watched by analysts to determine the extent of downgrades in their estimates of profit growth in fiscal
2012.

“So far, it is only banks and IT firms that have declared earnings. We have to see how manufacturing firms
fare in protecting their margins,” said Rajesh Iyer, head of research at the wealth management arm of
Kotak Mahindra Bank Ltd.

Economists have downgraded India’s gross domestic product growth estimate for fiscal 2012 to 7-8.5%
from 8.5-9.5% earlier, citing slow pick-up in capital expenditure and high inflation, which could lead to
higher-than-anticipated rate tightening.

Wholesale Price Index data for March released last week show inflation rose higher than expected at nearly
9%. The Reserve Bank of India (RBI) has raised its policy rates eight times since March 2010 to 6.75%, but
real interest rates remain negative.

Analysts say many of the macro concerns have been priced in, and unless there is a sharp rate tightening by
RBI, markets may not see a major decline.

Elara Capital’s Kumar said while there might be 2-3% downward revisions after the current earnings season,
markets would not be affected much.

“We might see downgrades in profit expectations for fiscal 2012 by 2-3%, but even then, earnings for large
caps would grow by over 17%,” said Kumar. “Things could turn out to be different if RBI starts tightening
aggressively.”

Other than the earnings number that listed firms are declaring now, it is the level of crude oil prices and
RBI’s moves that would determine the extent of change in the market’s expectations on corporate earnings’
growth.
 For the fiscal year
ended 31 March, wholesale price inflation rose to close to 9%, beating RBI’s estimate-raised
twice during the year-by almost a full percentage point

Anup Roy & Joel Rebello

•
Mumbai: The Reserve Bank of India (RBI) on Monday said it is necessary to lower inflation “as quickly and
as decisively as possible” to sustain the growth momentum in the world’s second fastest growing major
economy, indicating in no uncertain terms that it would continue to raise rates to fight inflation.

Since March 2010, RBI has hiked its policy rate by 350 basis points (bps) to 6.75% in eight tranches.

For the fiscal year ended 31 March, wholesale price inflation rose to close to 9%, beating RBI’s estimate—
raised twice during the year—by almost a full percentage point.

The Indian central bank’s report Macroeconomic and Monetary Developments in 2010-11, released ahead of
its annual monetary policy, said inflation in 2012 would moderate slowly, but remain above its “comfort
level”.

“Risk to growth from sustained high inflation could condition the stance of the monetary policy in near
term,” the report said, adding, “since high inflation itself could disrupt growth, it is important for the
monetary policy to ensure a low inflation environment as a pre-condition for sustained high growth.”

This prompted many analysts and economists to believe that RBI may go for a higher dose of policy rate
hike even though they do not dub the central bank’s stance excessively hawkish and say it is “balanced”.

“The tone is hawkish on inflation, but it is well placed for both inflation and growth concerns,” said A.
Prasanna, economist at ICICI Securities Primary Dealership Ltd.

Based purely on recent data points, most economists see rates going up by 50 bps on Tuesday. One basis
point is one-hundredth of a percentage point.

Fearing a sharp rate hike, investors sold bank stocks on Monday, leading to a sharp fall in most stocks. All
14 stocks that constitute the Bombay Stock Exchange’s (BSE) banking index, Bankex, fell.

Shares of Bank of India fell the most, losing 7.73% of their value to close at Rs. 421.65 each.

Among other bank stocks, shares of Canara Bank fell 5.72%, Vijaya Bank, 5.6%, United Bank of India,
4.82% and State Bank of India, the nation’s largest lender, 4.06%.

Among private banks, shares of ICICI Bank Ltd fell 1.44% and HDFC Bank Ltd, 0.08%.
 The Sensex, the benchmark index of BSE, fell 0.72% to close at 18,998.02 points.

The Bankex was the worst performer among the sectoral indices, losing 2.08% to close at 12,804.48 points.

Apart from the apprehensions about a 50 bps hike in policy rate, bank stocks also reacted to news reports
on a possible 50 bps hike on savings rate. If that happens, banks’ cost of deposits will go up sharply and
their net interest margin, or the difference between cost of deposits and yields on advances, will shrink.

About 22% of banking industry’s deposits are savings accounts on which they pay 3.5% interest. RBI could
raise the rate to 4% to protect the interest of savers against persistently high inflation.

Apurva Shah, vice-president and head (research strategy, financial services) at Prabhudas Lilladher Pvt.
Ltd, said the stocks were depressed because an increase in rates would likely squeeze interest margins for
banks.

In the past, RBI had assumed growth was robust and investment demand, buoyant. This time though, it
flagged off concerns about the potential impact of inflation on growth and said investment demand too is
slowing down.

“High energy and commodity prices may impact output and investment climate, and pose a threat to
maintaining high growth at a time when the investment momentum may be slowing down,” RBI said,
adding, “fresh pressures from commodity prices do make 2011-12 a challenging year for inflation
management.”

It also made it abundantly clear that high inflation and high growth cannot coexist, as has been suggested
by some economists, including Kaushik Basu, the government’s chief economic adviser.

“Balancing growth and inflation may be important in the short run, but in the long-run, persistent inflation is
a significant threat to growth,” it said.

RBI also harped on the importance of containing the fiscal deficit and suggested that the government must
try and bring down the subsidies on various petroleum products and fertilizers.

Despite risks to growth emanating from high oil prices and some moderation in investment, “GDP growth
during 2011-12 is expected to stay close to the trend,” RBI said, even as various agencies, including the
central bank’s survey of professional forecasters, are projecting a growth of 8-8.5%, lower than the
government expectation of 9% growth.

The money market was subdued on Monday with the yield on 10-year bonds rising to 8.15% from 8.13% on
Friday.

One-year overnight indexed swaps, a trading indicator of how short-term rates will move, ended at 7.88%,
up just 1 bps after touching 7.9% from 7.87% on Friday.

J. Moses Harding, executive vice-president and head (global markets group) at IndusInd Bank Ltd, said the
market is in a wait-and-watch mode, expecting a 50 bps hike in policy rates. “The market will be pleasantly
surprised if there is only a 25 bps hike because it is anyway geared for the repo rate increasing to 7.5% in
September from 6.75% now,” he said.

• Economy and Politics

•
• Posted: Tue, Apr 19 2011. 7:47 PM IST

•
 Plan
panel targets 9-9.5% economic
growth in 2012-17

The 12th Plan would

aim at 4% growth in agriculture sector and 11-12% increase in manufacturing sector to step up
overall growth rate in the next Plan

PTI

•
New Delhi: The Planning Commission is aiming an economic growth rate of 9-9.5% for the 12th Five Year
Plan (2012-17), up from 8.1% expected for the current Plan.

“We are targetting 9-9.5% annual gross domestic product (GDP) growth rate in the 12th Plan,” minister of
state for planning Ashwani Kumar told reporters, ahead of the meeting of the full Planning Commission on
12 April.

The Commission is likely to approve the Approach Paper for the 12th Plan at its meeting to be chaired by
Prime Minister Manmohan Singh. Among others, the meeting will be attended by Planning Commission
members and senior cabinet ministers, including finance minister Pranab Mukherjee and home minister P
Chidambaram.

The 12th Plan, Kumar added, would aim at 4% growth in agriculture sector and 11-12% increase in
manufacturing sector to step up overall growth rate in the next Plan.

“For achieving 9-9.5% growth rate, agriculture should grow at 4% and manufacturing at 11-12%. Without
this we would not be able achieve this high GDP growth target,” Kumar said.

The Planning Commission, he added, has prepared the Approach Paper to the 12th Plan wherein the major
thrust of the next five year Plan would be ‘Faster, More Inclusive and Sustainable Development´.

The ‘Approach´ paper lays broad outline of a Five Year Plan.

 Although the Commission had pegged the economic growth rate at 9% for the 11th Plan (2007-12), it was
scaled down to 8.1% in view of the impact of the global financial meltdown on the Indian economy.

Asked about how the Commission see such a high growth rates in farm and manufacturing sectors, Kumar
said, “There would be major thrust on water management and food storage in the 12th Plan to give boost to
agriculture and allied sector.”

About giving impetus to the manufacturing output, he said, “The Commission sees more qualitative skill
development and its larger geographical spread in 12th Plan period compared to quantitative approach in
the 11th Plan (2007-12).”

Besides skill development, he said that technological innovation would be another area of focus in the next
Plan to improve manufacturing sector’s performance.

“There would also be major policy initiative to promote Public Private Partnership (PPP) which would create a
conducive environment to bring an investor friendly regime,” he said.

About the urban renewal in the country as over 300 million people would be living in cities and big metros,
he said, “the government is planning an investment of over Rs. 1.4 lakh crore every year to create and to
improve infrastructure in urban areas.”

Kumar also hinted that the government would also consolidate the social sector scheme to improve delivery
system.

• Home
•
• Posted: Fri, May 6 2011. 1:00 AM IST

• Published on page 5

India’s
power demand to reach 1,400 bn
units by 2017
Utpal Bhaskar, utpal.b@livemint.com
New Delhi

•
•
India’s power sector, already struggling to meet demand, faces some difficult years ahead with electricity
requirement expected to soar by 55.5% by the end of the 12th five-year plan (2012-17).

“The demand is expected to increase from the current level of 900 BU (billion units) to 1,400 BU by the end
of the 12th plan,” power secretary P. Uma Shankar said at a conference on Thursday.

Inability to meet the power demand can hurt economic growth in the world’s second fastest growing major
economy. “We are targeting an economic growth of 9% to 9.5% during the 12th plan as compared to 8% to
8.5% growth in the 11th plan (2007-12),” B.K. Chaturvedi, member, energy, at the Planning Commission,
India’s apex planning body, said at the conference.

India’s per capita consumption of electricity is only around 700 units, compared with the global average of
2,600 units. But its record in increasing capacity is poor. In the five years to 2007, the country added
20,950MW of capacity against a target of 41,110MW.

The government plans to add 100,000 MW during the 12th plan to the current capacity of 174,000 MW. The
bulk of the targeted addition is coal-based, but the country is facing an increasing shortage of the fuel.
Shortage of fuel, compared with demand, has widened from 4 million tonnes (mt) in 2004-05 to 40 mt in
2010-11.

“The availability of domestic fuel has not kept pace with the growing demand,” Uma Shankar said. The
power sector is the country’s biggest consumer of coal, absorbing 78% of domestic production. To generate
1MW of power, around 5,000 tonnes of coal per annum is required.

To bridge the gap, the government wants power generation utilities to blend up to 30% of imported coal
with domestic coal. Imported coal typically has a higher calorific value, which reduces wastage and also
improves the generation efficiency of these power projects.

“While the government wants blending imported coal to the extent of 30%, it is only possible with new
projects,” said a senior official at NTPC Ltd, India’s largest power generation company, asking not to be
named.

Uma Shankar agreed. “While the new projects will be able to blend 30% imported coal with domestic coal,
the boiler design of current projects do not allow more than 15% blending. We are also looking at
retrofitting the existing boilers so that they can blend more imported coal.”

The size of the market for imported coal that goes into power generation in India is around 50 mt a year,
and is expected to double by 2012 as more thermal power projects come up.

India will also require an investment of around $400 billion ( Rs.17.8 trillion) in its power sector, said Uma
Shankar.

The 11th plan had set a target of adding 78,577MW of power generation capacity, requiring, at current
estimates some Rs.10.31 trillion of investment. The power ministry estimates a shortfal of Rs.4.51 trillion.
The target has since been revised to 62,374MW.

According to an internal analysis by the power ministry, a capacity addition of around 55,000MW in the
current five-year plan is now expected. Power minister Sushilkumar Shinde, speaking at the same
conference, said he was confident the country will be able to meet the revised target in the terminal year of
the 11th plan.
Indian IT sector to hire 2.5 lakh people in 2011-2012

The recovery of IT, ITES and telecommunication services has spurred a major hiring
process in India. According to the National Association of Software and Service Companies
(Nasscom), the Indian IT industry is now looking forward to hiring 2.5 lakh people during
this fiscal year.

As per the reports, the leading information, communications and technology company,
Mahindra Satyam will hire 18,000 people, whereas, Tata Consultancy Services Limited
(TCS) is likely to rope in approximately 60,000 people.

According to staffing firm TeamLease Services, the overall hiring sentiment is bullish in IT
and ITeS sector.

According to Nasscom, the Indian IT and BPO sectors have grown 19 per cent in 2010-11 to
USD 76 billion in revenues for the same fiscal year. The IT, ITES and telecommunication
surge in hiring, spells good news for the IT jobs seekers who can be assured a placement
thanks to the revival of IT demands and return of the discretionary spending

Inflation, Policies To Curb India's Growth: ADB

By Nick Godt
Published April 07, 2011
| MarketWatch Pulse
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MUMBAI -- A combination of inflationary pressures, slower external demand, and tighter fiscal and
monetary policies is expected to curb India's growth this year, the Asian Development Bank said in a
report. India's gross domestic product is now expected to expand by 8.2% in 2011, down from an
estimated rate of 8.6% in 2010, ADB said. Agricultural output, strong private consumption and
exports all supported growth in 2010, it said. But inflationary pressures have led the Reserve Bank of
India to hike interest rates eight times in about a year, while the government has adopted tighter
fiscal targets. This year, these policies will "also remain less accommodating than in the past," while
"high oil prices remain a threat," ADB said. However, it expects growth to bounce back to 8.8% in
2012 "as investment and overall economic activity pick up and as planned reforms move forward."