ECONOMY MATTERS

Inside This Issue

Rising Current Account Deficit Emerges as a Major Macroeconomic Risk

Cover Story

Foreword 01

Executive Summary 02

Global Trends 03

Domestic Trends 06

Sector in Focus: Indian Cement 10Industry

Special Article: Rising Current 14Account Deficit Emerges as a Major Macroeconomic Risk

Economy Monitor 19

Volume 13 No. 21March 2013

The US economy grew at a moderately faster rate at the end of last year than

previously reported, but the pace of growth remained sluggish. In the final

quarter of 2013, the US economy expanded at an annual rate of 0.4 per cent,

taking the full year growth to 2.2 per cent, after a 1.8 per cent increase in 2011.

The expectations of growth for the current year are also a bit sanguine on the

back of slew of positive developments such as improvement of business

investment growth and surge in consumer spending amongst other reasons.

High unemployment however still remains a problem, with the current rate

hovering around 7.5 per cent.

rdThe Annual Monetary Policy of the RBI is due on May 3 , 2013. The Policy will be

closely watched as it would enunciate the annual growth and inflation

estimates of the RBI for the current fiscal. In addition to hoping for at least 50

basis points cut in the repo rate, CII proposes the Central Bank to consider

putting a cap on the Statutory Liquidity Ratio (SLR) by allowing the banks to

park only up to 2 per cent higher than the current prescribed rate of 23 per cent.

This is in view of the fact that the commercial banks are at present investing in

government securities in excess of the mandated SLR requirement, which has

been necessitated due to sizeable jump in the bank’s non-performing loans

(NPAs). Putting a cap on SLR will help in freeing up more resources for the

private sector, given that liquidity continues to remain in deficit.

One of the risks which the Central Bank has time and again highlighted is the

rising current account deficit (CAD). As per the latest data available for the third-

quarter of FY13, CAD widened sharply to a high of 6.7 per cent of GDP. The

deterioration in CAD was mainly on the back of a sharp rise in the trade deficit,

exacerbated by the inelastic imports of gold & oil and weak external demand.

The only sliver lining amidst this gloomy scenario was that the entire CAD was

fully financed by the net capital flows. However, this increased dependence on

debt flows comes with a caveat. These flows run the risk of reversing abruptly

in line with the changed global macroeconomic scenario. In this regard, it’s

important to lay emphasis on increasing FDI flows along with devising measures

to boost exports.

FOREWORD

1

DISCLAIMER

Copyright © 2013 by Confederation of Indian Industry (CII), All rights reserved.

No part of this publication may be reproduced, stored in, or introduced into a retrieval system, or transmitted in any form or by

any means (electronic, mechanical, photocopying, recording or otherwise), without the prior written permission of the

copyright owner. CII has made every effort to ensure the accuracy of information presented in this document. However,

neither CII nor any of its office bearers or analysts or employees can be held responsible for any financial consequences arising

out of the use of information provided herein. However, in case of any discrepancy, error, etc., same may please be brought to

the notice of CII for appropriate corrections.

Published by Confederation of Indian Industry (CII), The Mantosh Sondhi Centre; 23, Institutional Area, Lodi Road, New Delhi-

110003 (INDIA),

Tel: +91-11-24629994-7, Fax: +91-11-24626149; Email: info@cii.in; Web: www.cii.in

ECONOMY MATTERS

Chandrajit Banerjee

(Director General, CII)

The US economy grew at a moderately faster rate at the end of last year than

previously reported, but the pace of growth remained sluggish. In the final

quarter of 2013, the US economy expanded at an annual rate of 0.4 per cent,

taking the full year growth to 2.2 per cent, after a 1.8 per cent increase in 2011.

The expectations of growth for the current year are also a bit sanguine on the

back of slew of positive developments such as improvement of business

investment growth and surge in consumer spending amongst other reasons.

High unemployment however still remains a problem, with the current rate

hovering around 7.5 per cent.

rdThe Annual Monetary Policy of the RBI is due on May 3 , 2013. The Policy will be

closely watched as it would enunciate the annual growth and inflation

estimates of the RBI for the current fiscal. In addition to hoping for at least 50

basis points cut in the repo rate, CII proposes the Central Bank to consider

putting a cap on the Statutory Liquidity Ratio (SLR) by allowing the banks to

park only up to 2 per cent higher than the current prescribed rate of 23 per cent.

This is in view of the fact that the commercial banks are at present investing in

government securities in excess of the mandated SLR requirement, which has

been necessitated due to sizeable jump in the bank’s non-performing loans

(NPAs). Putting a cap on SLR will help in freeing up more resources for the

private sector, given that liquidity continues to remain in deficit.

One of the risks which the Central Bank has time and again highlighted is the

rising current account deficit (CAD). As per the latest data available for the third-

quarter of FY13, CAD widened sharply to a high of 6.7 per cent of GDP. The

deterioration in CAD was mainly on the back of a sharp rise in the trade deficit,

exacerbated by the inelastic imports of gold & oil and weak external demand.

The only sliver lining amidst this gloomy scenario was that the entire CAD was

fully financed by the net capital flows. However, this increased dependence on

debt flows comes with a caveat. These flows run the risk of reversing abruptly

in line with the changed global macroeconomic scenario. In this regard, it’s

important to lay emphasis on increasing FDI flows along with devising measures

to boost exports.

FOREWORD

1

DISCLAIMER

Copyright © 2013 by Confederation of Indian Industry (CII), All rights reserved.

No part of this publication may be reproduced, stored in, or introduced into a retrieval system, or transmitted in any form or by

any means (electronic, mechanical, photocopying, recording or otherwise), without the prior written permission of the

copyright owner. CII has made every effort to ensure the accuracy of information presented in this document. However,

neither CII nor any of its office bearers or analysts or employees can be held responsible for any financial consequences arising

out of the use of information provided herein. However, in case of any discrepancy, error, etc., same may please be brought to

the notice of CII for appropriate corrections.

Published by Confederation of Indian Industry (CII), The Mantosh Sondhi Centre; 23, Institutional Area, Lodi Road, New Delhi-

110003 (INDIA),

Tel: +91-11-24629994-7, Fax: +91-11-24626149; Email: info@cii.in; Web: www.cii.in

ECONOMY MATTERS

Chandrajit Banerjee

(Director General, CII)

2 3

EXECUTIVE SUMMARY GLOBAL TRENDS

US Economy Grew More-than-Expected in Q4 2012

Global Trends

Domestic Trends

The US economy grew at a faster-than-expected

rate of 0.4 per cent in the fourth quarter, 2012.

However, the growth has been lower than the

previous quarter growth rate of 3.1 per cent.

Overall, 2012 growth clocked 2.2 per cent as

compared to 1.8 per cent in the previous year but

could not really make a dent on the unemployment

levels. Further, in view of the burgeoning fiscal

problems and environmental un-sustainability, IMF

urges economies to undertake energy subsidies

reforms. IMF estimates that current energy

subsidies amount to a staggering US$1.9 trillion,

equivalent of 2.5 per cent of global GDP or 8 per

cent of government revenues. Reducing subsidies

is not easy but economies must try to reduce them

as quickly as possible for the overall good of the

economic growth and environment.

The Statutory Liquidity Ratio (SLR) currently stands

at 23 per cent. However, our estimates show that

the commercial banks are already investing in

government securities in excess of the mandated

SLR requirement. One of the reasons for this is that

banks are currently risk averse to lend to the private

sector, given sizeable jump in bank's rising non-

performing loans (NPAs). Liquidity deficit

meanwhile continues to remain high. Hence, in the

current backdrop it is suggested that the Central

Bank should consider putting a cap on SLR by

allowing the banks to park only up to 2 per cent

higher than the prescribed rate. This will help in

freeing up more resources for the private sector,

given that liquidity continues to remain in deficit.

The external vulnerabilities are meanwhile on the

rise in view of the staggering rise in the external

debt at the end of the third quarter of FY13.

Sector in Focus: Cement

Special Article

Indian cement industry is one of the core industries,

which plays a vital role in the growth of the country.

Post 2004, the industry has flourished well with the

real estate boom. During 2004-05 and 2011-12, the

cement production grew at a CAGR of 8.3 per cent.

But growth remained volatile and exhibited a

downtrend during this period. Particularly post

2010-11, growth remained somewhat muted as

compared to the past years, indicating foreplay of

both demand and supply-side factors. Nonetheless,

cement demand is expected to improve in the

coming months of the current fiscal with the revival

of economic growth. According to a report by the

working group on the industry, India would require

an overall cement capacity of around 480 million thtonnes during current 12 Five Year Plan period.

In this month's special article, we focus on the

Current Account Deficit (CAD) which has emerged

as a major macroeconomic risk. The latest data

released for the third-quarter of 2012-13 shows that

the current account deficit widened to an all time

high of 6.7 per cent of GDP from 5.4 per cent in the

previous quarter. The deterioration in CAD was on

the back of a US$11 billion increase in the trade

deficit to US$59.6 billion (12.3 per cent of GDP). As

far as the financing of the CAD is concerned, the

funding of the same is not expected to pose a

problem in 2012-13. India received its highest net FII

inflows ever in 2012-13 on the back of pro-reform

policies on the domestic front. The rising capital

flows is holding India in a good stead but it comes

with a rider, which is increasing reliance on debt

flows. In this regard, following a two pronged

approach - of boosting exports and substituting

imports - is crucial.

ECONOMY MATTERS ECONOMY MATTERS

attributable to positive contributions from personal

consumption expenditure (PCE), residential and non-

residential fixed investments that were partly offset

by negative contributions from private inventory

investment, federal government spending, exports,

and state and local governments spending.

The US economy grew by 0.4 percent in the fourth

quarter of 2012, faster than the expected rate of 0.1 per

cent. However, the growth has been lower than the

previous quarter growth rate of 3.1 per cent. The

increase in real GDP in the fourth quarter is primarily

Source: US Bureau of Economic Analysis

non-residential structure and equipment and

software. Investment in former increased by 16.7

percent, however, remained unchanged from Q3,

2012, while in latter, it augmented by 11.8 per cent, in

contrast to a decrease of 2.6 per cent in the third

quarter. Real residential fixed investment showed a

robust increase of 17.6 per cent, over 13.5 per cent in

the previous quarter.

During Q4 2012, real personal consumption

expenditure increased by 1.8 per cent as compared to

1.6 per cent in the third quarter. Durable goods

increased by 13.6 per cent, compared with an increase

of 8.9 per cent. Non-durable goods increased by 0.1 per

cent, against an increase of 1.2 per cent. Real non-

residential fixed investment surged by 13.2 percent in

the fourth quarter, in contrast to a decrease of 1.8 per

cent in the third quarter, owing to robust increase in

2.5%

1.3%

4.1%

0.1%

2.0%

1.3%

3.1%

0.4%

Q4Q3Q2Q1Q4Q3Q2Q1

2011 2012

2011=1.8% 2012=2.2%

US GDP Growth

2 3

EXECUTIVE SUMMARY GLOBAL TRENDS

US Economy Grew More-than-Expected in Q4 2012

Global Trends

Domestic Trends

The US economy grew at a faster-than-expected

rate of 0.4 per cent in the fourth quarter, 2012.

However, the growth has been lower than the

previous quarter growth rate of 3.1 per cent.

Overall, 2012 growth clocked 2.2 per cent as

compared to 1.8 per cent in the previous year but

could not really make a dent on the unemployment

levels. Further, in view of the burgeoning fiscal

problems and environmental un-sustainability, IMF

urges economies to undertake energy subsidies

reforms. IMF estimates that current energy

subsidies amount to a staggering US$1.9 trillion,

equivalent of 2.5 per cent of global GDP or 8 per

cent of government revenues. Reducing subsidies

is not easy but economies must try to reduce them

as quickly as possible for the overall good of the

economic growth and environment.

The Statutory Liquidity Ratio (SLR) currently stands

at 23 per cent. However, our estimates show that

the commercial banks are already investing in

government securities in excess of the mandated

SLR requirement. One of the reasons for this is that

banks are currently risk averse to lend to the private

sector, given sizeable jump in bank's rising non-

performing loans (NPAs). Liquidity deficit

meanwhile continues to remain high. Hence, in the

current backdrop it is suggested that the Central

Bank should consider putting a cap on SLR by

allowing the banks to park only up to 2 per cent

higher than the prescribed rate. This will help in

freeing up more resources for the private sector,

given that liquidity continues to remain in deficit.

The external vulnerabilities are meanwhile on the

rise in view of the staggering rise in the external

debt at the end of the third quarter of FY13.

Sector in Focus: Cement

Special Article

Indian cement industry is one of the core industries,

which plays a vital role in the growth of the country.

Post 2004, the industry has flourished well with the

real estate boom. During 2004-05 and 2011-12, the

cement production grew at a CAGR of 8.3 per cent.

But growth remained volatile and exhibited a

downtrend during this period. Particularly post

2010-11, growth remained somewhat muted as

compared to the past years, indicating foreplay of

both demand and supply-side factors. Nonetheless,

cement demand is expected to improve in the

coming months of the current fiscal with the revival

of economic growth. According to a report by the

working group on the industry, India would require

an overall cement capacity of around 480 million thtonnes during current 12 Five Year Plan period.

In this month's special article, we focus on the

Current Account Deficit (CAD) which has emerged

as a major macroeconomic risk. The latest data

released for the third-quarter of 2012-13 shows that

the current account deficit widened to an all time

high of 6.7 per cent of GDP from 5.4 per cent in the

previous quarter. The deterioration in CAD was on

the back of a US$11 billion increase in the trade

deficit to US$59.6 billion (12.3 per cent of GDP). As

far as the financing of the CAD is concerned, the

funding of the same is not expected to pose a

problem in 2012-13. India received its highest net FII

inflows ever in 2012-13 on the back of pro-reform

policies on the domestic front. The rising capital

flows is holding India in a good stead but it comes

with a rider, which is increasing reliance on debt

flows. In this regard, following a two pronged

approach - of boosting exports and substituting

imports - is crucial.

ECONOMY MATTERS ECONOMY MATTERS

attributable to positive contributions from personal

consumption expenditure (PCE), residential and non-

residential fixed investments that were partly offset

by negative contributions from private inventory

investment, federal government spending, exports,

and state and local governments spending.

The US economy grew by 0.4 percent in the fourth

quarter of 2012, faster than the expected rate of 0.1 per

cent. However, the growth has been lower than the

previous quarter growth rate of 3.1 per cent. The

increase in real GDP in the fourth quarter is primarily

Source: US Bureau of Economic Analysis

non-residential structure and equipment and

software. Investment in former increased by 16.7

percent, however, remained unchanged from Q3,

2012, while in latter, it augmented by 11.8 per cent, in

contrast to a decrease of 2.6 per cent in the third

quarter. Real residential fixed investment showed a

robust increase of 17.6 per cent, over 13.5 per cent in

the previous quarter.

During Q4 2012, real personal consumption

expenditure increased by 1.8 per cent as compared to

1.6 per cent in the third quarter. Durable goods

increased by 13.6 per cent, compared with an increase

of 8.9 per cent. Non-durable goods increased by 0.1 per

cent, against an increase of 1.2 per cent. Real non-

residential fixed investment surged by 13.2 percent in

the fourth quarter, in contrast to a decrease of 1.8 per

cent in the third quarter, owing to robust increase in

2.5%

1.3%

4.1%

0.1%

2.0%

1.3%

3.1%

0.4%

Q4Q3Q2Q1Q4Q3Q2Q1

2011 2012

2011=1.8% 2012=2.2%

US GDP Growth

4 5 ECONOMY MATTERS ECONOMY MATTERS

Though the 2012 growth has certainly been better than

the previous year growth, it was not really reflected in

cut in unemployment levels. The unemployment rate

still remained high at 7.6 per cent in March 2013 as

compared to 7.7 per cent in February 2013 and 8.2 per

cent in the same period last year, reflecting a modest

reduction.

The US government is hopeful of a better economic

recovery in the first quarter of 2013 on the back of

certain positive developments - (a) continuing

investment by companies in new equipment and

rebuilding of depleted stockpiles, (b) surge in

consumers spending, (c) upbeat housing market, and

(d) improvement in the business investment growth.

This is going to be supported by the central bank's

decision to hold back its benchmark interest rate near

zero as long as joblessness stayed above 6.5 per cent

and the outlook for inflation was below 2.5 per cent.

The central bank appears to continue with monetary

policy easing as it would keep up its bond buying at a

pace of US$85 billion a month to bolster the economic

expansion through improved liquidity in the system.

On the other hand, decline was noticed in the exports

of goods and services of 2.8 per cent in the fourth

quarter, contrary to an increase of 1.9 per cent in the

previous quarter. Plunge was also noticed in the

imports; in fact, it was much higher than that of

exports. Imports contracted by 4.2 per cent in Q4 2012

as compared to a fall of 0.6 percent in the third

quarter. Further, contraction has also been noticed in

the federal government consumption expenditures

and gross investments. Both these components

contracted considerably by 14.8 per cent each in the

fourth quarter, against an increase of 9.5 per cent in

the third quarter. A sharp cut of 22.1 per cent has been

observed in the government spending on defence, in

contrast to an increase of 12.9 per cent in the previous

quarter. Amongst these components, steep dip in

government expenditure and military spending has

significantly dampened the GDP growth in the fourth

quarter and hence the overall economic growth. For

whole of 2012, the world's largest economy expanded

by 2.2 per cent after a 1.8 per cent gain in 2011.

emissions by delivering about 15-30 per cent of the

Copenhagen Accord's goal. In advanced economies,

subsidies most often take the form of taxes that are

too low to capture the true costs to society of energy

use ("tax subsidies"), including pollution and road

congestion. Post-tax subsidies are four times larger

than pre-tax subsidies, and advanced economies

account for 40 per cent of post-tax subsidies. But as a

share of gross domestic product, post-tax subsidies

are roughly eight times larger in the Middle East and

North African region than in advanced economies.

Hence, eliminating post tax energy subsidies would

deliver even more significant emissions reductions,

reducing CO2 emissions by 4.5 billion tons, a 13 per cent

reduction.

the biggest consumers of energy. According to IMF

estimates, on an average, the richest 20 per cent of

households capture 43 per cent of fuel subsidies in low

and middle income countries. IMF acknowledges that

with subsidy reforms, upward correction in fuel prices

will take place that can have a significant impact on the

poor. Hence, mitigating measures to protect them

from subsidy reform must be an integral part of any

successful and equitable reform program.

In addition, subsidies aggravate climate change and

worsen local pollution and congestion. The study finds

that eliminating pre-tax subsidies would cut global

CO2 emissions by about 1-2 per cent which would, by

itself, represent a significant first step in reducing

saving and alternative technologies. IMF further

argues that while subsidies intend to benefit select

group of consumers, they are often inefficient and

could be replaced with better means of protecting the

most vulnerable segment of the population.

IMF observed that for some countries the fiscal weight

of energy subsidies is growing so large that the budget

deficits are becoming unmanageable, threatening the

stability of the economy. IMF research shows that 20

countries maintain pre-tax energy subsidies that

exceed 5 per cent of GDP. For other emerging and

developing countries, the share of the scarce

government resources spent on subsidies remains a

stumbling block to higher growth and fundamentally

impairs their future. Because of substantial diversion

of funds on subsidies, little investment is made in

much-needed infrastructure, public health and

education; thereby undermining the development of

human capital. Subsidies also result in the

misallocation of resources to capital and energy-

intensive activities.

Energy subsidies also reinforce inequality because

they mostly benefit upper-income groups, which are

As it is a well known fact that subsidies in any form

leads to distortion in the efficient allocation and

utilization of resources; IMF in its recent study on

energy subsidies throws light on the need to bring

global reforms in on energy products, ranging from

coal to gasoline to ensure major gains for both

economic growth and the environment.

IMF estimates, which are based on a new database for

176 countries, shows that energy subsidies amount to

a staggering US$1.9 trillion, equivalent of 2.5 per cent

of global GDP or 8 per cent of government revenues.

Since energy subsidies are pervasive and costly for

governments to maintain, we see scope for reform not

only in emerging markets and developing countries,

but also in advanced economies. The top three

subsidizers across the world are the United States at

US$502 billion, China at US$279 billion and Russia at

US$116 billion.

It suggests that subsidy reforms can lead to a more

efficient allocation of resources, which will help spur

higher economic growth over the longer term.

Removing energy subsidies can also strengthen

incentives for research and development in energy-

IMF Advocates for Energy Subsidies Reforms for Growth and Environment

IMF outlines six key ingredients to successful subsidy

reforms. The first is to implement a comprehensive

reform plan, which should involve establishing clear

long-term objectives, such as achieving full price

liberalization and improving the quality of service. The

second is a far-reaching communications strategy and

consultation with the stakeholders. The third is the

appropriately phased and sequenced price increases,

which allows time for households and governments to

adjust their energy consumptions. The fourth is to

implement measures to protect the poor. The fifth is

the improvements in efficiency of state-owned

enterprises to help reduce their fiscal burden. And the

final ingredient is to depoliticize the setting of energy

prices.

IMF acknowledges that reducing subsidies is not easy,

but many countries now see the benefits of doing so

and intend to try. This study by IMF clearly highlights

that subsidies have adverse effects on public finances,

economic growth, equity and the environment and

offers a roadmap, based on best practices and

countries' experiences. Further, IMF is committed to

help those who want to go forward with the subsidy

reforms, and stresses that it is better to do it the right

way, than to do it right away.

IMF recalls the commitment of the G-20 which, at the

Pittsburgh Leaders Summit in 2009, pledged to

eliminate inefficient fossil fuel subsidies over the

medium term. Time has come to fulfilling this very

important commitment.

Key:E.D. Asia = Emerging and Developing AsiaS.S Africa = Sub-Saharan AfricaMENA = Middle East and North AfricaCEE-CIS = Central and Eastern Europe and Commonwealth of Independent StatesLAC = Latin America and Caribbean

Total pre-tax subsidies$480 billion

(0.7% GDP, 2.1% revenues)

Total post-tax subsidies$1.90 trillion

(2.7% GDP, 8.1% revenues)

MENA

S.S. Africa

LAC

E.D.Asia

CEE-CIS

Advanced

Advanced

CEE-CIS

E.D. Asia

S.S. Africa

LAC

MENA

Source: IMF

Magnitude of Pre-Tax and Post-Tax Energy Subsidies by Regions (2011)

4 5 ECONOMY MATTERS ECONOMY MATTERS

Though the 2012 growth has certainly been better than

the previous year growth, it was not really reflected in

cut in unemployment levels. The unemployment rate

still remained high at 7.6 per cent in March 2013 as

compared to 7.7 per cent in February 2013 and 8.2 per

cent in the same period last year, reflecting a modest

reduction.

The US government is hopeful of a better economic

recovery in the first quarter of 2013 on the back of

certain positive developments - (a) continuing

investment by companies in new equipment and

rebuilding of depleted stockpiles, (b) surge in

consumers spending, (c) upbeat housing market, and

(d) improvement in the business investment growth.

This is going to be supported by the central bank's

decision to hold back its benchmark interest rate near

zero as long as joblessness stayed above 6.5 per cent

and the outlook for inflation was below 2.5 per cent.

The central bank appears to continue with monetary

policy easing as it would keep up its bond buying at a

pace of US$85 billion a month to bolster the economic

expansion through improved liquidity in the system.

On the other hand, decline was noticed in the exports

of goods and services of 2.8 per cent in the fourth

quarter, contrary to an increase of 1.9 per cent in the

previous quarter. Plunge was also noticed in the

imports; in fact, it was much higher than that of

exports. Imports contracted by 4.2 per cent in Q4 2012

as compared to a fall of 0.6 percent in the third

quarter. Further, contraction has also been noticed in

the federal government consumption expenditures

and gross investments. Both these components

contracted considerably by 14.8 per cent each in the

fourth quarter, against an increase of 9.5 per cent in

the third quarter. A sharp cut of 22.1 per cent has been

observed in the government spending on defence, in

contrast to an increase of 12.9 per cent in the previous

quarter. Amongst these components, steep dip in

government expenditure and military spending has

significantly dampened the GDP growth in the fourth

quarter and hence the overall economic growth. For

whole of 2012, the world's largest economy expanded

by 2.2 per cent after a 1.8 per cent gain in 2011.

emissions by delivering about 15-30 per cent of the

Copenhagen Accord's goal. In advanced economies,

subsidies most often take the form of taxes that are

too low to capture the true costs to society of energy

use ("tax subsidies"), including pollution and road

congestion. Post-tax subsidies are four times larger

than pre-tax subsidies, and advanced economies

account for 40 per cent of post-tax subsidies. But as a

share of gross domestic product, post-tax subsidies

are roughly eight times larger in the Middle East and

North African region than in advanced economies.

Hence, eliminating post tax energy subsidies would

deliver even more significant emissions reductions,

reducing CO2 emissions by 4.5 billion tons, a 13 per cent

reduction.

the biggest consumers of energy. According to IMF

estimates, on an average, the richest 20 per cent of

households capture 43 per cent of fuel subsidies in low

and middle income countries. IMF acknowledges that

with subsidy reforms, upward correction in fuel prices

will take place that can have a significant impact on the

poor. Hence, mitigating measures to protect them

from subsidy reform must be an integral part of any

successful and equitable reform program.

In addition, subsidies aggravate climate change and

worsen local pollution and congestion. The study finds

that eliminating pre-tax subsidies would cut global

CO2 emissions by about 1-2 per cent which would, by

itself, represent a significant first step in reducing

saving and alternative technologies. IMF further

argues that while subsidies intend to benefit select

group of consumers, they are often inefficient and

could be replaced with better means of protecting the

most vulnerable segment of the population.

IMF observed that for some countries the fiscal weight

of energy subsidies is growing so large that the budget

deficits are becoming unmanageable, threatening the

stability of the economy. IMF research shows that 20

countries maintain pre-tax energy subsidies that

exceed 5 per cent of GDP. For other emerging and

developing countries, the share of the scarce

government resources spent on subsidies remains a

stumbling block to higher growth and fundamentally

impairs their future. Because of substantial diversion

of funds on subsidies, little investment is made in

much-needed infrastructure, public health and

education; thereby undermining the development of

human capital. Subsidies also result in the

misallocation of resources to capital and energy-

intensive activities.

Energy subsidies also reinforce inequality because

they mostly benefit upper-income groups, which are

As it is a well known fact that subsidies in any form

leads to distortion in the efficient allocation and

utilization of resources; IMF in its recent study on

energy subsidies throws light on the need to bring

global reforms in on energy products, ranging from

coal to gasoline to ensure major gains for both

economic growth and the environment.

IMF estimates, which are based on a new database for

176 countries, shows that energy subsidies amount to

a staggering US$1.9 trillion, equivalent of 2.5 per cent

of global GDP or 8 per cent of government revenues.

Since energy subsidies are pervasive and costly for

governments to maintain, we see scope for reform not

only in emerging markets and developing countries,

but also in advanced economies. The top three

subsidizers across the world are the United States at

US$502 billion, China at US$279 billion and Russia at

US$116 billion.

It suggests that subsidy reforms can lead to a more

efficient allocation of resources, which will help spur

higher economic growth over the longer term.

Removing energy subsidies can also strengthen

incentives for research and development in energy-

IMF Advocates for Energy Subsidies Reforms for Growth and Environment

IMF outlines six key ingredients to successful subsidy

reforms. The first is to implement a comprehensive

reform plan, which should involve establishing clear

long-term objectives, such as achieving full price

liberalization and improving the quality of service. The

second is a far-reaching communications strategy and

consultation with the stakeholders. The third is the

appropriately phased and sequenced price increases,

which allows time for households and governments to

adjust their energy consumptions. The fourth is to

implement measures to protect the poor. The fifth is

the improvements in efficiency of state-owned

enterprises to help reduce their fiscal burden. And the

final ingredient is to depoliticize the setting of energy

prices.

IMF acknowledges that reducing subsidies is not easy,

but many countries now see the benefits of doing so

and intend to try. This study by IMF clearly highlights

that subsidies have adverse effects on public finances,

economic growth, equity and the environment and

offers a roadmap, based on best practices and

countries' experiences. Further, IMF is committed to

help those who want to go forward with the subsidy

reforms, and stresses that it is better to do it the right

way, than to do it right away.

IMF recalls the commitment of the G-20 which, at the

Pittsburgh Leaders Summit in 2009, pledged to

eliminate inefficient fossil fuel subsidies over the

medium term. Time has come to fulfilling this very

important commitment.

Key:E.D. Asia = Emerging and Developing AsiaS.S Africa = Sub-Saharan AfricaMENA = Middle East and North AfricaCEE-CIS = Central and Eastern Europe and Commonwealth of Independent StatesLAC = Latin America and Caribbean

Total pre-tax subsidies$480 billion

(0.7% GDP, 2.1% revenues)

Total post-tax subsidies$1.90 trillion

(2.7% GDP, 8.1% revenues)

MENA

S.S. Africa

LAC

E.D.Asia

CEE-CIS

Advanced

Advanced

CEE-CIS

E.D. Asia

S.S. Africa

LAC

MENA

Source: IMF

Magnitude of Pre-Tax and Post-Tax Energy Subsidies by Regions (2011)

6ECONOMY MATTERS

attributed to the low and declining real interest rates

on time deposits. Moreover, with an increase in the

wedge between credit and deposit growth, banks are

likely to tap the inter-bank market to fund this gap.

With already tight liquidity conditions, the widening

wedge poses a concern as it is likely to worsen the

already tight liquidity condition

Liquidity conditions continue to remain tight.

Underlying liquidity trend is best measured by the gap

between credit and deposit growth. The gap between

the two continues to remain high, leading to an

elevated credit-deposit ratio. The deceleration in the

term deposits, which constitutes the major

component of aggregate deposit, could be largely

DOMESTIC TRENDS

A Thought Starter on Statutory Liquidity Ratio (SLR)

7 ECONOMY MATTERS

The below figure clearly shows that in the charted time

period, the actual SLR has always been higher then the

mandated requirement. The current SLR in the banking

system is already at almost 28 per cent as of January

2013 as compared to the revised mandated

requirement of 23 per cent. In fact ever since the SLR

was cut to 23 per cent in July 2012, the actual SLR in the

banking system has continued to remain above the

mandated SLR by at least 4.5-5.5 percentage points.

One of the reasons for this is that banks are currently

risk averse to lend to the private sector, given sizeable

jump in bank's rising non-performing loans (NPAs).

The Reserve Bank of India's has reduced the Statutory

Liquidity Ratio (SLR) by 1 percentage points to 23 per

cent in July last year. By definition, SLR is defined as the

amount that the commercial banks are required to

invest in government securities as a proportion of their

net demand and time liabilities (NDTL). But did the SLR

reduction really help in freeing up the commercial

bank's money for lending to the productive sector?

This question particularly gains significance in the

current scenario, given that the commercial banks are

already investing in government securities in excess of

the mandated SLR requirement.

30.7

27.6

25.0

23.0

32.0

30.0

28.0

26.0

24.0

22.0

20.0

(as a % ofNDTL)

Calculated SLR Mandated SLR

Apr

-06

Jul-0

6

Oct

-06

Jan-

07

Apr

-07

Jul-0

7

Oct

-07

Jan-

08

Apr

-08

Jul-0

8

Oct

-08

Jan-

09

Apr

-09

Jul-0

9

Oct

-09

Jan-

10

Apr

-10

Jul-1

0

Oct

-10

Jan-

11

Apr

-11

Jul-1

1

Oct

-11

Jan-

12

Apr

-12

Jul-1

2

Oct

-12

Jan-

13

Commercial Banks Investments in SLR Securities (Actual and Mandated)

Source: RBI and CII calculations

12.7

16.3

30

20

10

y-o-y%

Oct

-10

Dec

-10

Feb

-11

Apr

-11

Jun-

11

Aug

-11

Oct

-11

Dec

-11

Feb

-12

Apr

-12

Jun-

12

Aug

-12

Oct

-12

Dec

-12

Feb

-13

Aggregate deposits Bank credit

Rising Gap between Credit and Deposit Ratio

Source: RBI

figure below, except for months from July-Oct 2012,

the net liquidity deficit has remained above the Central

Bank's comfort levels. To address this, the RBI had

reduced the cash reserve ratio (CRR) by a cumulative

75 basis points in last fiscal (2012-13). Despite the RBI's

steps, the liquidity situation does not look too

favorable at present.

A higher credit-deposit ratio weighs negatively on

inter-bank liquidity deficit. Net liquidity deficit (repo

less reverse repo balance) has remained high, with the

average net LAF borrowing standing at Rs 990 billion in

February and first two weeks of March 2013. The

Central Bank is comfortable with liquidity deficit

around 1 per cent of NDTL. But as we see from the

0

-200

-400

-600

-800

-1000

-1200

-1400

-1600

Average Net LAF Volumes 1% of NDTL

Rs

Bill

ion

Jan-

12

Feb

-12

Mar

-12

Apr

-12

May

-12

Jun-

12

Jun-

12

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13

Liquidity Deficit still Remains High

Source: RBI & CII calculations

than the prescribed rate will help in freeing up more

resources for the private sector, given that liquidity

continues to remain in deficit.

Hence, under the current backdrop, it is suggested that

the Central Bank should put a cap on the SLR

requirement for the banks. By putting a cap on SLR and

allowing the banks to park only up to 2 per cent higher

6ECONOMY MATTERS

attributed to the low and declining real interest rates

on time deposits. Moreover, with an increase in the

wedge between credit and deposit growth, banks are

likely to tap the inter-bank market to fund this gap.

With already tight liquidity conditions, the widening

wedge poses a concern as it is likely to worsen the

already tight liquidity condition

Liquidity conditions continue to remain tight.

Underlying liquidity trend is best measured by the gap

between credit and deposit growth. The gap between

the two continues to remain high, leading to an

elevated credit-deposit ratio. The deceleration in the

term deposits, which constitutes the major

component of aggregate deposit, could be largely

DOMESTIC TRENDS

A Thought Starter on Statutory Liquidity Ratio (SLR)

7 ECONOMY MATTERS

The below figure clearly shows that in the charted time

period, the actual SLR has always been higher then the

mandated requirement. The current SLR in the banking

system is already at almost 28 per cent as of January

2013 as compared to the revised mandated

requirement of 23 per cent. In fact ever since the SLR

was cut to 23 per cent in July 2012, the actual SLR in the

banking system has continued to remain above the

mandated SLR by at least 4.5-5.5 percentage points.

One of the reasons for this is that banks are currently

risk averse to lend to the private sector, given sizeable

jump in bank's rising non-performing loans (NPAs).

The Reserve Bank of India's has reduced the Statutory

Liquidity Ratio (SLR) by 1 percentage points to 23 per

cent in July last year. By definition, SLR is defined as the

amount that the commercial banks are required to

invest in government securities as a proportion of their

net demand and time liabilities (NDTL). But did the SLR

reduction really help in freeing up the commercial

bank's money for lending to the productive sector?

This question particularly gains significance in the

current scenario, given that the commercial banks are

already investing in government securities in excess of

the mandated SLR requirement.

30.7

27.6

25.0

23.0

32.0

30.0

28.0

26.0

24.0

22.0

20.0

(as a % ofNDTL)

Calculated SLR Mandated SLR

Apr

-06

Jul-0

6

Oct

-06

Jan-

07

Apr

-07

Jul-0

7

Oct

-07

Jan-

08

Apr

-08

Jul-0

8

Oct

-08

Jan-

09

Apr

-09

Jul-0

9

Oct

-09

Jan-

10

Apr

-10

Jul-1

0

Oct

-10

Jan-

11

Apr

-11

Jul-1

1

Oct

-11

Jan-

12

Apr

-12

Jul-1

2

Oct

-12

Jan-

13

Commercial Banks Investments in SLR Securities (Actual and Mandated)

Source: RBI and CII calculations

12.7

16.3

30

20

10

y-o-y%

Oct

-10

Dec

-10

Feb

-11

Apr

-11

Jun-

11

Aug

-11

Oct

-11

Dec

-11

Feb

-12

Apr

-12

Jun-

12

Aug

-12

Oct

-12

Dec

-12

Feb

-13

Aggregate deposits Bank credit

Rising Gap between Credit and Deposit Ratio

Source: RBI

figure below, except for months from July-Oct 2012,

the net liquidity deficit has remained above the Central

Bank's comfort levels. To address this, the RBI had

reduced the cash reserve ratio (CRR) by a cumulative

75 basis points in last fiscal (2012-13). Despite the RBI's

steps, the liquidity situation does not look too

favorable at present.

A higher credit-deposit ratio weighs negatively on

inter-bank liquidity deficit. Net liquidity deficit (repo

less reverse repo balance) has remained high, with the

average net LAF borrowing standing at Rs 990 billion in

February and first two weeks of March 2013. The

Central Bank is comfortable with liquidity deficit

around 1 per cent of NDTL. But as we see from the

0

-200

-400

-600

-800

-1000

-1200

-1400

-1600

Average Net LAF Volumes 1% of NDTL

Rs

Bill

ion

Jan-

12

Feb

-12

Mar

-12

Apr

-12

May

-12

Jun-

12

Jun-

12

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13

Liquidity Deficit still Remains High

Source: RBI & CII calculations

than the prescribed rate will help in freeing up more

resources for the private sector, given that liquidity

continues to remain in deficit.

Hence, under the current backdrop, it is suggested that

the Central Bank should put a cap on the SLR

requirement for the banks. By putting a cap on SLR and

allowing the banks to park only up to 2 per cent higher

8ECONOMY MATTERS 9 ECONOMY MATTERS

per cent of India's external debt while the remaining (75.6

per cent) was long-term debt as of end-December 2012.

Within long-term, components such as commercial

borrowings accounted for 30.0 per cent of the total

external debt, followed by NRI deposits (18.0 per cent)

and multilateral debt (13.7 per cent). The US dollar

denominated debt accounted for 56.8 per cent of the

total external debt stock as at end-December 2012,

followed by Indian rupee (23.1 per cent) and Special

Drawing Rights (SDRs) of the IMF (7.9 per cent).

The rise in external debt during the period was due to

both long-term as well as short-term components.

Increase in long-term debt was led mainly by NRI deposits

and commercial borrowings, while short-term debt stood

higher on account of trade related credits. The long-term

debt accounted for 55.5 per cent of the rise in total

external debt at end-December 2012 over the level at end-

March 2012, while short-term debt accounted for 44.5 per

cent of the rise in debt during the period.

Short-term debt (original maturity) accounted for 24.4

External Debt Rises to Alarming Levels

The increase in stock of external debt is mainly

attributable to a widening current account deficit and

continued uncertainty in global economic scenario

due to which the dependence on debt flows rose

considerably during 2012-13. Notably, other key

vulnerability indicators like debt-GDP ratio and debt

service ratio also witnessed deterioration over the

year.

India's external debt increased by a staggering

US$30.8 billion or by 8.9 per cent to US$376.3 billion (20

per cent of GDP) at end-December 2012 as compared to

end-March 2012. The valuation gain (appreciation of US

dollar vis-à-vis most major international currencies)

accounted for a decline of US$11.6 billion in the debt

stock at end-December 2012. This implies that the

increase in debt would have been US$42.4 billion at

end-December 2012, had there been no valuation gain.

Deteriorating External Debt Situation

Source: RBI

400

350

300

250

200

150

100

50

0

US$ billion

25

20

15

%

External debt Ratio of External debt to GDP (RHS)

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

2009

-10

2010

-11

2011

-12

End

-Dec

201

2

Source: RBI

External debt position (end-December 2012)

External debt position (end-December 2012)

Outstanding Variation (Over March-12)

(USD billion) (% share in total) (USD billion) y-o-y%

Multilateral 51.6 13.7 1.2 2.3

Bilateral 26.3 7.0 -0.5 -2.0

IMF 6.1 1.6 0.0 -0.8

Export credit 18.5 4.9 -0.5 -2.6

Commercial borrowings 113.0 30.0 8.1 7.8

NRI deposits 67.6 18.0 9..0 15.3

Rupee debt 1.3 0.3 -0.1 -7.4

Short-term debt 91.9 24.4 13.7 17.5

Total debt 376.3 100.0 30.8 8.9

reserves owe to the shift in the policy stance of the

exchange rate management to a more market

determined approach. In addition, the debt-service ratio,

which is the amount of export earnings needed to meet

the annual interest and principal payments on a country's

external debt also increased to 5.8 per cent during end-

December 2012.

India's foreign exchange reserves provided a cover of

78.6 per cent to the external debt stock at end-December

2012, down from 85.2 per cent at end-March 2012,

indicating rising stress. The ratio of short-term debt to

foreign exchange reserves was 31.1 per cent at end-

December 2012, as compared to 26.6 per cent at end-

March 2012. The decline in the cover of foreign exchange

Depleting Forex Reserves Highlights External Risk

160140120100806040200

%40

30

20

10

0

%

Ratio of forex reserves to total debt Ratio of Short-term debt to forex reserves (RHS)

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

2009

-10

2010

-11

2011

-12

End

-Dec

201

2

Source: RBI

crisis period of 2008-09, when capital flows from the

advanced world dried, India's forex cover to external

debt stood at 112 per cent. The external vulnerabilities for

the Indian economy have clearly exacerbated. Unless

measures are taken to boost FDI flows and exports, the

situation would continue to remain grim.

The dismal external debt data is a cause of concern. It

clearly highlights the rising vulnerability of the Indian

economy to any external shock. There is a concern on the

low forex cover for external debt. Till 2009-10, forex

reserves covered the entire external debt. Even in the

8ECONOMY MATTERS 9 ECONOMY MATTERS

per cent of India's external debt while the remaining (75.6

per cent) was long-term debt as of end-December 2012.

Within long-term, components such as commercial

borrowings accounted for 30.0 per cent of the total

external debt, followed by NRI deposits (18.0 per cent)

and multilateral debt (13.7 per cent). The US dollar

denominated debt accounted for 56.8 per cent of the

total external debt stock as at end-December 2012,

followed by Indian rupee (23.1 per cent) and Special

Drawing Rights (SDRs) of the IMF (7.9 per cent).

The rise in external debt during the period was due to

both long-term as well as short-term components.

Increase in long-term debt was led mainly by NRI deposits

and commercial borrowings, while short-term debt stood

higher on account of trade related credits. The long-term

debt accounted for 55.5 per cent of the rise in total

external debt at end-December 2012 over the level at end-

March 2012, while short-term debt accounted for 44.5 per

cent of the rise in debt during the period.

Short-term debt (original maturity) accounted for 24.4

External Debt Rises to Alarming Levels

The increase in stock of external debt is mainly

attributable to a widening current account deficit and

continued uncertainty in global economic scenario

due to which the dependence on debt flows rose

considerably during 2012-13. Notably, other key

vulnerability indicators like debt-GDP ratio and debt

service ratio also witnessed deterioration over the

year.

India's external debt increased by a staggering

US$30.8 billion or by 8.9 per cent to US$376.3 billion (20

per cent of GDP) at end-December 2012 as compared to

end-March 2012. The valuation gain (appreciation of US

dollar vis-à-vis most major international currencies)

accounted for a decline of US$11.6 billion in the debt

stock at end-December 2012. This implies that the

increase in debt would have been US$42.4 billion at

end-December 2012, had there been no valuation gain.

Deteriorating External Debt Situation

Source: RBI

400

350

300

250

200

150

100

50

0

US$ billion

25

20

15

%

External debt Ratio of External debt to GDP (RHS)

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

2009

-10

2010

-11

2011

-12

End

-Dec

201

2

Source: RBI

External debt position (end-December 2012)

External debt position (end-December 2012)

Outstanding Variation (Over March-12)

(USD billion) (% share in total) (USD billion) y-o-y%

Multilateral 51.6 13.7 1.2 2.3

Bilateral 26.3 7.0 -0.5 -2.0

IMF 6.1 1.6 0.0 -0.8

Export credit 18.5 4.9 -0.5 -2.6

Commercial borrowings 113.0 30.0 8.1 7.8

NRI deposits 67.6 18.0 9..0 15.3

Rupee debt 1.3 0.3 -0.1 -7.4

Short-term debt 91.9 24.4 13.7 17.5

Total debt 376.3 100.0 30.8 8.9

reserves owe to the shift in the policy stance of the

exchange rate management to a more market

determined approach. In addition, the debt-service ratio,

which is the amount of export earnings needed to meet

the annual interest and principal payments on a country's

external debt also increased to 5.8 per cent during end-

December 2012.

India's foreign exchange reserves provided a cover of

78.6 per cent to the external debt stock at end-December

2012, down from 85.2 per cent at end-March 2012,

indicating rising stress. The ratio of short-term debt to

foreign exchange reserves was 31.1 per cent at end-

December 2012, as compared to 26.6 per cent at end-

March 2012. The decline in the cover of foreign exchange

Depleting Forex Reserves Highlights External Risk

160140120100806040200

%40

30

20

10

0

%

Ratio of forex reserves to total debt Ratio of Short-term debt to forex reserves (RHS)

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

2009

-10

2010

-11

2011

-12

End

-Dec

201

2

Source: RBI

crisis period of 2008-09, when capital flows from the

advanced world dried, India's forex cover to external

debt stood at 112 per cent. The external vulnerabilities for

the Indian economy have clearly exacerbated. Unless

measures are taken to boost FDI flows and exports, the

situation would continue to remain grim.

The dismal external debt data is a cause of concern. It

clearly highlights the rising vulnerability of the Indian

economy to any external shock. There is a concern on the

low forex cover for external debt. Till 2009-10, forex

reserves covered the entire external debt. Even in the

10ECONOMY MATTERS 11 ECONOMY MATTERS

Indian cement industry is one of the core industries,

which plays a vital role in the growth and development

of the country. Post 2004, the industry has flourished

well with the real-estate boom. However, in past

couple of years, since the economy has remained off-

beat due to sluggish economic activities, high inflation,

high input costs and other factors, the cement sector's

performance has also taken a hit.

SECTOR IN FOCUS

Indian Cement Industry

Overview of the Industry

There are 139 large cement plants and over 365 mini

cement plants in India with a total installed capacity of

324 million tonnes per annum. Currently, there are 42

players in the industry, providing employment to

about 1.2 lakh people. India is second largest producer

and consumer of cement in the world. Ironically, the

per capita cement (at 156 kg) consumption in the

country remains much lower than the global average

(356 kg).

Chi

na

Indi

a

US

A

Bra

zil

Rus

sia

Iran

Turk

ey

Egy

pt

viet

nam

Indo

nesi

a

Sau

di A

rabi

a

Japa

n

Mex

ico

Italy

Sou

th K

orea

2048

22272 65 58 56 56 50 49 48 47 46 42 34 33

Mill

ion

To

nn

es

Chi

na

Indi

a

Iran

US

A

Baz

il

Turk

ey

Japa

n

Rus

sia

Vie

tnam

Indo

nesi

a

Egy

pt

Sou

th K

orea

Mex

ico

Ger

man

y

Sau

di A

rabi

a

Mill

ion

To

nn

es

22166 66 64 63 56 56 52 49 49 48 48 35 34

2058

Top 15 Producer Countries Top 15 Consumer Countries

Source: International Cement Review

Production Trend

There has been consistent rise in the cement

production. During 2004-05 and 2011-12, the cement

production grew at a compound annual growth rate of

8.3 per cent. But growth remained volatile and

exhibited a downtrend during this period. Particularly

post 2010-11, growth remained somewhat muted as

compared to past years, indicating foreplay of mostly

demand side factors. Sluggish economic growth and

other un-favourable macroeconomic indicators, which

led to downturn in real estate sector and delay in

infrastructure projects, affected the demand for

cement and hence its production. On the supply side, it

is mostly the escalation in input costs which has

impacted its production. During 2012-13, production of

cement augmented by 5.5 per cent from 2, 07,600

thousand tonnes in April-February 2011-12 to 2,19,118

thousand tonnes in April-February 2012-13. Cement

Production is expected to pick-up with the revival in

economic momentum and rise in construction

activities throughout the country in the coming

quarters.

Cement Production and Growth Rate

Source: Office of Economic Advisor

12.4

9.1

7.2

10.5

4.55.5

14

12

10

8

6

4

2

0

250,000

200,000

150,000

100,000

50,000

-

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-(Apr-Feb)

13

Gro

wth

Rat

e (%

)

Production (000 tonnes) Growth (%)

(000

To

nn

es)

6.7

8.1

131,

559

147,

808

161,

310

174,

310

186,

940

206,

630

215,

980

230,

490

219,

118

Installed Capacity Spread

The Indian cement industry is split in to five geographic segments. The diagram below shows region-wise installed

capacity in 2011 and the key markets.

Cement Industry

North (66.4MTPA)

South (126.9MTPA)

East (43.5MTPA)

West (44.1MTPA)

Central (37.3MTPA)

Rajasthan,

PunjabHaryana and the NCR

Andhra Pradesh, TamilNadu and Karnataka

ChhattisgarhWest Bengal, Orissa

and Jharkhand

Gujarat Maharashtra

and Madhya

Pradesh and Uttar Pradesh

Note: Installed capacity is as per 2011 year

10ECONOMY MATTERS 11 ECONOMY MATTERS

Indian cement industry is one of the core industries,

which plays a vital role in the growth and development

of the country. Post 2004, the industry has flourished

well with the real-estate boom. However, in past

couple of years, since the economy has remained off-

beat due to sluggish economic activities, high inflation,

high input costs and other factors, the cement sector's

performance has also taken a hit.

SECTOR IN FOCUS

Indian Cement Industry

Overview of the Industry

There are 139 large cement plants and over 365 mini

cement plants in India with a total installed capacity of

324 million tonnes per annum. Currently, there are 42

players in the industry, providing employment to

about 1.2 lakh people. India is second largest producer

and consumer of cement in the world. Ironically, the

per capita cement (at 156 kg) consumption in the

country remains much lower than the global average

(356 kg).

Chi

na

Indi

a

US

A

Bra

zil

Rus

sia

Iran

Turk

ey

Egy

pt

viet

nam

Indo

nesi

a

Sau

di A

rabi

a

Japa

n

Mex

ico

Italy

Sou

th K

orea

2048

22272 65 58 56 56 50 49 48 47 46 42 34 33

Mill

ion

To

nn

es

Chi

na

Indi

a

Iran

US

A

Baz

il

Turk

ey

Japa

n

Rus

sia

Vie

tnam

Indo

nesi

a

Egy

pt

Sou

th K

orea

Mex

ico

Ger

man

y

Sau

di A

rabi

a

Mill

ion

To

nn

es

22166 66 64 63 56 56 52 49 49 48 48 35 34

2058

Top 15 Producer Countries Top 15 Consumer Countries

Source: International Cement Review

Production Trend

There has been consistent rise in the cement

production. During 2004-05 and 2011-12, the cement

production grew at a compound annual growth rate of

8.3 per cent. But growth remained volatile and

exhibited a downtrend during this period. Particularly

post 2010-11, growth remained somewhat muted as

compared to past years, indicating foreplay of mostly

demand side factors. Sluggish economic growth and

other un-favourable macroeconomic indicators, which

led to downturn in real estate sector and delay in

infrastructure projects, affected the demand for

cement and hence its production. On the supply side, it

is mostly the escalation in input costs which has

impacted its production. During 2012-13, production of

cement augmented by 5.5 per cent from 2, 07,600

thousand tonnes in April-February 2011-12 to 2,19,118

thousand tonnes in April-February 2012-13. Cement

Production is expected to pick-up with the revival in

economic momentum and rise in construction

activities throughout the country in the coming

quarters.

Cement Production and Growth Rate

Source: Office of Economic Advisor

12.4

9.1

7.2

10.5

4.55.5

14

12

10

8

6

4

2

0

250,000

200,000

150,000

100,000

50,000

-

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-(Apr-Feb)

13G

row

th R

ate

(%)

Production (000 tonnes) Growth (%)

(000

To

nn

es)

6.7

8.1

131,

559

147,

808

161,

310

174,

310

186,

940

206,

630

215,

980

230,

490

219,

118

Installed Capacity Spread

The Indian cement industry is split in to five geographic segments. The diagram below shows region-wise installed

capacity in 2011 and the key markets.

Cement Industry

North (66.4MTPA)

South (126.9MTPA)

East (43.5MTPA)

West (44.1MTPA)

Central (37.3MTPA)

Rajasthan,

PunjabHaryana and the NCR

Andhra Pradesh, TamilNadu and Karnataka

ChhattisgarhWest Bengal, Orissa

and Jharkhand

Gujarat Maharashtra

and Madhya

Pradesh and Uttar Pradesh

Note: Installed capacity is as per 2011 year

12ECONOMY MATTERS

December (2012) quarter is attributable mainly to high

base effect and weak demand.

Expenditure grew but at a relatively low rate during

April-December 2012 in comparison to last year

primarily due to decline in the growth of electricity,

power and fuel cost. This is because of the decline in

the power and fuel cost of companies using imported

coal as the international coal prices have been

declining since January 2012. On the other hand, cost

of other raw materials remained firm and on a higher

side (over 22 per cent) for the most part of the year.

High growth of expenditure over net sales in

December quarter (2012) resulted in the decline of

both PBDIT and PAT for the first time in last eight

quarters. To overcome the slowdown, the companies

must innovate ways to cap their burgeoning raw

material costs and improve their capacity utilization.

Further, PAT and PBDIT margins (ratio of profits to

sales) showed modest performance in comparison to

previous quarters, clearly reflecting weak profitability

in December 2012 quarter.

Rajasthan has the highest installed capacity in North

India, accounting for a 66.5 per cent share in capacity in

the region in 2011. Chhattisgarh leads the Eastern

region with a share of 32.6 per cent of total installed

capacity in the region. Andhra Pradesh has the highest

installed capacity in the Southern region with a 53.5 per

cent share. Madhya Pradesh is ahead in the Central

region in installed capacity having a share of 65.6 per

cent, while Gujarat leads the pack in Western region

with a 55.0 per cent share.

Indian cement firms did a better business during

March-December 2012 as compared to a year ago, as

net sales improved considerably in absolute terms.

Nearly similar trend was reflected in net sales growth

except in quarter ending December 2012, when it grew

by 10.6 per cent against a high of 26.3 per cent growth

in the same period last year. The decline in growth in

Financial Performance in

2012-13 (till December 2012)

13 ECONOMY MATTERS

Some of the major private investments lined-up for the

sector are as follows:-

Ambuja Cements Ltd plans to invest Rs 2,000

crore (US$ 370.37 million) to enhance its cement

capacities in Rajasthan and northern region. The

proposed project at Rajasthan would add five

million tonne (MT) capacity to the total cement

production of India.

Dalmia Cement plans to invest Rs 1,800 crore (US$

333.33 million) to increase the company's cement

manufacturing capacity over the next two years.

The company also plans to set up a 2.5 million

tonne (MT) greenfield unit in Karnataka.

Germany-based Heidelberg Cement has

commissioned Phase-I of its Jhansi grinding unit.

The company currently executing its Rs1,400 crore

(US$ 259.36 million) expansion plan through the

recent initiative has escalated the capacity of its

unit to 2.7 MT. The company also aims to

accelerate the operational capacity at its Damoh

plant in Madhya Pradesh, which will be raised to 6

MT.

France-based Vicat Group is likely to sell 4.5 MT of

cement in India in FY 2013. Apart from the newly-

commissioned Rs 1,800 crore (US$ 333.33 million)

joint venture cement plant, Vicat-Sagar Cement at

Chattrasal, Gulbarga district of Karnataka, Vicat

owns 51 per cent stake in Bharathi Cement

Amrit Cement India Ltd has announced the launch

of Amrit Cement in North-Eastern market. ACIL

possesses ambitious plan to achieve annual

production of 5 MT by 2015-16 through capacity

addition in North-East and adding fresh capacities

in Nepal and Bihar for which initiative has already

been taken.

l

l

l

l

l

a penalty of Rs. 6,304 crore on 11 major cement

companies for price cartelization. According to CCI,

these companies are not optimally utilizing the

available plant capacity to restrict the supply.

Nonetheless, with the hope that cement demand is

expected to improve in the coming months with the

revival of economic growth, cement prices may remain

stable or rise marginally.

The industry (cement and gypsum products) is also

attracting foreign direct investments. The sector

attracted FDI worth US$2,626.43 million between April

2000 and January 2013, which is 1.4 per cent of the total

FDI received during the period.

The latest report from the working group on the

industry states that India would require an overall

cement capacity of around 480 million tonnes during ththe 12 Five Year Plan period (2012-17). This means the

industry will have to add another 150 million tonnes of

capacity during the period. In 2013, the industry is

projecting a capacity addition of 30-40 million tonnes in

view of the expected surge in demand. The southern

and central region would witness much of the capacity

addition. Some of the major projects that will be

completed during the year include ABG Shipyard's 3.3

mtpa at Kutch in Gujarat and Century Textiles' 2.5 mtpa

at Chandrapur in Maharashtra. In Karnataka, Sagar

Cement and Chettinad Cement will add 3 mtpa and 2.5

mtpa at Gulbarga, and UltraTech Cement will come up

with 4.4 mtpa at Malkhed. Besides, cement companies

must raise their present rate of plant utilization from

75-80 percent in order to meet the demand in future.

FDI Inflows

Capacity Expansion during th12 Five Year Plan

Source: Ace Equity & CII Calculations

Quarterly Financial Performance of the Cement Industry

The December quarter (2012) witnessed softening in

prices of cement in contrast to the past trend; cement

prices normally raise post monsoon owing to upswing

in construction activities. Such pick-up in construction

activities was muted in December 2012 leading to

softening of cement prices. The prices were hovering

around Rs 305 per 50 kg bag in December, 2012 as

compared to Rs 323 per bag in July, 2012 and Rs 314 per

bag in October, 2012. Weak demand due to subdued

construction activities and capacity overhang in the

industry are the reasons responsible for the fall in

prices. In addition, the Competition Commission of

India's (CCI) verdict against cartelization made it

difficult for the companies to hike prices. CCI has levied

Mar 2011 Jun 2011 Sept 2011 Dec 2011 Mar 2012 Jun 2012 Sept 2012 Dec 2012

Net Sales (Rs. Crore) 20503.3 19923.1 18014.9 20730.9 24268.1 24,154.8 21,755.5 22,924.1

Net sales growth (%) 11.7 24.1 21.4 26.3 18.4 21.2 20.9 10.6

Expenditure growth (%) 13.1 23.9 18.6 22.8 19.1 21.0 13.2 13.9

Raw material cost growth (%) 11.6 19.3 17.1 19.2 13.5 22.5 23.8 25.6

Electricity, power & fuel cost 26.4 30.9 20.9 24.4 24.6 12.6 15.5 5.0growth (%)

PBDIT growth (%) 8.9 23.0 39.0 42.5 20.4 22.4 138.7 -2.8

PAT growth (%) 18.6 23.1 82.7 77.4 -3.9 41.9 54.4 -21.8

PBDIT margin (%) 22.6 24.0 16.0 20.1 23.0 24.2 20.4 17.7

PAT margin (%) 10.8 10.9 4.3 9.4 8.7 12.8 8.5 6.7

Outlook

Outlook for the Indian cement industry is bright as the world economy has started showing some signs of

recovery, which in turn will have a positive impact on the domestic economic activities. Further with several

positive announcements in the Budget 2013-14 for housing and infrastructure, the demand for cement is bound

to bounce back. This is likely to be aided by the expected cut in interest rate by RBI owing to moderating inflation

in the past several months. Further, the government should take measures to ease the supply of coal and other

inputs, which will help both consumers and producers.

12ECONOMY MATTERS

December (2012) quarter is attributable mainly to high

base effect and weak demand.

Expenditure grew but at a relatively low rate during

April-December 2012 in comparison to last year

primarily due to decline in the growth of electricity,

power and fuel cost. This is because of the decline in

the power and fuel cost of companies using imported

coal as the international coal prices have been

declining since January 2012. On the other hand, cost

of other raw materials remained firm and on a higher

side (over 22 per cent) for the most part of the year.

High growth of expenditure over net sales in

December quarter (2012) resulted in the decline of

both PBDIT and PAT for the first time in last eight

quarters. To overcome the slowdown, the companies

must innovate ways to cap their burgeoning raw

material costs and improve their capacity utilization.

Further, PAT and PBDIT margins (ratio of profits to

sales) showed modest performance in comparison to

previous quarters, clearly reflecting weak profitability

in December 2012 quarter.

Rajasthan has the highest installed capacity in North

India, accounting for a 66.5 per cent share in capacity in

the region in 2011. Chhattisgarh leads the Eastern

region with a share of 32.6 per cent of total installed

capacity in the region. Andhra Pradesh has the highest

installed capacity in the Southern region with a 53.5 per

cent share. Madhya Pradesh is ahead in the Central

region in installed capacity having a share of 65.6 per

cent, while Gujarat leads the pack in Western region

with a 55.0 per cent share.

Indian cement firms did a better business during

March-December 2012 as compared to a year ago, as

net sales improved considerably in absolute terms.

Nearly similar trend was reflected in net sales growth

except in quarter ending December 2012, when it grew

by 10.6 per cent against a high of 26.3 per cent growth

in the same period last year. The decline in growth in

Financial Performance in

2012-13 (till December 2012)

13 ECONOMY MATTERS

Some of the major private investments lined-up for the

sector are as follows:-

Ambuja Cements Ltd plans to invest Rs 2,000

crore (US$ 370.37 million) to enhance its cement

capacities in Rajasthan and northern region. The

proposed project at Rajasthan would add five

million tonne (MT) capacity to the total cement

production of India.

Dalmia Cement plans to invest Rs 1,800 crore (US$

333.33 million) to increase the company's cement

manufacturing capacity over the next two years.

The company also plans to set up a 2.5 million

tonne (MT) greenfield unit in Karnataka.

Germany-based Heidelberg Cement has

commissioned Phase-I of its Jhansi grinding unit.

The company currently executing its Rs1,400 crore

(US$ 259.36 million) expansion plan through the

recent initiative has escalated the capacity of its

unit to 2.7 MT. The company also aims to

accelerate the operational capacity at its Damoh

plant in Madhya Pradesh, which will be raised to 6

MT.

France-based Vicat Group is likely to sell 4.5 MT of

cement in India in FY 2013. Apart from the newly-

commissioned Rs 1,800 crore (US$ 333.33 million)

joint venture cement plant, Vicat-Sagar Cement at

Chattrasal, Gulbarga district of Karnataka, Vicat

owns 51 per cent stake in Bharathi Cement

Amrit Cement India Ltd has announced the launch

of Amrit Cement in North-Eastern market. ACIL

possesses ambitious plan to achieve annual

production of 5 MT by 2015-16 through capacity

addition in North-East and adding fresh capacities

in Nepal and Bihar for which initiative has already

been taken.

l

l

l

l

l

a penalty of Rs. 6,304 crore on 11 major cement

companies for price cartelization. According to CCI,

these companies are not optimally utilizing the

available plant capacity to restrict the supply.

Nonetheless, with the hope that cement demand is

expected to improve in the coming months with the

revival of economic growth, cement prices may remain

stable or rise marginally.

The industry (cement and gypsum products) is also

attracting foreign direct investments. The sector

attracted FDI worth US$2,626.43 million between April

2000 and January 2013, which is 1.4 per cent of the total

FDI received during the period.

The latest report from the working group on the

industry states that India would require an overall

cement capacity of around 480 million tonnes during ththe 12 Five Year Plan period (2012-17). This means the

industry will have to add another 150 million tonnes of

capacity during the period. In 2013, the industry is

projecting a capacity addition of 30-40 million tonnes in

view of the expected surge in demand. The southern

and central region would witness much of the capacity

addition. Some of the major projects that will be

completed during the year include ABG Shipyard's 3.3

mtpa at Kutch in Gujarat and Century Textiles' 2.5 mtpa

at Chandrapur in Maharashtra. In Karnataka, Sagar

Cement and Chettinad Cement will add 3 mtpa and 2.5

mtpa at Gulbarga, and UltraTech Cement will come up

with 4.4 mtpa at Malkhed. Besides, cement companies

must raise their present rate of plant utilization from

75-80 percent in order to meet the demand in future.

FDI Inflows

Capacity Expansion during th12 Five Year Plan

Source: Ace Equity & CII Calculations

Quarterly Financial Performance of the Cement Industry

The December quarter (2012) witnessed softening in

prices of cement in contrast to the past trend; cement

prices normally raise post monsoon owing to upswing

in construction activities. Such pick-up in construction

activities was muted in December 2012 leading to

softening of cement prices. The prices were hovering

around Rs 305 per 50 kg bag in December, 2012 as

compared to Rs 323 per bag in July, 2012 and Rs 314 per

bag in October, 2012. Weak demand due to subdued

construction activities and capacity overhang in the

industry are the reasons responsible for the fall in

prices. In addition, the Competition Commission of

India's (CCI) verdict against cartelization made it

difficult for the companies to hike prices. CCI has levied

Mar 2011 Jun 2011 Sept 2011 Dec 2011 Mar 2012 Jun 2012 Sept 2012 Dec 2012

Net Sales (Rs. Crore) 20503.3 19923.1 18014.9 20730.9 24268.1 24,154.8 21,755.5 22,924.1

Net sales growth (%) 11.7 24.1 21.4 26.3 18.4 21.2 20.9 10.6

Expenditure growth (%) 13.1 23.9 18.6 22.8 19.1 21.0 13.2 13.9

Raw material cost growth (%) 11.6 19.3 17.1 19.2 13.5 22.5 23.8 25.6

Electricity, power & fuel cost 26.4 30.9 20.9 24.4 24.6 12.6 15.5 5.0growth (%)

PBDIT growth (%) 8.9 23.0 39.0 42.5 20.4 22.4 138.7 -2.8

PAT growth (%) 18.6 23.1 82.7 77.4 -3.9 41.9 54.4 -21.8

PBDIT margin (%) 22.6 24.0 16.0 20.1 23.0 24.2 20.4 17.7

PAT margin (%) 10.8 10.9 4.3 9.4 8.7 12.8 8.5 6.7

Outlook

Outlook for the Indian cement industry is bright as the world economy has started showing some signs of

recovery, which in turn will have a positive impact on the domestic economic activities. Further with several

positive announcements in the Budget 2013-14 for housing and infrastructure, the demand for cement is bound

to bounce back. This is likely to be aided by the expected cut in interest rate by RBI owing to moderating inflation

in the past several months. Further, the government should take measures to ease the supply of coal and other

inputs, which will help both consumers and producers.

14ECONOMY MATTERS

billion (5.4 per cent of GDP), as compared with US$56.5

billion (4.1 per cent of GDP) in April-December 2011.

However, despite, the deterioration witnessed in the

CAD, the balance of payment account recorded a

marginal surplus to the tune of US$1.1 billion in the first

three quarters of 2012-13. This was attributable to the

fact that robust capital flows helped to finance the

widening CAD.

Though, we seem to be doing reasonably well on the

BoP front, another crucial parameter- External debt

stock is slowly and steadily piling up. The latter

increased by US$30.8 billion and stood at US$376.3

billion by December-end 2012. The rise in the external

debt was primarily due to an increase in NRI deposits,

commercial borrowings and short-term trade related

credits. Share of short-term debt increased to around

24.4 per cent of the entire external debt from 23.1 per

cent in September-end 2012. The foreign exchange

reserve available to cover the external debt fell further

to 78.6 per cent by December-end 2012, down from

85.2 per cent in March-end 2012, indicating increasing

stress.

The recent sharp rise in the current account deficit

(CAD) both in absolute terms and as a percentage of

GDP due to the sharp widening of the merchandise

trade deficit has brought back the focus on the Balance

of Payments (BoP) account. But, do these risks

translate into a serious threat to the balance in external

accounts? We analyze this question in the backdrop of

recently released BoP data for the first three quarters

of 2012-13. We have divided the article into two

sections: Section I will analyze the recent data and

Section II will examine the risks and reasons behind the

high CAD.

The latest data released for the third-quarter of 2012-13

shows that the current account deficit widened to an

all time high of 6.7 per cent of GDP from 5.4 per cent in

the previous quarter. With this, the cumulative CAD in

the first three quarters of 2012-13 stands at US$71.7

Section I: Analyzing the BoP

data for April-December 2012

Rising Current Account Deficit Emerges as a Major Macroeconomic Risk

SPECIAL ARTICLE

15 ECONOMY MATTERS

The deterioration in CAD was on the back of a US$11

billion increase in the trade deficit to US$59.6 billion

(12.3 per cent of GDP) in the third-quarter of 2012-13,

taking the cumulative trade deficit for April-December

FY13 to US$150.3 billion as against US$138.2 billion

during the same period last fiscal. Both exports and

imports grew on a y-o-y basis, reversing the y-o-y

decline in the prior quarter; however, exports growth

lagged import growth, thus putting upward pressure

on the trade deficit.

Exports saw only a marginal increase of US$2 billion

over the second quarter, coming in at US$71.8 billion in

the third quarter of 2012-13, thus growing by a mere 0.6

per cent on an annual basis. This is in line with our

expectation since the export promotion schemes and

other incentives had been announced only towards the

end of December 2012, which should help boost

exports in the fourth quarter. Cumulative exports for

first three quarters of 2012-13 stands at US$218.4 billion.

Imports registered a significant increase, rising to

US$131 billion from US$118 billion in the second-

quarter, taking the overall import bill to US$368.7

billion in the first three quarters of 2012-13, marginally

higher than last year despite the growth slowdown.

Imports rose sharply to 9.4 per cent in the third-quarter

as compared to a decline of 4.8 per cent in the previous

quarter, largely aided by oil and gold imports.

Net invisibles declined 5.9 per cent on an annual basis

during the third-quarter of 2012-13, standing at US$27.1

billion compared with a decline of 0.4 per cent in the

previous quarter. This was largely on account of low

growth in software services exports and a decline in

private remittances. Software services exports growth

decelerated to 0.6 per cent on an annual basis in the

third quarter.

17.5 18.9 19.9

16.6

21.7

32.6

22.6

6.7

5.4

3.9

4.54.44.2

3.8

35

30

25

20

15

10

5

0

1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13

8

7

6

5

4

3

2

1

0

CAD (US$ billion) CAD (as a % of GDP) RHS

Current Account Deficit Reaches Alarming Levels

Source: RBI

(US$ billion) Q3 FY13 Q1-Q3 FY13

Trade Balance -59.6 150.3

- Exports 71.8 218.4

- Imports 131.0 368.7

Invisibles 27.1 78.3

- Services 17.6 46.9

- Transfers 15.7 48.3

- Income -6.3 -16.8

Current Account -32.5 -72.0

CAD as a % of GDP 6.7 5.4

Current Account Deficit Widens Sharply in 3QFY13

Source: RBI

14ECONOMY MATTERS

billion (5.4 per cent of GDP), as compared with US$56.5

billion (4.1 per cent of GDP) in April-December 2011.

However, despite, the deterioration witnessed in the

CAD, the balance of payment account recorded a

marginal surplus to the tune of US$1.1 billion in the first

three quarters of 2012-13. This was attributable to the

fact that robust capital flows helped to finance the

widening CAD.

Though, we seem to be doing reasonably well on the

BoP front, another crucial parameter- External debt

stock is slowly and steadily piling up. The latter

increased by US$30.8 billion and stood at US$376.3

billion by December-end 2012. The rise in the external

debt was primarily due to an increase in NRI deposits,

commercial borrowings and short-term trade related

credits. Share of short-term debt increased to around

24.4 per cent of the entire external debt from 23.1 per

cent in September-end 2012. The foreign exchange

reserve available to cover the external debt fell further

to 78.6 per cent by December-end 2012, down from

85.2 per cent in March-end 2012, indicating increasing

stress.

The recent sharp rise in the current account deficit

(CAD) both in absolute terms and as a percentage of

GDP due to the sharp widening of the merchandise

trade deficit has brought back the focus on the Balance

of Payments (BoP) account. But, do these risks

translate into a serious threat to the balance in external

accounts? We analyze this question in the backdrop of

recently released BoP data for the first three quarters

of 2012-13. We have divided the article into two

sections: Section I will analyze the recent data and

Section II will examine the risks and reasons behind the

high CAD.

The latest data released for the third-quarter of 2012-13

shows that the current account deficit widened to an

all time high of 6.7 per cent of GDP from 5.4 per cent in

the previous quarter. With this, the cumulative CAD in

the first three quarters of 2012-13 stands at US$71.7

Section I: Analyzing the BoP

data for April-December 2012

Rising Current Account Deficit Emerges as a Major Macroeconomic Risk

SPECIAL ARTICLE

15 ECONOMY MATTERS

The deterioration in CAD was on the back of a US$11

billion increase in the trade deficit to US$59.6 billion

(12.3 per cent of GDP) in the third-quarter of 2012-13,

taking the cumulative trade deficit for April-December

FY13 to US$150.3 billion as against US$138.2 billion

during the same period last fiscal. Both exports and

imports grew on a y-o-y basis, reversing the y-o-y

decline in the prior quarter; however, exports growth

lagged import growth, thus putting upward pressure

on the trade deficit.

Exports saw only a marginal increase of US$2 billion

over the second quarter, coming in at US$71.8 billion in

the third quarter of 2012-13, thus growing by a mere 0.6

per cent on an annual basis. This is in line with our

expectation since the export promotion schemes and

other incentives had been announced only towards the

end of December 2012, which should help boost

exports in the fourth quarter. Cumulative exports for

first three quarters of 2012-13 stands at US$218.4 billion.

Imports registered a significant increase, rising to

US$131 billion from US$118 billion in the second-

quarter, taking the overall import bill to US$368.7

billion in the first three quarters of 2012-13, marginally

higher than last year despite the growth slowdown.

Imports rose sharply to 9.4 per cent in the third-quarter

as compared to a decline of 4.8 per cent in the previous

quarter, largely aided by oil and gold imports.

Net invisibles declined 5.9 per cent on an annual basis

during the third-quarter of 2012-13, standing at US$27.1

billion compared with a decline of 0.4 per cent in the

previous quarter. This was largely on account of low

growth in software services exports and a decline in

private remittances. Software services exports growth

decelerated to 0.6 per cent on an annual basis in the

third quarter.

17.5 18.9 19.9

16.6

21.7

32.6

22.6

6.7

5.4

3.9

4.54.44.2

3.8

35

30

25

20

15

10

5

0

1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13

8

7

6

5

4

3

2

1

0

CAD (US$ billion) CAD (as a % of GDP) RHS

Current Account Deficit Reaches Alarming Levels

Source: RBI

(US$ billion) Q3 FY13 Q1-Q3 FY13

Trade Balance -59.6 150.3

- Exports 71.8 218.4

- Imports 131.0 368.7

Invisibles 27.1 78.3

- Services 17.6 46.9

- Transfers 15.7 48.3

- Income -6.3 -16.8

Current Account -32.5 -72.0

CAD as a % of GDP 6.7 5.4

Current Account Deficit Widens Sharply in 3QFY13

Source: RBI

16ECONOMY MATTERS

Section II: Current Account

Deficit: High and Persistent

(i). Savings Declining Faster than Investment:

Reasons for High and Persistent CAD

By

definition, in a country with a CAD, domestic demand

outstrips domestic production and the country must

borrow from abroad to finance it. In such a scenario, by

accounting identity, the current account deficit is equal

to net inflows of foreign capital to a country. It reflects

the imbalance between domestic saving and

investment after accounting for official transfer

payments. India has historically run a CAD, primarily

due to policy makers' desire to push investments and

growth higher than that supported by the domestic

savings rate. Since the BoP crisis in 1991, policy makers

have been conservatively maintaining CAD at 0.5 to 2

per cent of GDP until the credit crisis of 2008-09.

However, post credit crisis, a decline in savings has

pushed the current account deficit to the historically

high level, even greater than that witnessed during the

1991 balance of payment crisis. The driver for this rise in

current account deficit is the fact that savings have

been declining faster than investment.

Savings rate in India has declined from a peak of 36.8

per cent of GDP in 2007-08 to 30.8 per cent of GDP in

2011-12. A weakening business environment, explained

by global factors (including higher commodity prices

and weak global capital markets) and poor domestic

environment (including bad growth mix - rise in low

productivity government spending and decline in

productive private corporate capex) have resulted in

declines in public and private corporate savings as a

percentage of GDP.

In contrast to a deteriorating CAD balance, on a

cumulative basis, the net inflows under the financial

account rose to US$31.1 billion in the third quarter as

against US$23.9 billion in the second quarter and

US$15.8 billion in the first quarter. This increasing trend

in capital inflows has been the only silver lining in the

BoP, which has ensured that losses in the Rupee

remain capped.

Net foreign direct investment in the third quarter was

rather muted at US$2.5 billion, taking the cumulative

inflows to US$15.3 billion as against US$20.7 billion

during the same period last fiscal. Meanwhile, portfolio

inflows were robust at US$8.6 billion in the third

quarter as against US$7.6 billion in the previous

quarter. This is particularly worrisome, as it implies the

rising dependence of the Indian economy on debt-

creating inflows which tend to be more volatile and run

the danger of reversing quickly in case of increase in

global risks .

17 ECONOMY MATTERS

(ii). Inelastic Oil and Gold Imports:

(iii). Uncertain Global Scenario:

Gold imports have

surged in recent years due to rise in household incomes

and it has been used as an inflation hedge locally. In

addition, the thin spread of banking facilities has meant

that a sizeable portion of household savings is locked

up in physical gold. In value terms, gold imports nearly

doubled from US$29.9 billion in 2008-09 to US$56.5

billion in 2011-12. Though the government has

announced various policy measures, such as an

increase in customs duty on gold from 2 per cent to 6

per cent to arrest the demand in gold, imports of gold

has shown only feeble signs of moderation so far. Oil

imports have also continued to remain high, despite

the deregulation of petrol prices and partial decontrol

of diesel prices.

Back to back

recessionary conditions in the advanced economies

since the Lehman crisis in 2008-09, have exposed the

emerging economies like India to the perils of slowing

external demand, which in turn has led to the widening

of the merchandise trade deficit from 7.1 per cent of

GDP in 2007-08 to a high of 10.3 per cent in 2011-12.

Though India has taken major strides in diversifying its

exports markets (away from traditional markets in

advanced economies to new markets in emerging

economies) in recent years, there was a significant

contraction in exports growth during the previous

financial..

Risks Associated with a High

CAD

lFunding Risks:

lDeclining forex reserve cover:

lWeakening of the Rupee:

Majority of financing of the CAD is

via volatile capital inflows that can reverse quickly.

Thus, India is vulnerable to the risk of inadequate

financing of the deficit and to uncertainty regarding

the sustainability of financing. During 2004-07

period, when global capital markets were buoyant,

capital inflows continued to be higher than India's

current account deficit funding needs. But post the

global financial crisis of 2008-09, global liquidity is

far-stretched, thus a wide CAD has posed high risks

for the overall BoP account.

With a surge in the

import bill, India's import cover (that is, the number

of months of imports that the current level of

foreign exchange reserves can finance) of foreign

exchange reserves has fallen steadily in the recent

years. With reserves of around US$297 billion at

end-December 2012, the import cover has fallen to

around 7 months as against over 11 months in

March-2010. Internationally, 3 months of import

cover is deemed necessary as a protection against

an external shock.

Net FDI inflows fell to

US$2.5 billion in Q3FY13 from US$8.9 billion in

Under the present macroeconomic scenario, the risk to the BoP remains high mainly on account of a high and

persistent CAD. In the subsequent section, we will examine the reasons and the risks associated with a high CAD.

(US$ billion) Q3 FY13 Q1-Q3 FY13

Total Financial Account 31.1 70.7

- Direct Investment 2.5 15.3

- Portfolio Investment 8.6 14.2

- Other Investment 21.0 43.8

* (ADRs/GDRs) 0.2 0.3

* Currency & Deposits 2.6 12.5

* Loans (ECBs, Banking Capital) 7.1 14.0

* Trade credit & Advances 6.2 15.7

Financial Account Snapshot

Source: RBI

40.0

35.0

30.0

25.0

20.0

As a % of GDP

5.0

4.0

3.0

2.0

1.0

0.0

As a % of GDP

1990

-91

1992

-93

1994

-95

1996

-97

1998

-99

2000

-01

2002

-03

2004

-05

2006

-07

2008

-09

2010

-11

Savings Rate Investment Rate CAD (RHS)

Source: CSO & RBI

Savings Declining Faster Than Investment, Resulting in Higher CAD

16ECONOMY MATTERS

Section II: Current Account

Deficit: High and Persistent

(i). Savings Declining Faster than Investment:

Reasons for High and Persistent CAD

By

definition, in a country with a CAD, domestic demand

outstrips domestic production and the country must

borrow from abroad to finance it. In such a scenario, by

accounting identity, the current account deficit is equal

to net inflows of foreign capital to a country. It reflects

the imbalance between domestic saving and

investment after accounting for official transfer

payments. India has historically run a CAD, primarily

due to policy makers' desire to push investments and

growth higher than that supported by the domestic

savings rate. Since the BoP crisis in 1991, policy makers

have been conservatively maintaining CAD at 0.5 to 2

per cent of GDP until the credit crisis of 2008-09.

However, post credit crisis, a decline in savings has

pushed the current account deficit to the historically

high level, even greater than that witnessed during the

1991 balance of payment crisis. The driver for this rise in

current account deficit is the fact that savings have

been declining faster than investment.

Savings rate in India has declined from a peak of 36.8

per cent of GDP in 2007-08 to 30.8 per cent of GDP in

2011-12. A weakening business environment, explained

by global factors (including higher commodity prices

and weak global capital markets) and poor domestic

environment (including bad growth mix - rise in low

productivity government spending and decline in

productive private corporate capex) have resulted in

declines in public and private corporate savings as a

percentage of GDP.

In contrast to a deteriorating CAD balance, on a

cumulative basis, the net inflows under the financial

account rose to US$31.1 billion in the third quarter as

against US$23.9 billion in the second quarter and

US$15.8 billion in the first quarter. This increasing trend

in capital inflows has been the only silver lining in the

BoP, which has ensured that losses in the Rupee

remain capped.

Net foreign direct investment in the third quarter was

rather muted at US$2.5 billion, taking the cumulative

inflows to US$15.3 billion as against US$20.7 billion

during the same period last fiscal. Meanwhile, portfolio

inflows were robust at US$8.6 billion in the third

quarter as against US$7.6 billion in the previous

quarter. This is particularly worrisome, as it implies the

rising dependence of the Indian economy on debt-

creating inflows which tend to be more volatile and run

the danger of reversing quickly in case of increase in

global risks .

17 ECONOMY MATTERS

(ii). Inelastic Oil and Gold Imports:

(iii). Uncertain Global Scenario:

Gold imports have

surged in recent years due to rise in household incomes

and it has been used as an inflation hedge locally. In

addition, the thin spread of banking facilities has meant

that a sizeable portion of household savings is locked

up in physical gold. In value terms, gold imports nearly

doubled from US$29.9 billion in 2008-09 to US$56.5

billion in 2011-12. Though the government has

announced various policy measures, such as an

increase in customs duty on gold from 2 per cent to 6

per cent to arrest the demand in gold, imports of gold

has shown only feeble signs of moderation so far. Oil

imports have also continued to remain high, despite

the deregulation of petrol prices and partial decontrol

of diesel prices.

Back to back

recessionary conditions in the advanced economies

since the Lehman crisis in 2008-09, have exposed the

emerging economies like India to the perils of slowing

external demand, which in turn has led to the widening

of the merchandise trade deficit from 7.1 per cent of

GDP in 2007-08 to a high of 10.3 per cent in 2011-12.

Though India has taken major strides in diversifying its

exports markets (away from traditional markets in

advanced economies to new markets in emerging

economies) in recent years, there was a significant

contraction in exports growth during the previous

financial..

Risks Associated with a High

CAD

lFunding Risks:

lDeclining forex reserve cover:

lWeakening of the Rupee:

Majority of financing of the CAD is

via volatile capital inflows that can reverse quickly.

Thus, India is vulnerable to the risk of inadequate

financing of the deficit and to uncertainty regarding

the sustainability of financing. During 2004-07

period, when global capital markets were buoyant,

capital inflows continued to be higher than India's

current account deficit funding needs. But post the

global financial crisis of 2008-09, global liquidity is

far-stretched, thus a wide CAD has posed high risks

for the overall BoP account.

With a surge in the

import bill, India's import cover (that is, the number

of months of imports that the current level of

foreign exchange reserves can finance) of foreign

exchange reserves has fallen steadily in the recent

years. With reserves of around US$297 billion at

end-December 2012, the import cover has fallen to

around 7 months as against over 11 months in

March-2010. Internationally, 3 months of import

cover is deemed necessary as a protection against

an external shock.

Net FDI inflows fell to

US$2.5 billion in Q3FY13 from US$8.9 billion in

Under the present macroeconomic scenario, the risk to the BoP remains high mainly on account of a high and

persistent CAD. In the subsequent section, we will examine the reasons and the risks associated with a high CAD.

(US$ billion) Q3 FY13 Q1-Q3 FY13

Total Financial Account 31.1 70.7

- Direct Investment 2.5 15.3

- Portfolio Investment 8.6 14.2

- Other Investment 21.0 43.8

* (ADRs/GDRs) 0.2 0.3

* Currency & Deposits 2.6 12.5

* Loans (ECBs, Banking Capital) 7.1 14.0

* Trade credit & Advances 6.2 15.7

Financial Account Snapshot

Source: RBI

40.0

35.0

30.0

25.0

20.0

As a % of GDP

5.0

4.0

3.0

2.0

1.0

0.0

As a % of GDP19

90-9

1

1992

-93

1994

-95

1996

-97

1998

-99

2000

-01

2002

-03

2004

-05

2006

-07

2008

-09

2010

-11

Savings Rate Investment Rate CAD (RHS)

Source: CSO & RBI

Savings Declining Faster Than Investment, Resulting in Higher CAD

18ECONOMY MATTERS

Q2FY13. In contrast, net portfolio investment rose

to US$8.6 billion in Q3FY13 as against US$7.6 billion

in the previous quarter. As per SEBI data, net FII

inflows have risen further to around US$12.0 billion

in the last quarter of 2012-13. This suggests that

India received its highest net FII inflows ever in

2012-13, despite domestic economic slowdown.

Given the volatility of these inflows, dependence

on FII inflows for funding high CAD exposes the

economy to a sudden decline in rupee.

Cumulative balance of payments for the first three

quarters of 2012-13 stands at US$1.1 billion, defying

expectations of a negative BoP. The fourth quarter

BoP is likely to be flat to positive given expectations of

improvement on the CAD front, while capital flow are

Conclusion

likely to remain healthy. CAD in absolute terms is also

expected to improve in the next quarter.

As far as the financing of the CAD is concerned, the

funding of the same is not expected to pose a problem

in 2012-13. India received its highest net FII inflows ever

in 2012-13 on the back of pro-reform policies on the

domestic front and improvement in global risk

sentiments on the back of liquidity injections by the Fed

and European Central Bank. The rising capital flows is

holding India in a good stead but it comes with a rider,

which is increasing reliance on debt flows. In the short-

term, little can be done, however in the long-term, it's

important to reduce its reliance on the volatile debt

flows. In this regard, following a two pronged

approach - of boosting exports and substituting

imports - is crucial.

19 ECONOMY MATTERS

Source: CSO, Ministry of Industry, RBI, and Ministry of Commerce

54.854.6

54.3

53.8

54.4

5.5

2.4

5.26.4

-3.2

ECONOMY MONITORGDP GROWTH (y-o-y%)

WPI INFLATION (y-o-y%)

INDEX OF INDUSTRIAL PRODUCTION (IIP) (y-o-y%)

EXTERNAL ACCOUNT

Exports (%) Imports (%) Trade Deficit (US$ Bn) Avg Exchange Rate (Rs/US$)

Oct-12 Nov-12 Dec-12 Feb-13Jan-13

20.9 19.317.7

20.0

14.9

Current Account Deficit (US$ Bn)

19.921.7

16.6

22.6

32.6

Source: CSO, Ministry of Industry, RBI, and Ministry of Commerce

Overall GDP

6.05.3 5.5 5.3

4.5

3QFY12 4QFY12 1QFY13 2QFY13 3QFY13

4.1

1.7

2.9

1.2 1.1

3QFY12 4QFY12 1QFY13 2QFY13 3QFY13

Agriculture

2.6

1.9

3.6

2.7

3.3

3QFY12 4QFY12 1QFY13 2QFY13 3QFY13

Industry

8.3 7.97.0 7.2

6.1

3QFY12 4QFY12 1QFY13 2QFY13 3QFY13

Services

-1.6

-4.2

-1.9

0.8

4.2

7.46.4 6.3 6.1

2.6

Primary FuelOverall Manufacturing

General Electricity Manufacturing

9.9

-0.6 -0.7

2.7 2.2

Mining

7.2 7.3 7.36.8

6.0

Dec-12 Jan-13 Feb-13 Mar-13Nov-12

9.610.6

11.4

9.7

7.6

Dec-12 Jan-13 Feb-13 Mar-13Nov-12

10.0

10.2

9.3

10.5

10.2

Dec-12 Jan-13 Feb-13 Mar-13Nov-12

5.45.0 4.9

4.54.1

Dec-12 Jan-13 Feb-13 Mar-13Nov-12

8.4

-0.8 -0.5

2.40.6

Oct-12 Nov-12 Dec-12 Feb-13Jan-13 Oct-12 Nov-12 Dec-12 Feb-13Jan-13 Oct-12 Nov-12 Dec-12 Feb-13Jan-13

-0.2

-5.5

-3.4

-2.2

-8.1

Oct-12 Nov-12 Dec-12 Feb-13Jan-13

Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 Feb-13Jan-13Nov-12 Dec-12 Mar-13

18ECONOMY MATTERS

Q2FY13. In contrast, net portfolio investment rose

to US$8.6 billion in Q3FY13 as against US$7.6 billion

in the previous quarter. As per SEBI data, net FII

inflows have risen further to around US$12.0 billion

in the last quarter of 2012-13. This suggests that

India received its highest net FII inflows ever in

2012-13, despite domestic economic slowdown.

Given the volatility of these inflows, dependence

on FII inflows for funding high CAD exposes the

economy to a sudden decline in rupee.

Cumulative balance of payments for the first three

quarters of 2012-13 stands at US$1.1 billion, defying

expectations of a negative BoP. The fourth quarter

BoP is likely to be flat to positive given expectations of

improvement on the CAD front, while capital flow are

Conclusion

likely to remain healthy. CAD in absolute terms is also

expected to improve in the next quarter.

As far as the financing of the CAD is concerned, the

funding of the same is not expected to pose a problem

in 2012-13. India received its highest net FII inflows ever

in 2012-13 on the back of pro-reform policies on the

domestic front and improvement in global risk

sentiments on the back of liquidity injections by the Fed

and European Central Bank. The rising capital flows is

holding India in a good stead but it comes with a rider,

which is increasing reliance on debt flows. In the short-

term, little can be done, however in the long-term, it's

important to reduce its reliance on the volatile debt

flows. In this regard, following a two pronged

approach - of boosting exports and substituting

imports - is crucial.

19 ECONOMY MATTERS

Source: CSO, Ministry of Industry, RBI, and Ministry of Commerce

54.854.6

54.3

53.8

54.4

5.5

2.4

5.26.4

-3.2

ECONOMY MONITORGDP GROWTH (y-o-y%)

WPI INFLATION (y-o-y%)

INDEX OF INDUSTRIAL PRODUCTION (IIP) (y-o-y%)

EXTERNAL ACCOUNT

Exports (%) Imports (%) Trade Deficit (US$ Bn) Avg Exchange Rate (Rs/US$)

Oct-12 Nov-12 Dec-12 Feb-13Jan-13

20.9 19.317.7

20.0

14.9

Current Account Deficit (US$ Bn)

19.921.7

16.6

22.6

32.6

Source: CSO, Ministry of Industry, RBI, and Ministry of Commerce

Overall GDP

6.05.3 5.5 5.3

4.5

3QFY12 4QFY12 1QFY13 2QFY13 3QFY13

4.1

1.7

2.9

1.2 1.1

3QFY12 4QFY12 1QFY13 2QFY13 3QFY13

Agriculture

2.6

1.9

3.6

2.7

3.3

3QFY12 4QFY12 1QFY13 2QFY13 3QFY13

Industry

8.3 7.97.0 7.2

6.1

3QFY12 4QFY12 1QFY13 2QFY13 3QFY13

Services

-1.6

-4.2

-1.9

0.8

4.2

7.46.4 6.3 6.1

2.6

Primary FuelOverall Manufacturing

General Electricity Manufacturing

9.9

-0.6 -0.7

2.7 2.2

Mining

7.2 7.3 7.36.8

6.0

Dec-12 Jan-13 Feb-13 Mar-13Nov-12

9.610.6

11.4

9.7

7.6

Dec-12 Jan-13 Feb-13 Mar-13Nov-12

10.0

10.2

9.3

10.5

10.2

Dec-12 Jan-13 Feb-13 Mar-13Nov-12

5.45.0 4.9

4.54.1

Dec-12 Jan-13 Feb-13 Mar-13Nov-12

8.4

-0.8 -0.5

2.40.6

Oct-12 Nov-12 Dec-12 Feb-13Jan-13 Oct-12 Nov-12 Dec-12 Feb-13Jan-13 Oct-12 Nov-12 Dec-12 Feb-13Jan-13

-0.2

-5.5

-3.4

-2.2

-8.1

Oct-12 Nov-12 Dec-12 Feb-13Jan-13

Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 Feb-13Jan-13Nov-12 Dec-12 Mar-13

ECONOMY MATTERS

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Keeps readers abreast of global & domestic

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companies

Read by CII Members, Thought Leaders,

Diplomats, Policy Makers, MPs and other

decision makers

The Facts

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ECONOMY MATTERS

n

n

n

Keeps readers abreast of global & domestic

economic developments

Monthly Journal of top management of 8000

companies

Read by CII Members, Thought Leaders,

Diplomats, Policy Makers, MPs and other

decision makers

The Facts

n

n

n

n

n

n

Domestic Trends

Corporate Performance

Sector in Focus

Special Article

Economy Monitor

Global Trends

The Coverage

CII invites full-page* Advertisements for

this flagship document at an attractive rate

of Rs 50,000 per issue and Rs 5 lakh for 12

issues

* Full page size :

11.75 inch (Height) by 8.25 inch (Width)

For more details, Please Contact: Parul Bhardwaj, Confederation of Indian IndustryThe Mantosh Sondhi Centre, 23, Institutional Area, Lodi Road, New Delhi- 110003 (INDIA)

Tel : +91-011-24629994-7, Fax: +91-011-24626149; Email: Ecoresearch@cii.in

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