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7/27/2019 Ficci Italy

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STATUS REPORT-ITALY Page 1

ItalyA Status Report

ECONOMY

Italy has a diversified industrial economy, which is

divided into a developed industrial north,

dominated by private companies, and a less-

developed, welfare-dependent, agricultural south,

with high unemployment. The Italian economy is

driven in large part by the manufacture of high-

quality consumer goods produced by small and

medium-sized enterprises, many of them family

owned. Italy also has a sizable undergroundeconomy, which by some estimates accounts for

as much as 17% of GDP. These activities are most

common within the agriculture, construction, and

service sectors.

Italy is the third-largest economy in the euro-zone,

but exceptionally high public debt burdens and

structural impediments to growth have rendered

it vulnerable to scrutiny by financial markets.

Public debt has increased steadily since 2007,

reaching 120% of GDP in 2011, and borrowing

costs on sovereign government debt have risen to

record levels.

During the second half of 2011 the government

passed a series of three austerity packages to

balance its budget by 2013 and decrease its public

debt burden. These measures included a hike in

the value-added tax, pension reforms, and cuts to

public administration.

The international financial crisis worsened

conditions in Italy's labor market, with

unemployment rising from 6.2% in 2007 to 8.4% in

2011, but in the longer-term Italy's low fertility

rate and quota-driven immigration policies will

increasingly strain its economy. The euro-zone

crisis along with Italian austerity measures has

reduced exports and domestic demand, slowing

Italy's recovery. Italy's GDP is still 5% below its

2007 pre-crisis level.

Main highlight(s)

- With Mario Monti, a former member ofthe European Commission, who assumed

the premiership of Italy after Silvio

Berlusconi resigned from the post of

Prime Minister in November 2011,

expressing his intention to resign oncethe 2013 budget was passed, it has again

sent shock-waves within EU and rest of

the global economies about the uncertain

economic outlook for Italy.

- The tough austerity measures put inplace by Monti regime have strained the

domestic demand and employment

generation, but went a long way in

stabilizing the Italian economy, the 3rd

largest economy of EU.- Today Italian economy is witnessing an

economic slowdown with a negative

population growth rate and the public

debt up to 123% of the GDP.

- The near stagnant share ofmanufacturing sector is also not

conducive for employment generation.

- Of late, Italian industry has sought toactively engage emerging markets like

India to regain Lost decades sincePiaggio came to India in 1960s.

- The sectors to watch for promotingIndo-Italian trade and investment

relations-Higher education, tourism, skills

development, SME cooperation, fashion

and design, automobiles, renewable

energy, healthcare services and defence.


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Key Economic Indicators

Source: CIA World Factbook

Current State of Economy

The Italian economy is going through its second severe recession in five years. In particular,

problems in the financial sector, fiscal austerity and the weak external outlook mean that

economic activity will decline significantly in 2012. The GDP is now expected to fall by 2.3% this

year and by 0.5% in 2013, before a return to modest growth averaging just 0.8% in 201416.

The increase in the perceived riskiness of Italian assets will result in continued net portfolio

outflows in the short term, keeping yields on government bonds high. In turn, high interest rates

are expected to affect banks as they reduce the value of assets held on their balance sheets. As

this makes it harder for the banks to get market funding, lending rates will rise unless theEuropean Central Bank (ECB) continues to provide liquidity to the sector. Italian banks expect

credit conditions applied to corporate loans to be tightened in Q4, according to the Bank of

Italys lending survey.

Tighter credit conditions and plunging domestic demand will make it harder for companies to

expand in the short term. Business expectations have darkened in 2012, and confidence in the

manufacturing sector was down to its mid-2009 level in July. The investment is expected to

decline by about 8% this year and to be stagnant in 2013, with capacity remaining underutilized

until activity returns to stronger levels. The investment growth is expected to average just 2% a

year between 2014 and 2016.

2009(est.) 2010(est.) 2011(est.) 2012 (est.)

GDP(PPP) $1.83 trillion $1.863 trillion $1.871 trillion $1.834 trillion

GDP composition

by sector

Agriculture: 1.8%

Industry: 24.9%

Services: 73.3%

Agriculture: 2%

Industry: 24.7%

Services: 73.4%

Agriculture: 2%

Industry: 23.9%

Services: 74.1%

(2012 est.)

GDP- real growth

rate

-5.5% 1.8% 0.4% -2.3% (2012 est.)

Unemployment

Rate

7.8% 8.4% 8.4% 10.9% (2012 est.)

Public Debt 115.8% of GDP 118.7% of GDP 120.1% of GDP 126.1% of GDP

(2012 est.)

Inflation Rate

(consumer prices)

0.8% 1.4% 2.9% 3% (2012 est.)

Exports $407.2 billion $448.4 billion $523.9 billion $483.3 billion

(2012 est.)

Imports $403.9 billion $475.7 billion $556.4 billion $469.7 billion

(2012 est.)


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Conditions in the labor market are also expected to worsen in the coming quarters. The

unemployment rate rose to 10.8% in June, 2.7 percentage points above its level a year earlier

and at its highest in more than ten years. The ongoing recession, coupled with rising labor

supply, will push unemployment above 12% in second half of 2013. The jobless rate is forecasted

to start declining in 2014, but it will not fall below 10% until after 2016.

High unemployment will contribute to the decline seen in household spending in 201213,

which is being hit by fiscal consolidation measures and plunging consumer confidence in the

wake of worsening economic conditions. The private consumption is forecasted to fall 2.7% in

2012 and then 0.9% in 2013, before picking up slightly to report average growth of about 0.5% in

201416.

Lower domestic demand will result in a decline in inflation during second half of 2012 and first

half of 2013 from an average of 3.6% in first half of 2012. Consumer price inflation is now

forecasted to average 3.4% in 2012 and 2.6% in 2013. Over the medium term, inflation isexpected to fall to about 1%.

The weakness of domestic demand is also leading to a reduction in the external deficit. The

current account deficit, which widened to 3.3% of GDP in 2011 from close to balance in 2000, is

projected to more than halve in 2012 and then drop to around 1% of GDP in 2013.

General elections will be held in April 2013 to replace the current technocrat Government.

Although the outcome of the elections is uncertain, a faltering economy will remain an incentive

for continued policy action. But the risk that voters will vote against further austerity and reform

is not negligible.

INDIA-ITALY BILATERAL ECONOMIC RELATIONS

Economic and commercial relations between India and Italy have been growing steadily. Italy is

India's 5th

largest trading partner in the EU (25th

globally) and the 14th

largest investor in India.

The percentage share of India in Italys trade has been increasing steadily, though still hovers

around 1% showing the immense potential for development.

Trade Figures:

Year 2007-2008 2008-2009 2009-2010 2010-20112011-2012 2012-13(Apr-

Sep)

EXPORT 3,914.02 3,824.58 3,400.25 4,551.58 4,883.09 1965.59

%Growth 9.19 -2.29 -11.09 33.85 7.28

IMPORT 3,906.72 4,428.19 3,862.06 4,256.02 5,427.17 2653.75

%Growth 45.99 13.35 -12.78 10.2 27.52

TOTAL

TRADE

7,820.73 8,252.77 7,262.31 8,807.59 10,310.25 4619.34

%Growth 24.92 5.52 -12 21.27 17.06

Source: Ministry of Commerce and Industry, GoI Figures in USD million


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TRADE

The last few years have seen substantial growth in trade relations between the two countries.

Except for 2011-12, the balance of trade has largely been in Indias favour since the early

eighties. Bilateral trade was impacted negatively as a result of the financial/economic crisis of

2008-09. The trade which was showing signs of healthy growth (it grew by 68% during theperiod 2005-07), contracted by 12% in 2009, but for 2010 it has registered a volume ofUS$ 8.80

billion (+ 21.27% yoygrowth). For 2011 trade of US$ 10.31 billion was registered (+ 17.06% yoy

growth)

Trade Basket

Main items of Indian exports to Italy are textiles, yarns, ready-made garments, motor vehicles,

chemicals, iron and steel, footwear, machinery, automotive components, dyes,

pharmaceuticals, agricultural and engineering items, granite, gems & jewelry, carpets, iron ore

and coffee.

Main items of import from Italy are machinery and capital goods, non-electrical equipment,precision and other machine tools, metallurgical products, iron and steel laminates, chemical

and pharmaceutical products, engineering items, medium oil and gas oil.

INVESTMENTS

Italian Investments in India

Italy ranks 14th

in terms of cumulative inflows into India amounting to US$ 1,121.67 mln (April

2000 August 2012) accounting for 0.63% of total FDI inflows. (Inflows received through

FIPB/SIA route RBIs automatic route & acquisition of existing shares)

It is worth mentioning in particular that, in 2008, the value of Italian direct investment

increased considerably, (from 18.56 million to 235.9 million) and was higher than France

and Germany for that year.

Highest FDI inflows from Italy, from April 2000 to February 2012, have been in the Automobile

Industry, which accounts for over 54% of FDI inflows from Italy. Services Sector, with about 6%,

is in the second place and Railway Related Components, with about 4%, is in the third place.

Industrial Machinery (3%), Construction activity (3%) stands at fourth and fifth place.

Italian companies in India

Today there are around 400 Italian firms present in India, against 330 in 2008, operatingespecially in the textile and automobile sectors. Six Italian banks have representation in India.

Around 140 large Italian companies are active in India. Some of the major Italian companies

that have invested in India are FIAT Auto, Heinz Italia, FIOlA, Italcementi, Necchi Compressori,

Perfetti, Lavazza, Fata Hunter Engineering, ENI, SAI India, Isagro (Asia) Agrochemicals, Piaggio,

and Impreglio, SEA Deutzfahr Group, Finmeccanica SpA, Ferrero.

In particular, according to an economic analysis by the Pantheon group:

13 per cent of the Italian companies that operate in India belong to the textile and clothingsector


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8 per cent automotive and professional services 7 per cent electronics or economic and institutional associations 6 per cent logistics or provision of services to corporateMore than half the Italian firms in India are concentrated in the South-West of the country:

35 per cent in Maharashtra state 19 per cent in New Delhi 14 per cent in Tamil Nadu and 11 per cent in KarnatakaIndian Investments in Italy

Indian companies are present in sectors such as IT, electronics, engineering etc. The prominent

companies operating in Italy include Tata, TCS, S. Kumars, Raymonds, Wipro, L&T, Mahindra &

Mahindra, Jet Airways, Ranbaxy, Bombay Rayon Fashion, Zydus Cadila, Dr. Reddy Laboratories,

Aurobindo Pharma, Himatsingka Seide, Varroc Group, Endurance Technologies. SBI has a

representative office in Milan.

Indian outbound FDI in Italy (in million USD, Source: Ministry of Finance, GoI as on Aug 2010)

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 Total

7.62 0.216 7.117 437.729 34.85 35.277 522.81

RECENT TRADE AND INVESTMENT BREAKTHROUGHS

Technical Collaborations: Italy ranks 5th

in number of approved technical collaborations (488) in

India, accounting for more than 6% of the total since 1991. Italy comes after the US, with 1,824

transfers (22.62 per cent of the total), Germany (1,114 = 13.82 per cent), Japan (879 = 10.9 per

cent) and the UK (872 = 10.82 per cent). These figures show that Italian investments relateprimarily to industrial set-ups and not to mere stakes in the capital of Indian companies.

The largest technical collaborations have been in the transportation industry (77) followed by

electrical equipments, chemical (other than fertilizers), drugs and pharmaceuticals and

industrial machinery.

Recent Developments

MoU for formalizing JBC to be signed during the visit of Mr. Paolo Romani, Italysindustry minister, to India in October 2011

India and Italy have agreed to sign a memorandum of understanding (MoU) forenhancing their bilateral technical cooperation in the road infrastructure sector andfacilitating greater involvement of Italian infrastructure companies in highway projects

in this country.

The need for an MoU was felt and agreed upon during talks Minister for Road Transportand Highways Shri Kamal Nath had with Italian Minister for Economic Development Mr

Paolo Romani in Rome on December 15.

UAE-based telecom major, Etisalat, has launched a high capacity fibre optic submarinecable that stretches from India to Europe, in collaboration with eight other global

telecom players, including Bharti Airtel and Tata Communications.

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