The Reserve Bank of India released the May 2012 issue of its monthly Bulletin today. The May 2012 issue carries nine special articles: (i) Developments in India’s Balance of Payments during Third Quarter (October-December) of 2011-12, (ii) Foreign Direct Investment Flows to India, (iii) International Trade in Banking Services: 2009-10 and 2010-11 (iv) Consumer Confidence Survey: March 2012 (Round 8) (v) Inflation Expectations Survey of Households: March 2012 (Round 27), (vi) Quarterly Order Books, Inventories and Capacity Utilisation Survey: October-December 2011 (Round 16) (vii) Quarterly Industrial Outlook Survey: January-March 2012 (Round 57), (viii) Union Budget 2012-13: An Assessment, (ix) Railway Budget 2012-13: An Assessment.  Highlights of the special articles are:

Highlights:

1. Developments in India's Balance of Payments during Third Quarter (October-December) of 2011-12

The article provides details on developments in India's balance of payments during October-December 2011-12 (Q3). The disaggregated data on invisibles for the Q3 of 2011-12 along with quarterly data Q1 and Q2 of 2011-12 and annual data for 2009-10 and 2010-11 have also been published as part of the article.

Main Findings:

• During Q3 of 2011-12, India’s BoP came under stress as trade deficit widened, while capital inflows fell far short of financing requirements resulting in a significant drawdown of foreign exchange reserves.

• Export growth decelerated in October-December 2011 owing to economic sluggishness, particularly in advanced economies. Imports continued to rise largely due to high international commodity prices and inelastic demand for gold and silver. As a result, trade deficit rose little over 50 per cent (Y-o-Y).

• On a BoP basis, merchandise exports recorded a growth of 7.9 per cent during Q3 of 2011-12 while imports registered a growth of 22.0 per cent during Q3 of 2011-12. With export growth remaining lower than the import growth, the trade deficit widened to US$47.7 billion in Q3 of 2011-12 as compared with US$ 31.4 billion in Q3 of 2010-11.

• Net services exports and net secondary income recorded a robust growth during Q3 of 2011-12; however, net primary income account showed a net outflow. Consequently, the current account deficit (CAD) widened to US$ 19.6 billion in Q3 of 2011-12 which works out to 4.3 per cent of GDP.

• Capital and Financial account (excluding change in foreign exchange reserves), on a net basis, showed a significantly lower inflow of US$ 8.2 billion in Q3 of 2011-12 as compared with US$ 14.0 billion in Q3 of 2010-11.

• As a result, there was a drawdown of foreign exchange reserves of US$ 12.8 billion (excluding valuation) during Q3 of 2011-12 as against an increase of US$ 4.0 billion in the corresponding quarter of 2010-11.

• During April-December 2011, the CAD at US$ 53.7 billion (4.0 per cent of GDP) was higher than the corresponding period of the previous year mainly on account of increase in trade deficit, though services and secondary income recorded higher growth.

• Net inflows under Capital and Financial account (excluding changes in reserve assets) at US$ 47.5 billion showed moderation in April-December 2011 as compared with US$ 52.9 billion in April-December 2010.

• There was a drawdown of reserves to the extent of US$ 7.1 billion during April-December 2011 as against an accretion of US$ 11.0 billion in April-December 2010.

2. Foreign Direct Investment Flows to India

An analysis of the recent trends in foreign direct investment (FDI) flows at the global level as well as across regions/countries suggests that India has generally attracted higher FDI flows in line with its robust domestic economic performance and gradual liberalisation of the FDI policy as part of the cautious capital account liberalisation process. Even during the recent global crisis, FDI inflows to India did not show as much moderation as was the case at the global level as well as in other EMEs. However, when the global FDI flows to Emerging Market Economies (EMEs) recovered during 2010-11, FDI flows to India remained sluggish despite relatively better domestic economic performance ahead of global recovery. This raised questions especially in the backdrop of the widening of the current account deficit beyond the sustainable level of about 3 per cent.

Main Findings:

• Using Kauffmann’s Index, the Reserve Bank of India conducted an empirical exercise to analyse the factors behind such moderation.

• The study suggested that institutional factors, such as, policy uncertainty, are causing the slowdown in FDI inflows to India despite robustness of macroeconomic variables.

• A panel exercise for 10 major EMEs showed that FDI was significantly influenced by openness, growth prospects, macroeconomic sustainability, labour costs and uncertainty in government policy.

• A comparison of actual FDI flows to India vis-à-vis the potential level worked out on the basis of underlying macroeconomic fundamentals showed that actual FDI which generally tracked the potential level till 2009-10, fell short of its potential during 2010-11.

• Further, counter-factual scenario attempted to segregate economic and non-economic factors seemed to suggest that the divergence between actual and potential during 2010-11 could partly be on account of policy uncertainty.

3. International Trade in Banking Services, 2009-10 and 2010-11

The article presents the findings of the 2009-10 and 2010-11 rounds of the Reserve Bank’s survey on International Trade in Banking Services (ITBS) covering overseas branches/subsidiaries/associates of Indian banks and branches of foreign banks operating in India. The survey covered 309 out of 319 branches of foreign banks operating in India and 153 of the 155 branches/offices of Indian banks operating abroad in 30 countries as at end-March 2011. In addition, Indian banks operating abroad also furnished data for their 150 overseas subsidiaries and 81 overseas associates. Consistent and comparable data are captured on financial auxiliaries’ services rendered by the banks based on explicit/implicit fee/commission charged to customers.

Main findings:

• The global financial crisis had some adverse impact on international trade in banking services during the reference period. These were reflected in changes in size of their balance sheets, activity-wise and country-wise composition of fee income and profitability ratios.

• Indian banks’ branches operating abroad generated a major share of fee income by rendering services related to credit and trade finance, whereas foreign banks in India generated a major share of fee income by rendering derivative, stock, securities, foreign exchange trading services and financial consultancy and advisory services.

• Foreign banks’ operations in India were subdued in the wake of the crisis and their balance sheets which contracted during 2009-10 expanded later in 2010-11. On the other hand, overseas branches of Indian banks continued to expand their overseas business during the period.

• Fee income of overseas branches of Indian banks from rendering services to residents, non-residents in India and non-residents from other countries was evenly distributed whereas a dominant portion of fee income of foreign banks came from residents.

• The size of operations of foreign banks in India was much larger than the overseas operations of India banks during the reference period. As such, income from trade in banking services was much higher for foreign banks in India than that generated by overseas branches/subsidiaries of Indian banks.

4. Consumer Confidence Survey: January-March 2012 (Round 8)

This article presents the salient findings of the Consumer Confidence Survey conducted in March 2012, the 8th round in the series. The survey covers 5,352 households well-spread in six metro cities. Based on perceptions of the general economic and own financial situation, the survey captures the households’ confidence in the current and expected economic conditions, household circumstances, employment conditions, current and future spending and prices. The survey results are those of the respondents and are not necessarily the perceptions of Reserve Bank of India.

Main Findings:

• Households’ perceptions on current economic conditions and expectations one year ahead have moderated. However, more than half of the respondents perceive economic conditions to be favourable.

• Majority of respondents perceived improvement in household circumstances than a year ago. However, proportion of respondents reporting worsening of household circumstances has increased marginally.

• More than half of the respondent perceived increase in income, but this proportion has been sliding over the last four rounds.

• Consistent fall in spending intentions of households in the next year.

• Greater proportions of respondents are worried about employment prospects as compared with the previous round.

• The proportion of respondents perceiving and expecting increase in price level declined in current round.

• Current Situation Index and Future Expectations Index of Consumer Confidence declined.

5. Inflation Expectations Survey of Households: January-March 2012 (Round 27)

The findings of 27^th round of Inflation Expectations Survey of Households for January-March 2012 quarter, conducted during the first fortnight of March 2012 are presented in the article. The survey captures the inflation expectations of 4,000 urban households across 12 cities for the next three-month period and for the next one-year period. These expectations are based on their individual consumption baskets and, hence, should not be considered as predictors of any official measure of inflation. The households’ inflation expectations provide useful directional information on near-term inflationary pressures and also supplement other economic indicators to get a better indication of future inflation. The survey results are those of the respondents and not necessarily shared by the Reserve Bank of India.

Main Findings:

• The three-month ahead and one-year ahead inflation expectations have marginally declined to 11.7 per cent and 12.5 per cent, respectively, from 12.4 per cent and 13.3 per cent in the last round. Households expect inflation to rise further by 70 and 150 basis points during next three-month and next one-year period, respectively, from the perceived current rate of 11.0 per cent.

• The percentage of respondents expecting increase in general prices by ‘more than the current rate’ for three-month ahead and one-year ahead have gone up to 75.6 per cent and 78.8 per cent, respectively, from 73.4 per cent and 76.9 per cent observed in the previous round (October-December 2011).

• 53 per cent of the wage/income earners reported an increase in wages/income in the past one year. While 70 per cent do not see their incomes to change in next three-month, 73 per cent expect incomes to go up in next one-year.

• Regarding feedback on RBI action to control inflation, the survey finds 60 per cent of the respondents are aware of RBI action for inflation control.

6. Order Books, Inventories and Capacity Utilisation Survey: October-December 2011 (Round 16)

The  article, the third in the series, presents the findings of the 16th round of the Order Books, Inventories and Capacity Utilisation Survey. The survey was conducted for the October-December 2011 quarter (Q3:2011-12). It captures the quarter-over-quarter movements in order books, inventories and capacity utilisation based on a sample of manufacturing companies, which are important indicators of economic activities, inflationary pressures and overall business cycle and, as such, are useful for assessing the consumption and investment demand outlook.

Main Findings:

• The survey results indicate some improvement in demand conditions in Q3:2011-12 based on various parameters, viz., new orders growth, level of capacity utilisation and finished goods inventory to sales ratio over the previous quarter.

• Capacity utilisation level at the aggregate level increased from 73.9 per cent in previous quarter to 75.9 per cent in Q3:2011-12, but it was well below the peak level achieved in Q4:2010-11.

7. Quarterly Industrial Outlook Survey: January-March 2012 (Round 57)

The  article presents the findings of Industrial Outlook Survey conducted for the January-March 2012 quarter, the 57th round in the series. It gives an assessment of business situation of companies in manufacturing sector, for the quarter January-March 2012, and their expectations for the ensuing quarter April-June 2012.

Main Findings:

• The survey indicates that the demand conditions based on ‘production’, ‘order books’, ‘capacity utilisation’ (CU), ‘imports’ and ‘exports’ showed sign of improvement in assessment quarter when compared with the previous quarter; however, slight moderation is indicated in expectation quarter. The level of optimism on ‘availability of finance’ improved marginally in both the assessment and expectation quarters after steady decline in the last 4 quarters. Cost pressure from ‘raw material’ and ‘external finance’ continued but with slight moderation.

• The Business Expectation Index, a measure that gives a single snapshot of the industrial outlook in each study quarter, increased to 114.9 from 110.1 for assessment quarter but declined to 116.8 from 117.2 for expectation quarter; however, it remains well above 100, the threshold that separates contraction from expansion.

8. Union Budget 2012-13: An Assessment'

The article is an assessment of the Union Budget 2012-13 presented to the Parliament on March 16, 2012. It starts with an analysis of the underlying macroeconomic framework of the Budget and draws attention to the Central Government’s strategy to return to rule-based fiscal consolidation from 2012-13 after a significant fiscal slippage in 2011-12 due to shortfall in direct tax revenues and overshooting of subsidy expenditures. It covers the proposal to amend the FRBM Act, 2003 and identifies some key policy initiatives announced in the Budget in respect of tax reforms, agriculture, infrastructure and the financial sector.

Main Findings:

• The Union Budget 2012-13 indicates a favourable macroeconomic outlook in terms of real GDP growth (7.6 per cent), inflation scenario (6.4 per cent) and expected moderation in current account deficit.

• The fiscal outcome in terms of revised estimates (RE) for 2011-12 turned out to be worse than budgeted. The Central Government’s gross fiscal deficit (GFD) and revenue deficit (RD), as ratios to GDP, were higher at 5.9 per cent and 4.4 per cent, respectively, in   2011-12 (RE) over the budgeted estimates of 4.6 per cent and 3.4 per cent for the same year, reflecting the impact of higher non-plan revenue expenditure, lower revenue receipts and the downward revision in GDP.

• The budgetary estimates for 2012-13 indicate the commitment to carry forward fiscal consolidation. The RD, as a ratio to GDP, is budgeted to decline by 1 percentage point to 3.4 per cent of GDP in 2012-13. Similarly, the GFD-GDP ratio is budgeted to decline to 5.1 per cent in 2012-13 from the level of 5.9 per cent in the previous year.

• In 2012-13, the tax-GDP ratio is budgeted to increase by 0.5 percentage point, through roll-back of standard excise tax rates to 12 per cent, widening of the service tax base and rationalisation of customs duty rates.

• Revenue expenditure growth is budgeted to decelerate in 2012-13, while capital expenditure (both plan and non-plan components) is expected to increase sharply.  The restraint on non-plan revenue expenditure growth is critical to ensure that the fiscal consolidation going forward is sustainable, and not excessively reliant on revenue augmentation.

• The expenditure on subsidies is budgeted to decline in 2012-13, which may be subject to upward risks, particularly in view of rising international petroleum prices.

• Moving forward, the Government envisages corrections in RD and GFD under its rolling targets for 2013-14 and 2014-15. The targeted key deficit-GDP ratios to be achieved by 2014-15 would, however, remain higher than those recommended by the Thirteenth Finance Commission.

• The introduction of amendments to the FRBM Act, 2003 as part of Finance Bill, 2012 and incorporation of ‘Medium-term Expenditure Framework Statement’ in the Act are significant initiatives towards fiscal consolidation in 2012-13. The latter would set out three-year rolling targets for expenditure indicators, which could improve quality of public expenditure management.

9. Railway Budget 2012-13: An Assessment

The article covers the salient features of the Railway Budget 2011-12, which was presented in the Parliament on March 14, 2012.

Main Findings:

• The Railway Budget 2012-13 focuses on its developmental role as a catalyst of growth, defines its investment priorities and attempts to address the basic problem relating to its weak financial position through tariff and fare revision measures.

• There is special emphasis on safety-enhancing and modernisation measures; the latter measures have been recommended by two High Level Committees and relate to areas of rolling stock, tracks and bridges, signaling and telecommunication.

• The gross traffic receipts of Railways are budgeted to increase by 25.3 per cent during 2012-13, reflecting higher earnings from both passenger travel and freight traffic. Nonetheless, rollback of the fares after the announcement of the Railway Budget in some classes may make it difficult to realise the budgeted passenger earnings and to achieve a budgeted reduction in operating ratio of more than 10 percentage points to 84.9 per cent during 2012-13.

• Taking note of resource constraints, a number of projects are proposed to be undertaken under PPP mode and with the partnership of the States. The financial performance indicators such as operating ratio, net surplus and return on capital are expected to improve during 2012-13.

Ajit Prasad
Assistant General Manager

Press Release : 2011-2012/1784