Economic Environment And Capital Market-part-2 By Tarun Das

3 External Sector Is Under Control

Capital Market Dr. Tarun Das

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3

3.1 Improvement in Current Account Balance on External Sector (as % of GDP) 1 .8

2

1 .2

1

0 .7

0 -0 .3

-0 .4

-0 .5

19 91 91 19 - 92 92 19 - 93 93 19 94 94 19 -95 95 19 -96 96 19 9 7 97 19 - 98 98 19 -99 99 20 00 00 20 -01 01 20 -02 02 20 03 Ap 03-0 r-D 4 ec 04

-1

19

90

-1 .0

-2 -3

-1 .7

-1 .2

-1 .7

-1 .0 -1 .0

-0 .9

-1 .4

-3 .1

-4

Capital Market Dr. Tarun Das

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3.2 Acceleration in Export Growth Rate 30.0 24 .4

25.0

20

20.0

1 8.4

21

20.8

1 7.2

15.0 10.0

20 .3 21.1

10 .8

9 .0 3.8

5.0

5 .3 4 .6

0.0 -5.0

-1 .6 -5.1

199 0 -9 1 199 1-9 2 199 2-9 3 199 3-9 4 199 4-9 5 199 5 -9 6 199 6-9 7 199 7-9 8 199 8-9 9 199 9-0 0 200 0 -0 1 200 1 -0 2 200 2-0 3 200 3-0 4 200 4-0 5 200 5A pr

-10.0

-1.5

. Tarun Das Capital Market Dr.

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3.3 Steady Increase in Export/GDP ratios (per cent)

14

12

12

in US $ billion

10

9 .1 8 .9 8 .7 8 .3 8 .3 8 .3 8 .4

1 0 .61 0 .8 9 .4

6 .9 7 .3

8 6

9 .9

5 .8

4 2

19 90 19 -91 91 19 -92 92 19 -93 93 19 -94 94 19 -95 95 19 -96 96 19 -97 97 19 -98 98 19 -99 99 20 -00 00 20 -01 01 20 -02 02 20 -03 03 20 -04 04 -05

0

Capital Market Dr. Tarun Das

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1 5 .5

1 1 .1

1 1 .5

1 2 .4 1 2 .7

1 1 .8

1 2 .8 1 3 .3

9 .6 7 .9

90 19 - 9 1 91 1 9 -9 2 92 19 - 93 93 19 -94 94 19 - 95 95 19 - 9 6 96 19 - 9 7 97 19 - 9 8 98 19 - 99 99 20 - 0 0 00 20 -0 1 0 20 1-02 02 20 -03 03 20 -0 4 04 -0 5

8 .8

1 2 .3 1 2 .7 1 2 .5 1 2 .5

19

in US $ billion

18 16 14 12 10 8 6 4 2 0

3.4 Steady Increase in Import/GDP Ratios (per cent)

Capital Market Dr. Tarun Das

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3.5 Steady Improvement in Invisibles/GDP Ratios (per cent) 4 .3

4

in US $ billion

3

2 .7

2

1 .8

3 2 .4

2 .2

3 .3

2 .2

1 .6

1 .1

1 0

3 .1

4 .5

0 .7 0 .6 -0 .1

19

90 19 - 9 1 91 19 - 9 2 92 19 - 9 3 93 19 - 9 4 94 19 -95 95 19 -96 96 19 -97 97 19 - 9 8 98 19 -99 99 20 -00 00 20 - 0 1 01 20 -02 02 20 -03 03 20 -04 04 -0 5

-1

Capital Market Dr. Tarun Das

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3.6 Substantial increase in Foreign Investment Inflows (US$ billion) 14

1 2 .5

12

11

in US $ billion

10 8 6 4 .2

4

5 .4

5 .1

5 .9

6 .7 4 .6

2 .3

2 0 .1 0 .1

0 .6

19 90 19 -91 91 19 -92 92 19 -93 93 19 -94 94 19 -95 95 19 -96 96 19 -97 97 19 -98 98 19 -99 99 20 -00 00 20 -01 01 20 -0 2 02 20 -03 03 20 -04 04 -05

0

5 .1 4 .9

6 .0

Capital Market Dr. Tarun Das

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3.7 Significant reduction in External Debt Service Ratio (at end March) 40 35 30 25 20 15

(% of gross current receipts) 3 5 .3 3 0 .2 2 7 .5

2 5 .4 2 5 .9 2 6 .2

2 3 .0 1 9 .5 1 8 .8

1 7 .1 1 6 .2 1 3 .4

1 5 .8

1 7 .8 1 2 .3

10 5

19

91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05

0

Capital Market Dr. Tarun Das

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3.8 Significant reduction in External Debt/GDP ratios (at the end March) 3 8 .73 7 .5 2 8 .7

3 3 .8 3 0 .8 2 7 .0 2 4 .62 4 .32 3 .6

2 2 .12 2 .6 2 1 .1 2 0 .2

1 8 .6 1 6 .7

19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05

45 40 35 30 25 20 15 10 5 0

Capital Market Dr. Tarun Das

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3.9 Reduction in Concessional to Total External Debt Ratio (end March) 3 9 .5 3 8 .5 3 8 .9

3 5 .5 3 6 .0 3 6 .8 3 6 .4

19

92

19

19

4 2 .3

93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04

4 5 .9 4 4 .8 4 4 .5 4 4 .4 4 5 .3 4 5

91

50 45 40 35 30 25 20 15 10 5 0

Capital Market Dr. Tarun Das

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3.10 Reduction in Short Term Debt to Total External Debt Ratio (end March) 1 0 .2

10 8 .3

8

7 .2

7 .0

6 4

5 .4 3 .9

4 .3

5 .4 4 .4

4 .0

4 .4

5 .1

3 .6 2 .8

2

19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04

0

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3.5 3.0

3.11 Reduction in Short Term Debt to GDP Ratio (end March) 3 .0

3 .2 2.7

2.5 2.0 1.5 1.0

1 .8 1.3

1 .3

1 .4

1 .3 1 .0

0 .9

0 .8

0 .9 0 .6

0 .7

0.5

19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04

0.0

Capital Market Dr. Tarun Das

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3.12 Reduction in Short Term Debt to Total Foreign Exch. Ratio (end March)

450 400

382

350 300 250 200 15 0

126

10 0 50

24

30

30

19

15

11

9

5

6

6

5

93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05

21

19

92

19

91

0 19

98

Capital Market Dr. Tarun Das

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3.13 Substantial Build-up of Foreign Exchange Reserves (end March) 160

142

140 113

120 76

80 55

60 40 20

5 .8 9 .2 9 .8

1 9 .3

2 5 .22 1 .7 2 6 .4

2 9 .4 3 2 .5

3 8 .0 4 2 .3

0 -20

19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 200 05 4 M ay

in US $ billion

100

Capital Market Dr. Tarun Das

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3.14 Steady Improvement in Import Cover of FER (Number of months) (end March) 25 20

in US $ billion

20

18

15

1 3 .8 1 1 .3

10 5

8 .6 8 .4 5 .3 4 .9

6

6 .5 6 .9

8 .2 8 .2 8 .6

2 .5

19

90 19 - 91 91 19 - 9 2 92 19 -93 93 19 -94 94 19 - 9 6 95 19 -9 6 96 19 - 97 97 19 -98 98 19 -99 99 20 - 0 0 00 20 -0 1 01 20 -0 2 02 20 -0 3 03 20 -0 4 04 -0 5

0

Capital Market Dr. Tarun Das

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3.15 FDI Outstanding (%) Sectors Aug 1991 Aug 2003 1. Plantation & agriculture 9.5 1.4 2. Mining 0.3 0.1 3. Power 0.1 16.5 4. Manufacturing 84.9 50.4 5. Services 5.2 32.4 a)Financial & real estate na 6.4 b)Telecommunications na 19.8 c) Transport na 1.9 d)Hotels and retail trade na 2.7 e)Others na 1.6 Total 100 100

Capital Market Dr. Tarun Das

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3.16 Average Growth rates in India (per cent) Decade

Services Services Exports Imports 1950s 4.5 1.9 1960s 0.0 1.1 1970s 22.7 17.6 1980s 4.4 8.8 1990s 17.7 17.0 2000-2004 15.2 12.6

Capital Market Dr. Tarun Das

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3.17 Composition of service exports of India (per cent) Period Travel Trans Insurance Govt Misc 1950s 8.6 32.9 7.7 23.4 27.3 1960s 10.5 34.6 5.2 29.7 19.9 1970s 25.5 37.3 4.7 10.8 21.8 1980s 5.9 17.1 2.4 3.1 41.1 1990s 20.3 2.3 1.8 42.6 2000-04 15.4 10.7 1.3 2.0 70.6

33.0

Note: Misc includes financial, software and other modern services.

Capital Market Dr. Tarun Das

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3.18 Composition of service imports of India (per cent) Period 1950s 1960s 1970s 1980s 1990s 20002004

Travel 18.3 9.5 7.5 11.8 14.6 13.5

Trans 22.6 29.5 36.9 31.5 30.6 13.6

Insurance Govt Misc 6.7 22.6 29.8 2.4 16.9 39.0 1.1 9.4 40.8 0.5 4.2 49.6 0.3 2.7 49.8 1.3 1.1 70.5

___________________________________________

Note: Misc includes financial, software and other modern services.

Capital Market Dr. Tarun Das

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4 Fiscal and Financial Situation

Capital Market Dr. Tarun Das

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4.1Medium Term Fiscal Indicators (As % of GDP) Items 1.Revenue Deficit 2.Fiscal Deficit 3.Gross tax rev. 4.Year-end debt stock

2004-05 2005- 2006- 2007-08 RE 06 BE 07 Tar Tar 2.7 2.7 2.0 1.1 4.5 4.3 3.8 3.1 9.8 68.8

10.6 68.6

Capital Market Dr. Tarun Das

11.1 68.2

12.6 67.3

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4.2 Trend of Public Debt Status in June 1991 • Public debt as percentage of GDP (a) Central govt 61% - Internal 50% - External 12% (b) States 19% - Internal 19% (c )General govt 68% - Internal 56% - External 12%

Status in March 2005 • Public debt as percentage of GDP (a) Central govt 67% - Internal 61% - External 6% (b) States 29% - Internal 29% (c )General govt 96% - Internal 90% - External 6%

Capital Market Dr. Tarun Das

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4.3 Progress of Fiscal Reforms Status in March 2005

Status in June 1991 Fiscal Deficit was financed by: (a) RBI Ad Hoc TBs at 4.6% interest (b) Banks through SLR holdings at 38.5% and CRR 25% (c ) Market borrowings (d) Public funds (e) External debt

(a) Ad hocs replaced by WMAs at market rate (b) SLR reduced to 25% (c )Govt. securities are sold at market rates and CRR 4.5% (d) Reduction of interest rates for public funds (e) Less dependence on External debt

Capital Market Dr. Tarun Das

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4.4 Progress of Fiscal Reforms Status in March 2005

Status in June 1991 High duty & tax rates Maximum rates Excise duty 110% Import duty 400% Income tax 54% Corporate taxes: Domestic COs. 49% and 54% Foreign COs. 65%

Duties & taxes reduced Maximum rates Excise duty 16% Cenvat + 16% SED Import duty 15% Income tax 30%+(10% sur

Corporate taxes: Domestic COs. 30% + 10% surcharge Foreign COs. 40%+2.5% surcharge

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4.5 Progress of Fiscal Reforms Status in March 2005

Status in June 1991 • • No service tax • No MinAlternativeTax • • • No transactions tax • • No tariff value • • Dividend tax on both individuals & Cos. • • Existence of gift tax • • Limited cases of taxholidays • • No fringe benefit tax

Service tax @10% MAT introduced Trans. tax @0.02% Tariff value introduced Dividend tax on only companies Gift tax abolished Tax holidays widened to many infrastructure FBT proposed

Capital Market Dr. Tarun Das

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4.6 Progress of Fiscal Reforms Status in March 2005

Status in June 1991 • No MRP linked excise duties

• No estimated income scheme for retail traders • No presumptive tax

• Concept of MRP introduced for consumer goods • Estimated income scheme introduced for retail traders. • Presumptive income tax scheme introduced • State level VAT to be introduced wef April 05

• No state level VAT

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4.7 Central Government Deficit (% of GDP) Year Revenue 1990-91 3.3 1991-92 2.5 1995-96 2.5 2000-01 4.1 2001-02 4.4 2002-03 4.4 2003-04 3.5 2004-05RE 2.7 2005-06BE 2.7

Fiscal 6.6 4.7 4.2 5.7 6.2 5.9 4.5 4.5 4.3

Capital Market Dr. Tarun Das

Primary 2.8 0.7 0.0 0.9 1.5 1.1 0.0 0.4 0.5 27

4.8 State Governments Deficit (% of GDP) Year Revenue 1990-91 0.9 1991-92 0.9 1995-96 0.7 2000-01 2.5 2001-02 2.6 2002-03 2.5 2003-04RE 2.6 2004-05BE 1.4

Fiscal 3.3 2.9 2.6 4.3 4.2 4.7 5.1 3.6

Capital Market Dr. Tarun Das

Primary 1.8 1.2 0.8 1.8 1.5 1.7 2.1 0.7 28

4.9 General Govt Deficit (% of GDP) Year Revenue 1990-91 4.2 1991-92 3.4 1995-96 3.2 2000-01 6.6 2001-02 5.9 2002-03 6.7 2003-04RE 6.1 2004-05BE 4.1

Fiscal 9.4 7.1 6.5 9.5 9.9 10.1 9.6 8.1

Capital Market Dr. Tarun Das

Primary 5.0 4.5 1.3 3.7 3.7 3.6 2.1 1.1 29

III Strengths, Challenges and Prospects

Capital Market Dr. Tarun Das

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5.1 Strengths of Indian Economy

 Fourth largest economy in terms of PPPadjusted GDP after USA, China and Japan  Largest pool of technical manpower  Largest English speaking population  Huge domestic market with second largest population, democracy, free press, independent judiciary  Rich natural resources, well established financial system, wide spread infrastructure, dynamic private sector Capital Market Dr. Tarun Das

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5.2 Constraints to Growth Decline in agriculture growth Growing infrastructure constraints Low real deposit rates Lack of investment demand Slowdown of economic reforms Weak regulatory institutions Outdated laws on business Inflexible Land and Labour markets High fiscal deficit Capital Market Dr. Tarun Das

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5.3 Present Constraints  High energy intensity High international prices of oil Still high interest rates High inflation Negative real deposit rates Crowding out private investment

Capital Market Dr. Tarun Das

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5.4 There is need for corporate bodies to strengthen systems  Management information systemfor (MIS)  Asset-Liability Management  Good governance  International best practices  Performance Audit  Assessment, monitoring and management of risk  Policy Audit Capital Market Dr. Tarun Das

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5.5 Concluding Remarks  As first generation reforms take root and second generation reforms unfold, India is emerging as a favourite destination for investment and a land of immense opportunity for all.  Carried to their logical ends, reforms would make India as one of the most dynamic economies of Asia by 2010.  India is “an economic miracle” waiting to happen.  All of us have to play a distinct role in that exciting process of development. Capital Market Dr. Tarun Das

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Thank you

Capital Market Dr. Tarun Das

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