Presentation on theme: "ECONMOMIC ENVIRONMENT OF BUSINESS. Economic environment-major constituents 1.Global environment 2.Domestic environment Global environment: This involves."— Presentation transcript:
Economic environment-major constituents 1.Global environment 2.Domestic environment Global environment: This involves scanning global scenario in terms of performance of U.S, European Union, China and Japanese economy. Major variables such as GDP growth, inflation rate, employment scenario are the determinants. Domestic environment Overall growth, growth in index of industrial production, fiscal and monetary policies, inflation (CPI and WPI) are the major determinants. Political developments and policies after the new dispensation also important.
Key variables- Major global economies-April 2014 GDP growth Industry growth Current a/c balance(%) Unemploy ment rate% 10 yr Govt bond Stock mkt index U.S1.54.3-18.104.22.1686986 Japan3.00.82.63.50.5515303 U.K3.02.2-4.06.62.986718 Euro area0.91.42.511.61.21045 BRICS Brazil1.9-3.1-3.74.912.0953635 Russia0.92.81.34.98.551404 India5.5 (Q1) 3.4-22.214.171.12426300(BSE) China126.96.36.199.13.92134 South Africa4.0-11.85.6-51402 Indonesia5.22.5-3.55.7-5025 China followed by India & Indonesia highest growth economies. Red indicates current a/c surplus economies. Euro Zone scores low on growth and unemployment, a source of worry for our corporates with export potential.
Global scenario-other factors Geo political factors such as tension in Ukraine, Iraq etc. This has the potential to adversely affect commodity prices like oil. Regulations in overseas jurisdictions also matter.-Australian Govt decision capping coal exports overseas-adversely affecting major importers like India. Factors like tapering of quantitative easing in the U.S, theior immigration policies etc.
Domestic economy-composition of GDP Particulars FY 13FY 14 12MQ1Q2Q3Q412M Agriculture forestry & fishing1.422.704.603.606.304.7 Mining and quarrying-2.16-2.80-0.40-1.60-0.40-1.4 Manufacturing1.14-1.201.00-1.90-1.400.7 Electricity, gas and water supply2.263.707.705.007.205.9 Construction1.112.804.300.600.701.6 Trade, hotels, transport5.073.904.004.303.903.0 Financing, insurance, real estate10.928.9010.0012.5012.4012.9 Community, social personal service5.319.404.207.003.305.6 Total4.474.404.804.704.604.7 Stagnant share of manufacturing in GDP is a key concern. FY 14 GDP is just a tad higher than FY 13. However, FY 15 growth expected at 5.5%.
Components of GDP-by expenditure Particulars FY 13FY 14FY 13FY 14 Share in GDP YOY growth Private consumption expenditure57.1 12.2612.35 Govt consumption expenditure11.8 15.2112.80 Gross fixed capital formation30.428.37.364.54 Exports24.024.812.8616.11 Imports30.728.414.203.79 The worrying aspect is the declining share of capital formation, both as a share in GDP and in growth terms. Govt expenditure alos declined, which is a reason for slow GDP growth. This also proves that fiscal deficit was managed by expenditure compression rather than revenue maximization. Low capital formation ot GDP shows policy paralysis
Our external environment ExportImportOil importNon oil import Trade deficit Jan-14 26.836.813.223.6-9.9 Feb-14 25.733.813.720.1-8.1 Mar-14 29.640.115.824.3-10.5 Apr-14 25.635.712.922.8-10.1 May-1428.039.214.524.8-11.2 Jun-1426.538.213.324.9-11.7 Trade deficit widening since April as non oil imports are widening. This is due to gradual relaxation of gold import restrictions. There are allegations that the relaxation has favored big units. Meanwhile CAD declined to 1.7% by March 2014. it may widen further.
WPI inflation volatile, but CPI declining WPICPI Jan-14 5.058.79 Feb-14 4.688.03 Mar-14 5.708.31 Apr-14 5.208.59 May-146.018.28 Jun-145.437.31 CPI is below the glide path suggested by Urjit patel Committee. However, the target is 6% by January 2016. Hence RBI has not cut repo rate during the recent Bi-Monthly policy. WPI, hopwever, remains volatile.
Exchange rate effect: USD/INR, FII flows and trade deficit ($ billion) MonthExportImportTrade balance Net FII flows USD/INR April’1324.2042.00-17.801.9954.38 June’1323.8036.00-12.20-7.5457.98 Sep’1327.7034.40-6.801.1563.75 Dec’1326.236.5-10.3 Mar’14 29.640.1 -10.561.5 June’1426.538.2-11.760.1 July’14 Exchange rates stabilized and INR appreciated since September due to various RBI measures-FCNR(B) swaps etc. FII flows (debt + equity) are also seen increasing since January 2014.
India Inc overseas borrowings ($billion)Jan’14Feb’14Mar14Apr’1 4 May’1 4 Automatic Route 188.8.131.52.70.5 Approval route 0.53.61.41.50.9 Total184.108.40.206.21.4 Avg. maturity (in yrs) 6.354.34.026.66.4 Wt. rate over 6M LIBOR 2.231.72.022.082.73 Approximately $ 14 billion worth ECBs accumulated during the first 2 months of the FY. This will raise our external vulnerability as measured by external debt. If not unhedged, ECBs pose a significant risk. Hedging costs are also high.
FX reserves and USD/INR As FX reserves increased, INR appreciated and has attained stability. However, RBI continues to mop up Dollars.
Measures announced by RBI to reverse Rupee slide RBI announced various measures. They include: 1.Deregulation of interest rates on NRE deposits. 2.Banks allowed to offer interest rates upto LIBOR/SWAP + 400 bps on FCNR(B) deposits till Jan 31, 2014. Also exempted from CRR/SLR. 3.FCNR(B) deposits of >3 yr maturity allowed to be swapped with RBI at fixed swap rate of 3.5% p.a with a lock in of one year. Swap with RBI only in USD. 4.Banks allowed to swap Tier 1 capital raised abroad with RBI at 1% below market rate for those with 12% CRAR. 5.Special USD swap window for oil marketing companies.
Other measures 1.Attempting to limit rupee trade in the NDF market. NDF (Non Deliverable Forward) is the market for Rupee trade offshore- active is in Singapore and Dubai. Arbitrage between domestic and offshore INR market leads to volatility. 2.Attempt to get Indian bonds listed in JP Morgan Bond indices. If India gets 10% weight in the index, we would be able to attract $ 25 billion and add to reserves. Addition to FX reserves is necessary to improve import cover (7 months) and to prevent further slide in Rupee.
Growth in overall bank credit & to industry MonthBank credit (Rs.Lac Cr) Bank credit growth YOY Credit to industry YOY growth April’1352.914.522.315.5 June’1354.213.719.917.3 Sep’1356.217.923.217.6 Dec’1357.614.524.214.1 Mar’14 60.114.3 25.213.1 June’1461.213.322.810.3 July’1461.313.7-- Credit to industry on a declining trend. Shows lack of demand due to slow growth. ECBs at lower cost is also one reason. IIP growth also substantiates this aspect.
Fund raising by corporates Public issueQIPsDebt issuesSensexGDP growth Amnt (Rs.Cr) NoAmnt (Rs.Cr) NoAmnt (Rs.Cr) No 2006-07249938549632500130729.6 2007-085221990257703810001156449.3 2008-09203421189215001100486.7 2009-104694144439686725003175288.6 2010-1146182572455047943110194458.9 2011-1223982361713113561120174046.7 2012-13343134410818141698220188364.5 2013-141523482940264238335223864.7 2014-15*5989164311137351025991- *till July The amount raised through public issues(FPOs, IPOs, etc), QIPs and debt issues has little correlation with domestic growth. In 2008-09, the fall was sharpest due to global crisis. The correlation with Sensex movements is much stronger except 2013-14 due to political uncertainty.
How Various policies by Govt and regulators impact business environment Retrospective taxation rules and GAAR provisions adversely affected business sentiment Rigid rules set by MoEF during previous dispensation contributed Restrictions on mining adversely impacted steel majors, NPAs in banking sector increased. Mining restrictions also led to higher coal imports. Standoff between Govt and RIL-BP combine ovr gas pricing leading to costly LNG imports. Infrastructure sector in general suffered from policy paralysis. In the parameter ‘ease of doing business’, India slipped in rankings. RBI measure to curb INR fall by restricting access to LAF window did not help. It adversely affected bank margins.
CDR cell (corporate debt restructuring cell) references NoIndustryNo of casesAgg.debt (Rs.Cr)Debt (%) 1Infrastructure265790623.01 2Iron & Steel524078316.21 3Textiles46219908.74 4Power16202538.00 5Ship buildiing4167926.67 6Construction10160626.38 7telecom5107854.29 8Pharma1192493.68 9NBFC569762.77 10Engineering756682.25 11Others994514718.01 Total281251611*100.00 * Net of cases withdrawn and successfully exited. Top 4 sectors account for more than 50% cases referred to CDR by amount. These are the stressed sectors and the most leveraged. They account for bulk of NPAs.
RBI surveys-what they reveal For the ensuing periods, expectations are on a high level.
Key takeaways from the survey Expectation Index (BEI), shows improvement for Q2:2014-15 (114.7) as compared to previous quarter (111.1) and the corresponding quarter of previous year (112.7). The improvement in BEI for the expectation quarter is due to optimism on overall business situation, production, order books, capacity utilization, imports, etc. Reduced pessimism on cost of finance, cost of raw material and the profit margin is another reason. For Q2:2014-15, the proportion of respondents who expected increase in production and at the same time decline in employment (indicating jobless growth) turns out to be around two per cent. This has been consistent throughout past ten rounds of the survey.
Assessment and expectation on capacity utilization paramete r OptionAssessment(in %)Expectation (in %) Capacity utilisation Q1 2013 -14 Q2 201 3-14 Q3 201 3-14 Q4 2013 -14 Q1 2014 -15 Q1 2013- 14 Q3 2013- 14 Q34 2013- 14 Q4 2014- 14 Q2 2014- 15 Increase22.620.7 24.922.327.526.827.223.829.5 No change 57.158.659.960.161.360.960.661.963.660.4 Decreas e 20.320.719.415.016.311.612.610.912.610.1 Net respons 2.30.01.39.96.015.914.216.311.219.4 Level of CU vis-à- vis last 4 yr avg Above normal 220.127.116.110.110.39.8 11.19.710.6 Normal71.070.769.772.271.876.275.073.475.476.6 Below normal 20.320.421.817.617.913.915.215.514.912.7 Net respons e -11.6- 11.5 - 13.3 -7.5-7.6-4.1-5.3-4.4-5.2-2.1 The assessment and expectation survey on capacity utilisation show a robust and upbeat picture of future. Also indicates possibility of better growth prospects.
Consumer confidence survey Current & Future expectation Index Sep 13 Dec 13Mar 14Jun 14 Current situation Index 88.3090.799.9100.4 Future expectation Index 90.5100.3114.9122.9 Current Situation Index (CSI) in June 2014 remained at the threshold level as observed in March 2014. However, there has been significant improvement in Future Expectations Index (FEI) due to increase in the positive perceptions on all selected parameters except prices. Overall the consumer confidence index reflects improvement in the positive perceptions during current round of survey.
Expectation on future economic conditions Compared with 1 year ago 1 year ahead Impro ve 22.422.729.525.529.934.847.656.7 Remai n same 18.423.331.334.631.518.104.22.168 Worse n 59.354.039.139.938.622.214.171.124 Net respon se -36.9-31.2-9.6- 14.4 -8.84.726.539.1 The net responses on economic outlook witnessed consistent increase over the last three rounds. However, net response on current economic condition remained negative and the gradual improvement observed till the last round got reversed. However, the 1 year ahead expectation is upbeat.
Perception on outlays for major expenditure (% responses) Sep 13Dec 13Mar 14Jun 14 Motor vehicles Yes13.114.421.117.9 Can’t say13.217.321.3920.6 No67.168.257.061.5 House Yes14.117.719.725.4 Can’t say16.615.418.719.2 No69.367.061.655.4 Durable goods Yes15.321.920.229.7 Can’t say18.418.627.321.8 No66.459.452.548.5 Gold Yes9.818.915.532.0 Can’t say12.215.415.717.8 No78.065.668.850.2
Trends in CPI and WPI inflation Compared to 1 year ago1 year ahead Increase89.093.483.887.185.487.880.884.0 Remain same 126.96.36.1991.110.911.116.314.5 Decrease188.8.131.52.184.108.40.206.5 Net response - 86.3 - 93.0 - 82.2 -85.4-81.6-86.6-77.9-82.4 Majority of respondents expect an increase in inflation. This has policy implications for sectors like FMCG and even banks. For instance, banks might have to increase deposit rates to attract funds.
Survey of professional forecasts of macro indicators 2014-152015-16 Rea GDP5.36.5 Agriculture2.13.2 Industry3.34.8 Services7.07.5 Exports7.39.3 Imports7.610.6 Current a/c balance-2.1-2.4 Gross capital formation3.33.2 Gross domestic savings31.032.0 FY 2015-16 looks like the real turnaround year.
Some global data Fed fund rate0.25% Fed stimulus$25 bn US unemployment6.30% ECB rate0.15% EU unemployment12.20% BoJ stimulus$bn670 China Q1 GDP7.40% Eurozone inflation0.50% EUR/USD1.34 Fed inflation target2% ECB infltio target2% BoJ inflation target2% Chinese PMI54.7 Eurozone PMI52.7 US non farm payroll (in lakhs)209000
Certain measures by Govt & regulators Norms eased for infrastructure financing-takeout financing SEBI to formulate rules for REITs and Infrastructure investment trusts Steps on to make it difficult for willful defaulters to access finance from other sources Green norms to be eased for enabling investments Infrastructure sector accorded special focus. Renewed push for GST by compensating states to the extent of Rs.25,000 Cr. Merger of PSBs and changes in board constitution.
GLOBAL ENVIRONEMNT OF BUSINESS One of the major developments in international trade is the development of General Agreement on Tariffs and Trade (GATT) and establishment of the World Trade Organisation (WTO). The (GATT) was a multilateral agreement regulating international trade. Its purpose was the substantial reduction of tariffs and other trade barriers and the elimination of preferences, on a reciprocal basis." It was negotiated during the UN Conference on Trade and Development and was the outcome of the failure to create International trade organisation(ITO). GATT was signed in 1947, took effect in 1948, and lasted until 1994; it was replaced by the World trade organisation in 1995
Why WTO replaced GATT? While the GATT functioned well enough, the leading members wished to replace it with a world-wide trade-regulating body like the WTO for a number of reasons. GATT rules applied to trade only in merchandise goods. In addition to goods, the WTO covers trade in services and intellectual property (through the agreement on Trade-related Aspects of Intellectual Property Rights-TRIPs). The WTO dispute settlement system is faster, more automatic, and thus much less susceptible to blockages, than the old GATT system.GATT was a set of rules, a multilateral agreement, with no institutional foundation. Moreover, the GATT was applied on a "provisional basis" even if, after more than forty years, governments chose to treat it as a permanent commitment while the WTO commitments are fully and functionally permanent. GATT was on a "provisional basis“ while the WTO commitments are fully and functionally permanent.
The Doha Round is the latest round of trade negotiations among the WTO membership. Its aim is to achieve major reform of the international trading system through the introduction of lower trade barriers and revised trade rules. The work programme covers about 20 areas of trade. The Round is also known semi-officially as the Doha Development Agenda as a fundamental objective is to improve the trading prospects of developing countries. The Round was officially launched at the WTO’s Fourth Ministerial Conference in Doha, Qatar, in November 2001. The Doha Ministerial Declaration provided the mandate for the negotiations, including on agriculture, services and an intellectual property topic, which began earlier. In Doha, ministers also approved a decision on how to address the problems developing countries face in implementing the current WTO agreements.
Main areas of negotiation in Doha Rounds are agriculture, Non Agricultural market Access (NAMA), services, intellectual property, trade and development, environment, trade facilitation, WTO rules and dispute settlement. Right now, the Bali declaration started on December 2013 is going on. India has taken a tough stance in trade facilitation agreement by linking it with agriculture where the issue is that of [public stockholding of food grains.
BIPAs Bilateral Investment Promotion and Protection Agreement (BIPA) is a bilateral treaty which is defined as an agreement between two countries for reciprocal encouragement, promotion and protection of investments in each other's territories by the companies based in either country (or State) The Government of India has, so far, signed BIPAs with 62 countries out of which 50 BIPAs have already come into force and the remaining agreements are in the process of being enforced. Features of BIPA The agreements apply to all investments made by the investors of each contracting party in the territory of the other contracting party in accordance with their laws and regulations. In particular, it includes the following
Movable and immovable property as well as other rights such as mortgages, liens or pledges; Shares in the stocks and debentures of a company and any other similar forms of participation in a company; Rights to money or to any performance under the contract having a financial value Intellectual property rights, goodwill, technical processes and know how in accordance with the relevant laws of the respective contracting party; Business concessions conferred by law or under contract, including concessions to search for and extract oil and other minerals. The agreement also contains elaborate provisions for resolution of disputes between the contracting parties
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