The Reserve Bank of India released the June 2012 issue of its monthly Bulletin today. The June 2012 issue carries four special articles: (i) India’s Foreign Trade: 2011-12 (ii) Finances of State Governments - 2011-12: Highlights (iii) Report of the Working Group on Savings during the Twelfth Five-Year Plan (2012-13 to 2016-17) (iv) Finances of Non-Government Non-Financial Public Limited Companies: 2010. Highlights of the special articles are:

1. India’s Foreign Trade: 2011-12

This article reviews India’s merchandise trade performance during 2011-12 on the basis of data released by the Directorate General of Commercial Intelligence and Statistics (DGCI&S). It also analyses disaggregated commodity-wise and direction-wise details for the period 2011-12 (April-December).

Main Findings

• During 2011-12, exports stood at US$ 303.7 billion and recorded a growth of 20.9 per cent as compared with an increase of 40.5 per cent during the previous year. While the exports performed well during the first half of 2011-12, there was significant deceleration in the second half as global trading conditions deteriorated mainly reflecting weakening of world demand inter alia caused by euro zone crisis.

• During 2011-12, imports at US$ 488.6 billion registered a growth of 32.1 per cent as compared with 28.2 per cent in the preceding year. There has been a significant rise in import of petroleum, oil and lubricants (POL), gold and silver and machinery.

• Petroleum, oil and lubricants (POL) imports at US$ 155.6 billion in 2011-12 showed a higher growth of 46.9 per cent, largely reflecting increase in international crude oil prices, as compared with 21.6 per cent a year ago. The average price of Indian basket of crude oil during 2011-12 stood at US$ 111.6 per barrel, which was 31.1 per cent higher than US$ 85.1 per barrel during 2010-11.

• Gold and silver import at US$ 61.5 billion recorded a growth of 44.4 per cent during 2011-12 as compared with 43.5 per cent in 2010-11.

• Non-oil non-gold & silver imports during 2011-12 at US$ 271.5 billion recorded a growth of 22.7 per cent as compared with 29.0 per cent in the preceding year. Trade deficit during 2011-12 amounted to US$ 184.9 billion, as compared with US$ 118.7 billion during 2010-11.

• Trade deficit during 2011-12 amounted to US$ 184.9 billion, as compared with US$ 118.7 billion during 2010-11.

• The disaggregated data on commodity-wise merchandise exports indicate that during 2011-12 (April-December), engineering goods, petroleum products, chemicals, textiles, gems & jewellery and agricultural products contributed more than 88 per cent of India’s exports.

• While the share of exports to countries of European Union in India’s total merchandise exports declined marginally, the same of OPEC countries declined by around two percentage point during April-December 2011 over April-December 2010.

2. Finances of State Governments - 2011-12: Highlights

The article presents highlights of finances of State governments based on ‘State Finances: A Study of Budgets of 2011-12’ released on March 31, 2012.

Main Findings

• The State government budgets for 2011-12 proposed to carry forward the fiscal correction process by focusing more on expenditure control against the backdrop of roll back of fiscal stimulus measures and tapering off of the impact of the Sixth Pay Commission award. All States, barring one, amended their Fiscal Responsibility and Budget Management (FRBM) Acts/Rules, in line with the Thirteenth Finance Commission (ThFC) recommendation, with the aim of eliminating revenue deficits and bringing about graduated reductions in fiscal deficit and debt levels latest by 2014-15.

• The consolidated revenue account is budgeted to switch from deficit to surplus during 2011-12 after a gap of two years, driven primarily by a compression in revenue expenditure.

• The improvement in the revenue account is expected to not only provide the necessary resources for increased capital outlay but also enable a reduction in the GFD-GDP ratio by 0.5 percentage point in 2011-12(BE) over 2010-11(RE). The envisaged fiscal deficit-GSDP ratio for 2011-12 is, however, higher than the ThFC’s annual path, mainly on account of higher capital outlay.

• The consolidated debt-GDP ratio of the States declined in 2011-12 (BE) to 22.5 per cent from 25.5 per cent in 2009-10 which is below the ThFC recommended limit of 26.1 per cent for the year. This trend is poised to continue in the medium term with the amended FRBMs of the States setting out a graduated path of reduction in debt-GSDP ratios for the respective States.

• As the States embark upon the second phase of a rule-based fiscal consolidation path, care needs to be taken to address the structural rigidities in State finances, improve disclosures for remaining alert on qualitative aspects of fiscal correction, move towards the proposed restructured public expenditure system for better management of outlays for effective outcomes, rationalise centrally sponsored schemes for improving their effectiveness and address issues relating to financial losses of the State Power Utilities.

• An analysis of the Role of the Reserve Bank in State Finances traces the responsibilities of the Reserve Bank which have, over the years, increased beyond its mandated roles of serving as a banker and debt manager of the State governments. As a banker to the States, the Reserve Bank extends banking services to all the States, except Sikkim. It also modulates ways and means (WMA) limits and overdraft (OD) regulations to meet the short-term resource requirements of the States consistent with its objective of maintaining monetary stability. As a debt manager, the Reserve Bank created the enabling conditions for the States to transit to a full-fledged auction system for market borrowings. Apart from these traditional roles, the Reserve Bank has also been playing an advisory role and has been instrumental in initiating rule-based medium-term fiscal consolidation of the States, besides advising them on policy issues emerging from time to time to ensure fiscal sustainability.

3. Report of the Working Group on Savings during the Twelfth Five-Year Plan

The Planning Commission constituted a Working Group on Savings during the Twelfth Five-Year Plan (Chairman: Dr. Subir Gokarn, Deputy Governor, RBI) in March 2011, to estimate the various components of domestic and foreign savings as also the resources available for private investment including infrastructure and the likely flows for Micro, Small and Medium Enterprises (MSME) and Agriculture. The Working Group submitted its Report on April 24, 2012.

Main Findings

• The Working Group made savings projections under three scenarios viz., real GDP growth of 8.5 per cent and inflation of 5.0 per cent (Scenario I); real GDP growth of 9.0 per cent and inflation of 5.0 per cent (Scenario II); and real GDP growth of 8.0 per cent and inflation of 6.0 per cent over the Twelfth Plan (Scenario III).

• The projected average rate of Gross Domestic Savings (GDS) during the Twelfth Plan ranges between 36.2 per cent (Scenario III) and 37.0 per cent (Scenario II). In all the three scenarios, there is the assumption of a turnaround in public sector saving which is expected to contribute significantly to the increase in the GDS rate over the Twelfth Plan.

• The average estimated Current Account Deficit (CAD) ranges between 2.7 per cent (Scenario III) and 3.9 per cent (Scenario II) of GDP during the Twelfth Plan. Net capital flows in scenarios I and III, besides financing the CAD, would moderately add to the reserves. CAD in the range of 2.7 to 3.0 per cent of GDP is considered to be sustainable.

• The Working Group acknowledged the following risks to the savings projections, viz., (i) The household savings rate could remain stagnant or even decline as financial liabilities increase with greater retail credit penetration; (ii) The projected increase in the public sector savings rate is contingent upon the continuance of the fiscal consolidation process; (iii) In respect of the private corporate sector, the sustainability of at least the current levels of efficiency would be important; and (iv) Large shocks to growth and inflation could alter the savings scenario during the Twelfth Plan.

• The Working Group also estimated the flow of institutional credit to the agricultural sector at ` 42,080 billion during the Twelfth Plan. Credit supply to the MSME sector is projected between ` 76,490 billion and ` 85,710 billion. The flow of private resources for infrastructure is projected at ` 17,940 billion during the Twelfth Plan which would increase to ` 26,670 billion, subject to the implementation of select measures; in the latter case, total (budgetary and private) projected flow of resources works out to around USD one trillion, assuming USD/INR exchange rate of 50.

4. Finances of Non-Government Non-Financial Public Limited Companies: 2010-11

The article presents the financial performance of select 3,485 non-government non-financial public limited companies during the financial year 2010-11, based on their audited annual accounts.

Main Findings

• The aggregate results of the select companies have shown that the growth in sales and value of production improved in 2010-11 as compared with those in 2009-10.

• However, growth in various measures of profit, viz., PBDIT, gross profits (PBIT) and profits after tax moderated in 2010-11 mainly on account of relatively higher growth in manufacturing expenses than in sales.

• The profitability ratios such as profit margin and return on equity contracted in 2010-11as compared with that in 2009-10.

• The share of external sources of funds (i.e., other than own sources) in the total sources of funds during the year increased mainly due to significant increase in incremental borrowing and trade dues and other current liabilities during 2010-11.Capital formation in uses of funds in 2010-11 was lower than in 2009-10.

• However, corporate leverage as measured by the debt to equity ratio (debt as percentage of equity) declined gradually in the three year study period from 2008-09 to 2010-11.

Ajit Prasad
Assistant General Manager

 

Fiscal consolidation in state budgets emphasised to restore revenue balances and reduce debt while trade and savings present macro risks. The Bulletin presents four analyses: merchandise trade in 2011-12 showing import-led growth, export deceleration and a widening trade deficit; State finances for 2011-12 emphasising expenditure-led fiscal consolidation, amended FRBM paths, a budgeted revenue surplus and declining state debt-GSDP ratios alongside the Reserve Bank's banker, debt-manager and advisory roles; Working Group savings projections for the Twelfth Plan under three macro scenarios with associated CAD and credit flow estimates and risks; and 2010-11 financial results for select public companies showing higher sales but moderated profits and increased external funding.