General Awareness Updates – December 2009

Economy & Business

Economy comes full circle: India buys IMF gold

More than 18 years after India pawned 67 tons of gold to tide over a balance of payments crisis, the Reserve Bank of India (RBI) has bought thrice that amount of gold from the International Monetary Fund (IMF) to diversify its assets.

The IMF announced the sale of 200 metric tons of gold to the RBI, saying it represented almost half of the total sales volume of 403.3 metric tons that was approved by the Fund’s Executive Board in September 2009.

Welcoming the purchase of 200 metric tons of gold by India’s RBI, IMF MD Dominique Strauss-Kahn said, “I strongly welcome this transaction with RBI. It is an important step toward achieving the objectives of the IMF’s limited gold sales programme, which are to help put the Fund’s finances on a sound long-term footing and enable us to step up much-needed concessional lending to the poorest countries.”

For India, the purchase, apart from signalling that its economy has come full circle, is a way of spreading its assets which are said to be currently over-weighted with foreign currency, mainly in the form of sovereign U.S. Treasury bonds. In other words, it is a hedge against a falling dollar.

India is the world’s largest private gold consumer, but the government’s holding of gold as an asset is modest. Even so, the latest purchase puts it at Number 10 among the list of top 10 gold-holders in the world.

Of India’s current foreign exchange reserves of nearly $285 billion, foreign currency assets account for more than 90% (U.S.$268.3 billion), followed by gold (U.S.$10.3 billion), IMF’s Special Drawing Rights (U.S.$5.2 billion) and a reserve position in the IMF of U.S.$1.59 billion.

While India’s current gold holdings, accounting for just 3.7% of assets, are said to be historically low, buying 200 tons in addition to the 358 tons it already holds is expected to bump up the gold reserves to more than 6%. The dash to gold is prompted by the unsteady dollar and countries such as China, Russia and Brazil have already gone this route.

Commenting on the purchase, Finance Minister Pranab Mukherjee said, “It doesn’t mean we don’t prefer the dollar any more or like gold any better”. Recalling the embarrassment of 1991, when India was forced to mortgage a part of its gold reserve, he said that when RBI recently asked whether it should invest in gold, he told the RBI it could do so to bolster the reserve. An RBI statement said the purchase of gold was made as part of the bank’s foreign exchange reserves management operations.

India’s gold trauma occurred in the summer of 1991, when faced with dwindling foreign exchange reserves and a possibility of a default on payments, the government hocked 47 tons of gold to the Bank of England and 20 tons of gold to the Union Bank of Switzerland to raise U.S. $600 million. The move helped tide over the balance of payment crisis, and also kick-started the reforms process.

India poised to grow faster, says Dr. Singh

India should achieve seven per cent growth next year with a good monsoon, and a target of eight to nine per cent growth in the medium term is eminently feasible, given that the country’s domestic savings rate is now as high as 35 per cent of GDP, said the Prime Minister of India, Dr. Manmohan Singh at the opening plenary of the prestigious India Economic Summit in New Delhi.

The Summit, organised jointly by the World Economic Forum (WEF) and the Confederation of Indian Industry (CII), is celebrating 25 years in India with the theme ‘India’s Next Generation of Growth’.

Speaking on ‘Resilient India: 25 years of Economic and Social Growth’, Dr. Singh said India is looking to the future with confidence and hope. With the focus strongly on rapid and inclusive growth, the Prime Minister said sectors like education and healthcare in particular, amongst a host of other challenges, required sustained attention and spending of six per cent and 1.5 to two per cent of GDP respectively.

He called for increased private investment and more public - private partnerships in both physical and social infrastructure in the country. India welcomed not only more FDI but also portfolio investment in equity in Indian companies, said Dr. Singh. He assured an investor-friendly environment in all sectors of the economy.

Acknowledging climate change as a major concern for the entire globe, Dr. Singh said India was committed to work with all like-minded nations on this, and hoped for a purposive and positive outcome at the Copenhagen Summit in December 2009.

India had an action plan in place with eight key missions, he said, while calling on industrialised nations to share their technologies and capabilities with the developing nations for a concerted response to global environmental sustainability.

Another concern for India was its ‘unstable neighbourhood’, said Dr. Singh, and reiterated his call for international collaboration and a united response to terror.

Noting that India had fared better than many other countries in the global economic crisis, the Prime Minister observed that the path to global recovery would be long and uncertain, though the worst seemed to be behind us.

Dr. Singh acknowledged that India, moving forward, needed reforms in governance, particularly at the state and local-bodies level. India’s financial sector too required a broad agenda of reform, covering long term debt markets, corporate bond markets, development of insurance and pension sectors, he added.

Dr. Klaus Schwab, Founder and Executive Chairman, WEF, pointed out that few countries have the growth potential of India. As India looks to its next generation of growth, critical issues like inclusive development, integration, infrastructure, power, climate change and sustainability would take centre stage at this year’s Summit which has drawn over 600 delegates from all over the world.

The next major challenge is to make India’s future growth inclusive, said Mr. Venu Srinivasan, President, CII, and Chairman and Managing Director, TVS Motor Company. He assured the Prime Minister that Indian industry was fully aligned to the nation’s inclusive goals.

Global Economy to expand by 3 per cent in 2010, says WEO

As the world economy comes out of a deep global recession, global activity is forecast to expand by about 3 per cent in 2010 after contracting by about 1 per cent in 2009, according to the International Monetary Fund (IMF) projections.

Though well below the rates achieved before the crisis, these projections in the October 2009 World Economic Outlook (WEO) reflect modest upward revisions to those in the July 2009 WEO Update.

Advanced economies are projected to expand sluggishly through much of 2010, with unemployment continuing to rise until later in the year, the WEO said with annual growth in 2010 projected to be about 1.25 per cent, following a contraction of 3.50 per cent in 2009.

The recovery of activity is more clearly evident on a fourth-quarter-over-fourth-quarter basis: from 2009:Q4 to 2010:Q4, real GDP is expected to rise by about 1.75 per cent, up from an expansion of about half per cent (annualised) during the second half of 2009 and a 2 per cent contraction in the first half, it said.

In emerging economies, with rebound driven by China, India, and a number of other emerging Asian economies, real GDP growth is forecast to reach almost 5 per cent in 2010, up from 1.75 per cent in 2009, the WEO said.

Other emerging economies too are staging modest recoveries, supported by policy stimulus and improving global trade and financial conditions, it said. Downside risks to growth are receding gradually but remain a concern.

The main short-term risk is that the recovery will stall, the IMF report said. Premature exit from accommodative monetary and fiscal policies too seems a significant risk because the policy-induced rebound might be mistaken for the beginning of a strong recovery in private demand.

In general, the fragile global economy still seems vulnerable to a range of shocks, including rising oil prices, a virulent return of H1N1 flu, geopolitical events, or resurgent protectionism, the WEO warned.

The recovery is expected to be slow, as financial systems remain impaired, support from public policies will gradually have to be withdrawn, and households in economies that suffered asset price busts will continue to rebuild savings while struggling with high unemployment, the report said.

The key policy requirements remain to restore financial sector health while maintaining supportive macroeconomic policies until the recovery is on a firm footing. However, policymakers need to begin preparing for an orderly unwinding of extraordinary levels of public intervention, the WEO said.

India will grow at 6.5%

The International Monetary Fund (IMF) has said India’s economic growth rate will accelerate to 6.5 per cent in 2010 on account of robust domestic demand and rising private investment.

“India’s growth is expected to accelerate to 6.5 per cent in 2010 from 5.33 per cent in 2009, on the back of strong domestic demand,” the IMF said in its regional economic outlook.

“In particular, the normalisation of financial conditions is expected to support a rebound of private investment, sustaining demand even as the fiscal stimulus wanes,” it added.

In its twice-yearly World Economic Outlook released in Istanbul earlier in November 2009, the IMF had pegged the economic growth rate at 6.4 per cent for next year. The World Economic Outlook had projected India’s growth at 5.4 per cent for 2009.

The RBI has retained economic growth projection at six per cent with upward bias for 2009-10 in its second Quarterly Review of Monetary Policy. Even Prime Minister Dr.Manmohan Singh had recently said that the Indian economy would grow by 6-6.5 per cent in the current fiscal despite being affected by the global financial crisis and drought in the country. On account of global financial meltdown, India’s economic growth slowed down to 6.7 per cent during 2008-09, from over 9 per cent recorded in the previous three years. In the first quarter of the current fiscal, Indian economy grew by 6.1 per cent.

The IMF said emerging Asia, in particular China and India are rebounding much more quickly that the western world. It added that the economic recovery in Asia is faster than the rest of the world and is projected to grow by 5.75 per cent during 2010.

“[Asia] is outpacing other parts of the world, with the “green shoots” of recovery appearing earlier and taking firmer roots than elsewhere,” the IMF said. IMF forecasts suggest Asia will grow by 5.75 per cent in 2010, higher than the 1.25 per cent predicted for the G-7 economies, but short of the 6.66 per cent average recorded for the region over the past decade.

The Union Government has introduced a new mechanism for monitoring the wholesale price movement, under which the inflation of primary articles including food grains, pulses and vegetables declined to 0.11 per cent during the week ending October 24. As per the new system, the weekly wholesale price index data would cover only primary articles and commodities in the broad group- fuel, power, light and lubricants. Besides, the monthly price index covering all the commodities for October was released on November 12, in accordance with the decision taken by the Cabinet Committee of Economic Affairs.

India and Sweden have signed two Memoranda of Understanding (MoUs) for enhancing cooperation in the fields of defence and environmental protection. The two MoUs were signed after talks between Prime Minister Dr. Manmohan Singh and his Swedish counterpart Fredrik Reinfeldt (left). Mr. Reinfeldt also strongly pitched for an agreement on a successor to the 1997 Kyoto Protocol at the Copenhagen talks in December and said the absence of a clear deal would mean lack of infrastructure to tackle climate change.

The two sides launched negotiations in 2007 for a free trade agreement (FTA), but progress has been hampered because of differences over intellectual property rights and EU efforts to link trade with climate and India’s social sector performance. An FTA between the EU and India could improve market access for goods and services, covering all trade except for public procurement, which India is reluctant to include in the pact. India is also concerned, among other things, about costly certificates for exporting fruit to the EU and conformity procedures for the EC mark.

India, which insists developed countries take deeper carbon emission cuts and fund developing nation’s climate actions, has opposed efforts, including by the EU, to remove the distinction between rich and poorer countries.

India ’s global trade in services and goods has risen phenomenally in the last five years to constitute over 54 per cent of its gross domestic product, reflecting a greater integration with the world economy.

In 2003-04, the country’s exports and imports in both services and merchandise in relation to its GDP was only 30.9 per cent. These have now crossed well over half the size of the Indian economy, according to a Finance Ministry paper on the state of the economy. “India’s greater integration with the world economy is reflected in the trade openness indicator.”

The merchandise trade as a percentage of India’s GDP increased from 23.7 per cent in 2003-04 to 41 per cent in 2008-09. “If the services trade is included, the indicator is higher at 54.2 per cent in 2008-09, reflecting greater degree of openness,” the paper said.

“In the last 4-5 years our exports and imports are growing phenomenally...increasing external trade reflects India’s greater openness. However, the ongoing global economic crisis has briefly interrupted the integration of India with the world economy.”

British Airways and Spain’s Iberia Airlines have created Europe’s third largest airline through a £4.4 billion all-share merger. Under the deal, BA shareholders will have a 55 per cent stake in the new combined company, while the remaining 45 per cent stake will be with shareholders of Iberia Airlines.

Industrial growth continued its upward march with factory production rising 9.1 per cent in September against 6 per cent in the same period last year while food inflation edged up to 13.68 per cent for the week ended October 31. This takes total growth to 6.5 per cent during the first half of this fiscal against five per cent a year ago, official data showed. All the three sectors – manufacturing, mining and electricity – showed growth in September over the year-ago period.

Output in manufacturing was up by 9.3 per cent in September against 6.2 per cent in the same month last year and that of mining was up by 8.6 per cent compared to 5.8 per cent. Electricity generation rose 7.9 per cent over 4.4 per cent in the comparable period. Consumer durables, which bore the brunt of the meltdown from October 2008 onwards, grew by 22.2 per cent in September even on a high base of 14.7 per cent a year ago.

Diversified firm Wipro Ltd has acquired personal care brand Yardley for U.S.$45.5 million (about Rs.214 crore). Yardley is a global brand in personal care category offering fragrance, body wash and skin care products. The company has signed an agreement with UK-based Lornamead Group, which owns the Yardley brand, for its business in Asia, the Middle East, Australasia and certain African markets.

The Prime Minister’s new 15 point programme for welfare of minorities will have three additional schemes including the National Rural Drinking Water Programme (NRDWP). The decision to include NRDWP, Urban Infrastructure Development Scheme for Small and Medium Towns (UIDSSMT) and Urban Infrastructure and Governance (UIG) has been taken by the Union Cabinet.

The meeting also approved inclusion of Mewat district in place of Gurgaon, which has been bifurcated, in Haryana as one of the minority concentration districts. The Cabinet also decided to include MPs and MLAs in the state and district level committees to monitor the implementation of the 15-point programme. This modification would also make them members in the state and district level committees for implementation of Multi-Sectoral Development Programme (MSDP).