Unlocking India's potential

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Unlocking India’s potentialUtilities, industry and infrastructure

November 2015

An Economist Intelligence Unit report commissioned by

Unlocking India’s potential: Utilities, industry and infrastructure

© The Economist Intelligence Unit Limited 2015 1

Contents

Executive summary 2

Chapter 1: Enhancing industrial performance 3

Chapter 2: Powering India 9

Chapter 3: The urban infrastructure challenge 14

Chapter 4: Policy and economic outlook 18

Chapter 5: Data and charts 23

Chapters 4 and 5 are taken from The Economist Intelligence Unit’s India Country Report dated 29 September 2015. Chapters 1-3 are analytical reports on manufacturing, energy and infrastructure written by The Economist Intelligence Unit and commissioned by ABB India. All views expressed in this report are those of The Economist Intelligence Unit and not necessarily of ABB India.


© The Economist Intelligence Unit Limited 20152

Executive summary

Following the passage of liberalisation reforms in 1991, India’s economy has quadrupled in size, expanding by over 7% a year on average. The country is now the world’s third-largest economy in purchasing power parity (PPP) terms, having surpassed Japan several years ago. (India is ninth using market exchange rates). The Economist Intelligence Unit (EIU) expects growth to continue at over 7% a year between 2015 and 2018, and to exceed 8.5% in 2019.

India has the potential for greater growth, and a key driver of this would be expanding its industrial base. To this end, the government introduced the “Make in India” campaign, a policy to attract investment and build the country into a manufacturing hub. Almost every country that has transitioned from low-income to middle- or upper-income status has followed the same route: an agricultural revolution, followed by a move into labour-intensive manufacturing fuelled by rural-urban migration, followed by a move into higher value-added services and more capital-intensive manufacturing as the economy develops. China is the great exemplar of this. India may not, however, be able to tread the same path, both because new technologies may make basic manufacturing less labour-intensive, and because it faces competition from other populous Asian (and, in decades to come, African) countries with large pools of surplus rural labour. India will need to engage actively with trends such as high-quality manufacturing, smart manufacturing practices, automation and the Internet of Things in order for the “Make in India” strategy to be a success.

Any increase in manufacturing will also create a surge in energy demand, as will a growing, power-hungry middle class that spends more on consumer durables. This will create a greater strain on energy supplies in a country with already frequent power cuts. The government has invested in more renewable energy, and there are green shoots of success in solar and wind energy. The challenge, however, comes in scaling these solutions, especially in remote areas. Local and global environmental imperatives mean that the pursuit of coal is, at best, a medium-term solution. Given India’s constraints, a combination of new power sources and better transmission and distribution will be needed.

And as Indians grow richer and move into cities, the strain on infrastructure will exacerbate. The government has announced urban development plans to grow smart cities, focusing on energy efficiency and sustainability. Such infrastructure developments have the potential not just to improve quality of life, but also to improve India’s standing as a preferred manufacturing location. Nonetheless, the scale of the problem is vast, which makes infrastructure development immensely challenging.

In this report, The EIU presents an overview of India’s economic and industrial outlook, highlighting both opportunities and challenges with a focus on its manufacturing sector, its energy mix and its infrastructure needs.



Chapter 1: Enhancing industrial performance

In brief

n The ‘Make in India’ campaign aims to build a vibrant manufacturing sector in India. If successful, this would provide growth and jobs for its youth, although policy divergence between states means the impact will be uneven across the country.

n High quality manufacturing, smart manufacturing practices, automation and new technologies, such as Internet of Things, are important as India builds a successful manufacturing base; that India is a relative late starter in industrialisation means that these can be incorporated as the capital stock grows, rather than requiring retro-fitting.

n Government attention to the regulatory and enabling environment will be required to achieve high levels of manufacturing productivity growth.

The government’s “Make in India” campaign aims to tackle a key challenge facing India — its continued weakness in manufacturing output. The country’s manufacturing sector has barely grown as a proportion of the overall economy: its share of GDP has risen from 16.9% of GDP in 1996 to an expected 17.0% in 2015. However, the shift in labour-intensive manufacturing away from China (driven by rising average wages in Chinese coastal regions) presents India with an opportunity to transition its economy to a higher income level.

Focusing on states will yield rewardsUnder the “Make in India” campaign, the government envisages increasing manufacturing output to 25% of GDP and creating 100m jobs by 2022. Such an economic transformation would be highly beneficial for employment, both because manufacturing jobs tend to be higher paid than average, and because exports can be used to rapidly scale up the number of jobs created — a development that is particularly crucial in light of India’s abundant and young workforce. In addition, manufacturing is often better able to provide workers with low to moderate skills with a path towards the middle class. This is particularly relevant in India, where the dominant services sector typically provides workers with employment in low-productivity, low-wage activities.

However, the manufacturing sector does require basic levels of literacy and numeracy, and the absence of adequately skilled labour could prove a major constraint to such plans. While the country hosts some of the world’s leading academic institutions, 26% of its people are illiterate (according to the most recent census in 2011). If the recent pace of improvement in literacy is maintained, it will take India more than two decades to achieve full literacy. Employment, even in light manufacturing, often requires basic literacy and numeracy skills, and many illiterate people will therefore be forced to continue working in the informal sector. Furthermore, literacy and workforce participation rates are much lower among females than males. As a consequence, companies may struggle to benefit from the scale effects experienced in China, where an abundant workforce offers the flexibility to significantly increase production, almost on demand. China also benefitted from a higher average level of education when its manufacturing sector emerged into the global scene with World Trade Organisation membership in 2001.



A closer look at state-level data reveals that companies hoping to attract workers would benefit from targeting particular states. The three key states with the highest level of manufacturing activity—Maharashtra, Gujarat and Tamil Nadu—also have above-average levels of literacy and offer a combined population of approximately 245m people. Nonetheless, literacy levels even in these states are well below those in China at the time its manufacturing sector took-off. Consequently, companies need not necessarily wait for government plans to upgrade the skills of the country’s entire workforce (for example, through vocational training) to reap the benefits of the “Make in India” campaign. Instead, manufacturers can structure their strategies on a state-by-state basis. This diversification of opportunities is further exemplified in the policy arena.

Policy divergence will be a key themeWhile implementation of the “Make in India” campaign will improve the business environment and increase opportunities for manufacturers, it is likely that it will prove too ambitious, both in terms of scale and timing. Political gridlock will make timely implementation of key land and labour policy reforms difficult, and land reform, in particular, will remain highly controversial. The government has, for now, dropped its plan to ease the process for obtaining land using national legislation. The EIU does not expect the upper house of India to pass comprehensive land and labour reform until upcoming state elections change its composition. The EIU therefore expects significant national reforms to be passed after 2018, when the government, which already holds a comfortable majority in the lower house, is expected to gain control of the upper house. Many seats in the upper chamber will be reallocated in that year.

In the short term, India’s business environment is set to improve thanks to the “competitive federalism” initiative, which calls on individual states to pass reform. As each of India’s 29 states has its own policies on taxation, the environment, labour and land acquisition, we expect policy divergence to be a key trend over the coming years. Not all states will pursue reforms with the same zest and vigour, but state-level competition over investment will spur significant improvements in the business environment. While integrated, nation-wide improvements to the business environment would be more effective—allowing India to attract manufacturers with the lure of economies of scale from its potentially huge domestic market—state-by-state improvements are the next best solution.

India and China: Manufacturing sector, labour force and literacy rate

Country/stateManufacturing as a %

of GDP Population (m)Male literacy rate (%),

2011Female literacy rate

(%), 2011

India 19.6 1,210.9 82.1 65.5

Maharashtra 26.5 112.3 89.8 75.5

Gujarat 32.3 60.4 87.2 70.7

Tamil Nadu 26.4 72.1 86.8 73.9

Uttar Pradesh 16.1 199.8 79.2 59.3

Karnataka 20.6 61.1 82.0 68.1

Rajasthan 22.1 68.5 80.5 52.7

China (2001) 31.0 1,271.9 95.1 86.5

Source: The Economist Intelligence Unit. India Census 2011. World Bank.



One positive sign is that the government, in cooperation with the World Bank, released a report on the implementation of reforms across India’s states in September 2015. Overall, the states of Gujarat, Andhra Pradesh and Jharkhand made the strongest progress in implementing reforms. In the future, The EIU expects inequality between states to widen, but the focus on states remains a positive and welcome step as it will reward reformers.

Automation solutions offer the potential to enhance manufacturing productivityAccording to data from World Bank, on average, productivity in India’s manufacturing sector is lower than in other emerging markets such as China, Brazil, Turkey or Indonesia. Indeed, according to the 2012 Competitive Industrial Performance Index of the United Nations Industrial Development Organization, India was ranked 44th out of more than 140 countries, behind competitors such as Thailand and Indonesia. This underperformance is due mostly to the large number of small firms in India, which do not benefit from economies of scale, resulting in below-average productivity levels.

India is also only ranked 56th out of 82 countries in the Business Environment Ranking (2015-19) of The EIU, placing it on a par with Indonesia (57th) but behind China (53rd) and Malaysia (19th). Reforms of stringent labour legislation (which often makes it economically unviable for companies to expand) will be crucial in enhancing total factor productivity. For instance, employment protection legislation dictates that companies with more than 100 workers require government approval to dismiss workers. This incentivises firms to remain small, as they rightly fear that they will not be able to shed workers in the event of a future downturn. Minimising wage complexity will also be a key issue as there are more than 1,000 different minimum wages in India. Again, this means that India cannot fully exploit the advantages associated with offering economies of scale.

Over the past decades, productivity gains in India’s leading manufacturing and industrial subsectors (such as oil refining) were driven largely by increased capital intensity. In contrast, growth in total

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Source: World Input Output Database. Worldbank WDI database.

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factor productivity has been sluggish, with only a few exceptions, such as telecommunications or chemicals (according to India’s Annual Survey of Industries). By increasingly using automation solutions, however, manufacturers can permanently enhance productivity and ensure consistency in quality standards. This is crucial to maintaining profit margins as many manufacturing subsectors have become increasingly commoditised. Idle time can be another challenging issue in factories, but by adopting integrated automation processes, companies can reduce bottlenecks and improve efficiency within the overall value chain. Automation does pose a challenge for job creation in India, however, given that the labour intensity of manufacturing may be lower in the 2020s than it was in the 1990s, when China’s manufacturing boom began.

Automation is already being used by leading manufacturers in India. An automotive company, Volkswagen, has 114 robots and machines interconnected in its plant in Pune, India. An electronics manufacturer, Panasonic, is also investing US$200m in a large manufacturing facility in Haryana, where processes will be highly automated.

Smart manufacturing and the Internet of Things To succeed as a global manufacturing hub, India also has to be a leader in innovation. The “Make in India” policy thus has a strong focus on smart manufacturing, encouraging automation and state-of-the-art machinery to enhance productivity, from product development through to manufacturing and delivery.

The Internet of Things (IoT)—an environment in which objects communicate with each other through the Internet and without human-human or human-computer interaction—can be critical in such automation. Modi’s plan for high-quality manufacturing (his slogan is “zero defect, zero effect”) will require more IoT technologies, which are already increasingly in use in traditional economic sectors such as agriculture, transportation and healthcare. The government’s draft IoT policy aims to

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make the adoption of such technologies more attractive by reducing duties by up to 100% for imports of raw materials required in the production of IoT products.

Energy efficiency improvements will reduce costsIndia imports over 75% of its oil requirements and faces persistent shortfalls in power supply, both of which make energy efficiency important in manufacturing. Subject to the vagaries of global energy prices, this can negatively affect profitability at the firm level.

As India upgrades its manufacturing base, efficient energy systems will therefore play a critical role in keeping the sector globally competitive. According to the International Energy Agency (IEA), the creation of one unit of value added in the manufacturing sector, for example, requires 4 to 22 times as much final energy input than the services sector. The “Make in India” campaign will need to utilise the substantial energy savings potential in India if it is to be cost-competitive. Manufacturing activities already account for one third of the world’s total final energy demand and, with continued growth, industrial demand for energy is expected to rise rapidly, highlighting the importance of energy efficiency.

India will benefit from being a late starter in this area as this provides an opportunity to adopt the latest energy-efficient technologies to support its ambitions in improving industrial performance. Such investments often pay for themselves quickly. In Pepsi’s bottling plant in India, for example, introducing energy-efficient technologies led to savings of 10-20% in the plant’s entire electricity bill. Within two years, the costs of investment were recovered through these savings. Access to finance, especially for small and medium-sized firms, will be critical to unlocking the upfront capital expenditure required to adopt these technologies.

Energy-efficient machinery has a higher fixed cost and lower operating cost, making it difficult for credit-constrained small and medium enterprises (SMEs) to finance. In Singapore, the government ensured generous support for SMEs when it announced plans to enhance industrial productivity. Singapore’s SME Energy Efficiency initiative, which was launched in July 2013, targets four industries that were identified as having the largest potential for energy savings. The three-step government support includes energy audits, energy monitoring systems and energy efficiency project implementation. The “Make in India” campaign also aims to encourage growth in SME firms, seen as important in generating employment, and government support will play an important role in helping these cash-strapped firms to finance and implement projects designed to increase energy efficiency.

• 5% interest in reimbursement & 10% capital subsidy for the production of equipment/machines/devices for controlling pollution, reducing energy consumption and conserving water.

• A grant of 25% to SMEs for expenditure incurred on audit subject to a maximum of INR 100,000.

• A 10% one-time capital subsidy for units practising zero water discharge.

• A rebate on water cess for setting up wastewater recycling facilities.

• Incentives for renewable energy under the existing schemes.

• An incentive of INR 200,000 for all buildings that obtain a green rating under the IGBC/LEED or GRIHA systems.

Source: www.makeinindia.com

Incentives for green technology and practices



India set to perform wellIndian citizens will benefit from a more productive and efficient manufacturing sector through better employment opportunities and a reduced environmental burden. A low-productivity manufacturing sector has, for too long, kept Indian companies’ exposure to world markets far below potential. This is set to change. Solutions and opportunities are as abundant as challenges, but continued government support will be required to further improve the business environment, both at the national and the state level. Improvements will not be uniform across India, and certain states and subsectors will outpace others. This is not necessarily a negative development as economic growth, particularly in fast-developing nations, is often spread unevenly. It does, however, mean that the regulatory environment is critical. Manufacturers that opt for a careful and strategic approach, taking into account sectoral and geographical differences, could reap significant rewards.



Chapter 2: Powering India

In brief

n Economic growth will require more energy in a country that is already power-strapped.

n The government has invested in more renewable energy, especially wind and solar energy, but there is still a large scope for further expansion of renewables.

n Grid expansion using microgrids can decentralise electricity supply, minimise risk and enhance overall resilience of the electricity system.

Frequent power cuts have plagued India for years and will remain a key challenge, both for the government (which needs to fund and incentivise new investment) and for companies (which need to adapt to an unreliable power supply). An estimated 400m citizens lack connection to the national grid, and 50m manufacturing workers toil in factories without reliable electricity. In Maharashtra, for example, the System Average Interruption Duration Index (average outage for each customer served) was, on average, 76.7min per month in 2011, 85.3min in 2012 and 82.4m in 2013. The government has set out the ambitious target of providing 24-hour residential power to all of India’s citizens by 2022. While this will be difficult to achieve, particularly in northern regions where geography makes building of infrastructure a challenge, providing electricity to more households will positively contribute to overall growth.

The EIU forecasts that electricity consumption in India will increase by an annual average of 5.8% between 2015 and 2020. Demand will be driven by robust economic growth, which will continue to raise incomes and will lead to greater demand for consumer durables. India’s vast potential for energy efficiency and its deficiencies in supply mean that electricity demand will grow at a slower rate than GDP. Further gains in efficiency would be possible if the generous subsidy regime, which already places significant strains on power infrastructure, is wound back.

Theft, losses and grid solutionsGenerally, existing sources of power are mired in legal, structural and pricing issues, which vary widely across the country. Government figures show that the electricity deficit at peak times is much lower in certain states than in others. For instance, the deficit stands at just 0.8% of peak demand in Gujarat but is 5.2% in Maharashtra. Across India, the average deficit at peak times is 4.7%. Transmission and distribution losses mean that rolling blackouts and power grid failures will persist, even in the more successful states. Power transmission and commercial losses were estimated to be 31% in 2010/11, according to the International Energy Agency. This figure is much higher than in comparable emerging economies such as Indonesia, where only around 10% of the power that is generated never reaches the consumer.

Companies operating in the electricity sector would, however, benefit from implementation of the Phase 2 of the government’s financial restructuring plan (FRP) government plans, which could be issued in late 2015. Distribution companies (discoms) face high debt burdens as they have regularly



incurred losses by providing power at subsided rates to keep electricity affordable. Under the FRP, some state governments — including Tamil Nadu, Bihar and Uttar Pradesh — will take over the debt of power distribution companies and convert the debt into state government-backed bonds. This, in turn, will free up capital at distribution companies, allowing them to expand and invest in new capacity. However, the state and national government must accept that, overall, higher retail prices for electricity are necessary to sustainably drive further investment.

A key criticism of energy policy in India is that capacity expansion has not been accompanied by grid expansion and the upgrading of existing power plants, resulting in imbalances that prevent optimal operation of the network. By using micro-grids and renewable energy sources, the government could decentralise electricity supply, minimising risks while also enhancing the overall resilience of the electricity system. For instance, in the absence of connections to national or regional grids, solar power plants could rely on mobile towers from micro-grids in rural areas. This aligns with the government’s goal of bringing a reliable and constant electricity supply to India’s thousands of villages. These villages are often located in highly remote areas, which makes connections to larger grids cost-prohibitive and logistically very challenging.

Importantly, an emphasis on micro-grids would also help India to develop domestic capabilities in the micro-grids sector, allowing it to expand its presence in a high-value, high-technology manufacturing sector. With approximately 200 companies already engaged in this field, there is strong growth potential. However, these companies often lack a robust revenue model and struggle to attract the necessary capital to expand operations at a faster rate. One solution would be to place micro-grids close to mobile towers, which use a lot of energy, thereby establishing a revenue stream for energy companies while also enhancing communications in rural areas.

Of course, some challenges remain. For example, locals sometimes view such grids with suspicion and prefer subsidised conventional power, which makes renewable energy a potential political issue. The expensive components of micro-grids also tend to get stolen. Despite these challenges, however, micro-grids (in combination with renewable energy sources) have the potential to address India’s energy needs in a sustainable manner, particularly if awareness campaigns are conducted to communicate the benefits of these grids.

In 2013, the Power Grid Corporation of India integrated five regional grids into a single national grid, with more than 70,000 miles of transmission lines across the country. While these lines reportedly reach within a few miles of most of the population, transmission between regions remains unstable. Regulatory intervention could exploit communications technology to analyse user information and allow smart grids to respond to changes in local consumption patterns. Energy management through smart meters will be fruitful and important, particularly in combination with the smart cities and digital India initiatives.

Coal to remain the main source of energy…India will continue to rely on coal-powered thermal plants as its main source of energy in the long term, and in 2030, coal will account for over 50% of total energy supply. Although the country has the fifth-largest reserves of coal in the world, domestic production falls short of demand and coal imports



are required to bridge the gap. Going forward, increasing domestic coal production and developing other energy sources will be critical and inevitable. The government has plans to halve coal imports by 2020 and eliminate them by 2030, although this may be ambitious if there is not a marked increase in the rate of domestic supply growth. Mindful of this challenge, the government has granted over 40 mining licenses and expects a new coal mine to open every month until 2020, which could double domestic production by 2020, with 1.5bn tonnes of coal added every year between 2020 and 2030. While this might provide energy in the immediate term, it could leave India with an expensive stock of stranded assets if global climate change regulation forces an early move away from coal.

… but renewables will expand rapidlyIn order to sustainably develop the power sector, India plans to diversify its energy mix. Although it is starting from a relatively low base, the share of renewables within the energy sector is expected to rise significantly from 7.3% in 2014/15 to 18.9% in 2021/22, based on Ministry of New and Renewable Energy (MNRE) figures. India has also pledged that 40% of its electricity generation will be sourced from non-fossil-fuel energy resources by 2030. Developing more power from renewables will bring India closer to achieving another target: reducing the emission intensity of its GDP by around 35% by 2030. This is particularly important given that international regulations regarding greenhouse gas emissions are likely to become tougher throughout the 2020s, when India’s power needs will be growing rapidly.

The MNRE announced a renewable energy target of 175GW in the 13th Plan Period (2017-2022). The energy department’s goals include generating 100GW of solar power and an energy infrastructure investment of US$100bn, along with an additional investment of US$50bn to upgrade the strained grids. The Indian government also plans to increase wind generation to 15GW by 2017 in its 12th Plan Period (2012-17), and to 60GW by 2022. If investment sentiment remains positive, India could come close to reaching this target. According to the minister for power, Piyush Goyal, renewables currently contribute 35GW, and investors have committed to fund the generation of another 276GW by mid-2022. This may be optimistic, but it suggests that there is a willingness to invest in India’s renewable energy sector if the conditions are right.

More investment in renewables necessaryRenewable energy investment is much lower in India than in China, even though both countries have abundant renewable energy resources. According to a United Nations Environment Programme (UNEP) report, China attracted US$81bn (excluding research and development) in renewable energy investment in 2014, while India attracted US$7bn. In the renewables sector, opportunities for India lie primarily in solar and wind power. Indeed, India’s solar power sector has already attracted significant foreign interest and investment. Japan’s Softbank, for example, announced an investment of US$20bn in solar projects in India, and the German state committed to an investment of US$1.5bn in solar projects in India.

The falling cost of solar power globally is also good news for the country. In sunny parts of India that are remote from the grid, solar power is increasingly able to compete with the diesel generators that



currently provide much of the local power. Solar power could experience strong growth in these areas given that it is expected to reach grid parity by 2018 — four years earlier than the MNRE previously thought. There have also been city-level innovations. Bangalore, for example, has mandated that solar water heaters must be installed before electricity connections are provided. Such schemes are small, however, and need to be scaled to realise their full potential.

There are a number of challenges facing the solar power sector. First, India has to import most of its solar power equipment because international producers are more cost-competitive than local producers. This could create significant challenges for the government when large tenders for solar parks are awarded, prompting local producers to complain about unfair competition from abroad. Second, local distribution networks will have to be upgraded to balance power loads and ensure supply even on cloudy days and at night. While this could present a major challenge, utilities can address this problem by focusing on grid connections, grid control and energy storage options. Dynamic pricing also offers a way to balance power loads. Third, new bidders for India’s solar power projects have sometimes bid below cost, raising concerns about the financial sustainability of these projects. Many rely on the promise of government subsidies to bridge the cost gap, but in a country where the government has struggled with containing its fiscal deficit, this expectation is impractical.

At present, big solar power plants are concentrated in key states like Gujarat, Rajasthan and Karnataka. Such concentration means that aggressive state-level policy and initiatives will be required for a broader expansion of solar power. Gujarat, for example, has implemented an aggressive solar policy and has succeeded in attracting large-scale investments. It also has a solar park, which is home to all required infrastructure and has the capacity to handle multiple projects. Even as India’s solar villages and solar airports make headlines (Dharnai in Bihar became India’s first completely solar village in July 2014, and the Cochin International Airport became the world’s first solar airport in August 2015), challenges to the success of the National Solar Mission, under which most of India’s solar programmes have been undertaken, remain significant.

India also has opportunities in the wind power sector and already has the world’s fifth-largest wind power capacity. Further expansion will not be straightforward, however, as many of the windiest sites in India have already been taken by early adopters, and wind speeds in India tend to be lower than in western Europe or the United States. To address these challenges, India is innovating low-wind-speed turbine technologies and passing land use regulations that allow the dual use of agricultural land for wind power generation. Such initiatives are expected to lead to the continued growth of wind power.

According to credit rating agency CRISIL’s forecasts, doubling capacity in the wind and solar power sectors requires an investment of Rs3trn (US$46.2bn ) over the next five years. This poses a financing challenge, particularly as banks prefer to lend mostly to government-run conventional power companies. As such, state and federal governments will have to play a significant role in expanding the reach of renewables, either through direct funding or schemes to leverage private sector investment. India could be set to witness the most rapid expansion in solar power capacity ever seen; in 2013, it was only tapping 1% of its potential capacity.



Known challenges need to be tackledThe key issues facing the energy sector have been well known for years, and both the government and the private sector are taking positive steps to address them. Nonetheless, given the myriad constraints, a combination of new power sources and improved transmission mechanisms will be necessary to address the country’s severe and chronic power problems. It is also imperative to address the indebtedness of discoms, and to develop a uniform, transparent and sustainable pricing policy that can support a nascent and buoyant renewable energy sector. If India can overcome these issues, renewables may provide an opportunity to gradually reduce coal’s share in India’s energy mix over the coming 30 years, and to build a sustainable and efficient energy future.



Chapter 3: The urban infrastructure challenge

In brief

n Continued growth and urbanisation will put more strain on India’s infrastructure.

n Government plans to develop smart cities with a focus on energy efficiency and sustainability will improve city dwellers’ quality of life and support overall economic growth, but effective implementation will be challenging; nonetheless, it is possible the initiative could have an impact beyond its relatively modest funds.

n Some progress has been made to develop green buildings and transportation, but the regulatory, investment and financing environment remains an impediment.

India’s infrastructure needs are well chronicled and the scale of investment required is daunting. According to the World Bank, India will need US$1.7trn by 2020 to build its infrastructure, including new roads, ports, airports, railways and information technology structures. This is critical to supporting the country’s growth and pace of urbanisation, the scale of which will remain dizzying. Hundreds of millions of people will leave the countryside to seek higher wages and a better life in the cities. India’s urban population has already grown by more than 150m since 1990, and the OECD predicts that it will grow by another 500m by 2050. Urbanisation will place increased pressure on limited resources including land, water and clean air, all of which are already scarce in most urban areas. Without appropriate planning, this situation is likely to deteriorate further.

A smart missionThe government has an urban development plan called the Smart Cities Mission, which aims to improve the quality of life in cities. The administration is promising 100 smart cities by 2022, and the federal government has allocated US$7.5bn for the project. However, considering the scale of the investment needs, funds provided by the smart cities initiative are insufficient.

Smart cities represent the government’s urban vision of world-class infrastructure, regular water supply and uninterrupted electricity, all connected by grids and integrated with information technology to ensure a more efficient use of resources and to optimise services. State-of-the-art infrastructure and modern buildings are part of the 100 smart city ambition, and hospitals, schools and traffic will all be managed by a central command centre.

Fibre optics and next-generation infrastructure will be the hallmarks of these cities. Apart from new networked cities, plans include the rejuvenation of 500 additional cities, which will be upgraded and modernised. By 2030, the government expects that 70% of the country’s economic output will be generated in such places. The vast infrastructure needs of India’s burgeoning cities mean that the presently allocated funds for the Smart Cities Mission will prove too small to make a significant impact across all of the 100 cities. However, by acting as a catalyst that showcases best practices, rewards productive investments and instils a new urban vision in the predominately rural nation, the Smart Cities Mission could have a large impact beyond its relatively modest funds.



Smart villages also play a key roleWith two thirds of the population in the world’s biggest democracy still living in rural areas, there is both a political and an economic imperative to look beyond India’s largest cities. In September 2015, Mr Modi’s cabinet approved the Shyama Prasad Mukherji Rurban Mission (SPMRM), which seeks to establish 300 rural clusters by 2019-20. In these clusters, the federal government will participate in developing skills and local entrepreneurship and providing infrastructure to encourage development. Although there are other central government rural development schemes, the administration claims that its central role in this initiative sets it apart from similar programmes.

A notable state-level initiative is the one launched by the chief minister of Andhra Pradesh (AP), Chandrababu Naidu. Announced in January 2015, the “Smart Village — Smart Ward Towards Smart AP” initiative envisions participation by non-resident Indians, bureaucrats, businessmen and anyone else who will work with the government to increase the living standards of rural residents in the state.

The plan aims to tap into the urge to give back to society, and according to reports, 8,000 partnerships have already been established. With a push for financial inclusion from the central bank and the government of India, rapid growth in rural areas is more feasible now than ever before. In 2014, less than one sixth of India’s villages had a local bank branch, underlining the potential for new technology-based solutions. For instance, ICICI Bank (a large private-sector bank) launched an initiative in Akodara, turning it into a “digital village”. Thanks to this effort, all local residents have been able to open savings accounts and can conduct financial transactions with physical documentation. Bank accounts can also be accessed through mobile phones via SMS, offering another cost-effective way of providing financial services to India’s underbanked rural population.

Green buildings offer huge opportunitiesEnergy efficiency in construction, and particularly the development of green buildings, will offer one of the largest opportunities for cooperation between India and international partners. Approximately 35% of electricity consumption is attributable to buildings, and the potential for savings is significant. Throughout their life cycle, green buildings use resources such as energy, water and materials to limit their impact on the environment. Given the large inflow of people into cities, building suitable homes that comply with international best practices in environmental sustainability will be a mammoth task. India can leverage existing technologies to ensure that new buildings are constructed with energy efficiency in mind, reducing the burden on the environment, as well as heating and other energy-related costs for its people. In many cases, this can be done without developing new technology because best practices from elsewhere can be adopted.

Green buildings have come a long way in India, and the Indian Green Building Council (IGBC) — a non-profit group consisting of corporate members — wants to support the development of the sector and help turn India into a world leader in sustainable construction by 2025. The IGBC wants to support the expansion of India’s green building footprint, already among the largest in the world, to 9m sqm by 2022. Supporting this goal, the government and the IGBC will work together to ensure that the smart cities initiative encourages more green buildings through certifications and green building ratings.



Green buildings are often more expensive to construct for developers, however, and home buyers are often not convinced by purported energy savings. Awareness about the value of green buildings remains a challenge, particularly in tier two cities and below, but this can be overcome through dedicated marketing campaigns that explain the benefits. Trusting developers to comply with green building standards is another issue that limits demand.

A certification or rating process can solve such issues, and progress to date has been encouraging. The New Delhi-based Energy and Resource Institute developed the Green Rating for Integrated Habitat Assessment (GRIHA), which rates buildings across 34 criteria and has been adopted by the government. In the area of green buildings, smart regulation (if enforced consistently) can have a big impact.

Getting around—sustainably To ensure that India’s growing cities will be environmentally sustainable, the government and private sector partners will have to combine personal transport options with sustainable public transport. Car sales in India are growing fast and the country is set to surpass Russia this year, with 2m new cars expected to be purchased by Indian consumers. India is expected to surpass Germany as the fourth-largest car market by 2019. Considering its population size, however, India’s car market remains relatively small, standing approximately at the level of China’s in 2000. This puts India in a favourable position as dedicated government policies can still shape the direction of the car market, which is yet to enter its large expansion phase. Chinese consumers are expected to purchase as many as 20m new cars this year, underlining the enormous growth potential in India, particularly if the “Make In India” initiative is successful and incomes rise quickly.

Government support for electric cars has been much lower in India than in China. China has taken positive steps in the field of electric cars by aggressively promoting the sector with generous funding for search and purchase incentives. Many local governments run their own schemes, supporting local producers. Under new plans issued in late 2015, China also plans to build a nationwide network of charging stations, constructing a station for every 2,000 electric cars. Such plans allow China to address concerns about transport sustainability and environmental pollution, while ensuring that it plays a leading role in a space that will be critical in the future development of a large automotive sector.

In contrast, Indian government support for electric cars has been relatively subdued. At the national level, it will be challenging for the Indian government to provide the necessary infrastructure, such as charging stations. (Indeed, given the large size of the Indian subcontinent, it may be cost-prohibitive for decades to come.) However, the Chinese example shows that focusing on densely populated cities can work. Bridging the gap between relatively expensive electric cars and traditional cars will also be important.

On a positive note, there have already been encouraging and innovative schemes in the realm of public transportation that provide a glimpse into the future. For example, the Swedish automotive company Scania and Swedfund (the development financier of the Swedish state) launched a pilot in the



city of Nagpur, the third-largest city in the Indian state of Maharashtra. Under this scheme, a biogas plant will be built in the city and this will be used to operate the city’s ethanol-run buses.

The rail sector is also ripe for reform. Using railways for freight transport would free up India’s clogged roads and reduce pollution. Even though road transport is often inefficient in India — owing largely to poor road quality, slow turnaround times and long wait times at state border checkpoints — it is still generally preferred over the railways. This is because high freight rates are used to subsidise low passenger fares, encouraging the use of cheaper roads. The average freight rate is five times higher than the average passenger fare.

Rising freight costs have also proven burdensome in sectors such as steel, where high freight costs eat into slim profit margins. Exports of agricultural products such as rice also suffer. More investment into railway expansion will be necessary, and not just for passengers. Transport policy needs to become more integrated, and cross-subsidies need to be removed so that the relative environmental, congestion and other costs of road and rail are properly reflected in prices.

Getting investment right will be crucialFor India, the importance of getting infrastructure development right cannot be overstated. Urbanisation, connectivity, financing and inequality make this particularly challenging. Nonetheless, the scale of the opportunity is vast, and India remains at a point on the industrialisation path where the right action (by both the public and private sectors) can easily influence this for the better. The EIU expects that the average annual growth in investment in India will be 7.7% a year over the next decade, which means that the annual investment spend in 2025 will be more than double (in real terms) the annual investment spend in 2015. Spent well, this has the potential to make a huge difference, not just to the size of India’s economy but also to the living standards of India’s 1.3bn people.



Chapter 4: Policy and economic outlook

In brief

n India is undergoing rapid political and economic change. The National Democratic Alliance (NDA), led by the Bharatiya Janata Party (BJP), currently holds a majority of seats in the lower of house of parliament and The EIU expects it will remain in power in 2015-19.

n We expect real GDP growth of an average of 7.4% annually in fiscal years 2015/16 to 2019/20 (April-March). Economic expansion is forecast to accelerate once the BJP gains control of the upper house in 2018.

n We also forecast that consumer price inflation will average 5.6% in 2015 and 5.7% a year in 2016-19, which will give the Reserve Bank of India (the central bank) space to loosen monetary policy in a phased manner.

Policy trendsMr Modi stormed to power by making promises to boost economic growth, increase employment and improve infrastructure. To date, however, “big-bang” reforms have been limited. The BJP’s lack of a majority in the Rajya Sabha, upper house in Parliament, means that significant parts of Mr Modi’s economic reform package will be delayed or watered down in scale and content until the party gains a majority in the upper house, which we expect it to achieve in 2018.

The budget for fiscal year 2015/16 (April March) — the BJP government’s first full spending plan — was not visionary, but it did loosely stitch together some important reform measures. These included simplifying the tax structure and expanding the social security net.

The government is also encouraging states to compete with each other to improve their business environments in order to attract investment and propel economic growth. This has enhanced an existing trend under which state governments have been forced to improve their performance by increasingly demanding electorates. Significant steps to ease bureaucratic logjams have been adopted in states such as Maharashtra, Rajasthan, Andhra Pradesh and Gujarat.

The administration will have difficulty overcoming the many structural constraints on economic growth in the near term. These include a persistently wide fiscal deficit, archaic labour laws and major gaps in infrastructure. These problems require structural change, which will occur only gradually. Despite the much-vaunted launch of Mr Modi’s “Make in India” campaign, to turn the country into a global manufacturing hub, inadequate infrastructure (including erratic power supply) and uncertain prospects for reform in the politically difficult areas of land and labour laws mean that this campaign will disappoint.

Despite its right-of-centre slant, the government remains vulnerable to the demands of labour unions. In September ten trade unions, representing 150m workers, held one of the country’s largest strikes in history, affecting sectors such as banking, construction, transport and coal mining. In January the government had to renege on its plans to privatise the coal industry following a strike by 3.5m employees of a state-owned mining company, Coal India. However, the administration passed



legislation in March to permit commercial mining and successfully reauctioned some cancelled coal mining licences. These measures could boost coal supply and help to relieve India’s chronic power shortages, but the effects will probably be modest, as large swathes of coal reserves are in protected areas, which could lead to a delay in state clearances.

Fiscal policyThe budget for 2015/16 prioritised economic growth over fiscal consolidation, marking a missed opportunity to consolidate messy fiscal accounts amid a favourable environment of low oil prices. A sharp increase in public spending to drive economic growth and move ahead on stalled infrastructure projects resulted in an expansion of the budget deficit to 70% of the annual target in April-July 2015.

The implementation of the “One Rank, One Pension” scheme, which ensures uniform pension payments to former soldiers based on their length of service and rank, regardless of when they retired, will further add to the fiscal burden — it is expected initially to cost US$1.2bn to 1.5bn. Consequently, we expect the fiscal deficit to breach the government’s target, set at the equivalent of 3.9% of GDP, and come in at 4%.

Fiscal deficits are set to remain large over the forecast period. Despite an increase in tax revenue, an increasingly prosperous population will demand higher spending on social services and infrastructure. Those on lower incomes, in particular, will call for more government support. India has historically suffered from a low tax-to-GDP ratio, which the government will be keen to boost. As the economy expands at a healthy pace over the forecast period, the government will be able to tax a growing and increasingly wealthy share of the population, as well as businesses that have previously been able to operate outside the tax system.

The government’s inconsistent stance on retrospective taxation will have an adverse effect on business sentiment over the forecast period. In a positive step, in September the government stated that it would not impose the so-called minimum alternate tax on foreign portfolio investors. In March foreign investors were spooked after the Income Tax Department issued tax notices, worth up to US$10bn, demanding payments with retrospective effect. However, the final decision is unlikely to allay investor concerns, as the retrospective tax claim has fundamentally undermined the administration’s credibility. Consequently, concerns over retrospective taxation will remain and will dampen portfolio investment inflows.

Monetary policyThe Reserve Bank of India (RBI, the central bank) cut its main policy interest rate, the repurchase rate, by 50 basis points to 6.75% in September. We do not expect another rate cut in 2015. Further reductions could take place, albeit only gradually at a pace of 25 basis points, as the RBI wants to avoid the risk of reigniting inflation and currency depreciation.

Throughout the forecast period, the risk that poor crops will fuel inflationary pressures, as well as the weak transmission of policy rate cuts (if banks maintain high lending rates despite interest-rate reductions by the RBI), will weigh on monetary policy decisions. Future rate cuts will also be contingent on the effectiveness of the government’s fiscal consolidation efforts.



Tensions between the government and central bank over monetary policy could continue to feature throughout the forecast period. The term of the hawkish RBI governor, Raghuram Rajan, will be up for renewal by September 2016. An extension of his term is likely and would bode well for monetary and exchange rate stability, as Mr Rajan has lowered inflationary expectations and contributed to stabilising the currency.

We expect the RBI to maintain its independence in setting monetary policy, as proposed legislation to establish a monetary policy committee will probably give the deciding vote to the central bank governor. This would bode well for monetary independence under a strong RBI governor such as Mr Rajan. However, his eventual successor may not be similarly successful in fending off political pressure for looser monetary policy.

Economic growthEconomic expansion will average a healthy 7% a year in 2015/16-2017/18. However, the absence of comprehensive structural reforms, declining investor sentiment and barriers to investment, such as the cumbersome land-acquisition process and the myriad clearances required, mean that GDP expansion will be limited to below 8% in 2015-18. High-profile retrospective tax disputes will also constrain recovery in investor confidence. In the medium term the BJP’s incremental legislative changes and state-level efforts to improve the business environment will keep economic growth above 6%. We expect the rate of real GDP growth to accelerate to 8.5% in 2019/20, as the BJP is likely to gain control of the upper house in 2018, fuelling renewed confidence in reforms and investment by moving forward with its reform agenda.

International assumptions2014 2015 2016 2017 2018 2019

Economic growth (%)

US GDP 2.4 2.5 2.4 2.4 2.6 1.4

OECD GDP 1.8 2.1 2.3 2.3 2.4 1.9

World GDP 2.3 2.4 2.6 2.3 2.4 2.1

World trade 3.0 2.5 3.5 5.0 5.6 5.6

Inflation indicators (% unless otherwise indicated)

US CPI 1.6 0.3 1.7 2.3 2.5 2.0

OECD CPI 1.6 1.5 1.9 2.2 2.2 2.0

Manufactures (measured in US$) -0.3 0.4 1.5 1.9 1.2 1.4

Oil (Brent; US$/b) 98.9 53.1 60.0 72.7 81.2 85.0

Non-oil commodities (measured in US$) -5.3 -15.9 2.6 5.1 5.4 2.6

Financial variables

US$ 3-month commercial paper rate (av; %) 0.1 0.3 1.2 2.6 3.4 4.1

¥ 3-month money market rate (av; %) 0.1 0.2 0.2 0.1 1.7 1.8

Exchange rate: ¥:US$ (av) 105.9 122.1 124.4 124.0 122.0 120.0

Exchange rate: Rs:US$ (av) 61.0 64.7 68.0 69.6 69.2 67.9

Exchange rate: US$:€ (av) 1.33 1.13 1.06 1.12 1.17 1.20

Source: The Economist Intelligence Unit.



Economic growth(%; fiscal years beginning Apr 1st) 2014a 2015b 2016b 2017b 2018b 2019b

GDP 7.3 7.2 7.1 6.8 7.6 8.5

Private consumption 6.3 8.5 6.8 7.4 7.4 8.0

Government consumption 6.5 12.9 7.2 10.8 7.5 7.3

Gross fixed investment 4.7 7.8 6.9 4.7 8.4 10.6

Exports of goods & services -0.5 -4.6 5.0 8.1 10.1 9.6

Imports of goods & services -2.1 -3.8 5.3 7.6 9.5 9.4

Domestic demand 5.8 9.5 6.7 6.9 7.5 8.6

Agriculture 0.2 1.3 3.8 3.6 3.1 3.6

Industry 6.1 5.4 6.5 6.8 5.8 8.5

Services 10.2 7.2 7.9 8.2 7.9 8.6a Actual. b Economist Intelligence Unit forecasts.

Source: The Economist Intelligence Unit.

The purchasing power of consumers, which is already supported by rising wages, will be bolstered by lower rates of inflation in 2015 19 compared with the previous five years, resulting in stronger household consumption in real terms. A slowdown in the real-estate sector means that construction companies will delay investment, weighing on economic growth. A weak property sector will also influence consumption through a reduction in employment, adding to labour market challenges in states such as Bihar, which serve as a source of construction workers.

InflationWe expect consumer price inflation to average 5.7% a year in 2015-19. This will represent a continued moderation in inflation as disciplined monetary policy and improvements in tackling supply-side bottlenecks help to tame inflation, which averaged 9.4% a year between 2010 and 2014. Nevertheless, owing to structural factors, the inflation target, which is set at 4% with a band of 2 percentage points in either direction, for 2016-17 and onwards may be breached. Food and beverage products account for 45.9% of the consumer price index, but India’s agricultural supply chain is unlikely to see major improvements in areas such as storage, wastage or transport. There are significant upside risks to our inflation forecast, stemming from crop damage and the possibility of weak monsoon rains.

Exchange ratesFollowing prolonged weakness in key Asian currencies, we have revised down our exchange-rate forecast and now expect the rupee to average Rs64.7:US$1 in 2015, down from Rs61:US$1 in 2014. Despite India’s healthy economic fundamentals, the depreciation of currencies in emerging markets will put downward pressure on the rupee, which will weaken to Rs69.6:US$1 on average in 2017. However, there remains a significant risk that the rupee will depreciate by more than we expect. The weakness of many other key emerging market currencies — all vying for an increasing share of sluggish global demand — could ultimately force India to accept a currency devaluation in order to maintain its export competitiveness in the next few months.



External sectorIndia’s current account deficit will remain broadly steady as a proportion of GDP in 2015, at the equivalent of 1.4%. As a consequence of slowing growth in major trading partners’ economies, both imports and exports are expected to weaken in 2015 and could come under further downward pressure in 2016. As the cost of oil imports rises gradually each year over the forecast period, the current-account deficit will reach 1.6% of GDP in 2016. Solid economic expansion will also suck in more imports of capital goods. The strong growth in exports of services will ensure that the services account remains firmly in the black in 2015-19. Combined with a strengthening export sector as reforms improve the business environment in the tradable sector, India’s current-account deficit is expected to narrow from 2017-19.



Chapter 5: Data and charts

Annual data and forecast2010a 2011a 2012a 2013a 2014a 2015b 2016b

GDPc

Nominal GDP (US$ bn) 1,709.2 1,841.8 1,835.4 1,874.8 2,051.6 2,189.9 2,386.8

Nominal GDP (Rs bn) 77,873 88,264 99,861 113,429 125,445 144,907 162,630

Real GDP growth (%) 10.3 4.1 5.1 6.9 7.3 7.2 7.1

Expenditure on GDP (% real change)c

Private consumption 8.6 5.5 5.6 6.2 6.3 8.5 6.8

Government consumption 6.1 22.9 0.9 8.3 6.5 12.9 7.2

Gross fixed investment 11.0 12.9 -0.5 3.1 4.7 7.8 6.9

Exports of goods & services 19.2 11.6 6.5 7.3 -0.5 -4.6 5.0

Imports of goods & services 15.6 15.8 5.9 -8.3 -2.1 -3.8 5.3

Origin of GDP (% real change)c

Agriculture 8.6 5.0 1.2 3.7 0.2 1.3 3.8

Industry 7.6 7.8 2.4 4.5 6.1 5.4 6.5

Services 9.7 6.6 8.0 9.1 10.2 7.2 7.9

Population and income

Population (m) 1,184.1 1,202.1 1,220.0 1,237.9 1,255.8 1,274.1 1,289.6

GDP per head (US$ at PPP) 4,539 4,860 5,125 5,480 5,835 6,164 6,631

Fiscal indicators (% of GDP)c

Central government revenue 10.6 8.9 9.2 9.3 9.1 10.5 11.3

Central government expenditure 15.4 14.7 14.1 13.7 13.1 14.6 15.1

Central government balance -4.8 -5.8 -4.9 -4.4 -4.0 -4.0 -3.7

Net public debt 52.1 52.9 52.3 51.7 51.7 49.0 48.1

Prices and financial indicators

Exchange rate Rs:US$ (av) 45.73 46.67 53.44 58.60 61.03 64.73 67.95

Consumer prices (av; % change) 10.4 9.6 9.7 10.7 6.7 5.6 5.9

Producer prices (av; % change) 9.6 9.5 7.5 6.3 3.8 -2.4 0.9

Stock of money M1 (% change) 19.6 6.7 6.8 9.8 10.0 14.1 6.4

Stock of money M2 (% change) 18.7 16.0 11.2 14.8 10.7 13.7 11.5

Lending interest rate (av; %) 10.2 10.2 10.6 10.3 10.3 9.9 9.2a Actual. b Economist Intelligence Unit forecasts. c Fiscal years (beginning April 1st of year indicated). d Economist Intelligence Unit estimates. e Includes statistical discrepancy.

Source: IMF, International Financial Statistics.



Annual data and forecast2010a 2011a 2012a 2013a 2014a 2015b 2016b

Current account (US$ m)

Trade balance -129,176 -167,449 -201,666 -162,577 -143,122 -144,678 -152,242

Goods: exports fob 230,966 307,836 301,853 319,719 329,633 287,633 311,178

Goods: imports fob -360,142 -475,285 -503,519 -482,296 -472,755 -432,311 -463,420

Services balance 38,157 60,778 65,604 70,320 75,883 71,884 78,038

Primary income balance -15,601 -16,043 -20,842 -21,785 -25,813 -21,321 -21,942

Secondary income balance 52,109 60,211 65,434 64,814 65,602 63,633 57,619

Current-account balancee -54,511 -62,503 -91,470 -49,228 -27,450 -30,482 -38,527

External debt (US$ m)

Debt stock 291,651 336,845 395,071 427,562 440,946 424,738 431,939

Debt service paid 24,413 29,332 30,775 41,125 40,998 41,647 44,095

Principal repayments 19,018 22,227 21,202 31,228 30,272 30,698 30,741

Interest 5,395 7,105 9,574 9,897 10,727 10,948 13,354

International reserves (US$ m)

Total international reserves 297,747 297,905 297,807 296,218 322,833 370,705 368,958a Actual. b Economist Intelligence Unit forecasts. c Fiscal years (beginning April 1st of year indicated). d Economist Intelligence Unit estimates. e Includes statistical discrepancy.

Source: IMF, International Financial Statistics.



Quarterly data2013 3 Qtr 4 Qtr

2014 1 Qtr 2 Qtr 3 Qtr 4 Qtr

2015 1 Qtr 2 Qtr

Central government finance (Rs m)

Revenue 2,776 2,504 4,092 1,157 3,075 2,808 4,389 1,443

Expenditure 4,268 3,547 3,957 4,136 4,485 3,743 4,084 4,310

Balance -1,493 -1,043 135 -2,979 -1,410 -936 305 -2,867

Output

GDP at constant 2004/05 prices (Rs bn)a 24,634 24,889 25,339 25,946 26,613 26,582 27,286 n/a

Real GDP (% change, year on year) 7.0 6.8 7.0 6.5 8.0 6.8 7.7 n/a

Industrial production index (2004/05=100) 168.1 170.9 183.3 173.3 170.3 174.4 189.4 179.0

Industrial production (% change, year on year) 1.9 -0.8 -0.4 4.5 1.3 2.0 3.3 3.3

Prices

Consumer prices (2010=100) 111.3 114.4 114.8 116.8 118.7 119.0 120.9 122.7

Consumer prices (% change, year on year) 10.7 11.2 8.3 7.9 6.7 4.0 5.3 5.1

Wholesale prices (2004/05=100)

General index 176.9 180.6 180.9 182.2 183.5 181.2 177.8 178.1

Fuel 205.1 210.2 213.1 212.1 214.0 201.8 186.1 190.0

Manufactured goods 150.7 152.3 153.6 155.0 156.0 155.3 154.1 154.1

Financial indicators

Exchange rate Rs:US$ (av) 62.2 62.1 61.8 59.8 60.6 61.9 62.2 63.5

Exchange rate Rs:US$ (end-period) 62.8 61.9 60.1 60.1 61.6 63.3 62.6 63.8

Deposit rate (av; %) 9.0 9.1 9.1 9.1 9.1 9.0 8.8 8.6

Lending rate (av; %) 10.3 10.3 10.3 10.3 10.3 10.3 10.3 n/a

3-month money market rate (av; %) 10.3 9.3 9.6 9.1 8.9 8.7 8.6 8.2

M1 (end-period; Rs bn)b 19,105 19,897 20,598 21,477 21,142 21,885 22,917 23,528

M1 (% change, year on year) 9.4 9.8 8.5 8.9 10.7 10.0 11.3 9.5

M2 (end-period; Rs bn)b 88,331 92,230 95,174 97,740 99,316 102,097 105,456 108,520

M2 (% change, year on year) 13.0 14.8 13.4 11.8 12.4 10.7 10.8 11.0

BSE Sensex (end-period; 1978/79=100) 19,380 21,171 22,386 25,414 26,631 27,499 27,957 27,781

BSE Sensex (% change, year on year) 3.3 9.0 18.8 31.0 37.4 29.9 24.9 9.3

Sectoral trends

Production index (2004/05=100)

Manufacturing 178.4 180.3 194.0 181.7 179.2 182.2 201.2 188.5

Mining 115.0 126.1 138.0 123.3 115.5 128.8 138.4 123.9

Electricity 165.5 163.5 166.9 181.2 181.2 178.9 173.0 185.4

Foreign trade (US$ m)

Exports fob 80,309 78,075 82,586 80,511 81,332 78,660 69,831 66,201

Imports cif -109,611 -108,428 -111,306 -113,096 -120,867 -117,433 -95,920 -98,844

Trade balance -29,302 -30,353 -28,720 -32,585 -39,536 -38,774 -26,089 -32,643a At market prices. b Reserve Bank of India.

Sources: IMF, International Financial Statistics; Centre for Monitoring Indian Economy, Monthly Review of the Indian Economy; Financial Times; Reserve Bank of India.



Quarterly data2013 3 Qtr 4 Qtr

2014 1 Qtr 2 Qtr 3 Qtr 4 Qtr

2015 1 Qtr 2 Qtr

Foreign payments (US$ m)b

Merchandise trade balance fob-fob -33,305 -33,152 -30,668 -34,562 -38,605 -39,287 -31,725 -34,197

Services balance 18,372 18,120 19,605 16,986 18,993 20,299 19,405 17,423

Primary income balance -6,323 -5,446 -6,430 -6,695 -6,860 -5,828 -5,598 -5,572

Net transfer payments 16,103 16,254 16,283 16,436 16,322 16,561 16,632 16,170

Current-account balance -5,153 -4,223 -1,210 -7,836 -10,150 -8,256 -1,286 -6,177

Reserves excl gold (end-period) 257,753 276,493 285,032 298,024 296,204 303,455 323,825 338,107a At market prices. b Reserve Bank of India.

Sources: IMF, International Financial Statistics; Centre for Monitoring Indian Economy, Monthly Review of the Indian Economy; Financial Times; Reserve Bank of India.



Monthly dataJan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Exchange rate Rs:US$ (av)

2013 54.3 53.8 54.4 54.4 55.0 58.4 59.8 63.2 63.8 61.6 62.6 61.9

2014 62.1 62.3 61.0 60.4 59.3 59.7 60.1 60.9 60.9 61.3 61.7 62.8

2015 62.2 62.0 62.4 62.8 63.8 63.9 63.6 n/a n/a n/a n/a n/a

Exchange rate Rs:US$ (end-period)

2013 53.3 53.8 54.4 54.2 56.5 59.7 61.1 66.6 62.8 61.4 62.4 61.9

2014 62.5 62.1 60.1 60.3 59.0 60.1 60.2 60.5 61.6 61.4 62.0 63.3

2015 61.8 61.8 62.6 63.6 63.8 63.8 64.0 n/a n/a n/a n/a n/a

Money supply M1 (% change, year on year)

2013 7.9 8.9 9.2 8.8 9.9 9.0 9.6 8.4 9.4 11.3 9.4 9.8

2014 11.3 9.6 8.5 11.5 12.2 8.9 10.5 10.9 10.7 11.4 10.5 10.0

2015 8.9 10.7 11.3 10.0 10.0 9.5 11.1 10.7 n/a n/a n/a n/a

Money supply M3 (% change, year on year)

2013 13.0 12.7 13.6 12.9 13.6 12.7 12.4 12.1 13.0 13.7 14.9 14.8

2014 14.5 14.6 13.4 13.9 13.2 11.8 12.4 12.8 12.4 12.4 10.7 10.7

2015 10.7 11.1 10.8 10.7 11.2 11.0 11.5 11.3 n/a n/a n/a n/a

Money market rate (end-period; %)

2013 8.81 9.08 9.62 8.72 8.40 8.47 9.14 11.03 10.87 9.63 9.16 9.05

2014 9.21 9.63 9.93 9.30 9.11 8.90 8.79 8.92 8.91 8.85 8.68 8.62

2015 8.59 8.64 8.61 8.29 8.31 8.06 7.95 7.79 n/a n/a n/a n/a

Lending rate (av; %)

2013 10.5 10.5 10.3 10.3 10.3 10.3 10.3 10.3 10.3 10.3 10.3 10.3

2014 10.3 10.3 10.3 10.3 10.3 10.3 10.3 10.3 10.3 10.3 10.3 10.3

2015 10.3 10.3 10.3 10.3 10.0 n/a n/a n/a n/a n/a n/a n/a

Industrial production (% change, year on year)

2013 2.5 0.6 3.5 1.5 -2.5 -1.8 2.6 0.4 2.7 -1.2 -1.3 0.1

2014 1.1 -2.0 -0.5 3.7 5.6 4.3 0.9 0.5 2.6 -2.7 5.2 3.6

2015 2.8 4.8 2.5 3.0 2.5 4.4 4.2 n/a n/a n/a n/a n/a

BSE Sensex stockmarket index (end-period; 1978/79=100)

2013 19,895 18,862 18,836 19,504 19,760 19,396 19,346 18,620 19,380 21,165 20,792 21,171

2014 20,514 21,120 22,386 22,418 24,217 25,414 25,895 26,638 26,631 27,866 28,694 27,499

2015 29,183 29,220 27,957 27,011 27,828 27,781 28,115 26,283 n/a n/a n/a n/a

Consumer prices (% change, year on year; av)

2013 11.0 11.3 10.5 9.6 9.3 10.5 10.6 10.5 10.8 11.3 12.1 10.4

2014 8.7 8.0 8.2 8.5 8.3 6.7 7.3 7.1 5.6 4.6 3.2 4.3

2015 5.2 5.4 5.3 4.8 5.0 5.5 3.5 3.7 n/a n/a n/a n/a

Sources: IMF, International Financial Statistics; Haver Analytics.



Monthly dataJan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Wholesale prices (% change, year on year; av)

2013 7.4 7.3 5.7 4.9 4.7 5.2 5.9 6.7 6.9 7.2 7.4 6.5

2014 5.2 5.1 6.1 5.7 6.2 5.6 5.4 3.6 2.2 1.6 -0.2 -0.4

2015 -0.8 -2.0 -2.3 -2.4 -2.2 -2.1 -4.2 -5.0 n/a n/a n/a n/a

Total exports fob (US$ m)

2013 25,775 26,669 30,541 24,525 24,923 23,998 25,835 26,338 28,136 27,480 24,202 26,393

2014 26,892 25,353 30,341 26,033 27,998 26,480 25,793 26,803 28,735 26,057 26,476 26,127

2015 24,370 21,577 23,884 21,922 21,989 22,289 23,137 21,266 n/a n/a n/a n/a

Total imports cif (US$ m)

2013 44,755 40,792 40,948 41,577 43,987 35,304 38,326 37,026 34,258 38,075 33,773 36,580

2014 36,346 33,666 41,294 35,794 39,059 38,243 40,068 37,473 43,326 39,475 42,702 35,256

2015 32,109 28,108 35,704 32,939 32,789 33,117 35,950 33,744 n/a n/a n/a n/a

Trade balance fob-cif (US$ m)

2013 -18,979 -14,123 -10,406 -17,053 -19,064 -11,306 -12,491 -10,688 -6,122 -10,595 -9,571 -10,187

2014 -9,455 -8,312 -10,953 -9,761 -11,061 -11,763 -14,275 -10,669 -14,591 -13,418 -16,227 -9,129

2015 -7,738 -6,531 -11,819 -11,017 -10,799 -10,827 -12,812 -12,478 n/a n/a n/a n/a

Foreign-exchange reserves excl gold (US$ m)

2013 270,765 266,795 268,500 272,059 267,186 263,133 259,070 256,040 257,753 262,599 272,378 276,493

2014 273,388 275,731 285,032 292,402 293,862 298,024 301,132 299,916 296,204 298,473 298,852 303,455

2015 310,607 319,300 323,825 333,726 334,318 338,107 n/a n/a n/a n/a n/a n/a

Sources: IMF, International Financial Statistics; Haver Analytics.



Source: The Economist Intelligence Unit. Source: The Economist Intelligence Unit.



Annual trends charts

0.0

2.0

4.0

6.0

8.0

10.0

12.0WorldAsia (excl Japan)India

16151413121120100.0

2.0

4.0

6.0

8.0

10.0


1615141312112010

0.0

10.0

20.0

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70.0


1615141312112010-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0Asia (excl Japan)India

1615141312112010

Public debt (% of GDP)

Current-account balance (% of GDP)

Real GDP growth(% change)

Consumer price inflation(av; %)

(share of total) (share of total)Main destinations of exports, 2014 Main origins of imports, 2014

Others68.4%

US13.1%

UAE10.2%

Hong Kong4.2%

China4.1%

Others69.5%

China12.8%

US4.6%

Saudi Arabia7.1%

UAE6.0%



Quarterly trends charts

Source: The Economist Intelligence Unit.Source: The Economist Intelligence Unit.



Real GDP growth(% change, year on year)

Consumer price inflation(av; %)

Imports and domestic demand(% change, year on year)

Exports of goods and services(% change, year on year)

Interest rates(av; %)

Exchange rate(Rs:US$; av; inverted scale)

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0Quarter on quarter Year on year

Q115

Q114

Q113

Q112

Q111

Q110

Q109

Q108

Q107

Q12006

4.0

6.0

8.0

10.0

12.0

14.0

16.0Money market interest rateLending interest rate

Q115

Q114

Q113

Q112

Q111

Q110

Q109

Q108

Q107

Q12006

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

Domestic demandImports of goods & services

Q115

Q114

Q113

Q112

Q111

Q110

Q109

Q108

Q107

Q12006

70.0

65.0

60.0

55.0

50.0

45.0

40.0

35.0

Q115

Q114

Q113

Q112

Q111

Q110

Q109

Q108

Q107

Q12006

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

Q115

Q114

Q113

Q112

Q111

Q110

Q109

Q108

Q107

Q12006

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Q115

Q114

Q113

Q112

Q111

Q110

Q109

Q108

Q107

Q12006






Monthly trends charts

Foreign trade (US$ m; goods only)

Foreign-exchange reserves(US$ bn)

Exchange rate (Rs:US$; av; inverted scale)

Gold: London prices (US$/troy oz; av)

1,100

1,200

1,300

1,400

1,500

1,600

1,700

1,800

Jan15

OctJulAprJan14

OctJulAprJan13

OctJulAprJan2012

70.0

65.0

60.0

55.0

50.0

45.0

JulAprJan14

OctJulAprJan14

OctJulAprJan13

OctJulAprJan2012

250

260

270

280

290

300

310

320

330

340

AprJan15

OctJulAprJan14

OctJulAprJan13

OctJulAprJan2012

Price inflation (% change, year on year)

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0Producer pricesConsumer prices

JulAprJan15

OctJulAprJan14

OctJulAprJan13

OctJulAprJan2012

-30,000

-20,000

-10,000

0

10,000

20,000

30,000

40,000

50,000BalanceImportsExports

JulAprJan15

OctJulAprJan14

OctJulAprJan13

OctJulAprJan2012

Government finances (Rs bn)

-1,500

-1,000

-500

0

500

1,000

1,500

2,000

2,500

3,000BalanceRevenueExpenditure

AprJan15

OctJulAprJan14

OctJulAprJan13

OctJulAprJan2012



Comparative economic indicators, 2014

Sources: Economist Intelligence Unit estimates; national sources.

Sources: Economist Intelligence Unit estimates; national sources.Sources: Economist Intelligence Unit estimates; national sources.

Sources: Economist Intelligence Unit estimates; national sources.

Gross domestic product(US$ bn; market exchange rates)

Gross domestic product(% change, year on year)

Consumer prices(% change, year on year)

Gross domestic product per head(US$ '000; market exchange rates)

0 500 1,000 1,500 2,000 2,500

LaosPapua New Guinea

CambodiaMyanmarSri Lanka

BangladeshVietnam

New ZealandPakistan

PhilippinesHong KongSingapore

MalaysiaThailand

TaiwanIndonesia

South KoreaAustralia

IndiaJapanChina

0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0

MyanmarBangladesh

CambodiaPakistan

IndiaLaos

VietnamPapua New Guinea

PhilippinesSri Lanka

IndonesiaThailand

ChinaMalaysia

TaiwanSouth Korea

JapanHong Kong

New ZealandSingapore

Australia

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0

SingaporeTaiwan

New ZealandSouth Korea

ThailandChina

AustraliaJapan

MalaysiaSri LankaCambodia

VietnamLaos

PhilippinesHong Kong

Papua New GuineaMyanmar

IndonesiaIndia

BangladeshPakistan

-1.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0

JapanThailand

Hong KongAustralia

SingaporeNew ZealandSouth Korea

TaiwanPakistan

IndonesiaVietnamMalaysia

BangladeshPhilippines

MyanmarCambodia

Papua New GuineaIndiaLaos

ChinaSri Lanka

10,335 4,606

1.6

While every effort has been taken to verify the accuracy of this information, The Economist Intelligence Unit Ltd. cannot accept any responsibility or liability for reliance by any person on this report or any of the information, opinions or conclusions set out in this report.

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Unlocking India's potential

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