Management Discussion and Analysis

Business Review

a) Global Economy
In 2006, the global economy enjoyed one of its strongest periods of growth in last several years, with economic growth in real terms accelerating from 3.3% in 2005 to 3.9% in 2006. This was primarily due to the continuation of strong growth in developing and emerging economies as well as recovery in the Euro area in 2006 after five years of marginal growth. The Euro area registered an economic growth of 2.7% in 2006 as compared to 1.4% in 2005. The German economy which accounts for almost 30% of the region’s output recorded 6% growth in industrial production as business confidence reached its highest level since last 15 years and activity in construction sector showed significant improvement. While the US economy grew by 3.3% in 2006 as compared to 3.2% in 2005, the economy began to slow down in the second half of 2006 due to tightening of monetary policy and slowdown in the housing market. Japan grew by 2.2% in 2006 due to increased public investment, private consumption and buoyant exports. The Chinese economy grew by 10.7% in 2006, and contributed about a tenth of global growth. This is the fourth consecutive year of growth of at least 10%. China led the world, with manufacturing growth of around 20% in 2006. The global manufacturing output grew by 4.5%, the best since 2000 due to increased investment and global trade. The global economy in 2006 remained resilient even in the face of continued high oil prices. In real terms, the oil price levels experienced in the year were the highest since the second oil shock of 1979-81.

b) Indian Economy
The Indian economy witnessed robust growth in FY 2006-07. India’s GDP grew by 9.4% as compared to 9.0% in the previous year. India continues to be a high growth economy (second to China). The Indian economy grew at a stepped up rate for the consecutive fourth year from 3.8% in FY 2002-03 to 9.4% in FY 2006-07. The main drivers of growth were the manufacturing, services and construction sectors which grew by 12.5%, 11.0% and 10.7% respectively as compared to 9.1%, 9.8% and 14.2% respectively in the previous year. The overall industrial sector recorded a growth of 10.9% as compared to 9.6% in the previous year. The agriculture sector recorded a slow down with a growth rate of 2.7% as compared to 6.0% in the previous year. The private consumption and fixed capital formation represented 56% and 29.5% of the GDP respectively. The savings and investment touched a new high of 32.4% and 33.8% of the GDP respectively. Inflation was a cause of concern and the Wholesale Price Index increased from 4.1% at end March 2006 to a two year high of 6.7% in end January 2007 before moderating to 5.7% by end March 2007. The annual inflation increased to 5.4% as compared to 4.4% in the previous year, causing concerns of overheating the economy, which resulted in policy response from the Reserve Bank of India (RBI) in the form of higher interest rates. To tighten liquidity, RBI increased the Cash Reserve Ratio from 5.00% to 6.50% and the Repo Rate from 6.50% to 7.75% during the year.

India’s export grew by 23.9% to USD 124.6 billion, recording a strong growth rate of 20% plus for the fifth consecutive year. Imports grew by 29.4% to USD 181.4 billion, driven by increased imports of oil by 30.8% and non-oil imports by 28.7%. This resulted in an increase in India’s trade deficit to USD 56.7 billion as compared to USD 39.8 billion in the previous year. India’s fiscal position improved during the year and revenue deficit was estimated at 2.0% of GDP as compared to 2.6% in the previous year. The gross fiscal deficit constituted 3.7% of GDP as compared to 4.1% in the previous year. Indian corporates raised external commercial borrowings of around USD 25.3 billion, over 50% higher than the amount raised during the previous year. India’s foreign exchange reserves increased to USD 199.2 billion by end March 2007. The exchange rate of the Rupee against the US Dollar, which was Rs. 44.61 at end-March 2006 depreciated to Rs. 46.95 by July 19, 2006 but appreciated thereafter to Rs. 43.53 by end-March 2007. Overall, during the year, the Rupee appreciated by 2.3% against the US Dollar and 2.7% against the
Japanese Yen, but depreciated by 6.8% against the Euro and by 9.0% against the Pound Sterling.

Overall economic buoyancy, together with bullish domestic equity capital markets, boosted investor sentiments attracting robust capital inflows into the economy. FIIs were net investors in the Indian equity market and invested around Rs. 25,000 crores during the year. Domestic Mutual Funds also invested around Rs. 9,000 crores in the Indian equity market. The BSE Sensex crossed the 14,000 mark for the first time on 3rd January, 2007, reaching a peak of 14,652 on 8th February, 2007 before closing at 13,072 on 30th March, 2007, yielding a gain of 1,792 points (i.e. 16%) as compared to 11,280 on 31st March, 2006. Foreign Direct Investment (FDI) for the fiscal year ended 31st March, 2007 is estimated at around Rs. 70,000 crores (USD 15.9 billion), exceeding portfolio inflows, which were until recently the preferred means of participating in India’s rapid economic growth.

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