II.

ECONOMIC REVIEW
Growth rebounded strongly in 2010-11, after the dip in 2008-09 in the wake of the global financial crisis and the recovery in 2009-10. However, inflation rose and remained stubbornly high throughout 2010-11 as supply-side shocks got generalized amidst strong aggregate demand. With added risks to growth from inflation above the threshold level where growth-inflation trade-off can work, the Reserve Bank responded with eleven rate hikes between March 2010 and July 2011. This lifted effective policy rates by 475 basis points in the current interest rate cycle. As a result of monetary tightening and deteriorating global economic conditions, some moderation in growth and significant moderation in inflation from the later part of the year is anticipated going forward. However, risk to demand compression remains from likely slippage on envisaged fiscal consolidation. II.1.1 2010-11 marked the completion of the process of recovery from the adverse impact of the global financial crisis and the consequent slowdown of the global economy. Slack in the advanced economies, with their output gap estimated at 3.4 per cent in 2010, as also the uncertainty about their future growth, employment and debt still impinge upon the activity levels in India. However, growth in India was back to the earlier high growth path. II.1.2 Starting in double digits, headline inflation remained elevated throughout 2010-11. With vegetable prices spiking following unseasonal rains after a good monsoon and global commodity prices firming up in the second half of 2010-11, inflation expectations started to feed on themselves and cost push factors from the manufacturing side exerted pressures on inflation. Inflation turned persistent and generalized as a result. The stance of monetary policy continued to be anti-inflationary during the course of 2010-11 and in the year so far to contain inflation and anchor inflation expectations. I. THE REAL ECONOMY Growth rebounds strongly in 2010-11

II.1.3 Real GDP growth at factor cost increased to 8.5 per cent in 2010-11 from 8.0 per cent in 2009-10 (Appendix Tables 1 and 2). At this pace, the real GDP growth rate increased for the second successive year after the global crisis-induced sharp slowdown in 2008-09. II.1.4 The main impetus to growth during 2010-11 emanated from agriculture which rebounded to abovetrend growth rate on the back of a normal monsoon. Reflecting this, the contribution of the agriculture sector to overall GDP growth increased sharply in 2010-11 (Chart II.1). Services sector continued to be the predominant driver of growth, though its growth was slightly lower than the average in the pre-crisis high growth phase of 2003-08.

Sustainability of high growth enabling conditions II.1.5 Growth is expected to moderate to the trend level of about 8 per cent in 2011-12. If global conditions worsen, downside bias to this projection may arise. This raises concern about sustainability of the high growth over the medium to long-term. The Planning Commission in its paper on Issues for the Approach to the Twelfth Plan (2012-17) proposed a growth target of 9.0-9.5 per cent. A pre-requisite for high growth is upfront

removal of structural constraints with close attention on legal and institutional framework, as also execution and governance. In the short run, growth will have to contend with risks from low agricultural productivity, poor infrastructure, high global commodity prices, quality of corporate governance and low productivity enhancement in the manufacturing sector. Furthermore, the substantial increase in oil prices in 2010-11 and 2011-12 so far, has raised concerns about the near-term growth (Box II.1).

II.1.6 Calculations suggest that aggregate saving and investment rates need to be stepped up from 33.7 per cent and 36.5 per cent of GDP in 2009-10, in order to achieve GDP growth of 9.5 per cent, envisaged for the Twelfth Five Year Plan. An investment rate of around 38-39 per cent with an ICOR of around 4.1 (as was envisaged for the Eleventh Five Year Plan) would be required. Thus, the investment rate needs to be stepped up by 2.5-3.0 percentage points. The gross domestic saving rate needs to be augmented to 37 per cent or more. This underscores the importance of at least attaining the high levels of private corporate and public sector savings reached in the past. Furthermore, there is a need for stepping up of household savings, which have stagnated in recent years, largely reflecting the reallocation of savings between financial and physical assets as well as the near synchronous movement of changes in financial assets and financial liabilities (Chart II.2 and Appendix Table 3).

II.1.7 Preliminary estimates based on latest available information show that net financial savings of the household sector moderated to 9.7 per cent of GDP at current market prices in 2010-11 from 12.1 per cent in the previous year (Chart II.3 and Appendix Table 4). The decline in the net financial savings rate of the household sector reflected the slower growth in households savings in bank deposits and life insurance fund as well as an absolute decline in investment in shares and debentures, mainly driven by redemption of mutual fund units. Even so, there was a shift in favour of small savings and currency during the year. Households financial liabilities, however, increased reflecting higher borrowings from commercial banks. Notwithstanding the pick-up in the real GDP growth rate during 2010-11, persistently high inflation, relatively slower adjustment of bank deposit rates and the volatility in the Indian equity market impacted by global macroeconomic uncertainties, affected the level and composition of net financial savings of the household sector.

Box II.1 Would Firming Oil Prices Cringe Growth?

The oil price shocks of 1970s were associated with sharp output losses and large inflationary pressures. In the 2000s, even larger increases in the price of oil were associated with much softer impact on these macroeconomic variables. The 1973 oil embargo in the wake of the Arab-Israeli War and the 1979 oil price surge following the Iranian Revolution saw the supply of oil falling. In contrast, the 125 per cent rise in oil prices during 2002-06 was driven primarily by excess global liquidity and rising demand for oil. That raises the question whether we need to worry about the rising oil prices in 2011. Blanchard and Gali (2007) found that the oil prices are no longer correlated with business cycle as structural changes have weakened and modified the transmission mechanism of oil shocks. Further work suggests that this change is attributable to wage rigidities and anchored inflation expectations in recent period. Also, economic agents have viewed the recent episodes of firming oil prices as temporary and volatile movements. The impact of oil prices on growth is, however, corroborated by the IMFs World Economic Outlook, April 2011. It estimated that if global oil prices average US$ 150/barrel in 2011, it would lower real GDP growth in advanced economies by 0.75 per cent, while output loss in emerging and developing economies could vary from 0.75 per cent in Asia and sub- Saharan Africa to 0.5 per cent in Latin America. There is, thus, good reason for not being complacent about the macroeconomic adjustment that may become necessary if global oil prices firm up significantly. Bodenstein, et al. (2007) demonstrated that the impact differs from country to country and ultimately depends on the oil dependence, the structure of financial market and risk-sharing, critically hinging on structural parameters. Trading environment in the oil markets in 2011 remains uncertain with hedge funds liquidating and re-building positions causing volatility in prices. Event risks such as the political turmoil in the Middle East and North Africa (MENA) region, the Japanese quake shutting oil refineries and the sovereign default risks in the Euro zone have time and again reversed the otherwise firming oil prices on the back of global recovery broadly staying on track. The price of the Indian basket of crude rose from an average of US$ 69.8/barrel in 2009-10

to US$ 85.1/barrel in 2010-11 and further to US$ 118.5/barrel in April 2011, before declining to US$ 110.6/barrel in May 2011 on expectations of weaker global growth (Chart 1). Oil prices moderated temporarily in June 2011 on account of the decision of the International Energy Agency (IEA) members to release 60 million barrels of crude from their strategic reserves to offset supply disruptions, but edged up again, averaging US$ 112.4/ barrel during July 2011. Following the US sovereign rating downgrade by S&P, oil prices fell again averaging US$ 106.6/ barrel in the first fortnight of August 2011. Even with this, the August price of the Indian basket of crude is 25 per cent higher than its average during 2010-11. In the case of India, imports accounted for 87.3 per cent of total domestic oil requirement in 2010-11. Net oil imports (oil import less oil export) accounted for 65.3 per cent of total merchandise trade deficit in 2010-11. Though it is difficult to precisely quantify the impact of oil price on growth, a small macro model developed to evaluate the impact of oil price shock on Indias economic growth suggests that the impact could be somewhat significant. The model comprises seven structural equations pertaining to consumption, investment, government consumption expenditure, net exports and prices of non-oil commodities and two major identities relating to national income and aggregate wholesale price index (WPI) comprising prices of oil and non-oil commodities. Results showed that a 10 percentage point increase in oil price inflation, if passed through fully, would lead to a reduction in real GDP growth by about 0.3 percentage point. It would also raise WPI inflation by 1.0 percentage point through direct impact, with total impact after subsequent rounds of feed through estimated at about 2.0 percentage points.

INDUSTRY BACKGROUND HISTORY OF CARS:1769 : The first self-propelled car was built
Nicolas Cugnot, a French military engineer developed a steam powered road-vehicle for the French army to haul heavy cannons. Using a steam engine fixed to a three-wheeled cart, Cugnot successfully converted the back-and-forth action of a steam piston into rotary motion.

1801 : Britains steam powered cars

Richard Trevithick improved the design of steam engines, by making smaller and lighter with stronger boilers generating more power. In 1801, he put one of his new compact steam engines on wheels. His road locomotive - known as the Puffing Devil was the first horseless carriage to transport passengers. Innovations like hand brakes, gears, and steering improvements were developed in subsequent decades. he truck reputedly reached walking speed and carried four tonnes. The army later abandoned his invention. 1824 : Uphill struggle English engineer, Samuel Brown adapted an old Newcomen steam engine to burn a mixture of oxygen hydrogen gas. He used it to briefly power a vehicle up Shooter's Hill - the highest point in south London.

1858 : First Coal-gas engine Belgian-born engineer, Jean Joseph tienne Lenoir invented and patented (1860) a two-stroke, internal combustion engine. It was fuelled by coal gas and triggered by an electric spark-ignition. Lenoir later attached an improved engine to a three-wheeled wagon and completed a fifty-mile road trip. 1865 : Speed restrictions introduced in UK The Locomotive Act restricted the speed of horse-less vehicles to 4mph in open country and 2 mph in towns. The act effectively required three drivers for each vehicle; two to travel in the vehicle and one to walk ahead waving a red flag. For the next 30 years cars couldnt legally travel above walking speed.

1876 : Stroke of genius Nikolaus August Otto invented and later patented a successful four-stroke engine, known as the Otto cycle. The same year, the first successful two-stroke engine was invented by the Scottish engineer, Sir Dugald Clerk. 1886 : Motor age moves forward The first vehicles driven using internal combustion engines were developed roughly at the same time by two engineers working in separate parts of Germany Gottlieb Daimler and Karl Benz.They simultaneously formulated highly successful and practically powered vehicles that, by and large, worked like the cars we use today. The age of modern motor cars had begun. 1889 : The First Motor Company formed Two former French wood machinists, Rene Panhard and Emile Levassor, set up the worlds first car manufacturers. Their first car was built in 1890 using a Daimler engine. Another French company, Peugeot was formed the following year, and still going strong today. 1890 : Maybach speeds things up Wilhelm Maybach built the first four-cylinder, four-stroke engine. Three years later, he develops the spraynozzle carburettor, which becomes the basis for modern carburettor technology. A decade later, Maybach developed a race car using lightweight metals fitted with a 35-hp four-cylinder engine and two carburettors. Named the Mercedes, the car reaches 64.4 km/h to shatter the world speed record.

1894 : Grand Prix racing begins Motor racing began as cars were built. Races quickly evolved from a simple chases from town to town, to organized events like time trials endurance tests for car and driver. Innovations in engineering soon saw competition speeds exceeding 100 mph. Since races were often held on open roads, fatalities were frequent among drivers and spectators. 1896 : First Road Traffic Death Bridget Driscoll, a 44-year old mother of two from Croydon, stepped off a kerb and into the history books. She was hit by a passing motor car near Crystal Palace in London. She died from head injuries. The driver, Arthur Edsell, was doing just 4mph at the time. The coroner, returning a verdict of accidental death, said I trust that this sort of nonsense will never happen again. 1903 : The Ford Motor Company Formed After fitting moving assembly lines to the factory in 1913, Ford became the world's biggest car manufacturer.

By 1927, 15 million Model Ts had been manufactured. Workers on the production line assembled the car just in ninety-three minutes.

1911 : Key development Working for Cadillacs design and development department, Charles Kettering invented the electric ignition and starter motor. Cars could now start themselves. Kettering later introduced independent suspension, and four-wheel brakes. And By 1930, most of the technology used in automobiles today had already been invented. 1965 : Emissions regulations introduced Controls on harmful emissions initially introduced in California, the rest of the world soon followed suit. Safety devices also became mandatory before this, manufacturers only included seat belts as optional extras.

1973 : Energy crisis After the Arab oil Embargo beginning in October 1973, oil prices rocketed causing a world shortage. Though it was lifted a year later, the effect was explosive especially in America, where huge gas-guzzling cars were the norm. Fuel economy was suddenly something to consider when buying a car.

1978 : Safe stopping distance decreased The first antilock braking systems (ABS) were developed for automobiles by German manufacurers, Bosch. They first appeared in trucks and cars made by Mercedes-Benz. ABS brakes to allow the driver to maintain steering control and to shorten braking distances.

1997 : Car Manufacturers get green Manufacturers have acknowledged that oil reserves will dry up in the future. Theyre now developing engines that use more than one fuel source hybrid engines. At present time, Indian automobile industry is making a major contribution in increasing the country's GDP by 9% every year. New heights has been scaled by the industry in the year 2010. In January 2010, total automobile sales in the domestic market reached 1114157 units, the figures shows an increment of 44.9% compared to the sales units of 7,68,698 of same period last year. Even for the month of April-October after a gap of 11 years, total automobile sales in India stood at 1,120,081 Units. Annually, the Indian automobile industry is growing at an

average rate of 30% and marking itself as one of the fastest growing industries in India. According to the reports of Society of Indian Automobile Manufacturers, annual car sales are estimated to reach 5 million vehicles by 2015 and more than 9 million by 2020 To believe New York Times reports, several automobile companies like Hyundai Motors, Nissan, Toyota, Volkswagen and Suzuki have expanded their manufacturing facilities owing to India's strong engineering base and expertise in the manufacturing of low-cost, fuel-efficient cars. The following statistics explains the market share of different vehicles in the Indian automobile Industry. This data is valid for the Indian domestic market only.

Passenger vehicles Commercial Vehicles Three Wheelers Two Wheelers

15.86% 4.32% 3.58% 76.23%

The production of automobiles in India has greatly increased in the last decade. At present India is the largest tractor and three-wheel vehicle producer, second largest two-wheel vehicle producer, fourth largest commercial vehicle producer and eleventh largest passenger car producer. For the year 2003-2004 the production rate crossed 7,243,5648 and for the current year it has reached 14,049,830 in terms of total vehicles production. As a result of all this, the resultant annual turnover of the Indian automobile industry for the year is recorded to be 38,238 million USD by Society of Indian automobile Manufacturer (SIAM). For the year 2009-10, the production rate for different category of vehicles is as followed (As per SIAM)

Passenger Commercial Vehicles Three Wheelers Two Wheelers Grand Total

2,351,240 566,608 619,093 10,512,889 14,049,830

Last year, India's automobile exports had reached $4.5 billion and a consistent export growth rate can be estimated in the year 2010 also with the estimation that it will cross $12 billion by 2014. As per the SIAM records automobile exports have under gown a growth of 22.30 percent during the current financial year. United Kingdom

is largest export market for India's automobile industry followed by Germany, Netherlands and South Africa. In the year 2009-10, India has made a huge profit by exporting 1,804,619 no. vehicles. Different brands are utilizing the Indian automobile engineering expertise to manufacture and export maximum no. of vehicles from their Indian plants. Nissan Motors plans to export 250,000 vehicles manufactured in its India plant by 2011. Similarly, General Motors announced its plans to export about 50,000 cars manufactured in India by 2011. Listed below is the statistics showcasing export sales rate of Indian automobile industry for 2009

Passenger

446,146

Commercial Vehicles Three Wheelers Two Wheelers Grand Total : 1,804,619

45,007 173,282 1,140,184 1,804,619

Company Profile : Maruti Suzuki LTD Maruti Suzuki India Limited (MSIL) is primarily in the business of manufacture, purchase and sale of motor vehicles and spare parts (automobiles). The other activities of the Company consist of facilitation of pre-owned car sales, fleet management and car financing. The Company offers a range of cars across different segments. It offers 15 brands and over 150 variants - Maruti 800, people movers, Omni and Eeco, international brands Alto, AltoK10, A-star, WagonR, Swift, Ritz and Estilo, off-roader Gypsy, SUV Grand Vitara, sedans SX4, Swift DZire and Kizashi. In August 2010, the Company introduced factory fitted CNG option on five models across vehicle segments. These include Eeco, Alto, Estilo, Wagon R and Sx4. During the fiscal year ended March 31, 2011 (fiscal 2011), the Company sold over 1.27 million vehicles, including 1,38,266 units of exports.

Liquidity And Solvency Ratios

2011 Current Ratio Quick Ratio Debt Ratio Equity 1.47 1.14 0.02 2010 0.91 0.68 0.07 2009 1.51 1.26 0.07

Long Term Debt Equity Ratio

0.02

0.04

0.07

Debt Coverage Ratios

2011 Interest Cover Total Debt to Owners Fund Financial Charges Coverage Ratio Financial 126.04 0.02

2010 105.39 0.07 130.02

2009 34.21 0.07 48.06

167.58

136.33

100.18

38.75

Charges Coverage Ratio Post Tax

Competitor Analysis Name Last Price Market Cap. (Rs. cr.) 41,461.72 Sales Turnover Net Profit 2,662.10 Total Assets

Mahindra and Mahindra Maruti Suzuki Hind Motors

675.30

23,493.72

12,718.68

1,315.20 11.30

37,997.45 182.12

36,299.74 669.30

2,662.10 0.75

14,176.80 174.38