100th Annual Report 2006-2007 - Tata Steel

Management Discussion and Analysis
I ) 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.
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