STATUS REPORT-ITALY Page 1
Italy
A Status Report
ECONOMYItaly has a diversified industrial economy, which is divided into a developed industrial north,
dominated by private companies, and a less-developed, welfare-dependent, agricultural south, with high unemployment. The Italian economy is driven in large part by the manufacture of high-quality consumer goods produced by small and medium-sized enterprises, many of them family owned. Italy also has a sizable underground economy, which by some estimates accounts for as much as 17% of GDP. These activities are most common within the agriculture, construction, and service sectors.
Italy is the third-largest economy in the euro-zone, but exceptionally high public debt burdens and structural impediments to growth have rendered it vulnerable to scrutiny by financial markets. Public debt has increased steadily since 2007, reaching 120% of GDP in 2011, and borrowing costs on sovereign government debt have risen to record levels.
During the second half of 2011 the government passed a series of three austerity packages to balance its budget by 2013 and decrease its public debt burden. These measures included a hike in the value-added tax, pension reforms, and cuts to public administration.
The international financial crisis worsened conditions in Italy's labor market, with unemployment rising from 6.2% in 2007 to 8.4% in 2011, but in the longer-term Italy's low fertility rate and quota-driven immigration policies will increasingly strain its economy. The euro-zone crisis along with Italian austerity measures has reduced exports and domestic demand, slowing Italy's recovery. Italy's GDP is still 5% below its 2007 pre-crisis level.
Main highlight(s)
- With Mario Monti, a former member of the European Commission, who assumed the premiership of Italy after Silvio Berlusconi resigned from the post of Prime Minister in November 2011, expressing his intention to resign once the 2013 budget was passed, it has again sent shock-waves within EU and rest of the global economies about the uncertain economic outlook for Italy.
- The tough austerity measures put in place by Monti regime have strained the domestic demand and employment generation, but went a long way in stabilizing the Italian economy, the 3rd largest economy of EU.
- Today Italian economy is witnessing an economic slowdown with a negative population growth rate and the public debt up to 123% of the GDP.
- The near stagnant share of manufacturing sector is also not conducive for employment generation. - Of late, Italian industry has sought to
actively engage emerging markets like India to regain “Lost decades” since Piaggio came to India in 1960s.
- The sectors to watch for promoting Indo-Italian trade and investment relations-Higher education, tourism, skills development, SME cooperation, fashion and design, automobiles, renewable energy, healthcare services and defence.
STATUS REPORT-ITALY Page 2 Key Economic Indicators
Source: CIA World Factbook
Current State of Economy
The Italian economy is going through its second severe recession in five years. In particular, problems in the financial sector, fiscal austerity and the weak external outlook mean that economic activity will decline significantly in 2012. The GDP is now expected to fall by 2.3% this year and by 0.5% in 2013, before a return to modest growth averaging just 0.8% in 2014–16. The increase in the perceived riskiness of Italian assets will result in continued net portfolio outflows in the short term, keeping yields on government bonds high. In turn, high interest rates are expected to affect banks as they reduce the value of assets held on their balance sheets. As this makes it harder for the banks to get market funding, lending rates will rise unless the European Central Bank (ECB) continues to provide liquidity to the sector. Italian banks expect credit conditions applied to corporate loans to be tightened in Q4, according to the Bank of Italy’s lending survey.
Tighter credit conditions and plunging domestic demand will make it harder for companies to expand in the short term. Business expectations have darkened in 2012, and confidence in the manufacturing sector was down to its mid-2009 level in July. The investment is expected to decline by about 8% this year and to be stagnant in 2013, with capacity remaining underutilized until activity returns to stronger levels. The investment growth is expected to average just 2% a year between 2014 and 2016.
2009(est.) 2010(est.) 2011(est.) 2012 (est.)
GDP(PPP) $1.83 trillion $1.863 trillion $1.871 trillion $1.834 trillion GDP – composition by sector Agriculture: 1.8% Industry: 24.9% Services: 73.3% Agriculture: 2% Industry: 24.7% Services: 73.4% Agriculture: 2% Industry: 23.9% Services: 74.1% (2012 est.) GDP- real growth rate -5.5% 1.8% 0.4% -2.3% (2012 est.) Unemployment Rate 7.8% 8.4% 8.4% 10.9% (2012 est.) Public Debt 115.8% of GDP 118.7% of GDP 120.1% of GDP 126.1% of GDP (2012 est.) Inflation Rate (consumer prices) 0.8% 1.4% 2.9% 3% (2012 est.)
Exports $407.2 billion $448.4 billion $523.9 billion $483.3 billion (2012 est.)
Imports $403.9 billion $475.7 billion $556.4 billion $469.7 billion (2012 est.)
STATUS REPORT-ITALY Page 3 Conditions in the labor market are also expected to worsen in the coming quarters. The unemployment rate rose to 10.8% in June, 2.7 percentage points above its level a year earlier and at its highest in more than ten years. The ongoing recession, coupled with rising labor supply, will push unemployment above 12% in second half of 2013. The jobless rate is forecasted to start declining in 2014, but it will not fall below 10% until after 2016.
High unemployment will contribute to the decline seen in household spending in 2012–13, which is being hit by fiscal consolidation measures and plunging consumer confidence in the wake of worsening economic conditions. The private consumption is forecasted to fall 2.7% in 2012 and then 0.9% in 2013, before picking up slightly to report average growth of about 0.5% in 2014–16.
Lower domestic demand will result in a decline in inflation during second half of 2012 and first half of 2013 from an average of 3.6% in first half of 2012. Consumer price inflation is now forecasted to average 3.4% in 2012 and 2.6% in 2013. Over the medium term, inflation is expected to fall to about 1%.
The weakness of domestic demand is also leading to a reduction in the external deficit. The current account deficit, which widened to 3.3% of GDP in 2011 from close to balance in 2000, is projected to more than halve in 2012 and then drop to around 1% of GDP in 2013.
General elections will be held in April 2013 to replace the current technocrat Government. Although the outcome of the elections is uncertain, a faltering economy will remain an incentive for continued policy action. But the risk that voters will vote against further austerity and reform is not negligible.
INDIA-ITALY BILATERAL ECONOMIC RELATIONS
Economic and commercial relations between India and Italy have been growing steadily. Italy is India's 5th largest trading partner in the EU (25th globally) and the 14th largest investor in India. The percentage share of India in Italy’s trade has been increasing steadily, though still hovers around 1% showing the immense potential for development.
Trade Figures: Year 2007-2008 2008-2009 2009-2010 2010-2011 2011-2012 2012-13(Apr-Sep) EXPORT 3,914.02 3,824.58 3,400.25 4,551.58 4,883.09 1965.59 %Growth 9.19 -2.29 -11.09 33.85 7.28 IMPORT 3,906.72 4,428.19 3,862.06 4,256.02 5,427.17 2653.75 %Growth 45.99 13.35 -12.78 10.2 27.52 TOTAL TRADE 7,820.73 8,252.77 7,262.31 8,807.59 10,310.25 4619.34 %Growth 24.92 5.52 -12 21.27 17.06
Source: Ministry of Commerce and Industry, GoI Figures in USD million
STATUS REPORT-ITALY Page 4 TRADE
The last few years have seen substantial growth in trade relations between the two countries. Except for 2011-12, the balance of trade has largely been in India’s favour since the early eighties. Bilateral trade was impacted negatively as a result of the financial/economic crisis of 2008-09. The trade which was showing signs of healthy growth (it grew by 68% during the period 2005-07), contracted by 12% in 2009, but for 2010 it has registered a volume of US$ 8.80 billion (+ 21.27% yoy growth). For 2011 trade of US$ 10.31 billion was registered (+ 17.06% yoy growth)
Trade Basket
Main items of Indian exports to Italy are textiles, yarns, ready-made garments, motor vehicles, chemicals, iron and steel, footwear, machinery, automotive components, dyes, pharmaceuticals, agricultural and engineering items, granite, gems & jewelry, carpets, iron ore and coffee.
Main items of import from Italy are machinery and capital goods, non-electrical equipment, precision and other machine tools, metallurgical products, iron and steel laminates, chemical and pharmaceutical products, engineering items, medium oil and gas oil.
INVESTMENTS
Italian Investments in India
Italy ranks 14th in terms of cumulative inflows into India amounting to US$ 1,121.67 mln (April 2000 – August 2012) accounting for 0.63% of total FDI inflows. (Inflows received through FIPB/SIA route RBI’s automatic route & acquisition of existing shares)
It is worth mentioning in particular that, in 2008, the value of Italian direct investment increased considerably, (from € 18.56 million to € 235.9 million) and was higher than France and Germany for that year.
Highest FDI inflows from Italy, from April 2000 to February 2012, have been in the Automobile Industry, which accounts for over 54% of FDI inflows from Italy. Services Sector, with about 6%, is in the second place and Railway Related Components, with about 4%, is in the third place. Industrial Machinery (3%), Construction activity (3%) stands at fourth and fifth place.
Italian companies in India
Today there are around 400 Italian firms present in India, against 330 in 2008, operating especially in the textile and automobile sectors. Six Italian banks have representation in India. Around 140 large Italian companies are active in India. Some of the major Italian companies that have invested in India are FIAT Auto, Heinz Italia, FIOlA, Italcementi, Necchi Compressori, Perfetti, Lavazza, Fata Hunter Engineering, ENI, SAI India, Isagro (Asia) Agrochemicals, Piaggio, and Impreglio, SEA Deutzfahr Group, Finmeccanica SpA, Ferrero.
In particular, according to an economic analysis by the Pantheon group:
• 13 per cent of the Italian companies that operate in India belong to the textile and clothing sector
STATUS REPORT-ITALY Page 5
• 8 per cent automotive and professional services
• 7 per cent electronics or economic and institutional associations
• 6 per cent logistics or provision of services to corporate
More than half the Italian firms in India are concentrated in the South-West of the country:
• 35 per cent in Maharashtra state
• 19 per cent in New Delhi
• 14 per cent in Tamil Nadu and
• 11 per cent in Karnataka Indian Investments in Italy
Indian companies are present in sectors such as IT, electronics, engineering etc. The prominent companies operating in Italy include Tata, TCS, S. Kumars, Raymonds, Wipro, L&T, Mahindra & Mahindra, Jet Airways, Ranbaxy, Bombay Rayon Fashion, Zydus Cadila, Dr. Reddy Laboratories, Aurobindo Pharma, Himatsingka Seide, Varroc Group, Endurance Technologies. SBI has a representative office in Milan.
Indian outbound FDI in Italy (in million USD, Source: Ministry of Finance, GoI as on Aug 2010) 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 Total
7.62 0.216 7.117 437.729 34.85 35.277 522.81
RECENT TRADE AND INVESTMENT BREAKTHROUGHS
Technical Collaborations: Italy ranks 5thin number of approved technical collaborations (488) in India, accounting for more than 6% of the total since 1991. Italy comes after the US, with 1,824 transfers (22.62 per cent of the total), Germany (1,114 = 13.82 per cent), Japan (879 = 10.9 per cent) and the UK (872 = 10.82 per cent). These figures show that Italian investments relate primarily to industrial set-ups and not to mere stakes in the capital of Indian companies. The largest technical collaborations have been in the transportation industry (77) followed by electrical equipments, chemical (other than fertilizers), drugs and pharmaceuticals and industrial machinery.
Recent Developments
• MoU for formalizing JBC to be signed during the visit of Mr. Paolo Romani, Italy’s industry minister, to India in October 2011
• India and Italy have agreed to sign a memorandum of understanding (MoU) for enhancing their bilateral technical cooperation in the road infrastructure sector and facilitating greater involvement of Italian infrastructure companies in highway projects in this country.
• The need for an MoU was felt and agreed upon during talks Minister for Road Transport and Highways Shri Kamal Nath had with Italian Minister for Economic Development Mr Paolo Romani in Rome on December 15.
• UAE-based telecom major, Etisalat, has launched a high capacity fibre optic submarine cable that stretches from India to Europe, in collaboration with eight other global telecom players, including Bharti Airtel and Tata Communications.
