67_GS Asia Economics Analyst

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Asia Economics

Transcript of 67_GS Asia Economics Analyst

Page 1: 67_GS Asia Economics Analyst

March 28, 2014

Issue No: 14/13

Asia Economics Analyst

Economics Research

India: Adding 110 million jobs

India’s well-known demographic dividend is yet to be reaped. Employment

growth has stagnated in recent years, with the economy adding only 2m

jobs a year.

Manufacturing employment is weak, the scale of production is small, and

93% of the workforce is in the informal sector. Further, migration from rural

agriculture to urban manufacturing is slow, thus reducing productivity

gains.

India’s stringent labor laws are a key factor constraining employment

growth. We list reforms to labor laws that we believe are urgently needed

to increase flexibility and boost employment.

If labor share in manufacturing were to increase from the most stringent

labor law states to more flexible ones like Gujarat, we estimate that 40

million jobs could be added in manufacturing.

We show that government policies on rural employment guarantees and

rural subsidies are reducing the incentives for surplus labor to migrate

from agriculture to manufacturing and services. Reforms to encourage

urbanization, such as reducing the scope of NREGA and subsidies, can help

in our view.

The gains from reforms can be very large. In our bull case, some 110

million jobs can be added over the next 10 years, the largest for any major

economy. Demographics could contribute 3 percentage points to GDP

growth, from 1.7 ppt currently.

As a new government takes charge from mid-2014, we see labor market

reforms as a critical ingredient to accelerate India’s growth rate.

Andrew Tilton +852-2978-1802 [email protected] Goldman Sachs (Asia) L.L.C.

Goohoon Kwon, CFA +82(2)3788-1775 [email protected] Goldman Sachs (Asia) L.L.C., Seoul Branch

Tushar Poddar +91(22)6616-9042 [email protected] Goldman Sachs India SPL

Li Cui +852-2978-0784 [email protected] Goldman Sachs (Asia) L.L.C.

Yu Song +86(10)6627-3111 [email protected] Beijing Gao Hua Securities Company Limited

Mark Tan +65-6889-2472 [email protected] Goldman Sachs (Singapore) Pte

Chiwoong Lee +82(2)3788-1722 [email protected] Goldman Sachs (Asia) L.L.C., Seoul Branch

MK Tang +852-2978-6634 [email protected] Goldman Sachs (Asia) L.L.C.

Jonathan Sequeira +852-2978-0698 [email protected] Goldman Sachs (Asia) L.L.C.

Maggie Wei +852-2978-0106 [email protected] Goldman Sachs (Asia) L.L.C.

Vishal Vaibhaw +91(22)6616-9376 [email protected] Goldman Sachs India SPL

Investors should consider this report as only a single factor in making their investment decision. For Reg AC certificationand other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html.

The Goldman Sachs Group, Inc. Global Investment Research

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India: Adding 110 million jobs

Demographics Disturbed

India’s employment growth in recent years has been anemic. The economy added only

about 2 million jobs each year between FY05 to FY12, compared to 12 million a year in the

5 years before this. Moreover, increasing numbers of workers are leaving the workforce –

the labor force participation rate has fallen by 3 percentage points over the same period. As

a labor abundant country, India should be generating jobs in labor-intensive manufacturing.

However, the manufacturing sector saw a net decline of 5 million jobs between FY05 and

FY10, at a time when industrial growth was very strong at over 9% during this period. The

industries which are losing jobs are the most labor intensive ones – textiles, electronics,

and apparel. Firms are substituting capital for labor.

Exhibit 1: Anemic employment growth in the last decade

Source: NSSO, Goldman Sachs Global Investment Research

In theory, India can get significant labor market gains from its favorable demographics due

to – i) increases in labor input from the young; ii) urbanization - moving labor from low

productivity agriculture to high productivity industry and services; and iii) economies of

scale in operation – as a firm grows, it can initially have increasing returns to scale –

whereby adding more labor and other inputs leads to a more than proportional increase in

output.

Both supply and demand factors are at work. Stringent labor laws are affecting the demand

for labor, while generous rural programs may be reducing the supply. We argue that labor

laws are leading to a smaller scale of operation as well as taking recourse to informality in

employment. We discuss issues arising from these in Section II. The supply of labor from

agriculture to other sectors is being affected by programs such as NREGA (the National

Rural Employment Guarantee Act), which are reducing the ‘push’ factor. We discuss this in

Section III. In section IV, we discuss the benefit of demographics.

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FY00 FY05 FY10 FY12

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I. Labor Demand – small scale, mostly informal

India’s employment is remarkable for its small scale and informality. To escape stringent

laws (see Box 1), entrepreneurs keep the scale of their operations small.1 Most workers are

in small enterprises, with the share of workers in enterprises of less than 6 people 65.6%.

Self-employed are half the workforce. Even in the formal sector, India’s average factory

employs only 75 people, compared to 191 in China. They employ largely contractual

workers – the labor force in the formal sector is heavily unionized and protected, consisting

of 7% of workers, while 93% of workers are informal. This informality level is the highest in

the emerging world.

According to research by the World Bank, the value added per worker in the informal

sector is less than half of the value added per worker in the formal sector. Further,

employers have no incentive to invest in skills of contractual workers or in providing

insurance. Moving workers from the informal to the formal sector can unleash productivity

growth. In addition, formal workers in the formal sector pay taxes, so revenue collections

can rise.

Exhibit 2: Informal employment is highest in India…

Source: Planning Commission, Goldman Sachs Global Investment Research

Complex labor laws incentivize firms to remain small and in the informal sector. This

allows them to remain under the radar of labor officials and escape stringent provisions.

1 The informal sector is defined as enterprises with less than 10 employees, operated on a proprietary or partnership basis, as defined by the National Commission for Enterprises

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India Indonesia Philippines Brazil Mexico Thailand

PercentPercent

Informal sector employment

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Exhibit 3: …and scale of employment is very small

Source: Fourth All India Census of Micro, Small and Medium Enterprises, 2006-07: Registered Sector; Planning Commission, 12th Five Year Plan Draft, Goldman Sachs Global Investment Research

The large number of laws leads to inspection visits by different officials under different

laws, which increases transaction costs and opens up opportunities for rent seeking. There

is also no standardization of documentation required or time periods for which records

have to be kept. The inflexibility of labor laws has prevented large scale employment

growth in manufacturing, in our view.

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Box1: India’s Stifling Labor Laws

India has some 44 labor laws which are enacted by the central government and enforced by both the central as well as

state governments. In addition there are also labor laws enacted and enforced by the various state governments. Some

laws date from the colonial era. The Trade Unions Act is from 1926, the Workmen’s Compensation Act is from 1923, and

the Factories Act from 1948.

Industrial Disputes Act (1947) – The law deals with firing of workers, strikes, and closure of firms, and affects all firms

that employ more than 100 workers. All firms are required to consult with the government and trade unions, and get

both their approvals before firing workers. India is one of the only countries in the emerging world which not only

needs approval of the trade unions and government, but also has to consider alternatives, prior to considering

dismissal. Even those countries with restrictive labor regulations – eg. Bangladesh, Philippines, and Malaysia, do not

require consultation and approval from trade unions. It is even for difficult for a firm to exit. We think that this law has

done more to hold back the growth of India’s manufacturing sector than any other policy. It keeps most of the labor

force in the informal sector, primarily in temporary jobs, preventing employers from investing in their training.

Trade Unions Act (1926) – The act stipulates that any 7 or more workers can form a trade union and apply for

registration. Further amendments allow the formation of at least ten unions in an establishment with a size of 70

workers. This means multiple trade unions in an establishment, which affects harmony. Bangladesh reformed its labor

laws in 2006, and requires a minimum membership of 30% of workers to form a trade union.

Contract Labor Law (1970) - Although Indian regulations allow contract workers, central and state governments can

prohibit contract workers in any industry or even a single establishment. In addition, inspection and administrative

hurdles make the enterprises take the course of informal employment. The central and state governments can also ban

the fresh recruitment of permanent workers where contract workers are engaged. Further, the prevalence of contract

labor prevents the firm from investing in the worker, in terms of their training, and in providing social security.

The Factories Act (1948) – The act has antiquated provisions – e.g., it says the state government may prescribe the

number of latrines and urinals to be provided in any factory. Some rules say the factories must be whitewashed, and

earthen pots filled with water are required. These rules can lead to conflicts between the entrepreneur and officials.

For disputes, the process of conciliation happens at 4 different levels prior to arbitration. In Indonesia and the US, there

is only one level of mediation, which helps in reducing the time to resolve disputes.

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Box 2: Liberating Labor – Five Reforms

1. Simplify Labor Laws

There are 44 central laws alone, and numerous state laws in addition, some dating from the colonial era. The laws could

be simplified and brought under a few common headings to make it easier to comply with them. A new comprehensive

but simple labor code is overdue.

2. More flexibility to hire and fire

The Industrial Disputes Act should be amended to make it easier to hire and fire workers. This would allow firms to

grow during an upturn and downsize during a downturn. The act also should be amended to allow easier closure of

unprofitable firms to allow for capital and labor to be reallocated. We show the example of how Gujarat has done this

below.

3. Self-certification by the employers

This would reduce the number of inspector visits and the high costs of compliance that entrepreneurs face. States like

Gujarat, Maharashtra, and Rajasthan have already introduced this. Where possible, all certifications and inspections

should be done online.

4. Amend Trade Unions Act

The Trade Unions Act should be amended to reduce multiplicity of trade unions, and amend the definition so that no

trade union can stop work completely. We also see a need to reduce the scope for members and leadership from

outside the Union. At present 50% of the office bearers can come from outside the Union. The Unions have immunity

from criminal and civil liability, which we believe needs to change.

5. Faster Dispute Settlement

Labor disputes need to be resolved faster. Arbitration can be the quickest way to resolve labor disputes. An effective

way would be to resolve disputes online. An individual could go online to resolve labor disputes, without the need to

approach an arbitrator or judicial forum. The Philippines and Malaysia have started using online dispute resolution

successfully.

Gujarat versus West Bengal

The Gujarat government amended the Industrial Disputes Act in 2004 to allow for greater flexibility in the labor market

for Special Economic Zones (SEZ). It allowed for firms within the SEZ to lay off workers, without seeking the permission

of the government, by simply giving a 1 month notice to the worker. To allow for firm exit, the law was amended such

that the employer can close an undertaking by giving 2 months notice to the government. Contrast this with the normal

legal requirement of getting permission from the government, with the latter giving an opportunity for the employees to

be heard on the issue. The Gujarat Act 12 changed the definition of ‘industrial dispute’ to exclude the termination of

service of an employee in an SEZ, thereby significantly reducing the scope for litigation.

The West Bengal government, in contrast, made several pro-worker changes. The IDA was amended to be applicable to

more firms – those employing above 50 workers. It changed the laws to make it virtually impossible to shut down a

loss-making factory. The employer with the application for closure must “contain the particulars of the quantum, mode,

manner and time of payment of compensation to the workmen.” The owner is also required to furnish a guarantee to

discharge liability for payment of compensation to the workmen. Most factory owners thus prefer to keep their loss-

making units barely alive, but strip its assets. This prevents the churn of capital and labor, which is at the heart of

modern enterprise.

Gujarat has experienced a 60% growth in manufacturing employment between 2000-12, while West Bengal has seen

only a 22% increase.

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Pro-Worker versus Pro-Employer

There is a lot of evidence suggesting that states which implemented pro-worker

amendments to the Industrial Disputes Act faced a decline in output, employment, and

productivity, while those which introduced pro-employer amendments saw an increase in

employment and output2. Estimates using plant-level data suggest that firms in labor

intensive industries with flexible labor laws have 14% higher TFP than in states with more

stringent labor laws3.

As Exhibit 4 shows, states which are classified as having more liberal labor laws have

generated more manufacturing sector employment. We estimate that if states were to

increase their share of labor in manufacturing to the level of Gujarat currently, some 40

million jobs could be added in manufacturing over the next decade.

There is a trade-off between employment protection and unemployment benefits.

Employment protection helps those who already have a job, creating a labor aristocracy.

To reduce employment protection, generous severance payments and notice periods can

be chosen. To develop a constituency for reform, we believe it is better to provide for

increased severance payments and notice periods as employment protection is reduced.

The Voluntary Retirement Schemes (VRS) which allow for such payments have worked

well in India. A younger population tends to prefer a more flexible labor market regime

where it is relatively easier to find a job, but likewise easier to lose a job.

Exhibit 4: States with more liberal labor laws generated greater employment

Note: States classification on labor laws is based on “Economic Freedom of the states of India, 2012”. Source: NSSO, Economic Freedom of States of India, 2012, Goldman Sachs Global Investment Research

2Can Labor Regulation Hinder Economic Performance? Evidence From India; Besley and

Burgess, 2004

3Employment Protection Legislation and Plant- level Productivity in India; Dougherty, 2011

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Gujarat Tamil Nadu Haryana Rajasthan HimachalPradesh

Chattisgarh Bihar Jharkhand

Employment per thousand

(Average FY05-FY12)

Employment per thousand

(Average FY05-FY12)

Manufacturing sector employment in urban area:

Liberal Labor Laws Stringent Labor Laws

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II. Labor Supply – not increasing

The movement of excess workers from low productivity agriculture to higher productivity

sectors is critical to increase the supply of labor and for economic growth. In India, the shift

from rural agriculture to urban manufacturing and services is taking place at a slow pace.

The urbanization rate in India was higher than that of China in 1980 at about 20%. Since

then, China’s urbanization rate has accelerated to over 50%, while India has only moved to

just above 30%. The pace of movement from rural to urban usually accelerates with

economic growth as opportunities increase in other sectors. Therefore, agricultural

employment typically falls quite rapidly during this process. While this trend is also visible

in India, the pace of migration has been slower compared to its East Asian neighbors.

Exhibit 5: Agricultural employment falls with economic growth

Note: t=0 means 1980 for India, China and Thailand and 1969 for Korea. Source: ILO, WDI, Goldman Sachs Global Investment Research

Low Labor Productivity

India’s labor productivity is one of the lowest in Asia. A key reason is that a large number

of workers are still in low productivity agriculture. We find that labor is 4 times more

productive in industry and 6 times more productive in services compared to agriculture

(Exhibit 7). We measured the impact on GDP of ‘urbanization’ by looking at productivity

differences between agriculture and the manufacturing and services sector (see Appendix

A for details). We find that in recent years the increase in GDP due to the shift from rural to

urban areas has not increased significantly. The increase in GDP from migration of workers

from agriculture to other sectors was 0.87 ppt of GDP, according to our estimates, between

FY05 and FY12. This was not significantly higher than the contribution of migration

between FY00 and FY05 of 0.73 ppt of GDP. Moreover, the contribution of moving from

agriculture to industry has actually fallen over this period. Compare this with China, where

we estimate urbanization is contributing 2-3 percentage points to GDP growth.

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PercentPercent

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China

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From years of high agriculture employment

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Goldman Sachs Global Investment Research 9

Exhibit 6: Labor productivity is very low in India

Source: Conference Board, Goldman Sachs Global Investment Research

Exhibit 7: Labor is much more productive in industry and services compared to agriculture

Source: NSSO, CEIC, Goldman Sachs Global Investment Research

- 10 20 30 40 50 60 70 80 90 100

India

Philippines

Indonesia

Thailand

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*Industry and services productivity is expressed as a proportion of productivity in agriculture.

Page 10: 67_GS Asia Economics Analyst

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Goldman Sachs Global Investment Research 10

III. The Impact of NREGA – Tight Labor Markets, Higher Inflation

In our view, government policies to boost rural incomes may have contributed to limiting

urbanization. Rural wages have been growing by 17% on average since FY07 and have

outstripped urban wages. A number of government programs have supported this,

including the NREGA which provides 100 days of employment to a member of each rural

family.

We found evidence to suggest that NREGA has contributed to rural wage growth. To

investigate this, we looked at states which have had the largest share of households

enrolled under NREGA, and compared them to states which have the least. We also looked

at the same state before and after the program. The share of households enrolled in

NREGA was a significant explanatory factor for wage growth. We did the same exercise

for CPI inflation in the states. We found evidence to support the hypothesis that inflation

has been higher in states where NREGA has been implemented to a greater degree.

Not only are agricultural workers not moving to urban areas, the increase in wages,

without an increase in productivity, is fueling inflation. Earlier (see EMMD-India: Targeting

rural wages, February 25, 2014) we showed that rural wages have been driving CPI inflation

rather than the other way around, a finding which has also been corroborated by the RBI4.

NREGA has led to workers moving from agriculture to rural construction. The number of

workers in rural construction has jumped from 17 million to 37 million between FY05 and

FY12. This suggests that there is little surplus labor coming out of agriculture which could

drive down wages and inflation. Therefore, there may not be as much slack in the labor

market as output gap measures would suggest.

Policies to encourage Urbanization

We think that government policies should incentivize urbanization. To do this would

require a reduction in rural subsidies, which are fueling inflation without increasing labor

productivity. We think that the scope of NREGA could be reduced to make it applicable only

to women. A possible reform to NREGA could be to have the program focus on women,

and their skill development. This would increase female labor force participation, reduce

the scope for wage inflation, and would not hinder the movement of labor from agriculture

to manufacturing. Further, policies to increase efficiency of land markets, by improving

land records, easier conversion of land use, and land acquisition for industry, could help

incentivize urbanization.

4 Fighting Inflation, Speech by Dr. Raghuram Rajan, February 26, 2014

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IV. The Benefits of Demographics

India’s demographics remain extremely favorable. The UN estimates that over the next

decade, another 117 million people will enter working age (15-64). Given current trends in

work force participation rates, the economy will add only 73 million workers, which could

contribute 0.8 percentage points annually to GDP growth. In addition, if current trends in

urbanization continue, it could add another 0.9 percentage points to GDP growth annually.

However, if India were to undertake significant reforms in the labor market, the benefits

could be quite large. In a bull scenario, we project that India could add some 110 million

workers over the next decade. At this level, the number of jobs that India could create

would be larger than that of the US, China, Russia, and Brazil combined. This can add 1.2

percentage points annually to GDP growth. The gains from more accelerated urbanization

could be even greater, adding some 1.8 percentage points to GDP growth. Therefore, labor

supply and demand reforms could increase the annual contribution of demographics to

GDP to 3 percentage points from 1.7 percentage points currently.

Exhibit 8: India could provide the largest increase to global labour force

Source: UN, ILO, WDI, Goldman Sachs Global Investment Research

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Addition to labor force , 2014-23:

GS Projections (High Case)

ILO Projections

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Goldman Sachs Global Investment Research 12

Exhibit 9: Demographics could contribute 3 ppt to India’s GDP growth

Source: Goldman Sachs Global Investment Research

The stakes for reforms could not be higher, and a new government provides an excellent

opportunity. We believe a new government could focus on labor market reforms and

boosting urbanization through policies that we have discussed above. Some state

governments have shown the way by easing restrictions. Shrinking inter-state differences

can allow a virtuous cycle of reforms. A young workforce requires urgent reforms to

increase its participation and to move to higher productivity areas.

Tushar Poddar and Vishal Vaibhaw

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0%

Base Case

High Case

Demographics contribution to GDP over next decade*:

Urbanization

Labor Force

*Base case implies 73 million of labor force addition between 2014-2023 and 25 million of inter sectoral relocation from agri to industry and services. High case implies 108 million labor force addition and 54 million of intersectoral relocation.

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Appendix A1: Estimating the contribution of migration of labor to

GDP growth

We used a simple framework developed in our Global Economics Paper No. 152 to

estimate the impact of labor mobility on growth rates. We broke down GDP growth into

three components: 1) the contribution from sectoral increases in labor productivity,

suitably weighted by the sector’s share in GDP; 2) the contribution from growth in the labor

force in the sector, in the absence of labor mobility, again weighted by the sector’s share in

GDP; and 3) the impact on GDP growth from inter-sectoral labor mobility, in the presence

of differences in sectoral labor productivity levels.

These are summarized in the equation below:

(1)

where:

superscript A stands for agriculture, I stands for industry, S stands for services.

g: GDP growth

s: share of a sector in GDP

n: natural rate of growth of labor force in the sector

l: share of a sector in total employment

П: level of labor productivity

π: growth rate of labor productivity

m: the net movement of labor between sectors (e.g., mAS stands for labor movement from

agricultural to industry).

The contribution of inter-sectoral labor mobility on overall GDP growth is represented by:

(2)

Appendix A2: Estimating the impact of NREGA

To see the impact of NREGA, we used cross-sectional variation among states in the

implementation of the program, and variation across time, as the program started in FY07.

By exploiting these two differences, we construct a “difference in difference” estimator.

We performed a pooled least squares regression with state-level fixed effects. We tested

for the impact of NREGA on rural and urban construction workers, rural wages and CPI. A

 

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Goldman Sachs Global Investment Research 14

NREGA dummy takes a value of 1 from FY07 onwards for the states which have a larger

share of households covered under NREGA employment, with other states assigned a

value of 0. Income per capita is used as independent variable. Our analysis covers 15 major

states for the time period FY00-FY12. There are 8 states which we classify as NREGA and 7

which are not. We used people employed in construction activity per thousand in rural and

urban area from the NSSO. For rural wage, we used wage data for casual workers other

than public work from the NSSO. We used CPI: agricultural labourers from the Labour

Bureau for rural inflation.

As shown in the table below, we find that:

The proportion of rural construction workers in NREGA states is higher, as

suggested by the NREGA dummy which is significant at a 10% level.

The impact of NREGA on urban construction workers is insignificant.

The NREGA dummy with rural wages as the dependent variable is significant at a

1% level, suggesting a higher rural wage growth in the NREGA states.

CPI inflation has been higher for the states with a larger share of households

covered under the NREGA as suggested by a significant NREGA dummy at a 1%

level.

Exhibit A1: Results of “difference-in difference” estimator

Source: NSSO, CSO, Labour Bureau, Goldman Sachs Global Investment Research

Rural Construction

Workers

Urban Construction

Workers Rural Wage CPI

Estimation methodState fixed

effectsState fixed

effectsState fixed

effectsState fixed

effects

Income per capita0.83

(24.1)*0.21(7.9)*

0.96(53.0)*

7.86(10.3)*

NREGA dummy0.07

(1.8)***0.05(1.4)

0.06 (3.2)*

2.40 (3.1)*

Sample period FY00-FY12 FY00-FY12 FY00-FY12 FY00-FY12

Observations 195 195 180 180

R- squared 0.95 0.80 0.98 0.61

*/**/*** denotes significant at 1%/5%/10% respectively.

NREGA dummy = 1 assigned after FY2007 onwards to those states which have larger proportion of households covered under NREGA employment. These are Tamil Nadu, Rajasthan, West Bengal, Andhra Pradesh, Madhya Pradesh, Kerala, Assam and Odisha.

Note: Dependent and independent variables in natural logarithms.

t-statistic in parenthesis: >2.58/1.96/1.64: significant at 1%/5%/10% level.

Wage for casual workers, Other than public work (INR) is used to see the impact of NREGA wages in rural area wage rate.

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Weekly recap: Moderate recovery amid lower inflation

Data released during March 21-27 suggest that activities in the region recovered

moderately in February and part of March while inflation decelerated further in February.

Exports in Korea and Thailand gained moderately while imports were weak. Chinese Flash

PMI for March was down, weaker than expected.

Moderate recovery in Korea, Thailand and Taiwan

Korea’s headline exports rose 8% yoy for the first 20 days of March from 4% yoy for the

first 20 days of February. Per-day exports were flat year-on-year but the sequential

momentum rebounded to a positive 6.5% mom after falling 8.9% mom in January. Daily

imports for the first 20 days were down 6% yoy in March, possibly on low commodity

prices.

In Thailand, exports gained more than expected, growing 2.4% yoy in February compared

to -2.0% yoy in January and Bloomberg consensus of 0.2% yoy. Imports fell 16.6% yoy in

February, well below the consensus.

Industrial production in Taiwan increased 1.2% mom in February after adjusting for

seasonal and Chinese New Year effects, mainly on gains in manufacturing. Production in

the construction and utilities sectors also improved over the previous month. On a year-

over-year basis, manufacturing production expanded 7.6% yoy, up from -1.9% yoy in

January. Our current activity indicator for Taiwan moderated slightly to 5.0% qoq ann from

5.3% qoq ann in January, mainly driven by weak export orders and retail trade in February.

Weak outlook in China

The HSBC PMI flash reading for March suggests continued weakness in growth in China.

The key sub-components, new orders and production, show a similar pattern to that of the

headline numbers. Given that the flash PMI tends to be a lagging indicator (like in 2013 and

2010), a caution is needed for the interpretation. The release of final readings on April 1

would be important since the difference between flash and final readings is often more

informative for current-month activity.

Inflation decelerated further in Singapore

Inflation in Singapore decelerated further in February, to 0.4% yoy, the lowest reading

since December 2009. A 7.1% yoy drop in the "transport" category was the main reason for

the decline while food and accommodation costs also moderated. The Monetary Authority

of Singapore's core inflation measure--which excludes accommodation and private road

transport costs--moderated to 1.6% yoy (0.1% mom seasonally adjusted) from 2.2% last

month. We however still expect the MAS to keep the current SGD appreciation stance

unchanged at the upcoming semi-annual meeting in April, mainly on concerns about a

tight labor market.

Goohoon Kwon

Page 16: 67_GS Asia Economics Analyst

March 28, 2014 Asia Economics Analyst

Goldman Sachs Global Investment Research 16

Asia ex-Japan Economics Calendar

Korea industrial production (Mar 28): We expect industrial production to weaken moderately, down by 0.1% mom,

given sequential weakening in Korean exports in February.

Korea CPI (Apr 1): We expect inflation to pick up in March to 1.5% yoy on the erosion of the base effect, compared with

consensus of 1.4% yoy. Our annual inflation forecast of 1.8% yoy, much below the central bank forecast of 2.3% yoy,

reflects the pick-up in inflation since March.

Korea Exports (Apr 1): We expect exports to rise 4.0% yoy and gain moderately sequentially, slightly below the

consensus of 4.3% yoy.

China NBS PMI (Apr 1): We expect the official PMI to inch up to 50.4. The HSBC PMI flash reading was down but it has

not been a reliable indicator of the latest momentum. In July of 2013 and 2010 the HSBC PMI continued to soften despite

obvious signs of a rebound shown by other indicators. We believe underlying growth momentum remains relatively

weak though not necessarily as weak as January February. Furthermore, the official PMI tends to be strong seasonally in

March, unlike the HSBC PMI. In the past the official PMI has always rebounded in March and we believe it is likely to be

the case this year, though the magnitude of the rebound may be smaller than usual.

India central bank policy meeting (Apr 1): We expect the RBI to remain on hold in the April policy meeting. As the

RBI mentioned in the last policy meeting, “... if the disinflationary process evolves according to (the) baseline projection,

further policy tightening in the near term is not anticipated at this juncture”. CPI inflation has come down from 8.8% in

Jan to 8.1% in Feb, below the RBI's baseline projections.

Source: Bloomberg, Goldman Sachs Global Investment Research.

Date Country Indicator/Event Period GS Bloomberg Previous

Time (HKT) Forecast Consensus

Fri Mar 28

7:00 Korea Industrial Production Feb -0.1%mom -0.3%mom +0.1%mom

15:30 Thailand Foreign Reserves 14-Mar US$168.6bn

Mon Mar 31

7:00 Korea Current Account Balance Feb US$3.6bn

15:30 Thailand Current Account Balance Feb US$219.1mn

16:30 Hong Kong Retail Sales Feb +14.5% yoy

Tue Apr 1

7:00 Korea CPI Mar +1.5% yoy +1.4% yoy +1% yoy

8:00 Korea Exports Mar +4.0% yoy +4.3% yoy +1.6% yoy

8:00 Korea Imports Mar +3.5% yoy +4.0% yoy

8:00 Korea Trade balance Mar US$3.8bn US$0.9bn

9:00 China NBS manufacturing PMI Mar 50.4 50.1 50.2

9:45 China HSBC manufacturing PMI Mar 48.1 48.1

12:00 Indonesia CPI Mar +7.5% yoy +7.8% yoy

12:00 Indonesia Exports Feb -5.8% yoy

12:00 Indonesia Imports Feb -3.5% yoy

12:00 Indonesia Trade Balance Feb -US$430.6mn

13:30 India Central bank policy meeting 8.0% 8.0% 8.0%

# Thailand CPI Mar +2.2% yoy +2.0% yoy

* Korea Foreign Reserves Mar US$351.8bn

Thu Apr 3

9:00 Taiwan Foreign Reserves Mar US$418.0bn

* Indonesia Foreign Reserves Mar US$102.7bn

Fri Apr 4

9:00 Philippines CPI Mar +4.2% yoy +4.1% yoy

12:00 Malaysia Exports Feb +15.0% yoy +12.3% yoy

12:00 Malaysia Imports Feb +15.0% yoy +7.3% yoy

12:00 Malaysia Trade balance Feb RM9.4bn RM6.4bn

15:30 Thailand Foreign Reserves 21-Mar

# Release time uncertain, time shown (if any) is the approximate typical release time.

* Release date uncertain, date shown is the first possible day of release:

Korea foreign reserves (Apr 1-5)

Page 17: 67_GS Asia Economics Analyst

March 28, 2014 Asia Economics Analyst

Goldman Sachs Global Investment Research 17

Forecast Tables

Real GDP Growth (year-over-year)

GS Consensus GS ConsensusAsia ex-Japan 6.3 6.2 6.2 6.7 -

China 7.7 7.3 7.4 7.6 7.3

India 4.6** 5.5** 5.4** 6.5** -

South Korea 2.8 3.7 3.5 3.8 3.7

Hong Kong 3.2 3.7 3.5 4.4 3.6

Taiwan 2.4 3.8 3.3 3.9 3.7

ASEAN 5.0 4.7 4.8 5.5 5.2

Singapore 4.1 3.7 3.8 4.2 4.0

Malaysia 4.7 4.5 5.1 5.2 5.0

Thailand 2.9 3.0 2.8 4.7 4.4

Indonesia 5.8 5.5 5.4 6.0 5.8

Philippines 7.2 6.3 6.5 6.5 6.2

USA 1.9 2.8 2.8 3.2 3.1

Euro area -0.4 1.2 1.1 1.5 1.4

Japan 1.5 1.0 1.4 1.3 1.3*GS estimates for annualized growth rate of potential output from 2013-16

**Fiscal year basis, 2013 is India FY14 (Q2 2013-Q1 2014).

Source: Consensus Economics, Goldman Sachs Global Investment Research.

0.8

3.7

4.5

4.0

5.0

6.0

6.0

2.3

1.1

7.76.0

3.8

4.0

20132014 2015 Potential

Growth*

Consumer Prices (year-over-year)

GS Consensus GS ConsensusAsia ex-Japan 4.1 3.9 4.1 4.0 -

China 2.6 2.6 2.9 3.0 3.2

India 9.6* 8.3* 8.3* 7.5* -

South Korea 1.3 1.8 2.1 2.4 2.6

Hong Kong 4.0 3.3 3.9 3.3 3.6

Taiwan 0.8 1.4 1.3 1.8 1.8

ASEAN 4.0 4.6 4.3 4.0 4.0

Singapore 2.4 3.3 2.7 3.5 2.8

Malaysia 2.1 3.0 3.2 2.6 3.5

Thailand 2.2 2.6 2.4 2.9 2.8

Indonesia 6.4 6.8 6.3 5.5 5.3

Philippines 2.9 3.8 4.2 3.5 3.9

USA 1.5 1.6 1.7 1.9 2.0

Euro area 1.4 0.9 0.9 1.5 1.3

Japan 0.4 2.6 2.6 1.7 1.7

**Core inflation target

***ECB aims to maintain inflation rates "below, but close to, 2% over the medium term"

Source: Consensus Economics, Goldman Sachs Global Investment Research.

-

-

0.5-3.0 **

3.5-5.5

*Fiscal year basis, 2013 is India FY14 (Q2 2013-Q1 2014); 8.0% as the inflation target by March 2015 recommended by the Monetary Policy Framework Committee

20132014

2.0

2.5-3.5

-

3.0-5.0

2.0

2.0***

2015 Inflation Target/Range

3.5

8.0*

-

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March 28, 2014 Asia Economics Analyst

Goldman Sachs Global Investment Research 18

Forecast Tables (continued)

Policy Interest Rates (percent)

CurrentMar 27 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Asia ex-Japan

China 3.89 4.00 4.00 4.25 4.25 4.50 4.50 4.50 4.50India 8.00 8.00 8.00 8.25 8.50 8.50 8.50 8.25 8.00South Korea 2.50 2.50 2.25 2.25 2.25 2.50 2.75 2.75 3.00Hong Kong - - - - - - - - -Taiwan 1.9 1.9 1.9 2.0 2.0 2.0 2.1 2.3 2.3ASEAN

Singapore - - - - - - - - -Malaysia 3.00 3.00 3.00 3.25 3.50 3.50 3.50 3.50 3.50Thailand 2.00 2.00 2.00 2.00 2.00 2.50 2.75 2.75 2.75Indonesia 7.50 7.50 7.50 7.50 7.50 7.25 6.75 6.75 6.75Philippines 3.50 3.50 3.75 4.00 4.00 4.00 4.00 4.00 4.00

USA 0.06 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.13Euro area 0.25 0.25 0.10 0.10 0.10 0.10 0.10 0.50 0.50Japan 0.07 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10

Policy interest rates: China: 7-day repo, India: repo rate; Korea: 7-day repo; Malaysia: overnight policy rate;

Thailand: 1-day repo, Philippines: repo rate, Indonesia: 1-month SBI rate, Taiwan: rediscount rate; USA: Fed funds effective rate;

Euro Area: Main refinancing operations: fixed rate; Japan: Overnight call rate.

Source: Goldman Sachs Global Investment Research.

2014F 2015F

Exchange Rates (local currency units per USD)

Current 3-Month Horizon 6-Month Horizon 12-Month Horizon

Mar 27 Forward Forecast Forward Forecast Forward Forecast

Asia ex-Japan

China 6.14 6.17 6.16 6.19 6.15 6.21 6.05

India 60.65 61.77 58.50 62.95 61.00 65.19 63.00

South Korea 1077 1082 1080 1086 1080 1093 1100

Hong Kong 7.8 7.8 7.8 7.8 7.8 7.8 7.8

Taiwan 30.6 30.5 29.8 30.4 29.5 30.3 29.0ASEAN

Singapore 1.27 1.27 1.20 1.27 1.18 1.27 1.15

Malaysia 3.30 3.32 3.18 3.34 3.17 3.37 3.15

Thailand 32.5 32.6 34.0 32.8 34.0 33.1 33.5

Indonesia 11369 11535 11400 11730 11300 12140 11200

Philippines 45.1 45.3 42.3 45.4 41.2 45.6 40.0

Euro area* 1.38 1.38 1.38 1.38 1.40 1.38 1.40

Japan 102.2 102.2 103.0 102.1 107.0 101.9 110.0* USD per Euro

Source: Goldman Sachs Global Investment Research.

Page 19: 67_GS Asia Economics Analyst

March 28, 2014 Asia Economics Analyst

Goldman Sachs Global Investment Research 19

Highlights of Recent Goldman Sachs Global Macro Research

Asia ex Japan

Policy proactivity lies behind the resilience of the INR and IDR Feb 19, 2014

Export-led growth in Asia: Better short-term, challenged long-term Feb 7, 2014

Questions for the 2014 Asia-Pacific economics outlook Jan 3, 2014

Diverging fortunes—the emerging Asia outlook for 2014 Nov 21, 2013

Asian current accounts could adjust faster than you might think Oct 31, 2013

Tooling up to analyze the Asian economies Oct 24, 2013

How emerging Asia reacts to higher US yields Sep 13, 2013

A deep dive into regional financial flows: Possible impact of US Fed tapering Sep 6, 2013

Cyclicality of Asian financial markets—seen from our Global Leading Indicator Jun 3, 2013

A redesigned MAP of emerging Asia data May 10, 2013

Greater China

China: CNY: regime shift or a temporary bout of volatility Mar 24, 2014

China: Revising growth forecasts for China Mar 20, 2014

China: How fast are Chinese exports really growing? Mar 17, 2014

China: The implications of CNY band widening Mar 16, 2014

China: Gauging stress during financial deregulation Feb 18, 2014

A look at CNH flows via Hong Kong banks’ positions data Feb 5, 2014

China: Cleaner and (probably) slower growth Feb 3, 2014

A matter of trust: Q&A on a potential Chinese trust default Jan 21, 2014

Tracking reforms in China: The balancing act of a credit slowdown Jan 13, 2014

China: Gaining fewer pounds—improving exports allow for slower leverage growth Jan 10, 2014

China: RMB internationalization to power ahead Dec 11, 2013

China outlook for 2014 and beyond: Steady drive on a bumpier road Dec 6, 2013

Transmission of interbank interest rates in China: Limited on bank loan rates Nov 25, 2013

Korea

Korea: Low inflation recovery bodes well for a rate cut Jan 24, 2014

Korea: Changes in our view—rate cut possibly this Thursday Jan 6, 2014

Korea: Less FX appreciation, more equity strength and a steeper curve Nov 15, 2013

Korea: Near-term outlook for the balance of payments and the KRW Oct 24, 2013

Korea: Growth upgrade on improving global demand and investment pickups Oct 4, 2013

Korea’s current account—headed for a 14-year-high surplus of 5% of GDP this year Sep 4, 2013

India

India: No 'banking' on growth Feb 14, 2014

India—a step forward for the RBI’s policy framework Jan 27, 2014

India 2014 outlook: Focus on inflation, investment, and elections Nov 28, 2013

India: What are the different measures of inflation saying? Nov 7, 2013

A primer on India’s 2014 elections Oct 18, 2013

India—what are the policy options? Aug 26, 2013

ASEAN

Indonesia’s rebalancing progressing at a faster pace Feb 12, 2014

Thailand’s political turmoil and its economic consequences Jan 16, 2014

Modeling the probability of Bank Indonesia’s next hike Dec 9, 2013

Indonesia: The path to sustainability is still fraught with risks Oct 4, 2013

ASEAN markets roiled—where do we go from here? Aug 22, 2013

ASEAN’s half a trillion dollar infrastructure opportunity May 30, 2013

Japan (this section is provided by our Japan Economics team based in Tokyo)

Japan: Pulse check on pre-tax-hike surge in demand Feb 14, 2014

Japan: Watch for the large gap between ‘Shunto’ wage hikes and macro basic wage growth Jan 24, 2014

Japan: 2014 critical for Abenomics: Watch wages, exports, Cabinet approval ratings Jan 10, 2014

Income outflows from Japan due to worsening terms of trade, a cause of sluggish wages Dec 6, 2013

FY2014 Japanese economy: Nominal wages and foreign demand are key Nov 21, 2013

'Visit Japan' project has strong potential but unlikely to be a decisive growth engine Nov 13, 2013

Page 20: 67_GS Asia Economics Analyst

March 28, 2014 Asia Economics Analyst

Goldman Sachs Global Investment Research 20

Disclosure Appendix

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