Will India’s growth rebound?assets1c.milkeninstitute.org/assets/Events/Conferences/Global... ·...
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Will India’s growth rebound? Real GDP, projection after 2013
Source: Oxford Economics.
Percent change, year ago
Share of services in GDP has been increasing Constant prices
Source: Oxford Economics.
Percent
Services
Industry
Agriculture
India’s international trade Current prices, not seasonally adjusted
Source: Datastream.
Imports
Exports
US$ billions
India has much less of an aging problem than U.S. Share of population aged 65+
Source: World Bank.
Percent
U.S. 13.6% in 2012
India
5.2% in 2012
There will be more youngsters in India Share of population up to 25 years old
Source: United Nations.
India
China
Percent
India and China make waves in the global middle class Share of global middle-class consumption, 2000-2050
Source: OECD.
India’s oil imports pick up Share of oil in total imports
Source: Datastream.
Percent
Indian rupee has weakened against US Dollar
Source: Bloomberg.
Indian rupee per US$
India’s current account deficit improves Current prices, not seasonally adjusted, 2000 Q1 – 2013 Q4
Source: Datastream.
US$ billions
India’s exports of goods and services Current prices, 1990-2013
Source: Datastream.
US$ billions Percent
India is undergoing an Internet boom
Sources: World Bank, McKinsey.
Percent Millions
Existing composition
Composition of Current Lok Sabha (Lower House of Parliament)
Current
Incumbent
Party
Regional Parties/
Third Front
Likely PM
Candidate:
Rahul Gandhi
PM Candidate:
Narendra Modi
Current Opinion Poll
& Market Favorite
Notes: UPA: Congress-led alliance (United Progressive Alliance); BJP: Bharatiya Janata Party; NDA: BJP-led alliance (National Democratic Alliance)
What has the incumbent Congress-led government achieved over
last 5 years and what legacy will the new government inherit?
Sources: RBI, Citi Research, UBS.
40
62
0
20
40
60
80
FY 2008 FY 2014
US$/INR –Annual Avg.
9%
5%
0%
2%
4%
6%
8%
10%
FY 2008 FY 2014E
Real GDP Growth Rate
2%
8%
0%
2%
4%
6%
8%
10%
FY 2008 FY 2013
Bad Corporate Loans %
4%
7%
0%
2%
4%
6%
8%
FY 2008 FY 2014
Fiscal Deficit (% of GDP)
6%
9%
0%
2%
4%
6%
8%
10%
FY 2008 FY 2014
Inflation (Avg. CPI)
12%
-2%
-5%
0%
5%
10%
15%
FY 2008 FY 2014E
Car Sales (% YoY)
Elections currently underway
• Largest in the world with 800 million+ voters (100 million+ first time voters)
• Elections held in several phases from April 7 to May 12. Results on
May 16
• Total Parliamentary Seats: 543 • Seats required to form a government: 272
• Poll projections suggest that the BJP led NDA will gain majority and Narendra Modi (NaMo) will be the next Prime Minister of India
• NaMo is seen as a pro-business reformist
Notes: UPA: Congress-led alliance (United Progressive Alliance); BJP: Bharatiya Janata Party; NDA: BJP-led alliance (National Democratic Alliance)
Anticipated results: Notoriously unpredictable
Opinion polls pointing to an absolute majority for NDA which can result
in a stable government for the next 5 years & mark a new beginning
1999 Elections 2004 Elections 2009 Elections 2014 Election Opinion Polls
Seats % Seats % Seats %
Times
Now
Times
Now
ABP
News
India
Today
CNN-
IBN
Times
Now
ABP
News NDTV
CNN-
IBN NDTV
Jul-13 Oct-13 Jan-14 Jan-14 Jan-14 Feb-14 Feb-14 Mar-14 Mar-14 Apr-14
BJP led NDA 270 50% 159 29% 159 29% 156 186 226 220 221 227 236 259 285 275
Congress led UPA 135 25% 181 33% 262 48% 134 117 101 103 117 101 92 123 111 111
Others 138 25% 203 37% 122 22% 253 240 216 220 205 215 215 161 147 157
Total 543 100% 543 100% 543 100% 543 543 543 543 543 543 543 543 543 543
Sensex Levels 19,126 19,534 20,943 20,943 20,943 20,943 20,521 21,818 21,818 22,513
Correlation between NDA seat & Sensex movements 94.4%
SENSEX 30 and NIFTY 50 (large company indices) have been exuberant and have priced
in a landslide majority for the NDA alliance
A personal view on possible outcomes
7%+ GDP in 12
months; 9%+ in 36
months
Scenario 1:
Majority for NDA,
the BJP led
Coalition (260+
seats)
Scenario 2:
Fragmented
Coalition resulting
in NDA requiring
support of regional
parties (220-260
seats)
Scenario 3:
Hung Verdict
(Possible Third
Front led
government backed
by Congress)
Outcome Growth Prospects
5%-7% GDP
for the next two
years with a
rebound
thereafter
Fiscal Management Investment Sentiment
Rupee appreciation
Sub 5% GDP
growth rate
Well disciplined
fiscal policies
Coalition politics
can result in some
delay in the reform
process
Policy paralysis to
continue
Slower pace of
investments
Short term capital
outflows as
immediate impact
Probability
How will the different scenarios play for the three possible outcomes:
(1) Majority; (2) Fragmented Coalition; and (3) Hung Verdict
H
M
L
But, don’t put too much faith in polls…
Sources: CNN-IBN, Star News, NDTV, TV Today, Goldman Sachs Global Investment Research.
Indian national elections are difficult to predict. Current elections can lead to surprises as
opinion polls have been wrong in the past
GDP growth has slowed down
Sources: CEIC, Morgan Stanley Research
Low Growth and High Inflation
The NDA government were in a similar scenario in 1999 when they
came to power – can the turnaround story repeat again?
While the new government will inherit a “crippled” economy, we believe this can be
“Modi”fied over the next few quarters
NREGA has not been effective
Source: Morgan Stanley Research.
The new government will need to focus on modifying the labor policies to manage
wage growth (and inflation) in line with productivity improvements
Poor populist policies for income redistribution have back-fired, having an adverse
impact on the rural population
Capex slowdown
New Projects Stalled Projects
A stable government and a continued push to resolving execution bottlenecks is
likely to revive capex cycle over the next few years
The new government will need to take steps to give impetus to the
investment cycle (fuel availability, land acquisition, mine clearances, etc.)
Source: CMIE.
Slowdown in credit growth
Source: Morgan Stanley Research.
Steep Decline in Credit Off-take for Infrastructure
Credit growth and growth in banking sector is dependent on the pick-up in investment
spend which can improve with a progressive government
Credit Growth vs. Nominal GDP Growth
Policy paralysis has increased corporate bad debts
Source: UBS
Impaired Loans as % of Total Loans
Credit quality has deteriorated over the past 5 years due to a sustained deceleration in
GDP, policy paralysis and high interest rates
Is now the best time to invest in structured credit in India?
2.4%2.0% 2.1%
3.8%
5.4%
4.6%
6.0%
6.9%
8.0%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
FY
2006
FY
2007
FY
2008
FY
2009
FY
2010
FY
2011
FY
2012
FY
2013
FY
2014
Strong government needed for power sector reforms
Sources: CEA, Morgan Stanley Research.
Key structural issues afflicting the power sector in India are:
– The domestic fuel deficit,
– The poor financial condition of SEBs (state electricity boards), and
– Economically un-viable PPA (power purchase agreement) tariffs of many power producers
PLFs of Thermal Power Plants Have Been Under Pressure
PLFs (plant load factors) have
shrunk over past 5 years
Inadequate existing healthcare infrastructure
Healthcare spending and infrastructure in India still remains paltry as
compared to several other countries
Public healthcare infrastructure remains inefficient with most units offering basic services, under-staffed and
ill-equipped in terms of obsolete or poorly managed medical equipment
A knowledge economy needs better higher education
Source: UNESCO Institute for Statistics Database
The new Government is likely to take positive steps in the higher education sector by reducing
the complexities governing foreign investment
GER (gross enrollment) in Higher Education (2009) - International Comparison
India ranks second last in a U21 rankings of national higher education systems done in
2013 for 48 countries
Markets have performed well under new RBI Governor September 2013 - Dr. Raghuram Rajan Appointed Governor of the Reserve Bank of India
Sources: Bloomberg, GTC
Indian markets have performed well since September 2013
New RBI Governor took pragmatic steps to control deficits, open up banking and attract investments
INR has recovered well since September 2013
India: 36%
Indonesia: 13%
MSCI EM: 6%
China: -4% Brazil: 4.7%
India is better prepared for tapering Global risks impact on India will be milder than in the summer of 2013
Source: CSDS (2014)
Policy makers are belatedly moving to address the risks emanating from the Taper. Their focus is on:
Increasing the supply of dollars and the country’s foreign exchange reserves
Attracting nearly $20bn by opening up banking deposits for Non-resident Indians
Opening up contingency swap lines with other sovereigns. For e.g. India opened a $50bn swap line with Japan in September , 2013
Speeding up approval of FDI proposals pending with regulators
Making India more attractive for foreign investments into equities
Ease regulations for entry of foreign investors and companies in restricted sectors
Including India in global benchmark debt funds. Will need rationalization of restrictions on foreign investment in domestic bonds but can attract upto $20 billion as India will have a sizeable benchmark allocation
Rebalancing India’s macroeconomic picture
Controlling the country’s fiscal and current account deficits by rationalizing subsidies and by policy to limit import of gold and oil
Prime Minister level policy push to kick start stalled infrastructure projects
New initiatives such as Inflation indexed bonds, and opening up of India’s pension schemes to encourage financial savings
India’s external risks are overstated Contrary to perception, India is not a candidate for a typical emerging markets currency crash
India's Total Debt to GDP ratio is quite manageable India has one of the lowest Foreign Debt to GDP
72
122 148
184
287 289 310 315
349 366
494 511
0.0
100.0
200.0
300.0
400.0
500.0
600.0
Ru
ssia
Ind
ia
Bra
zil
Ch
ina
Ger
man
y
USA
Ital
y
Ko
rea
Fran
ce
Spai
n
UK
Jap
an
Total Debt as % of GDP
19 21 27 29 33 55
100 124
164 168 192
412
0.0
50.0
100.0
150.0
200.0
250.0
300.0
350.0
400.0
450.0
Bra
zil
Ind
ia
Ru
ssia
Ind
on
esi
a
Ko
rea
Jap
an
USA
Euro
Are
a
Ger
man
y
Spai
n
Fran
ce UK
External Debt as % of GDP
Source: International Monetary Fund, Economist and Reserve Bank of India