Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

74
India – Macro challenges responses responses November 2013 s and policy

Transcript of Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

Page 1: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

India – Macro challenges and policy responsesresponses

November 2013

Macro challenges and policy

Page 2: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

Not much respite from weak growthNot much respite from weak growthNot much respite from weak growthNot much respite from weak growth

2

Page 3: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

Growth on a weak footing

Forecast8%

10%

12%

Back to square one%y/y

0%

2%

4%

6%

Mar-09

Sep-09

Mar-10

Sep-10

Mar-11

Sep-11

Mar-12

Sep-12

Mar-13

Sep-13

Mar-14

10%

12%

14%

Non government sector is under immense pressure%y/y

Source: Standard Chartered Research 3

0%

2%

4%

6%

8%

Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13

Page 4: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

7%

8%

9%

10%

11%

12%RBI starts

hiking rates

by 25bps

GDP

% y/y

From high inflation/high growth to sticky inflation/low growth

0%

1%

2%

3%

4%

5%

6%

7%

Q4-FY7 Q2-FY8 Q4-FY8 Q2-FY9 Q4-FY9 Q3-FY10 Q1-FY11

WPI

RBI starts

hiking rates

by 25bps RBI hikes by

50bps

From high inflation/high growth to sticky inflation/low growth

RBI starts

easing

Forecasts:

another

25bps

increase in

repo rate

RBI

starts

hiking

Q3-FY11 Q1-FY12 Q3-FY12 Q1-FY13 Q3-FY13 Q1-FY14 Q3-FY14

Sources: CEIC, Standard Chartered Research 4

repo rate

expected

before end

of 2013

Page 5: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

Investment demand collapses

Slowing capex on new projects is worryingINR bn, %y/y

40

60

80

250

300

350

Capex on

existing projectsCapex growth

rate

-40

-20

0

20

0

50

100

150

200

FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14

Capex on new

projects

Infrastructure dominates capex spending% share of corporate capex, FY11 & FY13

Power

Metals

Telecom

Hotels

Construction

FY11

FY13

0 10 20 30 40 50

Cement

Textiles

Petroleum

Ports and Airports

Transport services & equipments

Chemicals

Others

5Sources: RBI, Standard Chartered Research

Page 6: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

INR bn

Projects getting stalled

15,000

20,000

25,000

-

5,000

10,000

FY03 FY04 FY05 FY06 FY07 FY08

Shelved projects New projects

100,000

120,000

140,000

160,000

Sources: CMIE, Standard Chartered Research 6

-

20,000

40,000

60,000

80,000

FY08 FY09 FY10 FY11 FY12 FY13

New projects Outstanding (RHS)

Page 7: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

The vanishing “animal spirits”

48.8%

52.0%

50.0%

52.0%

54.0%

No improvement in project approvals% of total projects above INR150 cr delayed

46.4%

44.8%45.2%

40.0%

42.0%

44.0%

46.0%

48.0%

April 2010 April 2011 April 2012 December 2012

May-13

Negative sentiment impacting investment intentions% y/y

100%

150%

200%

Investment

intention

-100%

-50%

0%

50%

Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13

7Sources: RBI, CEIC, Standard Chartered Research

Page 8: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

Rising debt equity ratio constraining

Debt-to-equity ratio of CNX 500 firms

130.0

140.0

150.0

160.0

80.0

90.0

100.0

110.0

120.0

Jun-04 Mar-05 Dec-05 Sep-06 Jun-07 Mar-08 Dec

Rising debt equity ratio constraining capex

Sources: CEIC, Standard Chartered Research 8

Dec-08 Sep-09 Jun-10 Mar-11 Dec-11 Sep-12 Jun-13

Page 9: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

High lending rates also affecting investment demand

5

6

7

8

%

0

1

2

3

4

FY03 -08 FY09 FY10

Real lending rate

High lending rates also affecting investment demand

Nominal lending rate (RHS)

11

12

13

Sources: RBI, Standard Chartered Research

6

7

8

9

10

FY11 FY12 FY13

9

Page 10: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

Worsening asset quality of banks another concern

Gross NPAs as % of gross advances

10.0

12.0

14.0

16.0

2.0

4.0

6.0

8.0

10.0

FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06

Worsening asset quality of banks another concern

Sources: RBI, Standard Chartered Research

FY07 FY08 FY09 FY10 FY11 FY12 FY13 Jun'13

Restructured Std. Asset to

Gross Advances (%)

10

Page 11: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

Investment slowdown is impacting household spend too

8%

10%

12%

Household consumption expenditure% y/y

0%

2%

4%

6%

Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13

Investment slowdown is impacting household spend too

Source: Standard Chartered Research 11

Page 12: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

Consumer confidence remains weak

Household economic conditions worsened

Q1 FY13

Q2 FY13

Q3 FY13

51.5

40

50

60

Q4 FY13

Q1 FY14

0

10

20

30

Have become better off Have become worse off

Consumer confidence remains weak

…but some improvement in expectations

109.8110

115

120

Q1 FY13Q2 FY13Q3 FY13

Q4 FY13

Q1 FY14

90

95

100

105

Current conditions Future expectations

12Source: CEIC, Standard Chartered Research

Page 13: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

…particularly in urban areas

Same store sales growth of retailers %y/y

30

35

40

45

50

-5

0

5

10

15

20

25

Q1-FY10 Q3 FY10 Q1-FY11 Q3-FY11 Q1-FY12

Pantaloon lifestyle

Pantaloon Value

Jubilant

Sources: Company reports, Standard Chartered Research 13

FY12 Q3-FY12 Q1-FY13 Q3-FY13 Q1-FY14

Page 14: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

12

14

16

18

…but consumption of staples relatively flat

%y/y

0

2

4

6

8

10

Q1-FY11 Q3-FY11 Q1-FY12 Q3-FY12

Dabur

Colgate

…but consumption of staples relatively flat

FY12 Q1-FY13 Q3-FY13 Q1-FY14

HUL

Sources: Company reports, Standard Chartered Research 14

Page 15: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

….as wage increases in rural areas still quite strong

% y/y

15%

20%

25%

Nominal rural agri wages

-5%

0%

5%

10%

Jan-05

May-05

Sep-05

Jan-06

May-06

Sep-06

Jan-07

May-07

Sep-07

Jan-08

May-08

Sep-08

….as wage increases in rural areas still quite strong

Sources: CEIC, Standard Chartered Research 15

Jan-09

May-09

Sep-09

Jan-10

May-10

Sep-10

Jan-11

May-11

Sep-11

Jan-12

May-12

Sep-12

Jan-13

May-13

Nominal rural non-agri wages

Page 16: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

Some preliminary signs of growth bottoming out

FY13 growth slips to 5%...Real GDP growth (% y/y)

Decade average

8

9

10

4

5

6

7

FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13

Some preliminary signs of growth bottoming out

Pace of decline has moderatedReal GDP growth (% y/y)

0.1

0.1

0.1

Sources: CEIC, Standard Chartered Research 16

0.0

0.0

0.0

0.1

Dec-08 Jul-09 Feb-10 Sep-10 Apr-11 Nov-11 Jun-12 Jan-13

Page 17: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

….but not many growth green-shoots

-13

-3

7

17

27

Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13

Commercial vehicles

Passenger vehicles

Two wheelers

Vehicle sales % y/y, 3mma

Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13

-10%

0%

10%

20%

30%

40%

50%

Feb-11

May-11

Aug-11

Nov-11

Feb-12

May-12

Aug-12

Nov-12

Feb-13

May-13

Aug-13

Mobile phone connections

Mobile phone connections% y/y, 3mma

shoots

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13

International air travellers

Domestic air travelers

Air travel% y/y, 3mma

Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13

0%

5%

10%

15%

20%

25%

30%

35%

-10%

0%

10%

Feb-11

May-11

Aug-11

Nov-11

Feb-12

May-12

Aug-12

Nov-12

Feb-13

May-13

Aug-13

Cargo TrafficRailway freight (RHS)

Cargo Traffic and railway freight% y/y, 3mma

Sources: CEIC, Standard Chartered Research 17

Page 18: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

Credit deceleration has reversed in some sectors

10%

20%

30%

40%

50%

60%

Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13

Roads

PowerInfrastructure

Credit to infrastructure% y/y, 3mma

Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13

5%

15%

25%

35%

Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13

Vehicle loans

Retail credit

Housing loans

Retail credit% y/y, 3mma

Credit deceleration has reversed in some sectors

5%

15%

25%

35%

Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13

Credit to small scale industries

Industrial credit

Credit to industry% y/y, 3mma

Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13

5%

15%

25%

35%

May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13

Services

Retail and wholesale trade

Credit to service sector% y/y, 3mma

Sources: CEIC, Standard Chartered Research 18

Page 19: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

Hopes on short term recovery stems from....

Impact of good monsoon on agriculture and rural consumption

Continued export growth momentum on the back of global recovery

Election related spending

Some activity on projects which had recently received critical approvals

…..we expect FY14 GDP growth at 4.7%, with Q2

Hopes on short term recovery stems from....

Impact of good monsoon on agriculture and rural consumption

Continued export growth momentum on the back of global recovery

Some activity on projects which had recently received critical approvals

…..we expect FY14 GDP growth at 4.7%, with Q2-FY14 being the bottom

Page 20: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

Growth: structural issuesGrowth: structural issuesGrowth: structural issuesGrowth: structural issues

20

Page 21: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

Declining productivity is at the root of the growth problem

160

170

180

190

200

Total Factor Productivity (TFP)

100

110

120

130

140

150

160

1982 1984 1986 1988 1990 1992 1994 1996

Declining productivity is at the root of the growth problem

Sources: CEIC, Standard Chartered Research

1996 1998 2000 2002 2004 2006 2008 2010

21

Page 22: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

Savings fall faster than investments, widening the gap

32

34

36

38

40

% of GDP

Investment to GDP ratio

20

22

24

26

28

30

32

FY90 FY92 FY94 FY96 FY98 FY00

Savings fall faster than investments, widening the gap

Sources: CEIC, Standard Chartered Research

Investment to GDP ratio

FY02 FY04 FY06 FY08 FY10 FY12

Savings to

GDP ratio

22

Page 23: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

NREGA has changed the wage dynamics

% y/y

12%

14%

16%

18%

20%

Nominal urban wages

0%

2%

4%

6%

8%

10%

FY 01

FY02

FY 03

FY 04

FY 05

FY 06

NREGA has changed the wage dynamics

NREGA

Implementation

Sources: CEIC, Standard Chartered Research 23

FY 07

FY 08

FY 09

FY 10

FY 11

FY 12

FY 13

Nominal rural wages

Page 24: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

Fiscal transfer mechanism adds to rural demand

INR cr 2007-08 2011-

MGNREGA 12,661 40,000

Indira Awas Yojana 3,886 10,000

National social assistance program 3,104 6,158

PMGSY 6,500 20,000

NRHM 10,509 18,115

ICDS 5,193 10,000

Mid-day meal 5,832 10,380

Sarva Sikhsha Abhiyan 11,477 21,000

JNNURM 5,508 13,700

AIBP 5,446 12,650

RGGVY 3,913 6,000

Drinking water mission 7,320 11,000

Rashtriya Krishi Vikas Yojana 1,200 7,811

Total 81,217 186,539

Fiscal transfer mechanism adds to rural demand

-12 (BE) 11th Plan total % growth Share

40,000 156,301 216% 22.6

10,000 41,486 157% 6.0

6,158 23,536 98% 3.4

20,000 65,002 208% 9.4

18,115 69,214 72% 10.0

24

10,000 38,980 93% 5.6

10,380 38,602 78% 5.6

21,000 77,576 83% 11.2

13,700 48,485 149% 7.0

12,650 46,622 132% 6.7

6,000 25,913 53% 3.7

11,000 46,722 50% 6.8

7,811 18,550 551% 2.7

186,539 691,976 130% 100.0

Sources: Planning Commission, Standard Chartered Research

Page 25: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

The “chaotic” urbanisation process

Urbanisation rate increased from 27.2% in 2001 to 31.towns, 42.6% of the urban population stay in million plus towns

2011

Statutory Towns 4,041

Census Towns 3,894

Urban Agglomerations 475

Out Growths 981

Class I towns 468

Million plus towns 53

The “chaotic” urbanisation process

31.2% in 2011, 70% of urban population live in Class I towns, 42.6% of the urban population stay in million plus towns

2001 % growth

3,799 6%

1,362 186%

384 24%

962 2%

394 19%

35 51%

25Source: Standard Chartered Research

Page 26: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

Gen “I” aspires a better life

1990s

# Television channels 1

# car models ~5

75% of population in 2020 will be from Gen “I” i.e. grew up in a liberalized economy (<14 years of age when economy started opening)

# car models ~5

# Shopping malls 0

% of household with mobile phones 0

Internet penetration, % 0

1990s 2010

1 >500

~5 ~165

Sources: Boston Consulting group, Standard Chartered Research

75% of population in 2020 will be from Gen “I” i.e. grew up in a liberalized economy (<14 years of age when economy started opening)

~5 ~165

0 >500

0 ~60

0 ~11

26

Page 27: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

Inflation: Mixed signalsInflation: Mixed signals

27

Page 28: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

Fear of inflation prevails

Mixed signals on inflation ...%y/y

CPI

Core CPI9

11

13

WPI

Core WPI

1

3

5

7

Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13

Pricing power reduces

� WPI which fell within the RBI’s 4-6% comfort zone has moved up

� Sustained fall in core WPI indicates lack of pricing power

� CPI higher on the back of surprising increase in food prices, particularly

Sources: CEIC, Standard Chartered Research 28

increase in food prices, particularly vegetables

� Second round effects of fuel price hike not being felt but risks from another round of fuel price increase remains

� INR effect not felt acutely, we estimate 70-100bps impact of 10% depreciation

Page 29: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

Benign commodity prices and lack of pricing power positives

7

9

11

13

15

% y/y

-5

-3

-1

1

3

5

7

Sep-09 Mar-10 Sep-10 Mar-11 Sep

Benign commodity prices and lack of pricing power positives

Imported inflation

Sources: CEIC, Standard Chartered Research

Sep-11 Mar-12 Sep-12 Mar-13

Core inflation

29

Page 30: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

Vegetable prices the culprit behind the recent rise

20%

30%

40%

50%

-30%

-20%

-10%

0%

10%

Apr-05 Apr-07 Apr-

Vegetable prices the culprit behind the recent rise

Vegetables

Food prices

Sources: CEIC, Standard Chartered Research

-09 Apr-11 Apr-13

30

Page 31: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

Internal imbalance led to persistent inflation

Average

Alarm level8%

10%

12%

Rising average inflation rates and inflation stickiness make us worried

-2%

0%

2%

4%

6%

Feb-96 Feb-98 Feb-00 Feb-02 Feb-04

Internal imbalance led to persistent inflation

Rising average inflation rates and inflation stickiness make us worried

Sources: CEIC, Standard Chartered Research

WPI % YoY

Feb-06 Feb-08 Feb-10 Feb-12

31

Page 32: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

CPI turns out to be stickier than WPI

10%

15%

20%

-5%

0%

5%

10%

Dec-96 Dec-98 Dec-00 Dec-02 Dec-

CPI turns out to be stickier than WPI

CPI% YoY

Sources: CEIC, Standard Chartered Research

-04 Dec-06 Dec-08 Dec-10 Dec-12

32

Page 33: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

Inflation expectations are getting de

Current perception

10

11

12

13

14

% y/y

4

5

6

7

8

9

10

Q1-FY10 Q3 FY10 Q1-FY11 Q3-FY11 Q1-FY12

Inflation expectations are getting de-hinged

1 year ahead

8

10

12

Sources: CEIC, Standard Chartered Research

WPI quarterly average (RHS)

0

2

4

6

FY12 Q3-FY12 Q1-FY13 Q3-FY13 Q1-FY14

33

Page 34: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

Rising fiscal risksRising fiscal risks

34

Page 35: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

Noble intent and strong execution in FY13

An ambitious fiscal consolidation planGrowth (%y/y), % of GDP (RHS)

-4

-3

-2

20

25

30Receipts Expenditure Fiscal deficit (RHS)

-7

-6

-5

-4

0

5

10

15

FY04 FY06 FY08 FY10 FY12 FY14 F

Noble intent and strong execution in FY13

Petrol

65

70

75

80

Regular revision in fuel product prices INR/ litre

Sources: CEIC, Standard Chartered Research 35

Diesel

30

35

40

45

50

55

60

Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13

Page 36: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

Fiscal deficit widened significantly in H1

H1 fiscal deficit as a proportion of annual fiscal deficit

50

60

70

80

0

10

20

30

40

FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06

Fiscal deficit widened significantly in H1-FY14, %

H1 fiscal deficit as a proportion of annual fiscal deficit

Fiscal deficit as a % of GDP (RHS)

4

5

6

7

Source: Standard Chartered Research 36

0

1

2

3

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14*

Page 37: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

H1-FY14 fiscal deficit performance

H1-

5-yr avg

H1-FY13

50

60

70

80

Slower taxes and high expenditure widen deficitAs a proportion of annual aggregates

H1-FY14

avgFY13

0

10

20

30

40

Tax revenue Total expenditure Fiscal deficit

FY14 fiscal deficit performance

500

600

700

800

Government likely to miss disinvestment target INR bn

Source: Standard Chartered Research 37

FY14

H1-FY14

0

100

200

300

400

Disinvestment Stake sale in two metal companies

Telecom spectrum auctions

Dividends & profits

Page 38: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

Fiscal equation: Budgeted vs. our estimates

INR bn FY14 budgeted Our estimates

Tax revenue 8,840

Non-tax revenue incl. disinvestment target 2,387

Total revenue 11,227

Expenditure 16,652

Fiscal deficit -5,425

Fiscal deficit as a % of GDP~ -4.8%

Fiscal equation: Budgeted vs. our estimates

Our estimates Slippage H1 H2

8,290 -550 3,075 5,215

2,287 -100 893 1,394

Source: Standard Chartered Research 38

10,577 -650 3,968 6,609

16,152 -500 8,090 8,062

-5,575 -150 -4,122 -1,453

-5.0% ~0.2% - -

Page 39: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

Swing factors for fiscal deficit

INR bn FY14 budgeted

Unknown unknowns

Metal-company-stake sales 156

Resolution of tax dispute with a telecom company

0

Private-company-stake sales by the government

0government

Known unknowns

Coal-block auction 0

Disinvestment 400

Telecom-related revenue 400

Dividends and profits 738

FY14 budgeted Our estimates Probability

156 Uncertain

0Uncertain but if resolved, can yield INR 100bn

0Uncertain, but if resolved, can yield INR

120bn

Source: Standard Chartered Research 39

120bn

50 Medium

200 Medium

400 High

738 High

Page 40: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

External sector developmentsExternal sector developmentsExternal sector developmentsExternal sector developments

40

Page 41: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

Increased openness is welcome but…

USD bn

400

500

600

0

100

200

300

FY01 FY02 FY03 FY04 FY05 FY06 FY07

Increased openness is welcome but…

Imports

Sources: CEIC, Standard Chartered Research 41

Exports

FY08 FY09 FY10 FY11 FY12 FY13 FY14(E)

Page 42: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

…. need to worry about the trade deficit

-100

-50

0

Trade deficitUSD bn

-250

-200

-150

-100

FY01 FY02 FY03 FY04 FY05 FY06 FY07

…. need to worry about the trade deficit

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14E

Sources: CEIC, Standard Chartered Research 42

Page 43: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

Why is trade deficit worsening?

Commodities FY10 FY13 Change

Petro related products

28.2 60.3 32.1

Machinery/ electronics, Engg

34.6 59 24.4

Gems and jewelllery 28.9 43.4 14.5

Chemicals, pharmaand cosmetics

15.7 27 11.3

Exports, USD bn

and cosmetics 15.7 27 11.3

Textiles 19.8 27.3 7.5

Cereal 2.9 9.6 6.7

Rubber 2.7 5.1 2.4

Plastics 3.3 6.3 3

Iron and Steel 3.6 6.2 2.6

Ores and Minerals 8.6 5.5 -3.1

Total exports 178.7 300.5 121.7

Imports, USD bn

Commodities FY10 FY13 Change

Oil 87.1 169.3 82.2

Gold and Silver 29.6 55.6 26

Machinery 19.7 27.6 7.9

Electronics 20.9 31.5 10.6

Sources: CEIC, Standard Chartered Research 43

Electronics 20.9 31.5 10.6

PreciousStones 16.1 22.6 6.5

Chemicals 11.9 19.2 7.3

Coal 8.9 15.4 6.5

Ores 7.7 14.9 7.2

Transport 11.6 13.7 2.1

Edible Oil 5.6 11.3 5.7

Total Imports 288.4 490.8 202.5

Page 44: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

Widening deficits raise alarm about macro stability

Fiscal deficit spills on to the current account% of GDP

-2%

-1%

0%

1%

CAD

-4.8(f)

-4.0(F)

-7%

-6%

-5%

-4%

-3%

Mar-04 Mar-07 Mar-10 Mar-13

Fiscal deficit

Widening deficits raise alarm about macro stability

Governance deficitNumber of cabinet decisions taken in a year

Jul 10 - Jun 11

Jul 11 - Jun 12

Jun 12- Jun 13 Chidambaram Effect

20 70 120 170 220 270

Jul 06 - Jun 07

Jul 07 - Jun 08

Jul 08 - Jun 09

Jul 09 - Jun 10

44Source: Standard Chartered Research

Page 45: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

The outlook on C/A deficit appears

Gold Imports duty

Import duty (%) RHS

5%

6%

7%

8%

9%

250

300

350

400

Gold imports(tons)

0%

1%

2%

3%

4%

5%

0

50

100

150

200

`

Q4FY12

Q1 FY13

Q2 FY13

Q3 FY13

Q4FY13

Q1FY14

The outlook on C/A deficit appears favourable

-15

-10

-5

0

C/A deficit likely to narrow substantially USD bn

45Sources: CEIC, Standard Chartered Research

-35

-30

-25

-20

-15

Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14

Forecast

Page 46: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

FII outflows on tapering fear, but stabilising

100

200

300

Equities

Bond outflows have outpaced equitiesNet daily portfolio inflows, USD mn, 30-day moving average

-300

-200

-100

0

100

Jan-13 Mar-13 May-13 Jul-13 Sep-13

Bonds

Equities received USD 15bn between Jan – May, outflow USD 2.8bn since then

Bonds received USD 4.5bn, lost USD 9.4bn after that

stabilising recently

QE 1

QE 3

40

50

60

Indian equities have benefited most from QE3Foreign buying of AXJ equities, USD bn

Source: CEIC, Standard Chartered Research 46

QE2

OT

QE 3

-10

0

10

20

30

Sum INR IDR PHP KRW THB

May, outflow USD 2.8bn since then

Page 47: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

The importance and volatility of FII flows

USD bn

Exports Imports Trade balance

May-12 24.8 41.7 -17.0

Jun-12 24.9 36.2 -11.2

Jul-12 23.1 40.2 -17.1

Aug-12 23.1 36.9 -13.8

Sep-12 24.9 41.8 -16.9

Oct-12 24.0 44.7 -20.6

Nov-12 23.3 41.3 -18.1Nov-12 23.3 41.3 -18.1

Dec-12 25.5 43.4 -17.8

Jan-13 25.7 45.7 -20.0

Feb-13 25.8 41.3 -15.5

Mar-13 30.7 40.5 -9.8

Apr-13 23.7 41.9 -18.3

May-13 24.5 44.6 -20.1

Jun-13 23.8 36.0 -12.2

Jul-13 25.8 38.1 -12.9

Aug- 13 26.1 37.0 -10.9

Sep -13 27.6 34.4 -6.7

Oct- 2013 27.2 37.3 -10.5

The importance and volatility of FII flows

FDI gross inward

FII total FII equity FII debt

2.3 0.6 -0.1 0.7

2.2 0.2 -0.1 0.3

2.8 2.5 1.9 0.6

3.5 2.0 1.9 0.1

5.4 3.7 3.6 0.1

3.2 3.6 2.2 1.5

2.4 1.8 1.7 0.1

Sources: CEIC, RBI, Standard Chartered Research

2.4 1.8 1.7 0.1

2.6 4.9 4.6 0.3

3.6 4.6 4.1 0.6

3.1 5.3 4.6 0.7

3.0 2.7 1.7 1.1

2.3 2.0 1.0 1.0

1.6 5.2 4.1 1.2

1.4 -7.5 -1.9 -5.7

1.65 -3.0 -0.9 -2.1

1.40 -2.3 -0.95 -1.4

0.73 1.9 -1.2

0.83 2.9 -2.0

47

Page 48: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

BoP expected to surprise positivelyexpected to surprise positively

Sources: CEIC, RBI, Standard Chartered Research

48

Page 49: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

Outstanding debt situation needs a close watch

External commercial debt is on the rise and short term debt tooUSD bn

100

120

140

0

20

40

60

80

Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06

Outstanding debt situation needs a close watch

External commercial debt is on the rise and short term debt too

119

96.70

External commercial debt

06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12

Short-term debt

Sources: RBI, CEIC, Standard Chartered Research 49

Page 50: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

Assessing the risk from short term debt

100

120

140

160

180

USD bn, outstanding as of June 2013

0

20

40

60

80

Short term debt Trade credit NRI Deposit FII in GoISec

* The hedged proportion is taken to be 50% as an approximation

Assessing the risk from short term debt

Source: Standard Chartered Research 50

FII in GoISec Hedged ECB* Unhedged ECB* Sovereign debt

Page 51: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

Its different this time

FY97

FY91 FY13

4

6

8

10

12

There are similarities to 1991… % y/y

. .. but also important differences %

-6

-4

-2

0

2

4

GDP growth Inflation Fiscal deficit C/A deficit

FY91 FY97 FY13

Services as % GDP 50 51 66

Exports as % of GDP 5.7 8.5 16.7

. .. but also important differences %

Source: Standard Chartered Research 51

Currency vs. 5 year average 20 2.0 -10

Short-term debt/FX reserves 227 51 61.9

Stable inflows as % of trade deficit

54 132 85

Capital openness 2.2 3.0 4.9

Page 52: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

External Vulnerability Index (ST external debt to reserves ratio)

India’s vulnerability has increased between 2007 and 2013 beating the trend in rest of Asia

120

140

160

180

200783 493

KR

THID

PH

0

20

40

60

80

100

120

1997

External Vulnerability Index (ST external debt to reserves ratio)

India’s vulnerability has increased between 2007 and 2013 beating the trend in rest of Asia

Source: Standard Chartered Research 52

PH

MY

IN

CNTW

2007 2013F

Page 53: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

Early Fed tapering fears adds to external weakness

INR depreciates close to 16%

Early Fed tapering fears adds to external weakness

Sources: Bloomberg, Standard Chartered Research 53

Page 54: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

INR depreciation feeds into macro risks

Higher inflation

� 70-80bps impact on inflation of a 10% depreciation

Higher fiscal deficit

� Fuel and fertiliser subsidies likely to go up

External debt refinancing risks

� Unhedged FX exposure component of the USD 390bn external debt

Little impact on CAD

� Exports are relatively insensitive to exchange rate movements

Confidence

� Currency depreciation can push back investment decisions

INR depreciation feeds into macro risks – negative feedback loop

FX exposure component of the USD 390bn external debt

Exports are relatively insensitive to exchange rate movements

Currency depreciation can push back investment decisions

Page 55: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

Policy responses and INR outlookPolicy responses and INR outlookPolicy responses and INR outlookPolicy responses and INR outlook

55

Page 56: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

RBI took strong steps to tighten liquidity and stem depreciation

Banks to borrow cash up to 1% of NDTLs at

7.25%

0.0

0.5

1.0

Our forecasts

New liquidity framework will push overnight rates higherINR trillion

Banking system's cash deficit

Banks to borrow cash in excess of 1% of NDTLs

at 10.25%

-2.5

-2.0

-1.5

-1.0

-0.5

Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13

End August

End September

RBI took strong steps to tighten liquidity and stem depreciation

Our forecasts

� LAF limited to 1% of NDTL of the banking system from 17 July

� Marginal Standing Facility(MSF) rates have been increased b

200 bps to 10.25%, penalising borrowings under the MSF.

RBI announced the following steps on 15 July…..

……..And the markets reacted swiftly.

� LAF limited to 0.5% NDTL of each bank

� Banks will have to hold cash equivalent of at least 99% ofCRR on a daily basis, compared with 70% earlier(Eff. 27July).

Followed by additional measures on 23 July…..

56

September

15 July close level

16 July open level

24 July Level

Change 15-24 July

Overnight call money rate (%) 7.15% 9.25% 10% +285bps

USD-INR 59.89 59.14 59.15 -0.74

6M USD-INR forward premia (annualised, %)

6.40% 7.60% 9.50% 3.10%

1Y OIS rate (%) 7.62% 8.75% 9.45% +183bps

5Y OIS rate (%) 7.60% 8.32% 8.40% +80bps

10Y GoISec yield (%) 7.55% 8.05% 8.42% +87bps

……..And the markets reacted swiftly.

Page 57: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

USD 11bn package announced by the FM

6

44

5

6

7

The USD 11bn mathUSD bn

0

1

2

3

4

Overseas borrowings o.w. oil companies

This inflow has not hit the market as of now

USD 11bn package announced by the FM

4

57

1

Quasi sovereign bond NRI deposit

Sources: Standard Chartered Research

This inflow has not hit the market as of now

Page 58: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

Rules on outflows tightened

-10

-5

0

FDI outflows norms made tighterUSD bn

-25

-20

-15

FY02 FY04 FY06 FY08 FY10 FY12

In our view, not many corporate were investing more than 100% of their net worth on outward FDI

We do not interpret these measures as capital controls but weak sentiments has left the market with such a perception

0.8

1

1.2

1.4

Outward remittances have been smallUSD bn

Source: Standard Chartered Research 58

0

0.2

0.4

0.6

FY07 FY09 FY11 FY13

In our view, not many corporate were investing more than 100% of their net worth on outward FDI

We do not interpret these measures as capital controls but weak sentiments has left the market with such a perception

Page 59: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

Demand for USDs for oil imports partially taken off the market

Commodities FY10 FY13% of total imports

Oil 87.1 169.3 34%

Gold and Silver 29.6 55.6 11.3%

Machinery 19.7 27.6 5.6%Machinery 19.7 27.6 5.6%

Electronics 20.9 31.5 6.4%

PreciousStones 16.1 22.6 4.6%

Chemicals 11.9 19.2 3.9%

Demand for USDs for oil imports partially taken off the market

- RBI decided to open a forex swap window

to meet the entire daily dollar requirements

of three public sector oil marketing

companies (IOC, HPCL and BPCL)~

Source: CEIC, Standard Chartered Research 59

- This should take away ~ USD 6-8 bn per

month demand away from the market

Page 60: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

Tapping the NRI diaspora

50

60

70

80

USD bn, outstanding as of June 2013

0

10

20

30

40

NRI Deposits FCNR(B)

Source: RBI, Standard Chartered Research 60

NR(E)RA NRO

Page 61: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

Measures announced to attract USD 10

Overseas borrowing by banks against tier 1capital made cheaper

Banks’ lower INR funding costs via the FCNR (B) scheme to attract more flows

%Old New

6M LIBOR0.39 0.39

Spread over LIBOR

1.25-1.5 1.25-1.5

1Y swap cost1Y swap cost

7.2 6.2

Landed cost of one year overseas funds under the loan route

8.84 - 9.1 7.84 - 8.1

India has attracted USD17

Measures announced to attract USD 10-15bn

Banks’ lower INR funding costs via the FCNR (B) scheme to attract more flows

%Old New

Interest rate on 3Y

FCNR(B) deposits after adjusting for

~4.0 ~4.0

Source: Standard Chartered Research 61

adjusting for

Swap cost 7 3.5 ~4.00-4.25

Landed cost of one year overseas

funds

11.0 8.00-8.25

India has attracted USD17 bn till Nov 8 2013.

Page 62: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

How to think about the recent RBI measures?

Policy priorities

� No easy choice in a slowing economy with high CAD, buffeted by global shocks

� Inflation is emerging as a concern again after a brief respite and dominating

� Speculation about INR depreciation was becoming a self-fulfilling prophecy (drawing a line on the sand)

� RBI’s “hands-off” approach was interpreted as “weakness”

Success of the measures

� Clearly indicated that the policymakers do not want too much depreciation

� Gave them space to take more corrective steps to address

� RBI’s credibility increased as a central bank not wary of taking difficult decisions

Difficulty of implementation

� No clarity on which inflation metric is going to be used – CPI or WPI

� Transmission mechanism not clear, interest rate could be a blunt instrument

What more to expect?

� 50bps repo rate hike and 50 bps MSF rate cut, more liquidity easing

� More measures to create buffer on the external sector

� Intervention on the other side?

Risks of the measures

� If measures sustain a little longer then growth may be impacted

� Weaker growth outlook can trigger equity outflows and put more pressure on INR

� Does not address the core macro issues – false sense of stability

How to think about the recent RBI measures?

No easy choice in a slowing economy with high CAD, buffeted by global shocks

Inflation is emerging as a concern again after a brief respite and dominating mindspace

fulfilling prophecy (drawing a line on the sand)

Clearly indicated that the policymakers do not want too much depreciation

s the structural challenges (CAD reduction and CAD financing)

RBI’s credibility increased as a central bank not wary of taking difficult decisions

CPI or WPI

Transmission mechanism not clear, interest rate could be a blunt instrument

50bps repo rate hike and 50 bps MSF rate cut, more liquidity easing

If measures sustain a little longer then growth may be impacted – monetary policy stance has changed

Weaker growth outlook can trigger equity outflows and put more pressure on INR

false sense of stability

Page 63: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

Index inclusion could be a game-changer

Our estimates of FII inflows into GoISecs if India is included in GBI

AuM tracking GBI-EM-GD index (A)

Estimated GoISec weightage in the index (B)

Estimated inflows from funds tracking GBI-EM-GD

(C=A*B)

Estimated EM dedicated funds not tracking GBI-EM-GD Estimated EM dedicated funds not tracking GBI-EM-GD

index (D)

Assumed allocation to GoISecs (E)

Estimated inflows from EM dedicated funds not

tracking GBI-EM-GD index (F=D*E)

Total inflows (G=C+F)

Current foreign holding (H)

Incremental flows due to index inclusion (G-H)

changer

if India is included in GBI-EM-GD index

USD 200-250bn

10%

USD 20-25bn

USD 350-400bn

63

USD 350-400bn

3%-5%

USD 10.5 - 20

USD 30.5-45 bn

USD 8bn

USD 22.5-37bn

Source: Standard Chartered Research

Page 64: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

The wildcard of politics The wildcard of politics The wildcard of politics The wildcard of politics

64

Page 65: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

Political deadlock in parliament

Ruling CoalitionNumber of seats

in Lok Sabha

UPA with outside support 281

India National Congress 202

UPA allies 30

Parties providing outside support to UPA

A weaker NDA, a weaker UPA?

SP 22

BSP 21

JD(S) 3

RJD 3

• When is the next general election likely? – risks of an early election receding

• The pivotal issue of the general election yet to be identified

OppositionNumber of seats

in Lok Sabha

NDA (BJP and allies) 132

Left 20

Others 106

Seats needed to be in majority 270

Source: Standard Chartered Research 65

UPA less support from SP 259

Seats needed to be in majority if DMK and left abstain

261

Seats needed to be in majority if DMK, left and TMC abstain

242

risks of an early election receding

The pivotal issue of the general election yet to be identified – choice between economy, religion and corruption

Page 66: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

Everybody likes to be populist!

1.0%

1.2%

1.4%

Fiscal burden of the Food Security bill% of GDP

0.0%

0.2%

0.4%

0.6%

0.8%

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

Land bill proposes 4X increase in rural land price and 2X in urban

Marginal and small holdings< 2

hectares

3.0%

3.5%

4.0%

4.5%

80%

85%

90%

Land bill to increase the time for land acquisition% of total land holdings

Source: Standard Chartered Research 66

Largeholdings > 10 hectares

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

60%

65%

70%

75%

1970-71

1976-77

1980-81

1985- 1990-91

1995-96

2000-01

2005-06

2010-11

Land bill proposes 4X increase in rural land price and 2X in urban

Page 67: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

Ahead of busy election cycle

400

500

600

5 states to hold elections in Q4-2013; general elections in 2014

0

100

200

300

Madhya Pradesh Mizoram Delhi

Loksabha seats*

2013; general elections in 2014

Source: Standard Chartered Research 67

Assembly seats

Delhi Rajasthan General election

Page 68: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

The reform pipeline appears limited

Pipeline of reform bills requiring parliamentary approval is small

Increase in FDI limit for insurance

Goods and Services tax (GST)

Quite a few policy changes require a simple executive decision

Clearance of delayed projects by CCI

Decisions regarding coal pricing pool and renegotiations of PPAs

Liberalization of FII registration norms

National manufacturing investment zone

The reform pipeline appears limited

Pipeline of reform bills requiring parliamentary approval is small

Direct tax code

Real estate regulatory bill

Source: Standard Chartered Research 68

Quite a few policy changes require a simple executive decision

Urea price decontrol

Regulator for the road sector to quicken projects

Delhi Mumbai industrial corridor

Page 69: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

Fragmented polity increases the risk of a hung parliament

280

330

380

430

% of votes in favour of parties other than BJP and INC

(RHS)

30

80

130

180

230

1984 1989 1991 1996 1998

Number of parties

contesting the general

elections

Fragmented polity increases the risk of a hung parliament

48

50

52

54

of parties other than BJP and INC

Source: Standard Chartered Research 69

40

42

44

46

1998 1999 2004 2009

Number of parties

contesting the general

elections

Page 70: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

But weak coalitions are not new to India …

9

11

13

# of months/ years the government lasted

Number of coalition parties and stability of the government

13M 10 M 11 M

-1

1

3

5

7

May-96 Mar-97 Mar-98

But weak coalitions are not new to India …

# of parties in ruling coalition

# of months/ years the government lasted

Number of coalition parties and stability of the government

5 Y 5 Y

Oct-99 May-04 May-09

70Source: Election Commission, Standard Chartered Research

Page 71: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

Rates outlookRates outlook

71

Page 72: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

SCB India forecasts

FY09 FY10

GDP growth, % 6.7 8.6

WPI, % 8.0 3.9

Fiscal balance, % of GDP

-6.0 -6.3

CAD, % of GDP -2.4 -2.8

Repo rate, % 5.00 5.00

Reverse repo rate, % 3.50 3.50

USD-INR, end-March 50.70 44.90

FY11 FY12 FY13(F) FY14(F)

9.3 6.2 5.0 4.7

9.6 8.8 7.4 6.0

-5.1 -5.9 -4.9 -5.0

-2.6 -4.2 -4.8 -2.4

6.75 8.50 7.75 8.00

5.75 7.50 6.75 7.00

44.60 50.94 54.50 63.0

India’s Fiscal Year (FY) is from 1 Apr to 31 Mar

7Source: Standard Chartered Research

Page 73: Europe Macroeconomic Outlook - Samiran Chakraborty, Standard Chartered

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