India Energy GS

8/12/2019 India Energy GS

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June 20, 2014

Issue No: 14/25

Asia Economics Analyst

Economics Research

India: How Much Energy?

India is a large importer of energy—in FY14, its net energy imports were

6.3% of GDP. Without energy imports, we calculate it would have run a

current account surplus of 4.6% of GDP.

We project India’s energy imports for the next decade. According to our

projections, annual energy imports could rise to US$230 billion by FY23

from US$120 billion currently, driven by economic growth, greater

industrialization and urbanization.

Despite an increase in energy intensity, our projections show that energy

imports as a share of GDP have likely peaked, and can moderate over the

next decade, based on the assumption of subdued commodity prices.

Energy imports can be reduced further by switching from oil to natural gas

and improving conservation. We show that reforms in the energy sector

could reduce India’s annual energy import bill by US$40 billion by FY23.

Energy imports in a reform scenario could come down to about 4% of GDP,

from 6.3% of GDP currently.

We show that if India were to improve its energy efficiency by 15% over the

next ten years, it could save US$32 billion annually by FY23. Conservation

measures include reducing transmission and distribution losses, using

more energy efficient appliances, and stricter emission standards for

vehicles.

The reduction in energy imports as a share of GDP could improve India’s

current account on a structural basis, which in turn could be positive for

the INR over the medium term.

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

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

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

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

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

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

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

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

Vishal Vaibhaw+91(22)6616-9376 v [email protected] 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



June 20, 2014 Asia Economics Analyst

Goldman Sachs Global Investment Research 2

How Much Energy?

The Energy Problem

On July 30th 2012, India’s northern electricity grid broke down due to overdrawing by

states, plunging an estimated 640 million people into darkness. As factories couldn’t

operate, homes remained dark, and people were stuck in elevators, the realization dawned

that the Indian economy just could not grow without the country resolving its energy

problem. India has a fifth of the world’s population, but only a 30th of its energy. It just

doesn’t produce enough to meet its needs. Hence, it has to import energy – oil, gas, and

increasingly coal. In FY14, India’s net energy imports were 6.3% of GDP. Without energy

imports, all else being equal, we calculate it would have run a current account surplus of

4.6% of GDP.

Exhibit 1: India’s current account deficit is mainly due toenergy imports…

Exhibit 2: …driven largely by Oil

Source: CIEC, Goldman Sachs Global Investment Research Source: Haver, Goldman Sachs Global Investment Research

It is not only the direct cost of fuel that matters, but also the environmental cost, and the

security of energy supplies. Taking these into account gives the ‘all-in-cost’ of energy.

India’s predominant use of more polluting coal, which meets more than 50% of its energy

needs, and its import dependence means that its all-in-cost of energy is high and rising.

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

FY97 FY99 FY01 FY03 FY05 FY07 FY09 FY11 FY13

Percent of GDPPercent of GDP

Current account balance:

With energy imports

Without energy imports

0

2

4

6

8

10

12

0

2

4

6

8

10

12

Korea India ASEAN Japan China US

PercentPercent

Oil imports as a share of GDP (2013):





Exhibit 3: King Coal dominates India’s energy consumption

Source: BP Statistical Review of World Energy June 2013

As a new government formulates its economic and energy policy, we think that a focus on

energy reforms will be critical. We forecast India’s energy demand over the next decade,

project how much it would need to import, and then quantify savings from switching to

cheaper energy sources as well as greater conservation efforts.

I. A Rise in India’s Energy Demand

We forecast India’s net energy imports could increase to $230 billion by FY23 from $120

billion currently. We projected separately imports of key energy inputs of coal, oil, and gas,

which together account for all of energy imports. For the period 2014-2017, we use the

supply-demand estimates of our energy team. From 2017 onwards, as we expect India to

enter a more energy intensive phase of growth, driven by greater industrialization,

electrification, and urbanization, we think its demand for energy will increase significantly

more rapidly than in the previous decade. Therefore, we used the energy elasticity ofdemand of China from 2001-2010 as a benchmark, given a similar per capita income

compared to what we expect for India in 2017, to derive demand forecasts for each energy

source.1 To our knowledge, this is the first attempt at long term forecasts for energy import

demand in value terms for India.

Interestingly, even with a large energy elasticity of demand, India’s energy imports as a

share of GDP may have peaked already. Our projections show the share of energy imports

declining very gradually to 4.9% of GDP from 6.3% of GDP currently. This is despite our

energy demand projections being higher than other agencies. A primary driver of this is

our commodity team’s view that oil prices will remain subdued. Oil comprises 80% of

energy imports and stagnant oil prices have a large impact on India’s energy bill. Further,

our longer term projections for thermal coal prices are also benign.

1 We used an energy elasticity of demand of 1.2%, 0.7% and 1.5% for coal, oil and gas respectively with

an assumption of 7% real GDP growth.

Oil30%

Natural Gas9%

Coal53%

Hydro electricity5%

Nuclear energy1%

Renewables2%

India's Energy Consumption (2012):





Exhibit 4: A gradual decline in energy imports as a share of GDP

Source: PPAC, CEIC, Goldman Sachs Global Investment Research

II. Constraints in Production

India’s domestic supply of energy can increase only gradually, given natural resource and

environmental constraints. India’s proven oil and gas reserves are small. In oil, it has only

0.3% of global reserves compared to a consumption share of 4.2%. In gas it has 0.7% of

reserves compared to a consumption share of 1.6%. Indian basins are generally considered

unprolific. The fastest growth in supply can be in coal, where India has ample reserves, and

policy initiatives can increase supply. We used our mining team’s projections for coking

and non-coking coal volume growth of about 5% on average. For crude we assume a 2%

growth in domestic supply, based on our energy team’s forecasts. Similarly, there arelimits to natural gas production, as we discuss below. While renewables like wind and solar

are likely to see a significant increase in supply, in part due to policy responses, we think

given their low starting share of 2%, they are unlikely to represent a large source of supply

for our forecast horizon. Given capacity constraints and barring spectacular discoveries or

technological improvements, imports will likely remain the key source of energy over the

next decade.

0

2

4

6

8

0

2

4

6

8

FY97 FY99 FY01 FY03 FY05 FY07 FY09 FY11 FY13 FY15 FY17 FY19 FY21 FY23

Percent of GDPPercent of GDP

India's energy import demand*:Projections

*includes oil, gas and coal demand





Exhibit 5: Coal and gas imports likely to increase more than oil


Switching to Natural Gas

One potential area of savings would be a switch to natural gas from oil. Natural gas is only

9% of energy consumption. This compares with the average global gas consumption of

24%. The world is switching to gas, and we believe India also needs to make that shift. Gas

can not only be cheaper than oil, but is also much cleaner. Our estimates show that if India

were to increase its share of gas from 9% currently to 16% by FY23, it could save US$8

billion annually by FY23.

0

50

100

150

200

250

0

50

100

150

200

250

FY14 FY23 (E)

US$ billionUS$ billion

India's energy demand from import:

Gas

Coal

Oil

Box 1: Lessons from the US Shale Revolution1

The discovery of plentiful gas deposits under shale rocks in the US, known as shale gas, has been the biggestdiscovery in the energy space in a generation. Improvements in technology to allow for horizontal drilling and

breaking up the rock to release the gas, known as fracking, have transformed the US energy landscape. Frombeing one of the largest importers of energy in the world, the US can become a large exporter of gas.

Shale gas has been truly transformational. It accounts for 30% of US gas consumption, up from merely 1% just adecade ago. It is cleaner and cheaper than its alternatives. Gas prices have fallen from $7 to $3-3.5 a unit in thelast 5 years. Power generation is increasingly moving towards gas and away from more polluting coal. US

industrial units and households are now getting much cheaper fuel. The US is now liquefying its surplus gas andexporting it overseas.

Not only have oil and gas prices come down, but emissions have fallen, as gas has replaced more polluting coaland oil, and reliance on import partners have declined. So, there’s been a reduction in direct cost of fuel as well asits environmental costs, while energy security has improved.

How did the US get there? Shale gas exists in many other parts of the world, but nowhere has the success of theUS been replicated thus far. This is due to a number of reasons. First, it has provided generous tax incentives to

develop shale energy. Second, there has been a lot of technological innovation – especially in horizontal drillingand breaking up the rock to release the gas by subjecting it to a stream of water, known as ‘fracking’. Third, hugecapital expenditures have been directed at upstream exploration on their land, as they get to benefit from theeventual revenues. Fourth, the market structure in the US is highly competitive with hundreds of companies

competing with each other. This not only spawns innovation, but also more investment. Finally, the supportinginfrastructure, including a vast network of pipeline capacity, allows for easy transportation.

Compare this with India where high taxes and unstable policies, technological restrictions and lack of engineeringexpertise, dominance of state-owned players and lack of competition, and no private ownership of rigs, ishampering investments both by private players and foreign. While proven shale reserves in India are small, we

feel the lessons from the US can be applied to the natural gas industry.

1see Oil on the boil-again? Top of Mind , September 6, 2012; Where will the shale gale blow next?, Fortnightly Thoughts , January

31, 2013





Fixed gas prices have discouraged investment and innovation by the private sector. In May

2010 the government raised the gas price to $4.2. This compares to an imported price of

$13-$14 a unit. The previous government proposed $8.4 a unit for domestically produced

gas effective from April 1, 2014, but the decision was postponed due to the elections. India

needs to free up gas prices to make it market-determined. Industry would need to become

more efficient if they pay market prices for their gas. Japan and South Korea pay market

prices, and yet have some of the most competitive industries.

A second issue we believe would be important for the gas sector is to have stable tax

policies. The government allowed for a 7 year tax holiday in the production sharing

contract for gas producers. However, in 2008-09, this was changed to be not applicable for

the gas sector, but only to oil. In another example, the UK based company Cairn invested in

an oil block in Rajasthan and entered into a production sharing contract with the state-

owned ONGC such that the latter would hold a 30% stake in the company, and pay all

royalties to the government. The policy was changed when Cairn’s assets in India were

acquired by a different company. According to the new policy, the acquiring company

would have to pay 70% royalty to the government – to the extent of Cairn India’s share in

the enterprise.

This lack of clarity on taxation and retrospective changes can hinder production. Since

India’s hydrocarbon base is unproven and unprolific, fiscal incentives can be important for

foreign and domestic investors.

Third, public investments in oil and gas blocs can be made more accountable. A large

number of blocs which have been auctioned under the New Exploration Licensing Policy

(NELP) have seen little exploration. Greater accountability can ensure that there is more

rationality in auctions so that the private sector is not crowded out.

III. Living within your means

Given the shortage of energy, India needs to emphasize conservation of energy. India isusing a lot of energy to produce energy due to inefficiencies in production. While the

global average is that 1 unit of energy input produces 4.3 units of energy, India only

produces 2.8 units for a unit input.

Exhibit 6: India’s energy efficiency needs improvement Exhibit 7: Power transmission and distribution losses are

very high in India

Source: IEA, Goldman Sachs Global Investment Research Source: WDI, Haver

0 1 2 3 4 5 6 7

Japan

US

Singapore

Taiwan

Korea

Indonesia

Thailand

India

China

Index, Japan =1

Primary energy supply per GDP

Less energy efficiency

0

5

10

15

20

25

0

5

10

15

20

25

India Brazil Russia Indonesia South Africa

World Malaysia EU US China Japan Korea

PercentPercent

T&D losses as a share of electricity generation (2011):





We emphasize three sources of conservation –reduction of transmission and distribution

(T&D) losses, more use of energy-efficient electric appliances, and savings from higher

emission standards for vehicles.

India’s T&D losses are very high at 24%, which is nearly double the average of developing

countries. Some large states like Bihar and Jharkhand lose nearly half of all electricity that

is produced due to theft, technical and distribution losses.

We estimate that reducing T&D losses from the current 24% to 15% by FY23 can save the

economy US$13 billion annually, or 0.3% of GDP.

One way to reduce T&D losses is to privatize distribution. After power distribution was

privatized in Delhi in 2002, T&D losses fell from 52% in the pre-reform era in the early

2000s to 19% by 2010-11. Bhiwandi, an industrial town in Maharashtra, witnessed a sharp

fall in T&D losses to 18% currently from 48% in 2007 after distribution was privatized.

Similarly, Nagpur also witnessed a meaningful reduction in T&D losses after the

privatization of power distribution.

A Standards and Labeling program can be very effective in reducing energy needs. In India,the scheme was launched in May 2006 and is being used for 12 appliances, of which only 4

have been made compulsory. The mandatory products are frost-free refrigerators, room air

conditioners, distribution transformers, and tubular fluorescent lights. We believe these

standards need to be extended to all major appliances and equipment. More importantly,

awareness needs to be raised among consumers, involving them in S&L programs. There

is a need to narrow the gap between the best achievable technologies and present 5 star

technologies for various appliances. The example of Japan (see Box 3) shows the efficiency

gains that can be achieved.

Box 2: Power reforms in Gujarat

In 2001, Gujarat’s power sector had major problems. It had large operating losses, T&D losses were about 35%, power

cuts were frequent, and the private sector was not investing.

The Gujarat government, under Chief Minister Modi, went about reforming the sector by first getting its finances in

order. The electricity board restructured debt which had been incurred at interest rates of 18% or more andrenegotiated power purchase agreements with private suppliers. The government plugged leakages in distribution.

Power theft ranged between 20% in urban areas and 70% in rural areas. It passed a law against power theft, set uppolice stations, and hired 500 retired army personnel to check power offenders. Unmetered power supply, which somerural areas were getting, was stopped altogether. There is no free power in Gujarat today.

In 2002, the Gujarat government unbundled power generation, transmission, and distribution, to better manageoperations and increase efficiency. A key reform was to separate the feeder line that supplied power to the rural areas

into two – one to supply power for agricultural needs, and other for household and other needs. Since the price forpower used for agriculture was much lower, villagers used this subsidized supply for household needs. Now, the ruralresidents had higher power bills to pay than in the past, but once they were assured of uninterrupted power, they werewilling to pay up.

The state power regulator revised power tariffs every year, which reduced the gap between the average cost of powerand the user price. The state electricity board turned from a loss to a profit. Private players are now investing inGujarat, with a third of total capacity to be installed coming from the private sector. T&D losses have fallen from 35%to 20%.

Source: Gujarat Urja Vikas Nigam Limited (GUVNL)





Exhibit 8: A sharp reduction in T&D losses after theprivatization of power distribution

Exhibit 9: Efficiency gains in Japan after the ‘Top Runner’Program

Source: CEA, Delhi Government’s Economic Survey, Torrent Power Source: Energy Conservation and Renewable Energy Dept. of Japan

We estimate that if electric appliances become more energy efficient, overall savings from

sales of these appliances could be US$2 billion annually by FY23.

Stricter emission standards for vehicles can also be a significant source of savings. We

estimate that moving from the current standard (Bharat IV) to higher standards (Bharat VI)

could lead to US$6 billion of annual fuel savings by FY23.

Finally, an extensive program of educating people on energy conservation needs to be

followed. Energy education at various levels, especially at the primary and secondary

school level, as well as more generally with the help of print, TV, and internet mediums,

can increase conservation.

0

20

40

60

80

0

20

40

60

80

India Delhi Bhiwandi Nagpur

PercentPercent

T&D losses:

Before Privatization

After Privatization

FY02

FY12

*Privatization year: Delhi -2002, Bhiwandi-2007, Nagpur-2011

750

850

950

1050

1150

1250

750

850

950

1050

1150

1250

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Kilo Watt Hour Kilo Watt Hour

Average power consumption of air conditioner in Japan after energy efficiency standard introduced:

30% improvement





Box 3: Energy efficiency programs in Japan

Japan is only 16% energy self-sufficient. It is the 3rd largest importer of crude oil, and imports all of its gas and most of itscoal. Given the high degree of energy dependency, Japan has followed energy efficiency rigorously to increase its energysecurity. Japan has improved its energy consumption efficiency by 37% over the past 30 years. As a result, the amount of

primary energy that Japan uses per unit of GDP is amongst the lowest in the world.

#1 Energy Conservation Act in 1979:The Act is the foundation of Japan’s energy efficiency and conservation policy. There has been a series of major revisionsin this law responding to changing needs. The act includes all major sectors, such as industrial, residential, commercial,

and transportation.

#2 Top Runner Program, 1999:

This established stringent energy efficiency standards for 18 energy intensive products – including cars, ACs, TVs,computers, and heaters. The goal was to manufacture products with efficiency standards better than the highest availableglobally. This program was very successful in increasing energy efficiency. In each appliance, significant improvement inenergy consumption was achieved. In TVs, there was an improvement of 25% between 1997 and 2003 due to innovation,with the annual power consumption amount falling from 140kWh to 104kwh. For ACs, the improvement was 30%, forrefrigerators it was over 50%, and so on. Japanese product labels were required to say how much energy the product

would save.

#3 Tax incentives and subsidies on loans for energy efficient houses and buildings:

The government gives tax incentives to reduce the consumption of energy. Tax breaks are given for residents whoconduct energy-saving renovation work (eg, change to double sash window) on their existing dwelling. Fixed property taxcan be reduced by 1/3rd, and deductions can be made on the annual income tax amount.

#4 Labelling and star rating:

An appliance standard and labeling program has been the major energy efficiency policy tool to increase the efficiency ofelectrical appliances in Japan since 2000. Provision of energy efficiency information on electric appliances is required forproduct manufacturers, importers, and retailers. The fuel efficiency labeling system was introduced in January 2004 topromote the public awareness of energy efficient vehicles.

#5 Public awareness:

Japan has followed an active system of energy related education. In primary and secondary schools, such education isprovided and various kinds of practical research are conducted. Select universities have been chosen to be the base forresearch and practice of energy education. Workshops and training sessions are organized for teachers to disseminatebest practices in energy education.

#6 Energy audits:

The government encourages energy conservation by providing a free energy audit service targeting factories andbusiness establishments.

Source: IEA, Energy Conservation and Renewable Energy Dept. of Japan





IV. Gains from Reforms

We estimate that India could reduce its annual energy imports by US$40 billion by FY23 by

switching from oil to gas, and by an improvement in energy efficiency of 15% (see Exhibits

10 and 11). With reforms, India’s energy import demand could fall by about 1% of GDP by

FY23 compared to our base case, to 4.0% of GDP. The improvement in the current account

would be directly attributable to an increase in national savings, due to lower energyimports as a share of GDP.

Exhibit 10: Energy reforms can reduce imports


Exhibit 11: A breakdown of energy savings

Source: CEIC, Goldman Sachs Global Investment Research

We believe the risks to our projections are balanced. If India could achieve 25% energy

conservation, similar to Japan, the gain would be much larger and India could reduce its

annual import bill by US$65 billion. Similarly, if oil and gas prices were to come off

materially, it could have a large impact on India’s energy import bill. On the other hand, if

commodity prices were to rise significantly and India were unable to reform its energy

sector, then energy imports could be much larger.

0

50

100

150

200

250

0

50

100

150

200

250

FY97 FY99 FY01 FY03 FY05 FY07 FY09 FY11 FY13 FY15 FY17 FY19 FY21 FY23

US$ billionUS$ billion

India's energy import demand*:

Base case

With reforms**

Projections

**includes oil, gas and coal demand

** If energy efficiency will increase by 15% with use of energy saving technique and an increase in share of natural gas from 9%currently to 16% by FY23

230 (8)(13)

(6)(2) (11)

190

Net energyimports

(Without reforms)

Switching from oilto gas

Reducing T&Dlosses

Stringent emissionstandard

Efficient electricappliances

Others Net energyimports

(With reforms)

Net energy import (FY23):

US$ billion





The shift away from oil imports to coal and gas imports has clear investment implications.

Our energy analysts think this could be positive for gas importers (see India Rising -

Energy: Reforms, better demand, operating leverage , May 29, 2014).

The largest impact, though, could be felt on India’s current account, and therefore the INR.

Given the gains in terms of national savings, lower import dependency, and a lower

environmental footprint, energy reforms will be a critical area to watch.

Tushar Poddar, Vishal Vaibhaw

Box 4: Energy Sector Reforms:

1) A stable policy regime to attract private/foreign players: Uncertainty about production sharing

contracts can be avoided. There can be greater clarity on taxation, royalty, transfer pricing among others.

2) Increase use of natural gas: The use of natural gas instead of oil and gas should be incentivized bypromoting its use in vehicles, converting thermal plants to gas, and more use of gas as raw material forindustrial use as well as for city usage.

3) Public investments in oil and gas blocs can be made more accountable: A large number of blocsauctioned through the NELP remain unexplored.

4) Market-determined energy prices: Natural gas prices should be market determined to incentivize greaterproduction and shift away from oil to gas. Energy taxation across states can be harmonized to reducedistortions.

5) Coordination among various ministries: Coordination among the various ministries in the energy spacecan help to remove bottlenecks. Coordination between the center and various state governments can alsohelp in addressing energy imbalances across states.

6) Reduce T&D losses: Privatizing distribution can help. Further, sub-transmission and distribution networksneed to be modernized. The R-APDRP program in urban areas is useful by establishing reliable and

automated data collection and greater use of IT. Smart Grid initiatives are also necessary.

7) Energy efficiency in equipment and transport: Use of ‘super-efficient’ electric appliances and fuelefficiency labeled equipment should be encouraged like the ‘Top Runner’ program in Japan. More stringent

auto emission standards can reduce energy usage.

8) ‘Energucation’: There is a need to focus on energy education at various levels, especially at the primary andsecondary school level, as well as more generally with the help of print, TV, and internet mediums to increase

energy conservation.





Appendix: Our calculations of energy-related savings

A) Saving from reduction in imports bill with increase in natural gas

consumption:

According to our estimates, if India increased its natural gas consumption share in the

overall energy mix from current 9% to 16%, switching away from more costly oil, it woulddemand 3 trillion cubic feet by FY23. The cost of consuming an incremental amount of gas

at the import price of $13/mmbtu would be US$17 billion. Instead, if India consumed an

equivalent amount of oil, at a cost of $100/bbl, import cost would be US$25 billion.

Therefore, the savings could be $8 billion annually in energy imports by FY23.

B) Savings from reduction in T&D losses:

To estimate this, we first projected annual average electricity generation over next ten

years by using our GDP growth projections and the sensitivity that every 1% increase in

real GDP can increase power demand by 0.8 percent point. This sensitivity could go up as

more homes are electrified. We assume that T&D losses in India will reduce from 24%

currently to 15% through FY23. Total savings in value could be US$13 billion annually

using an average power tariff of Rs.5/unit and current exchange rate.

C) Savings from energy efficient appliances

We first projected demand for key appliances through FY23 using estimates of total sales

of these electric appliances in 20102. We then estimated total savings if the current

weighted per unit energy consumed by these appliances is reduced by 50% by FY23. Total

savings in value could be US$2 billion by FY23 using an average power tariff of Rs.5/unit.

D) Savings from stricter emission standards:

We used our estimates of net oil imports over the next decade and assumed 30% of that

will be consumed by the transport sector. We assumed that with stricter emission

standards across all vehicles, approximately 15% of fuel savings could happen by FY23,

which is equivalent to 8mtoe. Total savings in value could be US$6 billion by FY23. One

caveat is that total fuel saving may differ if the share of transport demand in overall oil

imports were to increase. This could happen through an increase in numbers of vehicles, a

change in type of vehicles (e.g. large vs small) or alternate transport arrangements (such as

more use of railways with the opening up of freight corridors).

2Potential Savings from Selected Super-Efficient Electric Appliances in India, June 2011, Prayas Energy

Group





Forecast Tables

Real GDP Growth (year-over-year)

GS Consensus GS Consensus

Asia ex-Japan 6.3 6.1 6.1 6.6 6.3

China 7.7 7.3 7.3 7.6 7.1

India 4.7** 5.5** 5.4** 6.5** 6.0**

South Korea 3.0 3.7 3.6 3.8 3.7

Hong Kong 2.9 3.9 3.3 4.4 3.5

Taiwan 2.1 3.5 3.2 3.9 3.6

ASEAN 5.0 4.0 4.4 5.0 5.2

Singapore 4.1 3.7 3.8 4.2 4.0

Malaysia 4.7 5.1 5.3 5.2 5.1

Thailand 2.9 -0.5 1.3 3.8 4.1

Indonesia 5.8 5.3 5.3 5.3 5.7

Philippines 7.2 6.3 6.4 6.5 6.3

USA 1.9 2.2 2.2 3.1 3.1

Euro area -0.4 1.1 1.1 1.5 1.5

Japan 1.5 1.5 1.5 1.2 1.2

*GS estim ates 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

7.7

6.0

3.8

4.0

20132014 2015 Potential

Growth*

Consumer Prices (year-over-year)

GS Consensus GS Consensus

Asia ex-Japan 4.0 3.8 3.7 3.9 3.9

China 2.6 2.6 2.5 3.0 2.9

India 9.5* 8.0* 7.7* 7.0* 7.1*

South Korea 1.3 1.6 1.9 2.7 2.5

Hong Kong 4.3 4.3 3.9 3.8 3.6

Taiwan 0.8 1.4 1.2 1.8 1.8

ASEAN 4.0 4.3 4.3 4.5 4.2

Singapore 2.4 2.4 2.2 3.5 2.7

Malaysia 2.1 3.1 3.3 2.6 3.6

Thailand 2.2 2.2 2.4 2.7 2.8

Indonesia 6.4 6.4 6.2 6.7 5.7

Philippines 2.9 3.8 4.2 3.5 3.9

USA 1.5 1.8 1.8 1.9 1.9

Euro area 1.4 0.6 0.7 1.1 1.2

Japan 0.4 2.7 2.6 1.6 1.8

**Core inflation target

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

-





Forecast Tables (continued)

Policy Interest Rates (percent)

Current

Jun 19 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4QAsia ex-Japan

China 3.12 3.20 4.00 4.25 4.25 4.50 4.50 4.50 4.50

India 8.00 8.00 8.00 8.25 8.50 8.50 8.50 8.25 8.00

South Korea 2.50 2.50 2.50 2.50 2.50 2.50 2.75 2.75 3.00

Hong Kong - - - - - - - - -

Taiwan 1.9 1.9 1.9 2.0 2.0 2.0 2.1 2.3 2.3

ASEAN

Singapore - - - - - - - - -

Malaysia 3.00 3.00 3.00 3.25 3.50 3.50 3.50 3.50 3.50

Thailand 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.25 2.75

Indonesia 7.50 7.50 7.50 7.50 7.75 8.00 8.00 8.00 8.00

Philippines 3.50 3.50 3.75 4.00 4.00 4.00 4.00 4.00 4.00USA 0.08 0.08 0.13 0.13 0.13 0.13 0.13 0.13 0.13

Euro area 0.15 0.25 0.15 0.15 0.15 0.15 0.15 0.15 0.15

Japan 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 : overnigh t 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

Jun 19 Forward Forecast Forward Forecast Forward Forecast

Asia ex-Japan

China 6.15 6.18 6.16 6.19 6.15 6.22 6.15

India 59.33 60.10 58.50 61.12 61.00 63.21 63.00

South Korea 1017 1022 1010 1026 1050 1034 1070

Hong Kong 7.8 7.8 7.8 7.8 7.8 7.8 7.8

Taiwan 30.0 29.9 30.0 29.8 29.8 29.7 29.5

ASEAN

Singapore 1.25 1.25 1.25 1.25 1.23 1.25 1.22

Malaysia 3.21 3.23 3.25 3.24 3.23 3.28 3.20

Thailand 32.5 32.6 34.0 32.8 34.0 33.1 33.5

Indonesia 11809 11940 12400 12127 12700 12538 13000

Philippines 43.8 43.8 44.5 43.9 44.0 44.0 43.5

Euro area* 1.35 1.35 1.38 1.35 1.34 1.35 1.30

Japan 102.0 102.0 103.0 101.9 107.0 101.7 110.0

* USD per Euro

Source: Goldman Sachs Global Investment Resea rch.





Highlights of Recent Goldman Sachs Global Macro Research

Asia ex Japan

China’s changing growth: Trade spillovers to the rest of Asia May 8, 2014

Global expansion cycles and Asian exports—Now versus then Apr 17, 2014

Shock therapy: How EM Asia central banks respond to capital outflow pressures Apr 4, 2014

Low EM export beta? - Most likely nominal, not real Mar 13, 2014

The unwritten "rules" of EM Asia monetary policy Feb 21, 2014

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

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: Can China's economy move back to a sweet spot? Jun 11, 2014

China: China bond market: great long-term potential, tricky near-term challenges Jun 2, 2014

China: Macro at a cross-roads May 28, 2014

China: Higher term premium challenging monetary easing May 16, 2014

China: Employment conditions in China: Not bad yet, but worsening May 2, 2014

China: Cooling housing market a lasting headwind Apr 17, 2014

China: How policy loosening can push Chinese growth higher in Q2 Apr 10, 2014

China: Coding growth to help decode growth Apr 8, 2014

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

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

India

India: The Modi Government's First 10 days Jun 4, 2014

India: Hope in the Air May 13, 2014

EM Macro Daily - India elections: The End of the Beginning Apr 11, 2014

How India can become the next Korea Mar 28, 2014

India: Adding 110 million jobs Mar 26, 2014

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

ASEAN

Indonesia's tricky fiscal-monetary tradeoffs Jun 6, 2014

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: Demand for Japanese products down, even factoring in overseas production shift Jun 5, 2014

Japan: Female labor structure prevents Phillips Curve from changing its shape May 29, 2014

Japan: Reaffirming our outlook for a moderate decline in CPI May 14, 2014

Japan: Weakening correlation between forex and share prices, albeit stable based on intraday data Apr 17, 2014

Japan: Abenomics one year on: Portfolio rebalancing yet to gain traction Apr 11, 2014




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