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