Will India s growth rebound? Real GDP, projection after 2013

Transcription

1 Will India s growth rebound? Real GDP, projection after 2013 Percent change, year ago Source: Oxford Economics.

2 Share of services in GDP has been increasing Constant prices Percent Services Industry Agriculture Source: Oxford Economics.

3 India s international trade Current prices, not seasonally adjusted US$ billions Imports Exports Source: Datastream.

4 India has much less of an aging problem than U.S. Share of population aged 65+ Percent U.S. 13.6% in 2012 India 5.2% in 2012 Source: World Bank.

5 There will be more youngsters in India Share of population up to 25 years old Percent India China Source: United Nations.

6 India and China make waves in the global middle class Share of global middle-class consumption, Source: OECD.

7 India s oil imports pick up Share of oil in total imports Percent Source: Datastream.

8 Indian rupee has weakened against US Dollar Indian rupee per US$ Source: Bloomberg.

9 India s current account deficit improves Current prices, not seasonally adjusted, 2000 Q Q4 US$ billions Source: Datastream.

10 India s exports of goods and services Current prices, US$ billions Percent Source: Datastream.

11 India is undergoing an Internet boom Millions Percent Sources: World Bank, McKinsey.

12 Existing composition Composition of Current Lok Sabha (Lower House of Parliament) Current Opinion Poll & Market Favorite PM Candidate: Narendra Modi Current Incumbent Party Likely PM Candidate: Rahul Gandhi Regional Parties/ Third Front Notes: UPA: Congress-led alliance (United Progressive Alliance); BJP: Bharatiya Janata Party; NDA: BJP-led alliance (National Democratic Alliance)

13 What has the incumbent Congress-led government achieved over last 5 years and what legacy will the new government inherit? 10% Real GDP Growth Rate 80 US$/INR Annual Avg. 10% Bad Corporate Loans % 8% 6% 4% 2% 0% 9% FY % FY 2014E FY 2008 FY % 6% 4% 2% 0% 8% 2% FY 2008 FY % Fiscal Deficit (% of GDP) 10% Inflation (Avg. CPI) 15% Car Sales (% YoY) 6% 4% 2% 0% 7% 4% FY 2008 FY % 6% 4% 2% 0% 9% 6% FY 2008 FY % 5% 0% -5% 12% FY % FY 2014E Sources: RBI, Citi Research, UBS.

14 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)

15 Anticipated results: Notoriously unpredictable 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 % % % Congress led UPA % % % Others % % % Total % % % 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% 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 SENSEX 30 and NIFTY 50 (large company indices) have been exuberant and have priced in a landslide majority for the NDA alliance

16 A personal view on possible outcomes How will the different scenarios play for the three possible outcomes: (1) Majority; (2) Fragmented Coalition; and (3) Hung Verdict Outcome Probability Growth Prospects Fiscal Management Investment Sentiment Scenario 1: Majority for NDA, the BJP led Coalition (260+ seats) Scenario 2: Fragmented Coalition resulting in NDA requiring support of regional parties ( seats) Scenario 3: Hung Verdict (Possible Third Front led government backed by Congress) H M L 7%+ GDP in 12 months; 9%+ in 36 months 5%-7% GDP for the next two years with a rebound thereafter Sub 5% GDP growth rate Well disciplined fiscal policies Coalition politics can result in some delay in the reform process Policy paralysis to continue Rupee appreciation Slower pace of investments Short term capital outflows as immediate impact

17 But, don t put too much faith in polls Indian national elections are difficult to predict. Current elections can lead to surprises as opinion polls have been wrong in the past Sources: CNN-IBN, Star News, NDTV, TV Today, Goldman Sachs Global Investment Research.

18 GDP growth has slowed down While the new government will inherit a crippled economy, we believe this can be Modi fied over the next few quarters 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? Sources: CEIC, Morgan Stanley Research

19 NREGA has not been effective Poor populist policies for income redistribution have back-fired, having an adverse impact on the rural population The new government will need to focus on modifying the labor policies to manage wage growth (and inflation) in line with productivity improvements Source: Morgan Stanley Research.

20 Capex slowdown A stable government and a continued push to resolving execution bottlenecks is likely to revive capex cycle over the next few years New Projects Stalled Projects The new government will need to take steps to give impetus to the investment cycle (fuel availability, land acquisition, mine clearances, etc.) Source: CMIE.

21 Slowdown in credit growth 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 Steep Decline in Credit Off-take for Infrastructure Source: Morgan Stanley Research.

22 Policy paralysis has increased corporate bad debts Credit quality has deteriorated over the past 5 years due to a sustained deceleration in GDP, policy paralysis and high interest rates 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% FY % 2.0% 2.1% FY 2007 Impaired Loans as % of Total Loans FY 2008 FY % FY % FY % FY % FY % 8.0% FY 2014 Is now the best time to invest in structured credit in India? Source: UBS

23 Strong government needed for power sector reforms 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 Sources: CEA, Morgan Stanley Research.

24 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

25 A knowledge economy needs better higher education India ranks second last in a U21 rankings of national higher education systems done in 2013 for 48 countries GER (gross enrollment) in Higher Education (2009) - International Comparison The new Government is likely to take positive steps in the higher education sector by reducing the complexities governing foreign investment Source: UNESCO Institute for Statistics Database

26 Markets have performed well under new RBI Governor September Dr. Raghuram Rajan Appointed Governor of the Reserve Bank of India New RBI Governor took pragmatic steps to control deficits, open up banking and attract investments Indian markets have performed well since September 2013 INR has recovered well since September 2013 India: 36% Indonesia: 13% MSCI EM: 6% Brazil: 4.7% China: -4% Sources: Bloomberg, GTC

27 India is better prepared for tapering Global risks impact on India will be milder than in the summer of 2013 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 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 Making India more attractive for foreign investments into equities Ease regulations for entry of foreign investors and companies in restricted sectors 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

28 Russia India Brazil China Germany USA Italy Korea France Spain UK Japan Brazil India Russia Indonesia Korea Japan USA Euro Area Germany Spain France UK 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 Total Debt as % of GDP External Debt as % of GDP Source: International Monetary Fund, Economist and Reserve Bank of India