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2 April 2013
CONFIDENTIAL
Gloomyandpessimisticsentimentallaround
High fiscal deficit
Due to rise in unproductive spending, Indias fiscal deficit is among the highest in emerging markets
Growth slowdown
Indias GDP growth slowed to around 5% during FY13 the lowest in a decade
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Majorconcernsintheglobaleconomy
Eurozone: Enters into second year of recession
The big four Germany, France, Italy and Spain economies of the Eurozone contracted in 4Q 2012 A record high unemployment rate Crisis in Cyprus resulted in new uncertainties on the future of the Eurozone
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Indiascycle:SeenthroughtheEconomist
India'sriseoffersadollopof reassurancetoanyonewho believesinthecombination ofdemocracy andcapitalism. Itisasuperpowerinwaiting whosepeoplevote,whose societyisraucous,and whosefirmsareredblooded andstridingonto theworld stage. Someseeanecho ofAmerica'sfreewheeling approach,withspicierfood andworseroads. 22Oct11
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23May09 Goodnews:don'twasteit
Indiaisalandofbright promise.Itisalsoextremely poor. Congress nowhas aclearmandatetoprovide thecountrywitheducated minds,wellfed bellies, irrigated fieldsand uninterruptedelectricity, withoutbustingthebudget.
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23Jul11 Pushforeconomicreforms
GivenIndia'ssheerscale,its economicriseisbiggerthan anythatcamebefore,bar China's. Butsuccessive governmentshavefailedto repairthemarketsforinputs likelabour,landandpower. TwentyyearsafterIndias historiceconomicreforms, itstimeforanotherbig effort.
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24Mar12 Politickingkillingtheeconomy
PoliticsispreventingIndia fromfulfillingitsvast economicpotential. lately, likeaBollywood villainwho justrefusestodie,theold Indiahasmadeaterrifying reappearance.Themain reasonisthecountry's desperatepolitics.
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29Sep12 Reform,liberalize
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27Mar13 IndispensableIndia
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India:Everycloudhasasilverlining
Growth bottomed out?
We do not have full conviction on whether growth has bottomed out or not However, both manufacturing and investment have bottomed out and are showing gradual recovery
Decline in gold imports and reduction in oil prices would help improve the current account deficit Strong capital inflows continue to fund CAD and help in investment recovery
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UnderstandingmacrofundamentalsthroughtheGita
The atman is neither born nor does it die. Coming into being and ceasing to be do not take place in It. Unborn, eternal, constant and ancient, It is not killed when the body is slain.
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Whereistheeconomyinthebusinesscycle?
RoE starts dropping Corporate performance turns sluggish and inflation compels rise in interest rate P/B compression starts Risk aversion leads to EV/EBITDA and P/E de-rating Corporates tighten their operations and belts to tide over sluggish demand, uncertain capex and low return-rates Market lands in Value proposition zone and spells opportunity with high margin of safety RoE starts improving
We are here
Risk perception becomes benign and EV/EBITDA, Easing interest rates P/E re-rating starts trigger P/B re-rating and up-grading cycle starts
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WhatfactorstobringbackIndiasglory?
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GoodsandServicestaxtoimprovegovernmentfinance
Tax collection to go up
Tax-rate under the GST would come down by broadening the tax base and minimizing exemptions Number of assesses would increase Tax collection would go up due to broadening the tax base It would foster a common market across the country and reduce compliance costs Investment decisions would be independent of tax considerations and would be based on purely economic concerns
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DirectTaxCode:Toboostdirecttaxrevenue
DeclineinshareofdirecttaxintotaltaxafterFY10
100 90 80 70 (Share, %) 60 50 40 30 20 10 0 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
Note:Directtaxincludesonlytwomajortaxes
DirectBenefitTransfer:Toworkatthebottomofthepyramid
WelfareschemesworthUS$56bncanbeconvertedintoDBT
16 14 12 10 (US$, bn) 8 6 4 2.4 2 0 Food Subsidy Fertilizer Subsidy PDS Kerosene LPG Subsidy Pension, etc. MGNREGA State Govt. 13.7 11.6 10.5
Tomakewelfareschemes effective
DBTwouldsave$6bnworthof governmentspendingperyear Itwouldleadtoactivationof80m dormantbankaccounts
Majorconsumptionboostforthe poor
Regulartransferofmoneytopoor householdaccountstomakethem bankable Bettertargetingtoboostdemandfor basicconsumptiongoodsfromthe bottomofthepyramid
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India:Reapingdemographicdividend
India:Risingworkingpopulation
Indiaspopulationismorethanthe populationsoftheUS,Indonesia, Brazil,PakistanandBangladesh combined Indiahas513millionpeopleinthe workingagegroup Thenextlevelofworkingpopulation isalsohighwith464million populationbelow20yearsofage Urbanpopulationhasrisenatdouble thepaceoftheruralpopulationin thelastsevendecades
300
200
100 39 0 0 to 19 Year
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52
65 and Above
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Infrastructuretoleadnextcapexrecovery
Totalinvestmentininfrastructureis projectedatUS$1trnin12thPlanvs. US$539bnduring11thPlan CabinetCommitteeonInvestments toexpeditedecisionsonclearances forimplementationofprojects
Metrorailprojectsinmajorcities (Mumbai,Hyderabad,Chennai, Bangalore) 8,800kilometersunderNationalHighway DevelopmentProjectinFY13 88000MWcapacitytobeaddedduring 12th Plan(201217) 100,000villagestobeelectrifiedunder theBharat Nirman project
DelhiMumbaiIndustrialCorridor
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Shalegasleadingtoloweroilpricescanreducethetwindeficits
ShalereservesinIndia
Oilimportsaccountforaroundonethirdof Indiastotalimports TheEIA,USA, hasreportedthatIndiahasshale gasreservesof293trillioncubicfeet(TCF)with69 TCFasrecoverableinfourIndianbasins AccordingtoPetroleumMinistryestimates,thisis goodenoughtomeetIndia'snaturalgasdemand forthenext33years Indiamightoffershaleblocksforexplorationin Sep13 UShasbecome80%selfsufficientinitsenergy consumptionfrom69%7yearsago.Experts projectUStobe100%selfsufficientinadecade IncreaseinshalegasproductionintheUSmay reduceoildemand
Source:DirectorGeneralofHydrocarbons
Thus,itwouldreducethetwindeficits inIndia
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WhyIndiaslongtermprospectsremainunimpaired
India back on the path of fiscal prudence: Sharp cuts in spending and strict measures to avoid tax evasion to control India's fiscal deficit in next three years Current account deficit to improve: In FY13, excluding gold, Indias current account deficit was just 1.2% of GDP vs. 4.2% CAD including gold; Measures to control gold imports would bring down Indias CAD to 2-3% of GDP range in next three yeas. Reduction in oil prices may help further Domestic savings to improve: Governments commitment to bring down fiscal deficit and an increase in corporate profits would lead to increase in Indias gross domestic savings in coming years Inflation and interest rate to soften: Excess capacity and better rabi output to bring down inflation in FY14, leading to easy monetary policy by the RBI Perception of policy paralysis fading: Since Sep12, government has taken some reform measures such as partial decontrol of diesel prices, limited use of subsidized LPG-cylinder, FDI in multi-brand retail. Elections may compel the government to act fast on pending reforms Gradual economic recovery ahead: Growth, softening of inflation, declining cost of borrowing, and policy activism to pave the path of India's next boom cycle
History shows that the best of time starts when sentiment turns most pessimistic
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