India: New Government & Economic Outlook | Aranca Articles and Publications
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India:
New Government & Economic Outlook
Analysts:
Nilesh Sharma, Amresh Prasad
Vaibhav Tandon & Aniket Mittal
November 2014
India: New Government & Economic Outlook I November 2014 1
2 Improved decision making ends policy uncertainty; reforms on the anvil
Speedy decision-making process ends policy uncertainty; projects backlog worth over billions of dollars cleared by the new
administration
Government’s focus on infrastructure spending and expanding manufacturing activity by removing procedural bottlenecks
to boost investments
3
Strengthening external environment to boost investments and corporate sector performance
Corporate sector performance picking up; earnings growth increasing
Strict supervision and improving business environment reducing stress on asset quality of banks; credit growth likely to
revive 2015 onward
4 However, challenges persist…
At 142nd position among 189 countries, India languishing at the bottom half in the World Bank’s “Ease of Doing Business”
ranking; fares poorly on the “Global Competitiveness Index” ranking too
Higher non-planned expenditure and subsidies likely to derail fiscal consolidation; India’s sovereign ratings could be
negatively impacted
1 India on the brink of turnaround with the economy set to be back on high-growth trajectory
Real GDP growth set to bounce back after hitting a 10-year low in 2013; India to re-emerge as the second fastest growing
major economy
Falling crude prices easing inflationary pressure, paving the way for monetary easing
Key Takeaways
India: New Government & Economic Outlook I November 2014
After hitting a 10 year-low of 4.5% in 2013, real GDP growth set to pick up; India to re-emerge as the
second fastest growing major economy
2
INDIA REAL GDP GROWTH (%)
Source: Ministry of Finance, IMF World Economic Outlook October 2014 Estimates for 2015 & 2016
Economic growth
slows sharply with the
onset of the financial
crisis.
Sluggish external
environment
alongside policy
paralysis
accentuated the
slowdown.
3.9
8.0
7.1
9.5 9.6 9.3
6.7
8.6 8.9
6.7
4.5 4.7
5.6
6.4
2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16
India: New Government & Economic Outlook I November 2014
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
-
10
20
30
40
50
60
70
2000-01 2003-04 2006-07 2009-10 2012-13
Consumer Spending (INR Trillion) YoY Growth (%) - RHS
1.0
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
Apr-12 Sep-12 Feb-13 Jul-13 Dec-13 May-14
Exports (INR Trillion)
Rising consumer spending and exports to drive growth
3
GROWTH IN CONSUMER SPENDING
Source: Bloomberg, Reserve Bank of India (RBI)
GROWTH IN EXPORTS
India: New Government & Economic Outlook I November 2014
Falling crude prices ease inflationary pressure
4
Source: Bloomberg, Reserve Bank of India (RBI)
80
85
90
95
100
105
110
115
120
125
130
Ja
n-1
2
Apr-
12
Ju
l-1
2
Oct-
12
Ja
n-1
3
Apr-
13
Ju
l-1
3
Oct-
13
Ja
n-1
4
Apr-
14
Ju
l-1
4
Oct-
14
0%
2%
4%
6%
8%
10%
12%
Ja
n-1
2
Apr-
12
Ju
l-1
2
Oct-
12
Ja
n-1
3
Apr-
13
Ju
l-1
3
Oct-
13
Ja
n-1
4
Apr-
14
Ju
l-1
4
Inflation - Wholesale Price Index Inflation - Consumer Price Index
Brent crude prices have
fallen by over 23% since
July 2014 India Inflation (September 2014)
WPI – 2.4%
CPI – 6.5%
CRUDE OIL PRICES (US DOLLAR PER BARREL) INFLATION (WHOLESALE & CONSUMER PRICES)
India: New Government & Economic Outlook I November 2014
Interest rate cycle seems to have peaked; with inflation under control, Reserve Bank of India set to
adopt a pro-growth stance
5
Source: Reserve Bank of India (RBI)
6.50%
7.00%
7.50%
8.00%
8.50%
Jan-1
2
Feb
-12
Ma
r-1
2
Apr-
12
Ma
y-1
2
Jun-1
2
Jul-1
2
Aug-1
2
Sep-1
2
Oct-
12
No
v-1
2
De
c-1
2
Jan-1
3
Feb
-13
Ma
r-1
3
Apr-
13
Ma
y-1
3
Jun-1
3
Jul-1
3
Aug-1
3
Sep-1
3
Oct-
13
No
v-1
3
De
c-1
3
Jan-1
4
Feb
-14
Ma
r-1
4
Apr-
14
Ma
y-1
4
Jun-1
4
Jul-1
4
Aug-1
4
Sep-1
4
To arrest the fall in
economic growth,
the RBI cut interest
rates by 75 bps
Since taking over as the Governor of RBI in July
2013, Raghuram Rajan has increased interest rates
by 75 bps to rein in inflation.
REPO RATE
India: New Government & Economic Outlook I November 2014
Boosted by the absolute majority in the lower house of the parliament, the new government kick starts
the reforms process
6
Source: Ministry of Finance, Aranca Analysis
SECTOR REFORMS PROPOSED BENEFITS
Raised the foreign direct investment (FDI) limit
to 49% from 26% under government approval
route
India largest weapons importer in the world (imports
totaled USD5.6 billion in 2013)
Transfer of technologies through joint ventures to
improve domestic manufacturing capabilities and reduce
burden on imports
About INR250 billion to be invested in the next 7–8
years
Allowed 100% FDI (earlier FDI allowed only in
mass rapid transport systems)
Proposed to raise FDI limit to 49% (earlier
26%)
Would increase life insurance penetration in India
(currently about 3.2% of GDP in terms of total premiums
underwritten in a year, much lower than nearly 6% in
Australia and more than 10% in Japan)
Increase in FDI limit may attract USD5 billion over the
next five years
Defense
Railways
Insurance
Foreign investment expected to generate much-needed
resources to introduce a high-speed rail corridor, build &
upgrade suburban corridors and add capacity through
speedy development of dedicated freight corridors
12th five-year plan earmarks INR5,129.2 billion
investment for railways by 2017
Identified projects (38) likely to attract FDI totaling
INR900 billion
India: New Government & Economic Outlook I November 2014
Investor community responds positively to the change of guard; markets breach their all time highs as
portfolio inflows increase
7
Source: Bloomberg, Securities & Exchange Bureau of India (SEBI)
5,000
5,500
6,000
6,500
7,000
7,500
8,000
8,500
Jan-1
3
Ma
r-1
3
Ma
y-1
3
Jul-1
3
Sep-1
3
No
v-1
3
Jan-1
4
Ma
r-1
4
Ma
y-1
4
Jul-1
4
Sep-1
4
250 284
149
107
281
-442
-181 -157
74
21 21
214
133 127
317
4
338 307
360
221 210
Jan-1
3
Feb
-13
Ma
r-1
3
Apr-
13
Ma
y-1
3
Jun-1
3
Jul-1
3
Aug-1
3
Sep-1
3
Oct-
13
No
v-1
3
De
c-1
3
Jan-1
4
Feb
-14
Ma
r-1
4
Apr-
14
Ma
y-1
4
Jun-1
4
Jul-1
4
Aug-1
4
Sep-1
4
The benchmark Nifty50 index breached the 8,000
mark for the first time in history and has returned
over 34% to investors in 2014 YTD
NIFTY INDEX PERFORMANCE PORTFOLIO INFLOWS (INR BILLION)
India: New Government & Economic Outlook I November 2014
Speedy decision making process ends policy uncertainty; projects backlog worth over billions of
dollars cleared by the new administration
8
May 2014
New government unveils 10-point
vision within just two weeks of
coming to power with an aim to
boost investments, complete
infrastructure projects in a time-
bound manner and ensure efficient
utilization of natural resources
June 2014
Passenger railway fare and
freight fare hiked 14.2% and
6.5%, respectively
Seven big-ticket investment
projects worth INR210 billion
cleared
Road-related projects worth
INR400 billion cleared
July 2014
Plans to build 100 smart cities
with an initial investment of
USD1.2 billion with additional
funding expected from private
investors
Aug 2014
Newly created National Board
for Wildlife cleared 133
proposals out of 160 proposals
Sep 2014
India China signed 13 MOUs,
with the latter committing
investments worth USD20 billion
over the next five years
Japan commits to doubling its
investments in India to USD35
billion in the next five years,
especially in the infrastructure
sector
Oct 2014
Crucial defense-related projects worth
INR800 billion cleared
Over 180 projects with a combined value
of INR6,500 billion cleared by Project
Monitoring Group
Nearly 88 infrastructure and industrial
projects worth INR3,000 billion
commenced operations over the last few
months
Source: Ministry of Finance, Aranca Analysis
India: New Government & Economic Outlook I November 2014
Government focus on infrastructure spending and boosting manufacturing activity by removing
procedural bottlenecks to boost investments
9
HIGHER ALLOCATIONS
Allocated INR379 billion to the Ministry of Road Transport and Highways for infrastructure development
Raised the corpus of Rural Infrastructure Development Fund (RIDF) to INR250 billion (from INR200 billion) to extend financial assistance to rural
infrastructure
Allocated INR176 billion for urban infrastructure and governance
Infrastructure development schemes include:
Developing 100 smart cities
Building 8,500 km of national highways
Developing 16 new port projects
Building metro rail in Tier-2 cities
Setting up 3P India at a cost of INR5 billion to provide support to mainstream PPP projects
Creating eBiz platform to provide information on all business and investment-related clearances
Encouraging banks to extend long-term loans to infrastructure companies, and have a flexible strategy to absorb potential adverse contingencies
Exempting the issuing of long-term bonds for financing infrastructure from reserve requirements
Creating Infrastructure Investment Trusts
Source: Ministry of Finance, Aranca Analysis
STEPS TAKEN TO INCREASE INFRASTRUCTURE INVESTMENTS THROUGH …
IMPROVEMENT IN POLICY FRAMEWORK
India: New Government & Economic Outlook I November 2014
Increasing foothold in state assemblies to strengthen the NDA-led central government’s position to
implement key reforms
10
NDA RULED STATES – 2009 NDA RULED STATES – 2014
India: New Government & Economic Outlook I November 2014
Corporate sector performance picking up; growth in earnings gaining pace
11
Source: Bloomberg, Business Today, Aranca Analysis
REVENUE AND NET PROFIT NUMBERS OF TOP 500 LISTED COMPANIES IN INDIA
448.6
539.3
664.3
747.2
819.8
46.5
55.0 55.7
61.1
63.4
2010 2011 2012 2013 2014*
Revenue (USD bn) Net Profit (USD bn)
10.4% 10.2% 8.4% 8.2% 7.7%
Net Profit Margin (%)
Corporate performance seems to have bottomed out
after the long slump witnessed over FY2010–14.
Amid decreasing inflation-related concerns, likely
deduction in interest rates and improving business
confidence, corporate earnings are likely to bounce
back strongly.
Analysis of the earnings of 159 companies that
declared results for the July–September 2014 quarter
shows that net income grew 37.4% year-on-year,
almost twice compared to 19.7% year-on-year for the
April–June 2014 quarter.
India: New Government & Economic Outlook I November 2014
Strict supervision and improving business environment helping banks reduce stress on asset quality;
credit growth likely to revive 2015 onward
12
CAR and Tier I CAR (%) Trend Gross NPA and restructured assets trend (%) Credit-deposit growth and liquidity (%)
2.79%
3.46% 3.26%
3.98% 3.85%
5.38%
6.13% 6.03% 6.47%
6.16%
Mar-12 Sep-12 Mar-13 Sep-13 Mar-14
Gross NPA Ratio
Restructured Assets to Advances Ratio
13.26% 12.59%
11.54%
9.45% 9.12% 8.86%
Mar-12 Mar-13 Mar-14*
Median CAR Median Tier I CAR
* Ratio computed as per Base III norms for Mar 2014; earlier
periods are based on Basel II
17.84% 16.64% 14.49%
15.25% 15.21% 14.53%
78.50% 79.48% 79.44%
Mar-12 Mar-13 Mar-14*
Advances Growth Deposit Growth
Credit-Deposit ratio
Source: Bloomberg, Reserve Bank of India (RBI), Aranca Analysis: Note: Analysis on 39 banks - 26 Public Sector Banks & 13 Private Sector Banks
ASSET QUALITY STRESS REDUCING… …CREDIT-TO-DEPOSIT RATIO FAVORABLE …ADEQUATELY CAPITALIZED…
Due to the central bank’s guideline on early
detection and resolution of bad loans and a
general improvement in the economic
environment, the stress on the asset quality of
banks is decreasing.
The banking system witnessed a marginal
improvement in the quarter ended March 2014.
Though the capitalization ratio decreased year-
on-year, Indian banks remain adequately
capitalized.
The median Tier I CAR of 8.86% in March
2014 was higher than the stipulated minimum
mark of 6.5%.
Due to slow credit pickup, the overall advances
of the banking system lag behind the growth in
deposit
Individual depositors seek ‘higher return –
minimum risk’ investment avenues
The liquidity (credit-to-deposit) ratio, however,
remains comfortably placed at nearly 80%
India: New Government & Economic Outlook I November 2014
FDI inflows beginning to improve; momentum likely to gather pace in 2015
13
32.5 38.1
43.2
70.9
105.8
125.2
171.2
205.6 206.4
225.0 226.7
4.3 5.8
7.6
20.3
25.3
47.1
35.7
27.4
36.2
24.2
28.2
0
10
20
30
40
50
0
50
100
150
200
250
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
FDI Inward Stock (LHS) FDI Inflow
In USD billion
Source: UNCTAD
FDI INFLOWS SURGING AFTER BOTTOMING OUT IN 2012 SINCE THE PEAK OF 2008
For the first five months of FY14-15 (April–August 2014), FDI grew 42% year-on-year to USD12.0 billion.
FDI inflows expected to increase significantly in FY 2015.
India: New Government & Economic Outlook I November 2014
Concerns over long-term growth persist with India languishing at the bottom half in the World Bank’s
“Ease of Doing Business” and World Economic Forum’s “Global Competitiveness Index” rankings
14
Source: The World Bank, World Economic Forum (WEF)
142
120
90
62
43
26
18
India
Brazil
China
Russia
South Africa
Thailand
Malaysia
71
57
28
53
56
31
20
India
Brazil
China
Russia
South Africa
Thailand
Malaysia
EASE OF DOING BUSINESS RANKINGS (2014) GLOBAL COMPETITIVESS INDEX RANKINGS (2014-15)
India: New Government & Economic Outlook I November 2014
Higher non-planned expenditure and subsidies may derail fiscal consolidation; this could negatively
impact India’s sovereign ratings
15
Source: Ministry of Finance
3.9% 4.0%
3.3%
2.5%
6.0%
6.5%
4.9%
5.8%
4.5%
4.1%
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2011-12 2012-13 2013-14 2014-15 e
Higher government
spending to revive economic
growth during the downturn
worsened the country’s
fiscal situation.
Threat of a ratings
downgrade pushed the
government toward medium-
term fiscal consolidation
(fiscal deficit is likely to reach
3.0% of GDP by 2017).
FISCAL DEFICIT (% OF GDP)
India: New Government & Economic Outlook I November 2014
Concerns remain over big-bang labor and land acquisition reforms; once addressed, these measures
could usher in a new phase of growth
16
Source: Ministry of Finance, Aranca Analysis
ISSUES POTENTIAL BENEFITS
LABOR LAWS
Major reforms to rigid laws likely to trigger a political and trade union backlash
Strictly regulated hiring and firing policy
‘Inspector raj’ rule of inspectors creating inconvenience for employers with loads of
paperwork
Politicization of trade unions and bad trade union laws
Strong segmentation between formal and informal employment a barrier to inclusive
growth as it leads to income inequality
Likely to create a conducive environment for growth
in trade and industry, and bring transparency in
social security benefits to aid workers
Expected to encourage job creation in the formal
sector
LAND ACQUISITION
Land titling and land record management systems leading to delays in land
acquisition
Complex land purchase procedures making acquisition difficult for industrial projects
Distortions in land prices due to large regulatory constraints and unfair process of
valuation
Rehabilitation and environmental issues
High transaction costs in land trade
Speeding up the process for buying land for
industrial use likely to increase investments
Would boost infrastructure projects that often suffer
due to delays in approval and acquisition
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