India October Sajjid Chinoy

Presentation3

Sajjid Chinoy(91) 22-6157- [email protected]

India in 2014: an economy in transition

Toshi Jain(91)-22 6157 [email protected]

IND

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RIC

TL

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RIV

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ND

CO

NF

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NT

IAL

[email protected]

Presentation3

India in 2014: an economy in transition� New government pursues a gradualist approach; no big bang reforms; early focus on fixing the plumbing

� Growth to accelerate only modestly; expect a moderation in the coming quarters

� But macro stability sustains:

� Sharp correction in commodity prices provides a

1

� Sharp correction in commodity prices provides a powerful ToT shocks

� CAD tracking less than 1.5% of GDP ($27 bn)

� Fisc pressures release as oil subsidies fall

� RBI underscores its intent on inflation targeting; markets gradually getting convinced

� Rupee outperforms; but positioning and fair-value suggest gradual depreciation

Presentation3

A historic mandateA historic mandate

2

Presentation3

Enthusiasm at unprecedented highsIN

DIA

: BO

UN

CIN

G T

O M

ALA

ISE

3

Source : ECI

Presentation3

Redrawing the political mapIN

DIA

: BO

UN

CIN

G T

O M

ALA

ISE

4

Presentation3

Young voters go 2 -1 in favour of the BJP

30

35

40

45

BJP

INC

vote share, %

And also dominated youth

IND

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5

0

5

10

15

20

25

30

18-22 23-25 26-35 36-45 46-55 56+

Source : CSDS Post -poll

Presentation3

A 100 small stepsA 100 small steps

6

Presentation3

Why no big -bang ?

� A technical Constraint

�Big ticket items are on con-current list and necessarily involve the States:

� Land Acquisition, GST, Labour Laws

�Food Inflation (APMC Act)

7

�Rajya Sabha constraint

� A strategic choice

�Political economy of reforms: gradualism works if sequenced optimally

� Diesel versus LPG

� Multi-brand FDI, railway passes

Presentation3

The first 100 days

� Massive shake-up of bureacracy

� FDI reforms

� Insurance, Defence, Railways

� Efforts to fight food inflation

�MSPs, anti-hoarding, essential commodities, states to import; effort to reform FCI

8

� Online green clearances

� Increase coal mined ceiling from each pit

�Prodding state government to gradually dismantle labour laws

� Easing preemption on infrastructure financing

� More funds for warehousing, cold storage, and highways in Budget

� Pushing financial inclusion (loan mela ?)

�Finding political cover through an expenditure management commission

Presentation3

Labour Reform: the dark horse

60

70

80

90

Employment share by firm size in china and India, 2005Number of workers

India

IND

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9

0

10

20

30

40

50

<8 8-18 19-50 51-200 201-500 501-2000 >2000

China

Source : Hasan and Jandoc, Arvind panagariya & Jagdish Baghwati - The emerging giant

Presentation3

What to expect when you are expecting� GST Bill introduced in Winter Session of Parliament

� A Coal Policy

� Exemptions to Land Acquisition Policy increased (PPP, Defense)

� Carriage and Content Law Introduced in Winter

10

� Carriage and Content Law Introduced in Winter Session

� Preliminary report of Expenditure Management Commission – movement towards cash transfers

� Buffer Stock Management

� Passage of FDI in Insurance

Presentation3

The risks of gradualism� Political Capital Decays Over Time

� What if markets lose patience?

�Capital market buoyancy key part of strategy

11

� Hostage to electoral setbacks

�Bye elections

Presentation3NDA does not have the numbers in the RajyaSabha but…..

UPA, 79

Number of seats

But in the Rajya Sabha its a different story

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NDA, 62

Others, 109

Source : Rajya Sabha website

Presentation3

…this will not be a binding constraint

� Except for constitutional amendments, if the LokSabha passes a bill and the Rajya Sabha rejects it, the government can call for a joint session of Parliament

� Bill will pass if the joint session passes it with a simple majority

13

simple majority

� Currently the NDA (335+62 = 397) almost has a simple majority in any joint session (795 seats). So passage through joint session very likely

� However, this is not true for a GST, which is a constitutional amendment, and requires passage by 2/3rds majority in each house of Parliament

Presentation3

Growth: a modest cyclical upturnGrowth: a modest cyclical upturn

14

Presentation3

Modest industrial recovery loses steam

0

5

10

q/q, saar

Industrial Production

53

55

Index

Export orders rise sharplyManufacturing PMI

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15

Source : CSO, Markit, JPM Calculations

-15

-10

-5

0

Jul-

12

Oct-

12

Jan-1

3

Apr-

13

Jul-

13

Oct-

13

Jan-1

4

Apr-

14

Jul-

14

47

49

51

Jun-1

2

Sep-1

2

Dec-1

2

Mar-

13

Jun-1

3

Sep-1

3

Dec-1

3

Mar-

14

Jun-1

4

Sep-1

4

Presentation3

Mixed signals from domestic demand

5

10

15

Auto production

% oya, 3mma

Auto sales and production

-5

0

5

10

%oya, 3mma

But non-durables to get a kick from strong monsoonConsumer Durables

IND

IA: B

OU

NC

ING

TO

MA

LAIS

E

16

-10

-5

0

Dec

12

Feb 1

3

Apr

13

Jun 1

3

Aug 1

3

Oct

13

Dec

13

Feb 1

4

Apr

14

Jun 1

4

Aug 1

4

Auto sales

-20

-15

-10

-5

Ap

r-12

Ju

l-12

Oct-1

2

Jan

-13

Ap

r-13

Ju

l-13

Oct-1

3

Jan

-14

Ap

r-14

Ju

l-14

Source : CEIC, JPM Calculations

Presentation3

Mixed signals from domestic demand

20

40

60

q/q, saar

India: Capital Goods Production

16

18

20

22

Credit growth

q/q saar %

IND

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OU

NC

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TO

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E

17

-60

-40

-20

0

Apr-1

2

Jul-

12

Oct-1

2

Jan-1

3

Apr-1

3

Jul-

13

Oct-1

3

Jan-1

4

Apr-1

4

Jul-

14

6

8

10

12

14

Fe

b 1

2

Aug

12

Fe

b 1

3

Aug

13

Fe

b 1

4

Aug

14

Source : CSO, CEIC, RBI, JPM Calculations

Presentation3

External demand is driving growth

3

5

8

12

16

% oya, 3mma

India: IP and exports

Exports

IP

% oya, 3mma

52

54

56

58

Index

Export orders rise sharplyNew export order Index

18

-3

-1

1

-4

0

4

8

Ju

n 1

3

Aug

13

Oct

13

De

c 13

Feb 1

4

Apr

14

Ju

n 1

4

Aug

14

44

46

48

50

52

Sep-1

1

De

c-11

Mar-

12

Jun-1

2

Sep-1

2

De

c-12

Mar-

13

Jun-1

3

Sep-1

3

De

c-13

Mar-

14

Jun-1

4

Sep-1

4

Source : CSO, MOC,CEIC, Markit, JPM Calculations

Presentation3

Drivers of 2Q growth are transient

8

10

%oya

India: Composition of 2Q growth

7

9

11

India: GDP ex agri ex govt. expenditure

% q/q, saar

19

0

2

4

6

Agri govt. exp Industry Private services

-1

1

3

5

7

11Q2 11Q4 12Q2 12Q4 13Q2 13Q4 14Q2

Source : CSO, CEIC, JPM Calculations

Presentation3

The structural heavy -lifting remainsThe structural heavy -lifting remains

20

Presentation3

Its all about productivity

3

3

4

India: Productivity growth (TFP)

% oya

8

9

10

35

38

41

as % of GDP

Growth and Investments

Investments

% oya

IND

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21

1

2

2

3

00 02 04 06 08 10 12 143

4

5

6

7

23

26

29

32

02 04 06 08 10 12

GDP growth


Presentation3

…underpinned by lower corporate investment

16

20

as % of GDP

Household + Valuable

Its the compsoition, silly!

3

4

13

15

17% of GDP % oya 5-year - avg

Equipment investment

Equipment investment

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22

4

8

12

02 04 06 08 10 12

Corporate

Public

0

1

2

7

9

11

13

79 83 87 91 95 99 03 07 11

Productivity


Presentation3Constrained, in turn, by implementation bottlenecks

8

10

12

Despite recent clearances stalled projects remain high

Value

% of projects under implementation

2.5

3

3.5

Completed projects slump

% completed every quarter (3qma)

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23

0

2

4

6

Mar-9

7

Mar-9

9

Mar-0

1

Mar-0

3

Mar-0

5

Mar-0

7

Mar-0

9

Mar-1

1

Mar-1

3Volume

0

0.5

1

1.5

2

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

13

Source : CSO,CMIE, JPM Calculations

Presentation3Almost half the slowdown due to implementation bottlenecks and associated loss of confidence

ppts

Actual Growth Slowdown (ex agri, com serv) 695.0

Slowdown that can be explained 660.0

percent explained by (%)

Slowing Trading Partner Growth 10.0

Decomposition of Slowdown from 2010 to 2013

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Slowing Trading Partner Growth 10.0

Higher Oil Prices ($) 11.0

Real Interest Rates 35.0

Implementation Bottlenecks (proxied by stalled projects) 28.0

Investor Confidence (proxied by projects starts) 16.0

Supply Bottlenecks and investor confidence 44.0

Source : JPM Calculations

Presentation3

CCI has undoubtedly made progress…

4,000

5,000

6,000

Rs. bn

India : Progress under CCI

Under consideration

Approved

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25

-

1,000

2,000

3,000

Gas Power Steel Others

Source : CMIE

Presentation3

But the bottleneck is at the state level !! IN

DIA

: BO

UN

CIN

G T

O M

ALA

ISE

26

Source : CMIE, JPM Calculations

Presentation3

Coal production has come to a standstill

8

10

12% oya

India: coal india production

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NC

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27

-2

0

2

4

6

FY08 FY09 FY10 FY11 FY12 FY13 FY14

Source : CEIC, JPM Calculations

Presentation3

And SEB’s remain a key drag

72

74

76

India: all India thermal power plants PLF

%

0.8

0.9

1.0

1.1

1.2

4

5

5

India : SEB's revenues and cost

Rs/kWh

Average revenue

Average cost of service

Gap between cost & revenue

Rs/kWh

IND

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OU

NC

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TO

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LAIS

E

28

64

66

68

70

FY12 FY13 FY140.2

0.3

0.4

0.5

0.6

0.7

0.8

2

3

3

4

FY05 FY07 FY09 FY11 FY13E

revenue realization

Source : Central Electricity Authority

Presentation3

Financing remains a constraint

2.5

3.0

3.5

Debt/equity ratio

Balance sheet stress in power sector

2.0

2.5

3.0

Debt/equity ratio

Balance sheet stress in construction & engineering sector (including roads)

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29

0.0

0.5

1.0

1.5

2.0

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

0.0

0.5

1.0

1.5

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

Note : Debt/equity ratio of BSE500 companies, Bloomberg

Presentation3Debt-equity ratios at decade highs in infrastructure

1.2

1.4

1.6

Debt/equity ratio

Balance sheet stress in telecom sector

1.2

1.4

1.6

1.8

Debt/equity ratio

Balance sheet stress in transportation sector(including airline, ports)

IND

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30

0.0

0.2

0.4

0.6

0.8

1.0

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

0.0

0.2

0.4

0.6

0.8

1.0

1.2

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

Note : Debt/equity ratio of BSE500 companies, Bloomberg

Presentation3

Resulting in bank impaired loans pile up

8

10

12

NPL Restructured loans

% of loans

India: Banking Sector Stress

IND

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OU

NC

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TO

MA

LAIS

E

31

0

2

4

6

Mar 08 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13 Sep 13

Source : RBI

Presentation3

Some light at the end of the tunnel

600

700

800

900

1,000

Rs. bn

New capital issuance : primary markets

Rs. bn, 12M rolling

IND

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OU

NC

ING

TO

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LAIS

E

32

0

100

200

300

400

500

600

02 04 06 08 10 12 14

Source : CEIC

Presentation3

InflationInflation

33

Presentation3

A fortuitous convergence of interestA fortuitous convergence of interest

34

Presentation3The changed political economy of food inflation

Development

Price rise

Single most important issue on which you vote in 2014 elections?

Kerala

Maharashtra

Gujarat

Which state has best on development indicators ?

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35

0 10 20

Employment

Corruption

(% of the respondents)

0 10 20

Karnataka

Kerala


Source : CSDS Pre -poll

Presentation3

Inflation was also most important voting issue in 3 of the 4 states

0 10 20 30

Governance

Corruption

Employments

Price rise


Madhya Pradesh

0 10 20

Corruption

Governance

Unemployment

Price rise


Rajasthan

IND

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36

(% of the respondents)(% of the respondents)

0 20 40 60

Water problem

Development

Corruption

Price rise


Delhi

0 5 10 15

Roads

Employment

Price rise

Development


Chhattisgarh

Source : CSDS

Presentation3

Recent voting correlated with inflation

10

11

5 year average inflation* oya %

Rajasthan

State wise- growth - inflation dynamics

States worse than trend

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37

6

7

8

9

5 6 7 8 9 10 11 12

5 year average growth oya %

Trend line

Bihar

W.B.

Gujarat

H.P.A.P.

U.P.

M.P

Odisha

Chattisgarh

Karnataka

Maharashtra

Tamil Nadu

Punjab Delhi

Kerala

States better than trend

*GDP deflator of stateSource : CSO, CEIC

Presentation3

Inflation expectations likely adaptive

10

12

14

16

Inflation expectations % oya

Current perception

Year ahead expectation

10

12

14

16

Perceived inflation higher than expectations% oya

Current perception

38

2

4

6

8Se

p-0

6

Sep-0

7

Sep-0

8

Sep-0

9

Sep-1

0

Sep-1

1

Sep-1

2

Sep-1

3

Sep-1

4

perception

2

4

6

8

10

Sep-0

6

Sep-0

7

Sep-0

8

Sep-0

9

Sep-1

0

Sep-1

1

Sep-1

2

Sep-1

3

Sep-1

4

Measured inflation (CPI-IW)

Source : RBI, CEIC, Labour Bureau

Presentation3

Is 6% too ambitious?

9

10

11

12

%

CPI Headline

5

6

7

8

9

10

We've been there before

% oya

IND

IA: B

OU

NC

ING

TO

MA

LAIS

E

39

5

6

7

8

Aug-

12

Dec-

12

Apr-

13

Aug-

13

Dec-

13

Apr-

14

Aug-

14

RBI' s Jan 15 target

RBI' s Jan 16 target

0

1

2

3

4

5

Apr-01 Apr-02 Apr-03 Apr-04 Apr-05

Average CPI IW from 2001-2006 = 5.1%

Source: MOSPI

Presentation3

New CPI and CPI-IW move in tandem

1

2

2

3m/m, 3mma

Food Momentum: CPI IW vs All india CPI

Food (CPI- IW)

0.8

1.0

1.2

CPI- IW Core

m/m, sa 6MA m/m, sa 6MA

CPI Core vs CPI IW core

IND

IA: B

OU

NC

ING

TO

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LAIS

E

40

-1

-1

0

1

1

Mar-

12

May-1

2

Jul-

12

Sep-1

2

Nov-1

2

Jan-1

3

Mar-

13

May-1

3

Jul-

13

Sep-1

3

Nov-1

3

Jan-1

4

Mar-

14

May-1

4

Food (new CPI)

0.0

0.2

0.4

0.6

Jul-

11

Oct

-11

Jan-1

2

Apr-

12

Jul-

12

Oct

-12

Jan-1

3

Apr-

13

Jul-

13

Oct

-13

Jan-1

4

Apr-

14

CPI core

Source : RBI, MOSPI

Presentation3

But real rates were positive !!

0

2

4

6

8

Real policy rates

%, deflated by CPI

IND

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OU

NC

ING

TO

MA

LAIS

E

41

-12

-10

-8

-6

-4

-2

0

01 03 05 07 09 11 13

Source : MOSPI, Bloomberg, CEIC

Presentation3

Food inflation elevated for almost a decade

12

14

16

18

India: Food inflation

%oya

15

20

25

% oya

India : Cereal and non-cereal inflation

cereal inflation

IND

IA: B

OU

NC

ING

TO

MA

LAIS

E

42

0

2

4

6

8

10

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

-5

0

5

10

FY01 FY03 FY05 FY07 FY09 FY11 FY13

non-cereal inflation

Source : MOSPI

Presentation3

Which is unsurprising given a structural mismatch

0

50

100

150

200

250

300

90 92 94 96 98 00 02 04 06 08 10 12

CerealsIndex, 1990 = 100

Per-capita income

Per-capita output

0

50

100

150

200

250

300

90 92 94 96 98 00 02 04 06 08 10 12

PulsesIndex, 1990 = 100

Per-capita income

Per-capita output

43

90 92 94 96 98 00 02 04 06 08 10 12 90 92 94 96 98 00 02 04 06 08 10 12

0

50

100

150

200

250

300

90 92 94 96 98 00 02 04 06 08 10 12

OilseedsIndex, 1990 = 100

Per-capita income

Per-capita output0

50

100

150

200

250

300

90 92 94 96 98 00 02 04 06 08 10 12

SugarcaneIndex, 1990 = 100

Per-capita income

Per-capita output

Source : NSSO, JPM Caculations

Presentation3A complex interplay of food, wages, core and expectations

Core

Inflation expectations(IE)

Input cost

44

Wages

(Slack, IE

Food

Inflation IE

Input cost

Presentation3

2014 monsoon makes a strong, late recovery

30

40

50

2014 monsoon season rainfall

Cumulative

% deficit(+)/surplus(-) of LPA

30

35

40

45

50

2009 monsoon season rainfall

Cumulative

Monthly

% deficit of LPA

IND

IA: B

OU

NC

ING

TO

MA

LAIS

E

45

-20

-10

0

10

20

June July August September

Monthly

0

5

10

15

20

25

June July August September

Monthly

Source : MET

Presentation3

Monsoon picks up, but is it too late?IN

DIA

: BO

UN

CIN

G T

O M

ALA

ISE

46

Source : MET

Presentation3

Key states to watch; it’s not just about cerealsIN

DIA

: BO

UN

CIN

G T

O M

ALA

ISE

47


Presentation3Food prices soften in September, but the danger has not yet passed

1

3

4

High frequency food prices

m/m, nsa %

-6

-4

-2

0

% y-o-y growth

Kharif crop: first advance estimates

IND

IA: B

OU

NC

ING

TO

MA

LAIS

E

48

-5

-4

-2

-1

Mar

13

Jun 1

3

Sep 1

3

Dec 1

3

Mar

14

Jun 1

4

Sep 1

4

Source : DCA, Ministry of Agriculture

-16

-14

-12

-10

-8

Total Rice Course Cereals

Pulses Oilseeds

Presentation3

The key will be how core reacts

0.4

0.6

0.8

ppts

Impact on core from a 100 bps food shock

13

15

17

19

% oya

Food

Core

Food spills into core

IND

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OU

NC

ING

TO

MA

LAIS

E

49

-0.4

-0.2

0

0.2

0.4

1 2 3 4 5 6 7 8 9 10

3

5

7

9

11A

pr-0

8

Oct-0

8

Apr-0

9

Oct-0

9

Apr-1

0

Oct-1

0

Apr-1

1

Oct-1

1

Source : MOSPI, JPM Calculations

Presentation3

Slack, margins and core

9.0

11.0

0.5

1.5

2.5

%

Output gap and growth

Output gap

16

18

Sensex EBIT margins (%)

Margins of corporate sector

IND

IA: B

OU

NC

ING

TO

MA

LAIS

E

50

1.0

3.0

5.0

7.0

-3.5

-2.5

-1.5

-0.5

04Q2 08Q2 12Q2

GDP growth 12

14

Q1

FY 1

0

Q1

FY 1

1

Q1

FY 1

2

Q1

FY 1

3

Q1

FY 1

4

Q1

FY 1

5

Source : Bloomberg, CEIC, JPM Calculations

Presentation3Government commences the daunting fight against food inflation

�MSPs increased only 2.1%

�Government announces plan to release 5 million tonnes of rice from buffer stocks

� Increase Minimum Export price for onions to Bill and potatoes

51

� “Advises” states to de-notify fruits and vegetables from APMC; Delhi to start

� Line of credit to states to import pulses and oilseeds

Presentation3

A continuation of fiscal orthodoxy

52

Presentation3

A welcome continuation of fiscal orthodoxy

6.5

7.0

7.5

8.0

% GDP

Need to net out asset sales

Adjusted for asset sales

-9

-8

-7

-6

3

5

% GDP

Federal deficit

% GDP

Reversing the Lehman stimulus finally

53

3.0

3.5

4.0

4.5

5.0

5.5

6.0

FY10 FY11 FY12 FY13 FY14 FY15

Headline deficit

sales

-5

-4

-3

-2

-1

0-3

-1

1

1998/99 2002/03 2006/07 2010/11 2014/15

Cyclically-adjusted stimulus

Source : CSO, Ministry of Finance, Budget Documents, JPM Calculations

Presentation3Uncomfortable, not impossible, fiscal arithmetic

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LAIS

E

54

Source : CSO, Ministry of Finance, Budget Documents, JPM Calculations

Presentation3

A continuation of policy orthodoxy

� New government committed to reducing fiscal deficit to 4.1% of GDP from 4.5% of GDP

�Resisted the temptation of easing the fiscal stance and/or meeting target primarily through asset sales

� Would have resulted in fiscal easing (4.5% of GDP + 0.8% of GDP in asset sales = 0.% of GDP easing)

55

�Instead, net of asset sales, underlying fiscal stance tightened by 0.15% of GDP

�Finance Minister reiterated bringing down the deficit down to 3% of GDP in 2 years

�Importantly, supported the need for a “ formal, modern, monetary policy framework” (read: inflation targeting)

Presentation3

Some quibbles

�Very aggressive tax collection targets. Gross tax collections are pegged to grow at 19.7% this year compared to 10% last year. Tax buoyancy budgeted at 1.47 from 0.8 last year.

�If tax revenue at 15% , it would mean shortfall of 0.3% of GDP

56

0.3% of GDP

� Three options:

� Change the target later in the year

� Garner more asset sale revenue

� Cut expenditures (potentially capex)

Presentation3Recent rally presents excellent opportunity to offload

perseverance

350

400

450

India: PSU ETF

Index

PSU share up by 55% since Feb this

year

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OU

NC

ING

TO

MA

LAIS

E

57

perseverance

150

200

250

300Jan-1

4

Jan-1

4

Feb-1

4

Mar-

14

Mar-

14

Apr-

14

May-1

4

May-1

4

Jun-1

4

Jul-

14

Jul-

14

Aug-

14

Source : Bloomberg

Presentation3But need fundamental tax and expenditure reforms

11

12

13

% GDP

Tax to GDP ratio never recovered post crisis

3.0

3.5

4.0

Source: GOI% GDP

India: government capex expenditure

IND

IA: B

OU

NC

ING

TO

MA

LAIS

E

58

8

9

10

11

FY92 FY97 FY02 FY07 FY12

1.0

1.5

2.0

2.5

FY98 FY00 FY02 FY04 FY06 FY08 FY10 FY12 FY14

Source : MoF, CSO

Presentation3

Nudges and pushes

Infra and Manufacturing

•Banks permitted to raise long-term funds for infrastructure sector without CRR/SLR

•Introduce an investment allowance at the rate of 15% to a manufacturing company that invests more than Rs250 million in new plant and machinery over the next three

59

million in new plant and machinery over the next three years.•A target of national highway construction of 8500 kilometers set for the current financial year with higher allocation of roads

Financial Savings

•Investment limit under Section 80C raised from Rs 1 lac to Rs 1.5 lac per person

Presentation3

Nudges and pushes

Capital flows

• FDI raised to 49% in defense and insurance

•Capital requirement for FDI for development of smart cities was eased

•Moving towards international settlement of Indian debt

60

•Moving towards international settlement of Indian debt securities

•Extending of 5% withholding tax to Indian corporatesbonds issued abroad to 2017

Presentation3

INR: what a difference a year makes

61

Presentation3

INR has stabilized in recent months

57

62

67

RBI announces slew of measures to arrest INR slide

USD/INR level

INR has depreciated by 40% in last 3 years

ECB comments of "will whatever it

takes" to save EuroChidambaram appointed as FM

New government

comes to power

62

42

47

52

57

Jan-1

1

Apr-

11

Jul-

11

Oct

-11

Jan-1

2

Apr-

12

Jul-

12

Oct

-12

Jan-1

3

Apr-

13

Jul-

13

Oct

-13

Jan-1

4

Apr-

14

European crisis

LTRO announced

European crisis spreds to core countries

Global EM sell off due to taper fears

Source : Bloomberg

Presentation3

And actually appreciated across a basket of currencies

57.5

58.0

58.5

59.0

59.5

67

68

69

LevelIndex

NEER

USD/INR

NEER and USD/INR

63

59.5

60.0

60.5

61.0

61.5

62.0

62.563

64

65

66

Jan-1

4

Feb-1

4

Mar-

14

Apr-

14

May-1

4

Jun-1

4

Ju

l-14

Aug-

14

Sep-1

4

USD/INR

Source : RBI, CEIC, Bloomberg , JPM Calculations

Presentation3

INR holds its own among EMs

-3

2

EM's currencies since 1Jan

% Appreciation(+/Depreciation (-)

Top five

0

2

Fragile five since 1Jan

% Appreciation(+)/Depreciation (-)

64

-23

-18

-13

-8

THB INR IDR MYR HKD PLN HUF CLP RUB ARS

Bottom five

-8

-6

-4

-2

INR IDR BRL TRY ZAR

Source : Bloomberg

Presentation3

A much sharper CAD adjustment in India

6

7

8

% of GDP

India has seen most dramatic CAD adjustment

2012

2013

2014(F)6

7

8

9

10

Turkey

% of GDP

But very different degree of current account adjustment

65

1

2

3

4

5

India Turkey South Africa

2014(F)

0

1

2

3

4

5

Q1-1

2

Q2-1

2

Q3-1

2

Q4-1

2

Q1-1

3

Q2-1

3

Q3-1

3

South Africa

India

Source : JPM Research

Presentation3

But most of it is regulatory

6

8

10

US$billion

Helped by gold imports plunge

66

0

2

4

Mar-12 Sep-12 Mar-13 Sep-13 Mar-14

Source : Ministry of Commerce

Presentation3

..and cyclical

6

7

8

9

10

10

15

20

25

Non-oil non-gold growth has declined tracking growth slowdown

oya% oya%

Non-oil non-gold imports

GDP growth(RHS)

12

14

16

18

30

40

50

Oya % Oya %

Capital goods imports fall in tandem with investments

Capital goods imports

67

0

1

2

3

4

5

-10

-5

0

5

10

FY

08-1

0

FY

11

FY

12

FY

13

FY

14

0

2

4

6

8

10

12

-20

-10

0

10

20

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14

Investment

Source : CSO, CEIC JPM Calculations

Presentation3And commodities correction serves as a significant, positive terms of trade shock

102

104

March 14, prices re-based to 100

Global commodity prices

95

97

99

101

103

March 14, prices re-based to 100

Indian oil basket

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TO

MA

LAIS

E

68

96

98

100

Mar-

14

Apr-

14

May-1

4

Jun-1

4

Jul-

14

Aug-

14

Sep-1

4

85

87

89

91

93

95

Mar-

14

Apr-

14

May-1

4

Jun-1

4

Jul-

14

Aug-

14

Sep-1

4

Source : Bloomberg

Presentation3

CAD expected to remain depressed

India: CAD forecast

US$ billion

2011-12 2012-13 2013-14 2014-15(F)

Current a/c balance -78 -88 -32 -27

% of GDP -4.2 -4.7 -1.7 -1.3

Merchandise trade balance -190 -196 -147.7 -139

% of GDP -10.1 -10.5 -7.9 -6.8

Ex ports 310 307 319 337

Imports 500 502 466 476

69

Imports 500 502 466 476

Oil imports* 155 169 168 161

Non-oil imports 345 333 299 315

Gold 62 54 29 31

Non-oil, non-gold 283 279 270 285

Net Inv isibles 112 107 115 112

o/w

serv ices 64 65 73 75

priv ate tranfers 63 64 63 65

inv estment income -16 -21 -23 -28

Source: RBI and JPM estimates

Source : RBI, JPM Calculations

Presentation3Impact of oil and commodity prices on macros

Every $10/barrel decline in oil prices:

Reduces CAD by 0.5% of GDP

Reduces Fiscal deficit by 0.2% of GDP

70

Reduces Fiscal deficit by 0.2% of GDP

Lowers WPI by 70 bps

Lowers Core CPI by 10 bps

Boosts growth by 20 bps


Presentation3

Even as structural drags remain

30

40

Trade deficit of coal, iron ore, scrap metal and fertlizers has surgedUS$bn

5000

10000

15000

20000

Coal Imports

$ mn

71

0

10

20

2005

2006

2007

2008

2009

2010

2011

2012

2010 2011 2012 2013

0

2000

4000

6000

8000

2010 2011 2012 2013

Iron Ore Exports

$ mn

Source : CSO, Ministry of Commerce, CEIC, JPM Calculations

Presentation3

But capital account …..

30

40

Estimated capital flow 2014 (YTD)

USD bn, YTD

Equity

72

0

10

20

FDI Portfolio Loans

Debt

Source : RBI, Bloomberg, CEIC, JPM Calculations

Presentation3

…and positioning remain a risk

61

62

63

Level

Interventions, bar height, 1 = $1 bn

RBI appears more permissive of a slow grind higher...

62

63

64

Actual USD/INR. Level

The carry has almost been wiped out in 2H

May 14 USD/INR levels adjusted for carry

Level

73

58

59

60

61

Jan-1

4

Feb-1

4

Mar-

14

Apr-

14

May-1

4

Jun-1

4

Jul-

14

Aug-1

4

Sep-1

4

USD/INR level

58

59

60

61

Jan-1

4

Mar-

14

May-

14

Jul-

14

Sep-1

4

Source : Bloomberg, RBI, JPM Calculations

Presentation3

INR staying close to fair value

125

CPI adjusted REER

Index

INR currently close to its fair value

74

95

105

115

04 06 08 10 12 14

Equilibrium REER

Source : RBI, CEIC, JPM Calculations

Presentation3

A constant ratcheting down

38

41

44

47

50

USD/INR, reverse scale

INR has ratcheted down following every bout of weakness

75

50

53

56

59

62

65

68

Apr 04 May 06 Jul 08 Aug 10 Sep 12 Oct 14

Average

Source : Bloomberg

Presentation3

High inflation generates a depreciating bias

100

110

120

130

140

REER

What explains this ...

150

170

Index, 1Q00=100

India's relative GDP 65% higher than in 2000

76

40

50

60

70

80

90

100

2000

2002

2003

2004

2006

2007

2008

2010

2011

NEER

90

110

130

2000 2002 2004 2006 2008 2010

Source : RBI, CSO, Bloomberg, CEIC, JPM Calculations

Presentation3Sustained appreciation needs sustained lower inflation

10

12

14

16

The INR's unpleasant arithmetic%-pts

Growth differential

Inflation differential

77

0

2

4

6

8

10

04 05 06 07 08 09 10 11 12 13 14

Source : CSO, JPM Calculations

Presentation3

Appendix

78

Appendix

Presentation3

Upside risk: exports should lift if global growth l ifts

6

Elasticity

India: except for BPO price elasticity of other exports is insignifcant

Demand elaticity

0

5

10

15

20

Change in manufacturing exports over the last decade%

79

-3

0

3

Texti

les

Leath

er

Gem

s

Ch

em

Eng

Soft

ware

BPO

Price elasticity

-20

-15

-10

-5

0

Leath

er

Ch

em

ical

Engg

goods

Texti

les

Gem

s &

Jew

el

Oth

ers

Source : Ministry of Coomerce, JPM Calculations

Presentation3

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Presentation3

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Presentation3

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India October Sajjid Chinoy

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