Presentation to FEDAI Managing Committee

Saugata Bhattacharya

Mumbai

28th September 2017

The nature of economic slowdown … What to do about it …

… and some structural changes underway

Views are Personal

2

Structure of the presentation

1

Looking ahead: Structural changes in India

2

3

Levers of growth: Monetary, Fiscal, Trade policies, …

Economic environment: Growth, consumption, investment, …

3

0.4% 0.4% 0.4% 0.8%

0.3%

0.6% 0.3%

1.8%

1.5% 1.9% 1.0%

0.2%

0.2%

0.2%

0.5%

0.5% 0.3%

-0.3%

0.2%

1.9%

1.9% 1.7%

1.3%

2.1%

2.1%

2.3% 2.2%

0.4% 1.5%

0.4% 0.7% 1.0%

2.0% 1.1%

-1%

1%

3%

5%

7%

9%

Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17

Contribution to growth

Public Admin. + Otr. Services

Financial Services+

Trade, Hotels, Communication+

Construction

Electricity

Manufacturing

Mining

Agriculture

India’s near term growth prospects have slowed, led by manufacturing and

financial services …

4

0%

5%

10%

15%

20%

Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17

GVA Non-Agri Nominal

GVA Non Agri Real

YoY%

Rather than focus on real growth slowdown, the path of nominal GVA growth

provides better insight; nominal growth drop was a combo of commodities

prices and volumes

5

… with private consumption having held up most of growth, and Govt spending

compensating for investment

-25%

-15%

-5%

5%

15%

25%

35%

-4%

0%

4%

8%

12%

Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17

Private Consumption Fixed Capital Formation

Govt. Consumption (RHS)

YoY%

6

… but the investment slowdown is due more to household investment than

corporate

16.0%

14.8%

12.7% 12.8%

11.0%

6%

8%

10%

12%

14%

16%

18%

FY12 FY13 FY14 FY15 FY16

Investment by constituents as % of GDP

Public sector Private corporate sector Households

7

…which has something to do with a loss of discretionary incomes of households

-10%

0%

10%

20%

30%

40%

50%

2005 2007 2009 2011 2013 2015

YoY Growth (%)

Net Sales

Employee Cost

8

5%

7%

9%

11%

13%

15%

17%

FY01 FY03 FY05 FY07 FY09 FY11 FY13 FY15 FY17F

HH Savings (as % of GDP) HH Physical Savings

HH Financial Savings

… but begs the question of the switch from financial to physical savings during

FY12; the gap between the two has thereafter narrowed

Fiscal stimulus +

6 CPC

9

… but perceptions of house price increases do

0%

5%

10%

15%

20%

25%

30%

9%

10%

11%

12%

13%

14%

15%

16%

17%

FY01 FY03 FY05 FY07 FY09 FY11 FY13 FY15 FY17F

% YoY

HH Physical Savings (% of GDP)

RBI HPI [R]

HPI: RBI House Price Index

10

However, a glimpse of recovery in project sanctions by banks and other lenders

Year of

sanction

Total no. of

cos

Project

cost FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E

Beyond

FY17

Upto FY08 5,306 7,996 375 98 47

FY09 1,001 3,432 530 346 84 46

FY10 1,003 4,436 1,311 770 316 77 34

FY11 1,029 4,089 1,257 1,161 817 469 85 1 9

FY12 1,095 2,305 232 926 685 301 96 29

FY13 958 2,566 1 367 950 698 337 125 65 20

FY14 1,056 2,081 13 151 910 663 231 74 42

FY15 828 1,456 1 148 716 433 130 30

FY16 700 1,351 38 74 671 387 118 67

FY17 922 2,064 14 40 254 883 484 389

Total 13,898 31,776 3,706 3,681 3,051 2,701 2,045 1,744 1,548 694 456

YoY (%) 10% -1% -17% -11% -24% -15% -11% -55%

Pipeline of Capital Expenditure of Projects Funded Through Banks/ECBs/FCCBs/IPOs Rs bn

11

2 Levers for reviving growth: Monetary, Fiscal, Trade policies, …

12

(12)

(10)

(8)

(6)

(4)

(2)

-

2

4

6

8

Dec-00 Oct-02 Aug-04 Jun-06 Apr-08 Feb-10 Dec-11 Oct-13 Aug-15 Jun-17

Real rates on the 1 year T-bill are the highest since Nov 2014,

opening up space for further rate cuts …

2 Monetary Policy

13

… but the projected path of inflation limits room for deeper rate cuts

1%

2%

3%

4%

5%

6%

7%

8%

9%

Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19

CPI - Headline

Forecast

5.7%

4.8%

4.0%

Core

14

The total Govt budget deficit has been more sticky than suggested by the Centre,

and remains on the higher side of most EM peers

5.9%

2.5%

6.5%

4.8%

5.9%

4.9% 4.5%

3.5% 3.2% 4.1%

1.5%

3.0%

2.0% 2.0%

2.2% 2.9% 2.7%

10.0%

4.1%

9.5%

6.8%

7.9%

6.9%

6.7% 6.4%

5.9%

0%

2%

4%

6%

8%

10%

12%

FY02 FY04 FY06 FY08 FY10 FY12 FY14 FY16 FY18

Centre States Total

Fiscal Policy

15

India debt levels are still reasonable by global standards, but high compared to EM peers

Debt as a % of GDP 2015

16

The weak USD and skepticism on rates has driven EM carry as a strategy:

higher INR real rates and stronger INR has led to outperformance…

70

80

90

100

110

120

130

140

Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17

INR

CNY

IDR

BRL

S&P500

US aggregate bond returns

Exchange Rate Policy

17

Does a strong currency impact trade? The textiles trade provides clues

90

95

100

105

110

115

120

Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17

Select EM currencies vs USD

INR VND LKR KRW BDT

18

India has done relatively well, but this is obviously much beyond exchange

rates …

Share of imports ($ value) into US of textiles products

2014 2015 2016 2017 YtD

India 6.3% 6.6% 7.0% 7.9%

B'desh 4.7% 5.0% 5.3% 5.5%

Vietnam 9.3% 10.1% 10.8% 11.5%

Sri Lanka 1.7% 1.8% 1.9% 1.9%

Korea 0.9% 0.8% 0.9% 0.9%

Unit Prices in US of textiles products

Unit prices

2014 2015 2016 2017 YtD

India 0.88 0.91 0.90 0.93

B'desh 1.47 1.45 1.51 1.38

Vietnam 1.38 1.46 1.52 1.50

Sri Lanka 2.30 2.35 2.47 2.54

Korea 0.37 0.36 0.35 0.33

19

Looking ahead: Risks and some structural changes in India 3

20

The USD has been driven lower in large part by faster Eurozone growth

21

Probability of Fed hikes has risen sharply as Korea risks ebb and Fed remains

hawkish

22 22

A big move to financial savings will keep domestic liquidity high

5.1 4.2

6.1 5.9 5.9

7.0

8.3

10.8

12.3

17.5

0

2

4

6

8

10

12

14

16

18

20

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17

Rs

Tn

Assets Under Management (AUM) of Mutual Funds in India

23

Lack of jobs and opportunities in India will have multiple effects

CAGR for 10 years FY06-FY15

(220 cos)

CAGR for 5 years FY11-FY15

(320 cos)

-40%

-20%

0%

20%

40%

60%

80%

100%

-40% -20% 0% 20% 40% 60% 80% 100%

CA

GR

Mkt

Cap

CAGR Employee-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

-40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60%CA

GR

Mk

t C

ap

CAGR Employee

last 10 yrs last 5 yrs

Median CAGR No. of employees 3% 1%

Median CAGR Mkt Cap 9% 12%

24

India’s productivity has stagnated

-

2

4

6

8

10

12

14

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

China share

India share

80

90

100

110

120

130

2000 2000 2001 2002 2003 2004 2005 2005 2006 2007 2008 2009 2010 2010 2011 2012 2013 2014 2015 2015

China REER

India REER

Share of Global Trade, %

Currency appreciation

25 25

Thank You