WHAT MADE INDIA THE SHOW STOPPER?

SUMMARY

In 1990, China was little poorer than India, but since then its growth has skyrocketed

touching double figure growth mark for more than 2 decades on continuous basis

surpassing India and Japan to be crowned as the World’s 2nd largest Economy. Its known to

be the manufacturing hub of the world. But in recent years China growth story has slowed

down. Once a sprinter, China’s sluggish growth has also slowed down the World GDP

growth rate. So what happened to the dragon(China)? It seems that China had built more

factories than it needed, Govt. had taken more debt than it actually needs to spend,

reduced consumption from home buyers, Low demand from Europe and other countries

resulted in supply outpacing demand, due to which the companies were no longer able to

make full utilization of their plants, Profit plunged and debt started to rise. Also, China is

considered to be one of the biggest importers in the world, with drop Chinese imports,

global commodities prices fell considerably, also one of the biggest blow was to Oil

prices, because China is the biggest importer of Oil in the world, which has created havoc

in Gulf countries, US and Russia. Other reason for fall in commodities prices is due to a

stronger Dollar. Most of the commodities come from developing countries, a stronger

dollar reduces the prices of the commodities as their currency gets weaker against the

dollar. With China slowing down, the global demand as fell down considerably, so the

next best bet is India as its hold a vast population and it has huge number of mid-income

groups, so probably it can drive global demand which can help revive growth output of

world.

Economic growth in India accelerated in Fiscal Year 2015 despite a double-digit decline in

exports. It is projected to dip marginally in FY2016 due to a slowdown in public

investment, stressed corporate balance sheets, and declining exports, then pick up in

FY2017 as newly strengthened bank and corporate finances allow a revival in investment.

Notwithstanding unexpected delays in enacting some economic reform, the prospects for

continued rapid growth are undiminished.

Let us look some of the events which made India the preferred destination for investors.

Slowing of Chinese Economy Government Policies like Make in India, Skill

India Mission, Digital India, and other measures

India’s demographics Untapped potential Demand Performance of Ruppee against Dollar as

compared to other Asian currencies Better growth potential as compared to other

BRICS nations.

FACTORS AND CATALYST

BRAKE ON CHINA’S GROWTH RUN

China is second largest economy in the world after U.S, major economies depends

on exports to China for their growth. China is also one the largest exporters in the

world. China's economy is now registering its slowest pace of growth in 25 years

after decades of breakneck expansion. Investors are worried about the scale of the

slowdown, which has set off waves of volatile trading in stocks, commodities and

currencies in recent months. China's exports fell 11.2 percent on-year in January,

while imports declined 18.8 percent, clocking far bigger slides than expected by

analysts. China's problems are compounded by weakness elsewhere in the world

economy. Manufacturing contributes around 59% to the Chinese GDP. And mind it,

all of it is for the export. But, the slowdown in the EU, Japan and South Korea has

led to reduced demand. These regions are also the largest trading partners of

China. The real estate sector accounts for between 25% and 30% of China’s GDP (if

upstream and downstream industries such as steel, cement, glass, furniture, and

appliances are included). Plunging housing prices will not only hurt affluent

Chinese who have poured their fortunes into investment properties, but it will also

trigger defaults by overleveraged real estate developers who can no longer service

or repay their bank loans.

You know, there has been a decline in Automobile sector, construction sector (these

industries require steel and iron). Plus, the concerns about the environment.

Therefore, reducing the demand for iron and steel. Why is it so important?

Because, China is the largest producer of steel. In fact, its production is 7 times

that of the second largest producer(Japan). So, when the steel prices go down due

over production or lack of demand. Chinese Economy would face some heat.

Recently, the United Kingdom pressurized China to close some of its steel plants as

it had flooded U.K with cheap Chinese Steel and that its own steel plants were

taking beating for it. TATA already announced closure of its UK plant and admitted

that it had been a victim of cheap Chinese steel imports.

GOVERNMENT POLICIES AND INITIATIVES

Several policies of Govt like Make In India, Skill India Mission, Digital India.,

easing of FDI norms in Defense, Multi-Brand retail, telecom, Airlines etc. has

brought India in to the limelight of Global powers. India’s demographic and

huge potential demand is luring MNCs to open their manufacturing plants in

India. Also, with skill India mission by govt. will provide necessary skills to the

youth in order to provide companies with readily skilled man power and save

their training cost. Since 75% of population in >35 years of age, training the

youth becomes a daunting task. If not handled well it might lead to massive

unemployment or employment gap. Digital India is a campaign launched by

the Government of India to ensure that Government services are made

available to citizens electronically by improving online infrastructure and by

increasing Internet connectivity or by making the country digitally empowered

in the field of technology. It was launched on 1 July 2015 by PM Narendra

Modi. The initiative includes plans to connect rural areas with high-speed

internet networks. Digital India has three core components. These include:

The creation of digital infrastructure, Delivering services digitally and Digital

literacy.

With the govt. now providing necessary infrastructure and creating a

corporate friendly environment, companies are keen to set up their

manufacturing units in India, rather than importing their products into India.

However, many companies have shown interest in setting up their plants In

India. The move of Govt. to make India a manufacturing Hub and take away

the crown from China is a bold move and only time will tell whether it will

pay off or not.

RUPEE STELLAR PERFORMANCE AGAINST USD

The Russian Ruble was hit hard in 2014, losing nearly 40% of its value following

economic sanctions by the West and low oil prices. So far, in 2015, the ruble

itself has remained fairly unchanged, however the ripple effect to former Soviet

countries, including Ukraine, Belarus, Azerbaijan and Moldova, has made these

nation's currencies among the worst performers so far this year.

Brazil's economy stagnated in 2014-2015, along with a general decline in

commodity prices, which it relies on for exports. Political uncertainty and rising

inflation has caused the Brazilian Real to lose nearly 20% so far this quarter.

Rupee has been by far the best performing Asian currency. While Yuan and Yen

continue to depreciate against the dollar and rupee.

The Euro, the common currency of the Eurozone member nations, has seen its

value steadily decline due to persistent economic woes, prompting

the European Central Bank (ECB) to begin quantitative easing (QE) efforts in

order to jump start the economies there. Furthermore, fear of a Greek and

United Kingdom exit from the euro and the contagion that would cause

throughout the peripheral nations has depressed its value.

Canada and Australia, both traditionally stable economies during economic

downturns, have not been able to escape the effect of low oil and commodity

prices. The Canadian dollar is down nearly 9% and the Australian dollar down

almost 6.5% year to date. The New Zealand dollar, which is closely correlated

with the Australian economy has also lost nearly 5% of its value so far this year.

Indian rupee is one of the best performing currencies in Asia despite global

uncertainties, prompting dealers to give the Reserve Bank of India (RBI) and

the finance ministry credit for astute management of the foreign

exchange market. The rupee has posted a total return of 1.04% in the period,

ranking it fourth in Asia behind the Indonesian rupiah, the Japanese yen and

Singaporean dollar. It's done better than the Chinese yuan, the sixth-best

currency with a 0.24% return.

Major Currencies performance against the USD in past 1Yr period

CONCLUSION

India’s Macro Economic fundamentals are strong and therefore it has been least affected by global economic turbulences. Govt. and RBI

initiatives have helped Indian economy and the currency to remain competitive in Global world.

India is by far the fastest growing economy in the World. Even among BRICS nations India is by far the best performing nation.

Fall in commodities prices and Oil has also helped India in improving its Balance of Trade positions. However, Exports have taken a hit due

to devaluation of Yuan, the overall trade position still holds positive, with an equal fall in imports.

China is restructuring its economy, while Brazil is facing internal challenges due to rising tension among people leading to social problems,

Russia is hit by falling crude prices (Major contribution to GDP), Japan and South Korea are facing slowing down of domestic demand,

Europe its self is in turmoil due to Greek and United Kingdom opting to leave the EU, American Economy has shown some positive sign of

recovery but still in gloom, India on the other hand as kept fiscal and revenue measures under strict monitoring, Macro economic

environment has improved due to which business and investors are showing more faith in India.

While Japan, Europe, China and other developed countries are suffering from ageing population, on the other hand India has by far the

most number of working population with over 75% of its total population below 35 years of age.

CHALLENGES AHEAD

India has a daunting task of tainting its youth and making them Industry-ready. Critic says that India’ s education system is not up with the

Industry trends and that nearly 70% youth are unemployable. Companies are unable to find right candidate for the Job.

Govt Policies are easy to declare rather than implementing them. The current NDA govt. will have to make the changes happen and not

just put them on papers, Corporates want ground work rather than open promises.

“China’s loss is India’s Gain”, this is just not the case, China’s is roughly 5 times the size of India, China’s already has a huge foothold over

the world, many companies have heavily invested in China and they may not be willing to take back their investment even if china is

slowing down, Remember India growing @ 7% and same for China is different, if China is to grow @ 7% its like its adding every year an

economy size of Switzerland or Indonesia to it.

Recently social tensions are on the rise in India, this may not be a good sign. India has history of conflicts between religions, such kind of

acts do not favor businesses and they maybe careful in investing in India.

The complex tax structure in India create hurdles for the smooth functioning of business. Implementation of GST holds key to India’s

growth, this will not only help the tax menace in the country but also will put India at par with global tax system.

License and other bureaucracy hurdles is one of the biggest problems of corporate world. However, Govt. has taken steps to bring

transparency in granting licenses and speedy process for starting new business or startups.

Made by,

Kunal KapoorAnalyst

IndusInd Bank