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Sourajit Aiyer - Putting The Fiscal Year In Perspective, India in FY2013 - IFA WealthGram Magazine, Switzerland - May 2013
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Sourajit Aiyer - Putting The Fiscal Year In Perspective, India in FY2013 - IFA WealthGram Magazine, Switzerland - May 2013

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  • 1. Gram Wealth THE IFA’s LA TRIBUNE MENSUELLE DES MEMBRES DU GSCGI wealthgram@gscgi.ch www.gscgi.ch Vol. II N° 16 - Mai 2013 Groupement Suisse des Conseils en Gestion Indépendants www.gscgi.ch WHAT DOESN’T KILL THE SWISS FINANCIAL CENTER MIGHT MAKE IT STRONGER •
  • 2. The fiscal year in India is from April to March (FY 2013 - Apr 2012 to Mar 2013) and it is now an ideal time to take stock of the economic scenario as of the recently concluded fiscal year. Domestic and global headwinds which impacted the economy in FY 2012 continued to pose a downside risk to growth in FY 2013. However, certain positive news-flow, especially in the second half of the year, triggered short bursts of optimism as well. The GDP growth rate, which ranged between ~7-9% per annum during most years of the last decade,fell below ~6.5% in FY 2012 and is expected to be ~5% in FY 2013 - the lowest in the decade. In terms of segments, agriculture GDP growth was mainly impacted by less than normal monsoon rains. Slowdown in the industrial output hit manufacturing GDP growth. Services GDP growth was largely impacted by the trade, hotel, transport sector, as this is linked to the first two segments. Rating agencies like S&P and Fitch lowered their credit rating outlook for India given the slowdown in GDP growth and industrial output, widening current account deficit, inflation and fiscal pressures, policy slowdown,etc. Certain positive triggers in the second half included easing in manufacturing inflation, some action on the reforms/policy front, plans to bring the fiscal deficit below 5%, as well as regulatory changes to increase savings flows. Inflation has probably been the biggest enemy of the average Indian, being persistently above comfort levels for most part of the year. Factors include recent price trends in global crude, precious metals and commodities, electricity tariff hikes, supply GramGram Wealth THE IFA’s LA TRIBUNE MENSUELLE DES MEMBRES DU GSCGI wealthgram@gscgi.ch • www.gscgi.ch Vol. II - N° 16 - Mai 2013 L’AVIS DE L’ANALYSTE Putting the fiscal year in perspective - the Indian economy in FY 2013 Groupement Suisse des Conseils en Gestion Indépendants www.gscgi.ch 1 • side inefficiencies including infrastructure support,changes in the dietary pattern towards protein foods and better cereal varieties and revision of agriculture product MSPs (minimum support price). WPI (Wholesale price index) remained over ~7-8% for the first nine months of FY 2013 as fuel and commodity prices exerted pressure. Thereafter, easing in the global commodity prices impacted manufactured product inflation positively, which helped the WPI moderate to ~sub-7% levels since Jan 2013. CPI (Consumer price index) has been above the ~9-10% range throughout this year. The increased divergence between CPI and WPI is largely on account of the higher weightage of food and services within CPI. Food inflation has been impacted due to weak monsoons, supply-side constraints, higher MSP and input costs. Moderation in food inflation would largely help lower the gap between CPI and WPI and bring the CPI closer to WPI levels. Given the inflation scenario, Reserve Bank of India (RBI) maintained an anti-inflation stance for most part of the year. Following successive hikes in the policy rates in the previous fiscal, it kept them largely unchanged for most part of FY 2013. This high interest rate scenario had a consequent impact on economic growth. Nevertheless, the silver lining is that the moderation in WPI since Jan 2013 possibly instilled the confidence in RBI to lower the policy rates (repo and reverse repo rates) during its policy review meetings in Jan and Mar 2013. However, the rate cuts have not really seen a commensurate effect on the lending rates so far, as the liquidity scenario remained tight. As inflation 6.5% 4.4% 6.5% 4.8% 8.0% 3.6% 9.6% 8.9% 7.2% 3.8% 4.4% 6.7% 6.2% 9.1% 12.4% 10.5% 8.2% 10.0% FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13E WPI CPI 6.50% 6.75% 7.25% 7.50% 8.00% 8.25% 8.50% 8.00% 7.75% 7.50% Jan25, 2011 Mar 17, 2011 May3, 2011 Jun16, 2011 Jul26, 2011 Sep 16, 2011 Oct 25, 2011 Apr 17, 2012 Jan29, 2013 Mar 19, 2013 Recent Changes in the Repo Rate Annual average WPI and CPI in India Source: Motilal Oswal EcoScope Recent Changes in the Policy Rate (Repo Rate) Source: www.global-rates.com
  • 3. stability sustains and liquidity improves, it can lead to further monetary easing. This should eventually help to lower the cost of borrowing and revive the investment cycle. The need to balance coalition politics took its toll on the speed of reforms. This, along with environment clearance issues, regulatory delays, inflation and the global slowdown contributed to the slowdown in the investment cycle by companies. Tight monetary policy kept the cost of borrowing high. Infrastructure development was slow given the regulatory delays along with the challenges of PPP models (Public-Private Partnerships) and long- term funding sources. New projects slowed down and a number of existing projects are currently facing delays. IIP growth (Index of Industrial Production) has been largely dismal this fiscal year. Initiation of some reform measures since Sept 2012, even at the risk of snapping ties with coalition partners,raised some cheer and an uptick in sentiments was visible. Foreign portfolio investors (FIIs in Indian parlance) started pumping in record inflows, markets picked up and the Indian Rupee (INR) appreciated slightly. The government also set up a Cabinet Committee of GramGram Wealth THE IFA’s LA TRIBUNE MENSUELLE DES MEMBRES DU GSCGI wealthgram@gscgi.ch • www.gscgi.ch Vol. II - N° 16 - Mai 2013 L’AVIS DE L’ANALYSTE Putting the fiscal year in perspective - the Indian economy in FY 2013 Groupement Suisse des Conseils en Gestion Indépendants www.gscgi.ch 2 • Investment as a single window to clear large projects, and is further working towards public spending projects like dedicated freight corridors, urban transport etc. However, reviving the investment cycle would also demand sustenance of the reforms engine, a more involved decision-making with state governments on issues related to land, resources, closer monitoring of stalled projects and systematic reduction of the cost of funds to catalyse further investments. India’s external sector variables saw stress this year. Its growing integration with the global economy meant that the continued economic pressures globally impacted demand for India’s exports. On the other hand, the import bill was impacted due to price and/or demand trends in oil,gold,coal,etc as well as depreciation in the INR. India’s dependence on oil imports has risen to ~80% of total oil demand and put under pressure the oil import bill. For a traditionally gold obsessed nation,the demand for gold also shot up since the last couple of years due to its perception as a relatively better investment option. Given the twin impacts of export slowdown and higher imports, the trade deficit rose 90 95 100 105 110 115 avr. 12 juin 12 juil. 12 sept. 12 nov. 12 janv. 13 mars 13 THB KRW CNY USD MYR EUR GBP RUB BRL JPY Rebased to 100 Currency movements in FY 2013: Units of INR to 1 unit of foreign currency (Rebased to 100) / Source: www.oanda.com
  • 4. to ~US$190bn now (~10% of nominal GDP). Capital inflows from foreign portfolio investors did provide some cushion, though these flows are volatile in nature. The increase in the import bill increased dollar demand and export slowdown reduced dollar supply. From a historical average of ~Rs 45 during the last decade, the INR/US$ exchange rate breached the Rs 50 mark in FY 2012 (average Rs 48 for the year). In FY 2013, it further breached the Rs 55 mark (average Rs 54 for the year). In this scenario, the current account deficit as a percent of GDP increased from a historic average of ~1-2% to over 4%. The rise in trade deficit has also been a possible cause for the stagnancy in forex reserves,which has remained around US$290-300bn since the last five years. Action on the reforms front in Sept-Oct 2012 improved sentiments and the INR did appreciate to ~Rs 53. But it subsequently reverted to ~Rs 54-55 levels as the current account deficit continued to exert pressure. The government is now working on regulations to curb gold imports and is expected to address the needs for enhancing domestic oil & gas upstream activities. The need is also to improve the relative competitiveness of exports, expand into new export geographies and attempt some import substitution GramGram Wealth THE IFA’s LA TRIBUNE MENSUELLE DES MEMBRES DU GSCGI wealthgram@gscgi.ch • www.gscgi.ch Vol. II - N° 16 - Mai 2013 L’AVIS DE L’ANALYSTE Putting the fiscal year in perspective - the Indian economy in FY 2013 Groupement Suisse des Conseils en Gestion Indépendants www.gscgi.ch 3 • by domestic production. India is also becoming a global production hub for automobiles, consumer non- durables etc, which should enhance export prospects. Another possible catalyst for INR appreciation would be to increase foreign direct investments (FDI), as it is a more stable and long-term source of foreign capital, apart from stability in prices of import goods. These should help the current account deficit situation. Incidentally, apart from USD and Euro, the INR also depreciated against currencies like Chinese Yuan, Thai Baht, Korean Won and Malaysian Ringgit this year. Exports have been a key growth driver in most of these Asian peers, and the current currency trends may increase India’s relative export competitiveness. Also, any growth in manufacturing sector exports specifically would benefit from the current trends in the INR. On the other hand, the INR appreciated or remained flat this year against other emerging market peers like Brazilian Real, Russian Rouble, as well as the Pound Sterling and the Japanese Yen. India’sfiscalsituationhas been closely monitored by policy makers, business and investor communities alike, and government announced in its recent Union Budget to rein in fiscal deficit to ~sub-5% in the coming year. Since Sept 2012, the ball had 3.9% 4.0% 3.3% 2.5% 6.0% 6.5% 4.9% 5.9% 5.4% 7.0% 9.5% 9.6% 9.3% 6.7% 8.6% 9.3% 6.2% 5.0% FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13E Fiscal Deficit GDP Growth % Fiscal Deficit and GDP Growth in India / Source: Motilal Oswal EcoScope 0.3% 1.2% 1.0% 1.3% 2.3% 2.8% 2.6% 4.2% 4.8% 44.9 44.3 45.3 40.2 45.9 47.4 45.6 47.9 54.5 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13E Current Account Deficit INR/USD INR and Current Account Deficit in India Source: Motilal Oswal EcoScope
  • 5. started rolling on some of the reforms/policy fronts. The cap on LPG subsidies and the deregulation of diesel prices should ease the subsidy burden to some extent. As the GDP picks up,the net tax-GDP ratio should typically move from the current ~7-7.5% to ~8.5%, where it was five years back. While the recent Union Budget kept the tax structure as largely unchanged (except for a couple of surcharges on corporate and wealthy taxes), the government is also expected to earn from non-tax sources. These include its d i s i n v e s t m e n t programme, sale of spectrum and other resources like mines, land etc, as well as possible cash dividends from the cash- rich government- owned companies (PSUs). It has already approved disinvestment of four PSUs and strategic sale in a couple of firms. Opening up of FDI avenues should bring in further long-term capital. Recent announcements included liberalizing FDI norms in sectors like retail, aviation and broadcasting. On the other side, the Budget also announced a hefty 29% rise in planned spending, given the need to spur growth in the context of the current slowdown. However,the challenge will be to meet the estimated revenue targets. In the event of lower than expected revenues, expenditures may need to be appropriately managed to help keep fiscal deficit within comfort limits. Apart from macroeconomic stabilization and manufacturing revival, India also needs to shift towards from consumption to savings and investment. For a traditionally savings-oriented country,gross domestic savings as a percent of GDP has declined from the last five-year historical average of ~33-34% to ~31% as of FY 2012 (N/A for FY 2013). Within households, the share of financial savings has declined in recent years while that of physical savings has risen, coinciding with the increased demand for gold and real estate. Bank deposits always comprised the lion’s share of GramGram Wealth THE IFA’s LA TRIBUNE MENSUELLE DES MEMBRES DU GSCGI wealthgram@gscgi.ch • www.gscgi.ch Vol. II - N° 16 - Mai 2013 L’AVIS DE L’ANALYSTE Putting the fiscal year in perspective - the Indian economy in FY 2013 Groupement Suisse des Conseils en Gestion Indépendants www.gscgi.ch 4 • household financial savings and its proportion within household financial savings rose to over 50% as of FY 2012. In order to spur retail inflows into financial savings, the government has engaged with asset management companies by initiating several measures like Rajiv Gandhi Equity Savings Scheme to bring in new equity investors, direct mutual fund plans to reduce fund costs, reviving distributor interest through incentives, expansion into small towns by increasing fund expense, flexibility in fund charges, investor awareness i n i t i a t i v e s , amongst others. Institutionalization of retail savings has been a key mobilizer towards investment flows, as seen in mature markets like USA, Korea etc. These regulatory initiatives, along with possible growth in disposable income (following moderation in inflation and creation of more skilled jobs), should encourage flows into financial assets further. In conclusion, India has faced tough economic times before and has always managed to navigate itself out and emerge stronger. Even in the years immediately following the global financial crises, India showed resilience by clocking ~9% per annum growth in GDP in both FY 2010 and FY 2011. While the recent reforms initiatives boosted sentiments,it is also imperative to address regulatory delays, governance of projects and inflation. The recent interest rate cuts have not really led to a reduction in lending rates so far, as liquidity was a concern. Apart from RBI’s Open Market Operations,further cuts in the Cash Reserve Ratio shouldhelptheliquiditysituation. Asstabilityininflationsustains, liquidity improves and fiscal deficit remains contained, it would create further headroom for interest rate softening. Monetary easing should eventually help lower the cost of borrowing. Going forward, the action plan is essentially on reviving the investment cycle, sustaining reforms action, combating inflation, Some of the policy measures announced recently Liberalises FDI norms in retail, aviation, broadcasting Raises diesel prices, caps subsidised LPG at 6 per year Cabinet approval to raise FDI in insurance and pension Plans to speed up cash transfer of subsidies Proposes disinvestment in 4 PSUs Easing of fund-raising abroad Deferment of GAAR provisions
  • 6. rein in the twin deficits of fiscal and current account, creating skilled jobs and enhancing labour productivity, expanding export geographies, removing infrastructure bottlenecks and reducing borrowing costs. * * * Disclaimer: This article is meant for information purposes only and does not construe to be an investment advice. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Anyactiontakenbyyouonthebasisof theinformation contained herein is your responsibility alone. We have exercised due diligence in checking the correctness and authenticity of the informationcontainedherein,butdonotrepresentthatitisaccurate or complete. The readers should rely on their own investigations. GramGram Wealth THE IFA’s LA TRIBUNE MENSUELLE DES MEMBRES DU GSCGI wealthgram@gscgi.ch • www.gscgi.ch Vol. II - N° 16 - Mai 2013 L’AVIS DE L’ANALYSTE Putting the fiscal year in perspective - the Indian economy in FY 2013 Groupement Suisse des Conseils en Gestion Indépendants www.gscgi.ch 5 • Sourajit Aiyer Senior Manager,Investor Relations (Corporate Planning) Motilal Oswal Financial Services Mumbai, India sourajit.aiyer@motilaloswal.com / www.motilaloswal.com Sourajit AIYER Experience Synopsis Sourajit works in the corporate planning team of Motilal Oswal Financial Services, Mumbai, where he manages the investor relations function. Prior to this, he worked in the corporate finance team of Reliance Broadcast Network, Mumbai, and the equity trading operations team of UBS Investment Bank, London. He started his career in the investment research team of Evalueserve, Delhi, and also completed an internship in Grameen Bank, Bangladesh.