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India: how much energy

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According to Goldman Sachs report, According to our
projections, Indian annual energy imports could rise to US$230 billion by FY23
from US$120 billion currently, driven by economic growth, greater
industrialization and urbanization...

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India: how much energy

  1. 1. June 20, 2014 Issue No: 14/25 Asia Economics Analyst Economics Research India: How Much Energy? India is a large importer of energy—in FY14, its net energy imports were 6.3% of GDP. Without energy imports, we calculate it would have run a current account surplus of 4.6% of GDP. We project India’s energy imports for the next decade. According to our projections, annual energy imports could rise to US$230 billion by FY23 from US$120 billion currently, driven by economic growth, greater industrialization and urbanization. Despite an increase in energy intensity, our projections show that energy imports as a share of GDP have likely peaked, and can moderate over the next decade, based on the assumption of subdued commodity prices. Energy imports can be reduced further by switching from oil to natural gas and improving conservation. We show that reforms in the energy sector could reduce India’s annual energy import bill by US$40 billion by FY23. Energy imports in a reform scenario could come down to about 4% of GDP, from 6.3% of GDP currently. We show that if India were to improve its energy efficiency by 15% over the next ten years, it could save US$32 billion annually by FY23. Conservation measures include reducing transmission and distribution losses, using more energy efficient appliances, and stricter emission standards for vehicles. The reduction in energy imports as a share of GDP could improve India’s current account on a structural basis, which in turn could be positive for the INR over the medium term. Andrew Tilton +852-2978-1802 andrew.tilton@gs.com Goldman Sachs (Asia) L.L.C. Goohoon Kwon, CFA +82(2)3788-1775 goohoon.kwon@gs.com Goldman Sachs (Asia) L.L.C., Seoul Branch Tushar Poddar +91(22)6616-9042 tushar.poddar@gs.com Goldman Sachs India SPL Li Cui +852-2978-0784 li.cui@gs.com Goldman Sachs (Asia) L.L.C. Yu Song +86(10)6627-3111 yu.song@ghsl.cn Beijing Gao Hua Securities Company Limited MK Tang +852-2978-6634 mk.tang@gs.com Goldman Sachs (Asia) L.L.C. Jonathan Sequeira +852-2978-0698 jonathan.sequeira@gs.com Goldman Sachs (Asia) L.L.C. Maggie Wei +852-2978-0106 maggie.wei@gs.com Goldman Sachs (Asia) L.L.C. Vishal Vaibhaw +91(22)6616-9376 vishal.vaibhaw@gs.com Goldman Sachs India SPL Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. The Goldman Sachs Group, Inc. Global Investment Research
  2. 2. June 20, 2014 Asia Economics Analyst Goldman Sachs Global Investment Research 2 How Much Energy? The Energy Problem On July 30th 2012, India’s northern electricity grid broke down due to overdrawing by states, plunging an estimated 640 million people into darkness. As factories couldn’t operate, homes remained dark, and people were stuck in elevators, the realization dawned that the Indian economy just could not grow without the country resolving its energy problem. India has a fifth of the world’s population, but only a 30th of its energy. It just doesn’t produce enough to meet its needs. Hence, it has to import energy – oil, gas, and increasingly coal. In FY14, India’s net energy imports were 6.3% of GDP. Without energy imports, all else being equal, we calculate it would have run a current account surplus of 4.6% of GDP. Exhibit 1: India’s current account deficit is mainly due to energy imports… Exhibit 2: …driven largely by Oil Source: CIEC, Goldman Sachs Global Investment Research Source: Haver, Goldman Sachs Global Investment Research It is not only the direct cost of fuel that matters, but also the environmental cost, and the security of energy supplies. Taking these into account gives the ‘all-in-cost’ of energy. India’s predominant use of more polluting coal, which meets more than 50% of its energy needs, and its import dependence means that its all-in-cost of energy is high and rising. -6.0 -4.0 -2.0 0.0 2.0 4.0 6.0 -6.0 -4.0 -2.0 0.0 2.0 4.0 6.0 FY97 FY99 FY01 FY03 FY05 FY07 FY09 FY11 FY13 Percent of GDPPercent of GDP Current account balance: With energy imports Without energy imports 0 2 4 6 8 10 12 0 2 4 6 8 10 12 Korea India ASEAN Japan China US PercentPercent Oil imports as a share of GDP (2013):
  3. 3. June 20, 2014 Asia Economics Analyst Goldman Sachs Global Investment Research 3 Exhibit 3: King Coal dominates India’s energy consumption Source: BP Statistical Review of World Energy June 2013 As a new government formulates its economic and energy policy, we think that a focus on energy reforms will be critical. We forecast India’s energy demand over the next decade, project how much it would need to import, and then quantify savings from switching to cheaper energy sources as well as greater conservation efforts. I. A Rise in India’s Energy Demand We forecast India’s net energy imports could increase to $230 billion by FY23 from $120 billion currently. We projected separately imports of key energy inputs of coal, oil, and gas, which together account for all of energy imports. For the period 2014-2017, we use the supply-demand estimates of our energy team. From 2017 onwards, as we expect India to enter a more energy intensive phase of growth, driven by greater industrialization, electrification, and urbanization, we think its demand for energy will increase significantly more rapidly than in the previous decade. Therefore, we used the energy elasticity of demand of China from 2001-2010 as a benchmark, given a similar per capita income compared to what we expect for India in 2017, to derive demand forecasts for each energy source.1 To our knowledge, this is the first attempt at long term forecasts for energy import demand in value terms for India. Interestingly, even with a large energy elasticity of demand, India’s energy imports as a share of GDP may have peaked already. Our projections show the share of energy imports declining very gradually to 4.9% of GDP from 6.3% of GDP currently. This is despite our energy demand projections being higher than other agencies. A primary driver of this is our commodity team’s view that oil prices will remain subdued. Oil comprises 80% of energy imports and stagnant oil prices have a large impact on India’s energy bill. Further, our longer term projections for thermal coal prices are also benign. 1 We used an energy elasticity of demand of 1.2%, 0.7% and 1.5% for coal, oil and gas respectively with an assumption of 7% real GDP growth. Oil 30% Natural Gas 9% Coal 53% Hydro electricity 5% Nuclear energy 1% Renewables 2% India's Energy Consumption (2012):
  4. 4. June 20, 2014 Asia Economics Analyst Goldman Sachs Global Investment Research 4 Exhibit 4: A gradual decline in energy imports as a share of GDP Source: PPAC, CEIC, Goldman Sachs Global Investment Research II. Constraints in Production India’s domestic supply of energy can increase only gradually, given natural resource and environmental constraints. India’s proven oil and gas reserves are small. In oil, it has only 0.3% of global reserves compared to a consumption share of 4.2%. In gas it has 0.7% of reserves compared to a consumption share of 1.6%. Indian basins are generally considered unprolific. The fastest growth in supply can be in coal, where India has ample reserves, and policy initiatives can increase supply. We used our mining team’s projections for coking and non-coking coal volume growth of about 5% on average. For crude we assume a 2% growth in domestic supply, based on our energy team’s forecasts. Similarly, there are limits to natural gas production, as we discuss below. While renewables like wind and solar are likely to see a significant increase in supply, in part due to policy responses, we think given their low starting share of 2%, they are unlikely to represent a large source of supply for our forecast horizon. Given capacity constraints and barring spectacular discoveries or technological improvements, imports will likely remain the key source of energy over the next decade. 0 2 4 6 8 0 2 4 6 8 FY97 FY99 FY01 FY03 FY05 FY07 FY09 FY11 FY13 FY15 FY17 FY19 FY21 FY23 Percent of GDPPercent of GDP India's energy import demand*: Projections *includes oil, gas and coal demand
  5. 5. June 20, 2014 Asia Economics Analyst Goldman Sachs Global Investment Research 5 Exhibit 5: Coal and gas imports likely to increase more than oil Source: PPAC, CEIC, Goldman Sachs Global Investment Research Switching to Natural Gas One potential area of savings would be a switch to natural gas from oil. Natural gas is only 9% of energy consumption. This compares with the average global gas consumption of 24%. The world is switching to gas, and we believe India also needs to make that shift. Gas can not only be cheaper than oil, but is also much cleaner. Our estimates show that if India were to increase its share of gas from 9% currently to 16% by FY23, it could save US$8 billion annually by FY23. 0 50 100 150 200 250 0 50 100 150 200 250 FY14 FY23 (E) US$ billion US$ billion India's energy demand from import: Gas Coal Oil Box 1: Lessons from the US Shale Revolution1 The discovery of plentiful gas deposits under shale rocks in the US, known as shale gas, has been the biggest discovery in the energy space in a generation. Improvements in technology to allow for horizontal drilling and breaking up the rock to release the gas, known as fracking, have transformed the US energy landscape. From being one of the largest importers of energy in the world, the US can become a large exporter of gas. Shale gas has been truly transformational. It accounts for 30% of US gas consumption, up from merely 1% just a decade ago. It is cleaner and cheaper than its alternatives. Gas prices have fallen from $7 to $3-3.5 a unit in the last 5 years. Power generation is increasingly moving towards gas and away from more polluting coal. US industrial units and households are now getting much cheaper fuel. The US is now liquefying its surplus gas and exporting it overseas. Not only have oil and gas prices come down, but emissions have fallen, as gas has replaced more polluting coal and oil, and reliance on import partners have declined. So, there’s been a reduction in direct cost of fuel as well as its environmental costs, while energy security has improved. How did the US get there? Shale gas exists in many other parts of the world, but nowhere has the success of the US been replicated thus far. This is due to a number of reasons. First, it has provided generous tax incentives to develop shale energy. Second, there has been a lot of technological innovation – especially in horizontal drilling and breaking up the rock to release the gas by subjecting it to a stream of water, known as ‘fracking’. Third, huge capital expenditures have been directed at upstream exploration on their land, as they get to benefit from the eventual revenues. Fourth, the market structure in the US is highly competitive with hundreds of companies competing with each other. This not only spawns innovation, but also more investment. Finally, the supporting infrastructure, including a vast network of pipeline capacity, allows for easy transportation. Compare this with India where high taxes and unstable policies, technological restrictions and lack of engineering expertise, dominance of state-owned players and lack of competition, and no private ownership of rigs, is hampering investments both by private players and foreign. While proven shale reserves in India are small, we feel the lessons from the US can be applied to the natural gas industry. 1 see Oil on the boil-again? Top of Mind, September 6, 2012; Where will the shale gale blow next?, Fortnightly Thoughts, January 31, 2013
  6. 6. June 20, 2014 Asia Economics Analyst Goldman Sachs Global Investment Research 6 Fixed gas prices have discouraged investment and innovation by the private sector. In May 2010 the government raised the gas price to $4.2. This compares to an imported price of $13-$14 a unit. The previous government proposed $8.4 a unit for domestically produced gas effective from April 1, 2014, but the decision was postponed due to the elections. India needs to free up gas prices to make it market-determined. Industry would need to become more efficient if they pay market prices for their gas. Japan and South Korea pay market prices, and yet have some of the most competitive industries. A second issue we believe would be important for the gas sector is to have stable tax policies. The government allowed for a 7 year tax holiday in the production sharing contract for gas producers. However, in 2008-09, this was changed to be not applicable for the gas sector, but only to oil. In another example, the UK based company Cairn invested in an oil block in Rajasthan and entered into a production sharing contract with the state- owned ONGC such that the latter would hold a 30% stake in the company, and pay all royalties to the government. The policy was changed when Cairn’s assets in India were acquired by a different company. According to the new policy, the acquiring company would have to pay 70% royalty to the government – to the extent of Cairn India’s share in the enterprise. This lack of clarity on taxation and retrospective changes can hinder production. Since India’s hydrocarbon base is unproven and unprolific, fiscal incentives can be important for foreign and domestic investors. Third, public investments in oil and gas blocs can be made more accountable. A large number of blocs which have been auctioned under the New Exploration Licensing Policy (NELP) have seen little exploration. Greater accountability can ensure that there is more rationality in auctions so that the private sector is not crowded out. III. Living within your means Given the shortage of energy, India needs to emphasize conservation of energy. India is using a lot of energy to produce energy due to inefficiencies in production. While the global average is that 1 unit of energy input produces 4.3 units of energy, India only produces 2.8 units for a unit input. Exhibit 6: India’s energy efficiency needs improvement Exhibit 7: Power transmission and distribution losses are very high in India Source: IEA, Goldman Sachs Global Investment Research Source: WDI, Haver 0 1 2 3 4 5 6 7 Japan US Singapore Taiwan Korea Indonesia Thailand India China Index, Japan =1 Primary energy supply per GDP Less energy efficiency 0 5 10 15 20 25 0 5 10 15 20 25 India Brazil Russia Indonesia South Africa World Malaysia EU US China Japan Korea PercentPercent T&D losses as a share of electricity generation (2011):
  7. 7. June 20, 2014 Asia Economics Analyst Goldman Sachs Global Investment Research 7 We emphasize three sources of conservation –reduction of transmission and distribution (T&D) losses, more use of energy-efficient electric appliances, and savings from higher emission standards for vehicles. India’s T&D losses are very high at 24%, which is nearly double the average of developing countries. Some large states like Bihar and Jharkhand lose nearly half of all electricity that is produced due to theft, technical and distribution losses. We estimate that reducing T&D losses from the current 24% to 15% by FY23 can save the economy US$13 billion annually, or 0.3% of GDP. One way to reduce T&D losses is to privatize distribution. After power distribution was privatized in Delhi in 2002, T&D losses fell from 52% in the pre-reform era in the early 2000s to 19% by 2010-11. Bhiwandi, an industrial town in Maharashtra, witnessed a sharp fall in T&D losses to 18% currently from 48% in 2007 after distribution was privatized. Similarly, Nagpur also witnessed a meaningful reduction in T&D losses after the privatization of power distribution. A Standards and Labeling program can be very effective in reducing energy needs. In India, the scheme was launched in May 2006 and is being used for 12 appliances, of which only 4 have been made compulsory. The mandatory products are frost-free refrigerators, room air conditioners, distribution transformers, and tubular fluorescent lights. We believe these standards need to be extended to all major appliances and equipment. More importantly, awareness needs to be raised among consumers, involving them in S&L programs. There is a need to narrow the gap between the best achievable technologies and present 5 star technologies for various appliances. The example of Japan (see Box 3) shows the efficiency gains that can be achieved. Box 2: Power reforms in Gujarat In 2001, Gujarat’s power sector had major problems. It had large operating losses, T&D losses were about 35%, power cuts were frequent, and the private sector was not investing. The Gujarat government, under Chief Minister Modi, went about reforming the sector by first getting its finances in order. The electricity board restructured debt which had been incurred at interest rates of 18% or more and renegotiated power purchase agreements with private suppliers. The government plugged leakages in distribution. Power theft ranged between 20% in urban areas and 70% in rural areas. It passed a law against power theft, set up police stations, and hired 500 retired army personnel to check power offenders. Unmetered power supply, which some rural areas were getting, was stopped altogether. There is no free power in Gujarat today. In 2002, the Gujarat government unbundled power generation, transmission, and distribution, to better manage operations and increase efficiency. A key reform was to separate the feeder line that supplied power to the rural areas into two – one to supply power for agricultural needs, and other for household and other needs. Since the price for power used for agriculture was much lower, villagers used this subsidized supply for household needs. Now, the rural residents had higher power bills to pay than in the past, but once they were assured of uninterrupted power, they were willing to pay up. The state power regulator revised power tariffs every year, which reduced the gap between the average cost of power and the user price. The state electricity board turned from a loss to a profit. Private players are now investing in Gujarat, with a third of total capacity to be installed coming from the private sector. T&D losses have fallen from 35% to 20%. Source: Gujarat Urja Vikas Nigam Limited (GUVNL)
  8. 8. June 20, 2014 Asia Economics Analyst Goldman Sachs Global Investment Research 8 Exhibit 8: A sharp reduction in T&D losses after the privatization of power distribution Exhibit 9: Efficiency gains in Japan after the ‘Top Runner’ Program Source: CEA, Delhi Government’s Economic Survey, Torrent Power Source: Energy Conservation and Renewable Energy Dept. of Japan We estimate that if electric appliances become more energy efficient, overall savings from sales of these appliances could be US$2 billion annually by FY23. Stricter emission standards for vehicles can also be a significant source of savings. We estimate that moving from the current standard (Bharat IV) to higher standards (Bharat VI) could lead to US$6 billion of annual fuel savings by FY23. Finally, an extensive program of educating people on energy conservation needs to be followed. Energy education at various levels, especially at the primary and secondary school level, as well as more generally with the help of print, TV, and internet mediums, can increase conservation. 0 20 40 60 80 0 20 40 60 80 India Delhi Bhiwandi Nagpur PercentPercent T&D losses: Before Privatization After Privatization FY02 FY12 *Privatization year: Delhi -2002, Bhiwandi-2007, Nagpur-2011 750 850 950 1050 1150 1250 750 850 950 1050 1150 1250 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Kilo Watt HourKilo Watt Hour Average power consumption of air conditioner in Japan after energy efficiency standard introduced: 30% improvement
  9. 9. June 20, 2014 Asia Economics Analyst Goldman Sachs Global Investment Research 9 Box 3: Energy efficiency programs in Japan Japan is only 16% energy self-sufficient. It is the 3rd largest importer of crude oil, and imports all of its gas and most of its coal. Given the high degree of energy dependency, Japan has followed energy efficiency rigorously to increase its energy security. Japan has improved its energy consumption efficiency by 37% over the past 30 years. As a result, the amount of primary energy that Japan uses per unit of GDP is amongst the lowest in the world. #1 Energy Conservation Act in 1979: The Act is the foundation of Japan’s energy efficiency and conservation policy. There has been a series of major revisions in this law responding to changing needs. The act includes all major sectors, such as industrial, residential, commercial, and transportation. #2 Top Runner Program, 1999: This established stringent energy efficiency standards for 18 energy intensive products – including cars, ACs, TVs, computers, and heaters. The goal was to manufacture products with efficiency standards better than the highest available globally. This program was very successful in increasing energy efficiency. In each appliance, significant improvement in energy consumption was achieved. In TVs, there was an improvement of 25% between 1997 and 2003 due to innovation, with the annual power consumption amount falling from 140kWh to 104kwh. For ACs, the improvement was 30%, for refrigerators it was over 50%, and so on. Japanese product labels were required to say how much energy the product would save. #3 Tax incentives and subsidies on loans for energy efficient houses and buildings: The government gives tax incentives to reduce the consumption of energy. Tax breaks are given for residents who conduct energy-saving renovation work (eg, change to double sash window) on their existing dwelling. Fixed property tax can be reduced by 1/3rd, and deductions can be made on the annual income tax amount. #4 Labelling and star rating: An appliance standard and labeling program has been the major energy efficiency policy tool to increase the efficiency of electrical appliances in Japan since 2000. Provision of energy efficiency information on electric appliances is required for product manufacturers, importers, and retailers. The fuel efficiency labeling system was introduced in January 2004 to promote the public awareness of energy efficient vehicles. #5 Public awareness: Japan has followed an active system of energy related education. In primary and secondary schools, such education is provided and various kinds of practical research are conducted. Select universities have been chosen to be the base for research and practice of energy education. Workshops and training sessions are organized for teachers to disseminate best practices in energy education. #6 Energy audits: The government encourages energy conservation by providing a free energy audit service targeting factories and business establishments. Source: IEA, Energy Conservation and Renewable Energy Dept. of Japan
  10. 10. June 20, 2014 Asia Economics Analyst Goldman Sachs Global Investment Research 10 IV. Gains from Reforms We estimate that India could reduce its annual energy imports by US$40 billion by FY23 by switching from oil to gas, and by an improvement in energy efficiency of 15% (see Exhibits 10 and 11). With reforms, India’s energy import demand could fall by about 1% of GDP by FY23 compared to our base case, to 4.0% of GDP. The improvement in the current account would be directly attributable to an increase in national savings, due to lower energy imports as a share of GDP. Exhibit 10: Energy reforms can reduce imports Source: PPAC, CEIC, Goldman Sachs Global Investment Research Exhibit 11: A breakdown of energy savings Source: CEIC, Goldman Sachs Global Investment Research We believe the risks to our projections are balanced. If India could achieve 25% energy conservation, similar to Japan, the gain would be much larger and India could reduce its annual import bill by US$65 billion. Similarly, if oil and gas prices were to come off materially, it could have a large impact on India’s energy import bill. On the other hand, if commodity prices were to rise significantly and India were unable to reform its energy sector, then energy imports could be much larger. 0 50 100 150 200 250 0 50 100 150 200 250 FY97 FY99 FY01 FY03 FY05 FY07 FY09 FY11 FY13 FY15 FY17 FY19 FY21 FY23 US$ billionUS$ billion India's energy import demand*: Base case With reforms** Projections **includes oil, gas and coal demand ** If energy efficiency will increase by 15% with use of energy saving technique and an increase in share of natural gas from 9% currently to 16% by FY23 230 (8) (13) (6) (2) (11) 190 Net energy imports (Without reforms) Switching from oil to gas Reducing T&D losses Stringent emission standard Efficient electric appliances Others Net energy imports (With reforms) Net energy import (FY23): US$ billion
  11. 11. June 20, 2014 Asia Economics Analyst Goldman Sachs Global Investment Research 11 The shift away from oil imports to coal and gas imports has clear investment implications. Our energy analysts think this could be positive for gas importers (see India Rising - Energy: Reforms, better demand, operating leverage, May 29, 2014). The largest impact, though, could be felt on India’s current account, and therefore the INR. Given the gains in terms of national savings, lower import dependency, and a lower environmental footprint, energy reforms will be a critical area to watch. Tushar Poddar, Vishal Vaibhaw Box 4: Energy Sector Reforms: 1) A stable policy regime to attract private/foreign players: Uncertainty about production sharing contracts can be avoided. There can be greater clarity on taxation, royalty, transfer pricing among others. 2) Increase use of natural gas: The use of natural gas instead of oil and gas should be incentivized by promoting its use in vehicles, converting thermal plants to gas, and more use of gas as raw material for industrial use as well as for city usage. 3) Public investments in oil and gas blocs can be made more accountable: A large number of blocs auctioned through the NELP remain unexplored. 4) Market-determined energy prices: Natural gas prices should be market determined to incentivize greater production and shift away from oil to gas. Energy taxation across states can be harmonized to reduce distortions. 5) Coordination among various ministries: Coordination among the various ministries in the energy space can help to remove bottlenecks. Coordination between the center and various state governments can also help in addressing energy imbalances across states. 6) Reduce T&D losses: Privatizing distribution can help. Further, sub-transmission and distribution networks need to be modernized. The R-APDRP program in urban areas is useful by establishing reliable and automated data collection and greater use of IT. Smart Grid initiatives are also necessary. 7) Energy efficiency in equipment and transport: Use of ‘super-efficient’ electric appliances and fuel efficiency labeled equipment should be encouraged like the ‘Top Runner’ program in Japan. More stringent auto emission standards can reduce energy usage. 8) ‘Energucation’: There is a need to focus on energy education at various levels, especially at the primary and secondary school level, as well as more generally with the help of print, TV, and internet mediums to increase energy conservation.
  12. 12. June 20, 2014 Asia Economics Analyst Goldman Sachs Global Investment Research 12 Appendix: Our calculations of energy-related savings A) Saving from reduction in imports bill with increase in natural gas consumption: According to our estimates, if India increased its natural gas consumption share in the overall energy mix from current 9% to 16%, switching away from more costly oil, it would demand 3 trillion cubic feet by FY23. The cost of consuming an incremental amount of gas at the import price of $13/mmbtu would be US$17 billion. Instead, if India consumed an equivalent amount of oil, at a cost of $100/bbl, import cost would be US$25 billion. Therefore, the savings could be $8 billion annually in energy imports by FY23. B) Savings from reduction in T&D losses: To estimate this, we first projected annual average electricity generation over next ten years by using our GDP growth projections and the sensitivity that every 1% increase in real GDP can increase power demand by 0.8 percent point. This sensitivity could go up as more homes are electrified. We assume that T&D losses in India will reduce from 24% currently to 15% through FY23. Total savings in value could be US$13 billion annually using an average power tariff of Rs.5/unit and current exchange rate. C) Savings from energy efficient appliances We first projected demand for key appliances through FY23 using estimates of total sales of these electric appliances in 20102 . We then estimated total savings if the current weighted per unit energy consumed by these appliances is reduced by 50% by FY23. Total savings in value could be US$2 billion by FY23 using an average power tariff of Rs.5/unit. D) Savings from stricter emission standards: We used our estimates of net oil imports over the next decade and assumed 30% of that will be consumed by the transport sector. We assumed that with stricter emission standards across all vehicles, approximately 15% of fuel savings could happen by FY23, which is equivalent to 8mtoe. Total savings in value could be US$6 billion by FY23. One caveat is that total fuel saving may differ if the share of transport demand in overall oil imports were to increase. This could happen through an increase in numbers of vehicles, a change in type of vehicles (e.g. large vs small) or alternate transport arrangements (such as more use of railways with the opening up of freight corridors). 2 Potential Savings from Selected Super-Efficient Electric Appliances in India, June 2011, Prayas Energy Group
  13. 13. June 20, 2014 Asia Economics Analyst Goldman Sachs Global Investment Research 13 Forecast Tables Real GDP Growth (year-over-year) GS Consensus GS Consensus Asia ex-Japan 6.3 6.1 6.1 6.6 6.3 China 7.7 7.3 7.3 7.6 7.1 India 4.7** 5.5** 5.4** 6.5** 6.0** South Korea 3.0 3.7 3.6 3.8 3.7 Hong Kong 2.9 3.9 3.3 4.4 3.5 Taiwan 2.1 3.5 3.2 3.9 3.6 ASEAN 5.0 4.0 4.4 5.0 5.2 Singapore 4.1 3.7 3.8 4.2 4.0 Malaysia 4.7 5.1 5.3 5.2 5.1 Thailand 2.9 -0.5 1.3 3.8 4.1 Indonesia 5.8 5.3 5.3 5.3 5.7 Philippines 7.2 6.3 6.4 6.5 6.3 USA 1.9 2.2 2.2 3.1 3.1 Euro area -0.4 1.1 1.1 1.5 1.5 Japan 1.5 1.5 1.5 1.2 1.2 *GS estimates for annualized growth rate of potential output from 2013-16 **Fiscal year basis, 2013 is India FY14 (Q2 2013-Q1 2014). Source: Consensus Economics, Goldman Sachs Global Investment Research. 0.8 3.7 4.5 4.0 5.0 6.0 6.0 2.3 1.1 7.7 6.0 3.8 4.0 2013 2014 2015 Potential Growth* Consumer Prices (year-over-year) GS Consensus GS Consensus Asia ex-Japan 4.0 3.8 3.7 3.9 3.9 China 2.6 2.6 2.5 3.0 2.9 India 9.5* 8.0* 7.7* 7.0* 7.1* South Korea 1.3 1.6 1.9 2.7 2.5 Hong Kong 4.3 4.3 3.9 3.8 3.6 Taiwan 0.8 1.4 1.2 1.8 1.8 ASEAN 4.0 4.3 4.3 4.5 4.2 Singapore 2.4 2.4 2.2 3.5 2.7 Malaysia 2.1 3.1 3.3 2.6 3.6 Thailand 2.2 2.2 2.4 2.7 2.8 Indonesia 6.4 6.4 6.2 6.7 5.7 Philippines 2.9 3.8 4.2 3.5 3.9 USA 1.5 1.8 1.8 1.9 1.9 Euro area 1.4 0.6 0.7 1.1 1.2 Japan 0.4 2.7 2.6 1.6 1.8 **Core inflation target ***ECB aims to maintain inflation rates "below, but close to, 2% over the medium term" Source: Consensus Economics, Goldman Sachs Global Investment Research. - - 0.5-3.0 ** 3.5-5.5 *Fiscal year basis, 2013 is India FY14 (Q2 2013-Q1 2014); 8.0% as the inflation target by March 2015 recommended by the Monetary Policy Framework Committee 2013 2014 2.0 2.5-3.5 - 3.0-5.0 2.0 2.0*** 2015 Inflation Target/Range 3.5 8.0* -
  14. 14. June 20, 2014 Asia Economics Analyst Goldman Sachs Global Investment Research 14 Forecast Tables (continued) Policy Interest Rates (percent) Current Jun 19 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Asia ex-Japan China 3.12 3.20 4.00 4.25 4.25 4.50 4.50 4.50 4.50 India 8.00 8.00 8.00 8.25 8.50 8.50 8.50 8.25 8.00 South Korea 2.50 2.50 2.50 2.50 2.50 2.50 2.75 2.75 3.00 Hong Kong - - - - - - - - - Taiwan 1.9 1.9 1.9 2.0 2.0 2.0 2.1 2.3 2.3 ASEAN Singapore - - - - - - - - - Malaysia 3.00 3.00 3.00 3.25 3.50 3.50 3.50 3.50 3.50 Thailand 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.25 2.75 Indonesia 7.50 7.50 7.50 7.50 7.75 8.00 8.00 8.00 8.00 Philippines 3.50 3.50 3.75 4.00 4.00 4.00 4.00 4.00 4.00 USA 0.08 0.08 0.13 0.13 0.13 0.13 0.13 0.13 0.13 Euro area 0.15 0.25 0.15 0.15 0.15 0.15 0.15 0.15 0.15 Japan 0.07 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 Policy interest rates: China: 7-day repo, India: repo rate; Korea: 7-day repo; Malaysia: overnight policy rate; Thailand: 1-day repo, Philippines: repo rate, Indonesia: 1-month SBI rate, Taiwan: rediscount rate; USA: Fed funds effective rate; Euro Area: Main refinancing operations: fixed rate; Japan: Overnight call rate. Source: Goldman Sachs Global Investment Research. 2014F 2015F Exchange Rates (local currency units per USD) Current 3-Month Horizon 6-Month Horizon 12-Month Horizon Jun 19 Forward Forecast Forward Forecast Forward Forecast Asia ex-Japan China 6.15 6.18 6.16 6.19 6.15 6.22 6.15 India 59.33 60.10 58.50 61.12 61.00 63.21 63.00 South Korea 1017 1022 1010 1026 1050 1034 1070 Hong Kong 7.8 7.8 7.8 7.8 7.8 7.8 7.8 Taiwan 30.0 29.9 30.0 29.8 29.8 29.7 29.5 ASEAN Singapore 1.25 1.25 1.25 1.25 1.23 1.25 1.22 Malaysia 3.21 3.23 3.25 3.24 3.23 3.28 3.20 Thailand 32.5 32.6 34.0 32.8 34.0 33.1 33.5 Indonesia 11809 11940 12400 12127 12700 12538 13000 Philippines 43.8 43.8 44.5 43.9 44.0 44.0 43.5 Euro area* 1.35 1.35 1.38 1.35 1.34 1.35 1.30 Japan 102.0 102.0 103.0 101.9 107.0 101.7 110.0 * USD per Euro Source: Goldman Sachs Global Investment Research.
  15. 15. June 20, 2014 Asia Economics Analyst Goldman Sachs Global Investment Research 15 Highlights of Recent Goldman Sachs Global Macro Research Asia ex Japan China’s changing growth: Trade spillovers to the rest of Asia May 8, 2014 Global expansion cycles and Asian exports—Now versus then Apr 17, 2014 Shock therapy: How EM Asia central banks respond to capital outflow pressures Apr 4, 2014 Low EM export beta? - Most likely nominal, not real Mar 13, 2014 The unwritten "rules" of EM Asia monetary policy Feb 21, 2014 Policy proactivity lies behind the resilience of the INR and IDR Feb 19, 2014 Export-led growth in Asia: Better short-term, challenged long-term Feb 7, 2014 Questions for the 2014 Asia-Pacific economics outlook Jan 3, 2014 Diverging fortunes—the emerging Asia outlook for 2014 Nov 21, 2013 Tooling up to analyze the Asian economies Oct 24, 2013 How emerging Asia reacts to higher US yields Sep 13, 2013 A deep dive into regional financial flows: Possible impact of US Fed tapering Sep 6, 2013 Cyclicality of Asian financial markets—seen from our Global Leading Indicator Jun 3, 2013 A redesigned MAP of emerging Asia data May 10, 2013 Greater China China: Can China's economy move back to a sweet spot? Jun 11, 2014 China: China bond market: great long-term potential, tricky near-term challenges Jun 2, 2014 China: Macro at a cross-roads May 28, 2014 China: Higher term premium challenging monetary easing May 16, 2014 China: Employment conditions in China: Not bad yet, but worsening May 2, 2014 China: Cooling housing market a lasting headwind Apr 17, 2014 China: How policy loosening can push Chinese growth higher in Q2 Apr 10, 2014 China: Coding growth to help decode growth Apr 8, 2014 China: CNY: regime shift or a temporary bout of volatility Mar 24, 2014 China: Revising growth forecasts for China Mar 20, 2014 China: How fast are Chinese exports really growing? Mar 17, 2014 China: The implications of CNY band widening Mar 16, 2014 China: Gauging stress during financial deregulation Feb 18, 2014 A look at CNH flows via Hong Kong banks’ positions data Feb 5, 2014 Korea Korea: Low inflation recovery bodes well for a rate cut Jan 24, 2014 Korea: Changes in our view—rate cut possibly this Thursday Jan 6, 2014 Korea: Less FX appreciation, more equity strength and a steeper curve Nov 15, 2013 Korea: Near-term outlook for the balance of payments and the KRW Oct 24, 2013 Korea: Growth upgrade on improving global demand and investment pickups Oct 4, 2013 India India: The Modi Government's First 10 days Jun 4, 2014 India: Hope in the Air May 13, 2014 EM Macro Daily - India elections: The End of the Beginning Apr 11, 2014 How India can become the next Korea Mar 28, 2014 India: Adding 110 million jobs Mar 26, 2014 India: No 'banking' on growth Feb 14, 2014 ASEAN Indonesia's tricky fiscal-monetary tradeoffs Jun 6, 2014 Indonesia’s rebalancing progressing at a faster pace Feb 12, 2014 Thailand’s political turmoil and its economic consequences Jan 16, 2014 Modeling the probability of Bank Indonesia’s next hike Dec 9, 2013 Indonesia: The path to sustainability is still fraught with risks Oct 4, 2013 ASEAN markets roiled—where do we go from here? Aug 22, 2013 ASEAN’s half a trillion dollar infrastructure opportunity May 30, 2013 Japan (this section is provided by our Japan Economics team based in Tokyo) Japan: Demand for Japanese products down, even factoring in overseas production shift Jun 5, 2014 Japan: Female labor structure prevents Phillips Curve from changing its shape May 29, 2014 Japan: Reaffirming our outlook for a moderate decline in CPI May 14, 2014 Japan: Weakening correlation between forex and share prices, albeit stable based on intraday data Apr 17, 2014 Japan: Abenomics one year on: Portfolio rebalancing yet to gain traction Apr 11, 2014
  16. 16. June 20, 2014 Asia Economics Analyst Goldman Sachs Global Investment Research 16 Disclosure Appendix Reg AC I, Goohoon Kwon, CFA, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. We, Andrew Tilton, Tushar Poddar, Li Cui, Yu Song, MK Tang, Jonathan Sequeira, Maggie Wei and Vishal Vaibhaw, hereby certify that all of the views expressed in this report accurately reflect our personal views, which have not been influenced by considerations of the firm's business or client relationships. Disclosures Global product; distributing entities The Global Investment Research Division of Goldman Sachs produces and distributes research products for clients of Goldman Sachs on a global basis. 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