India on the brink of turnaround with the economy set to be back on high-growth trajectory. Aranca's article highlights Indian economic developments which include GDP, FDI, growth rate, exports, repo rate, crude price, portfolio inflows, corporate sector etc.

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India:
New Government & Economic Outlook
Analysts:
Nilesh Sharma, Amresh Prasad
Vaibhav Tandon & Aniket Mittal
November 2014

2. India: New Government & Economic Outlook I November 2014
1
2
Improved decision making ends policy uncertainty; reforms on the anvil
Speedy decision-making process ends policy uncertainty; projects backlog worth over billions of dollars cleared by the new administration
Government’s focus on infrastructure spending and expanding manufacturing activity by removing procedural bottlenecks to boost investments
3
Strengthening external environment to boost investments and corporate sector performance
Corporate sector performance picking up; earnings growth increasing
Strict supervision and improving business environment reducing stress on asset quality of banks; credit growth likely to revive 2015 onward
4
However, challenges persist…
At 142nd position among 189 countries, India languishing at the bottom half in the World Bank’s “Ease of Doing Business” ranking; fares poorly on the “Global Competitiveness Index” ranking too
Higher non-planned expenditure and subsidies likely to derail fiscal consolidation; India’s sovereign ratings could be negatively impacted
1
India on the brink of turnaround with the economy set to be back on high-growth trajectory
Real GDP growth set to bounce back after hitting a 10-year low in 2013; India to re-emerge as the second fastest growing major economy
Falling crude prices easing inflationary pressure, paving the way for monetary easing
Key Takeaways

3. India: New Government & Economic Outlook I November 2014
After hitting a 10 year-low of 4.5% in 2013, real GDP growth set to pick up; India to re-emerge as the second fastest growing major economy
2
INDIA REAL GDP GROWTH (%)
Source: Ministry of Finance, IMF World Economic Outlook October 2014 Estimates for 2015 & 2016
Economic growth slows sharply with the onset of the financial crisis.
Sluggish external environment alongside policy paralysis accentuated the slowdown.
3.9
8.0
7.1
9.5
9.6
9.3
6.7
8.6
8.9
6.7
4.5
4.7
5.6
6.4
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15
2015-16

4. India: New Government & Economic Outlook I November 2014
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
-
10
20
30
40
50
60
70
2000-01
2003-04
2006-07
2009-10
2012-13
Consumer Spending (INR Trillion)
YoY Growth (%) - RHS
1.0
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
Apr-12
Sep-12
Feb-13
Jul-13
Dec-13
May-14
Exports (INR Trillion)
Rising consumer spending and exports to drive growth
3
GROWTH IN CONSUMER SPENDING
Source: Bloomberg, Reserve Bank of India (RBI)
GROWTH IN EXPORTS

5. India: New Government & Economic Outlook I November 2014
Falling crude prices ease inflationary pressure
4
Source: Bloomberg, Reserve Bank of India (RBI)
80
85
90
95
100
105
110
115
120
125
130
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jul-14
Oct-14
0%
2%
4%
6%
8%
10%
12%
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jul-14
Inflation - Wholesale Price Index
Inflation - Consumer Price Index
Brent crude prices have fallen by over 23% since July 2014
India Inflation (September 2014)
WPI – 2.4%
CPI – 6.5%
CRUDE OIL PRICES (US DOLLAR PER BARREL)
INFLATION (WHOLESALE & CONSUMER PRICES)

6. India: New Government & Economic Outlook I November 2014
Interest rate cycle seems to have peaked; with inflation under control, Reserve Bank of India set to adopt a pro-growth stance
5
Source: Reserve Bank of India (RBI)
6.50%
7.00%
7.50%
8.00%
8.50%
Jan-12
Feb-12
Mar-12
Apr-12
May-12
Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
Nov-12
Dec-12
Jan-13
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Jul-14
Aug-14
Sep-14
To arrest the fall in economic growth, the RBI cut interest rates by 75 bps
Since taking over as the Governor of RBI in July 2013, Raghuram Rajan has increased interest rates by 75 bps to rein in inflation.
REPO RATE

7. India: New Government & Economic Outlook I November 2014
Boosted by the absolute majority in the lower house of the parliament, the new government kick starts the reforms process
6
Source: Ministry of Finance, Aranca Analysis
SECTOR
REFORMS
PROPOSED BENEFITS
Raised the foreign direct investment (FDI) limit to 49% from 26% under government approval route
India largest weapons importer in the world (imports totaled USD5.6 billion in 2013)
Transfer of technologies through joint ventures to improve domestic manufacturing capabilities and reduce burden on imports
About INR250 billion to be invested in the next 7–8 years
Allowed 100% FDI (earlier FDI allowed only in mass rapid transport systems)
Proposed to raise FDI limit to 49% (earlier 26%)
Would increase life insurance penetration in India (currently about 3.2% of GDP in terms of total premiums underwritten in a year, much lower than nearly 6% in Australia and more than 10% in Japan)
Increase in FDI limit may attract USD5 billion over the next five years
Defense
Railways
Insurance
Foreign investment expected to generate much-needed resources to introduce a high-speed rail corridor, build & upgrade suburban corridors and add capacity through speedy development of dedicated freight corridors
12th five-year plan earmarks INR5,129.2 billion investment for railways by 2017
Identified projects (38) likely to attract FDI totaling INR900 billion

8. India: New Government & Economic Outlook I November 2014
Investor community responds positively to the change of guard; markets breach their all time highs as portfolio inflows increase
7
Source: Bloomberg, Securities & Exchange Bureau of India (SEBI)
5,000
5,500
6,000
6,500
7,000
7,500
8,000
8,500
Jan-13
Mar-13
May-13
Jul-13
Sep-13
Nov-13
Jan-14
Mar-14
May-14
Jul-14
Sep-14
250
284
149
107
281
-442
-181
-157
74
21
21
214
133
127
317
4
338
307
360
221
210
Jan-13
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Jul-14
Aug-14
Sep-14
The benchmark Nifty50 index breached the 8,000 mark for the first time in history and has returned over 34% to investors in 2014 YTD
NIFTY INDEX PERFORMANCE
PORTFOLIO INFLOWS (INR BILLION)

9. India: New Government & Economic Outlook I November 2014
Speedy decision making process ends policy uncertainty; projects backlog worth over billions of dollars cleared by the new administration
8
May 2014
New government unveils 10-point vision within just two weeks of coming to power with an aim to boost investments, complete infrastructure projects in a time- bound manner and ensure efficient utilization of natural resources
June 2014
Passenger railway fare and freight fare hiked 14.2% and 6.5%, respectively
Seven big-ticket investment projects worth INR210 billion cleared
Road-related projects worth INR400 billion cleared
July 2014
Plans to build 100 smart cities with an initial investment of USD1.2 billion with additional funding expected from private investors
Aug 2014
Newly created National Board for Wildlife cleared 133 proposals out of 160 proposals
Sep 2014
India China signed 13 MOUs, with the latter committing investments worth USD20 billion over the next five years
Japan commits to doubling its investments in India to USD35 billion in the next five years, especially in the infrastructure sector
Oct 2014
Crucial defense-related projects worth INR800 billion cleared
Over 180 projects with a combined value of INR6,500 billion cleared by Project Monitoring Group
Nearly 88 infrastructure and industrial projects worth INR3,000 billion commenced operations over the last few months
Source: Ministry of Finance, Aranca Analysis

10. India: New Government & Economic Outlook I November 2014
Government focus on infrastructure spending and boosting manufacturing activity by removing procedural bottlenecks to boost investments
9
HIGHER ALLOCATIONS
Allocated INR379 billion to the Ministry of Road Transport and Highways for infrastructure development
Raised the corpus of Rural Infrastructure Development Fund (RIDF) to INR250 billion (from INR200 billion) to extend financial assistance to rural infrastructure
Allocated INR176 billion for urban infrastructure and governance
Infrastructure development schemes include:
Developing 100 smart cities
Building 8,500 km of national highways
Developing 16 new port projects
Building metro rail in Tier-2 cities
Setting up 3P India at a cost of INR5 billion to provide support to mainstream PPP projects
Creating eBiz platform to provide information on all business and investment-related clearances
Encouraging banks to extend long-term loans to infrastructure companies, and have a flexible strategy to absorb potential adverse contingencies
Exempting the issuing of long-term bonds for financing infrastructure from reserve requirements
Creating Infrastructure Investment Trusts
Source: Ministry of Finance, Aranca Analysis
STEPS TAKEN TO INCREASE INFRASTRUCTURE INVESTMENTS THROUGH …
IMPROVEMENT IN POLICY FRAMEWORK

11. India: New Government & Economic Outlook I November 2014
Increasing foothold in state assemblies to strengthen the NDA-led central government’s position to implement key reforms
10
NDA RULED STATES – 2009
NDA RULED STATES – 2014

12. India: New Government & Economic Outlook I November 2014
Corporate sector performance picking up; growth in earnings gaining pace
11
Source: Bloomberg, Business Today, Aranca Analysis
REVENUE AND NET PROFIT NUMBERS OF TOP 500 LISTED COMPANIES IN INDIA
448.6
539.3
664.3
747.2
819.8
46.5
55.0
55.7
61.1
63.4
2010
2011
2012
2013
2014*
Revenue (USD bn)
Net Profit (USD bn)
10.4%
10.2%
8.4%
8.2%
7.7%
Net Profit Margin (%)
Corporate performance seems to have bottomed out after the long slump witnessed over FY2010–14.
Amid decreasing inflation-related concerns, likely deduction in interest rates and improving business confidence, corporate earnings are likely to bounce back strongly.
Analysis of the earnings of 159 companies that declared results for the July–September 2014 quarter shows that net income grew 37.4% year-on-year, almost twice compared to 19.7% year-on-year for the April–June 2014 quarter.

13. India: New Government & Economic Outlook I November 2014
Strict supervision and improving business environment helping banks reduce stress on asset quality; credit growth likely to revive 2015 onward
12
CAR and Tier I CAR (%) Trend
Gross NPA and restructured assets trend (%)
Credit-deposit growth and liquidity (%)
2.79%
3.46%
3.26%
3.98%
3.85%
5.38%
6.13%
6.03%
6.47%
6.16%
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
Gross NPA Ratio
Restructured Assets to Advances Ratio
13.26%
12.59%
11.54%
9.45%
9.12%
8.86%
Mar-12
Mar-13
Mar-14*
Median CAR
Median Tier I CAR
* Ratio computed as per Base III norms for Mar 2014; earlier periods are based on Basel II
17.84%
16.64%
14.49%
15.25%
15.21%
14.53%
78.50%
79.48%
79.44%
Mar-12
Mar-13
Mar-14*
Advances Growth
Deposit Growth
Credit-Deposit ratio
Source: Bloomberg, Reserve Bank of India (RBI), Aranca Analysis: Note: Analysis on 39 banks - 26 Public Sector Banks & 13 Private Sector Banks
ASSET QUALITY STRESS REDUCING…
…CREDIT-TO-DEPOSIT RATIO FAVORABLE
…ADEQUATELY CAPITALIZED…
Due to the central bank’s guideline on early detection and resolution of bad loans and a general improvement in the economic environment, the stress on the asset quality of banks is decreasing.
The banking system witnessed a marginal improvement in the quarter ended March 2014.
Though the capitalization ratio decreased year- on-year, Indian banks remain adequately capitalized.
The median Tier I CAR of 8.86% in March 2014 was higher than the stipulated minimum mark of 6.5%.
Due to slow credit pickup, the overall advances of the banking system lag behind the growth in deposit
Individual depositors seek ‘higher return – minimum risk’ investment avenues
The liquidity (credit-to-deposit) ratio, however, remains comfortably placed at nearly 80%

14. India: New Government & Economic Outlook I November 2014
FDI inflows beginning to improve; momentum likely to gather pace in 2015
13
32.5
38.1
43.2
70.9
105.8
125.2
171.2
205.6
206.4
225.0
226.7
4.3
5.8
7.6
20.3
25.3
47.1
35.7
27.4
36.2
24.2
28.2
0
10
20
30
40
50
0
50
100
150
200
250
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
FDI Inward Stock (LHS)
FDI Inflow
In USD billion
Source: UNCTAD
FDI INFLOWS SURGING AFTER BOTTOMING OUT IN 2012 SINCE THE PEAK OF 2008
For the first five months of FY14-15 (April–August 2014), FDI grew 42% year-on-year to USD12.0 billion.
FDI inflows expected to increase significantly in FY 2015.

15. India: New Government & Economic Outlook I November 2014
Concerns over long-term growth persist with India languishing at the bottom half in the World Bank’s “Ease of Doing Business” and World Economic Forum’s “Global Competitiveness Index” rankings
14
Source: The World Bank, World Economic Forum (WEF)
142
120
90
62
43
26
18
India
Brazil
China
Russia
South Africa
Thailand
Malaysia
71
57
28
53
56
31
20
India
Brazil
China
Russia
South Africa
Thailand
Malaysia
EASE OF DOING BUSINESS RANKINGS (2014)
GLOBAL COMPETITIVESS INDEX RANKINGS (2014-15)

16. India: New Government & Economic Outlook I November 2014
Higher non-planned expenditure and subsidies may derail fiscal consolidation; this could negatively impact India’s sovereign ratings
15
Source: Ministry of Finance
3.9%
4.0%
3.3%
2.5%
6.0%
6.5%
4.9%
5.8%
4.5%
4.1%
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2011-12
2012-13
2013-14
2014-15 e
Higher government spending to revive economic growth during the downturn worsened the country’s fiscal situation.
Threat of a ratings downgrade pushed the government toward medium- term fiscal consolidation (fiscal deficit is likely to reach 3.0% of GDP by 2017).
FISCAL DEFICIT (% OF GDP)

17. India: New Government & Economic Outlook I November 2014
Concerns remain over big-bang labor and land acquisition reforms; once addressed, these measures could usher in a new phase of growth
16
Source: Ministry of Finance, Aranca Analysis
ISSUES
POTENTIAL BENEFITS
LABOR LAWS
Major reforms to rigid laws likely to trigger a political and trade union backlash
Strictly regulated hiring and firing policy
‘Inspector raj’ rule of inspectors creating inconvenience for employers with loads of paperwork
Politicization of trade unions and bad trade union laws
Strong segmentation between formal and informal employment a barrier to inclusive growth as it leads to income inequality
Likely to create a conducive environment for growth in trade and industry, and bring transparency in social security benefits to aid workers
Expected to encourage job creation in the formal sector
LAND ACQUISITION
Land titling and land record management systems leading to delays in land acquisition
Complex land purchase procedures making acquisition difficult for industrial projects
Distortions in land prices due to large regulatory constraints and unfair process of valuation
Rehabilitation and environmental issues
High transaction costs in land trade
Speeding up the process for buying land for industrial use likely to increase investments
Would boost infrastructure projects that often suffer due to delays in approval and acquisition

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