Snapshot
|
As on 2nd January, 2015
|
As on 1st January, 2014
|
India Sovereign Rating
|
S&P Moody’s Fitch
BBB-
Baa3 BBB-
(stable) (Stable) Stable)
|
S&P Moody’s Fitch
BBB- Baa3 BBB-
(-Ve)
(Stable) (-Ve)
|
Bombay Stock Exchange
|
27,888
|
21,140
|
10 year Government yield %
|
7.94
|
8.84
|
10 year AAA bond spread over G-Sec in bps
|
34
|
60
|
Bank Rate %
|
9
|
8.75
|
Repo Rate %
|
8
|
7.75
|
Credit – Deposit Ratio %
|
76.13
|
75.77
|
Forex Reserve in US$ bn
|
319.78
|
293.10
|
USDINR
|
63.28
|
61.91
|
EURINR
|
76.30
|
85.27
|
Forward Premia of US$ in %
1 – month
3 – month
6 – month
|
7.63
7.90
7.42
|
8.91
8.97
8.30
|
Economic
Forecasts:
|
|
2012
|
2013
|
2014f
|
2015f
|
2016f
|
2017f
|
2018f
|
2019f
|
GDP (% yoy),
expenditure
|
6.6
|
4.8
|
5.4
|
5.9
|
6.7
|
6.8
|
7.4
|
7.9
|
Consumer expenditure
|
8.3
|
6.4
|
4.8
|
6.3
|
7.1
|
7.0
|
7.6
|
8.1
|
Government expenditure
|
7.9
|
4.3
|
3.8
|
4.5
|
4.9
|
4.8
|
5.1
|
5.0
|
Investment
|
6.2
|
5.5
|
-0.1
|
5.8
|
7.4
|
8.6
|
9.1
|
9.6
|
Exports
|
12.6
|
5.1
|
8.4
|
6.9
|
9.4
|
7.6
|
7.6
|
8.0
|
Imports
|
20.3
|
6.0
|
-2.5
|
3.7
|
7.7
|
9.7
|
10.6
|
9.9
|
GDP (% yoy),
income
|
6.3
|
4.5
|
4.7
|
5.5
|
6.5
|
6.8
|
7.1
|
7.7
|
Agriculture
|
5.7
|
1.4
|
4.7
|
2.5
|
3.2
|
3.3
|
2.5
|
2.8
|
Industry
|
6.2
|
1.0
|
0.4
|
4.2
|
6.7
|
6.4
|
6.3
|
7.2
|
Service
|
6.5
|
7.0
|
6.8
|
6.8
|
7.2
|
7.7
|
8.4
|
8.8
|
Nominal GDP (%
yoy)
|
15.1
|
12.7
|
12.3
|
11.4
|
11.4
|
11.6
|
12.3
|
12.5
|
WPI headline (%
yoy)
|
8.9
|
7.3
|
6.0
|
3.6
|
3.8
|
4.6
|
4.8
|
3.9
|
WPI core (% yoy)
|
7.3
|
4.9
|
2.9
|
3.5
|
2.8
|
2.0
|
2.7
|
2.7
|
CPI headline (%
yoy)
|
|
10.2
|
9.5
|
6.5
|
5.8
|
5.4
|
5.3
|
5.2
|
Savings rate (%)
|
31.3
|
30.1
|
31.0
|
31.5
|
32.0
|
32.5
|
33.0
|
33.5
|
Fiscal stance*
(% GDP)
|
-0.5
|
-0.4
|
-0.4
|
-0.3
|
-0.2
|
-0.2
|
-0.2
|
-0.1
|
Output gap (%
GDP)
|
2.1
|
0.3
|
-1.2
|
-1.5
|
-0.7
|
0.2
|
0.6
|
0.5
|
Current account
(% of GDP)
|
-4.2
|
-4.7
|
-1.7
|
-1.6
|
-2.0
|
-2.2
|
-2.2
|
-2.0
|
Budget balance
(% of GDP)
|
-5.7
|
-4.9
|
-4.6
|
-4.1
|
-3.6
|
-3.3
|
-3.0
|
-2.7
|
Public Debt (%
of GDP)
|
65.5
|
65.4
|
65.6
|
65.9
|
65.3
|
64.5
|
62.9
|
61.3
|
Repo rate
|
8.0
|
7.3
|
8.0
|
7.8
|
7.5
|
7.0
|
6.5
|
6.3
|
Sources: RBI, Datasteam,
SG Cross Asset Research/Economics, * Net contribution to GDP growth,
** The fiscal
stance is defined as the change in the cyclically-adjusted budget balance
*** 2014 refers
to FY2014
|
Ø
India registered a
fiscal deficit of INR 493.83 billion during November 2014 representing a
decline of 4.43% over the fiscal deficit of INR 516.71 billion in November
2013. The fiscal deficit during April-November 2014 accounted for 99% of the
budgeted estimates of INR 5,311.77 billion for 2014-15.
Ø
The eight core
industries with a combined weight of 37.90% in the Index of Industrial
Production (IIP) expanded 6.70% in November 2014 as compared to growth of 3.20%
in November 2013. Cumulative growth for April-November 2014-15 was 4.60%, as
against 4.10% growth in April-November 2013-14.
Ø
The HSBC India
Purchasing Managers' Index (PMI) — a composite indicator, which provides an
overview of manufacturing operating conditions — climbed to two-year high of
54.5 in December, up from 53.3 in the previous month.
Ø
At 51.1, down from
52.6, the seasonally adjusted HSBC India Services PMI Index –was indicative of
a moderate expansion in business activity of service companies in December.
HSBC India Composite PMI Output Index at 52.9 down from 53.6, the reading was
consistent with growth of private sector activity.
Ø
India’s total power
generation grew at a healthy pace in November 2014. According to actual data
report released by Central Electricity Authority (CEA), power stations in the
country generated 85.3 billion units of power in November 2014. This was 9.9%
higher compared to the corresponding month a year ago.
Ø
Government of India has
advised that to avoid withholding tax, Foreign Financial Institutions (FFIs) in
Model 1 jurisdictions, such as India, need to register with IRS and obtain a
Global Intermediary Identification Number (GIIN) before January 1, 2015.
Ø
The year-on-year
inflation measured by monthly CPI stood at 4.12% for November 2014 as compared
to 4.98% for October 2014 and 11.47% during November 2013.
Ø
Wholesale inflation
decelerated for the sixth consecutive month this fiscal as it came in at ZERO in November’14 (y-o-y) as against
7.5% during the corresponding period of the previous fiscal year.
Ø
FDI inflows into India
rose by about 25% to US$ 17.35 billion in April-October 2014. Total FDI into
India, since April 2000 and September 2014, including equity inflows,
reinvested earnings and other capital, stood at US$ 345.29 billion.
Ø
Indian companies raised
INR 12.01 billion through IPOs in 2014, the lowest since 2001. Overall they
raised INR 390.00 billion fresh capital in the equity market through various
channels.
Ø
Fund raising by Indian
companies through retail issuance of NCDs plunged by 58% to about INR 73.00
billion in April-December 2014.
Ø
M&A as well as
private equity deals involving Indian firms rose by 26% to US$48 billion this
year.
Ø
Private equity (PE)
investments in India touched a four-year high this year, with PE funds
investing $10.9 billion across 436 deals, said a report released by Venture
Intelligence, a research service focused on private company financials,
transactions and valuations.
Ø
According to the
report, the surge was led by mega deals in online services companies,
especially e-commerce firm, which accounted for almost $4.1 billion (across 106
deals) or 37.6% of the investment during the year
Ø In
its latest Monetary Policy Review on 2nd December, 2014 RBI
maintained status quo in policy stance by keeping key policy repo rate under Liquidity Adjustment Facility (LAF)
unchanged at 8%. Hence, the reverse repo rate and Marginal Standing Facility
(MSF) remained unchanged at 7% and 9% respectively. Though RBI has indicated a
dovish tone with expectation of rate cut likely in next review in February
2015.
Ø Cash reserve
ratio (CRR) remained at 4.0%,
whereas Statutory Liquidity Ratio (SLR) at 22%.
Trends in Major
Monetary Indicators (%)
Indicators
|
Jan-14
|
Jan-15
|
SLR
|
23.00
|
22.00
|
CRR
|
4.00
|
4.00
|
Repo
|
8.00
|
8.00
|
Reverse Repo
|
7.00
|
7.00
|
Source: Reserve Bank of
India
Highlights
of India's International Investment Position (IIP) for the quarter-ended
September 2014:
Ø
Net claims of
non-residents on India (as reflected by the net IIP) increased by US$ 6.8
billion over the previous quarter to US$ 353.7 billion as at end-September 2014
reflecting a US$ 3.5 billion increase in the value of foreign-owned assets in
India vis-à-vis a US$ 3.3 billion decrease in the value of Indian Residents'
financial assets abroad.
Ø
The fall in Indian
residents' financial assets abroad was mainly due to a decrease of US$ 2.3
billion in Reserve assets. Foreign-owned assets in India increased mainly due
to increase in direct investment in India and portfolio investment in India.
Ø
Among other investment
liabilities, currency and deposits increased by US $2.5 billion and loans
(mainly external commercial borrowings) decreased by US$ 0.9 billion.
Ø
The ratio of India's
international financial assets to international financial liabilities stood at
58.0% in September 2014 (58.6% in June 2014).
Ø
Reserve Assets
continued to have the dominant share (64.2%) in India's international financial
assets in September 2014, followed by direct investment abroad (26.5%).
Ø
Direct Investment
(30.0%), portfolio investment (24.4%), loans (21.2%), and currency and deposits
(12.9%) were the major constituents of the country's financial liabilities.
Ø
The share of non-debt
liabilities decreased marginally to 45.5% as at end-September 2014 from 46.1%
at end-June 2014.
India's
External Debt as at End-September 2014 Highlights:
Ø
At end-September 2014,
India's total external debt stock stood at US$ 455.9 billion, recording an
increase of US$ 13.7 billion (3.1%) over the level at end-March 2014. The rise
was due to long-term external debt particularly commercial borrowings and Non
Resident Indians (NRI) deposits.
Ø
Long-term debt was
US$369.5 billion at end-September 2014, an increase of 4.7% over the end-March
2014 level, while short-term debt declined by 3.2% to US$ 86.4 billion.
Ø
Short-term debt
accounted for 18.9% of India's total external debt at end-September 2014, while
the remaining (81.1%) was long-term debt. Component-wise, the share of
commercial borrowings stood highest at 35.4% of total external debt, followed
by NRI deposits (23.8%) and multilateral debt (11.7%).
Ø
Government (Sovereign)
external debt stood at US$ 88.4 billion, (19.4% of total external debt) at
end-September 2014 vis-à-vis US$ 81.5 billion (18.4%) at end-March 2014.
Ø
The share of US dollar
denominated debt continued to be the highest in external debt stock at 60.1% at
end-September 2014, followed by the Indian rupee (24.2%), SDR (6.5%), Japanese
yen (4.5%), and euro (3.0%).
Ø
India's foreign
exchange reserves of US$ 320 bn provided a cover of 68.9% to the total external
debt stock at end-September 2014 vis-à-vis 68.8% at end-March 2014.
Recent Regulatory/Policy
Development
Cabinet approves ordinance route to amend land
takeover act
In a move aimed at faster
completion of projects, the cabinet on December 29 approved an ordinance to
amend the Land Acquisition Act (LAA) to remove "procedural
difficulties" in acquiring land for national projects and to "further
strengthen" provisions concerning "affected families".
According to the amended
LAA, compensation will remain high as per the act and rehabilitation and
resettlement norms will be followed but the procedure for acquiring land for
projects will be easier by removing steps like social impact assessment, impact
on food security, and consent of 80% land owners.
The changes will allow a
fast track process for defence and defence production, rural infrastructure
including electrification, housing for poor including affordable housing,
industrial corridors and infrastructure projects including projects taken up
under Public Private Partnership mode where ownership of the land continues to
be vested with the government.
Section 105 of the Act has
kept 13 most frequently used legislations used for land acquisition for central
projects out of its purview. These are applicable for projects including
national highways, metro rail, atomic energy projects and electricity.
According to the Right to
Fair Compensation and Transparency in Land Acquisition, Rehabilitation and
Resettlement Bill, 2013, the process for land acquisition involves a social
impact assessment survey, preliminary notification stating the intent for
acquisition, a declaration of acquisition, and compensation to be given by a
certain time. All acquisitions require rehabilitation and resettlement of the
affected people while compensation to the owners will be four times the market
value in rural areas and twice in urban areas.
President re-promulgates coal ordinance
President
approved the Coal Ordinance (Special Provisions) Act, 2013. Initiating the coal
block re-allocation process, without waiting for the Rajya Sabha approval.
The
government, in October, had promulgated special ordinance for re-allocation of
coal blocks, cancelled by the Supreme Court in its judgment in September. The
apex court had set a deadline of March 31 for reallocation of 42 producing coal
mines through the bidding process. Under the Indian Constitution, the
government is empowered to enact a law through an ordinance signed by the
President, without going through the legislative process.
The ordinance
will address issues related to coal supply to companies of central and state
governments, as well as private companies in the cement, steel and power
businesses. It will also address valuation of the land to be taken over from
those who have lost coal blocks.
Government approves ordinance for mines
allocation
The government approved
amendments to the near six-decade-old mining and minerals development and
regulation (MMDR) act through the ordinance route, paving the way for auction
of minerals such as iron ore, bauxite and limestone.
The auction route first
introduced in coal mining does away with the traditional method of granting
mineral licences on a case-to-case basis. While it maximises the revenue
potential and is believed to be more transparent, the industry has been opposed
to it since it is not a global practice.
To fast-track over 60,000
pending applications with state governments, the ordinance also expanded the
area for mineral leases from 10 sq kilometres to 100 sq kilometres to
facilitate large-scale mining. Further, mines would be auctioned for 50 years
with no further clause for renewal. They would be re-auctioned after 50 years.
The ordinance, however,
introduces some contentious clauses in the Act that sets different rules for
public and private sector mining companies and between captive and non-captive
mining firms, moves that are likely to act as stumbling blocks in the reform
process. For existing mining leases for example, the moratorium for captive
mining firms is 15 years while for non-captive firms it is 5 years.
Foreign holding limit in Insurance companies
increased from 26% to 49%
The Cabinet, through an
Ordinance, has raised the FDI limit in insurance to 49%, recommending a
composite cap of 49%, which would include all forms of foreign direct
investments and foreign portfolio investments. The government is now in a
position to dilute its equity stake by up to 49% in five public sector general
insurance companies following the promulgation of the Insurance Laws
(Amendment) Ordinance, 2014. However, the clauses in the ordinance have made it
impossible for foreign partners to get management control in India, Section
2.7A of the ordinance defines an Indian insurance company as “which is Indian
owned and controlled in such manner as may be prescribed”. Explanation under
Section 2.7A.b further elaborates Indian control.
The government has added a
new section — Section 10B — to the General Insurance (Business)
Nationalisation Act (GIBNA) which says “General Insurance Corporation (GIC) and
insurance companies may raise their capital for increasing their business in
rural and social sectors to meet solvency margins and such other purposes as
the Central government may empower in this behalf.”
Cabinet finalises reserve prices for upcoming
2G airwave auction
The cabinet on January 5,
2015 approved the proposal of the Department of Telecom (DoT) to proceed with
auction in 800, 900 & 1800 (mega hertz) MHz bands and finalised its reserve
prices, an official statement said. "The reserve price approved is INR
36.46 billion pan-India per MHZ in 800 MHz, INR 39.80 billion for 900 MHz band
pan India excluding Delhi, Mumbai, Kolkata, and Jammu and Kashmir; INR 21.91
billion pan India (excluding Maharashtra and West Bengal) in 1800 MHz
band," the statement said. The estimated revenues from this auction are
INR 648.40 billion.
Medical devices sector opens up to 100% FDI
The department of
industrial policy and promotion (DIPP) on 6th January, 2015 issued a
press note notifying the Cabinet's decision to open the cash-starved medical devices sector to 100% foreign direct investment through the
automatic route. The Cabinet had last month cleared the proposal, which was
floated by DIPP, the nodal agency for FDI policy. Earlier, there was no separate
policy for medical devices, which were covered under pharmaceuticals. The
pharma policy imposed stiff foreign investment conditions, including mandatory
government approvals in case of brownfield investment or stake acquisition in
existing Indian companies.
Change in Defence Procurement Policy
(expected)
Changes in the Defence
Procurement Policy to legalise representatives from foreign defence firms will
be done in another month and a half, Defence Minister Manohar Parrikar said in
an interaction with journalists on December 30, he also said that the
ministry is thinking of giving conditioned and limited approval to dealing with
banned firms, and a ban has been lifted to get spare parts for Tatra trucks. Parrikar
added that a draft of the changed policy is ready and a final draft will be
ready in another 8-10 days. It will then go through further procedures before
going to the union cabinet.
Goods & Service Tax (GST) Constitutional
Amendment bill (Proposed)
Government has introduced
the GST constitutional amendment bill in the lower house of parliament– the
bill will be considered for approval in the Budget session of the parliament.
Key features of the bill:
(a) A single rate GST
which will subsume multiple layers of taxation such as central excise, state
VAT, entertainment tax, octroi, entry tax, luxury tax and purchase tax on goods
and services, and eliminate the
cascading effect of taxes.
(b) While liquor has been
completely kept out of the GST, petroleum goods will be part of the GST but
they will be levied at zero rate in the initial few years - implying that the
states will continue to levy VAT while Centre will levy excise duty.
(c) A GST Council, which
will consist of 2/3rd members from the state will decide on the tax rate as
well as the date of including petroleum taxes in the GST ambit.
(d) Compensation to states
for revenue loss – The centre plans to provide 100% compensation in first three
years, 75% in the fourth year and 50% in the fifth year. Moreover, states where
goods originate can levy 1% additional tax over GST to make up for any revenue
loss for the first two years.
Impact – Once the Goods
& Services Tax is implemented, it will help to create a single nationwide
system of taxation and also eliminate the cascading nature of taxation. It is
expected to boost competitiveness especially in the manufacturing sector and
thus increase exports and output growth. Moreover, easier taxation structure
will help to increase compliance and subsequently improve revenue collection.
Government expects GST to be implemented from Apr-16
Macro-economic Outlook:
As India strives
to be re-branded as ‘emerging’ from ‘submerging’, the government’s prime focus
is to bridge the infrastructure gap. India currently invests 5% of GDP in
infrastructure. This needs to increase by at least 3% in order to achieve a
sustainable growth rate of 7.5- 8%. The question is – can India finance its
infrastructure needs? While infrastructure investment and revival of stalled
projects will help re-start the investment cycle, progress will be slow and
financing needs will remain a concern in the short to medium term. However,
this concern will fade in the longer term. There are certain important factors
that would have significant impact on India’s ability to finance the same.
Banking sector stress: As of March
2014, stressed and restructured advances, as a proportion of gross advances,
stood at 9.8%. Of this, the NPL stood at 4% of gross advances – a fifth of
which is due to the infrastructure sector. As of September 2014, banks are
sitting on restructured loans worth US$19bn given to various infrastructure
sectors. This severely restricts the ability of the banks to finance
infrastructure projects, especially in a scenario where infrastructure accounts
for around 35% of their gross advances. An important reason for this is that a
large number of infrastructure projects in India have been stuck over a fairly
long period of time due to multiple factors. Recently, the government announced
online submission of applications for environmental clearances to ensure
timelines, transparency in the application process, and real-time monitoring of
projects. The same process was extended to forest clearances needed by
infrastructure projects as well. However, it is crucial for the government to
be able to bring forward key reforms in the areas of land acquisition, coal
block allocation, etc. Only these would help revive a vast chunk of stuck
projects, thereby reducing banking sector stress and enhancing lending
capacity.
Restructuring corporate
balance sheets: Over-leveraged corporations pose an immense
challenge. The previous wave of infrastructure development by the private
sector ended on a sour note as stalled projects and a fast slowing economy took
a huge toll on their balance sheet, as did high inflation and interest rates.
Available evidence suggests that corporate balance sheet restructuring has
started in earnest.
So far this
year, Indian companies have sold around US$1.5bn worth of infrastructure
projects in India and abroad to reduce the stress on their balance sheets.
Expected monetary policy easing will also bring cheer in this respect. The
process, however, will be slow.
Fiscal deficit: India’s weak
fiscal situation gets in the way of government spending on infrastructure. For
FY15, India’s fiscal deficit is expected to be around 4.4% of GDP however this
may improve and government can achieve the targeted fiscal deficit of 4.1% if
the spectrum allocation announced in January is completed before March 2015.
That said, it is important to note that India’s fiscal deficit will likely be
on a structural downtrend in the coming years – not the least because of the
recent deregulation in diesel price. The government’s decision to opt for DBT
(direct benefit transfer) could be a potential game changer. They have already
identified six social sector schemes for which payments would be made directly
to the intended beneficiaries. Thus far, payments were made through multiple
agencies which resulted in major leakage from the system (less than 30% of
funds going to the intended beneficiaries). Once fully implemented, DBT would
drastically reduce waste and enable the government to spend an increasingly
larger share on infrastructure.
Domestic savings: The recent
sharp fall in the savings rate is a reflection of the impact of policy missteps
over the years. It was due to reduced public (higher fiscal deficit) and
corporate (lower earnings growth) savings, as well as lower household savings
(high inflation and negative real rate). As India’s investment
needs grow, savings also need to increase to
ensure that India’s CAD remains sustainable. With the recent easing of
inflation assuming structural proportions, household savings are expected to
pick up. This process will be facilitated by India’s favourable demographics,
with a rising proportion of high income earners in the population and a rapidly
expanding middle class.
Recent steps in
infrastructure financing: The lack of a well-developed and deep
corporate bond market has resulted in high dependency on domestic lenders.
Given the near-term public spending constraint, the government and RBI have
made efforts to improve the flow of private capital into the infrastructure
sector. RBI has allowed lenders to raise longer term resources by selling
infrastructure bonds that are exempt from regulatory requirements like the cash
reserve ratio (CRR), the statutory liquidity ratio (SLR) and priority sector
lending (currently banks with more than 20 branches are required to lend 40% of
their loans to sectors such as agriculture and small business units). Also,
with an aim to reduce stress on infrastructure companies, RBI has allowed bank
loans to infrastructure for 25 years or more, with periodic refinancing every
five to seven years, with appropriate terms and conditions.
Improving Macro Fundamentals
Investment-led recovery
theme playing out, though slowly: Expectation of an investment-led
recovery appears to be playing out, as we see some progress in the government’s
effort to provide momentum to stalled projects. The latest data from the CMIE
shows that, of the infrastructure projects (for which implementation was
stalled) tracked since July, 27 projects have moved from being classified as
‘stalled’ to being classified as ‘under implementation’. While being under
implementation does not mean that these projects are now up and running, the
visible momentum is encouraging.
Big improvements
expected in India’s fiscal deficit over the longer term:
Deregulation
of diesel prices and the renewed focus on direct benefit transfer (DBT) will
ensure that India’s fiscal deficit will decline substantially longer term to a
level that will be more manageable and one that can be easily sustained.
Growth forecast revised
up from FY16 onward: India, it seems, has finally stopped
disappointing the international investor. India’s 2015 growth outlook has not
only stabilised but has actually started to improve, while the growth outlook
has been falling for other large emerging markets, especially the commodity
exporters who have been badly affected by weak oil and other commodity prices.
India, on the other hand, has benefited greatly through easing inflation. In
fact, India is among the few nations who are enjoying an enviable combination
of rising growth and falling inflation. Even on the current account balance
front, India’s CAD expectation for 2015 is on a clearly improving path, which
is not the case for other developing countries. For oil consumer, lower oil
prices bring a welcome boost.
A strong government
adds to the shine: Among the
five major developing countries that went to election, i.e. Brazil, India,
Indonesia, South Africa and Turkey, India turned out to be the only country
that elected a reform-oriented leader with a clear political mandate. While
Turkey remained under the control of Recep Tayyip Erdogan, in South Africa, the
ANC maintained its 20- year dominance. In Brazil, the incumbent president
retained her position, much against market expectations and by a very narrow
margin. Indonesia did manage to elect a reformist president like Jokowi but the
political mandate in his favour was very weak. This leaves Modi as the only
leader with reformist credentials, who the market was overwhelmingly in favour
of, and who came to power with a huge political mandate. The continued success
of the BJP in state-level elections would ensure that the government (that has
so far been focussing on painless reforms) will soon embark on the more painful
reforms.
What
Do Lower Oil Prices Mean for India?
As India is a net oil importer, a significant
reduction in oil prices will have the following four key implications:
1. Positive Terms of
Trade Impact: Given that India is a net oil importer, a decline in oil
prices will result in a positive terms of trade impact and will provide support
to reduce current account deficit pressures. Indeed, India’s net oil import
balance has reduced to 4.9% of GDP for 12 months ending Nov-14 from 5.3% of GDP
for the 12 months ending Nov-13.
2. Lower Inflation
Pressure: A fall in oil prices would help to quicken the pace of
reduction in inflationary pressures. Wholesale price fuel inflation fell to
-4.9% YoY in Nov-14 from 11.1% in Nov-13. In retail basket, fuel inflation
lowered to 3.3% in Nov-14 from 7% 12 months earlier.
3. Monetary Policy
Implications: Lower inflation will create more room for policy-makers to
ease monetary policy.
4. Reduced Fiscal
Burden, Positive for Public Saving: Fuel prices of cooking gas, kerosene
and until recently diesel have been regulated in India. Diesel accounted for
nearly 50% of overall oil subsidy burden; however, with periodic price rise
since Jan-13, prices of diesel were marked up to the market prices and in
Oct-14, the government formally announced diesel price de-regulation. Moreover,
the government has put a cap of 12 subsidized cooking gas (LPG) cylinders to be
available per family per year. In this context, oil
subsidy is expected to
reduce to 0.6% of GDP in F2015 from 1.2% of GDP in F2015. Moreover, with lower
oil prices, oil subsidy is expected to be 0.4% of GDP in F2016, with the
governments share in subsidy at near zero level.
Index of Industrial Production (IIP)
Industrial Output Growth Slumps: The Index of Industrial
Production (IIP) for the first time in the current fiscal contracted 4.2% yoy
in October 2014. Cumulatively the industrial output growth for April-October
FY15 now stands at 1.9%. Although industrial output growth numbers on a monthly
basis do not indicate any trend, the fact that they contracted significantly in
the month which is considered to be the beginning of the festive season,
indicates that consumption demand is still weak and fragile. However, we expect
IIP to recover somewhat in the second half and grow faster than the first half
of FY15.
Manufacturing
output contracted by a substantial 7.6% in October 2014 as compared to a 2.9%
growth in September 2014 in y-o-y terms, partly on account of a truncated work
calendar owing to an earlier onset of the festive season. Additionally, while
domestic demand conditions remained sluggish, merchandise exports displayed a
5.0% y-o-y decline in October 2014. In April-October 2014, manufacturing output
increased by 0.7% as compared to the 0.1% contraction in the same months of
2013.
16
sub-sectors of the manufacturing sector, with a significant weight of 50.1% in
the IIP Index, underwent a contraction in October 2014. Notably, 10 of these
sub-sectors (with a weight of 33.3% in the IIP Index) had recorded an expansion
in the previous month.
Chemicals
and chemical products, accounting for 10% of the IIP index, recorded a
considerable 10.3% contraction in October 2014. While output of vitamins and
ayurvedic medicaments expanded by 53% and 30%, respectively, that of
antibiotics and its preparation and ethylene contracted by 41% and 29%,
respectively in October 2014.
Additionally, furniture; manufacturing contracted by 24.7% in October
2014, reflecting the y-o-y decline in output of wood furniture (31%) and gems
& jewellery (50%). The latter is surprising given the impending wedding
season and considerable gold imports in October 2014.
Tobacco products recorded a contraction of 4.7% in October 2014, partly
led by the 22% fall in output of cigarettes in October 2014. The latter may
have been on account of the proposal by the Central Government to ban the sale
of loose cigarettes, which was later withdrawn. Moreover, food products and
beverages displayed a contraction of 6.9% in October 2014.
Radio, TV & communication equipment & apparatus displayed a
sharp contraction of 70.2% in October 2014, with a 78% fall in output of
telephone instruments, partly on account of a fall in production at of Nokia’s
Chennai factory.
Wood & products of wood & cork except furniture; articles of
straw & plating materials recorded a y-o-y decline of 7.5% in October.
Core sector growth continued with dream run: Core sector comprising eight sectors and has a
weightage of 39% of total industrial output grew by 6.7% in November 2014. This
is the highest rate of growth in the last five months. The sectors that drove
the growth include coal, cement and electricity, which grew in double-digits.
Coal production
grew by 14.5% in November 2014. Output of Coal India, which accounts for 80% of
India’s coal output, grew by 13.3% to 44.4 million tonnes in November from a
year earlier.
An increase
in production of coal also improved the generation of electricity. Electricity
generation grew by 10.2% in November 2014. The growth came over a growth of
6.3% in the year-ago month. It was driven by strong performance of thermal
power stations. Electricity generation of thermal power plants grew by 13.8% in
November. All regions recorded an increase in thermal power generation in
November from a year earlier.
Cement
production grew by 11.3% in November 2014. This is its highest level of growth
recorded in the last four months. The growth came over and above a 3.9% growth
in cement production in November 2013.
Growth in
output of the steel sector however slowed to 1.3% in November 2014. This is its
lowest level in the last four months. An oversupply of steel from China
impacted the demand for domestically manufactured steel. According to the data
from Joint Plant Committee (JPC), India’s imports of finished steel grew by
49.2% to 5.6 million tonnes in November 2014 from a year earlier. Production of
steel manufacturers like Steel Authority of India (SAIL), Rashtriya Ispat Nigam
(RINL) and Jindal Steel & Power (JSPL) contracted in November.
Output of
refinery products grew by 8.1% in November 2014. This is the highest level of
growth in the last 20 months. According to data from Petroleum Planning and
Analysis Cell (PPAC), refinery throughput of Indian Oil refineries grew by 8.2%
to 19.2 million tonnes in November 2014. Oil refineries also exceeded their
planned target for November 2014 by 7.6%. Essar Oil recorded the highest
increase of 26.6% followed by Hindustan Petroleum, which recorded an increase
of 18.5%.
To put it in
a nutshell, the growth of the eight core industries continued with its upward
momentum in November primarily because of improved performance of three main
sectors - coal, cement and electricity. The refinery products recorded a
healthy growth of 8.1%. But the other sectors continue to lag behind.
Purchasing
Manager Index (PMI), Manufacturing
Indian goods producers ended 2014 in a higher gear, with business
conditions improving at the quickest pace in two years in December. Accelerated
growth of the manufacturing sector was reflected by faster expansions in
output, new business and foreign orders. Latest data also painted a brighter
picture in terms of prices, as inflationary pressures eased during the month.
Adjusted for seasonal factors, the headline HSBC India Purchasing
Managers’ Index –climbed to a two-year high of 54.5 in December, up from
53.3 in the prior month. Business conditions improved at a faster pace in all
three market groups during the month, with the sharpest expansion seen in
consumer goods.
Latest data reflected reports of improving demand in December, as new
orders increased for the fourteenth consecutive month. Moreover, the rate of
expansion was marked overall and the fastest since the end of 2012. Similarly,
Indian manufacturing companies registered a further rise in new export business
in December. New work from abroad expanded at the quickest pace since April
2011.
Reflective of further growth of output and new orders, input buying
among Indian goods producers increased in December. The rate of expansion
accelerated to the most marked in the current 14-month sequence of growth.
Subsequently, the pace of pre-production inventory building picked up to the
sharpest in more than two years. Furthermore, stocks of finished goods held by
Indian manufacturers rose at the fastest rate since the survey began in April
2005.
Meanwhile, contrasting with continued growth of production and incoming
new work, staffing levels in India’s manufacturing economy declined in
December. That followed two successive months of slight job creation, although
the pace of contraction was fractional overall. Job losses were evident in two
of the three surveyed sub-sectors, with the exception being intermediate goods.
PMI
Services
At 51.1, down from 52.6, the seasonally adjusted HSBC India Services
PMI Business Activity Index was indicative of a moderate expansion in
business activity in December. Despite slowing since November, the rise
remained stronger than the average observed for 2014. As per Markit, “Anecdotal
evidence linked rises in service sector output to improvements in demand”.
‘Other Services’ was the best performing of the six monitored sub-sectors,
while the sharpest contraction occurred in Financial Intermediation.
The overall slowdown in activity growth was mirrored by a weaker
expansion in service sector new business in December. The latest increase was
the eighth in as many months and moderate overall. Across the private sector as
a whole, growth of new work inflows remained solid, led by a further
acceleration at manufacturers.
Volumes of outstanding business at Indian service providers continued to
rise in December, as has been the case in nine of the past ten months. That
said, the rate of backlog accumulation slowed to the weakest in three months
and was marginal overall. Growth of backlogs also eased across the private
sector as a whole.
Following the first
monthly fall in more than five-and-a-half years in November, input costs faced
by Indian services firms rose in December. However, the rate of cost inflation
was only modest overall and mild in the context of historic survey data.
Meanwhile, cost pressures in the manufacturing industry eased to the weakest in
the current 69-month sequence of inflation.
Consequently, private sector input costs rose at a historically muted
pace.
Overall, Output in the Indian private sector continued to rise in December, as
signalled by the headline HSBC India Composite PMI Output Index posting
above the neutral 50.0 threshold for the eighth month in a row. At 52.9, down
from 53.6, the reading was consistent with solid growth of private sector
activity. The latest rise was driven by manufacturing output, which rose at the
quickest pace in two years. Meanwhile, growth of service sector activity
moderated during the month.
Fiscal
Deficit
India’s gross fiscal deficit (GFD) reached 98.9% of the annual budget
estimates by November 2014. The deficit during April-November 2014 amounted to
INR 5.3 trillion. At the same time last year, the deficit had amounted to 93.9%
of the budgeted target for 2013-14.
Government expenditure rose by 5.2% to INR 10.2 trillion during
April-November 2014, as compared to its year-ago level. Non-plan expenditure
rose by 6.9% to INR 7.8 trillion, while plan expenditure remained flat at INR
2.9 trillion.
Net tax revenue collections of the government rose by a mere 4.3% cent
to just about INR 4 trillion during April-November 2014. India’s FY15 budget
was made with the assumption of the oil price averaging US$ 105/bbl. Up until
mid–November, the government imposed a combined custom and excise duty on
petrol at around INR 20/ltr plus 2.5%, while the equivalent for diesel was
around INR 10/ltr plus 2.5%. With crude prices falling over 40% since June,
indirect tax collection took a major hit. Weak IP data further added to the
woes. Not surprisingly, since
mid–November, the government raised the excise duty on petrol and diesel on
three different occasions to bridge the gaping fiscal hole rather than passing
on the benefit of falling crude prices to consumers. Clearly, the so-called
deregulation of diesel and petrol prices does not mean that these prices are
market determined. As can be seen from the chart above, retail petrol and
diesel prices have changed at a moderate pace compared to the fall in the crude
price.
The government also did not make much progress on the disinvestment
front by November 2014. Its disinvestment receipts amounted to a meagre INR 2.2
billion during April-November 2014, as against an annual target of INR 634.3
billion. Net recoveries of loans, which is another large component of non-debt
capital receipts, amounted to INR 71.7 billion during April-November 2014, as
compared to INR 73.6 billion a year ago. The government financed 69.1 per cent
of its fiscal deficit through market borrowings.
Policy bullets at the government’s disposal to
meet the deficit target
In order to keep the
fiscal deficit within the budgeted target, we expect the government to embark
on the following strategies:
• Force oil companies to
share a larger proportion of the subsidy burden than is currently the case.
Despite this, the absolute subsidy burden on oil companies would still be lower
than it was in FY14.
• Postpone some of the
subsidy payout to FY16, as was successfully done by Mr. Chidambaram on previous
two occasions.
• Force cash-rich
state-owned companies to pay significantly higher dividends.
• Get state-owned
financial institutions, led by Life Insurance Corporation (LIC), to bail out
the government with regard to the sale of the ONGC and CIL stakes. In FY12, for
example, LIC had invested around INR 120 bn and picked up over 90% of the
shares on offer in ONGC, the largest offering of that year’s disinvestment
programme.
• Curtailment of
expenditure. Like in FY14, we expect the government to come up with major
fiscal surplus during the month of March through expenditure contraction.
Current
Account Deficit (CAD)
CAD Rises: Current
account deficit (CAD) is expected to widen to US$ 48.7 bn (2.3% of GDP) in FY15
from US$ 32.7 bn (1.7% of GDP) in FY14. India’s CAD came in at US$ 10.1 bn
(2.1% of GDP) in 2QFY15 (period ending September 2014). This is higher than in
both preceding quarter (1QFY15: 1.7% of GDP) and the same quarter previous
fiscal (2QFY14: 1.2% of GDP). The key reason for deterioration in CAD is a
15.8% yoy increase in trade deficit to US$ 38.6 bn because of deceleration in
export growth and acceleration in imports growth. Although the acceleration in
imports growth is in line with market expectation, the reason for acceleration
is different. Imports instead of growing in response to a recovering economy
grew due to a sharp rise in gold imports.
Merchandise Exports Growth Decelerates: The performance of advanced economies continues to weigh on export
growth as recovery across these economies remains fragile and uneven. After an
encouraging 1QFY15, exports growth decelerated to 4.9% in 2QFY15. Even,
services exports grew only 3.9% yoy to US$ 17.6 bn in 2QFY15. Services exports
were unchanged on sequential basis. Even World Trade Organisation has cut its
estimate for global trade growth to 3.1% for 2014 from 4.7%. Although India’s
look-east policy has helped the country diversify its exports basket both in
terms of items and destination, it still has to fully substitute the export
demand coming from advanced economies.
Imports Growth Accelerates: Market expects only a modest pick-up in imports this fiscal due to
lower crude prices and limited upside to GDP growth. After witnessing a
contraction of 6.5% yoy in 1QFY15, merchandise imports increased 8.1% yoy to
US$ 123.8 bn in 2QFY15. The rise in imports is mainly due to a sharp rise in
gold imports to USD 8.9 bn in 2QFY15 from US$ 1.0 bn in 1QFY15. Excluding gold,
imports in fact grew 3.3% yoy in 2QFY15 compared with 1.3% yoy in 1QFY15. This
shows that gold import significantly impacts the overall import bill and
resulted in a higher trade deficit.
Remittances Remain Flat: Remittances from aboard have ranged between US$ 15 bn to US$ 17 bn
since 2QFY12 and were US$ 16.3 bn for 2QFY15. Even, net invisibles at USD28.5bn
in 2QFY15 were nearly of the same level of US$ 28.1 bn as witnessed in 2QFY14.
Net Capital Inflow: On a net basis, the capital account witnessed an inflow of US$ 18.7 bn
in 2QFY15 compared with US$ 19.8 bn in 1QFY15. Both major heads of capital
account - foreign direct investment and portfolio investment - witnessed a net
inflow. In 2QFY15, net inflow under foreign direct investment was US$ 8.0 bn
(1QFY15: US$ 8.2 bn) and under portfolio investment was US$ 9.8 bn (US$ 12.4
bn).
Inflation
Wholesale inflation decelerated for the sixth consecutive month this fiscal as it came in
at nil in November’14 (y-o-y) as against 7.5% during the corresponding period
of the previous fiscal year. The slowdown in price rise is a positive sign with
a marked decline across the broad heads of the WPI:
- Food prices have come down
- Fuel prices continue to fall
- Manufactured goods inflation remains weak
- Some downward bias due to high base effect
The decline in WPI
inflation is a welcome sign which appears to be sustainable given the direction
of movement of farm and fuel prices. The only risk factor is a possible
increase in agricultural product prices in the next two months as kharif crop
is estimated to be lower this year. However, so far this has not manifested in
any significant increase in prices. Crude oil prices are expected to supportive
of lower inflation. The base effect however, is unlikely to impact the overall
changes in WPI significantly and hence WPI inflation is unlikely to be a
concern for the rest of the year.
Retail inflation as measured by the Consumer Price Index (CPI) was
at a 4.4% on a YoY basis for the month of November 2014. The high base effect
from corresponding figures last year (11.2% in November 2013) played a major
role in the downward slide in prices. The all-time low growth of 4.4% came over
an all-time high growth of 11.2% last year. This was thereby the fourth
consecutive month where retail inflation remained downward bound.
Food Inflation: Future Trajectory
Much to everyone’s relief,
inflation has begun to ease led by a sharp fall in food prices. This has
sparked a clamour for monetary easing as most likely. But RBI has not yielded
as yet; it remains more focused on the medium-term outlook, especially the 6%
glide path target set for January 2016. Its caution is guided
by its model, which
projects inflation to return to 6% levels in 2015-16 from a 4.4% low in
November 2014 as base effects wane and absent any visible supply response, food
prices come under renewed pressure with acceleration in aggregate demand.
Arguably however, the
drivers of food inflation have so significantly weakened that suggestions of
any sharp reversal in 2015-16 seem over-cautious. In addition, the declines in
international food prices provide the option of augmenting domestic supplies
and contain future prices. As in a recent RBI working paper, “Analytics of Food
Inflation in India” (October 2014), shows the food inflation persistence in
recent years is largely attributable to higher rural wages, minimum support
price increases for rice and wheat and rise in agriculture input costs.
Recent data clearly shows
a sharp deceleration in rural wage rate growth in the last two years, a marked
weakening of a key driver of food inflation. Will the trend reverse as
aggregate demand accelerates, since GDP growth is projected to rise to 5.4% to
5.5% in 2014-15 and further above 6% in 2015-16? The answer would depend on
both the pace of demand acceleration and its sectoral composition. At this
point of time, growth projections appear a little optimistic given the weak
credit demand, investment activity and exports, apart from contractionary
monetary-fiscal policies and strained public revenues.
Since rural consumption
demand is facing severe headwinds from public-spending cuts, lower farm prices
and slowing remittances—evidence suggests severe compression of demand for food
by rural households who allocate a larger income portion to these items. On the
other hand,
higher demand concentrated
in services’ activities, i.e., mostly urban and semi-urban segments—also
suggests that demand for non-protein foods will be weak as these households
allocate relatively lower expenditure shares for these things.
Next, while agriculture
input costs are expected to benefit from the fortuitous movements of global oil
and fertilizer prices, it needs to be underscored that the RBI study finds the
impact of MGNREGA (Government Social employment programme) on food inflation is
not sustained. With spending on this programme sharply cut in the current
budget, this driver has weakened even more. Topping these waning impulses is
the moderation in Minimum Support Price (MSP) increases for rice and wheat in
the last two years; the more notable feature here is the recent advisory by the
central government that states refrain from paying additional bonuses that
earlier seemed to have compounded food price increases. Future MSP hikes can
reasonably be expected to be dampened as domestic prices converge to those
internationally.
The above analysis
suggests the three key drivers of food inflation should remain tempered, at
least in the near-term. A base-line, normal monsoon scenario would therefore
suggest that any sharp reversal in food prices should be a low probability
outcome in 2015-16. Benign international food prices would additionally benefit
the food economy in the event domestic conditions falter from monsoon
uncertainties.
Monetary Policy
Rate Reduction January End: As we
forecasted, Reserve Bank of India (RBI)
maintained status quo in its fifth bi-monthly policy review held on 2nd
December, 2014, keeping the policy repo rate unchanged at 8%. It stuck to its
stance despite pressure from the Finance Ministry. The Finance Minister had
expressed the need to lower interest rates during interaction with the media.
However, the Central Bank
provided a dovish policy outlook, highlighting that a change in the monetary
stance is likely early next year, including outside the policy review cycle.
Given, RBI’s focus on the quality of Government of India’s fiscal consolidation
suggests that a rate cut is unlikely prior to the presentation of the Union
Budget for 2015-16 at the end of February 2015. RBI expects the fiscal
situation to benefit from lower fuel subsidies post the fall in crude oil
prices, but conceded that weak tax growth and the back-ending of disinvestment
issuances have created some uncertainty about the achievement of fiscal
targets, as well as the quality of eventual fiscal adjustment.
Interest Rate
The 10 year Government
Security has been moving downwards so far in this fiscal. G-Sec yields have
fallen from 8.16% on to 7.94%% on 31st November 2014. The G-Sec
yield has been moving downwards owing to excess liquidity in the system and an
expectation of rate cut in the coming policy review on account of declining
inflation.
