India’s macroeconomic
situation and outlook
April 3, 2018 – ChennaiVivien MASSOT
India Economic Situation and Outlook
Rationale for TAC ECONOMICS
• TAC ECONOMICS is a fully independent European research groupproviding advisory services on international economic andfinancial issues for investors and industrial companies. TACECONOMICS also provides policy advisory services throughresearch funded by multilateral institutions.
• TAC ECONOMICS covers a large range of macro issues and macrorisks (mature / emerging / frontier markets, cyclical outlooks /exchange rates / interest rates, oil prices forecasts….) for which itdevelops and implements original and powerful quantitativetechniques and models.
• With a staff of 15 highly qualified researchers and analysts,customer relation advisors in Europe and Asia, and a researchoffice in India, TAC ECONOMICS has the size and means toengage into research delivering results that are ready-to-use andbusiness-decision oriented.
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India Economic Situation and Outlook
Structure of the presentation
I. India’s Economic and Financial challenges and risksStrong economic growth with fiscal and currency risks
II. Transformation of the Indian society: political and societal challengesProgressive modernization of society with permanent localized tensions and swings of openness and control politics
III. Regional analysis – Focus on Tamil Nadu
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India Economic Situation and Outlook
I. India’s Economic & Financial challenges and risks
India Economic Situation and Outlook
I – India’s Economic & Financial challenges and risksSome key messages
1. Robust economic growth, but weak investment
2. Strong reduction of current account deficit due to fall in global commodity prices (oil, gold)
3. Large attractiveness with ongoing structural reforms (ease of doing business, monetary policy committee, banking sector, fiscal sustainability, etc.)
4. Positive cyclical performances, following several shocks (low monsoon, demonetisation, GST implementation, etc.), though with credible monetary policy
5. Likely pressures on exchange rate
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India Economic Situation and Outlook 6
I – India’s Stylized FactsLevel of relative development
2017 (or latest)
Population (mn) 1,317
Population growth (%) 1.3
Population 15-64 (% of total) 66.0
Urban population (% of total) 33.1
Literacy rate (% of adults) 72.1
Life expectancy at birth (years) 68.3
GDP current (bn $) 2,439
GDP per capita ($) 1,852
Ease of Doing Business Rank (/190) 100
India Economic Situation and Outlook 7
I – India’s Stylized FactsEducation and development
School Enrollment and GDP
India Economic Situation and Outlook 8
I – TAC ECONOMICS’ View on Emerging MarketsKey contribution in global growth
Contributions to World GDP Growth (%) Emerging Countries Contributions to
World GDP Growth by country
India Economic Situation and Outlook 9
I – TAC ECONOMICS’ View on Emerging MarketsEconomic Growth projections
GDP Growth Outlook: 2015-2017 vs 2018-2020 (average, %)
India Economic Situation and Outlook 10
I – Measure of Eco. & Fin. risks in emerging marketsRiskMonitor Methodology
� Economic & Financial risks defined by 3 macro risks : currency risk, cross-border payment risk, and cyclical / activity risk, on 3 different time-horizons (<1 year, 1-3 years, 3-5 years)
� 2 measures for Economic & Financial risks:
� Economic & Financial Risk Ratings combine the information provided by 12 Fundamental Indicators, with non-linear relations; measured on a continuous scale and assess risks in “normal” circumstances
� Crisis Signals, provided by non-parametric / data-mining tools, assess the likelihood of systemic breaks and major crises
� Political Risk measured with Political Risk Ratings based on World Bank KKZ indicators, including broad governance indicators
� Risk-Related Cost of Capital (RRECC) through econometric modelling and including smoothed market price measures
� Data updated on monthly basis for 95 countries
India Economic Situation and Outlook 11
Economic Risk Political Risk
Growth Balance
Real GDP, current account,…
Debt Balance
External debt, FDI
Liquidity Balance
Short-Term debt, rfx level
Exchange Rate Balance
Currency valuation, rfx dynamic
Cyclical Balance
Business cycle, monetary policy
Banking System Balance
Domestic credit, fx.refinancing
KKZ Methodology
Voice &
Accountability
Political Stability
Regulatory Quality
Government
Effectiveness
Rule of Law
Control of Corruption
Country Groups
Three groups
Major arbitrage
markets
Commodity exporters
High number of past
restructuring
I – Measure of Eco. & Fin. risks in emerging marketsRiskMonitor Methodology
India Economic Situation and Outlook 12
Economic Risk
Crisis
Signals
Political Risk
Economic Risk
Ratings
Political Risk
Ratings
Group
Premium
Country Risk Premium (RRECC), calibrated on JP Morgan’s EMBI
Country Groups
Statistical Calibration on
combinations & threshold effects
Data Mining 5 non-parametric
models
Statistical
Normalization
I – Measure of Eco. & Fin. risks in emerging marketsRiskMonitor Methodology
India Economic Situation and Outlook 13
Country Ratings are a normative appreciation of the macroeconomic and financial
qualities of the country regarding three types of difficulties (solvability, exchange
rate depreciation, poor cyclical performances).
The Ratings are graduated from 0 (best quality) to 100 (worst quality) and classified
in four categories: A : 0-30 / B: 30-40 / C: 40-60 / D: 60-100
I – India’s Economic & Financial Risk ratingsEconomic & Financial Risk Summary
India Economic Situation and Outlook 14
I – India’s Economic & Financial Risk ratingsEconomic & Financial Risk Summary
Strong
Fundamental
Balances
Higher
vulnerabilities
India Economic Situation and Outlook 15
The Growth Balance measures the ability of a country to register a sufficient economic growthwithout triggering unsustainable external imbalances.
I – India’s Structural BalanceGrowth Balance into low risk area
India Economic Situation and Outlook 16
I – India’s GDP and InvestmentSteady improvement in GDP growth and weak Investment outlook
India Economic Situation and Outlook 17
I – India’s External AccountsStructural trade deficit, notably with China and oil producers
India Economic Situation and Outlook 18
I – India’s Current Account and FDIWorsening of external accounts, yet financed by large FDI inflows
India Economic Situation and Outlook 19
I – India’s FDI sources and sectorsFDI inflows: importance of offshore centers and services sector
FDI Equity Inflows by Country and Industry
Sources: Santander, Ministry of Commerce
India Economic Situation and Outlook 20
I – India’s Foreign Reserves and Exchange RateLarge fx reserves accumulation, but likely pressures on currency
India Economic Situation and Outlook 21
I – India’s Cyclical PerformancesPMI, IIP and Inflation in a soft breeze
India Economic Situation and Outlook 22
I – India’s Fiscal SituationOngoing fiscal consolidation to prevent debt sustainability issues
Fiscal Balance and Public Debt (% of GDP)
India Economic Situation and Outlook 23
II – India’s Political Risk and Cost of CapitalImproving Political Risk and Reduction in Risk Premium
India Economic Situation and Outlook
II. Transformation of the Indian society: political and societal challenges
India Economic Situation and Outlook
II – LT Transformation of the Indian societyKey messages
1. Modernization trend in a context of permanent,but limited and localized instability;inability to reach a point of systemic break
2. Policies characterized by phases of openness / liberalization and of stricter administrative control, with political structure dominated by ‘power sharing’, coalition building and growing regional powers, implying ‘sub-optimal’ efficiency
3. Over the long-run, social tensions and international conflict / tensions / isolation are the most critical risks
4. Differentiation between States to remain or increase, and ‘local’ units (housing or industrial zones) likely to benefit
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India Economic Situation and Outlook
II – LT Transformation of the Indian societyThree angles to look at the Indian society
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Permanent Balancing between Unity and Diversity
(or inclusive vs autonomous)
Perceived / Real International
Security Threats
Difficulties in Political
Representation
• National sentiment &
symbolism
• English, social
networks, mobile
phones
• Migration
• Consumerism / middle
class
• Secularism / inclusion
• Rural / urban, States /
center
• Religious / castes,
Resilience & fatalism
• Income inequalities
• Migration
• Democracy under constraints and limits,
federalism, checks and balances
• Corruption, distrust, marginalized groups
• Geography and border constraints
• India vs China for access to resources
• Pakistan / terrorism / destabilizations
India Economic Situation and Outlook
II – LT Transformation of the Indian societyA look at the federal structure and perspectives
• Strong local / State recognition / sense of belonging, and specific features (religion, language, clothing, food…);
• Increasing number of States, increased devolution of powers and permanent role of regional parties in national coalition;
• Federal control on State’s finance (including critical role of RBI) associated with increasing conflicts on fiscal redistribution and persistent deficits at State level;
• Multiple dividing lines across the Indian states: Northern Hindi / Southern Dravidian, frontier states / Deccan inland, richer Delhi-Mumbai-Bangalore-Chennai axis / poorer BIMARU (Bihar, Madya Pradesh, Rajasthan, Uttar Pradesh).
• Very unlikely reduction in regional powers and a permanent compromise between Center and States.
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India Economic Situation and Outlook
II – LT Transformation of the Indian societyAnchor Points & Risk Areas (political & society perspective)
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Anchor Points
• A ‘boiling clear-soup’ and no milk: permanence of « limited » instability
but an ability to move from one to the other source without ever
reaching a “convergence point” potentially leading to systemic political
shocks.
• Modernization trend based on education changes, increasing
participation of women, urbanization and “coping with infrastructure”.
• Policies towards public services will always be characterized by rotating
phases of more openness / liberalization and more control at State
and central levels.
• Political structure dominated by questions about ‘power sharing’, with
coalition politics a persistent feature, implying “sub-optimal” efficiency.
India Economic Situation and Outlook
II – LT Transformation of the Indian societyAnchor Points & Risk Areas (political & society perspective)
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Risk Areas
• A rapidly emerging lower-middle class associated with increased
perceived corruption and uncontrolled urbanization could lead to (so far
unknown) large-scale social tensions. The inertia of the political
structure could then imply longer periods of instability, policy paralysis
and higher inflation.
• An exogenous shock (e.g. higher tensions with China, renewed tensions
with Pakistan / Afghanistan, very large terrorist…) could exacerbate
underlying domestic tensions / fracture lines. Episodes of high
domestic / civil violence could happen, but would still remain localized.
• These risks would translate into moments of greater centralization and
stronger government interference / influence in the economy
India Economic Situation and Outlook
II – LT Transformation of the Indian societyImplication for foreign investments
• Policy making and decision-taking at central level will remain permanently fraught with obstacles, tensions and compromises, with reversals and long waiting times.
• Differentiation (and competition) between States will remain or even increase, according to scenarios.
• Local units (housing: colonies, i.e. self-sustained urban development, industrial plants / clusters or zones) are likely to benefit from the permanence of localized conflicts and policy-making difficulties at the center.
• Cost of conflict resolution (financial- and time-wise) need to be fully assessed and computed.
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Thank you!
Contact us:Morgane Lohézic
Head of Business Development & [email protected]
Vivien MassotManaging Director - India, & Senior Economist
or call TAC ECONOMICS at +33 2 99 39 31 40