Some perspectives on India and China...North America 11.7 US 11.1 Asia and Oceania 2.7 Other OECD...

Samiran Chakraborty November 2012

Some perspectives on India and China

Contents page

A perspective on India’s growth experience 3

Opportunities in India 5

India’s near term challenges 43

Our views on China 50

The dragon and the tiger 59

2

A perspective on India’s growth

Growth not a ‘flash in the pan’ GDP growth, % y/y

World

Emerging Markets

0

1

2

3

4

5

6

7

8

1980's 1990's 2000's

ASEAN 5

India

But growth is decelerating more recently

GDP growth, % y/y

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

12%

Q1 FY06 Q4 FY07 Q3 FY09 Q2 FY11 Q1 FY13

Sources: IMF, CEIC, Standard Chartered Research 3

Cycles of pessimism and optimism are not new to India

2002 2010

2004 2012

India has come a long way since 2002

4

Opportunities in India

Underpinnings of the India opportunity

Sources: Standard Chartered Research

Demographics

Young working population –

Low dependency ratio

High savings rate

Domestic Demand

Growing consumer markets

Changing lifestyles

Unleashing rural demand

Infrastructure Build

Growth preceded infra development

Private sector participation

Global integration

Removing the trade barriers

Opening up to capital flows

Ingredients for sustainable economic growth

Economic,

Social and

Political

Drivers

6

Demography: Young population to run the global workshop

0

10

20

30

40

50

60

India China/US Europe Japan

China India

-40

-30

-20

-10

0

10

20

30

40

1990 2000 2010 2020 2030 2040

Growing share of the global workforce

% share of incremental world population aged 15-59

Out of every 100 new entrants in the global workshop, 28 will be Indians

Sources: UNDP, Standard Chartered Research

Average age by 2020

7

Young population saves more

Savings rate of more than 30% of GDP creates the base for sustained investment

Sources: CEIC, Standard Chartered Research 8

0%

2%

4%

6%

8%

10%

12%

20

22

24

26

28

30

32

34

36

38

FY

91

FY

93

FY

95

FY

97

FY

99

FY

01

FY

03

FY

05

FY

07

FY

09

FY

11 Savings rate (% of GDP) Real GDP growth (RHS)

The income explosion….

Per capita income increased from USD 100 to USD 500 in 33 years and then moves to USD 1000 in just 5 years

Sources: CEIC, Standard Chartered Research

0

200

400

600

800

1.000

1.200

1.400

FY71 FY75 FY79 FY83 FY87 FY91 FY95 FY99 FY03 FY07 FY11

Per capita income ( USD)

9

…..and the bulge in middle class

China

India

Japan

US

EU

Others

0%

20%

40%

60%

80%

100%

2000 2010 2020 2030 2040 2050

Sources: OECD, Standard Chartered Research

This rise of middle class will offer a huge consumer market

Shares of global middle-class consumption, 2000-50,%

10

Paradigm shift in rural wages

-10%

-5%

0%

5%

10%

15%

20%

25%

Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12

Nominal rural-agri wages

Nominal rural non-agri wages

% y/y

Sources: CEIC, Standard Chartered Research 11

The “chaotic” urbanisation process

Urbanisation rate increased from 27.2% in 2001 to 31.2% in 2011, 230mn more urbanites in the next two

decades

2011 2001 % growth

Statutory Towns 4,041 3,799 6%

Census Towns 3,894 1,362 186%

Urban Agglomerations 475 384 24%

Out Growths 981 962 2%

Class I towns 468 394 19%

Million plus towns 53 35 51%

12 Source: Standard Chartered Research

Gen “I” aspires a better life

Sources: Boston Consulting group, Standard Chartered Research

75% of population in 2020 will be from Gen “I” i.e. grew up in a liberalized economy (<14 years of age

when economy started opening)

1990s 2010

# Television channels 1 >500

# car models ~5 ~165

# Shopping malls 0 >500

% of household with mobile phones 0 ~60

Internet penetration, % 0 ~11

13

Increased openness to trade flows

Exports

0

100

200

300

400

500

600

FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 (E)

Imports


Exports and imports increased 7 times in almost a decade

USD bn

14

Although trade deficit has become a policy challenge

-201,00

-250

-200

-150

-100

-50

0

FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13(E)


Trade deficit

USD bn

15

16

The strategy of export diversification

Moving up the value chain

% share of total exports

Diversification into different geographies

% share of total exports

27%

16%

13%

2%

27%

15%

14%

0%

16%

10%

21%

8%

9%

10%

27%

17%

0% 10% 20% 30%

Textile and Textile Products

Agriculture and Allied Products

Engineering Goods

Petroleum Products

FY11 FY05 FY00 FY95 Region/Country 2011-12 (Apr – Dec)

I. OECD Countries 33.6

EU 17.5

North America 11.7

US 11.1

Asia and Oceania 2.7

Other OECD Countries 1.7

II. OPEC 18.5

III. Eastern Europe 1.1

IV. Developing Countries 40.3

Asia 29.3

SAARC 4.1

Other Asian Developing Countries 25.2

China 5.8

Africa 6.6

Latin America 4.4

V. Others/Unspecified 6.5

Total Exports 100

Sources: CEIC, RBI, Standard Chartered Research

Two-way FDI flows

FDI Inward

0

5

10

15

20

25

30

35

40

45

FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12

FDI outward


FDI allowed in most of the sectors, few restrictions remain which are being gradually removed

USD bn

Attracting portfolio flows

Portfolio inflows

0

5

10

15

20

25

30

35


External commercial

borrowings


Preferring equity inflows over debt inflows

USD bn

19

Source: Medium Term Appraisal of 11th Plan, Economic Survey FY11, Standard Chartered Research

0

2

4

6

8

10

12

FY

08(A

)

FY

09 (

A)

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

Infrastructure spending to boost market opening

Spending on infrastructure as % of GDP

USD 500bn for FY08-12, USD 1trn for FY13-17

Private sector importance increases

83%80%

74%72% 71%

66% 66% 65% 63%61%

17%20%

26%28% 29%

34% 34% 35%37%

39%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12

Share of public investment Share of private investment

India’s near term challenges

Declining productivity


100

110

120

130

140

150

160

170

180

190

200

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

21

Total Factor Productivity (TFP)

Moderating investment


Investment to GDP ratio

20

22

24

26

28

30

32

34

36

38

40


% of GDP

22

Sticky inflation


WPI % YoY

Average

Alarm level

-2%

0%

2%

4%

6%

8%

10%

12%

Apr-95 Apr-97 Apr-99 Apr-01 Apr-03 Apr-05 Apr-07 Apr-09 Apr-11

Rising average inflation rates and inflation stickiness make us worried

23

Widening deficits

Twin deficits

% of GDP

Governance deficit

Number of cabinet decisions taken in a year

-5.8(f)

-3.4(F)

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

Mar-04 Mar-07 Mar-10 Mar-13

Fiscal deficit

CAD

20 70 120 170 220 270

Jul 05 - Jun 06

Jul 06 - Jun 07

Jul 07 - Jun 08

Jul 08 - Jun 09

Jul 09 - Jun 10

Jul 10 - Jun 11

Jul 11 - Jun 12


Depreciating currency

Sources: Bloomberg, Standard Chartered Research

42

44

46

48

50

52

54

56

58

60

62

Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12

Measures to contain INR slide

Expectations from state

elections & budget

Risk on

Iran oil payments

Comments from authorities

Eurozone crisis

S&P downgrades India

rating outlook

Tax uncertainty

Weakening fundamental

Global worries

ECB announces

OMT

Fed announces

QE3

Reform rush in

India

25

Reform rush!

Foreign investors Status

49% FDI in multi-brand retail Notified, state approval reqd

100% FDI in single-brand retail Notified

49% FDI in insurance and

pension Parliament approval reqd

FDI in Aviation Parliament approval reqd

GAAR deferral Likely soon

Retrospective taxation Under consideration

Withholding tax reduction Notified

FII debt holding simplification Notified

Fiscal deficit reduction Status

Diesel price hike Announced

Cooking gas cylinder cap Announced

Divestment Intent shown, details awaited

Deficit consolidation roadmap Under consideration

Urea price decontrol Under consideration

Domestic investment Status

SEB loss restructuring Announced, state approval reqd

FSA between power producers and Coal India Likely soon

Incentives for small investors in equity markets Announced

Tax incentives for insurance products Under consideration

National Investment Board Under consideration

Faster clearance of projects Under consideration

Land acquisition Bill Under consideration


27

Nominal GDP multiplies to USD 9.5trn, per capita income at USD 7000

Young population – Average age at 29 years, half the

population below 25

40% of the population entering middle class with

aspirations to consume

Changing consumption profile – from food to

branded luxury

Infrastructure investment for the decade could be USD

2.4trn

Outstanding bank credit could be USD 6.2trn

Exports likely to expand to USD 2trn penetrating unexplored markets

India to become the third

largest economy

India 2020: Land of opportunities

The China story

China’s economic cycle

14,8%

6,8%

12,1%

7,6%

Forecasts

7,0%

6%

9%

12%

15%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014


Quarterly GDP growth rate, y/y, real

Real credit growth

Cement

-10%

0%

10%

20%

30%

40%

Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

Cement production and real credit growth, % y/y

Real credit growth suggests investment activity will pick up


Monetary policy easing will help

PBoC lowered RRR

Sources: Bloomberg, Standard Chartered Research

21,0%

19,5%

0%

5%

10%

15%

20%

25%


6,0%

4,2%

0%

2%

4%

6%

8%

10%


1Y lending rate 1Y saving rate Floor of 1Y lending rate Ceiling on 1Y saving rate

Saving and lending rates were lowered too

Inflation is not a concern for 2012, but 3013 could be different

CPI inflation is expected to continue to rise in 2013, we expect the first rate hike in Q4 2013


-4%

-2%

0%

2%

4%

6%

8%

10%

Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

CPI, y/y CPI forecast, y/y

Export growth, real y/y; export volume at Dec-2003 price

USD bn, 3mma

Exports and imports are OK, considering the world is so bad…


Import growth, real y/y; import volume at Dec-2003 price

USD bn, 3mma

10%

0

20

40

60

80

100

120

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

2005 2006 2007 2008 2009 2010 2011 2012

Import volume

Import growth, real y/y (LHS)

20%

39%

10%

4%

0

20

40

60

80

100

120

140

160

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

2005 2006 2007 2008 2009 2010 2011 2012

Export volume

Export growth, real y/y (LHS)

Transaction volumes

31 cities’ primary sales, mn sqm of floor space sold

Prices

31 cities’ average selling prices, CNY/sqm

Housing is key and it is turning

0

5

10

15

20

25

30

2008 2009 2010 2011 2012

Tier 1 Tier 2 Tier 3 Tier 1

Tier 2

Tier 3

0

5.000

10.000

15.000

20.000

25.000

2008 2009 2010 2011 2012

Sources: CRIC, Standard Chartered Research

The dragon and the tiger

Will history repeat itself?

GDP in Year 1850 (US$ bn)



0

50

100

150

200

250

China India UK US

0

10.000

20.000

30.000

40.000

50.000

China India UK US

0

500

1.000

1.500

2.000

China India UK US

22%

13%

8% 7%

23%

10%

2%

12%

5% 4% 7%

27%

36

Sources: IMF, Standard Chartered Research

Shift in balance of economic power

Sources: BIS, Standard Chartered Research

Rank 2000 USD trn 2010 USD trn 2020 USD trn 2030 USD trn

1 US 10.0 US 14.6 China 24.6 China 73.5

2 Japan 4.7 China 5.9 US 23.3 US 38.2

3 Germany 1.9 Japan 5.6 India 9.6 India 30.3

4 UK 1.5 Germany 3.3 Japan 6.0 Brazil 12.2

5 France 1.3 France 2.6 Brazil 5.1 Indonesia 9.3

6 China 1.2 UK 2.3 Germany 5.0 Japan 8.4

7 Italy 1.1 Italy 2.0 France 3.9 Germany 8.2

8 Canada 0.7 Brazil 2.0 Russia 3.5 Mexico 6.6

9 Brazil 0.6 Canada 1.6 UK 3.4 France 6.4

10 Mexico 0.6 Russia 1.5 Indonesia 3.2 UK 5.6

Ten largest economies by decade from 2000

Ranking and nominal GDP (USD trn)

Advantage India

A more sustainable balance between consumption and investment

Less exposed to global economic shocks

Did India skip a step on path of development? India’s services vs

China’s manufacturing

The demographic advantage: Ageing China and young India

Private enterprise: the dynamism behind India’s growth

Democratic institutions (including rule of law and freedom of speech)

as bedrock of sustainable growth

Deeper and more developed financial markets and market determined

macro variables

The language advantage

38

Where India is lagging China

A 13-year head start on economic reforms

Infrastructure and natural resources

Planned urbanization trends

Innovation and speed of execution

Fiscal and monetary policy flexibility which can provide buffer to

macro shocks

39

China’s dependence on investment


GDP share by expenditure

4,0% 5,2%

0,8%

4,2% 3,2%

3,8% 3,2%

-1,7%

4,4% 5,0%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

1978-2011 1978-1988 1989-1990 1991-2000 2001-2011

Weighted growth rate for each GDP component

40% 51% 19%

40% 30%

38% 32%

-44%

42% 48%

-50%

-25%

0%

25%

50%

75%

100%

125%

150%

1978-2011 1978-1988 1989-1990 1991-2000 2001-2011

Growth contribution of each GDP component

49% 46%

35%

30% 34%

46%

9% 3%

-20%

0%

20%

40%

60%

80%

100%

120%

1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Household consumption Government consumption Gross fixed capital formation Inventories Net export

China’s growth: from investment and productivity

Contribution to average growth over each period, ppt

Sources: Wu, NBS, Standard Chartered Research

Labour

Human capital

0,5

Physical Capital 7,1

TFP

1,7

-4

-2

0

2

4

6

8

10

1952-57 1957-65 1965-71 1971-78 1978-84 1984-91 1991-2001 2001-09

China’s capital stock is much lower than the US

Capital stock per capita, USD at constant 2005 prices

Sources: Dragonomics, Standard Chartered Research

0

20.000

40.000

60.000

80.000

100.000

120.000

140.000

2010 2010 1930 2009

China China at PPP US

43

Bridging the investment gap

Sources: The World Bank, Standard Chartered Research

20%

30%

40%

50%

1990 1992 1995 1996 1998 2000 2002 2005 2006 2008 2010

China

India

22ppts

3ppts

Investment % of GDP:

India was catching up with China

14ppts

44

Different economic models continue

Sources: World Bank, Standard Chartered Research

India

China

20

25

30

35

40

45

50

55

1990 1993 1996 1999 2002 2005 2008

India

China

20

25

30

35

40

45

50

55

1990 1993 1996 1999 2002 2005 2008

India

China

10

15

20

25

30

35

40

45

50

55

1990 1993 1996 1999 2002 2005 2008

Agriculture

% of GDP

Services

% of GDP

Industry

% of GDP

45

The Lewis Turning Point has arrived for China

998

200

400

600

800

1.000

1950 1970 1990 2010 2030 2050

192

229

180

50

100

150

200

250

1950 1970 1990 2010 2030 2050

Working age population to peak in 2015 (mn) Young working age (15-24) population to fall sharply (mn)


46

Entrepreneurship and creativity: built to last

India’s Jugaad (creative improvisation) focuses on SMEs

SME sector:

26 million enterprises

60 million jobs

SMEs contribute 45% of industrial output and

40% of exports

Sources: Union Budget Speech for FY11, Shanghai Stock Exchange, RBI, Standard Chartered Research

1.000

5.000

0

2.000

4.000

6.000

China India

SMEs, 45%

Rest, 55%

SMEs, 40%

Rest, 60%

SMEs contribution to exports

SMEs contribution to industrial output

Access to finance (publicly listed companies)

SCB Forecasts for India

FY09 FY10 FY11 FY12 FY13(F)

GDP growth, % 6.7 8.4 8.4 6.5 5.4

WPI, % 8.0 3.9 9.6 8.8 7.8

Fiscal balance, % of GDP -6.0 -6.3 -5.1 -5.9 -5.8

CAD, % of GDP -2.4 -2.8 -2.6 -4.2 -3.4

Repo rate, % 5.00 5.00 6.75 8.50 7.75

Reverse repo rate, % 3.50 3.50 5.75 7.50 6.75

USD-INR, end-march 50.70 44.90 44.60 50.94 52.50

India’s Fiscal Year (FY) is from 1 Apr to 31 Mar


SCB forecasts for China

Sources: Standard Chartered Research

2009 2010 2011 2012F 2013F 2014F

GDP growth, % 9.2 10.4 9.2 7.7 7.8 7.5

CPI, % -0.7 3.3 5.4 2.0 4.0 4.0

Current account, % of GDP 5.1 5.1 2.7 1.9 2.7 3.1

USD-CNY (year end) 6.828 6.623 6.301 6.31 6.19 6.00

FX reserves, USD bn (increase) 2,399

(453)

2,847

(448)

3,181

(334)

3,547

(366)

3,925

(378)

4,380

(455)

1-yr base loan rate, % 5.31 5.81 6.56 6.00 6.25 7.00

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