india’s macroeconomic situation and outlook · i –india’s economic & financial challenges...

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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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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I. India’s Economic & Financial challenges and risks


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


I – India’s Stylized FactsEducation and development

School Enrollment and GDP


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


I – TAC ECONOMICS’ View on Emerging MarketsEconomic Growth projections

GDP Growth Outlook: 2015-2017 vs 2018-2020 (average, %)


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


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



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



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


I – India’s Economic & Financial Risk ratingsEconomic & Financial Risk Summary

Strong

Fundamental

Balances

Higher

vulnerabilities


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


I – India’s GDP and InvestmentSteady improvement in GDP growth and weak Investment outlook


I – India’s External AccountsStructural trade deficit, notably with China and oil producers


I – India’s Current Account and FDIWorsening of external accounts, yet financed by large FDI inflows


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


I – India’s Foreign Reserves and Exchange RateLarge fx reserves accumulation, but likely pressures on currency


I – India’s Cyclical PerformancesPMI, IIP and Inflation in a soft breeze


I – India’s Fiscal SituationOngoing fiscal consolidation to prevent debt sustainability issues

Fiscal Balance and Public Debt (% of GDP)


II – India’s Political Risk and Cost of CapitalImproving Political Risk and Reduction in Risk Premium


II. Transformation of the Indian society: political and societal challenges


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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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


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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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.


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


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

[email protected]

or call TAC ECONOMICS at +33 2 99 39 31 40

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