note on gov_india

8/10/2019 Note on Gov_India

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Eight lessons learned from Narendra Modi

First, declare your ambitions and goals clearly.Rarely in Indian elections have we seen any

candidate clearly state what he wants and what he hopes to achieve if he gets what he wants.

While others pussyfoot around the idea and act coy, Modi has always been clear he wanted to

be PM. This is the main reason why many voters are clear about giving him a chance.

This is simple logic. Consider that there are three applicants for a job. The first applicant says it

does not matter if he gets the job or not, for he is on to higher things. The second applicant says

everyone else is a crook and doesnt deserve the job. The final applicant says he wants the job

and he is best qualified for it. He is willing to work hard and brandishes his past achievements to

support his candidature.

Who will you give the job to? The chances are you will consider the person who is keen on thejob, seems to have the qualifications, and willing to toil for it.

This is the power of goal clarity and focus.

Second, break the final target into a set of smaller targets and milestones.

Modis milestones were clear: First, win Gujarat convincingly, next win public backing for his

candidature through carefully-choreographed speeches to specific audiences (starting with the

address to the Shriram College of Commerce in January 2013 in Delhi), then win party support

by getting the cadre excited at various fora, and then expand his support base by winning votesfor his party CMs in various assembly elections (but after sealing his candidature for the top

post). Now he is in sight of the final peak: getting enough votes in crucial states to lead his party

to victory and form a government. Modi ran his campaign like a US presidential election -from

primaries to the final party nomination and on to voting day.

Third, demonstrate strength, then invite stakeholders. One of the big myths perpetrated by

the media is that Modi would never get allies because of 2002. For a while it seemed likely to

prove true. But Modi did not bother with this theory. He knew allies would come if they saw

winning potential in him. Once he demonstrated public support and the opinion polls started

conveying the same groundswell of support across the country, allies started trickling in one by

one. It is strength that attracts allies, not entreaties.
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Fourth, eliminate doubters and bring in team players. This is one of the core philosophies

that saw Roald Amundsen, the Norwegian explorer, beat Robert Scott to the South Pole in

1911. Amundsen knew that if his team had to make it first, it needed competent people, but

more important, he needed people who would fall in line and not try to be too individualistic. As

Morten Hansen writes in thisHBRblog:Amundsen emphasised unity and teamwork over

individual competence. He got rid of his best person, Johansen, and booted him from the final

assault team because he had quarrelled with Amundsen openly in front of all the others.

Amundsen could not risk fracture in his team, which could jeopardise the whole enterprise.

Likewise, Bill Gates was quick to manage out people who didnt fit, including two presidents.

This is exactly what Modi did. First, he got his bte noire Sanjay Joshi out of Gujarat in 2012.

Then he got the party to appoint his key person, Amit Shah, as the person in charge of his most

important state Uttar Pradesh. Shah is facing cases against him in some encounter killings,

but for Modi his loyalty and political acumen was what mattered. He brought back BS

Yeddyurappa despite opposition from within, and tied up with Ram Vilas Paswan in Bihar

despite misgivings in his party. Inside the party, LK Advani has been neutered, and Jaswant

Singh shown the door. Everybody knows now who is boss. To be sure, Modi will still face some

internal conspirators political parties are not like South Pole explorers with small teams of

specialists - but he will probably deal with them if he wins.. He cant outplace everyone and still

seek to win.

As Hansen writes in his HBRblog: Amundsen was not nice, warm, and fuzzy. However, he

didnt take the easy path (lets hope it will work out) but made difficult choices ahead of time. In

selecting people, it is not about being nice, but rigorous.

Modi is not in the race to win awards for being nice to people.

Fifth, plan meticulously and in detail.TV viewers watching Modis speeches in various places

may think it is all about oratory, but that is only one part of the Modi plan to communicate with

the masses. The truth is there is an entire army of people working to support his rallies. There in

ahuge IT crew that monitors the buzz on social media. There is a huge contingent of on-ground

researchers who thank people who come to his rallies and seek feedback.A Narendra Modi rally is not about erecting a stage and giving the speakers a mike. There is

water-tight security combing, there are LED screens to give everyone who attends a clear view

of the man, there are speakers at vantage points to amplify every soundbyte from the stage -

the works. Plus there are feeds organised for the TV channels, and facilities for live streaming

on the internet.
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Says anIndian Expressreport: Narendra Modi rallies have, in recent times, gone on to become

full-fledged stage productions involving light, sound, carefully chosen music, stage design and

sky cameras all intended to enhance viewer experience and build the Modi brand.

AnEconomic Timesreport explains why a Modi rally is not just any event: At every Modi

meeting, an army of volunteers combs through the crowd, gathering feedback, profiling

attendees and making a headcount. Later the party's IT cell collates all the data.

Sixth, set the agenda and keep control. Companies which hope to win in a competitive arena

must choose their battlefield and the agenda. In this election, Modi has been setting the agenda

most of the time. During the Gujarat campaign, he spent more time attacking Sonia and Rahul

than on local issueshe took the nations eyes way from any nagging issues in his own state.

The media labelled him as uncouth, and pooh-paahed him. He won by setting the agenda to his

advantage.

After emerging from Gujarat on the national stage, he began talking of the Gujarat model.

Suddenly, the man who everyone labelled communal was talking growth and development and

introducing new talking points to the TV and media circuit. The agenda excited young voters at

a time when Rahul Gandhi was talking elliptically about escape velocities. The Gujarat model

is now being questioned following Arvind Kejriwals foray into Gujarat, but the agenda has

changed again. It is too late to debunk the Gujarat model. The Congress gave him space to

introduce the Gujarat model by initially ignoring him. Now that they have decided to take him on,

he has shifted the agenda again.

Over the last few weeks, the main issue in this election is Modi himself. All his detractors have

taken him onmaking him the focus of this election. This suits Modi since this election will now

be a referendum on him. He has not only setthe agenda, he has becomethe agenda.

Take another example: Till a few months ago, the general assumption was that everyone votes

regionally and regionally alone. Indian Lok Sabha elections are about parties and alliances,

not about the candidate. But Modi has succeeded in making this election substantially

presidential.

Seventh, attack the enemy where he is weak.This strategy is, of course, obvious. Modis

strength has been the UPAs economic failures, and the meekness of Manmohan Singh as PM.

It did not need a Modi to discover where the UPAs chinks were, but it required genius to

discover whom to attack, how to attack, and for what.
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Contrary to general assumptions, Manmohan Singhs weakness is actually his strength and his

weakness his strength. As LK Advani found out in 2009 and even later in parliament, if you

attack Singhs meekness, you risk public opprobrium and Singh can easily turn the tables. But if

you pity him, you gain. The meek always inherit the publics sympathies. Modi was happy to

defend Singh when Rahul Gandhi insulted him by rubbishing the ordinance to help convicted

criminals as nonsense. Modi defended Singh. He attacks Sonia and Rahul more in order to

expose the weakness of their government.

Eighth, never play to your weakness. Answering direct questions from aggressive TV

anchors is an uncontrollable situation.. As Rahul Gandhi discovered in his TV interview with

Arnab Goswami, you can make a fool of yourself. Modi, in contrast, uses only friendly

interviewers for his Q&As. He has learnt from bitter experienceas in the India Today Conclave

in 2013, when he lost his cool following aggressive questioning about 2002. It is unlikely he will

change this strategy as long as he is not PM.

This is not to suggest that every part of his strategy is well worked out. Thats not the case. Modi

still does not have a substantial think-tank lending weight to his interviews. He probably talks too

much extempore with small strategic inputs, and does not prepare enough when talking on the

economy or complex subjects.

On the other hand, he has also not committed himself to making elaborate promises to theelectorate that he cannot keep. That will work to his advantage if he gets election. He has great

expectations to meet, but few promises to keep.


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Plepler was careful to describe the service as complementary to cable, rather than something aimed at

busting the industrys business model. He said HBO is targeting the 10 million homes in the U.S. that

have high-speed Internet but dont subscribe to cable or satellite television already.

Itstime to remove the barriers to those that want HBO, Plepler said.

The way things works now, cable firms and HBO have enjoyed a highly profitable and close relationship.

HBO charges cable firms hefty fees for the right to carry their programming; cable companies in turn

charge consumers additional moneysay, $10 or $20 per monthto add HBO to their selection of cable

channels. The linchpin of this arrangement: HBO agreeing to offer its content exclusively to cable

companies.

But in recent years, HBO has grown impatient with its cable partners, saying many have not done a good

job of marketing the premium channel. Plepler said hundreds of millions of dollars have been left on the

table through untapped distribution rights and poor marketing for new subscribers.

And studies show younger viewersparticularly millennials are choosing online video

subscription services over cable TV.

In May, Amazon and HBO announced a deal in which Amazon Prime members could watch a slew of

HBO shows, films and miniseriesmostly past seasons of old shows like The Sopranos.

When asked by an analyst if the plan will hurt HBOs cable business, Plepler said: I dont think this is

either or, adding that 85 percent of Netflixs users also subscribe to cable or satellite television. He said

the HBO online service would be offered in partnership with Internet service providers, who are also their

cable partners.

The announcement Wednesday is a striking reversal for parent company Time Warner, whose chief

executive Jeff Bewkes in 2010 famously dismissed the threat of Netflix, equating it to The Albanian army

or a 200-pound chimp.

But with an online streaming service, HBO is taking a page directly from Netflix and will soon compete

head-to-head with the rival streaming service. HBO has 30 million subscribers in the United States; Netflix

has about 37 million.


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Netflix has modeled itself after HBO with its mix of exclusive award-winning original shows like House of

Cards and movies. We have to become more like HBO before they become like us, Netflix CEO Reed

Hastings said in an interview last summer, referencing a favorite saying of the companys chief content

officer, Ted Sarandos.

With HBO stripped away from the cable bundle, Netflix loses one of its advantages over its rival. The

company, which reported Wednesday that it added fewer subscribers than anticipated, saw its shares

tank about 25 percent in after-market trading.

As much money as HBO makes from cable companiesthe company made $4.9 billion in revenues last

year, mostly from fees paid by cable firmsthe future of watching television is clearly online. According to

a report by Comscore this week, four out of ten online users subscribe to a service like Netflix or Amazon

Instant Video.

I find it hard to believe that HBOis going to offer something that will make [cable companies] angry, said

Deana Myers, an analyst for research firm SNL Kagan. She said the key will be how much the online

service is priced.

The big question is how much HBO charges for the online service. If the company sets the price too low,

many consumers will drop their cable subscriptions and eat into the firms profits from that business. But

set it too high, and viewers used to the roughly $10 per month charged by Netflix and Hulu Plus will balk.

The availability of more online content will provide more choices for consumers. But it wont necessarily

reduce costs. Cobble together HBO, Netflix, MLB.tv and a few more services and being an online-only

viewer adds up.

And even though HBOs announcementweakens the hand of the cable industry , firms like Comcast

still enjoy a huge advantage: exclusive live sports.

As a result, consumers like Avi Greenberger wont stop paying for the monthly service. The 25-year-old

Brooklyn resident subscribes to HBO, sports channels and online services such as Hulu Plus.

I hate double paying for both cable and online services , Greenberger said. But with the Rangers on

MSG and the Yankees on Yes Network, its hard to give up on cable.


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Will there be football and basketball streaming online for people who dont pay for cable or satellite? Not

anytime soon.

This month, ESPN and TNT inked deals to retain rights to show NBA games through the 2024-25 season.

And the National Football League and ESPN have a deal to keep Monday Night Football on the sports

network through 2021.


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8 Rare Gems from Heidi Roizen onBuilding a Fulfilling Life and Career

Heidi Roizenis one of those names in Silicon Valley that everyone learns atsome point. Thats what happens when you spend 14 yearsrunning your owncompany,then building developer relationships as a VP for Apple. Today,shes an investor withDFJ Ventureand teaches a class called the Spirit ofEntrepreneurship at Stanfords School of Engineering. Generally speaking,shes someone who knows everyone (theres even a Harvard BusinessSchool case about her)and shes wielded that influencegracefully.

Before graduation this year, she returned to Stanford (where she was also an undergraduate

and business student), tospeak at the Entrepreneurship Cornerand share the lessons she has

learned from over three decades of working and operating in tech. The result is a type of

commencement speech for entrepreneurs, full of seldom shared gems based on her

experiences.

Below are eight tenets Roizen has used to guide her career, create an expansive and

lasting network, and shape new innovations. The beauty is that while they were delivered

to an audience of people just starting out, they remain deeply relevant as a roadmap and

important reminders for entrepreneurs at all stages.

1. If youre not doing something hard, youre wasting your time.Melinda Gates was once walking by her young daughters room, and watched as she tried to

put on her shoes. This is hard, her daughter said. But I like hard. I love that line, says

Roizen. When youve been through a lot of hard things, you know that the best times are when

you get through them.

Successful entrepreneurs are constantly chasing a state of flow. You know that feeling when

youre working right at the edge of your capability and youre so engaged in trying and failing

and trying more that time just flies? Thats when youre really testing yourself. Ask yourself

every day, every week, What is something hard that I can tackle? Its funny, Roizen says,

that so many ambitious people still strive to eliminate difficulty from their careers they

want to cruise by, or land a dream job without earning it first but thats wrongheaded.

The reality is, when you get there, if you do, youll be bored. So look for the hard stuff.
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The great thing about being an entrepreneur is that it's hard.There's no safety net. No regular paycheck. You have to doit all on your own.

2. Your ethics set the tone for your life.

When Roizen was CEO of her first company, T/Maker, there was a sprinkler malfunction that

ruined all of the inventory in the stock room.Fortunately, it was mostly worthless. Even more

fortunately (in another sense), their landlord didnt know that and offered to cove r any amount of

damages with insurance. It was really tempting we could have collected $150,000 when we

were bootstrapped, she says. But we decided to tell the truth, because not only did we know

the inventory wasnt worth anything,but our employees knew too. If we were willing to cheat,

what would that tell them?

When youre setting an example for a staff of people, you have to be cognizant of every

move that you make.If T/Makers leadership had taken the money, they would have sent the

message that cheating is okay. It would be the same as saying, 'Hey file an expense report

thats not true. Take home that extra piece of equipment if you want.' Seems obvious, but it can

be an incredibly hard lesson to learn, Roizen says. You will think, 'I can take this easy road. I

can say this thing. I can tell this customer something that isnt really true about our product to

make a sale.'

Sometimes you get away with it. Sometimes you don't. A lotof times you won't.What you decide to do sets the tone and culture for the whole company you are building, she

says. Part of this is being able to sleep at night. More of it is about being a good contributor to

the people you work with and the relationships you build. This is easier when you hold yourself

to a higher standard.

3. Your gut has more information than you do.

While in business school at Stanford, Roizen took a class called Creativity in Business that

asked students to conduct an exercise for a week: Write down a decision you need to make the

next day on a piece of paper, go to sleep, wake up in the morning and immediately make the

decision. The purpose was to show students how gut decisions get made, and how right they

can be.
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Increasingly, tech culture is about the opposite making decisions driven by exhaustive data.

Theres this idea that the more data you have, the better the decision you can make. That may

be true for some things, but not everything, says Roizen. Gut instincts are built on years of

experience and subconsciously what you observe about human nature from every

interaction. They are informed in ways we dont even understand. Shes learned this

several times the hard way, especially when it came to decisions about people who to work

with, who to keep on, who to fire. When the data said something else and I didnt go with my

gut, I regretted it," she says.

4. Picking your team is the most important thing you will ever do.

The vast majority of companies succeed or die by thequality of the team.Over the years, Roizen has seen a lot of young entrepreneurs make the same mistake. They

have an idea for a company, they start their own thing, and when it comes time to hire

executives, they dont want to bring on anyone who knows more than them.They dont

want to be intimidated, so they hire someone who is the same age and knows about the same

stuff. You hire people who are familiar to you because you trust them. This sounds good, but at

the same time, youre missing out on all kinds of expertise because youre worried about being

outgunned or sidelined.

If you want to be the smartest person in the room, you're

going to build a crummy team.Do you really want a VP of sales who knows less about sales than you? Do you want a

CFO who knows less about accounting? No of course not,she says. You have to take

risks to find the right people and then trust in those relationships. Your job becomes to empower

those people and make sure they get along. My goal is always to be the dumbest person in the

room because I want to be surrounded by really bright, really amazing people. Thats when

exciting, world-changing things get done.

5. The art of negotiation is finding the optimal intersection of mutualneed.

In another one of Roizens business school classes, the students were paired off into buyers

and sellers and told to negotiate the purchase of a car. Everyone had the same data, yet the

difference between the highest sale price and the lowest at the end of class was drastic. She

was shocked, and it shaped her perception of how negotiations work. As she puts it, when you


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first learn about transactions, you see them as a zero-sum game. You either want to make the

most money you can, or pay the least. You dont care who is on the other side of the deal. You

want to win at their expense.

I dont believe anything in life is a transaction like this anymore, Roizen says. I believe

everything is about relationships. If you have a transactional view of life, you think, Im not going

to worry about the future. Im going to worry about getting as much as I can right now. The

relationship-based view is very different.

Nothing in life is a zero-sum game.If I can walk into a transaction with you, and my goal is not to just make myself better off but to

make you better off as well, were going to end up with a much better outcome. Youll want to do

business with me again and thats really, really important.

Roizen has spent nearly her entire life in Silicon Valley, and has run into the same people again

and again. This familiarity has only been compounded by Facebook profiles and Etsy ratings,and all kinds of other permanent metrics.You are now the sum total of your transactions

because they are relationships, she says.Every time you meet someone, think about the

relationship instead of the transaction. If you know more about them and they know more about

you, you will be able to collaboratively help each other.

6. Life is actually really, really random.

Bad things will happen to you. You will fail. Things outside of your control will happen. You

need to lean into this fact. In this environment, how can you survive, much less strive for

success? Roizen has one piece of advice:Expect things to be messy.

The key to happiness is to lower your expectations.This doesn't mean you shouldn't go after your goals. It means you should prepare for an

imperfect path on the way.For example, when Roizen travels internationally, she assumes

her checked baggage will be lost, that her flight will be late, that the rental car won't be there

waiting. I assume everything that can go wrong will go wrong so when it actually happens, Im

not stressed, she says. I have a change of clothes in my carry-on; I schedule no meetings

within two hours of landing; I expect the mess, and if it doesnt happen, Im pleasantly

surprised. 95% of stress is self-inflicted.

Roizen remembers one entrepreneur she knew in particular who would always make meticulous

plans everything would have to fall perfectly into place for things to work out, and of course

they never did. If you assume everything is going to go perfectly, bad things will happen to you.

You will run out of money before you reach the next milestone. Accept that life will get messy,

and when it does, pick yourself up again.


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If you fall down and refuse to get up, you will be down therest of your life.Remember, the other side of the randomness coin is that some really great things can and do

happen. When they do, dont balk at the opportunity. Theres no knowing what could happen. Ifyou get three truly excellent job offers, dont drive yourself nuts over picking the right one, for

example. The fact is if you pick one thats bad and it goes out of business and you get fired, it

may still be the greatest thing that ever happens to you. You might learn something amazing

that you may not have learned sitting at that other safer job.

A while ago, Roizen came across a book that said when people were asked about the best and

worst things that happened to them in the last five years, most people said the same thing

even things like getting divorced, getting cancer, losing a job. Its shocking when you ask real

people what has moved their life in the most positive directions, it is often those types of

things.Sometimes bad things can be good when you allow randomness in your life.

7. Get good at using your time.

The most important thing you have is time because youcan't make more of it.You can do things to leverage your time with money and help, but at the end of the day, youre

going to run out of it, so you have to be really sensitive about how you spend it, Roizen says.

A lot of people are really bad at understanding how much time things take. They have 1,000

unanswered emails and they say, I have no idea how to handle this. Well, the solution is to not

schedule more than five hours of things in a day to leave three hours to answer email and calls

and read, and stay informed. When people say they dont have time to do that, I say, Of course

you do. You just have to do them instead of other things.

Her advice:Think about every use of your time and give it all equal weight to

start. Recognize that grunt work takes time. Reading takes time. Figure out

what you like doing, what extends your capabilities the most, and organize

your time to strike the right balance. Ideally, this leaves some space for

reflection and sleep, but Roizen knows this isnt always realistic.I was once an entrepreneur, and I did not live a balanced life, she says. I think we live our

lives in a serial fashion there are periods where you wont have time to do everything you

want. If youre really excited about something, you can run on that for a while. That's okay, as

long as you're aware of the tradeoffs, she says. More time spent working means less time with

family and friends. Theres this fantasy that important things like relationships and


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communication dont take any time to maintain, but they do. You may not be perfectly

balanced, but the key is to keep trying.

If you don't give yourself space, there won't be any room for

good, random things to happen to you.8. The 20-40-60 Rule.Espoused by actress Shirley MacLaine, the rule goes something like this: At 20, you are

constantly worrying about what other people think of you. At 40 you wake up and say,

'Im not going to give a damn what other people think anymore.' And at 60 you realize no

one is thinking about you at all. The most important piece of information there, Roizen

says: Nobody is thinking about you from the very beginning.

Of course, this is good news and bad news. The bad news is that no one is constantly

wondering if you're okay, how much money youre making, whether youre fulfilled in your job or

your relationships.

You need to be your own advocate, Roizen says. If youre in a job you dont like, you need to

be the one to change it. You cant sit in your office and wait for someone to bring you the

answer.

Your boss is not thinking about you. Your peers are notthinking about you. You need to think about you.Harsh. But theres a flipside. People waste hours and hours torturing themselves over what

other people think about them and they do it needlessly. Even Roizen used to fret about

showing up to meetings after long flights with the wrong shoes, or a wrinkled suit. I would be so

worried about what people were going to think if I couldnt pull myself together. But then it

occurred to me, I have never once been in a meeting where halfway through I thought, Even

though this person is smart, they have a wrinkle in their jacket, so they must not be very good.

No one ever thinks that way.

People have enormous capacity to beat themselves up over the smallest foibles saying the

wrong thing in a meeting, introducing someone using the wrong name. Weeks can be lost,

important relationships avoided, productivity wasted, all because were afraid others are judging

us. If you find this happening toyou, remember, no one is thinking about you as hard asyou are thinking about yourself.So dont let it all worry you so much.


15/53

October 10, 2014

Oil Gauge

Equity Research

Physical markets keep weakening; 2015 capex budgets at risk

More weak demand and strong supply put pressure on oil markets

On September 12 we highlighted a weakening of the physical oil market

Oil Gauge: More supply growth, more demand weakness; focus on Brazil.

Since then all the datapoints that we collect from the regulators of the key

oil consuming and producing countries point to a further deterioration.

Datapoints on demand show deterioration in Europe, record decline in

Japan and only a moderate recovery in China. Non-OPEC production keeps

accelerating, led by North America and Brazil, while Russia recovers and

the mature offshore basins show slower declining trends. This accelerates

the deflationary pressure that we highlighted in Looking beyond Iraq: The

triple deflationary impact of shales, July 9, 2014, and poses downside risk

to our US$100/bl assumption for 2015.

OPEC production keeps recovering, adding to market concerns

The September OPEC survey shows a major pick-up in OPEC supply

recovering from recent disruptions back to 30.5 mbpd, led by strong Libya

and Iraq production. This puts further pressure on the physical market and

raises questions about OPECs willingness to balance the market. Our

analysis of the oil price required by the OPEC countries to balance their

budget, shows that OPEC has become increasingly reliant on oil prices

(Brent) above US$90/bl, with Saudi Arabia at c.US$85/bl, suggesting that

OPEC starts feeling under pressure at the current level of oil prices.

2015 capex budgets are at risk; cautious on European oil services

We update our analysis of the oil price required by the global oils in 2015

to balance their budget, which is US$113/bl, with the European integrated

oils requiring US$122/bl and TOTAL, BP, Repsol and Statoil all above

US$120/bl. As these companies are formulating their 2015 budgets, we

believe that they are all likely to implement further capital efficiency

measures. We reiterate our Cautious stance on European oil services,

which we believe will be the main losers from these cuts. We remain most

negative on the more capital intensive offshore segments, and reiterate our

Sell ratings on Seadrill, Odfjell Drilling, Technip and TGS Nopec (CL-Sell).

Our top picks from among the winners

Our global preferences are: BG, ENI, EOG, Range Resources, Santos, Afren,

Africa Oil, Gazprom-Neft, Halliburton, Patterson-UTI Energy.

DEMAND AND SUPPLY GROWTH L3M

Source: IEA, Goldman Sachs Global Investment Research.

RELATED RESEARCH

Energy & Utilities Investment Strategy: Valuation or g lobal

oil saturation? CL bias remains pipeline/MLP weighted,

October 9, 2014

Oil Gauge: More supply growth, more demand weakness;

Focus on Brazil, September 12, 2014

Oil Gauge Monthly: Looking beyond Iraq: The triple

deflationary impact of shales, July 9, 2014

Top 400 projects From revolution to dominance: Shale

drives deflation, M&A, capital efficiency, May 16, 2014

Oil Gauge Monthly: Non-OPEC supply recovery is broad, not

just from US shales, May 12, 2014

Oil Gauge Monthly: More divergence: DM vs. EM demand

and non-OPEC vs. OPEC, December 12, 2013

Oil Gauge Monthly: Non-OPEC supply acceleration, EM

vulnerability raise some risks, November21, 2013

Oil Gauge Monthly: Record North America oil growth

driving differentials wider, October 2, 2013

Oil Gauge Monthly: Time spreads well supported as

demand steps up/OPEC disappoints, August 19, 2013

Oil Gauge Monthly: Sharp demand recovery needed to

balance the oil market, July 5, 2013

Oil Gauge Monthly: Oil market remains balanced as US

demand recovers, May 8, 2013

Michele della Vigna, CFA+44(20)7552-9383 [email protected] Goldman Sachs International

Goldman Sachs does and seeks to do business withcompanies covered in its research reports. As a result,investors should be aware that the firm may have a conflict ofinterest that could affect the objectivity of this report. Investorsshould consider this report as only a single factor in makingtheir investment decision. For Reg AC certification and otherimportant disclosures, see the Disclosure Appendix, or go towww.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analystswith FINRA in the U.S.

Henry Tarr+44(20)7552-5981 [email protected] Goldman Sachs InternationalTheodora Lee Joseph+44(20)7051-8362 [email protected] Goldman Sachs International

Brian Singer, CFA(212) 902-8259 [email protected] Goldman, Sachs & Co.

The Goldman Sachs Group, Inc. Global Investment Research

-100

400

900

1,400

1,900

Demand growth-3m

IEA demandgrowth -3m

Supply growth -3m

IEA supplygrowth -3m

yoygrowth(kbpd)


16/53

October 10, 2014 Oil Gauge

Goldman Sachs Global Investment Research 2

Recent datapoints: Weak demand growth (Europe, Japan) andstrong non-OPEC supply growth (North America, Brazil)

The latest global demand datahas been soft since the start of the year and has been

unable to keep pace with the solid growth of non-OPEC supply. The latest July/August

datapoints have been the weakest year to date with Europe and Japan continuing to

disappoint, showing an accelerating demand decline, while China remains volatile.

Only demand from the US, Brazil and India shows consistent signs of growth.

Exhibit 1:Demand growth has been poor across the board in the last three monthsIncremental oil demand growth yoy (kbpd) from the major consuming nations

Source: DOE, METI, Chinese Bureau of Statistics, ANP, Pemex, Petronas, PPAC.

North America continues to dominate supply growth, with both the US and Canada

delivering consistent strong growth. However, the biggest surprise in recent months has

been the rest of non-OPEC, with very strong performance from the mature offshore basins.

Brazil in particular shows strong signs of growth after a couple of weak years and we

expect this new trend to continue, as positive momentum on pre-salt production continues.

The worlds major mature offshore basins delivered a very weak performance in 2012 and1H13, owing to declining reliability and utilization of infrastructure. We are now seeing

early signs of the high maintenance spend in 2012-13 paying off, with North Sea, GoM and

Brazil production all showing signs of stabilization and growth (Brazil). This will be, in our

view, a key driver of improved non-OPEC production in 2014-15. The region with a

deteriorating trend is Russia, although the September datapoint is back on a 1% growth

track.

Exhibit 2:Non-OPEC supply growth has kept up a strong pace especially in NA and BrazilIncremental supply growth yoy (kbpd) from the major non-OPEC producers (Aug/Sept data forUS implied)

Source: DOE, Chinese Bureau of Statistics, ANP, Pemex, Russian Energy Ministry, Ecopetrol, NPD, IEA.

kbpd May-14 %yoy Jun-14 %yoy Jul-14 %yoy Aug-14 %yoy

L3M

yoy

growth

3m yoy

%

growth

IEA 3m

growth

US -35 -0.2% 109 0.6% 118 0.6% 64 0.3% 94

Japan -138 -4.7% -134 -4.6% -377 -11.7% -334 -10.3% -282 -8.9% -273

China -92 -1.0% 258 2.6% -209 -2.1% 324 3.4% 124 1.3% 282

Brazil 105 5.1% 38 1.8% 100 4.8% 93 4.3% 77 3.6% 82

Mexico -79 -4.4% -147 -8.1% -26 -1.5% -186 -10.0% -120 -6.5% -80

Korea 54 2.5% -64 -2.8% -29 -1.3% 30 1.3% -21 -0.9% 33

India 101 3.0% 226 7.0% 84 2.7% 28 0.9% 113 3.5% 98France -22 -2.5% 36 4.2% -28 -2.9% -34 -4.0% -4 -0.4% -9

Italy -42 -3.5% -48 -4.0% -65 -4.9% -78 -6.6% -52 -4.1% -69

UK 44 3.6% 14 1.1% -54 -4.2% 2 0.1% -14

Global yoy gr -104 286 -486 -157 -100 144

kbpd May-14 % yoy Jun-14 %yoy Jul-14 %yoy Aug-14 %yoy Sep-14 %yoy

3m yoy

growth

3m yoy

%growth

IEA 3m

growth

US 1,075 15% 1,305 18% 1,075 14% 1 ,1 52 1 5. 7% 1,132

China 7 0% 14 0% 41 1% 44 1% 33 0.8% 75

Russia 68 1% 57 1% -25 0% -8 0% 72 1% 13 0.1% 1

Norway -204 -11% 99 6% -40 -2% 23 1% 27 -2.4% -34

UK 7 1% -37 -4% -58 -7% -29 -3.4% -30

Canada 240 10% 255 11% 154 7% 216 9.3% 216

Brazil 203 10% 150 7% 303 15% 326 16% 260 12.5% 228

Mexico 4 0% -83 -3% -106 -4% -106 -4% -98 -3.4% -92

Global yoy g 1,400 1,760 1,344 279 72 1,573 1,495


17/53



OPEC production: Supply rises led by Libya and Iraq recovering

OPEC production has been under pressure since 2Q13 owing to disruptions in Libya, Iraq

and Nigeria, but has recovered strongly over the past few months. This is a result of a

partial recovery in production in those countries, while Saudi Arabia has only marginally

cut back production. Production from Saudi Arabia picked up in response to the disruptions,

reaching a peak of 10.2 mbpd in August 2013. Since then, Saudi has only slightly scaled

back production, to 9.6 mbpd in September. The latest OPEC survey indicates that Saudicrude production slightly declined by 50 kbpd in September from August despite the

continued easing of Libyan production disruptions.

Exhibit 3:We expect OPEC effective spare capacity toincrease, even without Iraq growth or a Libyan recovery

Exhibit 4:Saudi still producing close to historical highs,while the rest of OPEC is recoveringSaudi Arabia and OPEC ex. Saudi crude oil production (kbpd)

Source: IEA, Goldman Sachs Global Investment Research. Source: IEA, OPEC Monthly Oil Market Report.

While we believe OPEC supply will likely remain volatile in the wake of recent geopolitical

events, we see signs of recovery in Libya, Nigeria and Iraq. The latest survey run by OPECindicates that output from OPEC surged by 402 kbpd in September, led by higher supply

from Libya and Iraq while Saudi and other Gulf producers have kept output steady to

higher. We include the survey datapoints for September but note that these are preliminary.

Exhibit 5:OPEC production has been improving since thestart of the yearOPEC crude production (kbpd)

Exhibit 6:and Saudi production shows no signs of apullbackSaudi crude production (kbpd)

Source: IEA. Source: IEA.

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

kbpd

OPEC spare capacity

Iraq growth

Libya and Iran shut-in production

19500

20000

20500

21000

21500

22000

22500

23000

23500

7000

7500

8000

8500

9000

9500

10000

10500

11000

Jan-07

Apr-07

Jul-07

Oct-07

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Apr-11

Jul-11

Oct-11

Jan-12

Apr-12

Jul-12

Oct-12

Jan-13

Apr-13

Jul-13

Oct-13

Jan-14

Apr-14

Jul-14

kbpd

kbpd

Saudi Arabia OPEC ex. Saudi (RHS)

28000

28500

29000

29500

30000

30500

31000

31500

32000

32500

33000

kbpd

7000

7500

8000

8500

9000

9500

10000

10500

11000

Oct-10

Nov-10

Dec-10

Jan-11

Feb-11

Mar-11

Apr-11

May-11

Jun-11

Jul-11

Aug-11

Sep-11

Oct-11

Nov-11

Dec-11

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

kbpd


18/53



In Libya, although the agreement to reopen some of the ports in the Eastern part of the

country has been effected, the outcome remains unpredictable and its production in the

Western desert remains unreliable. However, we are seeing early signs of production

recovery and according to the spokesman for the state-run National Oil Corp (NOC), the

countrys production reached c.900 kbpd in early October.

Exhibit 7:Iraq production has not suffered from recentinstability

Iraq crude production (kbpd)

Exhibit 8:Libyas recovery could be swift as evident inthe past (3Q11-1Q12)

Libya crude production (kbpd)


Saudis announcement in early October that it would cut official selling prices for Asian

customers in November came as a surprise to the market as the oil price continued its

strong decline. Saudi is a key swing producer, but cannot be the only one. In Exhibit 9 we

look at the hypothetical scenario under which Saudi was the only swing producer, all other

OPEC countries did not act, and there was no impact on non-OPEC supply from lower oil

prices.

We examine three scenarios and their implications for Saudis future production. The firstscenario assumes Libya continues to produce at its all-time low of 200 kbpd while Iraq does

not achieve any production growth at all; the second assumes a mild Libyan production

recovery to 600 kbpd while Iraq achieves only 50% of our assumed growth from its new

projects; and the third assumes recovery of Libyan supply to 1 mn bl/d while Iraq continues

its normal growth trajectory despite geopolitical events.

The analysis shows that even under a very bearish picture of continued Libyan supply

disruptions and no supply growth from Iraq, Saudi would be required to cut production to

below 8 mn bl/d to balance the market by 2018. This indicates that more adjustments in the

system are likely to be required, involving other OPEC countries and a slowdown of non-

OPEC growth.

2000

2200

2400

2600

2800

3000

3200

3400

3600

3800

Jan-0

9

Mar-09

May-0

9

Jul-09

Sep-0

9

Nov-0

9

Jan-1

0

Mar-10

May-1

0

Jul-10

Sep-1

0

Nov-1

0

Jan-1

1

Mar-11

May-1

1

Jul-11

Sep-1

1

Nov-1

1

Jan-1

2

Mar-12

May-1

2

Jul-12

Sep-1

2

Nov-1

2

Jan-1

3

Mar-13

May-1

3

Jul-13

Sep-1

3

Nov-1

3

Jan-1

4

Mar-14

May-1

4

Jul-14

Sep-1

4

kbpd

0

200

400

600

800

1000

1200

1400

1600

1800

2000

Oct-10

Nov-10

Dec-10

Jan-11

Feb-11

Mar-11

Apr-11

May-11

Jun-11

Jul-11

Aug-11

Sep-11

Oct-11

Nov-11

Dec-11

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

kbpd


19/53



Exhibit 9:Saudi is unlikely to rebalance the market by itself if Libya comes back and Iraqkeeps growingSaudi production required to balance the market in different scenarios

Source: IEA, Goldman Sachs Global Investment Research.

-

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

2015E 2016E 2017E 2018E

Saudicrudeproductiontobalancethemark

et(mbpd)

Implied Saudi (Libya @ 200kbpd, Iraq no growth) Implied Saudi (Libya @ 600kbpd, Iraq 50% growth)

Implied Saudi (Libya @ 1 mmbpd , Iraq normal growth)


20/53



Demand growth remains poor; no clear signs of significant pick-up

Exhibit 10 shows that the gulf between gasoline and diesel demand growth in China has

widened since the start of the year. Diesel demand growth in China has averaged 1% since

2012 compared with 10.8% gasoline demand growth, reinforcing the view that

consumption growth in China remains strong, while industrial production lags. We expect

this trend to continue over the coming 6-12 months, although recently even gasoline has

shown some signs of weakening. Recent US oil demand datapoints suggest that theexceptional growth in 4Q13 was led by weather, while the underlying growth is likely to be

0-500 kbpd yoy.

Exhibit 10:Chinas gasoline continues its divergencefrom diesel demandChina yoy diesel and gasoline demand growth

Exhibit 11:US oil demand is stabilizing on a positive noteUS oil demand growth (actual data is solid line, impliedweekly data is dotted line)

Source: CEIC. Source: EIA.

OECD crude inventories have been building but product inventories are low

OECD crude inventories saw large seasonal draws in the last quarter of 2013 which has leftthem lower than average. However, since then, inventories have gradually built up, largely

driven by an increase in US crude inventories. Total product inventories, on the other hand,

are at historical lows since the last quarter of 2013.

Exhibit 12:Current OECD crude inventory levels havebuilt up from the seasonal lows in JanuaryOECD crude inventories (mn bl)

Exhibit 13:although product inventories are lowOECD total products inventories (mn bl)


-20%

-10%

0%

10%

20%

30%

China yo y d iese l demand growth China yoy gaso line demand growth

-1500

-1000

-500

0

500

1000

1500

kbpd

870

890

910

930

950

970

990

1010

1030

1050

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

mnbls

2007 2008 2009 2010 2011 2012 2013 2014

870

970

1070

1170

1270

1370

1470

1570

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

mnbls

2007 2008 2009 2010 2011 2012 2013 2014


21/53



Exhibit 14 shows that the time spreads have overshot the level currently implied by

inventories and reflect a market expectation of further inventory builds, consistent with a

surplus market.

Exhibit 14:Historically, building levels of inventoriessupport looser time spreadsBrent 2-year time spreads (US$/bl) against the inverse ofOECD inventories vs. their 5-yr avg (i.e. above zero implies

tighter inventories than the historical average)

Exhibit 15:Recent mom changes in OECD inventories (ex.US NGLs) do not show a clear pictureChange in OECD industry inventories ex. US NGLs (mom,mnbls)

Source: IEA, Bloomberg. Source: IEA.

Saudi Arabia requires US$80-90/bl to balance its budget, on our analysis

Our analysis of the oil price required by the OPEC countries to balance their budgets

estimates an average OPEC breakeven price of US$95/bl, going to US$105 by 2015. The

Saudi Arabia breakeven price is currently US$85/bl on our estimates.

Exhibit 16:OPEC oil price required is currently US$95/bl,on our estimates...Oil price required by OPEC countries in aggregate to balance

their fiscal budgets (excluding Venezuela)

Exhibit 17:...with Saudi requiring US$85/blOil price required by OPEC countries (and Russia) to balancetheir fiscal budgets (excluding Venezuela)

Source: IMF, Goldman Sachs Global Investment Research. Source: IMF, Goldman Sachs Global Investment Research.

The global oil industry requires US$110/bl or more to balance the budgets

Exhibit 18 shows our estimate of the oil price required for the listed oil companies to be

free cash flow neutral after capex and dividends. It is a very steep curve, with significant

differentiation between companies and regions. In 2015, we estimate the vast majority of

the industry will need over US$100/bbl to balance the budget and the fourth quartile of this

graph needs US$130/bbl or more. The bottom quarter of the breakeven curve is dominated

by some of the better placed EM companies (Lukoil, PetroChina) and by some of the more

-170

-120

-70

-20

30

80

130

-15

-10

-5

0

5

10

15

20

25

30

35

Brent24monthtimespread

Brent 24mth timespread

Inventories vs. 10yr trailing average(inverted)

-50.0

-40.0

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

mnbls

10yr average 2013 2014

0

20

40

60

80

100

120

2 00 0 2 00 1 2 00 2 2 00 3 2 00 4 2 00 5 2 00 6 2 00 7 2 00 8 2 00 9 2 01 0 2 01 1 2 01 2 2 01 3 2 01 4 2 01 5 2 01 6 2 01 7

US$/bl

Brentoilprice(US$/bl)requiredtobalanceOPECfiscalbudgets includingQatarfrom2001andIraqfrom2004

AlgeriaAngola

IranIraq

Kuwait

Nigeria

Qatar

Saudi Arabia

UAE

Russia

20

40

60

80

100

120

140

20 40 60 80 100 120 140

Oilpricerequired(US$/bl)tobalancebudget2014E

Oil price required (US$/bl) to balance bu dget 2009


22/53

India Economics

Analysing the Implications of Lower Commodity Prices

October 13, 2014

For important disc losures , refer to the Disclos ures Section, located at the end of this repor t.

93

94

95

96

97

98

99

100

101

Oct-02

Oct-03

Oct-04

Oct-05

Oct-06

Oct-07

Oct-08

Oct-09

Oct-10

Oct-11

Oct-12

Oct-13

Oct-14

Commodity Terms of Trade excluding gold & silver 3MMA

ce: IMF, Bloomberg, Haver, Morgan Stanley Research

M O R G A N S T A N L E Y R E S E A R CAsia/Pac if ic

India Econo m ics Te am

Morgan St anley Asia Limited

Chetan [email protected]+852 2239 7812

Morgan Stanley I ndia Company Private Limite

Upasana ChachraUpasana.Chachra@morgansta nley.com+91 22 6118 2246


23/53

M O R G A N S T A N L E Y R E S E A

India Econo

October 13

Commodity Imports Account for 52% of Indias Total Imports but only 9% of Expor ts

ource: CEIC, Ministry of Fertilizer, GoI, BP Stats 2014, Morgan Stanley Research

Key Commodit ies Production Consumpt ion ImportsNet Exports as %of Demand

CoalMt oilequivalent 593 753 -160 -21

Oil Mn tonnes 42 175 -133 -76%

Steel Mn tonnes 75 74 1 1%

Edible Oil Mn tonnes 8 19 -12 -61%

Fertilizer Mn tonnes 16 24 -8 -33%

As commodity prices are weakening after a long super-cycle, India is beginning to benefit from improvingterms of trade. Indias net commodity imports had risen steadily from 1.9% of GDP in F2002 to a peak of7.4% of GDP in 2008, and remained elevated at 7% of GDP until 2012. India is relatively self-sufficient foriron (and steel), bauxite (and aluminum) and has a relatively large opportunity in thermal coal mining

(though regulatory, logistics and other constraints have meant that India is dependent on imports too).Indias key commodity imports are crude oil, coal (thermal and coking), edible oil, fertilizers andminerals/ores (such as copper and lead).


24/53


India Econo

October 13

Commodity Imports Account for 52% of Indias Total Imports but only 9% of Expor ts

Oil imports constitute thelargest share in commodiimports. Net oil accounts f91% of the net comm odityimports

ource: CEIC, Morgan Stanley Research

As % of GDP Exports ImportsNet

Exports

F2014 F2014 F2014

Commodity 6.4% 12.3% -5.9%Food 1.5% 0.7% 0.9%

Oil 3.3% 8.8% -5.5%

Mica, Coal & Other Ores, Minerals 0.2% 1.6% -1.4%

Fertilizers - 0.3% -0.3%Iron, Steel, ferrous and non ferrous

metals 1.3% 0.9% 0.4%

Non Commodity 10.2% 11.5% -1.3%

Engineering Goods 2.0% 3.0% -1.0%

Gems & Jewellery 2.2% 3.0% -0.8%Textiles, including readymade garments 1.3% 0.2% 1.0%

Drugs & Pharmaceuticals 0.8% 0.2% 0.6%

Organic & Inorganic Chemicals 0.3% 1.1% -0.7%

Electronic goods 0.4% 1.6% -1.2%

Others 3.2% 2.4% 0.8%

Total (Commodity + Non Commodity) 16.7% 23.9% -7.2%

cludes gold imports


25/53


India Econo

October 13

Prices of Indias Commodity Import Basket Has Risen 112% In last 12 years in Real Te

e: Bloomberg, Morgan Stanley Research

Trend in Commodity Prices in US$ and INR terms

275

438

212

85

185

285

385

485

585

Jan-02

Jun-02

Nov-02

Apr-03

Sep-03

Feb-04

Jul-04

Dec-04

May-05

Oct-05

Mar-06

Aug-06

Jan-07

Jun-07

Nov-07

Apr-08

Sep-08

Feb-09

Jul-09

Dec-09

May-10

Oct-10

Mar-11

Aug-11

Jan-12

Jun-12

Nov-12

Apr-13

Sep-13

Feb-14

Jul-14

in US$ terms

in INR terms

In INR, Deflated by GDP Deflator

India's Imported Commod ity Price Trend* (Jan 2002 = 100)

Pre Crisis -

Period of sready rise in commodity prices

Immediatelypost crisis -correction incommodityprices

Post Crisis -rising

commodity prices

Since Apr-14commodityprices movinglower

10Yr CAGR:13.2%

10Yr CAGR:5.1%

10Yr CAGR:

6.0%100

2004-2008: A systemic rise in commodity pricesparticularly in oil prices since 2002 has m eant steadydeterioration in terms of trade. However, with s trongproductivity growth with s teady rise in investment to GDPand savings to GDP, India could absorb this rise incomm odity prices.

2008-2010:As com modityprices collaps ed, commoditiestrade deficit fell sharply andremained within manageablelimits.

2011-2013: Rise in oil pricesabove US$100/bbl and asim ultaneous deterioration inproductivity dynamic reflectedin qu ick deterioration in macrostability indicators beyondRBIs comfort zone. Weakercurrency caused furtherpress ure on deficit

Apr-2014 onw ards : Improvememacro s tability and s tabilization ocurrency trend began to translatimprovement in terms o f trade s i2014

ommodity pr iceex is constructedsed on prices of

ent oil, crudem oil, fertilizerd coal priceshich constituteias top

mmodity importscluding gold)


26/53


India Econo

October 13

Prices of Indias Commodity Import Basket Have Recently Declined in INR Terms


Trend in Commodity Prices YoY%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

Oct-03

Feb-04

Jun-04

Oct-04

Feb-05

Jun-05

Oct-05

Feb-06

Jun-06

Oct-06

Feb-07

Jun-07

Oct-07

Feb-08

Jun-08

Oct-08

Feb-09

Jun-09

Oct-09

Feb-10

Jun-10

Oct-10

Feb-11

Jun-11

Oct-11

Feb-12

Jun-12

Oct-12

Feb-13

Jun-13

Oct-13

Feb-14

Jun-14

Oct-14

In Rupee Terms, YoY%

In Dollar Terms, YoY%

India's Imported Commodity Price Trend

Since Apr-14 comm odity prices fkey im ports have started todecelerate in INR terms

ommodity pr iceex is constructedsed on prices ofent oil, crudem oil, fertilizerd coal priceshich constituteias top

mmodity importscluding gold)


27/53


India Econo

October 13

Commodity Trade Balance To Narrow As Commodity Terms of Trade Improves

Evolution of Commodity Trade Balance

e: CEIC, Ministry of Commerce, Morgan Stanley Research

0.4%0.8%

-3.1%

-5.1%

-0.3%

-0.3%

-1.2%

0.6%0.2%

-2.5%

-0.1%

-5.5%

-9%

-7%

-5%

-3%

-1%

1%

Aug-04

Feb-05

Aug-05

Feb-06

Aug-06

Feb-07

Aug-07

Feb-08

Aug-08

Feb-09

Aug-09

Feb-10

Aug-10

Feb-11

Aug-11

Feb-12

Aug-12

Feb-13

Aug-13

Feb-14

Aug-14

Food Products (incld edible oil) OilFertilizer Coal, other ores and mineralsIron, Steel, ferrous and non ferrous metals Total

12M trailing sum as % of GDP

Peak comm odity trade deficit of7.4% of GDP in CY 2008

Immediately pos t credit crisiscomm odity trade deficit declinedto 4.7% of GDP in CY 2009

Combination ofdeteriorating domesticmacro s tability and rise i nglobal crude oil prices ledto widening of comm oditytrade deficit to 7% of GDPin CY 2012

Comm odity tdeficit hasnarrowed to of GDP for12months en

Aug-14


28/53


India Econo

October 13

Evolution of Indias Terms of Trade Since 2002 When Commodity Super CycleBegan

Four Phases of Terms of Trade Evolution

1) 2002-2008 (Pre-credit crisis):A systemic rise in commodity prices particularly in oil prices since 2002 had meantsteady deterioration in terms of trade. Commodities trade deficit also widened sharply from 1.9% of GDP in F2002 to

4.2% in 2007. However, with strong productivity growth with steady rise in investment to GDP and savings to GDP, Indiacould absorb this rise in commodity prices. Indeed up to 2007, while oil prices had already risen to US$100/bbl Indiasinflation and current account deficit were well within RBIs comfort zone. However, oil prices spiked sharply in short spanto US$145/bbl in July 2008, Indias commodities trade deficit shot sharply to 7.4% of GDP in 2008 pushing the currentaccount deficit to 2.4% of GDP and inflation also pushed higher than RBIs comfort zone.

2) 2H2008:2010 (Immediately post c redit crisis ): Immediately post crisis commodity prices collapsed and that led to afall in the commodities trade deficit which remained within manageable limits.

3) 2011 to 2013 (Period o f rise in commod ity p rices and increasing domestic macro stability): Rise in oil pricesabove US$100/bbl and a simultaneous deterioration in productivity dynamic reflected in quick deterioration in macrostability indicators beyond RBIs comfort zone. Productivity growth suffered post credit crisis macro policies of pushinggrowth with the support of high fiscal deficit, labour market policy encouraging strong growth and corruption scandals

related investigation slowing down administrative machinery. Moreover, RBIs decision to pursue with negative real ratesincreased the macro stability risks with higher gold imports and wider current account deficit. This in turn reflected inweaker currency causing further widening in commodities trade deficit. Weaker domestic coal and iron ore productiononly added to the deterioration in commodities trade deficit. Rise in coal imports and decline in iron ore exports pushedthe trade deficit higher by approx 0.8% of GDP. Weaker productivity dynamic also reflected in decline in Indias marketshare in global goods exports and a higher current account deficit.

4) 2Q2014 onwards (gradual improvement in terms of trade): While commodity price rise has softened since 2012,Indias poor macro stability and weaker currency have delayed the benefits of this development. For instance, crude oilprices were flat between 2012 and 2013 in USD terms but in INR terms, oi l prices moved higher by 11.5%. However,improvement in macro stability and stabilization of currency trend began to translate in slow improvement in terms oftrade since 2Q2014. Over the last two months with oil prices declining by 16%, Indias terms of trade are beginning tosee a big improvement.


29/53


India Econo

October 13

Commodity Terms of Trade Have Started to Improv e Since July 2014

e: IMF, Bloomberg, CEIC, Haver, IMF Morgan Stanley Research E-Morgan Stanley Research Estimate

Trend in Total Factor Productivity Growth %, YoYTrend in Commodity Terms of Trade vs. Commodity

Trade Balance

-1

0

1

2

3

4

5

6

F1997

F1999

F2001

F2003

F2005

F2007

F2009

F2011

F2013

Total Factor Productivity

High TFP shows improving

productivity trend

Steady improvement in TFPbetween 2004-2007 helped tobetter manage the rise incommodity prices

-7.3%

-5.5%

-10%

-9%

-8%

-7%

-6%

-5%

-4%

-3%

-2%

-1%

93

94

95

96

97

98

99

100

101

Oct-02

Oct-03

Oct-04

Oct-05

Oct-06

Oct-07

Oct-08

Oct-09

Oct-10

Oct-11

Oct-12

Oct-13

Oct-14

Commodity Terms of Trade excluding gold & silver

Commodity Trade Balance (3M Trailing Sum, Annualised), RS

Slowing productivity growthmeant weaker capacity toabsorb higher commodityprices


30/53


India Econo

October 13

Impact of Terms of Trade On Evolution of Current Account Deficit

ource: CEIC, Morgan Stanley Research

Current Account Deficit Has Narrowed in Last 12 Months

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

-100

-80

-60

-40

-20

0

20

40

Jun-96

Jun-97

Jun-98

Jun-99

Jun-00

Jun-01

Jun-02

Jun-03

Jun-04

Jun-05

Jun-06

Jun-07

Jun-08

Jun-09

Jun-10

Jun-11

Jun-12

Jun-13

Jun-14

% of GDP, RS

US$ bn, LS

Current Account Deficit,

Trailing 4-quarter sum

Pre Credit Crisis

Immediatelypost crisis

Widening CADbetween 2011-2013

2002-2008: Current account deficit remained in amanageable range as strong productivity growthwith steady rise in savings and investment to GDPmeant CAD did not widen beyond 2.5% of GDP

2008-2010: Fall incommodity prices led tonarrowing commodity tradebalance and CAD remainedin check

2011-2013: Widening CADdue to deterioration inproductivity, rising commodityprices, persistent negativereal rates and overvaluedexchange rate

3Q2013 onwards: Trend CAD improved with help orestrictions on gold importcompression of non oil noimports and better exportgrowth. However full benelower commodity prices wdelayed due to weaker cu


31/53


India Econo

October 13

ottom-line: If Commodity Prices Stay Flat for the Next 12 Months, What Would it Meanndias Terms of Trade and Macro Stability Indicators?

Impact CPI WPI

CAD as % of

GDP

Oil* -0.3% -0.8% to -1% -0.6%

Coal# -0.2% -0.2% -0.1%

Fertilizer NA -0.3% -0.03%

Iron & Steel NA -0.9% 0.01%

Impact of a 10% Decl ine in Prices (Direct Impact)

ce: CEIC, CSO, Morgan Stanley Research

*indirect impact could be of a similar magnitude for both CPI and WPI

# indirect impact w ill also be through pass through in electric ity prices

We have used weights from consumer expenditure survey to analsye the impact on CPI

Bottom-line: Decline in commodity prices is resulting in significant improvement in Indias terms oftrade. If current levels of commodity prices are maintained for the next 12 months, we estimatethat Indias net commodities trade deficit could decline by approximately 1% pt to 4.5% of GDPfrom 5.5% of GDP as of 12 months ended August 2014 and the recent peak 7% of GDP in 2012.Correspondingly, this will mean Indias current account deficit, subsidy burden (fiscal deficit) andinflation will be lower.


32/53


India Econo

October 13

Appendix Oil Subsidy Details

Source: Morgan Stanley India Oil & Gas Research Team, - V inay Jaising

F2013 F2014 F2015E F2016E F2017E F2018E

Diesel, INR bn 921 628 117 - - -

LPG (cooking gas), INR bn 396 465 428 378 347 343

Kerosene, INR bn 294 306 272 232 176 132

Total - Rs bn 1610 1,399 817 610 523 475

Total - US$ bn 29.6 22.6 13.6 10.2 8.7 7.9

As % of GDP 1.6% 1.2% 0.6% 0.4% 0.3% 0.3%

Oil Orice US$/bbl 110.4 110 102 99 99 99

Oil Orice US$/bbl Avg 110.4 107.5 104.8 99 99 99

FX Rate (INR/US$) 54.4 62 60 60 60 60

Govt Share (%) 62% 51% 19% 0% 0% 0%

Govt share (INR bn) 1000 708 157 - - -

As % of GDP (Fiscal Defici t Impact) 0.99% 0.62% 0.12% 0.00% 0.00% 0.00%

Savings in Fiscal Deficit (FY14 levels) 0.00% -0.37% -0.50% -0.62% -0.62% -0.62%


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India Econo

October 13

Appendix - Trend in Key Global Commodity Prices


Key Commodity Prices in INR (YoY%)Key Commodity Prices in US$ (YoY%)

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

Apr-04 Oct-05 Apr-07 Oct-08 Apr-10 Oct-11 Apr-13 Oc

CRB Food

CRB Commodity

CRB Metal

Brent Crude ~ rhs

3MMA YoY in INR terms

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

60%

40%

20%

0%

20%

40%

60%

80%

00%

Apr-04 Oct-05 Apr-07 Oct-08 Apr-10 Oct-11 Apr-13 Oct-14

CRB Food

CRB Commodity

CRB Metal

Brent Crude ~ rhs

3MMA YoY in USD terms


34/53


India Econo

October 13

Appendix - Trend in Commodity and Non Commodity Trade Balance

e: CEIC, CMIE, Ministry of Commerce, Morgan Stanley Research

As % of GDP

F2013 F2014 F2015* F2013 F2014 F2015* F2013 F2014 F2015*

Com m odity 6.1% 6.4% 5.8% 12.9% 12.3% 11.0% -6.8% -5.9% -5.2%

Food 1.3% 1.5% 1.3% 0.8% 0.7% 0.6% 0.5% 0.9% 0.6%

Oil 3.3% 3.3% 3.3% 8.8% 8.8% 7.6% -5.5% -5.5% -4.3%

Mica, Coal & Other Ores, Minerals 0.2% 0.2% 0.2% 1.8% 1.6% 1.2% -1.6% -1.4% -1.0%

Fertilizers 0.5% 0.3% 0.3% -0.5% -0.3% -0.3%

Iron, Steel, ferrous and non ferrous metals 1.3% 1.3% 1.1% 1.1% 0.9% 1.3% 0.2% 0.4% -0.2%

Non Com m odity 10.0% 10.2% 9.3% 13.4% 11.5% 10.4% -3.4% -1.3% -1.1%

Engineering Goods 1.9% 2.0% 2.3% 3.6% 3.0% 2.0% -1.7% -1.0% 0.3%

Gems & Jew ellery 2.3% 2.2% 1.8% 4.2% 3.0% 2.5% -1.9% -0.8% -0.7%

Textiles, including readymade garments 1.1% 1.3% 1.1% 0.2% 0.2% 0.1% 0.9% 1.0% 1.0%

Drugs & Pharmaceuticals 0.8% 0.8% 0.7% 0.2% 0.2% 0.3% 0.6% 0.6% 0.5%

Organic & Inorganic Chemicals 0.3% 0.3% 0.6% 1.0% 1.1% 0.9% -0.7% -0.7% -0.3%

Electronic goods 0.4% 0.4% 0.3% 1.7% 1.6% 1.8% -1.3% -1.2% -1.5%

Others 3.2% 3.2% 2.5% 2.5% 2.4% 2.8% 0.7% 0.8% -0.3%

Total (Com m odity + Non Com m odity) 16.1% 16.7% 15.1% 26.3% 23.9% 21.4% -10.2% -7.2% -6.3%

* Annualized April to August trade figures

Expor ts Im por ts Net Expor ts


35/53

Preparing for the global liquidity drought

India must monitor corporate leverage and build macroeconomic credibility

The growing strength of the dollar against other currencies with each passing day underlines the

realignment underway in global markets in anticipation of tighter monetary policy in the US. Monetary

tightening in the US has in the past led to turbulence in emerging markets, and there is no reason why

this time should be different.

Although the rupee has been facing depreciatory pressure over the past few weeks, it has been among

the more stable emerging market currencies this year, after being one of the worst-hit last year when

fears of tighter monetary policy in the US first surfaced. A key reason for the relative resilience of the

rupee is the improvement in Indias economic fundamentals over the past year. The current account

deficit has shrunk, inflation has fallen and the election of a stable government that has committed to

fiscal consolidation has reduced political risks, and even led to a sovereign ratings upgrade.

However, there are dark clouds on the horizon, and policymakers must pay attention to them before

things spiral out of control. Most of Indias problems relate to debt. This year, foreign investors have

pumped in nearly $21 billion net investments in debt markets compared with net investments of $13billion in Indian equities. Debt flows are much more fickle than equity flows and can reverse quickly. The

initial run on the rupee in mid-2013 was after all caused solely by debt outflows. As and when global

money managers start paring exposures to emerging markets, Indian debt markets are likely to see

outflows again. Some analysts have argued that the recent slump in international commodity markets

reflects pessimism about global growth prospects and signals growing risk aversion. If thats true,

emerging market equity assets could be the next asset class to witness a sharp correction.

Thats not all. Many large corporations in India have sizeable overseas borrowings, a large chunk of

which is unhedged. Several of them are stuck in long gestation or unviable projects, and are unable to

generate cash flows that can repay their domestic and overseas loans. With the dollar becoming

expensive and global interest rates set to increase, the costs of servicing foreign loans will only rise. Asthis newspaper has argued earlier, the pile-up of debt has become the Achilles heel of the Indian

economy. Foreign loans have allowed Indian companies easy access to cheap finance for the past few

years, but with global liquidity drying up, the chickens are coming home to roost.

According to data from the Reserve Bank of India, Indias external debt-to-gross domestic product (GDP)

ratio rose 1.3 percentage points to 23.3% in the year ended March over the previous year. Short-term

debt by residual maturity as a proportion of overall debt was 40% on March. But these numbers are

likely to be gross underestimates of Indias true external vulnerability. Very often, foreign subsidiaries of

Indian companies take overseas loans, or issue dollar-denominated debt instruments abroad, and then

use such funds to make rupee investments, leading to a currency mismatch. Using data from the Bank of

International Settlements (BIS), Hyun Song Shin, a professor at Princeton University and one of the

foremost financial economists in the world, has shown that the gap between official debt figures and

the actual foreign exposures of companies has grown since 2010 for most emerging markets, including

India.

Shin calls the post-2010 era the second phase of global liquidity in which emerging market corporations

have replaced banks as the key conduits of capital flows across the world. In essence, emerging market

companies have taken on a carry trade, by financing local assets with apparently cheap dollars. So far,

the arrangement has suited both purchasers of emerging market corporate bonds, who desired higher


36/53

yields in a low yield environment, and the issuers, who have received access to cheap finance. But the

turning tide of global liquidity can prove lethal for such trades. The volatility emerging markets faced in

2013 was because of such currency and risk mismatches, and we may be headed for another storm

soon. While India wont remain unaffected, we can weather the stormbetter if policymakers act now to

minimize the possible impact by monitoring corporate leverage levels more closely, and by building

credibility on Indias macroeconomic policies.

Sourc: http://www.livemint.com/Opinion/DuBD0yGvWn7CbiucX4i9fO/Preparing-for-the-global-

liquidity-drought.html
http://www.livemint.com/Opinion/DuBD0yGvWn7CbiucX4i9fO/Preparing-for-the-global-liquidity-drought.htmlhttp://www.livemint.com/Opinion/DuBD0yGvWn7CbiucX4i9fO/Preparing-for-the-global-liquidity-drought.htmlhttp://www.livemint.com/Opinion/DuBD0yGvWn7CbiucX4i9fO/Preparing-for-the-global-liquidity-drought.htmlhttp://www.livemint.com/Opinion/DuBD0yGvWn7CbiucX4i9fO/Preparing-for-the-global-liquidity-drought.htmlhttp://www.livemint.com/Opinion/DuBD0yGvWn7CbiucX4i9fO/Preparing-for-the-global-liquidity-drought.html


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Monetary policyWhen will they learn?Oct 14th 2014, 9:40 by R.A. | LONDON

THE monetary economics of a world in which interest rates are close to zero are not especially

mysterious. Stimulating the economy at that point requires central banks to raise expected inflation.

Disinflation, by contrast, results in passive tightening, since the central bank can't lower its policy

rate and since the real interest rate is the policy rate less expected inflation. In this world, the

downside risks are much larger than those to the upside. There is infinite room to raise interest rates

if inflation runs uncomfortably high (one might even welcome that opportunity to push rates up as

that would reduce the probability that rates would fall to zero again in future). But there is no room to

reduce interest rates if inflation is running to low. That, in turn, forces central banks to use

unconventional policy or run psychological operations to try to boost expectations. Central banks are

not very good at those sorts of things.You need to overshoot, in other words, because undershooting feeds on itself. The zero lower bound

is a heavy drag on an economy that must be thrown off by rapid growth. If a central bank is too

cautious it will not simply fail to escape the ZLB; the effort of trying to provide stimulus through

unconventional routes may lead to stimulus fatigue. The central bank may simply become less

willing to take the necessary expansionary steps, creating an increased risk that the weight of the

ZLB drags the economy beneath the waves.

Fatigue may be setting in at the Federal Reserve, which is expected to end its asset-purchase

programme at its meeting later this month. Hawkish members of the Federal Open Market

Committee are seizing on a relatively low and falling unemployment rate and on good hiring

numbers as evidence that the economy can stand on its own. And if the Fed's main policy rate were

at 4% rather than just above 0%, they might have a point. But the FOMC ought to have learned by

now that an economy at the ZLB does not function like an economy in which interest rates are well

above zero.

The threat is clear enough. Inflation in America is below the Fed's 2% target and looks to be falling

again. The disinflationary winds blowing in from abroad are strengthening to a gale. Commodity

prices are tumbling; cheaper resources will have a direct disinflationary impact in America but also

signal a weakening global economy which should itself reduce inflationary pressures. Inflation in theeuro zone hastumbledto 0.3%, and with many of the euro area's large economies in or near

recession the downside economic risks in Europe are substantial. In Britain, whichalongside

Americais the closest thing the rich world has to an economic success story, inflation hasdropped

sharplyto just 1.2%, and markets are revising outward the date at which the Bank of England is

expected to raise interest rates.
http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-30092014-AP/EN/2-30092014-AP-EN.PDFhttp://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-30092014-AP/EN/2-30092014-AP-EN.PDFhttp://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-30092014-AP/EN/2-30092014-AP-EN.PDFhttp://www.economist.com/news/leaders/21623675-growth-healthy-america-and-britain-most-world-economy-trouble-weakerhttp://www.economist.com/news/leaders/21623675-growth-healthy-america-and-britain-most-world-economy-trouble-weakerhttp://www.economist.com/news/leaders/21623675-growth-healthy-america-and-britain-most-world-economy-trouble-weakerhttp://www.economist.com/news/leaders/21623675-growth-healthy-america-and-britain-most-world-economy-trouble-weakerhttp://www.ons.gov.uk/ons/dcp171778_380135.pdfhttp://www.ons.gov.uk/ons/dcp171778_380135.pdfhttp://www.ons.gov.uk/ons/dcp171778_380135.pdfhttp://www.ons.gov.uk/ons/dcp171778_380135.pdfhttp://www.ons.gov.uk/ons/dcp171778_380135.pdfhttp://www.ons.gov.uk/ons/dcp171778_380135.pdfhttp://www.economist.com/news/leaders/21623675-growth-healthy-america-and-britain-most-world-economy-trouble-weakerhttp://www.economist.com/news/leaders/21623675-growth-healthy-america-and-britain-most-world-economy-trouble-weakerhttp://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-30092014-AP/EN/2-30092014-AP-EN.PDF


38/53

American markets are once again hunkering down for a bout of disinflation. Expectations for inflation

over the next five years have fallen half a percentage point since July, to around 1.5%: a level at

which the Fed haspreviously movedto beginnew asset purchases. The yield on long-term

Treasuries is tumbling again; the 10-year is down to around 2.2%, from nearly 3% earlier this year.

Equity prices are sinking while the dollar is rising sharply. And futures markets now suggest the firstincrease in the Fed's main policy rate will not occur until January of 2016.

My question for the Fed is: what happens when disinflation continues in November and December

after the Fed has termintated its asset purchase programme? Is it prepared to start purchases up

right away, or will it wait to see whether things turn around? If so, how long is it prepared to wait?

What is the plan here? Employment growth is not going to continue at current rates for very long if

inflation expectations continue to behave this way while interest rates are at zero.

There are so many ways things around the rich world could go very badly in coming months. The

euro zone, in particular, is entering a new and dangerous crisis phase, with Germany seemingly

committed to fiscal tightening even as its economy falls into recession alongside France and Italy. A

renewed dip into recession could lead to revolt, in markets or in the political systems of peripheral

economies that have had enough of economic contraction forever.

The sensible course is what it has been for the last six years: keep pushing until the economy is well

clear of danger. If inflation gets up to 3% or 4% or 5%, well, there are far worse things, and the

response is simple enough: tighten policy. Erring in the opposite direction may end up far more

costly, however. As, I fear, we all may learn.
http://www.economist.com/node/21530090http://www.economist.com/node/21530090http://www.economist.com/node/21530090http://www.economist.com/node/21530090


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CALIFORNIA MANAGEMENT REVIEW VOL. 49, NO. 4 SUMMER 20076

Misunderstanding the

Nature of CompanyPerformance:THE HALO EFFECT AND

OTHER BUSINESS DELUSIONS

Phil Rosenzweig

In February 2005, Dell Computer was ranked #1 among the Worlds

Most Admired Companies by Fortune magazine. Just two years later,

in February 2007, amid slumping performance, Michael Dell removed

CEO Kevin Rollins and took over the reins to revive the company.

What had gone wrong? Observers were quick to offer their views.

According to Business Week, Dell succumbed to complacency in the belief that its

business model would always keep it far ahead of the pack. It had been lulled

into a false sense of security. An unsuccessful acquisition was said to be evi-

dence of hubris.1

In Leadership Excellence, a management consultant explainedthat Dell got stuck in a rut and became reluctant to change. When rivals had

matched Dells strategy of customization, managers fell back on an old practice:

they cut costs to maintain market share. The Financial Times quoted a business

school professor at the University of Maryland who opined: [Dell has] forgotten

how to make customers happy. I have to believe the problems with the company

are cultural an

note on gov_india

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