http://www.gscgi.ch/en/wealthgram_details/16

1. Gram
Wealth
THE IFA’s
LA TRIBUNE MENSUELLE
DES MEMBRES DU GSCGI
wealthgram@gscgi.ch
www.gscgi.ch
Vol. II
N° 16 - Mai 2013
Groupement Suisse des Conseils en Gestion Indépendants www.gscgi.ch
WHAT DOESN’T KILL THE SWISS FINANCIAL CENTER
MIGHT MAKE IT STRONGER
•

2. The fiscal year in India is from April to March (FY 2013 - Apr
2012 to Mar 2013) and it is now an ideal time to take stock of
the economic scenario as of the recently concluded fiscal year.
Domestic and global headwinds which impacted the economy in
FY 2012 continued to pose a downside risk to growth in FY 2013.
However, certain positive news-flow, especially in the second half
of the year, triggered short bursts of optimism as well.
The GDP growth rate, which ranged between ~7-9% per annum
during most years of the last decade,fell below ~6.5% in FY 2012
and is expected to be ~5% in FY 2013 - the lowest in the decade.
In terms of segments, agriculture GDP growth was mainly
impacted by less than normal monsoon rains. Slowdown in
the industrial output hit manufacturing GDP growth. Services
GDP growth was largely impacted by the trade, hotel, transport
sector, as this is linked to the first two segments. Rating agencies
like S&P and Fitch lowered their credit rating outlook for India
given the slowdown in GDP growth and industrial output,
widening current account deficit, inflation and fiscal pressures,
policy slowdown,etc. Certain positive triggers in the second half
included easing in manufacturing inflation, some action on the
reforms/policy front, plans to bring the fiscal deficit below 5%, as
well as regulatory changes to increase savings flows.
Inflation has probably been the biggest enemy of the average
Indian, being persistently above comfort levels for most part of
the year. Factors include recent price trends in global crude,
precious metals and commodities, electricity tariff hikes, supply
GramGram
Wealth
THE IFA’s
LA TRIBUNE MENSUELLE DES MEMBRES DU GSCGI
wealthgram@gscgi.ch • www.gscgi.ch
Vol. II - N° 16 - Mai 2013
L’AVIS DE L’ANALYSTE
Putting the fiscal year in perspective - the Indian economy in FY 2013
Groupement Suisse des Conseils en Gestion Indépendants www.gscgi.ch
1
•
side inefficiencies including infrastructure support,changes in the
dietary pattern towards protein foods and better cereal varieties
and revision of agriculture product MSPs (minimum support
price). WPI (Wholesale price index) remained over ~7-8% for
the first nine months of FY 2013 as fuel and commodity prices
exerted pressure. Thereafter, easing in the global commodity
prices impacted manufactured product inflation positively, which
helped the WPI moderate to ~sub-7% levels since Jan 2013.
CPI (Consumer price index) has been above the ~9-10% range
throughout this year. The increased divergence between CPI
and WPI is largely on account of the higher weightage of food
and services within CPI. Food inflation has been impacted due
to weak monsoons, supply-side constraints, higher MSP and
input costs. Moderation in food inflation would largely help
lower the gap between CPI and WPI and bring the CPI closer
to WPI levels.
Given the inflation scenario, Reserve Bank of India (RBI)
maintained an anti-inflation stance for most part of the year.
Following successive hikes in the policy rates in the previous fiscal,
it kept them largely unchanged for most part of FY 2013. This
high interest rate scenario had a consequent impact on economic
growth. Nevertheless, the silver lining is that the moderation
in WPI since Jan 2013 possibly instilled the confidence in RBI
to lower the policy rates (repo and reverse repo rates) during its
policy review meetings in Jan and Mar 2013. However, the rate
cuts have not really seen a commensurate effect on the lending
rates so far, as the liquidity scenario remained tight. As inflation
6.5%
4.4%
6.5%
4.8%
8.0%
3.6%
9.6%
8.9%
7.2%
3.8%
4.4%
6.7%
6.2%
9.1%
12.4%
10.5%
8.2%
10.0%
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13E
WPI CPI
6.50%
6.75%
7.25%
7.50%
8.00%
8.25%
8.50%
8.00%
7.75%
7.50%
Jan25,
2011
Mar 17,
2011
May3,
2011
Jun16,
2011
Jul26,
2011
Sep 16,
2011
Oct 25,
2011
Apr 17,
2012
Jan29,
2013
Mar 19,
2013
Recent Changes in the Repo Rate
Annual average WPI and CPI in India
Source: Motilal Oswal EcoScope
Recent Changes in the Policy Rate (Repo Rate)
Source: www.global-rates.com

3. stability sustains and liquidity improves, it can lead to further
monetary easing. This should eventually help to lower the cost
of borrowing and revive the investment cycle.
The need to balance coalition politics took its toll on the speed
of reforms. This, along with environment clearance issues,
regulatory delays, inflation and the global slowdown contributed
to the slowdown in the investment cycle by companies. Tight
monetary policy kept the cost of borrowing high. Infrastructure
development was slow given the regulatory delays along with the
challenges of PPP models (Public-Private Partnerships) and long-
term funding sources. New projects slowed down and a number
of existing projects are currently facing delays. IIP growth (Index
of Industrial Production) has been largely dismal this fiscal year.
Initiation of some reform measures since Sept 2012, even at the
risk of snapping ties with coalition partners,raised some cheer and
an uptick in sentiments was visible. Foreign portfolio investors
(FIIs in Indian parlance) started pumping in record inflows,
markets picked up and the Indian Rupee (INR) appreciated
slightly. The government also set up a Cabinet Committee of
GramGram
Wealth
THE IFA’s
LA TRIBUNE MENSUELLE DES MEMBRES DU GSCGI
wealthgram@gscgi.ch • www.gscgi.ch
Vol. II - N° 16 - Mai 2013
L’AVIS DE L’ANALYSTE
Putting the fiscal year in perspective - the Indian economy in FY 2013
Groupement Suisse des Conseils en Gestion Indépendants www.gscgi.ch
2
•
Investment as a single window to clear large projects, and is
further working towards public spending projects like dedicated
freight corridors, urban transport etc. However, reviving the
investment cycle would also demand sustenance of the reforms
engine, a more involved decision-making with state governments
on issues related to land, resources, closer monitoring of stalled
projects and systematic reduction of the cost of funds to catalyse
further investments.
India’s external sector variables saw stress this year. Its growing
integration with the global economy meant that the continued
economic pressures globally impacted demand for India’s exports.
On the other hand, the import bill was impacted due to price
and/or demand trends in oil,gold,coal,etc as well as depreciation
in the INR. India’s dependence on oil imports has risen to ~80%
of total oil demand and put under pressure the oil import bill.
For a traditionally gold obsessed nation,the demand for gold also
shot up since the last couple of years due to its perception as
a relatively better investment option. Given the twin impacts
of export slowdown and higher imports, the trade deficit rose
90
95
100
105
110
115
avr. 12 juin 12 juil. 12 sept. 12 nov. 12 janv. 13 mars 13
THB
KRW
CNY
USD
MYR
EUR
GBP
RUB
BRL
JPY
Rebased
to 100
Currency movements in FY 2013: Units of INR to 1 unit of foreign currency (Rebased to 100) / Source: www.oanda.com

4. to ~US$190bn now (~10%
of nominal GDP). Capital
inflows from foreign portfolio
investors did provide some
cushion, though these flows
are volatile in nature. The
increase in the import bill
increased dollar demand and
export slowdown reduced
dollar supply. From a
historical average of ~Rs 45
during the last decade, the
INR/US$ exchange rate
breached the Rs 50 mark in
FY 2012 (average Rs 48 for the
year). In FY 2013, it further
breached the Rs 55 mark
(average Rs 54 for the year).
In this scenario, the current
account deficit as a percent
of GDP increased from a historic
average of ~1-2% to over 4%. The rise in trade deficit has also
been a possible cause for the stagnancy in forex reserves,which has
remained around US$290-300bn since the last five years. Action
on the reforms front in Sept-Oct 2012 improved sentiments and
the INR did appreciate
to ~Rs 53. But it
subsequently reverted to
~Rs 54-55 levels as the
current account deficit
continued to exert
pressure.
The government is now
working on regulations
to curb gold imports
and is expected to
address the needs for
enhancing domestic
oil & gas upstream
activities. The need
is also to improve the
relative competitiveness
of exports, expand into
new export geographies
and attempt some
import substitution
GramGram
Wealth
THE IFA’s
LA TRIBUNE MENSUELLE DES MEMBRES DU GSCGI
wealthgram@gscgi.ch • www.gscgi.ch
Vol. II - N° 16 - Mai 2013
L’AVIS DE L’ANALYSTE
Putting the fiscal year in perspective - the Indian economy in FY 2013
Groupement Suisse des Conseils en Gestion Indépendants www.gscgi.ch
3
•
by domestic production.
India is also becoming a
global production hub for
automobiles, consumer non-
durables etc, which should
enhance export prospects.
Another possible catalyst
for INR appreciation would
be to increase foreign direct
investments (FDI), as it is a
more stable and long-term
source of foreign capital,
apart from stability in prices
of import goods. These
should help the current
account deficit situation.
Incidentally, apart from
USD and Euro, the INR
also depreciated against
currencies like Chinese Yuan,
Thai Baht, Korean Won and
Malaysian Ringgit this year. Exports have been a key growth
driver in most of these Asian peers, and the current currency
trends may increase India’s relative export competitiveness. Also,
any growth in manufacturing sector exports specifically would
benefit from the current
trends in the INR. On
the other hand, the INR
appreciated or remained
flat this year against
other emerging market
peers like Brazilian Real,
Russian Rouble, as well
as the Pound Sterling
and the Japanese Yen.
India’sfiscalsituationhas
been closely monitored
by policy makers,
business and investor
communities alike, and
government announced
in its recent Union
Budget to rein in fiscal
deficit to ~sub-5% in
the coming year. Since
Sept 2012, the ball had
3.9% 4.0%
3.3%
2.5%
6.0%
6.5% 4.9%
5.9% 5.4%
7.0%
9.5%
9.6%
9.3%
6.7%
8.6% 9.3%
6.2%
5.0%
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13E
Fiscal Deficit GDP Growth %
Fiscal Deficit and GDP Growth in India / Source: Motilal Oswal EcoScope
0.3%
1.2% 1.0%
1.3%
2.3%
2.8% 2.6%
4.2%
4.8%
44.9 44.3 45.3
40.2
45.9
47.4
45.6
47.9
54.5
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13E
Current Account Deficit
INR/USD
INR and Current Account Deficit in India
Source: Motilal Oswal EcoScope

5. started rolling on some of the reforms/policy fronts. The cap on
LPG subsidies and the deregulation of diesel prices should ease
the subsidy burden to some extent. As the GDP picks up,the net
tax-GDP ratio should typically move from the current ~7-7.5%
to ~8.5%, where it was five years back. While the recent Union
Budget kept the tax structure as largely unchanged (except for a
couple of surcharges
on corporate and
wealthy taxes),
the government
is also expected
to earn from
non-tax sources.
These include its
d i s i n v e s t m e n t
programme, sale
of spectrum and
other resources like
mines, land etc,
as well as possible
cash dividends
from the cash-
rich government-
owned companies
(PSUs). It has
already approved
disinvestment of
four PSUs and strategic sale in a couple of firms. Opening up of
FDI avenues should bring in further long-term capital. Recent
announcements included liberalizing FDI norms in sectors
like retail, aviation and broadcasting. On the other side, the
Budget also announced a hefty 29% rise in planned spending,
given the need to spur growth in the context of the current
slowdown. However,the challenge will be to meet the estimated
revenue targets. In the event of lower than expected revenues,
expenditures may need to be appropriately managed to help keep
fiscal deficit within comfort limits.
Apart from macroeconomic stabilization and manufacturing
revival, India also needs to shift towards from consumption to
savings and investment. For a traditionally savings-oriented
country,gross domestic savings as a percent of GDP has declined
from the last five-year historical average of ~33-34% to ~31% as
of FY 2012 (N/A for FY 2013). Within households, the share of
financial savings has declined in recent years while that of physical
savings has risen, coinciding with the increased demand for gold
and real estate. Bank deposits always comprised the lion’s share of
GramGram
Wealth
THE IFA’s
LA TRIBUNE MENSUELLE DES MEMBRES DU GSCGI
wealthgram@gscgi.ch • www.gscgi.ch
Vol. II - N° 16 - Mai 2013
L’AVIS DE L’ANALYSTE
Putting the fiscal year in perspective - the Indian economy in FY 2013
Groupement Suisse des Conseils en Gestion Indépendants www.gscgi.ch
4
•
household financial savings and its proportion within household
financial savings rose to over 50% as of FY 2012. In order to spur
retail inflows into financial savings, the government has engaged
with asset management companies by initiating several measures
like Rajiv Gandhi Equity Savings Scheme to bring in new equity
investors, direct mutual fund plans to reduce fund costs, reviving
distributor interest
through incentives,
expansion into
small towns by
increasing fund
expense, flexibility
in fund charges,
investor awareness
i n i t i a t i v e s ,
amongst others.
Institutionalization
of retail savings
has been a key
mobilizer towards
investment flows,
as seen in mature
markets like
USA, Korea etc.
These regulatory
initiatives, along
with possible
growth in disposable income (following moderation in inflation
and creation of more skilled jobs), should encourage flows into
financial assets further.
In conclusion, India has faced tough economic times before and
has always managed to navigate itself out and emerge stronger.
Even in the years immediately following the global financial
crises, India showed resilience by clocking ~9% per annum
growth in GDP in both FY 2010 and FY 2011. While the
recent reforms initiatives boosted sentiments,it is also imperative
to address regulatory delays, governance of projects and inflation.
The recent interest rate cuts have not really led to a reduction in
lending rates so far, as liquidity was a concern. Apart from RBI’s
Open Market Operations,further cuts in the Cash Reserve Ratio
shouldhelptheliquiditysituation. Asstabilityininflationsustains,
liquidity improves and fiscal deficit remains contained, it would
create further headroom for interest rate softening. Monetary
easing should eventually help lower the cost of borrowing.
Going forward, the action plan is essentially on reviving the
investment cycle, sustaining reforms action, combating inflation,
Some of the policy measures announced recently
Liberalises FDI norms in retail, aviation, broadcasting
Raises diesel prices, caps subsidised LPG at 6 per year
Cabinet approval to raise FDI in insurance and pension
Plans to speed up cash transfer of subsidies
Proposes disinvestment in 4 PSUs
Easing of fund-raising abroad
Deferment of GAAR provisions

6. rein in the twin deficits of fiscal and current account, creating
skilled jobs and enhancing labour productivity, expanding export
geographies, removing infrastructure bottlenecks and reducing
borrowing costs.
* * *
Disclaimer: This article is meant for information purposes only and
does not construe to be an investment advice. It is not intended
as an offer or solicitation for the purchase or sale of any financial
instrument. Anyactiontakenbyyouonthebasisof theinformation
contained herein is your responsibility alone. We have exercised
due diligence in checking the correctness and authenticity of the
informationcontainedherein,butdonotrepresentthatitisaccurate
or complete. The readers should rely on their own investigations.
GramGram
Wealth
THE IFA’s
LA TRIBUNE MENSUELLE DES MEMBRES DU GSCGI
wealthgram@gscgi.ch • www.gscgi.ch
Vol. II - N° 16 - Mai 2013
L’AVIS DE L’ANALYSTE
Putting the fiscal year in perspective - the Indian economy in FY 2013
Groupement Suisse des Conseils en Gestion Indépendants www.gscgi.ch
5
•
Sourajit Aiyer
Senior Manager,Investor Relations (Corporate Planning)
Motilal Oswal Financial Services
Mumbai, India
sourajit.aiyer@motilaloswal.com /
www.motilaloswal.com
Sourajit AIYER
Experience Synopsis
Sourajit works in the corporate planning team of Motilal Oswal Financial Services, Mumbai,
where he manages the investor relations function. Prior to this, he worked in the corporate finance
team of Reliance Broadcast Network, Mumbai, and the equity trading operations team of UBS
Investment Bank, London. He started his career in the investment research team of Evalueserve,
Delhi, and also completed an internship in Grameen Bank, Bangladesh.