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©IMA India 2011 Strictly Confidential

Strong Headwinds

IMA India’s 24th Annual CFO Roundtable February 2020, Colombo

Adit Jain; Editorial Director IMA India

www.ima-india.com

India Outlook

2

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Are we losing the plot?

•  A troubled financial system has damaged the credit flow pipeline; banks and NBFCs in trouble

•  Market and investor sentiments were damaged by a mis-match of expectations from the budget

•  An unreasonably high indirect tax environment together with culmination of issues has impacted the automotive industry ‒ spread to others like a domino effect

•  Rural consumption has faltered due to stagnant wages

•  Lack of structural reforms in the three factor markets of land, labour and capital

3

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Growth has fumbled •  Business sentiment is subdued, demonstrating a lack of inspiration

on the economic outlook and mellowed demand

•  Gross investment has fallen; corporate sector feels unsure

•  Consumption too has crumbled ‒ could be an outcome of the wealth effect phenomenon?

•  Exports are no longer contributing to growth ‒ currently at a 14-year low

•  IMA’s Business Confidence Index is at 50.4 barely above the threshold

•  Anecdotally, businesses report weak sales and shrinking margins

4

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Now capital availability has fallen

•  Bond issuances collapsed after the IL&FS crisis from about Rs 3.4 trillion a year to under a trillion in H1 of FY20

•  With damaged balance sheets and wrong exposures lenders have become cautious

5

1.0 1.6 2.4 1.8 2.8

2.7 3.9 3.4

3.2 0.2

6.3 6.2 5.8 6.6 4.7 5.4 5.5

5.9 9.4

0.4

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20

H1

Rs

trill

ion

Total credit Bond issuances Bank credit

-0.2 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4

Jun-

10

May

-11

Apr

-12

Mar

-13

Feb-

14

Jan-

15

Dec

-15

Nov

-16

Oct

-17

Sep-

18

Aug

-19

Rs

trill

ion

New bond issuances IL&FS crisis

Source: CEIC, RBI, IMA analysis

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Tax reforms are essential •  The sustainability of Government spending depends on a rise in

the tax-to-GDP ratio; currently this stands at 11%

•  India has expanded its tax base but negated the effect through exemptions to farmers and the lower-middle class

•  The solution lies in the lowering of GST rates to a single figure ‒ 12% ‒ to spur consumption and encourage compliance

•  On direct taxes, the rate needs to be lowered for the rich and thresholds and exemptions revisited ‒ everyone must pay

•  There is the risk of imposition of wealth taxes and death duties ‒ these have never worked as they are hard to compute. They would be damaging

•  Put federal and state budgets back on FRBM 6

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More corrective measures needed •  A reduction in corporation tax from 30% to 22% is a damage

control measure ‒ will it raise investment?

•  The problems are no longer on the supply side ‒ capacity utilisation rate of 76% is below the investment threshold

•  The reallocation of capital and trade from China has benefited some South East Asian countries with a limited impact on India

•  India cannot sustain spending on its expanding welfare programmes without growth; something will have to give

•  The Government has enhanced efficiency but has failed to liberalise and reduce its role

•  The key issue is market reforms in land, labour and capital ‒ a lack of serious economic reform since 2004

7

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Migrations

8

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The short term

•  Growth is likely to linger in the 5% range ‒ lower than forecasts by agencies suggest

•  The first step to address this is to fix defunct banks and NBFCs

•  Privatisation is essential to improve productivity

•  Budget imbalances will be higher than the Government’s generous assumptions ‒ a risk of foreign investor panic and serious outflows

9

4

5

6

7

8

9

10

Sep-

13

Jun-

14

Mar

-15

Dec

-15

Sep-

16

Jun-

17

Mar

-18

Dec

-18

Sep-

19

GDP growth (quarterly % yoy)

Source: CEIC, CSO, IMA analysis

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Where it all began: auto

•  The automotive industry entered a downward spiral in mid 2018, and has yet to recover

•  Over April-October PVs declined by 20%; CVs by 23% and 2W by 16%; some recovery now

•  The new insurance norm was the trigger ‒ but higher product specs add to costs

•  As things stand, there are no immediate green shoots

10 Source: CEIC, SIA, IMA analysis

-40

-30

-20

-10

0

10

20

30

40

50

60

Apr

-17

Aug

-17

Dec

-17

Apr

-18

Aug

-18

Dec

-18

Apr

-19

Aug

-19

Dec

-19 % c

hang

e Yo

Y

Automotives (3MA) PV CV 2W

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Other sectors: varying impact

•  Tyres and components better off ‒ helped by after market sales

•  Consumer durables ‒ AC sales surged through the summer but this came at the expense of other durables; durable companies also have to shoulder much of the finance burden for EMI-based purchases by consumers

•  Real estate ‒ a recession for now but many believe that in the long term, the sector will emerge stronger as a result of RERA

•  Other industries doing well ‒ refineries, infrastructure, speciality chemicals, pharmaceuticals, packaged foods

11

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The misery is widespread

•  IMA India’s business confidence index dropped to 45.7 last quarter, the lowest in the Modi Government’s tenure; now a small recovery

•  The greater concerns stem from macroeconomic factors

12 Source: IMA India’s Business Confidence and Performance Index (BCPI)

-22

-14

-6

2

10

18

Jun-

14

Nov

-14

Apr

-15

Sep-

15

Feb-

16

Jul-1

6 D

ec-1

6 M

ay-1

7 O

ct-1

7 M

ar-1

8 A

ug-1

8 Ja

n-19

Ju

n-19

N

ov-1

9

IIP (3MA) IIP Capital goods 61.3

58.5 53.3

57.0 60.4

51.4 45.7

50.4

FY19

Q1

FY19

Q2

FY19

Q3

FY19

Q4

FY20

Q1

FY20

Q2

FY20

Q3

FY20

Q4

Business Confidence Index

www.ima-india.com

Travel and Trade affected

•  Domestic air travel growth has dropped from levels of over 20% yoy to about zero; international traffic has fallen from 10% to 0

•  Port cargo traffic, a good proxy for commerce, has also dropped to 0

13

-10

0

10

20

30

Jan-

15

Jun-

15

Nov

-15

Apr

-16

Sep-

16

Feb-

17

Jul-1

7

Dec

-17

May

-18

Oct

-18

Mar

-19

Aug

-19 %

cha

nge

yoy

Air travel Domestic International

-5%

0%

5%

10%

15%

Apr

-12

Dec

-12

Aug

-13

Apr

-14

Dec

-14

Aug

-15

Apr

-16

Dec

-16

Aug

-17

Apr

-18

Dec

-18

Aug

-19

Car

go g

row

th (

% y

oy)

Port traffic

Source: CEIC, IMA analysis

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Capital formation, by sector

% share 3-year CAGR 5-year CAGR Overall GFCF 100% 9% 8% Agri 7% 3% 6% Mining 2% 4% -1% Mfrg 17% 8% 7% Power 8% 6% 5% Construction 6% 28% 6% Trade and hospitality 10% 12% 6% Transport and comm. 10% 26% 12% Financial services 1% 2% 5% Real estate 22% 1% 6% Government 11% 14% 14% Other 7% 20% 19%

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A silver lining?

A possible turnaround in the investment pattern

15

68 70 72 74 76 78 80 82 84

Q4:

2010

-11

Q3:

2011

-12

Q2:

2012

-13

Q1:

2013

-14

Q4:

2013

-14

Q3:

2014

-15

Q2:

2015

-16

Q1:

2016

-17

Q4:

2016

-17

Q3:

2017

-18

Q2:

2018

-19

Q1:

2019

-20

Capacity utilisation (%)

80% level

Source: CEIC, SIA, IMA analysis

-60%

-20%

20%

60%

100%

140%

180%

Nov

-12

Nov

-13

Nov

-14

Nov

-15

Nov

-16

Nov

-17

Nov

-18

Nov

-19

Investments (% change yoy, 6MA)

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QE: A possible solution?

•  Commercial lending rates are not responding to cuts in the repo rate

•  Growth in M4, the widest measure of money supply has fallen to single digits; it was >20% in 2005

•  The problem is a lack of credit worthy borrowers; deposits and money supply will only increase if there are sufficient avenues to lend to

•  QE can help but not the conventional variety ‒ India can experiment with US-style QE

•  The Indian Government’s debt stands at USD 827 billion and is owned by RBI (15%); banks (40%) and non-bank (45%)

16

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Land, labour and capital

•  Economic growth is the only way to drive people out of poverty; high levels of investment are essential for this

•  Investment is a function of land, labour and capital ‒ these markets need to be efficient, transparent and accessible

•  Land and labour ‒ largely a state subject; centre can tweak but cannot radically reform; early efforts at land reforms failed and were not repeated

•  Capital ‒ more amenable to federal diktat; demonetisation and GST has created greater financialisation ‒ this needs to continue

•  The focus of the next Government must be on these three issues

17

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Risk factors ahead

•  The Coronavirus threat and the decoupling of the Chinese economy

•  Possible spike in commodity prices because of middle east tensions and its twin impact on the current and fiscal deficits

•  Slowdown in advanced economies including America, Europe, Japan and China, leading to a global downturn

•  Risk of capital flight should India’s fiscal deficit exceed targets and the consequent risk of a downgrade by rating agencies

•  Foreign investors have started doubting the sustainability of the India story; if interest rates rise in the US, capital could flow out

•  The global trade architecture has crumbled and bilateral agreements will replace the multi-lateral framework

18

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Changing trade architecture

19

1995

2015

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