NCAER-IIC

Mid-Year Review of the Economy

2015-16

November 14, 2015

New Delhi

Outline of the Presentation

• Macro-economic performance to date

• Dis-aggregated view / sectoral performance

• Near Term Challenges

• Forecast & Outlook

NCAER-IIC MYR

Then (2014) & Now (2015)

Fast-Forward : So how do we describe H1 2015-16?

A period when India almost lost its way !

Good thing about H2 2015 - 16 :

We’ve got a (undeserved ?) second chance

Flashback : In Nov 2014, we’d described H1, 2014-15, as:

Period when India got its mojo back!

We said the good thing about H 2 2014-15 was:

It gave us a rare (undeserved?) window of opportunity

Will it be promise belied

Second-time lucky ?

• From being a member of the Fragile Five in ’13

• To being the only BRIC standing in Mid 2014

• To losing our footing by March 2015

• To once again looking good; if only relatively !

• India has come full circle in 1 year

But it’s not the 1st time !

• Indian economy has flattered to deceive in the past as well…

• From being described the World’s Biggest Under-achiever (Economist 1999)

• To being the ‘eye’ of the Brics in 2003

• To being part of Fragile Five by 2010

• To now breaking loose from that grouping

• How will the world see us Nov 2016?

The billion dollar question!!

• Crouching tiger?

• A Nearly-power?

• Lumbering elephant?

Tortoise finally picking up pace?

Good news is it’s no longer

‘if & when’, but ‘how’!

In a nutshell….

‘It is the best of times,

it is the worst of times….’

Charles Dickens : Tale of Two Cities

2012-13 2013-14 2014-15

2004-05

base 2011-12

base 2004-05

base 2011-12

base 2004-05*

base 2011-12

base

Agri/forestry/fishing 1.4 1.2 4.7 3.7 3.5 0.2

Manufacturing 1.1 6.2 -0.7 5.3 1.8 7.1 Trade/hotels/restaurants 4.5 9.6 3 11.1 3.3 10.7 Fin/real estate/buss. services 10.9 8.8 12.9 7.9 10 11.5

GDP 4.5 4.9 4.7 6.6 5.5 7.3

Growth Forecasts: Old & New

Growth Forecasts

Notes: *GVA at basic prices (2011-12)

Sources: Asian Development Bank, Reserve Bank of India, World Bank, Finance Ministry, GOI, and International

Monetary Fund

Ministry of

Finance RBI ADB IMF

World Bank

Real GDP

market prices growth

(%)

>7.5

(Oct)

7.4*

(Sept)

7.4

(Sept)

7.3

(Oct)

7.5

(Oct)

Projections for the World (%)

Country/ Region 2013 2014 2015 2016

US 2.2 2.4 2.6 ( ) 2.8 (↓)

China 7.8 7.4 6.8 (↔) 6.3 (↔)

Euro Area -0.4 0.8 1.5 (↔) 1.6 (↓)

Japan 1.6 -0.1 0.6 (↓) 1.0 (↓)

India 6.9 7.3 7.3 (↓) 7.5 (↔)

Emerging Market and Developing

Economies 5.0 4.6 4.0 (↓) 4.5 (↓)

Advanced Economies

1.4 1.8 2.0 (↓) 2.2 (↓)

World 3.4 3.4 3.1 (↓) 3.6 (↓) Note: The arrows indicate changes in direction from July 2015 forecasts. Source: IMF World Economic Outlook (WEO) Update, Oct 2015

0

1

2

3

4

5

6

7

8

9

Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16

GVA GDP

Is the improvement real or illusory?

-6

-4

-2

0

2

4

6

8

Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15

Prices CPI Prices CPI food Prices WPI

On the price front, we’re in safe waters !

27.5

28

28.5

29

29.5

30

30.5

Q1 FY15 Q2 FY15 Q3 FY15 Q4 FY15 Q1FY16

Gross Fixed Capital Formation( % of GDP) Current prices

Gross Fixed Capital Formation( % of GDP) Constant prices

But investment is still in the doldrums

7.5

7.55

7.6

7.65

7.7

7.75

7.8

7.85

7.9

7.95

8

6-A

pr-

15

13

-Ap

r-1

5

20

-Ap

r-1

5

27

-Ap

r-1

5

4-M

ay-1

5

11

-May

-15

18

-May

-15

25

-May

-15

1-J

un

-15

8-J

un

-15

15

-Ju

n-1

5

22

-Ju

n-1

5

29

-Ju

n-1

5

6-J

ul-

15

13

-Ju

l-1

5

20

-Ju

l-1

5

27

-Ju

l-1

5

3-A

ug-

15

10

-Au

g-1

5

17

-Au

g-1

5

24

-Au

g-1

5

31

-Au

g-1

5

7-S

ep-1

5

14

-Sep

-15

21

-Sep

-15

28

-Sep

-15

10 Yr G Secs Yield

Govt gains more than corporates

24000

25000

26000

27000

28000

29000

30000

BSE SENSEX

Stock Markets: No longer irrationally exuberant!

-50000

0

50000

100000

150000

200000

250000

300000

2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16*

Equity Debt Total

FIIs play true to form, easy come, easy go !

0

5000

10000

15000

20000

25000

30000

35000

40000

2010 2011 2012 2013 2014 2015(till 16/10)

No. of IPOs Amount

Like monsoon, IPO position is sub-par but is improving

Policy rate CPI Real rate

Brazil 14.25 9.6 4.65

Russia 11 15.8 -4.8

India 6.75 3.66 3.09

S. Africa 6.00 5.00 1

Indonesia 7.5 7.2 0.3

Turkey 7.5 7.1 0.4

Mexico 3 2.6 0.4

Source: cbrates.com, Economist

Real interest rates among the highest!(Oct 15)

Is the whole more or less

than the sum of its parts?

The dis-aggregated view……

Agriculture:

News is grim and yet not so grim or without hope !

Industry

Have hopes been raised, only to disappoint?

Plus ça change, plus c'est la même chose

-6

-4

-2

0

2

4

6

8

10

Coal Crude oil Naturalgas

Refineryproducts

Fertiliser Steel Cement Electricity Overall Source:Office ofEA, DIPP

2014-15 H1 FY15 H1 FY16

Mixed signals from the core

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

Q1FY15 Q2FY15 Q3FY15 Q4FY15 FY15 Q1FY16

Tentative recovery in sight

Services :

Mixed signals : What is clear is services can no longer be the sole engine of growth !

4.0

6.0

8.0

10.0

12.0

14.0

16.0

Tra

de

, ho

tels

,tra

nsp

ort,c

om

mu

nic

atio

n e

tc

Fin

an

cin

g,

insu

ran

ce

, rea

l

Co

mm

un

ity, s

ocia

l&

Se

rvic

es e

xcl

Co

nstru

ctio

n

Serv

ices in

cl

Constru

ctio

n

GV

A-B

P

13-14 14-15 AE 14-15 PE

Real Growth rate of Services Sector GVA basic prices (%, Y-o-Y)

Money and Capital Markets …….

Bank credit continues to lag

5000000

5500000

6000000

6500000

7000000

7500000

8000000

8500000

9000000

Bank Deposits Non-Food Credit

External Sector:

Prima facie re-assuring …but anxieties remain …

US $ bn 2013-14 Q1 2013-14 Q1 2014-15 Q1 2015-16

Trade balance -147.6 -50.5 -34.6 -34.2

Net Service 73 16.9 17.1 17.4

Net Income -23 -4.8 -6.7 -5.6

Current account -32.4 -21.8 -7.8 -6.2

(-4.9) (-1.7) (-1.2) figs in brackets % of GDP Source: RBI

How real is the comfort?

Re less volatile than other EME

currencies

59.0

60.0

61.0

62.0

63.0

64.0

65.0

66.0

67.0

68.0USD/INR

Public Finance:

So far so good but …OROP & 7th Pay

Commission will rock the boat !

H1 2015-16 H1 2014-15

Revenue receipts 45.0 35.1

Tax revenue (net) 40.2 33.1

Non-tax revenue 64.8 44.6

Total receipts 43.5 33.5

Non-plan exp 50.0 50.5

Plan exp 54.6 42.8

Total exp 51.2 48.0

Fiscal deficit 68.1 82.6

Revenue deficit 68.2 91.2

Primary deficit 181.8 243

% of BE; Source: CGA

As good as it gets …

Prices:

Welcome relief; but have we got blind-sided in the process? Has growth suffered?

-6

-4

-2

0

2

4

6

8

Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15

Prices CPI Prices CPI food Prices WPI

Death of inflation? Or, too early to declare victory?

Near-term Challenges :

Internal

• Revive investment

• Improve productivity ; arrest rise in ICOR

• Reverse decline in manufacturing sector

• Improve governance

• Improve infrastructure: physical & social

• Structural reform - focus on land and labour markets

• Legal reform

Near term Challenges :

External

• End of Federal Reserve’s QE and reversal of US interest rate cycle

• Threat of recession in Europe

• Slowdown in China’s growth rate

• Stagnation in world trade

• Exclusion from trade pacts like TPP

• In the face of all this ………….

Question is: Can we make it?

Yes, we can !

Why?

UP

AP

Gujarat

M

a

h

a

G O I

Cos states & centre are working as equal partners

To conclude…..

‘……It is the age of wisdom, it is the age of foolishness, it is the epoch of belief, it is the epoch of incredulity, it is the season of Light, it is the season of Darkness, it is the spring of hope, it is the winter of despair, we have everything before us, we have nothing before us…..’

Charles Dickens: Tale of Two Cities

Forecast

Quarterly Model Assumptions

• Prices – ARIMA Model – deflation (-3.6% yoy)

• Rainfall – As per IMD reports, deficit rainfall, -6.2 %yoy

• BSE – 5% y-o-y increase in 2015

• BCC – 10.1% y-o-y increase in 2015-16

• Total Expenditure of the Central Government – 10% y-o-y increase in 2015-16

Quarterly Forecast for 2015-16

Gross Value Added at Basic Prices (constant 2011-12 prices) for 2015-16, %y-o-y

July-15 October 2015

2015-16:Q1 6.0 7.1*

2015-16:Q2 7.3 7.2

2015-16:Q3 7.6 6.4

2015-16:Q4 7.9 7.4

2015-16 7.2 7.0

Note: * Actual value Source: NCAER

Assumptions of the Annual

Model

• Rainfall : -6.7% increase in 2015-16

• BSE – 5% in 2015-16

• World GDP Growth - 3.1% in 2015

• International Crude Oil Prices – -46.4% in 2015-16

• Non-fuel Commodity Prices - -16.9% in 2015-16

• FDI Net Inflows – 10% in 2015-16

• Net Invisibles – 5% in 2015-16

• FII – 10% in 2015-16

• WPI Energy – -12.8% in 2015-16

• LIBOR – 0.3%

• Exchange Rate – Rs 65.25/$ in 2015-16

• Central Government Finances – Disinvestment – Rs 69,500 crore in 2015-16

NCAER Forecast for 2015-16

GDP Market Prices (2011-12 Prices),

Growth Rate Estimates for 2015–16

Item April 2015 July 2015 October 2015

GDP Market Prices

(2011–12 prices )% yoy)

7.8 7.5 7.4

Exports ($ value) (%yoy) 5.8 –19.3 –17.5

Imports ($ value)

(%yoy)

6.2 –20.5 –14.4

Inflation (WPI) (% yoy) 0.22 –1.5 –2.5

Current account balance

as percentage of GDP

-1.1 –0.9 –1.1

Fiscal Deficit (Centre)

as percentage of GDP

4.1 4.1 4.1

MYR Team

Overview Mythili Bhusnurmath Forecast: Bornali Bhandari Agriculture: Anil K. Sharma Industry: Poonam Munjal Services: Devender Pratap Money and Credit: Pallavi Choudhuri Prices: Sheshadri Banerjee External Sector: Rajesh Chadha & Ishita Gambhir Public Finance: Mythili Bhusnurmath Research/ Data Support: Ajaya Sahu, Praveen Sachdeva Organisational Support: Sudesh Bala

Thank You

Recent Trends in Selected

Economic Indicators

% Change YOY 2014-15 2015-

16

2015-16

Q4 Q1

Jul Aug Sep

I. Growth Environment: IIP

Manufacturing 3.7 3.8

4.6 6.9

Mining and Quarrying 0.3 0.4

0.9

3.8

Electricity 3.7 2.3

3.5 5.6

General 3.3 3.3

4.1

6.4

Recent Trends in Selected

Economic Indicators

% Change YOY 2014-15 2015-16 2015-16

Q4 Q1 Jul Aug Sep

II. Price environment

WPI(2004-05)

Primary articles 0.7 -0.4 -4.0 -3.7 -2.1

Fuel, power etc -12.7 -10.4 -11.6 -16.5 -17.7

Manufacturing 0.4 -0.6 -1.5 -1.9 -1.7

Rice or paddy 2.6 -1.0 -2.9 -3.5 -3.6

Wheat -1.7 2.0 2.0 2.0 3.3

Edible oils -0.8 0.8 1.4 1.4 3.2

All commodities -1.8 -2.3 -4.0 -4.9 -4.5

CPI

Industrial workers (2001=100) 6.6 5.9 4.4 4.3 5.1

Agricultural labour (1986-87=100) 5.8 4.4 2.9 3.0 3.5

Combined (2012=100) 5.6 5.7 4.3 4.4 4.9

Recent Trends in Selected

Economic Indicators

% Change YOY 2014-15 2015-

16

2015-16

Q4 Q1 Jul Aug Sep

III. Monetary/ Capital market

variables

Sensex 35.1 14.7 8.6 -1.3 -1.8

M3 11.1 10.7 11.2 11.1 10.7

RM 5.7 9.6 10.1 8.8 11.8

Bank credit to commercial sector 9.9 9.2 8.9 8.9 9.1

LIBOR (3 months, %)* 0.3 0.3 0.3 0.3 0.3

Recent Trends in Selected

Economic Indicators

% Change YOY 2014-

15

2015-

16

2015-16

Q4 Q1 Jul Aug Sep

IV. External account

Exports (US$ merchandise) -16.0 -16.8 -10.3 -21.1 -24.4

Imports (US$ merchandise) -13.4 -12.6 -10.3 -10.7 -25.1

Exchange rate Rs/US$ (+

depreciation/- appreciation

0.7 6.0 5.1 7.0 8.8

Brent $/barrel* 54.0 62.1 55.9 47.0 47.2

Forex Currency Assets (US$) 15.3 14.3 12.3 11.8 13.9

1. Does agriculture matter?

2. Industrial growth or not?

3. Investment

4. Inflation and Inflation Expectations

Puzzles

Does agriculture matter?

Does agriculture matter?

Distribution across Principal Industries of Households

%age share Households Consumption

Agriculture and allied 39.9 32.2

Industry 23.4 22.9

Services 29.4 39.0

Non economic activities 7.3 5.9

All 100.0 100.0

Source: NSSO 2011-12

Industrial Growth or Not?

Source: MoSPI

Industrial Growth or Not?

contd.

Source: MoSPI

Investment: Capital Goods

Source: MoSPI

Investment: NCAER BES

Source: NCAER Business Expectations Survey

Inflation and Inflation

Expectations are divergent

Source: RBI, Labour Bureau and Office of Economic Advisor

Mixed Outlook

Source: RBI, MoSPI and Office of Economic Advisor