Transcript India Economics

The Indian Economy
July 25, 2000
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Current Situation Overview
• Significant all around improvement after turbulent period (1998-99)
• 5.7% GDP growth estimated 1999-00 and forecast at 6.3% next year
• Inflation, driven by higher fuel prices, up from 4.5%
– Expected to stabilize at 6.5%
• Industrial environment improves in 1999-00, IIP growth around 8%
levels
– Stronger consumer demand, tentative industrial demand, rising exports
– Cement, automotive, home goods & services are the fast growing segments
• Corporate sector reports brisk topline growth of >20% and a
slightly slower bottomline growth of 18%
– Margins under pressure due to the mild over capacity in most industries
• Resurgence in Portfolio Flows (FII) during 2000, FDI flows
expected to pick up speed with greater clarity in policy
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Current Situation Overview
• Foreign Debt Under Control at less than 24% of GDP
– External debt service ratio at < 2% of GDP
– Large part of debt 40% concessional and short term part is only 5% of total
debt
• Foreign Currency Reserves rise to USD 35 bn (8 months import
cover)
• Rupee Depreciation only 2.17% in 1999-00, another 2% since April
2000
– Annual rate of depreciation estimated to be around 4.5-5%
• Political situation shows greater signs of stability
– Wider dispersion amongst partners makes the coalition less vulnerable
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Current Situation Overview (Concerns)
• Fiscal deficit at around 6% continues to be the main concern
– Successful completion of at least one privatization program
– Approach to cutting back subsidies
• Investment demand yet to materialize
– The much awaited infrastructure boom
– Step-up In new industrial capacities
– FDI flows to gather momentum (rise to more than 30% of approvals)
• Water scarcity and drought conditions in several states
– Is a concern though it is too early to assess impact
– Large government attention needed to manage the crisis
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Near Term Outlook
• Base case growth assuming near normal monsoon is around 6%
– Fuelled mainly by the growth in consumer demand mainly from rural areas
• Benign interest rate regime and a liberal Reserve Bank of India
policy of creating adequate liquidity in the market to help investment
over the next 12 months
• Large scale investments into infrastructure needed to catapult
growth to 8% plus trajectory to make a more meaningful trickle
down effect to different parts of the economy
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Current Economic Policies
• Centers around strong domestic industry but trade barriers are being
dismantled in accordance with commitments
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Increased importance on housing and rural industrialization
Product patents in place, import curbs lifted on several commodities
Attempts to create a rural industrial base (around small industry)
Investments guided by competitive advantages/ economic considerations
rather than licensing restrictions / allowances
• Strong industrial growth averaging 7% in the last five years
• Significant progress in opening up telecom and power sectors
• Privatization of PSUs (GOI holding upto 26%), closure of sick
units, repeal of the Urban Land Ceiling Regulations, etc.
• Significant capital flows generated from 1991 to 1998
– FDI - $15 Bn; Portfolio (FII) - $12Bn;
– FCY reserves increased from $2Bn in 1991 to over $35Bn as of April’2000
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Growth Targets & Imperatives
• Need to target GDP growth of 8-10%
• Liberalize and ease domestic consumption and investment
– India ranked 41st in competitiveness
• Strengthen the contribution from the export markets
• Promote and channel private and foreign investments into
infrastructure
– Required investment of $120Bn over next five years to sustain planned growth
– Current domestic savings of 24% needs to be augmented by foreign
investments ~ $10Bn p.a.
• Maintain financial and currency stability
– Controlled moderate inflation
– Cap on fiscal deficit, Bill on fiscal responsibility soon
• Clearer focus on planned government capital expenditure
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Growth Drivers & Bottlenecks
• Continued demand for consumer items with rising income levels
– More stable agricultural output & rising activity in services
– Moderate inflation would enhancing purchasing power
– Increased economic activity in infrastructure sector
• Telecom, power, roads, new homes
• Creation of new logistics infrastructure to drive penetration of
consumer goods
– Roads, ports and storage facilities
• Red-tape procedure and poor infrastructure still deter foreign
investors
– FDI levels still low as compared to requirements
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Outlook - 3years - Key Themes
• Growth would continue to be led by consumer demand growth
– Infrastructure would start contributing towards the end
• Rural economy to reduce dependence on agriculture
– Stabilize the rural consumption patterns
– Provide exponential growth window for consumer goods makers
• Government will step in to support investment climate
– Fiscal deficit levels would continue to be high
– Government expenditure under closer inspection
• Industrial investments guided by competitive advantages/ economic
considerations rather than licensing restrictions / allowances
• High growth will continue in:
– Infotech, telecom, transport vehicles (mainly personal transport vehicles),
consumer electronics, apparel, convenience foods, pharmaceuticals, financial
products (savings products)
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View From The Rating Agencies
Country
Moody's S&P
Thailand
Ba1*
BBB- (Stable)
Korea
Baa2
BBB (Positive)
Poland
Baa1
BBB (Positive)
India
Ba2
BB (Positive)
Argentina
B1
BB (Stable)
Brazil
B2
B+ (Positive)
Turkey
B1
B+ (Positive)
Russia
B3
SD
All ratings for Long term foreign currency borrowings.
S&P ratings as on April 28, 2000
Moody's as on April 26, 2000
* Under review for possible upgrade
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Economic Structure
• Significant transition in economic
structure
• Agriculture sector employs 75% of
the rural workforce
• Industrial sector consolidates through
liberalization
• Services sector stabilizes the economy
– Also includes PS/ GOI spending and
defense
• Economy largely internal driven and resilient
– Imports account for 10% of GDP, while
exports account for 8%
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Economic Indicators - Table
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Economy and outlook
•Macro economic overview 1991 - 2001f
A decade
full of
false
starts
Forecasts :Citibank
estimates
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Economy and outlook
•Other Indicators
Consol-idation
amid
uncertain
policy
direction
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Economy and outlook
•Interest rate trends
Falling
yields
Yields in %
Sep98
Jun99
Sep99
Mar00
Apr00
GOI 1 yr
10.42
10.71
10.45
10.11
9.35
GOI 2 yrs
11.04
10.89
10.61
10.05
9.45
GOI 5 yrs
11.84
11.44
11.03
10.33
9.82
GOI 10 yrs
12.18
11.74
11.62
10.81
10.35
AAA I yr
12.20
11.25
11.10
10.96
10.00
AAA 2 yrs
12.85
11.90
11.75
11.00
10.25
AAA 5 yrs
14.05
12.60
12.35
11.38
11.00
AAA 10 yrs
14.55
13.10
12.85
12.12
11.80
and credit
spreads
note :
GOI -S/A yld.
AAA - Ann. yld.
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Spot Rupee- Recent history
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6 month forward premia (in rupees)
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Stock Market and the Rupee
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Nasdaq and BSE
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FX markets
• Access
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Through RBI approved authorised dealers
INR trading between 9.00 AM to 4.00 PM
Crosses trading 24 hours
Based on exposures - assets / liabilities in foreign currencies
Limited freedom on the short INR side
FIIs given flexibility and freedom for entry / exit for hedging purposes
subject to some guidelines
• Instruments
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Spot and forward INR - liquid till 12 months
Prices available upto 3/5 years, execution on best efforts basis
FCY / INR Currency swaps for managing exposures
Other derivative instruments - swaps and (non-INR) options
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Citibank dealing strengths
• Global presence
• Rated number 1 in FX by Asiamoney and Corporate
Finance
• Competitive pricing on entire range of currencies
• Largest overnight limit amongst foreign banks:
domestic limits on par with largest nationalised bank
• Ability to handle large volumes
• Late night desk for crosses trading
• 24 hour order book
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Research
• Fundamental and technical research on all major
currency pairs
• Focus on Indian Rupee research
• Wide range of customer communication / market
updates
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Daily Treasury Letter
Weekly Treasury Letter
Monthly Indian Rupee Research report
Annual Treasury Letter
G7 Currencies Weekly Reviews
Monthly Global Economic Outlook
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Customer support
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Customer orientation
– focus on building long term FX relationships
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Technical support
– exposure tracking and management systems
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Integrated hedging approach
– Funds management and exposure management
– Focus on overall portfolio vs individual transactions
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Derivative Strengths
• Pricing capability on any kind of exotic derivative
products
• Ability to quote finest prices on account of large
global derivative presence
• Expertise in place for launch of new rupee derivatives
• Focus on creating customised derivative solutions
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Disclaimer
•Although the information contained herein is believed to be reliable, Citibank makes no
representation as to the accuracy or completeness of any information contained herein or
otherwise provided by Citibank.
•The ultimate decision to proceed with any transaction rests solely with the customer.
Citibank N.A. is not acting as your advisor. Therefore, prior to entering into any proposed
transaction, you should determine the economic risks and merits, as well as the legal, tax
and accounting characterizations and consequences of the transaction, and that you are
able to assume these RISKS.
•The contents of this presentation are proprietary in nature, and may not disseminated in
whole or in part without Citibank's written consent.
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