Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India EcoView
Cutting Our Growth
Estimates Again
In this week’s EcoView, our spotlight focuses on the
growth outlook. A few weeks ago, we cut our GDP
growth forecast to 8.2% from 8.7% in F2012 (see India
EcoView, Clouds Emerging over Growth Outlook, dated
January 25, 2011). Since then, we have been
highlighting that risks to our growth outlook are to the
downside. We are now cutting our growth estimate
further to 7.7% from 8.2% for F2012. We expect
domestic demand (consumption as well as investments)
growth to be slower than expected. While exports are
likely to grow at a strong pace, we do not believe it will
be enough to offset the slower growth in domestic
demand. A detailed analysis of our growth outlook
follows.
Cutting Our Growth Estimates Again
Key Points
• Government spending and consumption growth to
slow in F2012: We expect the central government to
slow its expenditure growth to single-digit levels in
F2012. Moreover, private consumption growth is likely to
moderate in F2012 as higher inflation affects purchasing
power, higher deposit rates encourage savings, and the
government’s transfer to households slows.
• Investment to pickup but slower than expected:
After a sharp decline in private corporate capex to GDP
due to the credit crisis, the pick-up in investment has
been gradual due to some concerns on global growth
earlier on and higher inflation later, as well as corruptionrelated
investigations and a rise in cost of capital.
• Exports to remain strong, but not enough to offset
slower growth in domestic demand: Seasonally
adjusted goods exports have increased by 18.5% over
the past four months. Considering the strong growth
estimated by our US economics team for 2011, we
expect export growth to remain strong. This we believe
will help to some extent in offsetting the slower-thanexpected
domestic demand growth.
• Cutting our growth forecasts: We are cutting our GDP
growth estimates for F2012 (YE Mar-12) to 7.7% from
8.2% and for F2013 to 8.7% from 9%. On calendar year
basis, we expect GDP growth for 2011 and 2012 at
7.7% and 8.7% (vs. 8.2% and 9% earlier), respectively.
• Medium story unchanged: We believe India’s medium
growth story remains strong. We expect India to be back
on higher a growth path of 8.5-9% from F2012 onwards
driven by three factors: demographics, reforms and
globalization (DRG factors).
Summary
Over the past few months, India’s growth outlook has been
affected by adverse macro developments. The two key
factors that are making us nervous on the growth outlook are
inflation persistently staying above policy-makers’ comfort
zone and weak investment growth trend. In this context, we
believe the recent spike in commodity prices and consequent
impact on inflation and cost of capital has increased the
downside risks to growth. We now expect domestic demand
growth to be more constrained than estimated earlier. We cut
our F2012 GDP (YE Mar-12) growth forecasts to 8.2%
from 8.7% in January 2011 (see India EcoView, Clouds
Emerging over Growth Outlook, dated January 25, 2011). We
are now cutting it further to 7.7%. On a calendar-year basis,
we expect GDP growth for 2011 at 7.7% compared with 8.2%
earlier. We have also trimmed our 2012 GDP growth forecast
to 8.7% from 9%.
Inflation Pressures Remain High
High inflation expectations have already pushed the cost of
capital higher than expected. With global commodity prices
continuing to rise and surprising on the upside, the cost of
capital is likely to remain high for longer than we had
expected, adversely affecting growth. The high inflation
expectations have meant a slow rise in bank deposit growth
of 16.9% YoY as of February 11, 2011, compared to the
recent peak of 23.2% YoY as of July 2009, whereas credit
growth remained high at 23.9% YoY as of February 11, 2011.
With the Central Bank continuing to be slow to hike policy
rates, banks delayed deposit rate hikes. However, given
persistent tightness in inter-bank liquidity, banks began to
resort to aggressive deposit rate hikes from December 6,
2010. State Bank of India, the largest bank, has increased its
deposit rates for the one to two-year period by 175bp to
9.25% currently over the last three months. Some banks are
offering 9.5-9.75% deposit rates for the same tenure. We
believe the Central bank may continue to follow its gradual
pace of lifting rates. We expect another 75bp hike in the repo
rate for rest of 2011.However, we now track bank deposit rate
as a better measure of tightening of monetary conditions
instead of the policy rates.
Until recently, we were expecting a quick improvement in
inter-bank liquidity due to acceleration in deposit growth. For
instance, we thought the deposit rate hikes were aggressive
and had expected deposit growth to respond much faster,
resulting in banks beginning to cut deposit rates by 25-50bp.
However, with the persistent rise in crude oil and other
commodity prices, we believe that inflation expectations will
remain sticky and inter-bank liquidity may remain tighter for
longer. Currently, overall loan-deposit ratio is extremely tight
at 75%, which is a multiple-year high. Considering that the
banks are required to invest 24% of deposits in government
securities (SLR) and park 6% of deposits with the central
bank in the form of cash reserve ratio (CRR), current
credit-deposit (C/D) ratio indicates the stretch in banking
system to fund strong credit growth. Moreover, unlike in
2006-07, when the banking system had excess liquidity as
reflected in the form of market stabilization scheme (MSS)
bonds or reverse repo balances, currently the RBI has been
injecting liquidity to prevent big pressure on inter-bank rates.
We believe banks are likely to have to slow credit growth with
more hikes in lending rates even as deposit growth
accelerates, unless deposit growth accelerates all the way up
to 22-24% in the near term, which appears unlikely.
Slowdown in Government Spending and Moderation in
Consumption Growth in F2012
Persistent higher inflation we believe will hurt private
consumption growth. Moreover, we believe higher bank
deposit rates will encourage households to increase savings.
Similarly, we expect the government to cut its expenditure
growth in F2012 to reduce the fiscal deficit. In F2012, the
central government’s fiscal deficit is likely to be lower at 5.2%
of GDP compared with 6.4% of GDP (excluding revenue from
telecom license fees) in F2011. In the absence of support of
one-off revenues, we believe the government’s expenditure
growth will decelerate to 7.5% YoY in F2012 from 18.7% YoY
in F2011. Indeed, the central government’s expenditure has
been growing at an average rate of 19.2% YoY over the last
five years. We believe this rising government expenditure to
GDP over the last five years played a key role in boosting
private consumption. Hence, a slowdown in government
expenditure will be another factor resulting in moderation in
private consumption.
Investment Growth Likely to Be Slower than Earlier
Expected
In the context of moderation in consumption growth,
acceleration in investments is important. However, we now
see investment growth as weaker than estimated earlier.
The pace of recovery in investment appears to have suffered
in the last quarter of 2010 based on the order book trends for
engineering and construction companies. As discussed
earlier, the credit crisis has resulted in a significant decline in
total investment to GDP (excluding investments in gold by
households) to 33.2% of GDP in F2009 from 37.1% of GDP in
F2008. More important, private corporate capex, which we
believe is the most productive component of total investments,
declined from the peak of 17.3% of GDP to 11.5% of GDP in
the same period. While there has been some rise over the last
two years, the pace of increase in investments has been
slower than warranted. Total investments (excluding gold
investments by HH) and private corporate capex has
improved to 34.7% of GDP and 13.5% of GDP, respectively,
in F2011, according to our estimates.
Post credit crisis, the corporate confidence to push for higher
investments is taking time to rebound to the levels seen in
2006 and 2007. In 2009, companies were focused on
repairing their balance sheets. In 2010, corporate confidence
recovered only gradually as the global macro environment
was still not comfortable enough. Right up to August 2010,
the sovereign debt concerns in EU had meant that the
companies were not ready for an aggressive capex plan. Just
as the global environment improved, domestic factors such
as corruption-related investigations and the rise in inflation
and cost of capital have held back the investment cycle.
Indeed, we did see a recovery in order backlog for
engineering and construction companies in the first half of
2010. Order backlogs again decelerated during the quarter
ended December 2010, however
In this context, the further rise in crude oil and other global
commodity prices has only increased the risk of inflation
remaining higher for longer and the cost of capital remaining
higher for longer. Over the past few days, the government’s
actions have raised our optimism that it will get back into
initiating efforts to clear investment projects transparently. For
instance, the environment ministry has started to clear key
projects. After a long delay, POSCO’s steel project received
approval in January 2011. Similarly, the ministry awarded
approval for a 4000 MW power project in the state of Orissa.
Recently, Prime Minister Manmohan Singh approved the
constitution of a ministerial panel (to be headed by Finance
Minister Pranab Mukherjee) to sort out environmental issues
currently holding up the development of coal mines. Also, our
conversations with engineering and construction companies
indicate the transportation ministry may soon start to award
highway construction contracts in a transparent manner.
Moreover, tight capacity should encourage corporate sector
to increase capex in F2012. However, we now expect the rise
in capex to GDP to be slower than expected earlier.
Strong Rise in Exports Will Help Partly Offset Slowdown
in Domestic Demand
In line with the recovery in G3, India and other Asian countries
have already seen a major rise in exports over the past few
months. Seasonally adjusted goods exports have increased
by 18.5% over the past four months. Considering the strong
growth estimated by our US economics team for 2011, we
expect export growth to remain robust. We believe that to
some extent this will help to offset slower-than-expected
domestic demand growth. Strong growth in exports is also
helping contain current account deficit close to 3% of GDP.
Cutting Our Growth Forecasts for 2011 (F2012)
Incorporating the above discussed macro developments, we
are cutting our GDP growth estimate for F2012 (YE Mar-12)
to 7.7% from 8.2%. We are also trimming our F2013 GDP
growth to 8.7% from 9%. On a calendar-year basis, we expect
GDP growth for 2011 and 2012 at 7.7% and 8.7% (vs. 8.2%
and 9% earlier), respectively. We believe following
developments can bring upside/downside risks to our growth
forecasts:
(a) Inflation: We believe that as far as inflation is concerned,
the monetary policy has effectively tightened considerably
with bank deposit rates having moved up to close to 11-year
highs if we exclude the period worst hit by the credit crisis.
While fiscal policy remains expansionary, we believe the
government has finally moved in the right direction targeting
meaningful reductions in underlying fiscal deficit for the first
time since credit crisis unfolded (Exhibit 8). Increasingly, we
believe that global commodity prices are key to the inflation
outlook. If global commodity prices moderate quickly with
better supply response, it will help reduce inflation pressure
faster than expected. At the same time, any major further
spike in commodity prices will make inflation management
even more difficult, hurting growth.
(b) Capex: For overall growth outlook, in the current
environment where policy makers are unlikely to be able to
support growth with loose fiscal and monetary policy, we
believe investment growth is key. Our base case currently
assumes a gradual recovery in capex considering the macro
environment. If the government manages to implement an
aggressive “campaign-style” effort to transparently clear
investment projects with coordination from all ministries to
revive corporate capex, than this will bring upside risks to our
forecasts. Similarly, if the government fails to pursue a
concerted effort to ensure a gradual recovery in capex, then
there will be further downside risks to our estimate. In this
context, apart from the general macro environment, we would
be tracking announcements from various government
ministries, anecdotal evidence on various investment projects
and quarterly order book data of engineering and construction
companies.
Medium-term Growth Remains Unchanged
We believe that the current growth challenges that India is
facing are more cyclical in nature. We believe that India will
be back to transitioning toward higher sustainable growth of
8.5-9% from F2013 onwards. As we highlighted in our report,
India and China: New Tigers of Asia Part III, dated August 15,
2010, we see India moving to a higher sustainable growth
driven by three factors: demographics, reforms, and
globalization (DRG factors). Indeed, we expect India to have
one of the best demographic trends in the world. We expect
India’s saving and investment trend to recover, again lifting
the potential growth.
Impact of Oil Price Rise on India’s Macro
Oil price rise can impact India's macro in the following manner:
Inflation
If crude prices were to rise by another US$10/bbl (for the full year), it would result in an increase in wholesale
price inflation by 0.8-1ppt if the government were to pass the full increase on to consumers (a cascading effect of
a similar amount would also be felt). We were expecting WPI inflation to remain at or above 7% for most of 1H11
unless global commodity prices pull back meaningfully. If crude oil prices reach US$120/bbl for a sustained
period of six months or more, we believe headline inflation (WPI) could spike to 8-9%.
External
Balance
A US$10/bbl change in crude oil prices would result in India’s import bill and current account deficit rising by
about US$8.1 bn (0.42% of GDP).
Subsidy
Burden
Every US$10/bbl increase in oil prices increases fuel oil subsidy in India by US$6.3 bn (0.32% of GDP) if
domestic fuel prices are unchanged.
Source: Morgan Stanley Research
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India EcoView
Cutting Our Growth
Estimates Again
In this week’s EcoView, our spotlight focuses on the
growth outlook. A few weeks ago, we cut our GDP
growth forecast to 8.2% from 8.7% in F2012 (see India
EcoView, Clouds Emerging over Growth Outlook, dated
January 25, 2011). Since then, we have been
highlighting that risks to our growth outlook are to the
downside. We are now cutting our growth estimate
further to 7.7% from 8.2% for F2012. We expect
domestic demand (consumption as well as investments)
growth to be slower than expected. While exports are
likely to grow at a strong pace, we do not believe it will
be enough to offset the slower growth in domestic
demand. A detailed analysis of our growth outlook
follows.
Cutting Our Growth Estimates Again
Key Points
• Government spending and consumption growth to
slow in F2012: We expect the central government to
slow its expenditure growth to single-digit levels in
F2012. Moreover, private consumption growth is likely to
moderate in F2012 as higher inflation affects purchasing
power, higher deposit rates encourage savings, and the
government’s transfer to households slows.
• Investment to pickup but slower than expected:
After a sharp decline in private corporate capex to GDP
due to the credit crisis, the pick-up in investment has
been gradual due to some concerns on global growth
earlier on and higher inflation later, as well as corruptionrelated
investigations and a rise in cost of capital.
• Exports to remain strong, but not enough to offset
slower growth in domestic demand: Seasonally
adjusted goods exports have increased by 18.5% over
the past four months. Considering the strong growth
estimated by our US economics team for 2011, we
expect export growth to remain strong. This we believe
will help to some extent in offsetting the slower-thanexpected
domestic demand growth.
• Cutting our growth forecasts: We are cutting our GDP
growth estimates for F2012 (YE Mar-12) to 7.7% from
8.2% and for F2013 to 8.7% from 9%. On calendar year
basis, we expect GDP growth for 2011 and 2012 at
7.7% and 8.7% (vs. 8.2% and 9% earlier), respectively.
• Medium story unchanged: We believe India’s medium
growth story remains strong. We expect India to be back
on higher a growth path of 8.5-9% from F2012 onwards
driven by three factors: demographics, reforms and
globalization (DRG factors).
Summary
Over the past few months, India’s growth outlook has been
affected by adverse macro developments. The two key
factors that are making us nervous on the growth outlook are
inflation persistently staying above policy-makers’ comfort
zone and weak investment growth trend. In this context, we
believe the recent spike in commodity prices and consequent
impact on inflation and cost of capital has increased the
downside risks to growth. We now expect domestic demand
growth to be more constrained than estimated earlier. We cut
our F2012 GDP (YE Mar-12) growth forecasts to 8.2%
from 8.7% in January 2011 (see India EcoView, Clouds
Emerging over Growth Outlook, dated January 25, 2011). We
are now cutting it further to 7.7%. On a calendar-year basis,
we expect GDP growth for 2011 at 7.7% compared with 8.2%
earlier. We have also trimmed our 2012 GDP growth forecast
to 8.7% from 9%.
Inflation Pressures Remain High
High inflation expectations have already pushed the cost of
capital higher than expected. With global commodity prices
continuing to rise and surprising on the upside, the cost of
capital is likely to remain high for longer than we had
expected, adversely affecting growth. The high inflation
expectations have meant a slow rise in bank deposit growth
of 16.9% YoY as of February 11, 2011, compared to the
recent peak of 23.2% YoY as of July 2009, whereas credit
growth remained high at 23.9% YoY as of February 11, 2011.
With the Central Bank continuing to be slow to hike policy
rates, banks delayed deposit rate hikes. However, given
persistent tightness in inter-bank liquidity, banks began to
resort to aggressive deposit rate hikes from December 6,
2010. State Bank of India, the largest bank, has increased its
deposit rates for the one to two-year period by 175bp to
9.25% currently over the last three months. Some banks are
offering 9.5-9.75% deposit rates for the same tenure. We
believe the Central bank may continue to follow its gradual
pace of lifting rates. We expect another 75bp hike in the repo
rate for rest of 2011.However, we now track bank deposit rate
as a better measure of tightening of monetary conditions
instead of the policy rates.
Until recently, we were expecting a quick improvement in
inter-bank liquidity due to acceleration in deposit growth. For
instance, we thought the deposit rate hikes were aggressive
and had expected deposit growth to respond much faster,
resulting in banks beginning to cut deposit rates by 25-50bp.
However, with the persistent rise in crude oil and other
commodity prices, we believe that inflation expectations will
remain sticky and inter-bank liquidity may remain tighter for
longer. Currently, overall loan-deposit ratio is extremely tight
at 75%, which is a multiple-year high. Considering that the
banks are required to invest 24% of deposits in government
securities (SLR) and park 6% of deposits with the central
bank in the form of cash reserve ratio (CRR), current
credit-deposit (C/D) ratio indicates the stretch in banking
system to fund strong credit growth. Moreover, unlike in
2006-07, when the banking system had excess liquidity as
reflected in the form of market stabilization scheme (MSS)
bonds or reverse repo balances, currently the RBI has been
injecting liquidity to prevent big pressure on inter-bank rates.
We believe banks are likely to have to slow credit growth with
more hikes in lending rates even as deposit growth
accelerates, unless deposit growth accelerates all the way up
to 22-24% in the near term, which appears unlikely.
Slowdown in Government Spending and Moderation in
Consumption Growth in F2012
Persistent higher inflation we believe will hurt private
consumption growth. Moreover, we believe higher bank
deposit rates will encourage households to increase savings.
Similarly, we expect the government to cut its expenditure
growth in F2012 to reduce the fiscal deficit. In F2012, the
central government’s fiscal deficit is likely to be lower at 5.2%
of GDP compared with 6.4% of GDP (excluding revenue from
telecom license fees) in F2011. In the absence of support of
one-off revenues, we believe the government’s expenditure
growth will decelerate to 7.5% YoY in F2012 from 18.7% YoY
in F2011. Indeed, the central government’s expenditure has
been growing at an average rate of 19.2% YoY over the last
five years. We believe this rising government expenditure to
GDP over the last five years played a key role in boosting
private consumption. Hence, a slowdown in government
expenditure will be another factor resulting in moderation in
private consumption.
Investment Growth Likely to Be Slower than Earlier
Expected
In the context of moderation in consumption growth,
acceleration in investments is important. However, we now
see investment growth as weaker than estimated earlier.
The pace of recovery in investment appears to have suffered
in the last quarter of 2010 based on the order book trends for
engineering and construction companies. As discussed
earlier, the credit crisis has resulted in a significant decline in
total investment to GDP (excluding investments in gold by
households) to 33.2% of GDP in F2009 from 37.1% of GDP in
F2008. More important, private corporate capex, which we
believe is the most productive component of total investments,
declined from the peak of 17.3% of GDP to 11.5% of GDP in
the same period. While there has been some rise over the last
two years, the pace of increase in investments has been
slower than warranted. Total investments (excluding gold
investments by HH) and private corporate capex has
improved to 34.7% of GDP and 13.5% of GDP, respectively,
in F2011, according to our estimates.
Post credit crisis, the corporate confidence to push for higher
investments is taking time to rebound to the levels seen in
2006 and 2007. In 2009, companies were focused on
repairing their balance sheets. In 2010, corporate confidence
recovered only gradually as the global macro environment
was still not comfortable enough. Right up to August 2010,
the sovereign debt concerns in EU had meant that the
companies were not ready for an aggressive capex plan. Just
as the global environment improved, domestic factors such
as corruption-related investigations and the rise in inflation
and cost of capital have held back the investment cycle.
Indeed, we did see a recovery in order backlog for
engineering and construction companies in the first half of
2010. Order backlogs again decelerated during the quarter
ended December 2010, however
In this context, the further rise in crude oil and other global
commodity prices has only increased the risk of inflation
remaining higher for longer and the cost of capital remaining
higher for longer. Over the past few days, the government’s
actions have raised our optimism that it will get back into
initiating efforts to clear investment projects transparently. For
instance, the environment ministry has started to clear key
projects. After a long delay, POSCO’s steel project received
approval in January 2011. Similarly, the ministry awarded
approval for a 4000 MW power project in the state of Orissa.
Recently, Prime Minister Manmohan Singh approved the
constitution of a ministerial panel (to be headed by Finance
Minister Pranab Mukherjee) to sort out environmental issues
currently holding up the development of coal mines. Also, our
conversations with engineering and construction companies
indicate the transportation ministry may soon start to award
highway construction contracts in a transparent manner.
Moreover, tight capacity should encourage corporate sector
to increase capex in F2012. However, we now expect the rise
in capex to GDP to be slower than expected earlier.
Strong Rise in Exports Will Help Partly Offset Slowdown
in Domestic Demand
In line with the recovery in G3, India and other Asian countries
have already seen a major rise in exports over the past few
months. Seasonally adjusted goods exports have increased
by 18.5% over the past four months. Considering the strong
growth estimated by our US economics team for 2011, we
expect export growth to remain robust. We believe that to
some extent this will help to offset slower-than-expected
domestic demand growth. Strong growth in exports is also
helping contain current account deficit close to 3% of GDP.
Cutting Our Growth Forecasts for 2011 (F2012)
Incorporating the above discussed macro developments, we
are cutting our GDP growth estimate for F2012 (YE Mar-12)
to 7.7% from 8.2%. We are also trimming our F2013 GDP
growth to 8.7% from 9%. On a calendar-year basis, we expect
GDP growth for 2011 and 2012 at 7.7% and 8.7% (vs. 8.2%
and 9% earlier), respectively. We believe following
developments can bring upside/downside risks to our growth
forecasts:
(a) Inflation: We believe that as far as inflation is concerned,
the monetary policy has effectively tightened considerably
with bank deposit rates having moved up to close to 11-year
highs if we exclude the period worst hit by the credit crisis.
While fiscal policy remains expansionary, we believe the
government has finally moved in the right direction targeting
meaningful reductions in underlying fiscal deficit for the first
time since credit crisis unfolded (Exhibit 8). Increasingly, we
believe that global commodity prices are key to the inflation
outlook. If global commodity prices moderate quickly with
better supply response, it will help reduce inflation pressure
faster than expected. At the same time, any major further
spike in commodity prices will make inflation management
even more difficult, hurting growth.
(b) Capex: For overall growth outlook, in the current
environment where policy makers are unlikely to be able to
support growth with loose fiscal and monetary policy, we
believe investment growth is key. Our base case currently
assumes a gradual recovery in capex considering the macro
environment. If the government manages to implement an
aggressive “campaign-style” effort to transparently clear
investment projects with coordination from all ministries to
revive corporate capex, than this will bring upside risks to our
forecasts. Similarly, if the government fails to pursue a
concerted effort to ensure a gradual recovery in capex, then
there will be further downside risks to our estimate. In this
context, apart from the general macro environment, we would
be tracking announcements from various government
ministries, anecdotal evidence on various investment projects
and quarterly order book data of engineering and construction
companies.
Medium-term Growth Remains Unchanged
We believe that the current growth challenges that India is
facing are more cyclical in nature. We believe that India will
be back to transitioning toward higher sustainable growth of
8.5-9% from F2013 onwards. As we highlighted in our report,
India and China: New Tigers of Asia Part III, dated August 15,
2010, we see India moving to a higher sustainable growth
driven by three factors: demographics, reforms, and
globalization (DRG factors). Indeed, we expect India to have
one of the best demographic trends in the world. We expect
India’s saving and investment trend to recover, again lifting
the potential growth.
Impact of Oil Price Rise on India’s Macro
Oil price rise can impact India's macro in the following manner:
Inflation
If crude prices were to rise by another US$10/bbl (for the full year), it would result in an increase in wholesale
price inflation by 0.8-1ppt if the government were to pass the full increase on to consumers (a cascading effect of
a similar amount would also be felt). We were expecting WPI inflation to remain at or above 7% for most of 1H11
unless global commodity prices pull back meaningfully. If crude oil prices reach US$120/bbl for a sustained
period of six months or more, we believe headline inflation (WPI) could spike to 8-9%.
External
Balance
A US$10/bbl change in crude oil prices would result in India’s import bill and current account deficit rising by
about US$8.1 bn (0.42% of GDP).
Subsidy
Burden
Every US$10/bbl increase in oil prices increases fuel oil subsidy in India by US$6.3 bn (0.32% of GDP) if
domestic fuel prices are unchanged.
Source: Morgan Stanley Research
No comments:
Post a Comment