Economy: Houston, we are taking off :: Kotak Securities

Please Share::

Houston, we are taking off. Ongoing global commodity price corrections and
buoyant domestic sentiment will help repair India’s structural imbalances. Low inflation
can lead to low interest rates, improved savings and investment and can offer scope for
higher, sustainable growth. We anticipate gains from a resilient Indian household, over
the medium term, supporting investment-led economic growth.

�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��

��

-->
Higher growth—structural measures to pave the way
Our estimates indicate that with improved savings-investment dynamics and productivity, India’s
growth can revert to 8.0-9.0% in the long term. Much of this optimism hinges on the
continuation of government measures to enable investment revival in the medium term,
followed by consumption revival. Total factor productivity estimates hint at a decadal low for
productivity, which needs to be pulled back to early 2000 levels, leading to potential GDP
growth of 7.0-7.5%. To increase GDP growth to 7.0-7.5% an average investment of ~US$800
bn each year is required along with productivity improvement.
Taming inflation—managing the demand-supply imbalance
In the near term, inflation will be benign and in the RBI’s comfort zone. With prudent
government policies, we expect inflation to trend down to 5.0-5.5% by the end of FY2017,
offering room for 125-175 bps policy rate cuts from current levels. In 2015, we expect further
repo rate reduction of 50-75 bps, based on the growth-inflation mix and external conditions.
Increasing household savings—financial inclusion, demographics and income growth
We expect the household savings rate to increase to 23.0% in FY2020 from ~18.5% in
FY2015E and the financial savings rate to increase to 9.1% by FY2020 from sub-7.0% in
FY2015E, providing a cumulative ~`90 tn (US$1.4 tn) for channeling into financial products
over the next five years. Bank deposits are likely to form ~60% (~`45 tn) of the financial
savings. Life insurance, provident and pension funds are likely to account for ~`30 tn.
Lower twin-deficit risks—capitalizing on the window of opportunity
We expect GFD/GDP to glide to ~3% by FY2018/19, factoring higher capital expenditure along
with expenditure rationalization. Even though improvement in investment needs to come
mainly from the corporate sector, the government’s initial helping hand through capital
expenditure is necessary. Benign global commodity prices are likely to keep CAD muted in the
near term. Risks from the external sector in the medium term are likely to be low with (1) gold
imports unlikely to rise sharply and (2) a steady decline in imports of indigenously available
commodities along with import-substitution strategies.

LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily20012015ch.pdf