madhansurya
12-01-2008, 05:13 PM
India in 2008
A Year of Priorities
➤ Macro fundamentals currently favor the
continuation of ~9% growth in FY09, but with
2008 being a pre-election year, we believe that
the government will try to ensure that this 9%
growth trickles down to all sections of society
➤ The government’s priorities in 2008 are likely to
be (1) Infrastructure, (2) Health, (3) Education,
and (4) Agriculture/Rural development
➤ Three other issues that are likely to influence
the economy in 2008 include (1) Development of
the Private Debt Market, (2) Offshoots of
Urbanization – Emerging Cities in India, and (3)
Environmental Dynamics and Climate Change
➤ Besides the existing domestic challenges of
infrastructure, the human resource paradox and
Naxalite threat, global risks to our benign
outlook include a US recession, agflation and
geo-political risks in the sub-continent
2008 – What lies in store? For India, 2007 was about establishing
paradigms – ~9% growth rate, appreciating currency trend, a
differentiated and key ‘emerging markets’ investment destination – as
well as roadblocks and risks – energy scarcity, fractured polity, ‘pocket
inflation’ with managed headlines. 2008 should be about ‘keeping your
eyes on the road and your hands on the wheel’.
Economy in 2008 – Positives Outweigh the Negatives
We expect GDP to sustain at 9% levels in FY09 with investments continuing to be
the key growth driver. On the monetary front, we see a gradual easing in policy rates.
Structural and cyclical factors should result in the combined fiscal deficit coming in
at sub 6% of GDP levels, but this masks off-balance sheet items. Rupee appreciation
is likely here to stay but the possible imposition of various controls will result in
trends not being uni-directional. On politics, we believe the odds favor the
government completing its term. Finally, we maintain our view that India has
potential to further lift its trend growth level to the 10% range if it addresses the
well-known challenges of infrastructure, the human resource paradox, state inequalities
and the Naxalite threat.
Global Developments and India – Be Aware of Subcontinent Risks
Our US team is not calling for a recession. While Citi strongly disagrees with the
“decoupling” thesis, we acknowledge that there will be a divergence in performance
in emerging markets. For India, we maintain our view that as economic growth is
largely domestically driven, if the US were to go into a recession, the impact on
India’s GDP would be the smallest as compared to the region. Another global worry
is that of rising food and energy costs which could result in upward pressure on
inflation. However, as this is a pre-election year for India, we expect the government
to absorb the cost of higher prices such that the impact on headline inflation is
minimized. Another factor to be aware of is geopolitical risks given that India is
surrounded by Pakistan, Bangladesh, Srilanka and Nepal – all countries where
politics is a worry.
The Government’s Priorities for 2008 – Four Key Areas to Watch
While economic growth has averaged 9% during the last three years with 2008 being
a pre-election year, we believe that the government will be keen to ensure that this
9% growth trickles down to all sections of society. In order to bridge the rural-urban
divide and state disparities, the four key areas that are likely to see a renewed focus
are infrastructure, health, education and agriculture/rural development. While
building physical infrastructure remains a top priority for the government, there is
likely to be a strategic shift wherein public investment would focus more on building
social capital and on equity issues, while private investment would have a larger role
in physical infrastructure.
Other Issues to Watch Out For in 2008
Besides the government’s four priorities for 2008, we analyse three other issues that
are likely to influence the economy. These include (1) Development of the Private
Debt Market, (2) Offshoots of Urbanization – Emerging Cities in India, and (3)
Environmental Dynamics and Climate Change
Indian Economy in 2008: Domestic
Drivers and Challenges
➤ We expect GDP to sustain at 9% levels in FY09 with investments
continuing to be the key growth driver. However, given that 2008 is a
pre-election year, we see a thrust on infrastructure, health, education
and agriculture/rural development
➤ 2008 is a year where food price inflation could pose upside
surprises. However, as inflation is the one macro variable that can
bring down the government, we could see more fiscal sops to ensure
that headline inflation is not felt by the masses
➤ On the monetary front, while the rate cycle has peaked with the next
move down, we expect the CRR to continue to be used as a “liquidity
absorption tool”
➤ Structural and cyclical factors will likely result in the headline fiscal
deficit number coming in at sub 6% of GDP levels. However, this
masks various off-balance sheet items such as oil/food/fertiliser
bonds
➤ Rupee appreciation is likely here to stay but the possible imposition
of various controls will result in trends not being uni-directional
➤ On politics, while the stalemate between the Congress and Left
parties over the nuclear deal with the US continues, given the resultsof the Gujarat state elections coupled with the Nandigram issue, we
believe it is in no parties’ interest to call for early elections. The odds
could thus favor the government completing its term
➤ Lastly, we maintain our view that India has potential to further lift its
trend growth level to the 10% range if it addresses the well-known
challenges of infrastructure, human resource paradox, state inequalities
and the Naxalite threat
Fiscal Conditions – To Remain Healthy but They Mask
the Off-Balance Sheet Items
Over the last few years, India’s fiscal deficit has declined from a high of 9.9% of
GDP in FY02 to 6.2% in FY07. Besides the cyclical factors (i.e. higher growth
resulting in buoyant tax revenues), the structural factors contributing to the decline in
the deficit include the implementation of the FRBM Act in 2004 at the central
government level, a similar legislation at the state level, coupled with the
introduction of the state VAT.
A Year of Priorities
➤ Macro fundamentals currently favor the
continuation of ~9% growth in FY09, but with
2008 being a pre-election year, we believe that
the government will try to ensure that this 9%
growth trickles down to all sections of society
➤ The government’s priorities in 2008 are likely to
be (1) Infrastructure, (2) Health, (3) Education,
and (4) Agriculture/Rural development
➤ Three other issues that are likely to influence
the economy in 2008 include (1) Development of
the Private Debt Market, (2) Offshoots of
Urbanization – Emerging Cities in India, and (3)
Environmental Dynamics and Climate Change
➤ Besides the existing domestic challenges of
infrastructure, the human resource paradox and
Naxalite threat, global risks to our benign
outlook include a US recession, agflation and
geo-political risks in the sub-continent
2008 – What lies in store? For India, 2007 was about establishing
paradigms – ~9% growth rate, appreciating currency trend, a
differentiated and key ‘emerging markets’ investment destination – as
well as roadblocks and risks – energy scarcity, fractured polity, ‘pocket
inflation’ with managed headlines. 2008 should be about ‘keeping your
eyes on the road and your hands on the wheel’.
Economy in 2008 – Positives Outweigh the Negatives
We expect GDP to sustain at 9% levels in FY09 with investments continuing to be
the key growth driver. On the monetary front, we see a gradual easing in policy rates.
Structural and cyclical factors should result in the combined fiscal deficit coming in
at sub 6% of GDP levels, but this masks off-balance sheet items. Rupee appreciation
is likely here to stay but the possible imposition of various controls will result in
trends not being uni-directional. On politics, we believe the odds favor the
government completing its term. Finally, we maintain our view that India has
potential to further lift its trend growth level to the 10% range if it addresses the
well-known challenges of infrastructure, the human resource paradox, state inequalities
and the Naxalite threat.
Global Developments and India – Be Aware of Subcontinent Risks
Our US team is not calling for a recession. While Citi strongly disagrees with the
“decoupling” thesis, we acknowledge that there will be a divergence in performance
in emerging markets. For India, we maintain our view that as economic growth is
largely domestically driven, if the US were to go into a recession, the impact on
India’s GDP would be the smallest as compared to the region. Another global worry
is that of rising food and energy costs which could result in upward pressure on
inflation. However, as this is a pre-election year for India, we expect the government
to absorb the cost of higher prices such that the impact on headline inflation is
minimized. Another factor to be aware of is geopolitical risks given that India is
surrounded by Pakistan, Bangladesh, Srilanka and Nepal – all countries where
politics is a worry.
The Government’s Priorities for 2008 – Four Key Areas to Watch
While economic growth has averaged 9% during the last three years with 2008 being
a pre-election year, we believe that the government will be keen to ensure that this
9% growth trickles down to all sections of society. In order to bridge the rural-urban
divide and state disparities, the four key areas that are likely to see a renewed focus
are infrastructure, health, education and agriculture/rural development. While
building physical infrastructure remains a top priority for the government, there is
likely to be a strategic shift wherein public investment would focus more on building
social capital and on equity issues, while private investment would have a larger role
in physical infrastructure.
Other Issues to Watch Out For in 2008
Besides the government’s four priorities for 2008, we analyse three other issues that
are likely to influence the economy. These include (1) Development of the Private
Debt Market, (2) Offshoots of Urbanization – Emerging Cities in India, and (3)
Environmental Dynamics and Climate Change
Indian Economy in 2008: Domestic
Drivers and Challenges
➤ We expect GDP to sustain at 9% levels in FY09 with investments
continuing to be the key growth driver. However, given that 2008 is a
pre-election year, we see a thrust on infrastructure, health, education
and agriculture/rural development
➤ 2008 is a year where food price inflation could pose upside
surprises. However, as inflation is the one macro variable that can
bring down the government, we could see more fiscal sops to ensure
that headline inflation is not felt by the masses
➤ On the monetary front, while the rate cycle has peaked with the next
move down, we expect the CRR to continue to be used as a “liquidity
absorption tool”
➤ Structural and cyclical factors will likely result in the headline fiscal
deficit number coming in at sub 6% of GDP levels. However, this
masks various off-balance sheet items such as oil/food/fertiliser
bonds
➤ Rupee appreciation is likely here to stay but the possible imposition
of various controls will result in trends not being uni-directional
➤ On politics, while the stalemate between the Congress and Left
parties over the nuclear deal with the US continues, given the resultsof the Gujarat state elections coupled with the Nandigram issue, we
believe it is in no parties’ interest to call for early elections. The odds
could thus favor the government completing its term
➤ Lastly, we maintain our view that India has potential to further lift its
trend growth level to the 10% range if it addresses the well-known
challenges of infrastructure, human resource paradox, state inequalities
and the Naxalite threat
Fiscal Conditions – To Remain Healthy but They Mask
the Off-Balance Sheet Items
Over the last few years, India’s fiscal deficit has declined from a high of 9.9% of
GDP in FY02 to 6.2% in FY07. Besides the cyclical factors (i.e. higher growth
resulting in buoyant tax revenues), the structural factors contributing to the decline in
the deficit include the implementation of the FRBM Act in 2004 at the central
government level, a similar legislation at the state level, coupled with the
introduction of the state VAT.