India Economics：2015 Outlook-Getting on the growth path

Please refer to page 19 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures. INDIA GDP growth – Scenario analysis Note: Real GDP growth from FY15 onwards is Macquarie estimates; Source: Macquarie Research, January 2015 Above-consensus FY16 growth estimates E = Macquarie estimates; Source: Consensus Economics, Macquarie Research, January 2015 CPI inflation seems to have peaked Source: CEIC, Macquarie Research, January 2015 Analyst(s) Tanvee Gupta Jain +91 22 6720 4355 tanvee.guptajain@macquarie.com 7 January 2015 Macquarie Capital Securities India (Pvt) Ltd India Economics 2015 Outlook: Getting on the growth path We believe the Indian economy is moving on the right track towards a cyclical and structural upturn and policymakers have been taking the right steps to improve productivity. We discuss the key themes for FY16 (or CY2015). #1 Moving towards high growth and slowing inflation We believe FY16 will be a notable year for India with economic growth improving gradually and inflation slowing on a sharp fall in global commodity prices and on policy initiatives. We expect the recent pick-up in real economic activity to be reflected in numbers from the June 2015 quarter. Overall, we expect GDP growth to pick up from 5.4% in FY15 to 6.5% in FY16 and further to 7% in FY17, supported by a step-up in investments, faster implementation of reforms and the addressing of supply-side issues. #2 Monetary easing likely We expect CPI inflation to moderate to ~6% in FY16 vs our estimate of 6.7% for FY15, giving RBI leeway to cut policy rates by as much as 100bps by end-FY16. Indeed, we expect policy easing to commence from 1Q 2015, with a high probability of the first rate cut being announced post the FY16 Union Budget in Feb-15. It is to be noted that in the last monetary policy review, RBI had indicated the possibility of an inter-meeting cut. #3 Reform momentum improving We remain optimistic about the ability of the government to undertake structural reforms and improve the productivity dynamics that will help India move to a higher growth path in the medium term. Considering its minority status in the Upper House of the parliament resulting in delays in passing of key legislations, the government has adopted the ordinance route in the interim to push through major economic reforms. Indeed, over the last week of Dec-14, the cabinet approved promulgation of the ordinance for FDI in insurance, allocation of coal blocks and amendments to the Land Acquisition Act. While using ordinance might be a temporary solution, it reflects the government’s commitment towards reforms. The government has also indicated its willingness to pass legislation by conducting joint sessions of parliament. We believe the government should work towards building a consensus with the opposition through multi-party dialogues so that critical bills like GST and land acquisition bill could be passed quickly without policy uncertainty. #4 Strong fundamentals – macro stability risks have improved Over the past year, policymakers have helped rebuild buffers to cushion against the possible spillovers. The twin deficits (fiscal and current account) have narrowed; funding environment has been strengthened that helped reduce external vulnerabilities and CPI inflation seems to have peaked. However, it is critical to build upon the recent improvement through structural reforms. We see modest depreciation bias in rupee (USD/INR) around the 64 level in the short term. However, we expect rupee to move back to 60-63 range over the course of the year on improving macro fundamentals and contained external stability risks. 7-7.5%3%4%5%6%7%8%9%10%FY08FY10FY12FY14FY16EFY18E5year peak5year troughBase BullBearYoY%8-8.5%4.5-5.5%5%6%7%8%Jan-13Jul-13Jan-14Jul-14Jan-15Consensus FY15Consensus FY16YoY%Macqestimate 6.5%Macqestimate 5.4%0%2%4%6%8%10%12%Jan-12Sep-12May-13Jan-14Sep-14Headline CPI inflationCPI Inflation ex Food ex FuelYoY% Macquarie Research India Economics 7 January 2015 2 The outlook in numbers Fig 1 Key Macro Forecasts FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E National Income Nominal GDP (Rs bn) 56301 64778 77841 90097 101133 113551 126262 141248 Nominal GDP (YoY%) 12.9% 15.1% 20.2% 15.7% 12.2% 12.3% 11.2% 11.9% Nominal GDP (US$ bn) 1226 1368 1711 1883 1861 1879 2051 2264 Per capita income (Rs) 48787 55366 65633 74956 83100 92061 101003 111486 Per capita income (US$) 1063 1169 1443 1566 1529 1524 1640 1787 Real GDP (YoY%) 6.7% 8.6% 8.9% 6.7% 4.5% 4.7% 5.4% 6.5% Sub sectors - by industry (YoY%) Agriculture 0.4% 1.5% 8.3% 4.4% 1.0% 4.0% 2.7% 3.3% Industry 4.7% 9.5% 7.6% 8.5% 1.2% 0.5% 3.9% 5.7% Services 10.0% 10.5% 9.7% 6.6% 7.0% 6.8% 6.7% 7.7% Sub sectors - by expenditure (YoY%) Consumption Expenditure 7.7% 8.4% 8.2% 8.9% 5.2% 4.7% 5.8% 6.2% Private Final Consumption Expenditure 7.2% 7.4% 8.7% 9.3% 5.0% 4.8% 5.6% 6.4% Govt Final Consumption Exp