Economic Trends Dr. Ajit Ranade 7 March 2019
India’s Recent Growth India GDP Growth (%)
7.9
8.1
8.5
End of capex cycle; high inflation
7.9
7.7
Demonetisation & GST 8.0
8.2
7.4
7.2
7.3
FY18
FY19 E
6.4 Global Financial Crisis
5.2
5.5
3.1
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
Fastest growing major economy, but still a long way to go GDP Per Capita, PPP (US $) 18,000
China
16,000
16,205
World
14,000 ~$ 6,600 India (2016) World (1995)
~$ 5,650 India (2014) World (1991)
12,000 10,000 8,000 6,000
~$ 2,300 India (2003) China (1997)
~$ 1,500 India (1995) China (1993)
4,000 2,000
~$ 6,500 India (2016) China (2006)
India is currently ~ a decade behind China and ~3 decades behind World average China’s catch-up was particularly pronounced in the last decade. Can India do it in the next decade?
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
0
Some Key Features of China’s Growth
Major Exports China
India
Computers
Refined Petroleum
Telecom Equipment
Diamonds
Telephones
Jewellery
Integrated Circuits
Packaged Medicines
Light Fixtures
Automobiles
While India exports lightly processed petrochemicals and jewellery, China focuses on high value consumer electronics
GDP – China’s GDP is 5.1X India’s GDP Exports – 7.2 X India’s exports Electricity -5.3 X India’s electricity generation Automobiles – Passenger Vehicles – 6.7X India’s annual PV sales Commercial Vehicles – 4.4X India’s annual CV sales Internet penetration – 1.67X times penetration in India Research – Patents filed – 29.8X times India’s filings in 2016 FDI: in China mainly into manufacturing; in India mainly into services & construction Unlike China, India is not integrated into regional value chains m
The big lift … will it happen? Near-double digit growth rates have happened in smaller, export-driven economies or controlled economies; Can India achieve it?
8-9% India’s aspiration
Structural Drivers Demography Urbanisation Catch-up of infrastructure
Cyclicals Global backdrop Return of private capex
6-7% India’s recent growth rates
Policies Investor-friendly policies NPA resolution Formalisation of economy
Demographic Dividend
116
India’s median age is 28 years (vs. 37+ in China and US, 45+ in Japan and Europe)
By 2025, India’s working age population will overtake China’s and cross 1 bn mark in 2027
India is projected to account for one-fourth of global incremental workforce between 2017 and 2027
Expected change in Population in the working age (15-64 years) between 2017 and 2027 (Million)
4
Working Age Population (2027, Mn)
19
8
28
34
16
11 -8
India
-21 China
US
Indonesia
Brazil
Pakistan
Nigeria
Bangladesh
Mexico
Russia
1003
989
217
197
153
147
136
126
97
90
Source: Bloomberg analysis of UN World Population Prospects
40% of Indians will live in cities by 2030 % of Population residing in Urban Areas
17.9
23.1
27.7
34.8
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030
17.0
19.8
25.5
30.9
39.5
ď ą Currently China has 750+ mn urban dwellers vs. 400+ mn in India ď ą Projections suggest that urban Indians will double in size by 2050 (i.e. another 400 mn) while China will add ~290 mn to its urban population
Source: World Urbanisation Prospects
Continued pace of urbanisation will drive consumption, housing, greater penetration of commodities
Infrastructure – A challenge and an opportunity India’s infrastructure investment need has been estimated at between $0.8-1.0 trillion over the next five years Govt. has announced a massive roads building programme (83,677 km at nearly $110 bn) over next five years Over 200 million housing units being built under Govt. programmes for “a roof over every head” 24x7 Power for All (24x7 PFA) - a Joint Initiative of Government of India (GoI) and State Governments
Growth push during implementation phase
Better connectivity and logistic efficiency
Improved living standards
In recent years, rising tax-GDP ratio and comfortable financing conditions for PSUs supported govt.-driven infra-push
Cyclicals: Is the global backdrop supportive? 2017
2018
2019
2020
2021
2022
2023
World
3.8
3.7
3.5
3.6
3.6
3.6
3.6
Advanced economies
2.4
2.3
2.0
1.7
1.7
1.5
1.5
European Union Emerging market and developing econ. ASEAN-5
2.4
1.8
1.6
1.7
1.7
1.7
1.6
4.7
4.6
4.5
4.9
4.9
4.8
4.8
5.3
5.2
5.1
5.2
5.2
5.3
5.3
China
6.9
6.6
6.2
6.2
6.0
5.8
5.6
Germany
2.5
1.5
1.3
1.6
1.5
1.3
1.2
India (FY)
6.7
7.3
7.5
7.7
7.7
7.7
7.7
United Kingdom
1.8
1.4
1.5
1.6
1.6
1.6
1.6
United States
2.2
2.9
2.5
1.8
1.7
1.5
1.4
Japan (FY)
1.9
0.9
1.1
0.5
0.7
0.5
0.5
Source: IMF Note - % YoY
Downside risks
Pvt. Capex revival – another necessary piece! India GFCF (% of GDP) 31.5 31.5 31.5 32.2 25.6
27.7
29.1
34.3 34.1
32.6
31.1 30.7 30.8 31.4
32.9
Capex has been depressed in recent years due to – Low capacity utilisation Difficulties in EC, land acquisition Leveraged balance sheets of corporates Stress on banking sector’s assets
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
Corporate sector deleveraging already underway; investment appetite could be back in next 4-6 quarters as capacity utilisation picks up
Govt. Initiatives and Reforms Greater formalization of the Economy Goods and Services Tax (GST)
JanDhan – Aadhaar Mobile (JAM) Trinity
Demonetization
Real Estate Regulatory Act (RERA)
Tackling of Vexing Issues UDAY Scheme (for sustainability of power distribution sector)
Insolvency and Bankruptcy Code
Recapitalization of Public Sector Banks
Medium-term Outlook on the Economy Growth in the range of 7.5% to 8% Moderate inflation – around 4% to 4.5% Interest rates will be under pressure due to fiscal worries – will be mitigated partially if the tax-GDP ratio improves on greater formalisation of the economy
Average depreciation of INR by ~2% p.a.; There will be phases of appreciation in between
However, a near-term churn in financial markets a distinct possibility
Near term Outlook
Macro Risks tilted to the downside Risks to the Global Macro Economy
Global Trade War
Uncertainty around Oil
Geopolitical Tensions
Emerging Markets Contagion
Risks to the Indian Macro Economy
Tightening Financial Conditions
Shortfall in GST collection
Widening Current Account Deficit
Global Business Cycle: Slowing Growth IMF Revised Growth Forecasts (% yoy)
• Downward revisions of growth forecasts • Key headwinds to growth: US-China trade war and tighter financial conditions
2018 E
2019 F
2020 F
US
2.9
2.5
1.8
Euro area
1.8
1.6
1.7
China
6.6
6.2
6.2
India
7.3
7.5
7.7
World Output
3.7
3.5
3.6
Eurozone: Growing concerns of growth and Brexit Eurozone GDP (% QoQ) 1.1
• Italy went into recession in Q4 ’18 (3rd time in 10 years)- a negative sign for the new populist government.
• UK economic data remained weak with no agreement on the Brexit deal • Germany’s growth was impacted by disruptions in the car industry due to new emission standards and insurance requirements. • In the Jan 2019 IMF projections, maximum downward revision was for the Euro area vs the Oct 2018 forecasts.
0.9 0.7
0.5 0.3
0.2
0.1 -0.1 -0.3 -0.5
EUR/USD
1.30 1.27 1.24 1.21 1.18 1.15 1.12 1.09 Feb-18
Apr-18
Jun-18
Aug-18
Oct-18
Dec-18
Feb-19
Significance of Cotton for India Cotton: World Production (2017-18)
• largest producer and second largest consumer in the world. Others, 23%
China, 22%
Pakistan, 7% Brazil, 7%
India, 23% United States, 17%
• third largest exporter of cotton globally • largest acreage for cotton at 12 mn hectares of global 33 mn hectares • sustains livelihood of estimated 5.8 mn cotton farmers
Cotton: World Consumption (2017-18)
Other, 21% Turkey, 6%
and 40-50 mn people engaged in activities like cotton processing and trade
• India’s textile mix tilted towards cotton with consumption mix of 55:45 in China, 31%
Vietnam, 5% India, 20% Bangladesh, 6% Pakistan, 9%
•
favour of cotton vis a vis man-made fibre. This is in contrast to global consumption pattern of 30:70 in favour of MMF.
Challenges for Cotton Sector in India • Low cotton Productivity: Cotton yield in India stagnated at 500 kg/hectare as against global average of 779 kg/ hectare. R&D of seeds and improvement in irrigation facilities required for improving yields • Rising cost of cultivation: Cost of cultivation escalated at 12.8% per annum during 2005-2015. Largest increase in cost due to labour cost as cotton cultivation is labour intensive. • Farmers Income suffering: Net income of farmers suffering due to stagnant yields, volatile prices and rising cost of cultivation. • Infestation of GM variety: Pink bollworm infestation plaguing cotton farmers even though GM seeds should be pest resistant. Cotton yield in 2017-18, 9% lower due to the infestation.
• Price volatility: Cotton price volatility due to weather related concerns aggravated by speculative market activities and China’s inventory management. • Consumption trend in favour of MMF globally: Need to focus on R&D to increase adaptability of cotton to latest fashion and utility of consumers.
Bt Cotton in India • Monsanto introduced Bt Cotton called BG-1 in 2002 and BG-2 in 2006
Area under GM crops (mn hectares, Yr: 2016)
• 95% cotton in India genetically modified by 2014
72.9
• India fifth largest area under GM crop cultivation
49.1
• Increase in area of BT cotton have not helped improve yields
23.8
US
Brazil
Argentina
11.6
10.8
Canada
India
• Last three years problem of pink bollworm infestation. Other 14 Bt cotton-growing countries not facing infestation issue. • Farmers complaining about spending more on pesticides and high cost Bt Seeds
Following reasons attributed to infestation of Bt cotton in India: Usage of unapproved Bt Cotton seeds. Usage of long-duration hybrids as against open-pollinated varieties used by other countries. Indian seed companies prefer hybrid seeds because they cant be re-planted by the farmers. Indian farmers grow crop longer so that they can produce enough cotton but this allows pest to thrive and evolve resistance. Farmers avoiding trap cropping (20% sowing area for non-bt cotton) required to prevent bollworm from developing resistance to Bt cotton.
China Reserve Stocks critical factor in global story Cotlook A (cents/lb)
250 200 150 100
50
Feb-19
Jul-18
Dec-17
May-17
Oct-16
Mar-16
Jan-15
Aug-15
Jun-14
Nov-13
Sep-12
Apr-13
Feb-12
Jul-11
Dec-10
Oct-09
May-10
Mar-09
Aug-08
Jan-08
Jun-07
Nov-06
Sep-05
Apr-06
Feb-05
0
• China started building state reserve for cotton in 2011 for supply security. They set a price floor and when prices fell below the floor they would step in to buy. • Attractive price floor by China, resulted in sharp increase in cotton production and subsequent fall in prices. By 2014/15 China reserves rose to 65 mn bales more than half the world cotton production.
• 2015 multi-year destocking started. By 2018/19, China’s stock est at 32 mn bales.
Global Cotton Stocks falling Global Cotton Ending Stocks (mn bales)
120 100 80
60 40 20 0 2014/15
2015/16 World
China
2016/17
2017/18
2018/19
World excluding China
• For 2018/19, global ending stock est at 75.5 mn bales (lower than 2017/18), but stock to use ratio still on higher side. • Market sentiments dampened by US-China trade war. • Brazil appears to be benefitting from trade war, with exports to China increasing.
• For 2018/19, higher production in China, Brazil and Australia offsetting lower production in Turkey and India. • Global consumption slightly lower in 2018/19 led by lower demand in India and China.
India Textile Sector
Textile Industry in India 14% share of Industrial Production
4% share of GDP 13% share of exports
2nd largest employer, 105 mn people
• India has presence in the entire value chain from fibre, yarn, fabric to garments • India has the advantage of abundant and low cost labour. • Textile exports from India around US$ 36 bn.
• Exports growth almost flat in FY17 and FY18, with marginal improvement in FY19. • India’s main export markets are EU, US and Canada • huge unrealized market potential with per capita consumption of all fibre less than 50% of global per capital consumption
India’s position in global textile industry % share in Global Apparel Exports
India’s Position in global textile exports Select items ROW, 44
India, 3.9 Italy, 4.5
China, 34
Bangladesh, 7.6 Vietnam, 5.6
% share in World Exports
Rank
Cotton based textile
12.2
2
Manmade filament based textile Manmade staple fibre based textile
4.3
6
5.7
3
Kinitted or crocheted fabric
0.8
14
Knitted apparel and accessories
3.6
6
Woven apparel and accessories
4.1
5
• India is the largest producer of cotton and second largest producer of MMF • India’s share in global textile exports 5% compared to China’s 38% • High share in global export market in upstream products, like fibre and yarn (14% each). Even in Fibre, cotton specifically, has a high share of 27%. • However, India has a low share in value added downstream segments. India’s export of Apparel has a share of 3.9% and Fabrics have a share of 3.5% in world trade.
Issues facing India’s Textile Industry • Small scale and unorganized players dominate the industry. SMEs make up about 80% of industry • Infrastructure bottleneck in terms of road/port connectivity leads to long lead time and delays in meeting delivery schedules • Outdated Technology: Around 60% of the spindles used in India are more than 25 years old. Technology upgradation schemes will help the Indian players increase their productivity and competitiveness. • Inflexible labour laws an obstacle for textile industry. There is also need for adequate skilling to take advantage of abundant labour availability
• Implementation of GST a challenge for industry given the large unorgainsed segment in the industry • Termination of export subsidies, required by WTO norm. MEIS and EPCG schemes to be affected • Differential tax treatment of Cotton vis a vis MMF. This prevents India from expanding share in MMF exports
Thank You