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David Fuller and Eoin Treacy's Comment of the Day
Category - India

The Revived Bretton Woods System First Decade

Thanks to a subscriber for this fascinating report by Michael Dooley at UCSC, David Folkerts-Landau and Peter Gerber at Deutsche exploring the role of trade-offs between international capital and China’s reserve accumulation. Here is a section on India which may be relevant for the future: 

Recent developments outlined above suggest that India is not now on the path to replace China in the system. But looking forward, the Modi government’s plan, if implemented, would reload India into the periphery of a Bretton Woods II system. The 2014 election manifesto of the Bharatiya Janata Party announced several economic goals. A country intending to push an export-driven development policy could hardly describe its policies and goals differently. In sum, the manifesto seems aimed at vigorously implementing this strategy. The manifesto espouses: “A strong manufacturing sector will…create millions of jobs and increase incomes for the working class. Above all, it will increase the revenue for the government and lead to import substitution to bring down the import bill. We will make India a hub for cost-competitive labour-intensive mass manufacturing. (p. 29).”

Specifically, the manifesto proposes several policy goals to boost labor-intensive manufacturing. The current account deficit is to be reduced aggressively by focusing on exports and reducing the dependency on imports (italics ours). A program for ports, roads and rail to the interior, and airports is intended to facilitate international merchandise trade by eliminating severe infrastructural barriers. It also intends to eliminate the artificial bureaucratic barriers to commerce. FDI will be allowed in most sectors, except retail, and investment and industrial regions are to be set up as international manufacturing hubs. 

Of course, a political party’s manifesto is a wish list. Full implementation always collides with resource and political constraints. But taking it at face value means that India is readying itself to take up China’s role as the next large periphery in the Revived Bretton Woods system. As we said in Section IV, the key to managing the export-driven strategy at a global macroeconomic scale is the recruitment of FDI. The amount of collateral on hand limits FDI, but a large and persistent current account surplus relaxes the limit. In India, the government is now opening the doors to more FDI; and simultaneously, it intends to reduce the current account deficit. Our caveat is that it cannot expect a China-like attraction of FDI unless it can swing the current account into surplus. The manifesto seems to aim for these conditions, but this is a case of wait-and-see for this next test of the collateral hypothesis.



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Who is the most competitive of EM all?

Thanks to a subscriber for this note from Lombard Street Research. Here is a section: 

India’s ‘actual’ competitive edge lies somewhere in between the REERs estimated by adjusting for ULC and PPI. The OECD’s estimate of ULC likely overstates the country’s competitiveness as the data may be skewed towards the more productive ‘organised’ sector. On the other hand, the PPI-based REER may understate competitiveness as it does not adequately capture productivity gains.

India has sharpened its relative advantage thanks to nominal currency depreciation and faster labour productivity growth and slower wage gains than in its trading partners. Meanwhile, producers have cut back on price increase to gain market share. 

It is one of the very few EMs where the decline in relative unit labour costs has been greater than nominal FX depreciation over the last decade, implying a chunky contribution to competitiveness. However, most of this improvement occurred before the Global Financial Crisis (GFC). After the crisis, the rupee’s nominal decline outstripped that of ULCs on the back of a widening current account deficit. 

Domestic policy errors, poor progress on structural reforms and populist fiscal policies that drove wage growth above productivity growth are largely to blame. Indeed, India appears less competitive after adjusting for CPI (vs. for ULC and PPI), reflecting entrenched inflation expectations and supply-side bottlenecks.

 



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Email of the day on the domestic Indian rupee

I have access to the USD INR in the charts. The charts are for the Indian Rupee (INR) trades off shore. The INR onshore which trades onshore has different and less exaggerated price movement. The INR is not a freely convertible currency as it is regulated by the central bank and hence an onshore chart is more relevant to traders who use the service onshore. Could you kindly share this information with Eoin so that he can consider our request?



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India to raise foreign investment limit in $60 bln insurance sector

This article by Sumeet Chatterjee and Devidutta Tripathy for Reuters may be of interest to subscribers. Here is a section:

India's insurance business was full of promise when it was thrown open to competition in 2000, but has been hobbled by losses, regulatory change, uncertainty and a sharp slowdown in the economy.

The federal government's approval for a proposal to raise the limit to 49 percent has been kept pending for a long time due to opposition by nationalist politicians, frustrating many overseas investors lured by low penetration rates in India.

Life insurance penetration in India is about 3.2 percent of gross domestic product in terms of total premiums underwritten in a year, much lower than more than 10 percent in Japan and nearly 6 percent in Australia.

Dutch banking and insurance group ING Groep NV and New York Life have quit their Indian ventures in recent years, while some other foreign investors were said to be weighing their options.

At the end of Sept 2013, India had 24 life insurers, which accounts for 80 percent of the sector's business. Only 17 of the 24 reported profits in the fiscal year ended March 2013, according to latest data available with the regulator.

State-owned Life Insurance Corp of India Ltd controls about 70 percent of the life insurance business.

"This measure should provide impetus for spurring growth of the insurance industry and enable foreign players to bring in capital required for growing distribution (and) product suite," said Shashwat Sharma, partner at consultant KPMG.

 



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Insights in 140 Words July 11th 2014

Thanks to a subscriber for this edition of Deutsche Bank’s weekly missive. Here is a section on Indian banks: 

Indians love Switzerland - over half a million visit each year. But Swiss delights are an expensive taste. Take Basel 3 capital norms. Meeting them requires a $40bn recapitalization of India's 26 public sector banks by 2018. But given fiscal constraints where to get the money? Yesterday's budget proposes issuing equity to dilute the government's stakes from a range of 55 to 80 per cent down to 51 per cent. Selling at today's prices however only raises a third of the capital required. Hence to maintain its majority shareholdings New Delhi would have to fork out another $15bn - the same amount spent in the past five years. Worse, India's banks are losing about 40 basis points off their core tier one capital ratios annually according to Deutsche Bank analysis. Recapitalising India's banks feels like running to stay in the same place



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India Strategy Midcaps

Thanks to a subscriber for this educative report from IIFL which may be of interest. Here is a section: 

Over the past one year, marked improvement has been seen in India's macro-economic variables. GDP growth which had dwindled from 6%+ to less than 5% in a matter of 4 quarters, has bottomed out and has been stable at 4.5%]4.7% range in the past few quarters. RBI then was raising interest rates but has now maintained status quo for past two monetary policies indicating peaking out of interest rates. Inflation, which was mounting then, has now seen downward trajectory in the past few months, notwithstanding near term risk from weak monsoon. Fiscal and current account deficits have been well reigned in through measures such as curbs on gold imports and postponement of subsidies to next year. Rating agencies, a year ago, were considering a downgrade in rating for India with a negative outlook on the economy. The outlook for ratings has now been revised to stable. Currency, which was on a depreciating spree and had reached Rs68/US$, has now stabilized in a range of Rs58-61/US$.

With regards to investment cycle, steps were taken by the UPA government which shall fructify in the medium term. These steps include 1) setting up of CCI (Cabinet Committee on Investment) which has cleared bottlenecks of 210 projects worth more than Rs3.8tn across various sectors. 2) Around 85-90% of 173 FSAs have been signed; full completion would ensure fuel supply to 78,000 MW worth of power capacity. 3) Partial mining ban reversals. Furthermore, announcements from the new government have also been encouraging towards this space. With regards to the asset quality in the banking system, after a period of sustained uptrend in NPAs, Q4 FY14 results indicated stable trend.

 



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Rajan Signals Easing If India Inflation Slows While Holding Rate

This article by Kartik Goyal for Bloomberg may be of interest to subscribers. Here is a section: 

The RBI said further policy tightening won’t be warranted if consumer-price inflation stays on course to hit 8 percent in January 2015 and 6 percent a year later. If disinflation is faster than anticipated “it will provide headroom for an easing of the policy stance,” it said.

Prime Minister Narendra Modi’s landslide win last month is spurring optimism that he’ll take steps to reduce price pressures and lead a recovery among the world’s biggest emerging markets, which are forecast to grow at the slowest pace since 2009. India must move toward fiscal discipline to lower inflation, curb the budget deficit and spur growth, Finance Minister Arun Jaitley said on June 1.

“The RBI extended a welcoming hand to the new Prime Minister,” Frederic Neumann, an economist at HSBC in Hong Kong, wrote in a research report today. “That the RBI remained on hold so soon after the election wasn’t really a surprise. But its dovish tone was.”

 



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Email of the day on India focused investment trusts

“I noticed that a few of the Indian investment trusts seem to be lagging the market (JPII-close to 13% discount to NAV; New India -14%). Any thoughts?”

And 

“Just saw comment of day-sorry. More specifically-should we expect the ITs to lag the underlying as they are doing (far off from their all-time highs), or is there something in the ITs themselves that would result in such a lag. Thanks”

 



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India to See Trend Reversal in 2014 CLSA Says

This note by Ameya Karve for Bloomberg may be of interest to subscribers. Here it is in full: 

Falling trend in GDP, investment and co. earnings growth to reverse during 2014, CLSA says in investor note dated yesterday.

Policy environment started improving since last 15 mos.,

2014 will see positive impact, analysts Mahesh Nandurkar, Abhinav Sinha and Rohit Kadam write

Investors to position much in advance for improvement even as it will be visible in 2H of 2014 and fiscal yr 2015

CLSA sees market ¡°developing patience¡± towards companies benefiting from recovery

Recommend cyclicals such as Axis Bank, ICICI Bank, Maruti Suzuki, UltraTech, power utilities, mid-cap property stocks HCL Tech, ITC, Lupin and Zee Entertainment are other buy ideas

CLSA underweight on staples, retail financials

 



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Is India Reinventing Politics

Here is the opening for this interesting opinion column by the novelist Chandrahas Choudhury for Bloomberg:

Indian democracy took a turn toward ancient Athens this week after the Aam Aadmi Party (“Common Man’s Party”) went to the people a second time in an attempt to resolve a political dilemma. The fledgling political outfit that earlier this month won 30 percent of the vote and 40 percent of the seats in elections in the city-state of Delhi brought up the notion of “direct democracy” in defense of its decision to hold a referendum in Delhi on the question of whether it should make a bid to form a minority government in the capital.

In its manifesto, the AAP has borrowed from Brazil’s Porto Alegre model of local government by popular consent. This makes it appear all of a sudden that the world’s emerging markets are also emerging as the sites of new developments in democratic thought and practice -- as indeed in the practice of authoritarianism and capitalism. New energies in India and Brazil are reworking forms of representative government that have settled into stasis in the developed world. (It has always been a conceit of the West that its own experience of democracy is somehow foundational and normative, when the reality might be instead that democracy moves in historically and culturally specific directions wherever it takes root.)

The referendum itself was a double-pronged affair involving a range of traditional and 21st-century forms. It offered the citizens of Delhi the option of going to a set of public meetings that would return a single “yes” or “no” answer by popular vote, or of sending in their answers by text message or on by phone. Some skeptics questioned, in my view wisely, the wisdom of such a referendum and the claim of “the will of the people” established by its results. After all, those who had voted for the AAP might be logically expected to be more willing than others to participate in such an exercise and to favor a yes.

And so it turned out, with the party declaring a 75 percent yes vote from individual respondents and a 90 percent yes vote from 280 public meetings. After the referendum, the party’s high command decided Dec. 23 to form the new government of Delhi. Its leader, the 45-year-old former bureaucrat and anti-corruption activistArvind Kejriwal, will take the oath as Delhi’s seventh and youngest-ever chief minister on Saturday at the Ramlila Maidan, a site closely associated with the party’s concerted struggle over the last few years for an anti-corruption watchdog for India.



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