Incentive to invest and 12 Incentive to invest and 12 Dr. Samiran Chakraborty November 2013 2 th FYP 2 FYP
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Incentive to invest and 12Incentive to invest and 12
Dr. Samiran ChakrabortyNovember 2013
Incentive to invest and 12th FYPIncentive to invest and 12th FYP
Investment has been a primary driver of India’s growth story
Investment as % of GDP
Investment has been a primary driver of India’s growth story
Source: 12th FYP 2
Productivity growth have helped but declining now
3.94.1
5.05
6
7
ICOR
3.94.1
0
1
2
3
4
1950's 1960's 1970's 1980's
Productivity growth have helped but declining now
4.64.3
5.3
6.4
Sources: RBI, Standard Chartered Research
1980's 1990's 2000's FY12
3
Macro assumptions behind 8% growth in 12
� Average investment rate (GFCF) of over 34% (similar to the peak achieved in 200708)
� No major change in public investment (8.4% of GDP)
� Private corporate fixed investment to increFY17
� Savings rate to average 33.6% almost same as 11
�Average current account deficit of 3.4% for 12
� Implicit assumption of ICOR around 4 – bringing ICOR down will be one of the biggest challenges of the 12th FYP
Macro assumptions behind 8% growth in 12th FYP
Average investment rate (GFCF) of over 34% (similar to the peak achieved in 2007-
No major change in public investment (8.4% of GDP)
crease from 11.3% of GDP in FY12 to 15% in
Savings rate to average 33.6% almost same as 11th FYP
Average current account deficit of 3.4% for 12th FYP is an area of concern
bringing ICOR down will be one of the
Investment demand collapses
Slowing capex on new projects is worrying
INR bn, %y/y
40
60
80
250
300
350
Capex on
existing projectsCapex growth
rate
-40
-20
0
20
0
50
100
150
200
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
Capex on new
projects
Infrastructure dominates capex spending
% share of corporate capex, FY11 & FY13
Power
Metals
Telecom
Hotels
Construction
FY11
FY13
0 10 20 30 40 50
Cement
Textiles
Petroleum
Ports and Airports
Transport services & equipments
Chemicals
Others
5Sources: RBI, Standard Chartered Research
The vanishing “animal spirits”
48.8%
52.0%
50.0%
52.0%
54.0%
Project delays continue
% of total projects above INR150 cr delayed
46.4%
44.8%45.2%
40.0%
42.0%
44.0%
46.0%
48.0%
April 2010 April 2011 April 2012 December 2012
May-13
Negative sentiment impacting investment intentions
% y/y
100%
150%
200%
Investment
intention
-100%
-50%
0%
50%
Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13
6Sources: RBI, CEIC, Standard Chartered Research
Investment activity has suffered from
�High interest rates
�High leverage
�Stalled projects
�Low trust on institutions and dip in business confidence
Investment activity has suffered from
Low trust on institutions and dip in business confidence
High lending rates also affecting investment demand
5
6
7
8
%
0
1
2
3
4
FY03 -08 FY09 FY10
Real lending rate
High lending rates also affecting investment demand
Nominal lending rate (RHS)
11
12
13
Sources: RBI, Standard Chartered Research
6
7
8
9
10
FY11 FY12 FY13
8
Rising debt equity ratio constraining
Debt-to-equity ratio of CNX 500 firms
130.0
140.0
150.0
160.0
80.0
90.0
100.0
110.0
120.0
Jun-04 Mar-05 Dec-05 Sep-06 Jun-07 Mar-08 Dec
Rising debt equity ratio constraining capex
Sources: CEIC, Standard Chartered Research 9
Dec-08 Sep-09 Jun-10 Mar-11 Dec-11 Sep-12 Jun-13
INR bn
Projects getting stalled
15,000
20,000
25,000
-
5,000
10,000
FY03 FY04 FY05 FY06 FY07 FY08
Shelved projects New projects
100,000
120,000
140,000
160,000
Sources: CMIE, Standard Chartered Research 10
-
20,000
40,000
60,000
80,000
FY08 FY09 FY10 FY11 FY12 FY13
New projects Outstanding (RHS)
Worsening asset quality of banks another concern
Gross NPAs as % of gross advances
10.0
12.0
14.0
16.0
2.0
4.0
6.0
8.0
10.0
FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06
Worsening asset quality of banks another concern
Sources: RBI, Standard Chartered Research
FY07 FY08 FY09 FY10 FY11 FY12 FY13 Jun'13
Restructured Std. Asset to
Gross Advances (%)
11
40
50
60
Business confidence drops drastically
% of respondents
10
20
30
Q1-FY11 Q3-FY11 Q1-FY12 Q3-FY12
Overall business
Business confidence drops drastically
FY12 Q1-FY13 Q3-FY13 Q1-FY14
business sentiment
Financial situation
Sources: Company reports, Standard Chartered Research 12
What can be done to improve investment?
High interest rates
� Containing inflation is top priority to provide a platform for sustainable growth
� Exchange rate stability
High leverage
� Ability of companies to raise capital and sell non-core assets has to improve
� Banks’ ability to restructure some of the NPAs will help them free up resources to lend again� Banks’ ability to restructure some of the NPAs will help them free up resources to lend again
Stalled projects
� CCI is taking some steps but more needs to be done
Low trust on institutions and dip in business confidence
� Reforms – land, labour, natural resources allocation, institutions
� Change in government?
What can be done to improve investment?
Containing inflation is top priority to provide a platform for sustainable growth
core assets has to improve
Banks’ ability to restructure some of the NPAs will help them free up resources to lend againBanks’ ability to restructure some of the NPAs will help them free up resources to lend again
trust on institutions and dip in business confidence
labour, natural resources allocation, institutions
Infrastructure financing plan
12th plan
Central budget
Central Internal generation
Central BorrowingsCentral Borrowings
States Budget
States Internal generation
States Borrowings
Private Internal
accruals/equity
Private Borrowings
170% growth expected in infra financing, reaching close to 9% of GDP
More dependence on private sector borrowing and equity infusion (48%), less dependence on state
budget
Central Internal generation
Central Borrowings
11th plan
Central Borrowings
States Internal generation
States Borrowings
Private Borrowings
170% growth expected in infra financing, reaching close to 9% of GDP
More dependence on private sector borrowing and equity infusion (48%), less dependence on state
Sources of debt financing
12th plan
Domestic bank credit
Unchanged proportions for 11th and 12th FYP, total debt requirement to go up by 174%
Dependence on bank credit and foreign borrowing to continue
NBFCs
Pension/insurance funds
ECBs
Domestic bank credit
11th plan
FYP, total debt requirement to go up by 174%
Dependence on bank credit and foreign borrowing to continue
Pension/insurance funds
Making domestic finance available
Household financial savings – at a 20-year low
� Impact of savings in the form of gold and real estate – channelising
� CPI-linked savings certificate
Better financial intermediation
� Financial inclusion to increase the size of the financial sector in relation to the economy
� Incentivising long term savings products � Incentivising long term savings products
Other policy options
� Making pension and insurance funds play a larger role in providing long term finance
� Better interest rate risk management products for providing long
� Development of the corporate bond market
Making domestic finance available
channelising unproductive savings
Financial inclusion to increase the size of the financial sector in relation to the economy
Making pension and insurance funds play a larger role in providing long term finance
Better interest rate risk management products for providing long-term financing
The requirement of foreign capital
Upto USD 140bn of foreign debt capital might be needed only to fund the infrastructure plan. Including needs of other sectors the requirement could be as high as USD 250bn.
� The total foreign borrowing need could go up to USD 400bn if we consider Indiantheir overseas acquisitions
Equity capital through FDI would also be important for the USD 140bn need of the private sector
Policy options
� Infrastructure debt funds
� Easier participation of FIIs (the new FPI regime)
� ECB norms may be relooked at
� Development of the corporate bond market and more foreign participation there
� India’s inclusion in the government bond index
� Ease of doing business
The requirement of foreign capital
USD 140bn of foreign debt capital might be needed only to fund the infrastructure plan. of other sectors the requirement could be as high as USD 250bn.
The total foreign borrowing need could go up to USD 400bn if we consider Indian companies need to borrow to finance
Equity capital through FDI would also be important for the USD 140bn need of the private sector
Development of the corporate bond market and more foreign participation there
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