Macroeconomic Outlook Report:

India

PESTLE Insights

ER0004CNTRYOUTLK
Table of contents

SECTION PAGE
Table of contents 02
List of exhibits 03
Country Highlights 04

Country Snapshot 06
Country’s Position in MLCRI (MarketLine Country Risk 13
Index)
PESTLE Insights 16
Political Landscape 17
Economic Landscape 18
Social Landscape 22
Technological Landscape 24
Legal Landscape 25
Environmental Landscape 26

Outlook 28

2
 List of exhibits

EXHIBIT PAGE EXHIBIT PAGE

Exhibit 1: Key Sectors Contribution to the Economy 09 23

Exhibit 13: Age-group Wise Share in Total Population
Exhibit 2: FDI Inflows by Sectors in FY 2015-16 (April- 12 Exhibit 14: Rural/Urban Share in Total Population 23
March)

Exhibit 3: Share of FDI Inflows by Regions (FY 2015-16) 12 Exhibit 15: Gender-wise Share in Total Population 23
Exhibit 4: India’s Performance in Country Risk Analysis In 15
Comparison to Asia and World
Exhibit 5: Performance Overview (Score: 1-100) 15

Exhibit 6: Real GDP and Household Consumption Growth 19

Rate
Exhibit 7: Exports, Imports and Trade Balance 19

Exhibit 8: Interest Rates 20

Exhibit 9: Exchange Rate 20

Exhibit 10: Current Account Balance 21

Exhibit 11: Public Finances 21

Exhibit 12: Labor Market Indicator, 2012-19f 23

3
Country Highlights

1 India is one of the fastest growing democracies of the world with a federal system of power sharing
Democratic principles are deeply entrenched in the Indian political system with a federal structure of power sharing. Indian democracy is very
stable with frequent elections and rule of institutions. This democracy is supported by a growing economy with 6.5%-7.5% growth, narrow trade
deficit and low levels of external debt.

2 Improved macroeconomic scenario and better government policy framework is expected to boost the economy
India’s macroeconomic scenario improved in the last year with GDP growth predicted to be above 7% despite demonetisation of higher value
currency notes (86% of currency in circulation). Lower inflationary expectation due to low oil prices, narrowing trade deficit and budgetary deficit
has strengthened the economy. Implementation of key policy reforms like Goods and Service Tax (GST), improved redistribution of social
welfare schemes through Jan Dhan Aadhar (JAM) programme, opening up of more sectors to FDI, and the abolition of Foreign Investment
Promotion Board (FIPB) are expected to boost growth in longer term.

3 Demographic strength and improved business environment will to boost job creation
India is expected to reap the benefits of demographic dividend in the next 15 years, helped by a marked improvement in the overall business
environment. India jumped 12 ranks to 130th in terms of ease of doing business in the World Bank 2017 report. Various initiatives like Make in
India and Skill India are expected to boost manufacturing jobs throughout the country. 100% FDI has been allowed in all sectors except Space
(74%), Defense (49%) and News Media (26%).

4 Huge middle class population driving the consumer economy of the country
Rapid economic growth over the past few decades have created a huge section of middle class population with significant disposable income
which is driving the Indian consumer market. As necessities are fulfilled, this section of population is spending and driving sectors like
education, FMCG, leisure, and telecommunications.

5 Despite the push to urban infrastructure, expenditure on research and development is inadequate
The country suffers from poor physical and technological infrastructure. However, new policies like 100 Smart Cities linked via optical fibre
networks have attracted the attention of technology giants like Cisco and IBM, who are showing keen interest in forming tie-ups with real estate
developers in order to submit proposals and bid for the projects. India’s GERD as a percentage of GDP was around 0.8% in 2016(f) which was
lower than those of the other BRIC economies China (2.1% in 2016(f)), Russia (1.3% in 2016(f)), and Brazil (1.3% in 2016(f)).

4
 Country Highlights

6 Rising geopolitical tensions and worsening relations with nuclear capable neighbours are matters of concern
The terrorist attack in Uri, Kashmir (September 2016) has worsened the relations between India and Pakistan, increasing the tension among
the two nuclear countries. Additionally, Chinese-Indian relations have worsened due to historical geopolitical rivalry and territorial issues over
Arunachal Pradesh /Aksai Chin. Recent events like China’s opposition to India’s NSG membership and progress on China Pakistan Economic
Corridor through Pakistani occupied Kashmir have not improved the situation.

7 Long term dual deficit increases risk exposure thereby making India more dependent on capital inflows
India has suffered from the problem of dual deficit: budget deficit and current account deficit for a long time. Sudden changes in capital flows
can affect the economy as most of the current account is financed by growing capital inflows.

8 Comprehensive legal framework, but barriers to trade and development remain stiff

Despite significant trade liberalization, tariffs still remain high for Indian imports on certain classes of commodities. In addition to standard trade
tariffs, importers are also required to pay countervailing duty (a form of VAT on imported products) which further distorts free trade. According to
the World Bank, the total tax on international trade as percentage of revenue was the highest of the BRICS nations.

9 Even though the country is growing rapidly, performance in social sectors is still below average
With about 30% of the population living on less than US$1.9 a day, the social sector performance in India in terms of Health and Education
remains poor. This is also reflected by the fact that India ranks 131st in terms of Human Development Index out of 188 countries. Its
performance is the worst among the BRICS nations.

10 High dependence on monsoons and dwindling water resources are potential causes of concern in long run

Even though Agriculture contributes roughly 17% of the GDP; the sector suffers from lack of irrigation infrastructure with a high reliance on
monsoons. Depleted groundwater levels have the potential to affect rural livelihoods and food security in India. According to the World Bank,
the annual fresh water withdrawal as percentage of internal resources was one of the highest amongst the BRICS nations. Recent disputes
between Tamil Nadu and Karnataka over Krishna water sharing highlights the seriousness of water scarcity in the region

5
Country Snapshot

6
 Country Snapshot (1/6)

Population GDP GDP per capita Inflation

1.26 bn US$ 2.18 tn US$ 1,810
4.9%
(World Ranking 2) (World Ranking 7) (nominal)

Economy headed for recovery

… But, unemployment
GDP growth is expected to improve Poor export performance continues to Inflation eased but is expected to gain
continues to be a challenge
with the key policy reforms like GST affect trade balance momentum in the future

23.3 22.6 8.9

7.80
18.6

4.9 5.1
6.90
6.64

2011 2016 2020f 2011 2016 2020f 2011 2016 2020f

Strengths Challenges
• High dependence on energy imports - thereby vulnerable to
• Moderate level of external debt with reasonable amount of foreign
global oil prices.
exchange reserve
• Poor technological and physical infrastructure is creating
• High proportion of younger population provides a huge labor force
bottlenecks to full growth potential
• High efficiency of private sector in services specially in Information
• Rising Indebtedness of private sector along with rising NPAs of
Technology
Banks
• Growth is diversified among many sectors thereby reducing risk.
• Bureaucratic red tape and delays costing development projects
• Improving macroeconomic fundamentals
• Rising geopolitical tensions over Kashmir and other issues with
China

7
Country Snapshot: Outlook (2/6)

Outlook

Indicators 2015 2016f 2017f 2018f 2019f Trend

GDP growth rate (%) 7.56 6.90 7.30 7.50 7.60

GDP Per Capita (USS) 1,733.42 1,810.69 1,954.63 2,119.80 2,320.06
Inflation (%) 5.87 4.90 5.30 5.15 5.13
Unemployment rate (%) 4.94 4.95 4.95 4.94 4.94
Exports (% of GDP) 20.06 22.60 21.74 20.75 19.64
Current account balance (% GDP) -1.06 -1.27 -1.76 -1.82 -1.96
Budget balance (% GDP) 0.16 -0.09 -0.06 0.14 0.33
Public debt (% GDP) 65.32 65.56 65.43 65.28 64.73
Note: Trend chart are on five year basis (2015-2019f)
Source: MarketLine

Events to look forward to

• Elections results of States - Gujarat and Himachal Pradesh: Having won crucial state elections of Uttar Pradesh and Uttarakhand; upcoming
State Elections in the home state of Prime Minister Narendra Modi is crucial for the current government’s success in the next Parliamentary
Election of 2019.

• G20 Summit (Hamburg) and US policy actions: G20 Summit in Hamburg is expected to be first meeting of US President Donald Trump and
Prime Minister Narendra Modi. It has the potential be to a platform for discussion of major issues affecting India’s interests including recent
changes on H1B Visa norms, trade deals, and future US foreign policy actions.

• RBI Monetary Policy Statements: With inflation easing and improving macroeconomic environment, there have been demands RBI to cut
repo rates by 25-50 basis points, to provide the impetus for investment growth. However, inflation from imports of crude oil, and increases in
overall spending after demonetisation could potentially prevent RBI from increasing interest rates.

8
 Country Snapshot: Key Sectors
(3/6)
Services, construction, and manufacturing to drive Indian economic growth in the coming years

EXHIBIT 1: KEY SECTORS CONTRIBUTION TO THE ECONOMY

CAGR CAGR
200000.0 INR Bn 2012-16 2017f-19f

180000.0
14.5% 13%
160000.0
11.1% 11.3%
140000.0
120000.0 11.8% 12.2%

100000.0 11.2% 10.3%

80000.0 7% 12.3%
60000.0 11.5
7.9%
40000.0 %
20000.0 8.1% 9.4%
0.0
2012 2013 2014 2015 2016 2017f 2018f 2019f

Other services Transport, storage and communication

Financial intermediation, real estate and business activities Wholesale, retail and hotels
Construction Mining, manufaacturing and utilities
Agriculture Gross value added

Source: MarketLine

Drivers:
• Large proportion of younger population provides an abundance of cheap labor
• Rising consumption expenditure and improved macroeconomic environment
• Growing capital inflows aided by opening of important sectors to FDI.
• High competitiveness and growth of service sectors

9
Country Snapshot: Emerging
Sectors (4/6)

The services sector attracted most FDI in 2016. Renewable Energy, Pharmaceuticals, and
Tourism are expected to grow in coming years

• Liberalization of FDI policies along with initiatives such as Start-up India have helped the country to be an ideal destination of FDI. India is
becoming a preferred choice for Foreign Direct Investments, The service sector continues to attract the highest share in terms of FDI Inflows.
According to the Department of Industrial Policy and Promotion (DIPP), India witnessed a 30% jump in FDI received during April-September 2016
on a year over year basis.
• Major Emerging sectors include:
• Renewable Energy: To reduce dependence on imported energy, the Government has revised its target of renewable energy production to 175
GW by 2022. The UN Environment Program’s (UNEP) ranks India among the top ten countries in the world investing in renewable energy in its
‘Global Trends in Renewable Energy Investment 2016’ report. Solar and wind saw massive expansion in terms of renewable energy generation.
While solar energy witnessed an increase of 140% from 2012-14 levels, wind energy saw a 52% increase in power generation during the same
period. Total FDI equity inflow in the non-conventional energy sector during April 2014 to December 2016 was US$2.1bn.
• Pharmaceuticals: India is a key player in the global generics market, exporting more than 50% of its domestic production. The Pharmaceutical
industry has witnessed FDI equity inflow of US$2.9bn between April 2014 and December 2016.
• Tourism: The tourism and hospitality sector witnessed a massive growth following initiatives like E-visas, Incredible India, and liberal FDI in this
sector. During Fiscal Year 2016-17, foreign exchange earnings from tourism was INR1,556bn (US$23.2 bn) which is a jump of 15.2% compared
to of INR1,351bn (US$20.1 bn) of 2015-16. Tourist arrivals via E-visas increased to 1.08 m in 2016 compared to 0.45 m in 2015.
• Construction: The construction sector employs the second largest number of people after agriculture and is expected to grow over the coming
years with various government initiatives such as Smart Cities Mission and Atal Mission for Rejuvenation and Urban Transformation (AMRUT).
The Government allows 100% FDI through automatic route for both Development projects (which include development of townships, construction
of residential/commercial premises, road or bridges, hotels, resorts, hospitals, educational institutes, recreational facilities, city and regional level
infrastructure, townships) and Industrial Parks. This sector also attracted FDI worth US$99m between April 2016 and March 2017.
• Ports and Shipping: With a coastline of over 75,00 km, India’s port structure is expected to improve with the growth in trade volumes. Almost
90% of country’s trade by volume and 70% by value is traded by maritime transport. With its Sagar Mala project, the government aims to build six
mega ports and modernize its existing ports. The Government also aims to build 106 new waterways along important rivers. The sector witnessed
a nine-fold increase in FDI inflows from US$85m (2012-14) to US$764m (2014-16).

10
Country Snapshot: Major Cities
(5/6)
Emerging cities like Bangalore and Hyderabad are new drivers of economic growth with a lower
share of population as compared to old metro-cities
0

Gujarat
Ahmadabad
Delhi
7.3% Uttar
3.7%
Delhi Lucknow
5.0% Pradesh
8.2% West Bengal
1.4% Kolkata
16.5%
6.7%
7.5%

Telengana
Hyderabad
Karnataka
3.7%
Maharashtra
2.9%
Mumbai
Bangalore
14.4%
GDP share % contribution by
9.3% 5.9%
capital city
5.1%
Population share %
contribution by capital city

Tamil Nadu
Chennai
8.2% Source: MarketLine
6.0%

Cleantech Life sciences Financial services Medtech Manufacturing

ICT Creative Pharma Tourism Food and Consumer

Goods
Chemical and petrochemical 11
industries
Country Snapshot: Key States (6/6)

Maharashtra, Delhi, Tamil Nadu, Karnataka, and Gujarat are the preferred locations
for FDI Inflows

EXHIBIT 2: FDI INFLOWS BY SECTORS IN FY 2015-16

EXHIBIT 3: SHARE OF FDI INFLOWS BY REGIONS (FY 2015-16)
(APRIL-MARCH)

8000 US$m Maharashtra, Dadra &

7000 Nagar Haveli, Daman & Diu

6000 Delhi, Part Of Up And

0.12% Haryana
5000 0.22%
Tamil Nadu, Pondicherry
4000 2.39% 10.51%
3.89% Karnataka
3000
23.78%
2000
Gujarat
5.61%
1000

10.30% Andhra Pradesh

0
Services

Computer Software and Hardware

Trading

Automobile

Chemicals (Other than Fertilizers)

Telecommunications

Power

Drugs and Pharmaceuticals

Metallurgical Industries

Construction Development

West Bengal, Sikkim,

31.86% Andaman & Nicobar Islands
11.32%
Kerala, Lakshadweep

Rajasthan

Others

Source: Department of Industrial Policy and Promotion (DIPP), RBI and MarketLine

12
Country’s Position in MarketLine Country Risk
Index (MLCRI)

13
MarketLine Country Risk Index (MLCRI)
2017 (1/2)
Top 5 lowest risk nations in
India ranks 61st out of 136 countries with Low Risk Profile MLCRI 2017
Singapore 14.5

GLOBAL RISK HEAT MAP Switzerland 16.8

Norway 17.1

Sweden 17.7

New Zealand 18.7

Score (0-100)

India 39.6

Bottom 5 highest risk nations in MLCRI

2017

Libya 63.6

Chad 63.6

Venezuela 64.2

Yemen 65.8

66.5
Syria
Score (0-100)
Source: MarketLine

14
MarketLine Country Risk Index (MLCRI)
2017 (2/2)

India overall risk scores is lower than the Asia Pacific and the World average in MLCRI
framework 2017

EXHIBIT 4: INDIA’S PERFORMANCE IN COUNTRY RISK ANALYSIS IN EXHIBIT 5: PERFORMANCE OVERVIEW (SCORE: 1-100)
COMPARISON TO ASIA PACIFIC AND WORLD 0 - BEST AND 100 - WORST

Pillars Asia Pacific

Macroeconomic India World average
risks average
0 is best and 100 is worst 60.0
Overall Score 39.6 39.5 40.9
50.0
40.0 Political
Overall Score
environment Macroeconomic risks 34.9 40.8 42.9
30.0
20.0
10.0 Political environment 46.7 43.5 41.9
0.0

Environment Legal environment Legal environment 31.9 39.9 44.4

Demographic and social

structure effectiveness
37.6 30.2 31.6
Demographic and
Technology and
social structure Technology and
infrastructure 53.3 42.0 43.6
effectiveness infrastructure

Environment 50.8 37.2 29.8

India Asia Pacific World Average

Source: MarketLine Source: MarketLine

15
PESTLE INSIGHTS

16
Political Landscape

Highlights
• After suffering for decades from high levels of corruption and policy paralysis, India’s political landscape has improved after the 2014 general
elections. The recent victory of the ruling National Democratic Alliance in the major state election is likely to give a majority to the party in upper
house of the parliament. This will enable the passage of pending legislative bills which were blocked by the opposition during the last two years.

• Challenges remain on the foreign policy front with an increase in geopolitical tensions with neighboring countries - mainly Pakistan and China.
The ongoing conflicts with Pakistan includes issues such as Kashmir conflict, terrorism, and CPEC has affected bilateral relations poorly. China’s
veto on India’s membership of NSG, and Chinese investment in CPEC has affected the Indian-Chinese relations adversely.

• India’s Look East policy aims to enhance its strategic partnerships with ASEAN countries by entering into another regional trade agreement, the
Regional Comprehensive Economic Partnership (RCEP), which involves five other countries—Australia, China, Japan, New Zealand, and South
Korea. The Land-Boundary agreement with Bangladesh and India’s assistance during Nepal’s earthquake has cemented the relations between
these nations.

• Formation of the new state of Telangana as well as growing demands for new states like Poorvanchal, Gorkhaland and Vidarbha has affected
business environment locally.

India’s Political Landscape: SWOT

Strengths Challenges
• Democratic system with federal power • Terrorism and conflicts with Pakistan and
structure China
• Sound Foreign Policy • Corruption and policy ineffectiveness

Future Risks Future Prospects

• Growing Political stability
• Social and Communal tension • Better relations with smaller immediate
• Intensifying demand for new states neighbors
• Improved accountability

17
Economic Landscape (1/4)

Highlights
• India’s economic growth for 2016 was recorded at 6.9% by Reserve Bank of India (RBI) in its Sixth Bi-monthly Monetary Policy Statement on 8th
February 2017. However, the growth is expected to jump to 7.4% in the next fiscal year of 2017.

• In March 2017, RBI predicted CPI inflation would increase to 5.3% by the fourth quarter of 2017-18 financial year.

• The government aimed the fiscal deficit at 3.5% of GDP in 2016. Rationalization of subsidies via schemes like Direct Benefit Transfer and JAM
trinity (Jan-Dhan, Aadhaar and Mobile) is expected to plug the leakages of the government subsidies. However, UDAY scheme are expected to
affect state finances as States will take up major part of DISCOM debts.

• India’s current account deficit (CAD) was 1.1% of GDP in 2015-16, sharply contracting from 4.8% of GDP in 2012-13. The narrowing of CAD is
mainly due to a reduction in imports compared to exports. Falling crude oil prices were mainly responsible for the fall in imports. Government
initiatives to reduce imports of coal and gold also helped to improve CAD.

• A decreasing current account deficit, along with increasing capital inflows (FDI and FPI), has led to overall accretion in foreign exchange
reserves. India’s foreign exchange reserve increased by US$11.8 bn in nominal terms. A low level of external debt to GDP ratio (23.7% at end-
March 2016) makes India one of the more stable emerging markets.

India’s Economic Landscape - SWOT

Strengths Challenges
• Second largest workforce in the world • Poor agriculture sector performance
• Improved Macroeconomic Environment • Over dependence on energy imports thereby
• Well developed equity market having higher exposure to price fluctuations

Future Prospects Future Risks

• Pro-growth government policies • Overheated property markets
• Improved business environment • Sustained current account and budget deficits of
both Central and State governments

18
 Economic Landscape (2/4)
Demonetization caused reduced growth, however growth is
expected to jump to 7.4% in the next fiscal year of 2017 EXHIBIT 6: REAL GDP AND HOUSEHOLD CONSUMPTION GROWTH RATE

Growth is expected to jump to 7.4% in the next fiscal year of 2017 on account of
%
various factors like: 8.0
• Discretionary consumer spending held back by demonetization is expected to 7.0
bounce back to normal. 6.0
• Demonetization caused a large inflow of current and savings accounts (CASA) 5.0
deposits. This is expected to lower the lending rate thereby giving impetus to 4.0
investment as well as consumption. The reduced credit growth due to stressed 3.0
balance sheets of banks is likely to be reversed by the high inflow of CASA 2.0
deposits. 1.0
• Various government initiatives such as increased capital expenditure in Union 0.0
2012 2013 2014 2015 2016 2017f 2018f 2019f
Budget 2017-18, opening up of various sectors to FDI, improving ease of doing
business, and GST implementation is expected to boost growth next year. 7th Real GDP growth
Central Pay Commission (CPC) is also likely to affect consumer spending Real household consumption expenditure growth
positively. Source: MarketLine

EXHIBIT 7: EXPORTS, IMPORTS AND TRADE BALANCE

India’s trade balance declined in 2016 due to the rise in prices
of commodities and crude oil 800.0 US$ bn % 30.0
600.0
India’s trade balance has declined in 2016 due to increased oil prices after the 400.0 20.0
OPEC meeting. Following slower global growth of 2.7%, export demand is
200.0
unlikely to gain momentum. As Indian imports of crude oil are somewhat
0.0 10.0
inelastic, rising oil prices affect the trade balance drastically .
-200.0
The improvement in trade balance from 2013 to 2015 was mainly due to a
larger fall in imports compared to fall in exports. -400.0 0.0
2012 2013 2014 2015 2016 2017f 2018f 2019f
However, the trade balance is expected to improve in the long run due to Exports Imports
higher export demand following the recovery of global growth and India’s push Trade balance Export (% of GDP) - RHS
for Make in India which is likely to reduce imports.
Source: MarketLine

19
Economic Landscape (3/4)
Significant reduction in repo rate in 2016; short term uncertainly remains for further rate cuts
RBI cut the repo rate twice in 2016 in the months of April and October giving
EXHIBIT 8: INTEREST RATES
much needed liquidity. Repo rate cut, facilitated by low inflation (due to falling oil
and commodity prices) and the improved macroeconomic environment in 2016, 10 %
was welcomed by the manufacturing industry. Repo rate cut along with high 8
inflow of CASA deposits since demonetization has reduced India’s lending rate 6
thereby boosting investment and growth. 4
Although industry is demanding a further rate cut, the possibility of future 2
reductions in the repo rate depends on various seasonal and external factors 0

Apr-12
Jul-12

Apr-13
Jul-13

Apr-14
Jul-14

Apr-15
Jul-15

Apr-16
Jul-16
Oct-12

Oct-13

Oct-14

Oct-15

Oct-16
Jan-13

Jan-14

Jan-15

Jan-16

Jan-17
such as the intensity of monsoon and global oil prices. Higher expectations of
inflation and further rate hikes by the Federal Reserve may delay rate cut
decision by RBI in 2017. Among the BRIC nations, only China (4.35%) has a
lower repo rate than India (6.25%). Higher rates of Russia (9.75%) and Brazil Repo rate Reverse Repo Rate
(11.25%) highlight that fact that India’s financial environment is investment Source: MarketLine
friendly.
EXHIBIT 9: EXCHANGE RATE

The domestic inflationary pressures are expected to increase INR per

%
in the coming months 100.0 US$ and 12.0
EUR
80.0 10.0
In March 2017, the Reserve Bank estimated that CPI inflation will increase from 8.0
60.0
its current level to 5.3% by fourth quarter of 2017-18 financial year. The rise in 6.0
inflation is mainly due to rise in discretionary spending following demonetization 40.0
4.0
and the recovery of global oil, metal and other commodity prices.
20.0 2.0
The domestic inflationary pressure will depend on the success of OPEC nations
in controlling oil prices, a deficient monsoon, and exchange rate volatility due to 0.0 0.0
2012 2013 2014 2015 2016 2017f 2018f 2019f
global financial market developments. High geo-political risks in 2017 could
INR per USD INR per EUR Inflaion rate
potentially affect global capital movements, thereby inducing inflationary
pressure through exchange rate fluctuations. Source: MarketLine

20
Economic Landscape (4/4)
Increasing non-performing loans; however demonetisation is
EXHIBIT 10: CURRENT ACCOUNT BALANCE
likely to reduce lending stress on banks
US$ bn %
India is the fastest growing large economy, and to continue with this pace the 0.0 0.0
country needs continuous access to internal and external finance. This is
-20.0 -1.0
evident from the growing demand for private sector credits. According to the
World Bank, domestic credit to the private sector by banks increased from -40.0 -2.0
46.22% in 2007 to 52.61% in 2015. Similarly, domestic credit provided by -60.0 -3.0
financial sector as percentage of GDP increased from 49.97% in 2007 to
-80.0 -4.0
76.75% in 2015. However, the ratio non-performing loans to total gross loans is
showing an upward trend and grew from 2.7% in 2007 to 7.57% in 2016. There -100.0 -5.0
were many recent cases of alleged frauds by business owners. 2012 2013 2014 2015 2016f 2017f 2018f 2019f
However, with higher inflow of CASA deposits since demonetization, lending is Current account balance
likely to pick up after being subdued due to growing bad loans Current account balance (% of GDP)

Source: MarketLine

India’s public finances are expected to improve due to higher EXHIBIT 11: PUBLIC FINANCES
rationalisation of subsides and lower leakages
450 US$ bn % 0.6
With policies such as Direct Benefit Transfer and Jan Dhan-Mobile-Aadhar
400 0.4
trinity, targeting of subsidies are likely to improve with reduced leakages. This 350
0.2
is expected to improve the budget balance in the upcoming years. 300
250 0.0
Additionally, lower government debt is also likely to reduce the primary deficit
200 -0.2
due to lower interest payments. 150
-0.4
Government revenues are expected to grow with the economic development 100
50 -0.6
as the tax base is expected to improve in the future, as more and more people 0 -0.8
move into taxable categories. Encouragement of Digitalization and bank 2012 2013 2014 2015 2016 2017f 2018f 2019f
transactions, along with reduced cash transactions is likely to discourage tax Revenue Expenditure Budget balance (% of GDP) - RHS
evasion, thus leading to higher revenue generation.
Source: MarketLine

21
Social Landscape (1/2)

Highlights

• With world’s second largest population, India is home to a large proportion of unskilled population. The Government introduced the 100 days
jobs program under National Rural Employment Guarantee Act (NREGA) to provide jobs to the vast pool of unskilled labor. Even though the
country is growing at a high pace, its performance in the social sector – healthcare and education remains low.

• With a median age of 27.6, 94.1% of India’s population is estimated to be less than 65 years old. A low dependency ratio has potential for a
demographic dividend. To harness the fruits of Demographic Dividend, Pradhan Mantri Kaushal Vikas Yojana (PMKVY) has been launched by
Ministry of Skill Development & Entrepreneurship which aims to train 10 m young people by 2020.

• Unemployment rate stood at 4.9% in 2015 and is expected to remain stable until 2019.

• As of 2010, the rural population accounted for 69.07% of total population. The rural population is expected to fall to 65.22% by 2020 due to
rapid urbanization and rural-urban migration.

India’s Social landscape - SWOT

Strengths
Challenges
• High youth population leading to low
dependency ratio • Low Human Development Index (HDI)
• Pro employment policies like NREGA, Skill • Rapid Urbanization
India

Future Prospects Future Risks

• Rising life expectancy and falling infant
• Low social/communal cohesion
mortality
• Improvement in employment scenario

22
Social Landscape (2/2)
Unemployment expected to be low Rising share of working age population

EXHIBIT 12: LABOUR MARKET INDICATOR, 2012-19f EXHIBIT 13: AGE-GROUP WISE SHARE IN TOTAL POPULATION

mn person 100 %
480.0 % 8.00 4.43 5.34 6.72
80
460.0 6.00
62.02 64.59
60 66.98
440.0 4.00
40
420.0 2.00
20 33.55 30.07 26.31
400.0 0.00 0
2012 2013 2014 2015 2016 2017f 2018f 2019f 2000 2010 2020
Employed population Unemployment rate (RHS) 0-15 16-64 65 and above

Rising urbanization Male populations share to remain unchanged

EXHIBIT 14: RURAL/URBAN SHARE IN TOTAL POPULATION EXHIBIT 15: GENDER-WISE SHARE IN TOTAL POPULATION

% %
2020 65.22 34.78 100%

2010
80% 47.6 48.2 48.1 48.1
69.07 30.93
60%
2000 72.33 27.67
40%
1990 74.45 25.55
52.4 51.8 51.9 51.9
20%
1980 76.90 23.10
0%
0.0 20.0 40.0 60.0 80.0 100.0 1990 2000 2010 2020
Rural Urban
Male Female
Source: MarketLine
23
Technology Landscape (1/2)

Highlights
• India made significant progress in the technology field which is evident from its booming Information Technology and Aerospace sector.
According to National Association of Software and Services Companies (NASSCOM), the IT sector is expected to grow within a range of 12%-
14% in 2016-17 in constant currency terms. NASSCOM also projected that the sector will triple its current annual revenue to reach US$350bn
by 2025.

• The Indian Space Research Organization (ISRO) has been successful in reaching multiple milestones with Chandrayaan – 1 in lunar orbit
(2008) and Mars orbiter (Mangalyaan). ISRO, through its commercial arm, Antrix Corporation is providing competition to other space agencies
In US and Europe in low cost satellite launches. Recently, ISRO created history by launching 104 satellites at once which included satellites of
smaller nations like Israel, Kazakhstan, the Netherlands, Switzerland and UAE along with satellites of tech giants like Google.

• The Government launched 22 initiatives under the Digital India programme which include electronic payments for government services,
geographical information system (GIS)-based decision-support system, and a request for proposal for selecting private cloud service providers
for government departments.

• With growing smartphone and internet penetration, the country is moving towards rapid digitalisation. According to the RBI, transaction
volumes and values are booming for cards, POS, ATM, and M-Wallets, since demonetization

India’s Technological landscape - SWOT

Challenges
Strengths
• Low R&D intensity
• Reputable Space Agency • Technological infrastructure is still poor as
• Fast and rapid digitalization compared to its peers

Future Prospects Future Risks

• New programs in nanotechnology, • Lack of knowledge intensive workers
biotechnology and defense technology • Low R&D incentives
• Significant technology transfer via FDI • Low proportion of High Technology exports

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Legal Landscape

Highlights
• The legal environment is conducive to investment as there are no significant barriers to starting a business in the country. This reflects the
policy framework and the mindset of the governmental structure of India, and ensures that every company is functioning according to the
statutory framework.

• In terms of fiscal legislations, GST and Direct Tax Code (DTC) are expected to benefit consumers. GST which is a huge indirect tax reform,
aims to eliminate multiple taxation with a single tax, thereby ensuring free movement of goods across country. The finance ministry has
proposed the implementation of the Direct Tax Code (DTC), which aims to widen tax bands and invalidate the numerous tax exemptions that
are currently in place

• India has a strong regulatory framework with regulatory bodies such as SEBI, the RBI, the Registrar of Companies, the Director General of
Foreign Trade, the Insurance Regulatory and Development Authority and the Telecom Regulatory Authority of India.

• Challenges remains in term of weak implementation of IPR laws and judicial delays. The Indian legal system measures up reasonably well in
fairness and independence but falls short in speed and efficiency. Weak IPR laws are responsible for high piracy and low R&D spending.

India’s Legal landscape - SWOT

Strengths Challenges
• Barriers to trade and investment
• Comprehensive legal framework for
• Weak implementation of IPR laws
business entities
• Judicial delays

Future Prospects Future Risks

• Improvement in corporate governance
• Inefficient implementation of regulations
• Tax reform

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Environmental Landscape

Highlights

• India’s rapid population growth has placed an excessive burden on natural resources such as water, forests, sand, rocks, and minerals, and the environment.
Rapid urbanization and industrialization has aggravated the problems of pollution and improper sanitation, posing a serious threat to biodiversity. The country
is frequently plagued with natural disasters such as floods, droughts, and earthquakes due to its geographical location.

• India has ratified a number of laws including the India Forest Act (1927) and the Forest (Conservation) Act (1980), Wildlife (Protection) Act (1972) and
Biological Diversity Act (2002) which aim to protect the environment. However poor implementation of these laws remains a cause of concern.

• With a major drive towards renewable energy, the current government is pushing for a larger contribution from wind and solar energy. The UN Environment
Program (UNEP) ranks India among the top ten countries in the world investing in renewable energy in its ‘Global Trends in Renewable Energy Investment
2016’ report.

• Initiatives like Swach Bharat Mission is expected to boost improvements in sanitation and cleanliness across the nation.

• Growing water scarcity is likely to remain a cause of concern. According to the World Bank, the annual fresh water withdrawal as percentage of internal
resources was one of the highest of the BRICS nations.

• After ratifying the Paris Climate Treaty, India aims to reduce present levels of carbon emission by 33%-35% by 2030 with huge investments in renewable
energy.

India’s Environmental landscape - SWOT

Strengths Challenges
• Rich biodiversity • Depleted water resources
• Comprehensive environmental policy framework • High dependence on fossil fuels for energy
• Frequent natural disasters

Future Prospects
• Growing investments on non conventional energy
Future Risks
sources, especially solar and wind
• Ecotourism • Enforcement deterrents
• Use of space technology to reduce economic • Distortionary policies
losses from natural disasters

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Outlook

27
Outlook

Sectoral Outlook

• Service sector, particularly financial services, is likely to experience growth: Gross domestic savings (GDS) as a percentage of GDP
remained above 30% for India since 2004. It is expected that the national savings of the country will reach US$1,272 bn by 2019. Huge
domestic savings are expected to boost the financial service sector by encouraging investments. The financial services sector is allowed
100% FDI which is also likely to boost the industry.

• Growth in pharma and chemicals to continue: The pharmaceutical industry is expected to grow due to the rise in health expenditure
driven by increasing disposable incomes. India’s export of generic drugs is also expected to grow due to its price competitiveness and
increasing demand from African markets. The Pharmaceutical industry has witnessed FDI equity inflow of US$2.93 bn between April 2014
to December 2016.

• Food industry growth will be led by food processing: The food industry is one of the largest in India with a huge market of both urban
and rural consumers. Major players, such as Cargill Inc, are aiming to increase their consumer base by increasing the numbers of retail
outlets.

• Despite blow from demonetisation, construction sector upswing to persist: the construction sector is expected to pick up in the
coming years backed by various government initiatives such as Smart Cities and Delhi Mumbai Industrial Corridor. However,
demonetisation has affected the construction sector in the short term due to reduced demand and lower prices.

• Metal industry is expected to grow but dampened prices is a cause to worry: The metal industry is expected to witness growth in the
coming years with the growth of allied sectors like construction. However, lower global prices and strong competition from Chinese exports
is squeezing the profits of domestic players. To improve productivity of this sector, government started ‘The scheme for the promotion of
R&D in the iron and steel sector’ and allocated US$24.6 m. It will also develop technology for Cold-Rolled Grain Oriented (CRGO) steel
sheets.

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Appendix

Ask the Analyst

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reachus@marketline.com.

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