India: A Bumpy Ascent: Global Markets Research

Connecting Markets East & West
Global Markets Research
India: A bumpy ascent

Sonal Varma
Chief India Economist
Nomura Financial Advisory and Securities (India) Private Limited.
+91 22 4037 4087

sonal.varma@nomura.com
Aman Mohunta - NFASL

aman.mohunta@nomura.com
+91 22 6617 5595
Neha Saraf - NFASL
neha.saraf@nomura.com
+91 22 4037 4218
See Appendix A-1 for analyst certification, important
disclosures and the status of non-US analysts.
May 2015
Any authors named on this report are research

analysts unless otherwise indicated.
Summary: ST bumps, MT positive
Big picture view: 2014 was an inflection year for India owing to a strong political mandate, growth bottoming out and the RBIs
increased credibility. Prudent macro policies should usher in a Goldilocks period of higher growth amid stable inflation in 2015-17.
Lower commodity prices are a positive externality.
Short-term bumps: Market sentiment has soured over uncertainty whether foreign investors will be subject to the minimum
alternative tax (MAT). A confluence of potential macro developments could further weigh on sentiment in the near term: (1) a setback
on reforms (land, GST); (2) a wider trade deficit (higher oil, REER appreciation); (3) weather-related risks (rural stress = populism?);
and (4) FII outflows (MAT related or global factors).
Why the medium-term positive story is still intact: The near-term risks do not alter our fundamental view that India will be
the biggest EM turnaround story in the next three years owing to: (1) a multi-year growth recovery; (2) low and stable inflation; (3)
macro stability as the RBI shifts to flexible inflation targeting; (3) incremental supply-side reforms focused on public infrastructure
spending and easing constraints to doing business; and (4) stable funding of the current account deficit through rising FDI inflows.
How we are different: (1) Despite current skepticism, we expect growth to recover cyclically; (2) after a 25bp rate cut in June, we
expect the RBI to stay on hold through 2016; and (3) relative INR outperformance to continue.
Nomuras strategy view: Equity - Dec 2015 Sensex target of 33500 (~20% upside). O/W sectors: financials, autos, industrials
and technology. U/W: Consumer staples, pharmaceuticals, metals and telecoms. FX - USD/INR (current: 63.5) to depreciate to 64.4
in Q3 2015, appreciate to 63.3 in Q4 2015 and further to 62.9 in end-2016. Rates - 10yr bond yields (cur: 7.85%) to fall to 7.5% by Q2
2015 and 7.2% by end-2015, staying unchanged thereafter in 2016. On swaps, we hold a flattener view.
India outlook at a glance

% y-o-y growth unless otherwise stated
Real GDP
3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16
7.6
7.2
8.0
8.2
8.5
8.6
8.1
8.1
8.2
7.5
2014
7.2
2015
7.8
2016
8.3
Agriculture
2.0
-0.4
0.4
2.4
4.4
5.0
4.0
4.0
4.0
4.0
2.2
3.1
4.0
Industry
5.5
4.6
5.6
7.0
7.3
7.6
4.8
7.5
7.2
6.8
5.5
6.9
6.6
Services (incld Construction)
9.8
11.7
9.5
8.9
9.3
9.3
9.3
9.3
9.9
9.5
8.8
9.3
9.5
Private consumption
Government consumption
Fixed investment
Exports (goods & services)
Imports (goods & services)
8.7
5.8
2.8
-3.8
1.2
3.5
31.7
1.6
-2.8
1.1
6.8
10.8
7.0
2.1
-0.6
6.7
9.0
7.2
7.5
8.0
8.0
9.0
7.5
7.5
8.0
8.3
9.0
8.5
7.5
8.0
8.3
9.0
10.0
7.0
8.0
8.5
8.0
10.2
7.0
7.8
8.5
8.0
9.8
7.0
9.0
9.0
8.0
10.0
6.5
9.5
5.8
5.5
2.5
3.8
-2.2
7.4
9.4
7.5
6.1
5.8
8.6
8.2
10.0
6.9
8.6
Wholesale price index

Consumer price index
3.8
6.7
0.6
4.1
-1.8
5.2
-1.3
4.8
-1.8
4.9
-0.6
5.3
1.0
5.3
2.3
5.3
2.1
4.7
2.4
5.0
3.9
6.7
-1.4
5.0
2.0
5.1
Current account balance (% GDP)

Fiscal balance (% GDP)
-2.0
-1.6
0.4
-1.2
-1.5
-1.7
-1.1
-2.3
-2.1
-1.5
-1.4
-4.1
-1.0
-3.9
-1.8
-3.5
Repo rate (%)

Reverse repo rate (%)
Cash reserve ratio (%)
10-year bond yield (%)
Exchange rate (INR/USD)
8.00
7.00
4.00
8.51
60.9
8.00
7.00
4.00
7.85
62.6
7.50
6.50
4.00
7.74
62.5
7.25
6.25
4.00
7.50
63.6
7.25
6.25
4.00
7.30
64.4
7.25
6.25
4.00
7.20
63.4
7.25
6.25
4.00
7.20
62.9
7.25
6.25
4.00
7.20
62.9
7.25
6.25
4.00
7.20
62.9
7.25
6.25
4.00
7.20
62.9
8.00
7.00
4.00
7.85
62.6
7.25
6.25
4.00
7.20
63.4
7.25
6.25
4.00
7.20
62.9
2
Source: CEIC and Nomura Global Economics estimates.
The framework: Growth with macro stability

Medium-term India view
We believe India is heading into a period of growth with macroeconomic stability. Tighter fiscal and monetary policies
and a correct growth mix (pro-investment and less entitlement-based consumption) have corrected Indias imbalances.
The growth recovery is likely to be gradual (no-Vs), but this environment should result in a steady and more
sustainable growth uptick, with lower inflation and higher productivity in the medium term.
3
Source: Nomura Global Economics.
The near-term bumps

A number of factors can weigh on sentiment in the near-term
1.
Uncertainty surrounding minimum alternative tax
2.
Setback on legislative reforms (land, GST)
3.
A wider current account deficit in Q2 2015
4.
Weather vagaries: unseasonable rains and a below-normal monsoon season
5.
Political fallout of weak rural demand amid upcoming state elections
6.
FII outflows due to global or domestic factors
1. The MAT ruckus - Background

Background
What is MAT? MAT is applicable on companies earnings a profit in India. Current MAT rate is 18.5% on book profits.
Applicability of MAT on foreign companies: This came into being through an order of Advance Authority Ruling (AAR) on a
company called Castleton. The Castleton case was for a restructuring of Glaxo Smith Klines holding in a Mauritius entity to a
Singapore entity. It approached the AAR to get clarity on the capital gains tax. AAR held that the transfer did not attract capital
gains (under the tax treaty with Mauritius), but held that the section pertaining to MAT did not distinguish between Indian
companies and foreign companies. It thus held that the capital gains arising out of this transfer would attract MAT. This
happened in 2012. This case is now pending before the Supreme Court of India. This has essentially meant that 1)foreign
companies are subject to MAT and 2) MAT has to be paid on capital gains.
Confusion created in the budget due to exemption provided to FPIs (no MAT prospectively). The Tax office has presumed
this means past MAT is applicable and it issued tax demands on FIIs while closing tax assessments FY 2010-11/2011-12,
taking support from the Castleton case. There are two claims MAT on LTCG and MAT on STCG (investors have been
paying tax @ 15% on ST capital gains).
Governments stated stance

Initially, combative: I can change the face of India's irrigation with that Rs 40,000 crore if I waive off, we will be like a tax
haven.
AAR has judicial status, so the government is not in a position to provide retrospective exemptions. In the Castleton case,
special leave petition has been filed and admitted by the Supreme Court, but yet to be taken up for the hearing.
Governments hands are tied. Responsibility with FIIs. Governments intention is clear (as stated in the finance bill)
Next steps
FPIs to file a petition in Supreme Court to get the matter expedited for early hearing
For DTAA countries, treaty benefits will be applicable
Clarification on applicability of MAT on coupon interest on bonds from April 2015 is likely in early May
Good scenario: Supreme Court verdict in favour of FPIs
Bad scenario: Verdict against FPIs. Then, government to make retrospective amendments?
5
The MAT ruckus: What is at risk?

Equity outstanding (USD bn)
Incremental
Mar-15
Jan-12
Equity inflow
1
2
3
4
5
6
7
8
9
10
US
MAURITIUS
SING
LUXEMBOURG
UK
UAE
NETHERLANDS
CANADA
IRELAND
Other
Total
Total (ex-Sing, Maur)
106.8
73.0
27.9
28.2
16.5
10.2
6.2
7.3
6.7
39.0
322
221
43.1
39.8
6.8
12.4
7.9
5.4
2.4
2.9
2.5
15.7
139
92
63.7
33.2
21.1
15.8
8.6
4.8
3.9
4.4
4.2
23.3
183
129
Debt outstanding (USD bn)

Incremental
Mar-15
Jan-12
Debt inflow
6.3
10.7
18.5
4.2
0.2
0.1
1.5
0.2
0.4
7.0
49
20
0.2
6.8
12.1
0.5
1.0
0.0
0.2
0.0
0.0
2.6
23
5
6.1
3.9
6.4
3.7
-0.8
0.1
1.3
0.2
0.4
4.4
26
15
Data on incremental money into debt and equity between Jan 2012 and March 2015 (i.e. the contentious period) from
different countries show total inflows of USD183bn in equity and USD26bn in debt.
Excluding Mauritius and Singapore (DTAA benefit), total equity inflows are USD129bn and USD5bn in debt, with most inflows
from the US.
6
Source: NSDL and Nomura Global Economics.
2. Setback on legislative reforms

Land acquisition bill
Why the bill: The old land bill (1894 Act) provided
compensation to farmers, but did not give rehabilitation &
resettlement (R&R).
2013 land bill: (1) Increased compensation (1.3x to 2x in urban
and 2-4x in rural), (2) provides R&R, (3) mandated Social
Impact Assessment (SIA) except urgent projects, (4) consent
(80% for private, 70% for PPP, none for govt. projects), (5)
irrigated multi-cropped land acquisition prohibited.
Amendments suggested: Exemption from SIA, consent and
acquiring of multi-cropped land for (i) defence, (ii) rural
infrastructure, (iii) affordable housing, (iv) industrial corridors
and (v) infrastructure projects. Land for private hospitals and
private educational institutions included under public purpose.
GST constitutional amendment bill
Why the bill: GST to replace plethora of central (excise,

services, customs) and state (CST, VAT, entertainment tax,
entry tax, octroi, luxury tax, purchase tax) taxes. However,
this requires an amendment to enable states to tax services
Why the opposition: States fear revenue loss, even though
the centre has promised compensation
Status: Opposition opposing without reason. To be taken up
in the monsoon session. Once passed, it needs ratification by
more than 50% of the states in their individual assemblies,
deciding the revenue neutral GST rate, setting up of a GST
Council and putting the relevant IT infrastructure in place. Not
enough time to implement it from April 2016.
Why the opposition: The five exempted categories cover a

majority of the projects and will hurt the poor.
Status: Large opposition means difficulty in passing the bill in
the current format. Either amendments are removed or the BJP
will have to call a joint session.
7
Source: Nomura Global Economics, PRS.
3. A wider trade deficit in Q2

Import volumes are rising
Weak global demand hurting exports
Price Effect
Volume Effect
%
30
Volume Effect
Price Effect
25
Export Value growth y-o-y
20
10
15
Import growth y-o-y
-10
-5
-20
-30
Jul-12
Mar-13
Nov-13
Jul-14
Mar-15
due to REER appreciation and faster domestic growth

% y-o-y, 3mma
60
Non oil non gold imports, lhs

REER (36 country), rhs
3mma
117
50
115
40
113
30
111
20
109
10
107
105
-10
103
-20
101
-30
99
-40
Mar-09
Mar-11
Mar-13
Source: Ministry of Finance, CEIC and Nomura Global Economics
97
Mar-15
-15
Jul-12
Mar-13
Nov-13
Jul-14
Mar-15
A wider current account deficit in Q2 2015
We expect the trade deficit to widen from USD27bn in Q1

2015 to USD35bn in Q2 2015 owing to (1) higher oil prices (2)
seasonal deterioration in April/May (3) REER appreciation and
strong domestic growth (on imports) (4) weak exports and (5)
higher net agriculture imports owing to a bad-crop year. This
will result in the current account balance moving from a
seasonal surplus in Q1 (0.2% of GDP) to a deficit of 1.8% in
Q2.
4. Unseasonable rains 30% of winter crop destroyed

The damage
Impact on agri output
Crop-wise
Crop
Wheat
Coarse cereal
Pulses
Oilseeds
Total
Area sown
mn hectare
30.6
5.7
14.3
8.0
58.6
Damage
mn hectare
6.3
0.3
1.1
1.8
10.7
%
of area sown
20.6
4.9
7.9
22.2
18.2
Damage
% of area under Rabi
Haryana
65.6
Rajasthan
33.6
Uttar Pradesh
78.5
Punjab
8.2
Madhya Pradesh
5.0
Rulling party
FY13
10
6.4
6.1
6
3.7
2.6
0.8
0.4 0.3
BJP
BJP
SP
SAD/BJP
BJP
0
-2
-2.6
-4
Vegetables
FY14
FY15 (1st adv)
9.5
State-wise
State
% y-o-y
Fruits
Rabi food grain
According to the Ministry of Agricultures initial assessment, the unseasonal rains damaged around 18.9 mn hectares of land,
which comprises about 31% of the total winter (rabi) crop sown area (of 60.6mn hectares).
Within rabi crops, the maximum damage has been inflicted on wheat (20% of total area sown damaged), oilseeds (22%) and
pulses (8%).
Among fruits, mangos and grapes are some of the fruits that have been damaged. The northern states of Haryana, Uttar
Pradesh, Rajasthan were hit particularly hard.
9
Lessons from past episodes of unseasonable rains

CPI inflation around unseasonable rains
Fruit & vegetable prices remain contained so far
% m-o-m, sa
1.8
Important
vegetables
Potato
1.6
1.4
Start of
unseasonal
rains
Weight
Feb
March
April
March
(% in CPI) INR/qtl INR/qtl INR/qtl % m/m
April
% m/m
1.0
1416
1262
1165
(10.9)
(7.7)
Onion
0.6
2431
2309
2131
(5.0)
(7.7)
1.2
Tomato
0.6
2257
2292
2342
1.5
2.2
1.0
Brinjal
0.4
2398
2307
2173
(3.8)
(5.8)
0.8
Cauliflower
0.2
1841
2155
2434
17.0
13.0
0.6
Green Chillies
0.3
4853
4743
4651
(2.3)
(1.9)
0.4
Lady's Finger
0.3
4578
4230
3747
(7.6)
(11.4)
0.2
Vegetables
6.0
(3.9)
(3.9)
Banana
0.6
3441
3207
3202
(6.8)
(0.2)
Apple
Fruits
0.5
10055
11201
10532
11.4
(6.0)
1.5
(4.5)
0.0
t-3
t-2
t-1
t+1
t+2
t+3
t+4
t+5
t+6
Impact on vegetable prices

Index (t=100)
135
130
t = Start of
unseasonal rain
125
120
Veg
115
110
Fruits
105
Cereals
Pulses
2.9
During the past episodes, CPI inflation rose by an average of 1.4% m-o-m,
seasonally adjusted, in the immediate 3 months following the unseasonable
rains, as compared with an average of 0.7% m-o-m, sa, in the three months
preceding the unseasonable rains. However, this rise is transitory and tends
to fade from the fourth month onwards. Not surprisingly, much of the upside
in food price inflation has been driven by a sharp acceleration in vegetable
price inflation, which picks up substantially (20-30% rise) in the two months
following unseasonable rains. Plus, fruits and, to some extent, pulses
registered a faster pace of price increase following unseasonable rains.
However, there has not been any visible price impact thus far.
100
95
t-3
t-2
t-1
t+1
t+2
t+3
t+4
t+5
t+6
10
IMD predicts below-normal monsoons in 2015

IMD forecast vs actual rainfall
Southern Oscillator Index
% of long period average
125
Index
Forecast
Actual
115
La Nina (favourable for

Monsoons )
25
Normal monsoon range

15
105
5
95
-5
85
-15
75
1990
1995
2000
2005
2010
2015
The IMD expects rainfall at 7% below normal. It assigns

only a 28% probability to rains being normal, while the
probability of below-normal or deficient rains is high at
69% (36% below normal + 33% deficient). Historically,
the IMD's monsoon predictions have often diverged
from actual rainfall, but we view this forecast as
relatively realistic, considering the rising risk of an El
Nio.
-25
Mar-05
El Nino (unfavourable
for Monsoons )
Mar-07
Mar-09
Mar-11
Mar-13
Mar-15
Australian Commonwealth Bureau of Meteorology pegs

the likelihood of El Nio conditions (unfavourable for
rains) developing in 2015 at 70%. Below-normal rains
could hurt agriculture output and depress rural
incomes, which are already reeling under consecutive
bad kharif (summer) and rabi (winter) seasons .
Source: Indian Meteorological Department, Commonwealth Bureau of Meteorology, Bloomberg and Nomura Global Economics
11
What if: Below-normal monsoon rains

Macro impact of past droughts (>20% below normal)
Macro impact of poor monsoons (10-15% below normal)
12
Source: CEIC and Nomura Global Economics
5. Rural demand is already quite weak

Two Wheeler sales
%, y-o-y
25.0
Tractor sales
%, y-o-y
40
Two Wheeler sales, 3MMA
20.0
Tractores sales
20
15.0
0
10.0
-20
5.0
0.0
-40
Apr-11
-5.0
-10.0
Apr-11
Jan-12
Oct-12
Jul-13
Apr-14
Jan-15
Minimum support prices - paddy
Jan-12
Oct-12
Apr-14
Jan-15
Rural wages
Rural wages
%, y-o-y
30
% y-o-y
35
Jul-13
25
30
20
20
15
15
10
10
5
Feb-15
Mar-14
Apr-13
May-12
Jun-11
Jul-10
-5
Aug-09
FY15
Sep-08
FY10
Oct-07
FY05
Nov-06
FY00
Dec-05
FY95
Jan-05
FY90
Feb-04
0
Mar-03
4.0
Apr-02
25
Rural incomes are reeling under consecutive bad kharif season in 2014 and unseasonable rains in March. There is a
13
risk of higher MSP increases in 2015 given political constraints.
Source: RBI, SIAM, CEIC and Nomura Global Economics.
which could become a political risk

State elections in the next few years
Most Rajya Sabha seats are up for re-election in 2016

No of seats up for re-election
60
Others
INC
BJP+
50
40
MH, BR, UP, OR,

PB
30
20
KL, PB, AS
GJ, WB
Delhi
Goa
SK
State elections at end-2015 will be an important political event. With 16 seats in the Rajya Sabha (5 of which
are due for re-election in 2016), Bihar will be in focus in the coming months. Seeing the rising clout of BJP,
smaller regional parties have come together to form a coalition and thus BJP may find it difficult to win the
state and repeat its performance of 2014.
Given the ongoing rural stress, the risk of a populist decision (higher MSP, farm loan waiver) remains.
Source: ECI and Nomura Global Economics.
Apr-18
Nom.
Mar-16
Pud.
Nov-15
KL
Oct-15
Nom.
Feb-18
10
Apr-15
2017
Uttarakhand (Mar), Manipur (Mar), Goa

(Mar), UP (May), Himachal Pradesh
(Dec+), Gujarat (Dec+)
TN. MP, KR, AP,

KL
Jan-18
Kerala (May), West Bengal (May), Tamil

Nadu (May), Assam (Jun)
Aug-17
2016
Jul-17
Bihar (Nov)
MH, BR, UP,

MP, GJ, AP, WB
Jul-16
2015
70
Jun-16
State going to polls
Apr-16
Year
14
6. The key risk for India: Debt capital outflows

Equity inflows: India
USD bn
Debt inflows: India

USD bn
FII equity flows (12m sum)
35
FII debt flows (12m sum)
30
30
25
25
20
20
15
15
10
10
0
0
-5
-5
-10
-15
Apr-05
Apr-07
Apr-09
Apr-11
Apr-13
Apr-15
-10
Apr-05
Apr-07
Apr-09
Apr-11
Apr-13
Apr-15
15
Source: EPFR, CEIC and Nomura Global Economics.
Why the medium-term story is positive

We see a number of factors supporting Indias fundamentals in the medium term
A multi-year growth recovery
Low and stable inflation
A regime shift towards flexible inflation targeting
Incremental supply-side reforms to continue
A stable external sector
16

17
Leading indicators pointing to a sustained recovery

OECDs composite leading index for India
Index
103
OECD's composite leading index for India

Long-run trend
Nomuras composite leading index for India

Index
104
Non-agriculture GDP (2qma), rhs
% y-o-y
Nomura's composite leading index, lhs
12
102
10
101
102
8
100
6
99
100
98
97
Feb-97 Feb-00 Feb-03 Feb-06 Feb-09 Feb-12 Feb-15
98
2
Sep-97 Sep-00 Sep-03 Sep-06 Sep-09 Sep-12 Sep-15
Even though IP data have been volatile, leading indicators suggest that growth momentum will continue to
pick up. We expect real GDP growth to rise to ~8.0% y-o-y in FY16 from 7.4% in FY15.
Note: The constituents of our CLI are real M2 money supply, non-oil imports, equity returns, the repo rate, real bank credit, industrial output and visitor arrivals. Data for Q2 2015 are provisional estimates.
Source: CEIC and Nomura Global Economics.
18
Growth: Where are the green shoots?

Monthly real activity data heat map
% y-o-y, 3mma
2012
2013
2014
2015
Q1
8.9
7.0
8.3
Q2
-19.6
1.2
2.1
Q3
-15.1
1.4
-9.7
Q4
-29.2
-0.2
-8.8
Q1
-39.7
-1.2
-0.5
Q2
-8.2
1.7
0.7
Q3
-32.2
3.7
13.6
Q4
-33.6
0.1
6.9
Q1
-6.5
1.3
1.4
Q2
-2.4
3.3
7.5
Q3
23.3
6.3
14.3
Q4
51.9
8.1
14.5
Jan
59.7
6.3
15.8
Feb
50.6
4.6
18.5
Mar
32.2
3.6
20.9
Capital Goods
Imports (ex-oil, gold)
-4.1
16.1
-19.3
5.0
-7.9
-4.2
-0.9
-3.2
5.4
3.9
-3.5
-3.6
2.5
-5.0
0.1
-7.4
-11.0
-7.5
13.6
-1.4
-0.2
10.1
3.0
14.6
8.3
13.9
8.9
7.7
4.3
Passenger cars
Diesel consumption
10.5
9.9
5.0
10.3
-8.3
10.8
4.5
4.2
-13.7
2.7
-12.5
0.7
13.7
-2.6
-6.5
-1.1
-7.2
-1.5
1.6
0.3
1.7
2.5
6.0
1.0
12.5
3.1
10.2
4.6
7.9
2.5
Coal
Electricity generation
11.0
4.8
8.0
6.7
12.0
2.9
3.5
4.4
-0.1
2.1
-1.7
3.2
6.9
8.4
0.3
5.1
0.9
7.8
5.6
11.4
8.9
9.5
12.8
9.5
7.9
6.0
7.0
4.6
3.6
6.4
9.3
3.4
12.5
1.8
5.8
3.8
5.4
7.6
7.2
13.4
3.4
12.3
5.9
8.8
2.0
9.2
1.5
1.8
9.6
3.2
10.0
0.4
4.7
0.2
5.2
-1.7
2.3
2 wheelers
11.7
10.4
-2.5
0.7
1.0
-3.6
7.2
13.9
12.0
15.7
20.2
4.0
5.4
1.9
0.2
Visitor arrivals
Exports
10.4
5.0
1.6
-3.7
1.6
-8.5
2.1
0.7
4.1
4.4
5.4
-0.1
7.9
12.9
7.1
7.4
7.9
-0.4
7.2
7.7
13.0
0.5
6.2
0.7
4.3
-0.7
3.7
-8.3
3.3
-14.8
Deposits
Bank Credit
14.6
16.4
14.7
18.1
14.0
16.8
13.0
16.5
13.5
15.5
13.8
14.4
13.0
16.3
13.3
14.8
12.5
14.1
11.0
13.1
10.5
10.8
11.1
10.8
11.1
10.3
11.4
10.2
12.0
11.1
MHCVs
Railway traffic: Net tonne km
Aviation: Passenger traffic
Steel
Cement
Green shoots are currently visible in the following categories:

1. Transportation sector - MHCV sales, railway freight traffic and aviation passenger traffic
2. Consumer discretionary demand cars
3. Upstream infrastructure sector electricity, coal
4. Investment capital goods, imports (ex-oil, gold)
Weaker segments
1. Rural demand
2. Exports
3. Bank credit
Source: CEIC and Nomura Global Economics. Heat map based on 3-month moving average.
19
Investment outlook gradually improving

New investment projects announced
INR trn
25
Chemicals & chemical products
Metals & machinery
Electricity
Transport services
Construction & real estate
Others
Stalled vs. revised investment projects

INR bn
3500
Stalled investment projects

Investment projects revived
3000
20
2500
15
2000
1500
10
1000
5
500
Investments are key to a sustainable growth pickup. New investments announced are still at a nascent
stage, but are inching higher. Meanwhile, stalled projects are lower and the revival in projects has been
much higher in FY15, suggesting de-bottlenecking is underway.
Source: CMIE and Nomura Global Economics.
20
Government efforts to drive investment

De-bottlenecking of stuck projects
Civil Aviation
Coal
Commerce
Industry
Mines
Petroleum
Power
Railways
Roads
Shipping
Steel
Textiles
Total
Number of
projects
cleared
2
29
2
4
3
17
100
9
15
8
7
1
197
Value of
projects cleared
(INR bn)
24
12
10
14
9
41
451
19
20
11
39
1
653
Reduced policy uncertainty to further help

% y-o-y
30
Index
GFCF, lhs
Economic policy uncertainity, 2 qtr lead, rhs

inverted scale
25
50
20
15
100
10
5
150
0
-5
200
-10
-15
Sep-05
Jun-07
Mar-09
Dec-10
Sep-12
Jun-14
250
Lower policy uncertainty bodes well for investments
Source: Economic Times, Cabinet Secretariat, www.policyuncertainity.com, CEIC and Nomura Global Economics.
21
Stalled projects: The reasons

Reasons for stalled projects
Top reasons for stalling across industries
Unfavourable market conditions
12.1%
Lack of non-environmental
clearance
11.8%
Lack of promoter interest
11.7%
Lack of funds
No. of
projects
Top reasons
Manufacturing
212
Unfavourable market conditions
Mining
40
clearance
Electricity
80
Fuel/feedstock/raw material supply

problem
Services
283
Lack of promoter interest
Construction & Real

Estate
143
clearance
10.4%
Land acquisition issues
8.2%
Raw material linkages
4.6%
Lack of environmental clearance

Natural calamity
Industry
4.2%
1.0%
Stalled investments: Only 8% of stalled projects are stuck because of land acquisition issues. With rising demand,
lower policy uncertainty, and better raw material linkages (coal auctions) existing stalled projects can be revived.
New investments: However, the stalling of the land bill could hurt new investment pipeline in roads/highways,
viewed as major drivers of growth for the next 2-3 years.
Source: Economic Times, India budget and Nomura Global Economics.
22
Banking system vs. economic cycle

Total stressed assets
Impaired assets vs. real growth
% of total assets
18
% y-o-y
12
GNPAs
16
Restructuring
Real GDP growth (ex-agri), lhs

Impaired assets (% of total), inverted, rhs
% of total assets
0
F
10
4
14
8
12
6
8
10
6
10
8
4
12
14
Higher NPA
16
2
0
0
1997 1999 2001 2003 2005 2007 2009 2011 2013 2015F 2017F
1997
2000
2003
2006
2009
2012
2015F
18
Nomuras banking analysts expect impaired assets (NPA + restructured) to have peaked in FY15. As growth improves
and government policy actions focus on de-bottlenecking, we expect stressed assets to gradually fall.
The causality between growth and impaired assets is unclear. High growth during 2005-07 was coincident with falling
NPAs, but reasonable growth was achieved during 1997-00 with high NPAs. Of course, this does put a constraint on
private-sector led investment revival, i.e. most of the recovery to be led by the public sector at this stage.
Source: Nomura, Bloomberg
23
Potential growth likely to rise

Estimates of potential growth
% y-o-y
12
Real GDP
Potential GDP (growth accounting)
pp
10
TFP
Labour
Capital Stock
Real GDP, % y-o-y
10
F
Real investment
(% CAGR)
Potential
growth
(% CAGR)
0%
4.8
3%
5.3
5%
5.6
10%
6.5
15%
7.4
20%
8.5
8
7
8
6
5
4
3
1
0
1988 1993 1998 2003 2008 2013 2018
FY81-FY90 FY90-FY03 FY03-FY08 FY08-FY14 FY14-FY19 FY14-FY19

baseline accelerate
reform
In our base case, we expect reforms to revitalise real investment growth to 10% per annum,
pushing potential output growth to 6.5% (old series) in the next five years. If reforms are fasttracked, real investment growth could hit 15% pa, in our view, thus lifting potential growth to 7.5%.
24

25
Underlying inflation lower at about 5.5%

What drove CPI from 8% in Q1 2014 to 5% in Q1 2015?
CPI inflation and CPI ex-vegetables, T&C

% y-o-y
0.5
CPI ex-vegetables, T&C
0.0
14
CPI
0.0
12
-0.5
10
-1.0
-0.6
Lower oil
prices
-0.4
-1.5
-0.1
8
6
Lower
MSP
-0.7
-2.5
-0.1
-0.7
-3.0
Statistical issues
Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
T&C
Fuel and
Light
Housing
Clothing
Intoxicants
Misc ex T&C
Sep-12
F&B
ex-cereals
Cereals
2
0
Mar-12
-0.3
-3.5
-3.0
Total (CPI)
-2.0
Excluding vegetables (volatile) and transport and communications (lower oil prices), CPI inflation is tracking 5.4%. Of
the 3.0pp fall in CPI inflation, 2.0pp (housing, oil, MSP) is unlikely to moderate any further.
26
CPI more sensitive to wages

Sensitivity of CPI is very high to rural wages
Correlation between macro variables and CPI inflation components
Expected
sign
Inflation nominal rural wages
% y-o-y
Positive
Inflation
Expectations
Positive
MSP
Positive Positive Negative Negative

Nominal
wages
Output
Gap
Rainfall Repo rate
% y-o-y
CPI inflation, lhs

Nominal rural wages, rhs
16
30
25
CPI
0.6
0.5
0.9
0.3
0.1
(0.2)
CPI food
0.1
0.5
0.8
0.1
0.1
(0.3)
CPI Core
0.8
0.4
0.8
0.4
0.1
(0.2)
12
20
15
8
10
5
0
0
Mar-03
Mar-06
Mar-09
Mar-12
(5)
Mar-15
27
Rural wages: supply versus demand

Nominal rural wages and labour force participation rate
% y-o-y
30
25
per 1000
Nominal agri wages, lhs
Labour force participation rate,

rhs (inverse scale)
% y-o-y
370
30
380
25
390
20
Nominal rural wages and output gap

% y-o-y
Nominal agri wages, lhs

Output Gap, rhs
3.0
2.0
20
1.0
15
0.0
10
(1.0)
(2.0)
400
15
410
10
420
5
0
Mar-02
430
Mar-06
Mar-10
Mar-14
440
Mar-18
0
Mar-02
Mar-06
Mar-10
Mar-14
(3.0)
Mar-18
After the sharp fall in rural wages in 2014, we expect rural wages to stabilise around 5-7% y-o-y in 2015-16 as improving
economic activity should be offset by an increase in labour supply (labour force participation rate).
28
Source: NSSO,CEIC and Nomura Global Economics
Low rural wages + low MSPs = Low CPI

Nominal rural wages projection
MSPs are important in the long run
% y-o-y
30
25
% y-o-y, 2ya
25
Nominal rural wages (Actual)

Nominal rural wages (Model Forecast)
Minimum support prices
Forecast
CPI inflation
20
20
15
15
10
10
5
0
5
-5
-10
Mar-02
0
Mar-05
Mar-08
Mar-11
Mar-14
Mar-17
FY87
FY91
FY95
FY99
FY03
FY07
FY11
FY15
Rural wages should consolidate in 2015. If the MSP increase is kept at 3% p.a. over the next three years (and there are no
adverse supply shocks), the MSP-food-wage spiral could be gradually circumvented. However, with the rural economy
reeling under a consecutive below-normal monsoon in 2014 and unseasonal rains in 2015, there is risk of higher MSP
29
increases (8-10%) in 2015, particularly with elections approaching in Bihar.
CPI inflation likely to stabilise ~ 5%

CPI inflation: Actual versus fitted
% y-o-y
16
CPI Actual
CPI Forecast
Forecast
14
12
10
8
6
4
2
0
Dec-01
Dec-03
Dec-05
Dec-07
Dec-09
Dec-11
Dec-13
Dec-15
Dec-17
30
Note: The CPI model uses nominal rural wage, minimum support prices , output gap, repo rate and rainfall as explanatory variables.

31
A new monetary policy framework

Past framework
New framework
Multiple-indicator
Flexible inflation targeting (FIT)
Nominal anchor: WPI target
Nominal anchor: CPI target
5% target (implicit)
6% by March 2016; 4% (+/- 2%) from March 2018 onwards
Governor veto
Monetary policy committee vote
Operative rate: Repo
Operative rate: Repo; 14-day term repo

Publicly available inflation model
Monetary policy reports
Publishing RBI policy minutes
32
New monetary policy framework = higher real rates

Real policy rates
% pa
Real Repo rate
Average
4
2003-06: 2.2%
2014-15: 1.5%
2
0
-2
-4
-6
2006-13: -2.3%
-8
-10
Mar-03
Mar-05
Mar-07
Mar-09
Mar-11
Mar-13
Mar-15
After nearly a decade of low to negative readings, real policy rates are finally positive. The non-inflationary
growth period (2003-06) witnessed an average real rate of ~2.2%. We expect the RBI to target higher positive
real rates to boost macro stability. The volatile global funding environment also calls for higher real rates. As
growth recovers, real rates will need to be higher to balance demand and supply of funds.
33
New monetary policy framework = Policy orthodoxy

We estimate equilibrium nominal rate at ~7.25%
Optimal versus actual policy rate
%
25
Optimal policy rate (Taylor rule)
Repo rate
Forecast
20
15
10
0
Mar-03
Mar-06
Mar-09
Mar-12
Mar-15
Note: Optimal rate = Neutral real rate + * (Inflation gap) + *(Output gap), where neutral real rate is assumed as 2% and the inflation and growth co-efficients are taken as 0.5.
Mar-18
34
RBIs policy stance to stay neutral-to-tight

RBIs policy stance vs. realised CPI inflation
%
20
CPI inflation: Scenario analysis

% y-o-y
Policy stance, lhs
16.0
CPI Inflation (actual)
% y-o-y
9
Repo @ 8%
Forecasts
14.0
15
Repo @ 8.5%
Repo @ 7.5%
Repo @ 7%
12.0
Repo@6.5%
7
10
10.0
8.0
6.0
4.0
-5
2.0
4
R2 of the model = 0.88
-10
Mar-02
Mar-05
Mar-08
Mar-11
Mar-14
0.0
Mar-17
3
Mar-14
Mar-15
Mar-16
Mar-17
Mar-18
If the RBI is serious about achieving 4% (from March 2018 onwards), then we believe that the policy stance has to
be tight. Currently, we do not expect 4% inflation on a sustainable basis.
35

36
Compendium of reforms so far

Execution
Ease of doing business
Abolished all EGoMs,

Skill devt: amendment to
Groups of Ministers (GoMs) Apprentice Act
Better inter-ministerial coordination
Infrastructure
To set up InvIT
(Infrastructure Investment
Trust); incentivise REITs
Validity of Industrial License Banks to issue long-term

extended from two years to infra bonds with no statutory
three years
pre-emption
Sagarmala project
Self-certification by citizens
Monthly meetings & targets
instead of affidavits
National fibre optic grid
Bullet train
Online clearances:
Plannig Commission
Environmental & forest
100 smart cities; Urban
replaced with NITI Aayog
clearance online; 16 states
renewal scheme (AMRUT)
also online
Labour laws: Considering
amendments in the Child
Labour Act, Factories Act,
Minimum Wages Act
E-auction of coal mines;

commercial coal mining
To allow women to work

on night shifts in a
factory; raise overtime
hours limit
Land acquisition laws

amended
Fiscal
FDI
Potatoes and onions under Domestic natural gas prices

Defense to 49% (from 26%)
Essential Commodities Act reviewed
Less regulation: Scrap

Roads Ministry empowered Minimum support prices
obsolete laws such as Boiler
to amend the Model
raised by around 2.5%
(Inspection) Act & move to
Concession Agreement
vs.15% (6-yr CAGR)
self-certification
Focus on deliverables
Government agreed to
reduce government stake in
PSU banks to 52% and
reduce government
interference
Food inflation
Diesel price deregulated
To restructure Food
10% blanket cut in
Corporation of India; set up discretionary spending
a price stabilization fund
announced.
States urged to remove
vegetables, fruits from
APMC Act
Expenditure management
commission constituted
To make hoarding nonbailable offence
Goods and Services Tax bill

tabled in the Lok Sabha
Rail infrastructure to 100%
Parliament passed a law to

increase FDI limit in
Insurance to 49%
Set up first of many food

parks under the PPP model
in Karnataka
Imposed restrictions on
states to announce
additional mark-up over
MSP
Proposed restricting
Single web portal for online Amended mining laws to
NREGA to tribal areas and
registration of units,
allow auctioning of non-coal
thus make wages more
reporting of inspections
mines
market determined.
37
Modi governments report card

Hits
Coal mine auctions and resolution of power sector

issues.
Telecom auction
FDI in insurance and defense manufacturing hiked to

49% and in rail infra to 100%
Proactive measures to control inflation
Lower MSP
Check on hoarding
Lot of small steps to improve the ease of doing business
Increase in public expenditure on capex with focus on

railways
Jan Dhan Yojana (bank accounts for all)
Differentiated banking licenses
Flexible inflation targeting monetary policy framework
Deregulation of diesel prices
Decentralization with greater involvement of states
Misses
Delay in changes to the land acquisition bill
Lack of progress on GST implementation
Subsidy rationalization (kerosene, urea, food)
Lack of a swift action plan to improve agricultural

productivity
Lack of swift reform in the public sector banks
Education sector reforms
38
Reform agenda and timeline

Focus area
Measure
Timeline
Fiscal
Expenditure Reforms (rationalisation of welfare schemes)
Q4 2015
Infrastructure
Agriculture
Ease of doing
business
LPG subsidy cap

GST Bill
E-auction of coal blocks
Land acquisition ordinance to law
Restructure Food Corporation of India
Price stabilization fund
Repeal 72 archaic laws
2016
Q3 2015
Underway
Q3 2015
H2 2015
H2 2015
Q2 2015
Amend labour laws
Underway
Monetary Policy
Setting of MPC
Banking
On-tap/differentiated bank licenses

Lower govt. stake and other reforms in public sector banks
Rural
Reduce MGNREGA coverage
H2 2015
Underway
2015
Unlikely
Key themes
Better governance and higher productivity
An improvement in the ease of doing business
Infrastructure development
Indigenous production (Make in India)
Digital India
Financial inclusion
39
FY16 budget: Credible but expansionary

Much more credible assumptions
Fiscal impulse of Central Government spending
FY14
FY15
FY15
FY16
Actual
15635
BE
17949
RE
16812
BE
17775
9.9
19.8
9.9
15.8
Corporation tax (% yy)
10.8
14.3
8.0
10.5
Income tax (% yy)
21.1
16.5
14.2
17.5
Customs (% yy)
4.1
17.2
9.6
10.4
Union Excise Duties (% yy)
-4.0
22.2
9.4
23.9
Service Tax (% yy)
16.6
39.7
8.7
24.8
Non-tax revenue
1992
2125
2178
2217
Disinvestment
276
634
314
695
Capital expenditure
1879
2268
1924
2414
Revenue expenditure
13756
15681
14888
15360
Food subsidy
927
1150
1227
1244
Fertiliser subsidy
680
730
710
730
Oil subsidy
855
634
603
300
Interest payments
3775
4270
4114
4561
5081
5312
5126
5556
Fiscal deficit (% of GDP)
4.5
4.1
4.1
3.9
Revenue Deficit (% of GDP)
3.2
2.9
2.9
2.8
Primary Deficit (% of GDP)
1.2
0.8
0.8
0.7
Net market borrowing
4689
4612
4532
4564
Gross market borrowing
5639
6000
5920
6000
Redemption
950
1388
1388
1436
Fiscal deficit financed through

dated securities
92
87
88
82
INR bn
Total receipts/expenditure
Gross tax revenues
Fiscal deficit
% of GDP
3
2
1
0
-1
-2
FY05
FY07
FY09
FY11
FY13
FY15
While the assumptions underlying the governments

FY16 budget estimates are more credible, the
government has deviated from the fiscal consolidation
path stated earlier and is now targeting a fiscal deficit
of 3.9% of GDP in FY16 versus earlier target of 3.6%.
Consequently, the fiscal impulse of the budget is likely
to be expansionary.
The government has argued that it is 1) spending
more money on capex and 2) transferring higher
resources to states and there may be consolidation at
40
the aggregate level.
Push towards greater public investment

Public investment (% of GDP)
% of GDP
Capex proposed in FY16 budget

INR bn
Public investment
6.5
6.0
5.5
5.0
FY15RE
FY16BE
Capex on the budget
1924
2414
Capex by CPSEs
2370
3179
Defense
820
820
Total Public capex ex-defence
3475
4774
2.7
3.4
% of GDP
4.5
Multiplier effect of public spending
4.0
Impact
Multipliers
3.5
Combined
Revenue Expenditure
Capital Outlay
Non-defence capital outlay
3.0
Long run
Peak year
Multipliers
0.37
1.29
1.81
0.37
3.56
5.88
1
4
5
0.19
0.39
2.1
0.09
0.85
3.84
1
4
0.6
2.13
0.6
7.61
1
3
2.5
2.0
1967
1975
1983
1991
1999
2007
2015
Centre
Revenue Expenditure
Capital Outlay
Non-defence capital outlay
States
Revenue Expenditure
Capital Outlay
Public investment has fallen in recent years, which the government aims to reverse given private sector balance sheet issues.
Studies have shown strong positive multiplier effect of capex spending especially over four years.
Source: Indian railways, CEIC and Nomura Global Economics.
41
Proposed public investment

Railways proposed investment plan (2015-19)
Roads & urban development

Investment
(INR bn)
INR bn
3500
Roads (Bharat Mala - East to West)
140
100 smart cities - Water, sanitation,

efficient urban mobilit, affordable
housing
480
Urban renewal (AMRUT) - water

supply, sewerage, water drains,
transport
500
Funding for railways
3000
Public sector co.s (1.5)
2500
2000
1500
3000
1000
1500
500
1500
1500
1000
0
Government
LIC
Private sector Tax free bonds/ Public sector

IDF
firms
Railways likely to be a key focus area of the government. Roads and urban development are also likely to remain in focus.
Source: Indian railways, CEIC and Nomura Global Economics.
42

43
Overall a problem of plenty on the external sector

BoP forecasts currently tracking a USD45bn surplus in FY16
USD bn
A Current Account
1 Merchandise
Exports
Oil
Non-oil
Imports
Oil
Gold
Non-oil/non-gold
2 Invisibles
Services
Transfers
Income
B Capital Account
3 Foreign Direct Investment (net)
4 Portfolio Investment
Equity (SEBI)
Debt (SEBI)
5 Loans
External Assistance
Commercial Borrowings
Short Term Credit to India
6 Banking Capital
7 Rupee Debt Service
8 Other Capital
C Overall Balance
Current account (% of GDP)
FY13
(88.2)
(195.7)
306.6
60.9
245.7
502.2
164.0
53.8
284.4
107.5
64.9
64.0
(21.5)
89.3
19.8
26.9
25.8
5.2
31.1
1.0
8.5
21.7
16.6
(0.1)
(5.0)
3.8
(4.7)
FY14
(32.4)
(147.6)
318.6
62.7
255.9
466.2
165.2
28.9
272.2
115.2
73.0
65.3
(23.0)
48.8
21.6
4.8
13.5
(4.5)
7.8
1.0
11.8
(5.0)
25.4
(0.1)
(10.8)
15.5
(1.7)
FY15F
(24.1)
(141.3)
318.4
56.1
262.3
459.7
138.3
34.3
287.1
117.2
77.9
65.6
(26.3)
88.2
31.5
42.5
18.4
27.3
6.4
1.4
9.2
(4.2)
12.0
(0.1)
(4.1)
60.1
(1.2)
FY16F
(29.5)
(148.9)
320.9
48.1
272.8
469.8
110.0
35.3
324.5
119.4
82.6
66.3
(29.5)
77.4
32.0
25.0
20.0
8.0
17.5
1.5
12.0
4.0
7.0
(0.1)
(4.0)
45.9
(1.4)
FY17F
(43.9)
(165.9)
339.8
56.1
283.7
505.7
120.0
35.3
350.4
122.0
87.5
66.9
(32.4)
65.4
36.0
20.0
15.0
8.0
22.5
1.5
13.0
8.0
(9.0)
(0.1)
(4.0)
18.5
(1.8)
Improved basic BoP suggests less vulnerability

% of GDP
Basic BoP (CA+ net FDI)
3
2
1
0
-1
-2
-3
-4
FY93
FY97
FY01
FY05
FY09
FY13 FY17E
We expect the current account deficit to remain at sustainable levels (<2% of GDP) and an overall
balance of payments surplus of around USD45bn; the basic BoP has improved sharply.
44
The good news: Indias love for gold is cooling off

Running an annualized run rate of USD37bn
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Gold
import
volume
mt
612
878
826
818
797
880
982
1106
1219
1141
731
Gold price
$/oz
378
414
477
628
766
868
1024
1295
1647
1654
1328
Gold import
value
USD bn
7
10
11
14
16
21
29
41
56
54
28
FY15
890
1240
35.5
USD bn
RBI imposes restriction

on gold imports
RBI eases
restrictions on
imports
7
6
Avg: 4.9bn
Gold imports
4
Avg: 3.1.bn
3
Avg: 1.3.bn
2
1
0
Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
Gold imports rose sharply in March but since there were no major policy changes to drive gold imports higher, the
pickup in gold imports could be a one-off, in our view.
Despite the sharp rise in March, the monthly run rate is still contained at USD3.1bn (annualized: USD 37.2bn, since
the easing of gold import restrictions in June 2014).
Overall, with gold prices in check and inflation under control, we expect investment and inflation hedge-related
demand for gold to remain contained.
The upcoming gold monetisation scheme aimed at increasing the domestic recycling of gold is likely to further
reduce reliance on imported gold.
45
FDI inflows surge sharply this year

Net FDI inflows tracking >USD30bn in FY15
USD bn
40
USD bn, lhs
Where has the incremental FDI flown in?

FDI inflows (USD mn)
% of GDP
2.0
% of GDP, rhs
35
1.8
Power
2014
1.6
Mining
30
2012-13 (Avg)
1.4
25
20
15
1.2
Computer Software &

Hardware
1.0
Auto
0.8
Oil & Gas
0.6
10
Trading (wholesale cash &

carry)
0.4
5
Telecom
0.2
0
1000
2000
3000
A substantial portion of the current account deficit is being financed through more stable net FDI
inflows. FDI inflows are up sharply led by investment in telecom, wholesale trading, oil & gas, auto,
power and mining sectors.
4000
0.0
46
Why is India better placed this time?

Much bigger firewall of FX reserves
Better placed than peers

% of GDP (4-qtr sum)
0
-1
-2
-3
-4
-5
Sep-13
-6
-7
Sep-14
-8
India
Indonesia
USD bn
400
FX reserves
350
300
250
200
150
100
Apr-05
Apr-07
Apr-09
Apr-11
Apr-13
Apr-15
India
China
Indonesia
Russia
South Africa
Turkey
Brazil
GDP growth
2014 2015
% y-o-y
7.2
7.6
7.4
6.8
5.0
5.2
0.6
-4.4
1.6
1.9
2.9
3.4
0.1
0.0
South
Africa
CPI inflation
2014 2015
% y-o-y
7.2
5.4
2.0
1.5
6.4
7.1
7.8
13.1
6.1
4.4
8.9
6.5
6.4
7.0
Brazil
Turkey
Policy rate
FX
2014 2015 2014 2015
% pa
against USD
7.00
7.25
63.4
62.9
2.75
2.50
6.1
6.1
7.75
7.00 12650 13100
17.00 12.00 60.5
65.0
5.75
6.50
11.6
11.3
8.25
7.00
2.4
2.4
11.75 13.00
3.0
3.1
India is much better placed to manage any volatility in the financial markets owing to Fed
interest rates liftoff owing to 1) much higher reserves and 2) better fundamentals as compared
with 2013 and as compared with peers.
47
Note: 2015 are Nomura forecasts. Source: Bloomberg, CEIC and Nomura Global Economics.
Why is RBI not defending the topside?

Real Effective Exchange Rate
Import cover
Index
130
36 countries
FCA (Months of import cover)
Months
6 countries
Threshold
18
125
120
16
115
14
110
12
105
10
100
95
90
85
Mar-07
Mar-09
Mar-11
Mar-13
Reason 1: Fair valuation

On a REER basis, INR is around 8-15% overvalued
currently. Adjusting for productivity differentials, the
overvaluation is around 4-6%.
Mar-15
4
Mar-95
Mar-99
Mar-03
Mar-07
Mar-11
Mar-15
Reason 2: Reserve adequacy

Assuming a comfortable threshold of nine months,
India needs to add ~USD20bn to its reserves from
current levels (USD340bn).
48
Nomura strategy views

Long equity, relative INR outperformance and long bonds
Equity: Dec 2015 Sensex target of 33500 (~20% upside). O/W sectors: Financials, autos, industrials and
technology. U/W: Consumer staples, pharmaceuticals, metals and telecoms.
FX: USD/INR (current: 63.5) to depreciate to 64.4 in Q3 2015, appreciate to 63.3 in Q4 2015 and further to 62.9
in end-2016.
Rates: 10yr bond yields (cur: 7.77%) to fall to 7.5% by Q2 2015 and 7.2% by end-2015, staying unchanged
thereafter in 2016. On swaps, we hold a flattener view.
49
Equity Strategy: Out of the pit stop (Prabhat Awasthi)

Rate and growth cycles improving together
35
Sensex 12-m Forward P/E
30
25
15.6x as on
29 Apr '15
20
15
10
5
End-Dec 2015 Sensex target of 33,500 implies ~20% potential upside

Five reasons for our positive stance: falling cost of capital; cyclical and structural improvement in growth; a positive terms-of-trade
shock; a right-of-centre governance; support from rising profitability on increasing asset utilisations, and rising margins on lower raw
material and interest costs.
We value the market on a one-year forward P/E of 16.6x, a 10% premium to its five-year average of 15.1x.
Over-weights: Financials, autos, industrials and technology.
Under-weights: Consumer staples, pharmaceuticals, metals and telecoms.
Our top five stock picks for 2015 are AXSB, HCLT, MSIL, NBCC and UNBK.
Source: Nomura Research
50
FX Strategy: INR outperformance to continue (Craig Chan)

Foreign equity flows vs. RBI intervention
Favourable FEER model valuation

Extent of overvaluation
%
India
-9.6
Indonesia
3.6
Taiwan
-48.6
Korea
-7.5
Thailand
-6.3
Hong Kong
1.1
Philippines
-12.3
Malaysia
-3.2
China
-4.9
Singapore
-24.3
Our view on the RBIs FX interventionist stance remains unchanged, in that while we believe the RBI still has a bias to
accumulate USDs it has become less aggressive. We measure this by looking at the RBIs spot and FX forward actions against
net foreign bond and equity inflows. This ratio has fallen from 4.1 in mid-2014 to around 1.6 in February 2015.
Our current account-based FX valuation model (FEER) shows INR is actually undervalued by around 9.6%. This macro balance
approach calculates FX valuation through the structural and equilibrium current account gap.
Overall, we continue to expect INR outperformance against the NDF and within the Asia region.
Near-term risks: Some possible disappointments on the land acquisition bill and the Minimum MAT issue.
Source: Nomura and Bloomberg
51
Rates Strategy : Long India bonds (Vivek Rajpal)

10yr bond yields and repo rate
OIS curve pricing in aggressive rate cuts
%
9.5
IGB 10yr generic yield
bp
Repo rate
0
-10
-20
-30
-40
-50
-60
-70
-80
-90
-100
9.0
8.5
8.0
7.5
7.0
Apr-12
-31
-51
Apr-13
Oct-13
Apr-14
Oct-14
-58
-87
0m
Oct-12
Latest (28-Apr-15)
3m
6m
12m
24m
Apr-15
Target 10yr bond yield at 7.20% due to lower inflation, tapering net supply and easing expectations. We continue
to hold the IGB 8.12 2020 (current: 7.75%; target: 7.30%) and IGB 8.28 2027 (current: 7.77%; target: 7.30%).
On swaps, we hold our 3mfwd1s5s flattener as we expect the swap curve to flatten as front-loading of rate cut
expectations are pushed back.
However, OIS curve is still pricing in approximately ~58bp of an equivalent cut within one year and ~90bp of rate
cutting in two year time. The aggressive pricing in front-end rates makes forward curves steeper relative to spot
curve.
52
Appendix
The new GDP puzzle

Changes in real growth
FY13
FY14
FY15
Old
New
Delta
Old
New
Delta
New
Agriculture, forestry and fishing
1.4
1.2
(0.2)
4.7
3.7
(1.0)
1.1
Mining and quarrying
(2.2)
(0.2)
2.0
(1.4)
5.4
6.8
2.3
Manufacturing
1.1
6.2
5.1
(0.7)
5.3
6.0
6.8
Electricity, gas, w ater supply
2.3
4.0
1.7
5.9
4.8
(1.1)
9.6
Construction
1.1
(4.3)
(5.4)
1.6
2.5
0.9
4.5
Trade, repair, hotels and restaurants
4.5
10.3
5.8
1.0
13.3
12.3
9.7
Transport, storage, communication
6.0
8.4
2.4
6.1
7.3
1.2
6.0
Financial, real estate & business services
10.9
8.8
(2.1)
12.9
7.9
(5.0)
13.7
Community, social & personal services
5.3
8.8
3.5
5.6
7.9
2.3
9.0
Total gross value added
4.5
4.9
0.4
4.7
6.6
1.9
7.5
% y-o-y
12
GDP_new base
10
8
6
4
2
0
GDP_old base
1990
1995
2000
2005
2010
2015
What: GDP growth revised up by ~2pp in FY14 and FY15. Led by manufacturing and trade sectors
Why?
Better coverage
Consistent with SNA 2008
Local bodies (60-70%) captured
Wider data coverage (MCA21 database): 0.5 million companies (85% of companies) up from 2500 earlier
Volume versus value addition
Enterprise vs establishment-level data: Now captures services by manufacturing firms
Service/sales tax growth for capturing value addition

54
Weak PSB = An opportunity for other banks?

Share in gross NPA (% of total)
Capital requirements for public sector banks
100
INR bn
700
90
80
SBI/BOB/PNB
600
70
Total ex
SBI/BOB/PNB
500
60
Total PSUs
50
400
40
300
30
20
200
10
0
100
FY10
FY11
Public sector banks
FY12
FY13
Private sector banks
FY14
FY15
Foreign banks
FY15
FY16
FY17
FY18
FY19
PSU banks require INR1649bn as capital between FY15 and FY19. Worryingly most of the capital requirement
comes from banks other than the big 3, whose ability to raise and lend capital is likely to be relatively weaker.
This is likely to be a constraint on the transmission of monetary policy easing and thus may reduce the efficacy of
rate cuts on boosting capital flows to the economy.
Opportunity: For private banks, and also for reforms in public sector banks.
55
Leveraged balance sheets a hurdle

Debt-equity ratio
%
130
BSE500 Ex Banks
Sectoral debt-equity ratio

Debt to Equity Ratio (%)
Mar-91
Mar-06
Mar-10
Mar-14
Automobile
125.8
75.3
110.9
82.2
120
Capital Goods - Elec Equipment
111.0
42.3
60.5
59.8
110
Cement
91.9
64.3
43.0
70.4
100
Chemicals
122.9
55.7
46.7
56.6
Construction
148.8
123.8
191.2
272.8
91.3
41.5
55.2
75.5
107.4
48.8
76.6
97.2
87.0
62.2
89.4
154.0
153.4
283.5
57.8
66.3
73.3
48.6
56.7
70.7
Telecomm-Service
198.7
57.9
53.2
136.1
Textiles
142.5
104.4
119.3
100.1
BSE500 Ex Banks
110.0
57.3
73.6
95.7
90
FMCG
80
Metals/Steel & Mining
70
Power Generation & Distribution
60
Realty
Refineries
50
40
Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar92
94
96
98
00
02
04
06
08
10
12
14
Leverage has been building since the financial crisis. Infrastructure developers, power generation, steel and
telecoms have experienced a significant debt buildup.
While rising equity markets and monetary easing may help improve the stressed balance sheets, the pace has
been very gradual.
Thus, monetary easing at this stage is likely to push credit flow towards retail sector and may reignite the
imbalances in the economy.
Source: Media reports, CapitalLine and Nomura Global Economics.
56
The role of inflation expectations

but what happens if crude oil prices move higher?
Inflation expectations have fallen
3-months ahead
% y-o-y
% y-o-y
USD/bbl
14
140
14
12
120
12
10
100
80
60
Inflation expectations, lhs
16
12-months ahead
10
8
6
Inflation expectations, lhs

4
4
2
Mar-07
Mar-09
Mar-11
Mar-13
Mar-15
2
Sep-06
40
Global crude oil prices, rhs
Oct-08
Nov-10
Dec-12
Jan-15
20
57
Impending inflationary fiscal impulses

7th Pay Commission
Goods and Services Tax
% of GDP
% of GDP
2.4
5th CPC
6th CPC
7th CPC
2.2
11.1
Services (exHousing)
18.2
Housing
2.0
Goods
10.1
1.8
Food
1.6
Fuel
45.9
14.7
1.4
1.2
Weight in the CPI basket (%)

FY96
FY99
FY02
FY05
FY08
FY11
FY14
FY17
The government is due to implement the 7th Pay

Commission recommended hikes sometime in
FY17. Past wage hikes had a substantial fiscal
impact and also increased the disposable income of
government employees.
The near- term impact of GST may be inflationary

given that 1) services will be taxed at higher rate
compared to current rate of 14%; 2) increased tax
compliance may mean increased tax incidence on
the customers.
58
Political strategy: Consolidate in Rajya Sabha

Lok Sabha (lower house); total seats: 543
NDA
UPA
AITMC
BJD
Others
AIADMK
AIADMK, 37
Others, 56
Rajya Sabha (upper house); total seats: 245
Others, 71
NDA, 65
NDA
UPA
AIADMK
AITMC
BSP
Others
BJD, 20
AITMC, 34
BSP, 14
UPA, 60
UPA, 77
NDA, 336
AITMC, 12
AIADMK, 11
BJP has an outright majority in the Lok Sabha (lower house), but lacks majority in the Rajya
Sabha (upper house)
Source: ECI and Nomura Global Economics.
59
Monetary policy transmission weak so far

Policy rate and lending rates
Repo rate
Base rate
Transmission in previous cycles
Deposit rate
%
11
bps
2001-2005
2005-2008
2008-2009
2010-2011
2012 - Jun 2013
2013 Jul - 2014 Mar
2014 Apr -date
10
9
8
Repo
rate
(300)
300
(425)
375
(125)
75
(50)
Base
rate
263
(33)
20
(14)
PLR
(190)
460
(163)
292
(28)
13
(10)
Deposit
rate
(438)
388
(288)
225
(63)
38
(25)
7
6
5
4
Mar-07
Mar-09
Mar-11
Mar-13
Mar-15
Monetary policy transmission has been weak due to high NPAs in the banking system
Only half of the 50bp rate cut since January has been transmitted so far
60
Still significant scope for an equity catch-up

Equity index versus market cap
% of GDP
160
M-Cap (% of GDP), lhs

Sensex, rhs
140
120
Cross-country market-cap comparison

Index
35000
% of GDP
160
30000
140
25000
120
100
20000
80
India
Philippines
Korea
Indonesia
Thailand
100
80
15000
60
60
10000
40
40
5000
20
0
Apr-99
Apr-03
Apr-07
Apr-11
0
Apr-15
20
0
Mar-03
Mar-07
Mar-11
Mar-15
Indias equity market capitalisation remains well below both its own historical average and most of
its Asian peers, which indicates significant upside potential.
61
Where is the bonanza given to states?

Net resource transfer to states
Aggregate budget of the 16 states
INR bn
FY14
FY15BE
FY15RE
FY16BE
States' share of taxes and Duties
3182
3822
3378
5240
Total Grants & Loans
2100
4056
3552
3283
Recovery of Loans & Advances

(less)
101
88
90
93
Net Resources transferred to

States & UT
5181
% of GDP
4.6
7790
6.1
6840
5.4
Windfall from the coal mine auctions

Over the lifetime
of the mines
INR bn
In first year (10

% of total)
INR bn
M Pradesh
355.9
35.6
Jharkhand
126.2
12.6
Chattisgarh
336.8
33.7
5.2
0.5
West Bengal
112.0
11.2
Total
936.1
93.6
Orissa
8430
6.0
% of GDP
FY14
FY15BE
FY15RE
FY16BE
Revenue receipts
8.6
10.4
10.3
10.3
Transfer from center
3.3
4.9
4.8
4.6
States own
5.2
5.5
5.5
5.7
Capital Receipts
1.6
1.7
2.0
1.8
Non -debt
0.0
0.0
0.1
0.0
Debt receipts
Total
expenditure/receipts
Revenue expenditure
1.6
1.7
1.9
1.7
10.2
12.1
12.2
12.1
8.6
10.1
10.2
10.0
Capital expenditure
1.6
2.0
2.0
2.1
Fiscal Deficit
1.6
1.6
1.9
1.7
Primary Deficit
0.5
0.6
0.8
0.6
Revenue Deficit
0.0
(0.3)
(0.3)
(0.4)
State-wise fiscal deficit
62
Fiscal stance is expansionary

Cyclically adjusted fiscal balance
% of GDP
4
Fiscal impulse
% of GDP
3
Cyclical fiscal balance (a-b)

Structural fiscal balance (b)
State
Center
Combined
Actual fiscal balance (a)
1
-2
-4
-6
-1
-8
-2
-10
FY05
FY07
FY09
FY11
FY13
FY15
-3
FY06
FY08
FY10
FY12
FY14
FY16
We estimate that the cyclically-adjusted fiscal balance (centre + 16 states) will worsen from an
estimated 5.9% of GDP in FY15 to 6.2% in FY16, leading to a positive fiscal impulse of 0.3-0.4pp after
three consecutive years of a negative fiscal impulse.
Overall, our analysis suggests that the general governments fiscal stance is mildly expansionary in
FY16 and positive for growth, which reduces the need for an accommodative monetary policy at the
margin.
63
Sensitivity of trade to REER

Imports are more sensitive to REER than exports
10% appreciation in
REER
Import growth
Sensitivity
Export growth
-1.6% (Not
significant)
11.8%
Lag
1-2 Quarters
2 Quarters
Within imports, consumption goods are more sensitive to REER and demand than capital
10% appreciation
goods
1% increase in demand
REER
Import growth
Sensitivity
Consumption
goods
Capital goods
16.7%
9.8%
Lag
(Quarters)
2
2
Sensitivity
3.3%
1.4%
Lag
(Quarters)
2
1
Both exports and imports are sensitive to demand (world and domestic, respectively)
1% increase in demand
Sensitivity
Lag
Import growth Export growth

4.1%
2 Quarters
6.0%
0
64
Appendix A-1
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(2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of my compensation is tied to any
specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.
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India: A Bumpy Ascent: Global Markets Research

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India: A Bumpy Ascent: Global Markets Research

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Connecting Markets East & West

Global Markets Research

India: A bumpy ascent

+91 22 4037 4087

Aman Mohunta - NFASL

Any authors named on this report are research

Summary: ST bumps, MT positive

India outlook at a glance

Services (incld Construction)

Wholesale price index

Current account balance (% GDP)

Repo rate (%)

The framework: Growth with macro stability

The near-term bumps

Uncertainty surrounding minimum alternative tax

Setback on legislative reforms (land, GST)

A wider current account deficit in Q2 2015

Weather vagaries: unseasonable rains and a below-normal monsoon season

Political fallout of weak rural demand amid upcoming state elections

FII outflows due to global or domestic factors

1. The MAT ruckus - Background

Governments stated stance

The MAT ruckus: What is at risk?

Debt outstanding (USD bn)

2. Setback on legislative reforms

GST constitutional amendment bill

Why the bill: GST to replace plethora of central (excise,

Why the opposition: The five exempted categories cover a

3. A wider trade deficit in Q2

Weak global demand hurting exports

Export Value growth y-o-y

Import growth y-o-y

due to REER appreciation and faster domestic growth

Non oil non gold imports, lhs

Source: Ministry of Finance, CEIC and Nomura Global Economics

A wider current account deficit in Q2 2015

We expect the trade deficit to widen from USD27bn in Q1

4. Unseasonable rains 30% of winter crop destroyed

Impact on agri output

Rabi food grain

Lessons from past episodes of unseasonable rains

Fruit & vegetable prices remain contained so far

(% in CPI) INR/qtl INR/qtl INR/qtl % m/m

Impact on vegetable prices

Source: Ministry of Finance, CEIC and Nomura Global Economics

IMD predicts below-normal monsoons in 2015

Southern Oscillator Index

% of long period average

La Nina (favourable for

Normal monsoon range

The IMD expects rainfall at 7% below normal. It assigns

Australian Commonwealth Bureau of Meteorology pegs

What if: Below-normal monsoon rains

Macro impact of poor monsoons (10-15% below normal)

5. Rural demand is already quite weak

Two Wheeler sales, 3MMA

Minimum support prices - paddy

which could become a political risk

Most Rajya Sabha seats are up for re-election in 2016

MH, BR, UP, OR,

Source: ECI and Nomura Global Economics.

Uttarakhand (Mar), Manipur (Mar), Goa

TN. MP, KR, AP,