1

Road map for the Indian Bullion Industry for the next 10 years

Sept 12, 2014

2

Global macro scenario

Global economy reviving, but traction continues to remain weaker than the previous cycle

Note: The point labeled “t” on the horizontal axis corresponds to the pre-recession peak quarter for each cycle Source: OECD database, KMBL

3

DM real GDP, relative to pre-recession peak

90

95

100

105

110

115

t-6 t-4 t-2 t t+2 t+4 t+6 t+8 t+10 t+12 t+14 t+16 t+18 t+20 t+22 t+24

1990s; Peak at 1990Q42000s; Peak at 2008Q1

Fragile Recovery process

4

Stabilizing global growth a positive for India’s external demand

Source::CEIC, IMF, Kotak Economic Research

(40)

(20)

0

20

40

60

80

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

25

30

35

40

45

50

55

60

65

70

75India Exports %YoY,3mma 3m lag (LHS)ISM export orders,3mma (RHS)

IMF Growth Projections2012 2013 2014 2015

World 3.5 3.2 3.4 4.0Advanced economies 1.4 1.3 1.8 2.4US 2.8 1.9 1.7 3.0Euro area (0.7) (0.4) 1.1 1.5UK 0.3 1.7 3.2 2.7Japan 1.4 1.5 1.6 1.1EM economies 5.1 4.7 4.6 5.2EM Asia 6.7 6.6 6.4 6.7

Commodity prices: US$ firmness to depress $ price of commodities

Source: Bloomberg, Kotak Mahindra Bank5

260

270

280

290

300

310

320

330

340

Jan-

12

Mar

-12

May

-12

Jul-1

2

Sep-

12

Nov-1

2

Jan-

13

Mar

-13

May

-13

Jul-1

3

Sep-

13

Nov-1

3

Jan-

14

Mar

-14

May

-14

Jul-1

4

7677787980818283848586CRY Index DXY Index, RHS

CRY Index

200

250

300

350

400

Jan-

09

Apr-0

9

Jul-0

9

Oct-0

9

Jan-

10

Apr-1

0

Jul-1

0

Oct-1

0

Jan-

11

Apr-1

1

Jul-1

1

Oct-1

1

Jan-

12

Apr-1

2

Jul-1

2

Oct-1

2

Jan-

13

Apr-1

3

Jul-1

3

Oct-1

3

Jan-

14

Apr-1

4

Jul-1

4

CRY Index

Question remains – If ECB goes in for a QE, what implications will this have on global commodity prices?

6

India: macro data hints that worst is over

7

Lead indicators as well as some real sector indicators point up

Source: Bloomberg, D&B, Kotak Economic Research

(30)(25)(20)(15)(10)

(5)05

10152025

Jan-

12

Mar

-12

May

-12

Jul-1

2

Sep-

12

Nov

-12

Jan-

13

Mar

-13

May

-13

Jul-1

3

Sep-

13

Nov

-13

Jan-

14

Mar

-14

May

-14

Jul-1

4

Total Automobile Sales Passenger Vehicle Commercial Vehicle %yoy,3mma

100

110

120

130

140

150

160

170

180

190

Jun-

08Se

p-08

Dec-

08M

ar-0

9Ju

n-09

Sep-

09De

c-09

Mar

-10

Jun-

10Se

p-10

Dec-

10M

ar-1

1Ju

n-11

Sep-

11De

c-11

Mar

-12

Jun-

12Se

p-12

Dec-

12M

ar-1

3Ju

n-13

Sep-

13De

c-13

Mar

-14

Jun-

14Se

p-14

Business Optimism Index (3QMA)

44

46

48

50

52

54

56

58

60

Jan-

12

Mar

-12

May

-12

Jul-1

2

Sep-

12

Nov-

12

Jan-

13

Mar

-13

May

-13

Jul-1

3

Sep-

13

Nov-

13

Jan-

14

Mar

-14

May

-14

Jul-1

4

PMI Manufacturing PMI Services PMI CompositeIndex,sa, 3mma

CAD has corrected meaningfully….

Source::CEIC, Kotak Economic Research8

100

300

500

700

900

1,100

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

0

10

20

30

40

50

60Volume of gold imports (tons, LHS)

Value of gold imports (US$ bn, RHS)

(7)

(6)

(5)

(4)

(3)

(2)

(1)

0M

ar-0

8

Jun-

08

Sep-

08

Dec

-08

Mar

-09

Jun-

09

Sep-

09

Dec

-09

Mar

-10

Jun-

10

Sep-

10

Dec

-10

Mar

-11

Jun-

11

Sep-

11

Dec

-11

Mar

-12

Jun-

12

Sep-

12

Dec

-12

Mar

-13

Jun-

13

Sep-

13

Dec

-13

Mar

-14

Jun-

14

40

45

50

55

60

65

CAD/GDP

Average USD-INR (RHS)

Foreign capital flows have improved, rewarding stable politics

Source: CEIC, SEBI, Kotak Economic Research;

9

(7,000)

(5,000)

(3,000)

(1,000)

1,000

3,000

5,000

7,000

Apr

-12

May

-12

Jun-

12Ju

l-12

Aug

-12

Sep-

12O

ct-1

2N

ov-1

2D

ec-1

2Ja

n-13

Feb-

13M

ar-1

3A

pr-1

3M

ay-1

3Ju

n-13

Jul-1

3A

ug-1

3Se

p-13

Oct

-13

Nov

-13

Dec

-13

Jan-

14Fe

b-14

Mar

-14

Apr

-14

May

-14

Jun-

14Ju

l-14

Aug

-14

FII equity net inflows FII debt net inflowsUS$ mn

(8)

(3)

2

7

12

17

Mar

-08

Jun-

08

Sep-

08

Dec

-08

Mar

-09

Jun-

09

Sep-

09

Dec

-09

Mar

-10

Jun-

10

Sep-

10

Dec

-10

Mar

-11

Jun-

11

Sep-

11

Dec

-11

Mar

-12

Jun-

12

Sep-

12

Dec

-12

Mar

-13

Jun-

13

Sep-

13

Dec

-13

Mar

-14

Jun-

14

40

45

50

55

60

65Foreign Portfolio Investment (US$bn) Average USD-INR (RHS)

Funding of CAD: Capital flows heavily biased towards FII …

Source: CEIC, Kotak Mahindra Bank estimates

10

Government policy traction to crucially determine pace of other flows, such as FDI

Biggest risk: Global issues

(1) Geopolitical and implications on oil and commodity prices

(2) Fed stance on interest rates – carry trades unwinding

(US$bn) FY11 FY12 FY13 FY14 FY15EFDI 9 22 20 22 25FII 30 17 27 5 25Banking capital 5 16 17 25 8 - NRI deposits 3 12 15 39 10Short-term credit 11 7 22 (5) 0ECBs 13 10 8 12 8Others (6) (5) (4) (10) (9)Capital account 62 68 89 49 57

11

India : Next 5-10 years

12

Policy steps

Outlined agenda of the government looks strong – making India a manufacturing hub etc.

Some steps in the right direction

Streamlining decision making by abolishing GoM; strengthening PMO Speeding up environmental clearances Pushing for greater accountability (less government, more governance)

National policies to bring about a resurrection of manufacturing sector

Labour laws Land acquisition Infrastructure issues and skilling of work-force

13

India’s manufacturing sector needs to gain importance in policy space

Source: WDI, CEIC, Planning Commission, KMBL

10 15 20 25 30 35

South AfricaIndiaBrazil

MexicoSri Lanka

JapanSingapore

PhilippinesIndonesia

MalaysiaChinaKorea

Thailand

Share of manufacturing sector (% of GDP)

India’s manufacturing is one of the worst in the EME space

0

20

40

60

80

100

120

China Germany Japan Russia Brazil Thailand US India UK

Manufacturing Agriculture Services

Employment distribution (%)

India’s manufacturing contributes only ~12% of employment

Key to boosting manufacturing exports – efficiency of the sector rather than currency dynamics

Source: CEIC, KMBL

14

Exports weaken even as INR depreciates sharply!

0

10

20

30

40

50

60

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

India China Indonesia Korea Thailand

Manufacturing Exports as a % of GDP

India’s manufacturing exports have remained stagnant for more than a decade

(35)

(25)

(15)

(5)

5

15

25

35

45

55

65

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

37

42

47

52

57

62

Exports (%yoy,3mma) USD-INR (3M lead, RHS) Reverse order

15

Bane for manufacturing: Labor - not competitive enough with widening skill gap

Source: WEF, Asian Productivity Organization (APO) productivity database; BCG

8.3

12.4

15.3

57.7

63.9

93.3

0 20 40 60 80 100

India

China

Thailand

Korea

Japan

US

('000 US$)GDP per worker (‘000s, US$)Labor productivity (X=1970)

0

400

800

1,200

1,600

1970 1980 1990 2000 2010

India China

Gap of skilled workforce widening [Annual skilled workers DD/SS (mn) ]

3.9

1.8

4.1

10.5

0

2

4

6

8

10

12

2012 2025

Demand Supply

-53%

-61%

16

Agriculture is another area that needs to be revitalized – both from the growth and inflation perspectives

Source: MOSPI, Kotak Mahindra Bank

The sector has been largely ignored by the policymakers in 2000s and still depends on monsoon vagaries

Capital investment in agriculture remains low at 2.3% of GDP and 8% of total investments

(6.0)

(4.0)

(2.0)

0.0

2.0

4.0

6.0

8.0

10.0

12.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Agri & allied activities GDP growth (%yoy) Planned Agri growth (%yoy)

Average 3.4%Average 2.8%

Agri capital formation (% of total capital formation)

6.0

7.0

8.0

9.0

10.0

11.0

12.0

13.0

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

17

Savings dip – household segment sees the maximum erosion

Gross Domestic Total Savings (% of GDP)

20

22

24

26

28

30

32

34

36

38

199

5

199

6

199

7

199

8

199

9

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

(4)

(2)

0

2

4

6

8

10

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20.0

21.0

22.0

23.0

24.0

25.0

26.0CorporatePublicHousehold (RHS)

Gross Savings as a % of GDP

Source: RBI, CEIC

18

Financial savings erosion is large as real returns to savings are low

20

21

22

23

24

25

26

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

7.5

8.5

9.5

10.5

11.5

12.5

13.5

14.5

15.5Household total savings (LHS)HH financial savings (RHS)HH physical savings (RHS)

% of GDP % of GDP

Real deposit rate (CPI based)

(11)

(9)

(7)

(5)

(3)

(1)

1

3

5

7

9

11

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Real deposit rate (CPI based)%

Source: RBI, CEIC

India : : Monetising Gold Reserves

• 25000 tonnes of Gold above ground • Recycling • Processing • Structuring• Gold-backed financial products• Gold imports in 2024 …. !!!

TradeTrade

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