Chief Economist & Political Strategist, CrossASEAN Research

Prasenjit K. Basu

Chief Economist & Political Strategist

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

Macroeconomics

India's nominal GDP increased 4.3% YoY in Oct-Dec 2020, although real GDP was only reported to have increased 1% YoY (based on production-side estimates). The implicit GDP deflator thus increased 3.3% YoY -- much more than the average WPI inflation rate of 1.66% YoY during the quarter. Using expenditure-side estimates, nominal GDP grew even faster (+5.3% YoY), although the reported real increase in GDE was only 0.4% YoY -- implying an increase in the GDE deflator of 3.9% YoY. While this appears consistent with the higher CPI inflation rate, the GDE deflator also takes account of the GFCF and net export deflators, neither of which were rising much. So it is likely that the GDP estimates for that quarter will be revised up eventually. The most encouraging aspect of the GDE estimates was that fixed investment spending (GFCF) increased 2.6% YoY in the Oct-Dec 2020 quarter, the first such increase in a year. This suggests that the production-linked incentives (PLI) and sharply-lower corporate tax rates are beginning to spur a revival in investment spending, not just in FDI (which was doing well anyway, but remains a small proportion of overall GFCF).  As investment gains momentum, the additional capacity creation will dampen costs and prices. Additionally, CPI inflation was artificially high in April-November 2020 because of supply disruptions and bottlenecks arising from the strict lockdown in April-June, which only eased gradually in subsequent months. CPI inflation has already eased to 4.06% YoY in January 2021. Compared with the high base in Apr-Nov 2020, CPI inflation is likely to ease toward 3% YoY by June 2021, obliging the RBI to cut its policy rate by 50bp (to 3.5%) by September 2021. We continue to expect a powerful economic recovery to occur in FY2021/22, helped by the low base from a year ago, the slew of fiscal incentives, an acceleration in privatization (which will crowd-in private investment, already enthused by low tax rates) and a surge of public investment. The decline in policy rates will be the icing on the cake, helping to deliver real GDP growth of 13.5% YoY in FY2021/22.

India's nominal GDP increased 4.3% YoY in Oct-Dec 2020, although real GDP was only reported to have increased 1% YoY (based on production-side estimates). The implicit GDP deflator thus increased 3.3% YoY -- much more than the average WPI inflation rate of 1.66% YoY during the quarter. Using expenditure-side estimates, nominal GDP grew even faster (+5.3% YoY), although the reported real increase in GDE was only 0.4% YoY -- implying an increase in the GDE deflator of 3.9% YoY. While this appears consistent with the higher CPI inflation rate, the GDE deflator also takes account of the GFCF and net export deflators, neither of which were rising much. So it is likely that the GDP estimates for that quarter will be revised up eventually. The most encouraging aspect of the GDE estimates was that fixed investment spending (GFCF) increased 2.6% YoY in the Oct-Dec 2020 quarter, the first such increase in a year. This suggests that the production-linked incentives (PLI) and sharply-lower corporate tax rates are beginning to spur a revival in investment spending, not just in FDI (which was doing well anyway, but remains a small proportion of overall GFCF).  As investment gains momentum, the additional capacity creation will dampen costs and prices. Additionally, CPI inflation was artificially high in April-November 2020 because of supply disruptions and bottlenecks arising from the strict lockdown in April-June, which only eased gradually in subsequent months. CPI inflation has already eased to 4.06% YoY in January 2021. Compared with the high base in Apr-Nov 2020, CPI inflation is likely to ease toward 3% YoY by June 2021, obliging the RBI to cut its policy rate by 50bp (to 3.5%) by September 2021. We continue to expect a powerful economic recovery to occur in FY2021/22, helped by the low base from a year ago, the slew of fiscal incentives, an acceleration in privatization (which will crowd-in private investment, already enthused by low tax rates) and a surge of public investment. The decline in policy rates will be the icing on the cake, helping to deliver real GDP growth of 13.5% YoY in FY2021/22.   

India: Easing Inflation Will Oblige RBI to Cut Policy Rates in the Next Half Year

Turbo-charged by a 34% surge in public investment, a widening privatization and asset monetization program, and a credible mechanism for cleaning up banks' bad assets, India's real GDP is likely to grow 13.5% in FY2021/22. With a labour market as flexible as any in Asia, corporate taxes as low as Singapore for new manufacturers, production-linked incentives, efficiency gains from privatization, and steadily-greater lending by cleaned-up banks, real GDP will grow 10% annually over the decade ahead. Stay Overweight India. 
India's economy received a fillip from the Budget for FY2021/22, which contained a 34.5% YoY increase in public investment (particularly infrastructure), a wider focus on privatization of government-owned companies (including 3 banks and an insurer) as part of a radical agenda that includes monetization of the government's other assets and land (via the the creation of Infrastructure Investment Trusts), and steps to work out banks' bad loan problems via an asset reconstruction company (for government-owned banks) that would take over, manage and then sell the bad loans on the market.  
This fiscal year's deficit is projected to be 9.5% of GDP, although this number includes more transparent accounting, particularly by bringing food subsidies back onto the government's books (rather than onto those of the Food Corporation of India). Even with that transparency, though, the actual deficit is unlikely to be larger than 8% of GDP -- and GDP likely to be higher than the government has forecast. With the big boost to public investment, the successful vaccine rollout, labour-market reforms, production-linked incentives, broad-based and widening privatization program, and mechanisms to unclog bank lending, we expect real GDP to grow 13.5% in FY2021/22, with CPI inflation averaging 4% YoY, which will allow policy rates to decline. Given the buoyancy in tax revenues, we expect the fiscal deficit to moderate to 4.5% of GDP next fiscal year, and a virtuous circle of lower interest rates and more crowding in of private investment. 
While FY2021/22 will see the completion of eight big-ticket strategic sales of public enterprises (SCI, BPCL, ConCor, Air India, IDBI, two banks and an insurer) and one large IPO (of LIC), privatizations and asset monetization will mark the medium-term roll-out of "minimum government, maximum governance", as the government steadily withdraws from running businesses, turning them over instead to the dynamism of entrepreneurial India and FDI. A rationally cleaned-up banking system will be positioned also to fund new lending, while FDI and domestic investment help the reformed Indian economy capture an increasing share of global value chains (GVCs) fleeing China for safer shores. We expect real GDP growth of 10% annually over the 2021-30 decade, transforming India into a high-middle-income economy by the end of the decade. EPS growth too will reflect the economy's growth. Stay solidly Overweight India.

Turbo-charged by a 34% surge in public investment, a widening privatization and asset monetization program, and a credible mechanism for cleaning up banks' bad assets, India's real GDP is likely to grow 13.5% in FY2021/22. With a labour market as flexible as any in Asia, corporate taxes as low as Singapore for new manufacturers, production-linked incentives, efficiency gains from privatization, and steadily-greater lending by cleaned-up banks, real GDP will grow 10% annually over the decade ahead. Stay Overweight India. 
India's economy received a fillip from the Budget for FY2021/22, which contained a 34.5% YoY increase in public investment (particularly infrastructure), a wider focus on privatization of government-owned companies (including 3 banks and an insurer) as part of a radical agenda that includes monetization of the government's other assets and land (via the the creation of Infrastructure Investment Trusts), and steps to work out banks' bad loan problems via an asset reconstruction company (for government-owned banks) that would take over, manage and then sell the bad loans on the market.  
This fiscal year's deficit is projected to be 9.5% of GDP, although this number includes more transparent accounting, particularly by bringing food subsidies back onto the government's books (rather than onto those of the Food Corporation of India). Even with that transparency, though, the actual deficit is unlikely to be larger than 8% of GDP -- and GDP likely to be higher than the government has forecast. With the big boost to public investment, the successful vaccine rollout, labour-market reforms, production-linked incentives, broad-based and widening privatization program, and mechanisms to unclog bank lending, we expect real GDP to grow 13.5% in FY2021/22, with CPI inflation averaging 4% YoY, which will allow policy rates to decline. Given the buoyancy in tax revenues, we expect the fiscal deficit to moderate to 4.5% of GDP next fiscal year, and a virtuous circle of lower interest rates and more crowding in of private investment. 
While FY2021/22 will see the completion of eight big-ticket strategic sales of public enterprises (SCI, BPCL, ConCor, Air India, IDBI, two banks and an insurer) and one large IPO (of LIC), privatizations and asset monetization will mark the medium-term roll-out of "minimum government, maximum governance", as the government steadily withdraws from running businesses, turning them over instead to the dynamism of entrepreneurial India and FDI. A rationally cleaned-up banking system will be positioned also to fund new lending, while FDI and domestic investment help the reformed Indian economy capture an increasing share of global value chains (GVCs) fleeing China for safer shores. We expect real GDP growth of 10% annually over the 2021-30 decade, transforming India into a high-middle-income economy by the end of the decade. EPS growth too will reflect the economy's growth. Stay solidly Overweight India.  

India: Public Investment, Privatization & Bank Reform Set the Stage for Faster Growth

While the Economic Survey garnered headlines for its bold call for aggressive fiscal spending in the period ahead, one remarkable fact was lost in the noise: India's fiscal deficit declined 12.7% YoY in October-December 2020, and was consequently up only 24.3% YoY in Apr-Dec 2020 despite a severe economic recession. This was made possible by ensuring that net tax revenues actually increased 6.35% YoY in Apr-Dec 2020, despite the economic contraction during the period. It was only after it was clear that tax revenues were recovering in Q3 of the fiscal year that government spending began to be ramped up (having declined marginally in Apr-Sep20). In a fuel-scarce economy, consumers of petrol and diesel have borne the brunt of fiscal restraint in a difficult year. Excise duty revenues were up 54% YoY in April-December 2020, almost entirely because of petroleum-related excise duties. Personal income tax revenue soared 25.5% YoY in 3Q (Oct-Dec 2020) and corporate tax revenue increased 34.8% YoY that quarter -- pointing to a clear rebound in middle-class incomes and corporate profits in the last quarter -- which are likely to continue in the Jan-Mar 2021 quarter, especially given that March is usually the biggest month for production, income and government tax revenue -- but March 2020 was when the lockdown began. We continue to expect that the government's forecast of a contraction in real GDP of 7.7% in FY2020/21 is too low: the rebound in the second half of the fiscal year will be substantially positive (not a contraction as the Survey conservatively estimates). Incredible fiscal restraint during the recession has now prepared the way for a powerful rebound in government spending -- permitted by a rebound in tax revenue as the economy recovers. More importantly, privatization revenues (which have performed very poorly again this FY) are likely to play a very big part in the period ahead. Given the strength of equity markets, it is a shame that the government did not make more progress with privatisation in 2020, but that is likely to be a big and genuine theme in the year ahead. We remain bullish on India.

While the Economic Survey garnered headlines for its bold call for aggressive fiscal spending in the period ahead, one remarkable fact was lost in the noise: India's fiscal deficit declined 12.7% YoY in October-December 2020, and was consequently up only 24.3% YoY in Apr-Dec 2020 despite a severe economic recession. This was made possible by ensuring that net tax revenues actually increased 6.35% YoY in Apr-Dec 2020, despite the economic contraction during the period. It was only after it was clear that tax revenues were recovering in Q3 of the fiscal year that government spending began to be ramped up (having declined marginally in Apr-Sep20). In a fuel-scarce economy, consumers of petrol and diesel have borne the brunt of fiscal restraint in a difficult year. Excise duty revenues were up 54% YoY in April-December 2020, almost entirely because of petroleum-related excise duties. Personal income tax revenue soared 25.5% YoY in 3Q (Oct-Dec 2020) and corporate tax revenue increased 34.8% YoY that quarter -- pointing to a clear rebound in middle-class incomes and corporate profits in the last quarter -- which are likely to continue in the Jan-Mar 2021 quarter, especially given that March is usually the biggest month for production, income and government tax revenue -- but March 2020 was when the lockdown began. We continue to expect that the government's forecast of a contraction in real GDP of 7.7% in FY2020/21 is too low: the rebound in the second half of the fiscal year will be substantially positive (not a contraction as the Survey conservatively estimates). Incredible fiscal restraint during the recession has now prepared the way for a powerful rebound in government spending -- permitted by a rebound in tax revenue as the economy recovers. More importantly, privatization revenues (which have performed very poorly again this FY) are likely to play a very big part in the period ahead. Given the strength of equity markets, it is a shame that the government did not make more progress with privatisation in 2020, but that is likely to be a big and genuine theme in the year ahead. We remain bullish on India.  

India: Incredible Fiscal Responsibility Amid the Economic Devastation of Covid

Silver Point

Thomas J. Monaco

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

Thematic (Sector/Industry)

*Bracing For Even Tougher Times: According to the Reserve Bank of India (RBI), India’s financial sector needs to prepare for even more challenging times given the continued risk of credit deterioration, which remains heightened due to this unrelenting pandemic; and*Open Your Wallets, Indian Financials Need Money: Given the economic uncertainty posed by COVID-19, credit quality in the Indian financial system is likely to present continued economic challenges in 2021. If the RBI is correct, and we believe that it is – although its forecasts appear quite light, FY 2022 will see continued losses and massive levels of capital raised.

*Bracing For Even Tougher Times: According to the Reserve Bank of India (RBI), India’s financial sector needs to prepare for even more challenging times given the continued risk of credit deterioration, which remains heightened due to this unrelenting pandemic; and*Open Your Wallets, Indian Financials Need Money: Given the economic uncertainty posed by COVID-19, credit quality in the Indian financial system is likely to present continued economic challenges in 2021. If the RBI is correct, and we believe that it is – although its forecasts appear quite light, FY 2022 will see continued losses and massive levels of capital raised.   

Reserve Bank of India – Continued Bank Waterboarding

India offers new manufacturing units an effective corporate tax rate of 17%, a completely flexible labour market (with new employees taken on fixed-term contracts that needn't be renewed upon expiry), and production-linked incentives to encourage export-oriented industry, which will induce a strong investment revival. Base effects will help growth (with real GDP likely growing over 12% YoY) in FY2021/22 and inflation (likely falling below 4% YoY in Apr-Jun 2021), allowing further RBI rate cuts that help strengthen growth, with privatization (including large-ticket strategic sales) substantially boosting the fiscal balance.  Real GDP growth should average 10% annually in the decade ahead. Stay Overweight India, as growth will boost EPS and hence improve valuations.The  BoP current account surplus (2.1% of GDP in Jan-Sep 2020, after the latest surplus for the Jul-Sep 2020 quarter of 2.4% of GDP) provides ample room to boost domestic demand in 2021 without significantly affecting the external balances. Although the fiscal deficit soared by 40.3% YoY in April-September (the first half of FY2020/21) while the economy was largely shut down and revenues slumped, public expenditure also was restrained (declining 0.6% YoY in Apr-Sep20, and still up only 4.7% YoY in Apr-Nov20 after a good recovery in Oct-Nov20). In October 2020, gross tax revenue expanded 16.9% YoY, accelerating to 23% YoY in November 2020, and the fiscal deficit for April-November 2020 was up a more modest 33.1% YoY. Despite the improved revenue in the second half of the fiscal year, there will be scant room for fiscal manoeuvre in FY2021/22. But this year's economic reforms will provide a massive medium-term boost to the economy. The most significant are the labour reforms, which have simplified 44 codes into four simple ones (easing compliance) and allowed all new employees to be taken on fixed-term contracts. This neatly gets around the biggest problem in India's labour market (the difficulty of firing workers, which inhibits hiring), and makes India's labour market incredibly flexible. When combined with a corporate tax rate of 17% for new manufacturing units (as low as any in Asia), and production-linked incentives (PLI) for specific export-oriented sectors, India is likely to attract large inflows of FDI and domestic investment into manufacturing in 2021, as global value chains also begin shifting to India (as ASEAN and India already have an FTA, as does India have with neighbours Bangladesh, Sri Lanka and Nepal). Real GDP growth is likely to be +3% YoY in the current quarter, +7% in Jan-Mar 2021, +25% YoY in Apr-Jun 2021 (still leaving that quarter's GDP 4% below Apr-Jun 2019), 10% YoY in Jul-Sep 2021, and 8% YoY in Oct21-Mar22 -- enabling real GDP to grow over 12.5% YoY in FY2021/22. This year's structural reforms (including a diluted version of the farm reforms) will provide a medium-term boost to productivity and employment across a broad swathe of the economy, enabling real GDP to sustainably move toward 10% annual growth for the decade.  Stay Overweight India, despite the seemingly stretched valuations (which will result in a short-term correction early in 2021).

India offers new manufacturing units an effective corporate tax rate of 17%, a completely flexible labour market (with new employees taken on fixed-term contracts that needn't be renewed upon expiry), and production-linked incentives to encourage export-oriented industry, which will induce a strong investment revival. Base effects will help growth (with real GDP likely growing over 12% YoY) in FY2021/22 and inflation (likely falling below 4% YoY in Apr-Jun 2021), allowing further RBI rate cuts that help strengthen growth, with privatization (including large-ticket strategic sales) substantially boosting the fiscal balance.  Real GDP growth should average 10% annually in the decade ahead. Stay Overweight India, as growth will boost EPS and hence improve valuations.The  BoP current account surplus (2.1% of GDP in Jan-Sep 2020, after the latest surplus for the Jul-Sep 2020 quarter of 2.4% of GDP) provides ample room to boost domestic demand in 2021 without significantly affecting the external balances. Although the fiscal deficit soared by 40.3% YoY in April-September (the first half of FY2020/21) while the economy was largely shut down and revenues slumped, public expenditure also was restrained (declining 0.6% YoY in Apr-Sep20, and still up only 4.7% YoY in Apr-Nov20 after a good recovery in Oct-Nov20). In October 2020, gross tax revenue expanded 16.9% YoY, accelerating to 23% YoY in November 2020, and the fiscal deficit for April-November 2020 was up a more modest 33.1% YoY. Despite the improved revenue in the second half of the fiscal year, there will be scant room for fiscal manoeuvre in FY2021/22. But this year's economic reforms will provide a massive medium-term boost to the economy. The most significant are the labour reforms, which have simplified 44 codes into four simple ones (easing compliance) and allowed all new employees to be taken on fixed-term contracts. This neatly gets around the biggest problem in India's labour market (the difficulty of firing workers, which inhibits hiring), and makes India's labour market incredibly flexible. When combined with a corporate tax rate of 17% for new manufacturing units (as low as any in Asia), and production-linked incentives (PLI) for specific export-oriented sectors, India is likely to attract large inflows of FDI and domestic investment into manufacturing in 2021, as global value chains also begin shifting to India (as ASEAN and India already have an FTA, as does India have with neighbours Bangladesh, Sri Lanka and Nepal). Real GDP growth is likely to be +3% YoY in the current quarter, +7% in Jan-Mar 2021, +25% YoY in Apr-Jun 2021 (still leaving that quarter's GDP 4% below Apr-Jun 2019), 10% YoY in Jul-Sep 2021, and 8% YoY in Oct21-Mar22 -- enabling real GDP to grow over 12.5% YoY in FY2021/22. This year's structural reforms (including a diluted version of the farm reforms) will provide a medium-term boost to productivity and employment across a broad swathe of the economy, enabling real GDP to sustainably move toward 10% annual growth for the decade.  Stay Overweight India, despite the seemingly stretched valuations (which will result in a short-term correction early in 2021). 

India's 2020 Reforms Will Usher in a Decade of Spectacular Growth from 2021 On

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India: Easing Inflation Will Oblige RBI to Cut Policy Rates in the Next Half Year

Nominal GDP was up 5.3%YoY in Oct-Dec 2020, although real GDP rose only 1%YoY. But CPI inflation will likely be below 3%YoY by June, forcing a 50bp...

Prasenjit K. Basu

India: Public Investment, Privatization & Bank Reform Set the Stage for Faster Growth

Turbocharged by 34% surge in capex, a growing privatization & asset monetization program, & a credible mechanism for cleaning up banks' bad assets,...

Prasenjit K. Basu

India: Incredible Fiscal Responsibility Amid the Economic Devastation of Covid

Excise duty (mainly petrol) was up 54%YoY in Apr-Dec 2020, but rebounding income (+25%YoY) and corporate tax (+35%YoY) revenues in Oct-Dec2020...

Prasenjit K. Basu

Reserve Bank of India – Continued Bank Waterboarding

RESERVE BANK OF INDIA: India’s financial sector needs to prepare for even more challenging times. If the RBI is correct, FY 2022 will see continued...

Thomas J. Monaco

India's 2020 Reforms Will Usher in a Decade of Spectacular Growth from 2021 On

17% corporate tax rate, an ultra-flexible labour market and performance-linked incentives to exporters will give a big fillip to investment & boost...

Prasenjit K. Basu

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