Future of Savings in India May15

Company Report
Strategy
INDIA
INDIA
May 05, 2015
BSE-30: 27,440
The future of savings in India: Watch it grow, not glow. We expect Indias
domestic savings rate to rise to 40% of GDP by FY2025 (31% for FY2015) and estimate
household financial savings to grow at a CAGR of 20% over the next 10 years. The
share of equities in household financial savings will also rise due to several structural
factors (greater financial literacy, higher GDP and earnings growth), likely higher returns
from equities versus other asset classes and progressive policy changes (reforms in
retirement saving schemes).
Financial savings: Economic growth and low inflation provide the fillip over the next five years
We expect the share of household financial savings to rise to 14% of GDP in FY2025 from 6.7%
in FY2015 led by (1) strong economic growth and (2) lower inflation. Higher economic growth
and Indias favorable demographics will see higher income and savings, including household
savings while lower inflation will result in higher household financial savings. Household savings
had got distorted towards physical savings (real estate) and higher consumption of gold in the
past 6-7 years.
Equities: Lower inflation and higher returns to result in higher inflows
We estimate the corpus of equities held by Indian households to rise to `300 tn by FY2025
against `60 tn in FY2015. The share of equities will rise to about 20% of household financial
savings in FY2025. Favorable government policies on retirement savings may increase this share
further. We believe the government will eventually allow greater choice to provident fund
contributors regarding their retirement savings (type of financial asset) in the government-run
Employee Provident Fund (EPF). An improved fiscal position of the government can release a
portion of the investment made by the EPF into government and other approved bonds.
Debt: Householders get a bigger say while intermediation declines
Indias staid debt market may change over the next few years. The traditional model of banks
being the intermediaries for savings and borrowings for companies, government and households
will change as (1) the governments fiscal position improves, lowering the burden on banks to
fund the governments fiscal deficit, (2) bond markets develop and (3) companies try to access
debt from the capital market directly.
Gold: Lessons from history dull its sheen
Low global inflation for an extended period of time and a strong US dollar may result in gold
prices remaining stagnant for a long time. With financial savings in India likely to offer much
higher real returns, we expect golds traditional savings role as a store of value to decline. Also,
stricter government regulations on black money and purchase of gold jewelry may diminish the
appeal of gold as a store of black money.
INSIDE
Domestic savings
rate to increase to
40% by FY2025E
from around 30%
.................. pg8
Household financial
savings flow to grow
6.5X over 10 years,
stock about 4.5X
.................. pg14
Household equity
flow to grow 8X,
stock 5X over 10
years .......... pg24
Sanjeev Prasad
sanjeev.prasad@kotak.com
Mumbai: +91-22-4336-0830
Saifullah Rais
Saifullah.rais@kotak.com
Mumbai: +91-22-4336-0895
Suvodeep Rakshit
Suvodeep.rakshit@kotak.com
Mumbai: +91-22-4336-0898
Kotak Institutional Equities

Research
Important disclosures appear
at the back
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India
Strategy
TABLE OF CONTENTS
Overview: Financial savings set to rise sharply ......................................... 3
Domestic savings: Structural drivers in place ........................................... 8
Financial savings: Higher share of equities of a bigger pie ..................... 14
Equities: Eating their way into home pies ............................................. 24
Gold: No gold billionaires ..................................................................... 28
The prices in this report are based on the market close of May 5, 2015.
KOTAK INSTITUTIONAL EQUITIES RESEARCH
Strategy
India
OVERVIEW: FINANCIAL SAVINGS SET TO RISE SHARPLY

We expect household financial savings to grow 6.5X from FY2015 levels to reach `56 tn (nominal terms) in
FY2025. Key drivers include (1) growth in overall national savings driven by strong GDP growth, favorable
demographics and (2) favorable policy and regulatory developments that could result in higher financial
savings by households. Within household financial savings, we expect the share of equities (both direct and
indirect) to rise to 21% from 10% in FY2014 led by likely higher returns and favorable policy developments.
The future of financial savings is bright
We expect household financial savings to grow strongly over the next 10 years driven by a
combination of (1) improving macro-economic factors and (2) favorable policy and regulatory
developments. We model household financial savings to increase 6.5X by 2025 versus
FY2015 levels. Exhibit 1 gives the summary data from our model for national savings broken
by key components such as households (both financial and physical), private and public.
Exhibit 1: We expect India's domestic national savings rate and household financial savings to rise rapidly as a proportion of GDP
Estimates of savings rates (proportion of GDP), March fiscal year-ends, 2011-25E (%)
Household (incl. gold savings)
Household physical savings
- Savings in gold
Household financial savings
Public savings
Private corporate savings
Domestic savings rate
2011
25.2
14.9
2.0
10.3
2.6
8.0
35.7
2012
25.4
18.4
2.6
7.0
1.2
7.3
34.0
2013
24.1
17.0
2.2
7.1
1.2
7.1
32.3
2014E
23.0
15.8
0.9
7.2
1.6
6.7
31.4
2015E
22.4
15.7
1.1
6.7
1.9
6.2
30.6
2016E
21.5
15.4
0.9
6.1
2.0
6.7
30.3
2017E
22.1
13.4
0.8
8.7
2.6
7.1
31.8
2018E
22.4
13.3
0.7
9.1
3.1
7.3
32.9
2019E
23.2
13.3
0.6
9.9
3.7
7.5
34.4
2020E
23.9
13.2
0.6
10.8
4.1
7.7
35.8
2021E
24.3
13.1
0.5
11.2
4.5
7.9
36.8
2022E
24.7
12.6
0.5
12.1
4.8
8.2
37.6
2023E
25.1
12.2
0.4
12.9
5.0
8.4
38.5
2024E
25.5
12.0
0.4
13.4
5.2
8.6
39.3
2025E
25.8
11.8
0.3
14.0
5.4
8.8
40.1
Notes:
(a) Gold savings is assumed to be equal to net gold imports.
Source: Source: CEIC, Kotak Institutional Equities estimates
We mention the key drivers below but discuss them and our projections in greater detail in
the next section.
Improving macro-economic factors to drive overall savings rate. We expect the
overall savings rate in India to rise to 40% in FY2025 from a low of 31% in FY2015.
Higher real GDP growth and income. We assume real GDP to grow at an average
rate of 7.5-8% between FY2015 and FY2025. This will drive both consumption and
savings. However, savings will likely grow given that the marginal propensity to
consume is typically less than 1.
Favorable demographics. Indias demographics dividend will play out over the next 10
years as a larger portion of its young population joins the workforce. In Indias case,
new workers (population joining the workforce) will start saving. That the unemployed
cannot save is a well-known pointwe iterate it only to emphasize the importance of
employment as a driver for Indias savings story over the next few decades. Our savings
story assumes that India can generate meaningful employment opportunities for about
12-15 mn people every year.
Lower government spending. We expect public sector saving to increase over the
next 10 years led by the governments efforts at fiscal consolidation. Lower government
spending (as a proportion of GDP) can have a positive impact on both household
consumption and savings if it results in lower taxation. Savings will likely increase if the
entire benefit of lower government spending does not translate into commensurate
higher consumption. As discussed above, the marginal propensity to consume is
typically less than 1, which means lower government spending should translate into
additional saving.
India
Strategy
Lower government taxation. On the subject of lower government taxation, we

expect taxation rates in India to decline over the next 10 years. The government has
already stated its intention reduce corporate taxes to 25% over the next four years
(from 30% base rate), which can lift private sector savings. The income tax rate for
individuals may also decline if the government is successful in broad-basing Indias tax
base through (1) implementation of GST, (2) an increase in the number of households
that pay income tax and (3) tighter measures on undisclosed income and assets as per
its stated goal.
However, the impact of lower taxation on consumption and savings is nuanced.
Changes in current taxes and expectations of future taxes are both important for
savings. Without delving with the theory behind this, we note that the expectation of
future tax cuts may result in higher consumption. Household savings will nonetheless
rise as the entire savings on taxes (our base-case assumption is that tax rates will
decline in India) for the households will not translate into consumption.
Favorable policy and regulatory developments to drive household financial
savings at the expense of physical savings.
RBIs focus on positive real interest rates. The RBIs current stated policy of positive
real interest rates (150-200 bps) may result in higher household financial savings at the
expense of physical savings. Positive real interest rates may entice households to view
financial assets more favorably versus real estate, whose value may be growing in line
with inflation. Real interest rates have been positive in India over the past one year
given lower inflation after being persistently negative during FY2009-14 (see Exhibit 2),
which resulted in a sharp decline in household financial savings over this period.
Exhibit 2: Real interest rate was negative for an extended period
Trend in 10-year G-sec yield adjusted for CPI inflation, March fiscal year-ends, 2000-15 (%)
Real interest rate (%)
15
10
5
0
(5)
Mar-15
Mar-14
Mar-13
Mar-12
Mar-11
Mar-10
Mar-09
Mar-08
Mar-07
Mar-06
Mar-05
Mar-04
Mar-03
Mar-02
Mar-01
Mar-00
(10)
Source: CEIC, Kotak Institutional Equities estimates
Financial inclusion. The governments thrust on financial inclusion has resulted in new
bank accounts being opened in unbanked areas and by hitherto unbanked segments of
the Indian population. Even though the new banks accounts will largely be used for
payments (transfer of government payments including subsidies on food and fuels)
initially, account holders will have an alternative to the traditional forms of savings
such as land/real estate and gold. We treat gold as a part of physical savings for the
purpose of this discussion as per international practice.
Strategy
India
Greater government focus on undisclosed income. The governments thrust on
greater disclosure and transparency with respect to ownership of financial and physical
assets may result in greater disclosure of income in the future and higher savings in
financial assets. Individuals or households with undisclosed income historically have put
more of their savings in physical assets (gold and jewelry, land and real estate) given
that the purchases of such assets are more difficult to detect (transactions are largely in
cash) versus purchase of financial assets such as bonds, insurance policies, mutual fund
units or stocks.
We note that individuals have to disclose their PAN (Permanent Account Number given
by the Income Tax department for taxation purposes) for financial transactions above a
certain limit, purchasing financial assets such as insurance policies, mutual fund units or
shares (above `50,000) and certain transactions such as purchase or sale of a motor
vehicle (see Exhibit 3). The Finance Act, 2016 has made the declaration of PAN
mandatory for all transactions above `0.1 mnwe expect this limit to be lowered,
bringing more transactions into the open.
Exhibit 3: Disclosure of PAN is mandatory for many financial transactions
Transactions for which PAN is mandatory
Sale or purchase of any immovable property valued at Rs0.5 mn or more
Making a time deposit with a banking company or deposit in Post Office Savings Bank exceeding Rs50,000
In an application for telephone connection including cellular telephone
Payment in cash for purchase of bank drafts or pay orders or banker's cheques for an amount aggregating to
Rs50,000 or more during any one day or deposit in cash aggregating to Rs50,000 or more with a bank during
any one day
A contract of a value exceeding Rs0.1 mn for sale or purchase of securities
Opening of a bank account
Payment to hotels and restaurants against their bills for an amount exceeding Rs25,000 at any one time
Payment in cash in connection with travel to any foreign country of an amount exceeding Rs25,000 at any one
time
Making an application for issue of credit card or debit card
Payment of an amount of Rs50,000 or more to a Mutual Fund for purchase of its units
Payment of an amount of Rs50,0000 or more to a company for acquiring shares issued by it
Payment of an amount of Rs50,000 or more to a company or an institution for acquiring debentures or bonds
issued by it
Payment of an amount of Rs50,000 or more to the Reserve Bank of India for acquiring bonds issued by it
Payment of an amount aggregating Rs50,000 or more in a year as life insurance premium to an insurer
Payment to a dealer :
Sale or purchase of a motor vehicle or vehicle (other than two wheeled vehicles)
I.
of an amount of Rs0.5 mn or more at any one time; or
II.
against a bill for an amount of Rs0.5 mn or more for purchase of bullion or jewelry
Source: Income Tax Department, Kotak Institutional Equities
Return expectations of financial assets versus physical assets. The recent relative
performance of assets is probably the most important factor for households while
determining allocation across assets. We expect financial assets such as bonds and
equities to deliver higher returns versus gold over the next 5-10 years if (1) government
reforms can push Indias real GDP growth to above 8% (new series) on a consistent basis
and (2) inflation remains low. The former can lead to strong growth in corporate profits
while the latter will significantly reduce interest rates and yields on bonds. Historical
data suggests that equities have delivered far superior returns compared to gold.
Equities can be a larger portion of financial savings

We model the share of equities to rise to about 20% of total financial savings from 10% in
FY2014. We base our view on the following factors, which we discuss in greater detail later
in the report.
India
Strategy
Likely higher returns from equities. We expect the Indian stock market to deliver
around 15% per annum returns over the next 5-10 years led by similar growth in
corporate net profits. We base our confidence on (1) real GDP growth of around 8%, (2)
4-5% inflation and (3) operating leverage. The top companies in the various sectors will
also likely benefit from market share gains. We do not rule out a de-rating of multiples
for high-growth, high-quality stocks over the next few months to more rational levels.
However, we note that the broader market valuations are more reasonable and we are
confident of 15% growth in corporate net profits based on favorable structural factors
and ongoing economic reforms.
Lower inflation and lower nominal returns on deposits. It is possible that lower rates
on bank deposits compel households to look for higher yields elsewhere even though
inflation will also be lower. We expect the gap between returns on equities and term
deposits to be quite high over the next few years if our expectations regarding strong
growth in GDP and corporate earnings and low inflation play out.
Policy framework for retirement savings (employee provident fund). Any changes
in Indias EPF regulations, which allow greater flexibility to contributors to choose the type
of financial asset in their EPF accounts, will result in a portion of retirement savings being
available for investment in equities. Currently, EPF regulations restrict investment in
certain types of long-term debt and the EPF decides the interest to be paid in a given year.
We note that the government has already allowed the state-run Employment Provident
Fund (EPF) to invest a part of its incremental flows into equities. We do not rule out the
government giving more flexibility to employees to put a portion of their contribution into
equities over the next few years and eventually, a part of the extant corpus too.
Government has significant incentives to reduce EPF rates or allocate more
funds to equities. We believe the government will have a strong incentive to reduce
interest rates on EPF funds if inflation is low (as we expect) versus historical levels. As a
large borrower, it will be in the governments interest to reduce the interest rates as its
fiscal position improves over the next few years. The interest rates are generally fixed
arbitrarily (see Exhibit 4) without any linkage to the underlying factors such as inflation;
there is strong resistance from labor unions and political parties to reduce the rates.
Exhibit 4: EPF interest rates have no linkage to inflation
EPF interest rates and inflation, March fiscal year-ends, 1991-2015 (%)
EPF rates
CPI (IW)
15
12
2015
2013
2014
2012
2010
2011
2008
2009
2006
2007
2004
2005
2002
2003
2000
2001
1998
1999
1996
1997
1995
1993
1994
1991
1992
Source: Government of India, Kotak Institutional Equities
Strategy
India
Contributors will get tax benefits for equities too (long-term savings). The key
attraction of EPF for an investor is the exempt-exempt-exempt nature of the
investment. Investments in EPF get income tax benefit up to `0.15 mn per annum and
interest income is exempt as also is the principal and accumulated interest amount at
the time of withdrawal. Thus, the nature of the investment by the EPF is not very
materiallong-term capital gains tax on equities or interest income will both be exempt
from tax under the exemption available for EPF. In any case, the tax on long-term
capital gains is zero.
India
Strategy
DOMESTIC SAVINGS: STRUCTURAL DRIVERS IN PLACE

We expect Indias domestic savings to grow steadily over the next 10 years on the back of (1) strong nominal
GDP growth of 12%, (2) favorable demographics, (3) the governments thrust on financial inclusion and (4)
healthier government accounts. We expect the gross domestic savings rate to improve to about 40% by
FY2025 from 32.4% in FY2013 driven by a higher household and public savings rate. Also, we expect the
share of household financial savings to increase to about 14% of GDP by FY2025 from 7.1% in FY2013.
Quantitative and qualitative improvement in domestic savings rate
We estimate the domestic savings rate to move to around 40% of GDP from our estimate of
about 31% in FY2015 (see Exhibit 5) based on our bottom-up assessment of the three
components of domestic savings.
Exhibit 5: India's domestic savings rate will improve to 40% over the long term
Estimates of savings rates (proportion of GDP), March fiscal year-ends, 2011-25E (%)
Household (incl. gold savings)
Household physical savings
- Savings in gold
Household financial savings
Public savings
Private corporate savings
Domestic savings rate
2011
25.2
14.9
2.0
10.3
2.6
8.0
35.7
2012
25.5
18.4
2.6
7.0
1.2
7.3
34.0
2013
24.1
17.0
2.2
7.1
1.2
7.1
32.4
2014E
23.0
15.8
0.9
7.2
1.6
6.7
31.4
2015E
22.4
15.7
1.1
6.7
1.9
6.2
30.6
2016E
21.5
15.4
0.9
6.1
2.0
6.7
30.3
2017E
22.1
13.4
0.8
8.7
2.6
7.1
31.8
2018E
22.5
13.3
0.7
9.1
3.1
7.3
32.9
2019E
23.2
13.3
0.6
9.9
3.7
7.5
34.4
2020E
23.9
13.2
0.6
10.8
4.1
7.7
35.8
2021E
24.3
13.1
0.5
11.2
4.5
7.9
36.7
2022E
24.7
12.6
0.5
12.1
4.8
8.2
37.6
2023E
25.1
12.2
0.4
12.9
5.0
8.4
38.5
2024E
25.5
12.0
0.4
13.4
5.2
8.6
39.3
2025E
25.8
11.8
0.3
14.0
5.4
8.8
40.1
Notes:
(a) Gold savings is assumed to be equal to net gold imports.
Household savings. We estimate the household financial savings rate to improve to 14%
in FY2025 from 6.7% in FY2015. Exhibit 6 has details of the breakup between household
financial and household physical savings. As can be seen, we expect the share of financial
savings to rise over the next decade. This qualitative improvement augments the modest
but steady improvement in household savings rate to around 26% in FY2025 from our
estimated low of about 22% in FY2015.
Exhibit 6: Financial savings rate to rise over the next few years
Trend in household, financial and physical savings as proportion of GDP, March fiscal year-ends, 1981-25E (%)
Financial savings rate
Physical savings rate
Household savings rate
30
25
20
15
10
5
2025E
2023E
2021E
2019E
2017E
2015E
2013
2009
2011
2007
2005
2003
2001
1999
1997
1993
1995
1991
1989
1987
1985
1983
1981
Source: RBI, Kotak Institutional Equities estimates
Strategy
India
The qualitative improvement in savings rate is driven by a shift to higher financial savings
by the households. We expect a combination of (1) low and stable inflation coupled with
positive real interest rates, (2) greater financial inclusion, (3) regulatory focus on
undisclosed incomes and (4) higher returns expectations from financial assets versus
physical assets to lead to a shift to financial savings. This would reverse the trend of the
past 5-6 years (since FY2009) whereby physical savings had gained ground in an adverse
inflation scenario (see Exhibit 7).
Exhibit 7: Household physical savings had increased significantly in FY2010-13 on the back of high
inflation
Physical savings and savings in gold as a proportion of GDP, March fiscal year-ends, 2000-25E (%)
Physical savings rate
Gold savings rate
Physical savings rate including gold
20
18
16
14
12
10
8
6
4
2
2025E
2024E
2022E
2023E
2021E
2019E
2020E
2018E
2016E
2017E
2015E
2013
2014E
2012
2010
2011
2009
2007
2008
2005
2006
2004
2002
2003
2000
2001
Private savings. Corporate sector savings will be one of the biggest beneficiaries of
steady and high economic growth. For our estimates, we assume net profit growth at
around 15%, in line with our nominal GDP growth assumption of 12%. A combination
of real GDP growth of 7.5-8.0% and low and stable inflation of 4-5% will provide the
base for healthy corporate profit growth.
This contrasts with the FY2013-15 period when the nominal growth mix was lopsided
towards high inflation, which squeezed the margins and profitability of companies. Net
profits of the BSE-30 Index grew 4%, 8% and 2% in FY2013, FY2014 and FY2015E. We
expect private corporate savings to improve to around 9% in FY2025 from our estimate
of 6.2% in FY2015.
Public savings. Higher public savings rate (see Exhibit 8) will also be an important
contributor to higher overall savings rate for India. We expect a lower fiscal deficit (3% of
GDP for central government by FY2018 and about 6% for consolidated deficit in the long
term) to drive public savings. We estimate public savings to improve to 5.5% by FY2025
from our estimate of 2% in FY2015.
India
Strategy
Exhibit 8: Public savings rate can significantly improve over the next decade
Trend of public savings as proportion to GDP, March fiscal year-ends,1973-2025E (%)
Public saving/GDP
6
5
4
3
2
1
2025E
2021E
2017E
2013
2009
2005
2001
1997
1993
1989
1985
1981
1977
(1)
1973
(2)
Understanding the long-term drivers of savings

Indias favorable demographics and better macro-economic variables point towards
a higher national savings rate over the next decade. The drivers of savings are wellunderstood and documented theoretically and typically, economic growth, inflation,
demographics, real interest rates and fiscal policies determine the long-term savings rate in
an economy. However, the experience varies across countries as do the drivers of savings.
Our 10-year model of Indias savings outlook incorporates (1) demographics, financial
inclusion, real GDP growth and deposit rates to estimate the household savings rate and (2)
fiscal consolidation to estimate the public savings rate.
Demographics. We project Indias dependency ratio based on the UNs population
projections and we factor in a steady decline in the dependency ratio to 46% in FY2025
from the current estimate of 51% (see Exhibit 9). This phenomenon will continue for the
next few decades given Indias young demographics. Exhibit 10 shows that the
proportion of Indias population in the working age population will constantly increase
over the next few decades up to 2040.
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Strategy
India
Exhibit 9: Dependency ratio to improve steadily

India's ratio of sum of 0-14 and 65+ population to 15-64 population, July year-ends, 1950-2025 (%)
Dependency ratio (%)
90
80
70
60
50
2025E
2020E
2015E
2010
2005
2000
1995
1990
1985
1980
1975
1970
1965
1960
1955
1950
40
Notes:
(a) UN provides data on a five-yearly basis; we use linear interpolation to derive a continuous series.
Source: UN Population estimates, Kotak Institutional Equities estimates
Exhibit 10: A larger portion of India's young population will join the workforce in the next few years
Population in 15-64 years age group to total population, calendar year-ends, 2000-50 (%)
72%
70%
69%
68%
70%
68%
67%
66%
64%
64%
62%
61%
60%
58%
56%
2000
2010
2020
2030
2040
2050
Source: UN Population, Kotak Institutional Equities
Theoretically, an individual is expected to be a net saver starting from her working age
and net consumer before and after her working age (in line with typical life-saving
hypothesis). In reality, this is more complicated due to country-specific savings behaviors
of non-working populations, the wealth effect and the younger workforces marginal
propensity to consume. We assume that favorable demographics will help add to the net
savings in the economy, but importantly, the exact savings behavior across the
demographic spectrum may differ from theory.
Economic growth. We assume real GDP growth of 7.5-8% on a sustained basis over the
next 10 years and inflation of 4-5%. Higher growth is indicative of higher aggregate
output in the economy, which provides the base for the consumption-savings dynamics
based on consumption behavior. Economic growth is a fundamental component of longterm savings.
11
India
Strategy
Financial deepening. We view financial deepening in the Indian economy as an

important factor for long-term savings growth given that financial inclusion is at an early
stage in India. The governments thrust on financial inclusion will play a big role in this.
Greater financial development and disintermediation brings about greater integration
between savers and borrowers and investors and issuers, which has a positive impact on
economic growth and in turn, on household savings and on the financial savings rate.
Exhibit 11 shows a sharp increase in the number of bank accounts under the Prime
Ministers financial inclusion scheme.
Exhibit 11: More than 147 mn accounts opened under the governments financial inclusion initiative
Number of accounts opened in Pradhan Mantri Jan-Dhan Yojana, March 2015 (mn)
Public sector banks

Regional Rural banks
Private banks
Grand total
No. of Accounts
Rural
Urban
63
53
22
39
36
25
88
59
Total
115
26
6
147
No. of
rupay
debit
108
18
6
131
Balance
in accounts
(Rs mn)
121,851
25,771
9,081
156,703
No. of accounts
with
zero balance
66
16
3
85
Source: Ministry of Finance, Kotak Institutional Equities
We use M3-to-GDP ratio as a proxy for financial inclusion with a higher ratio implying
financial deepening relative to the aggregate output in the economy. We assume average
M3 growth of 12.5% against average nominal GDP growth of 12% over the next 10 years.
Interest rate. The effect of a higher real interest rate on savings is much more
ambiguous than the other factors since it has two contrarian effects on a net saver(1) a
substitution effect (higher return on savings) and (2) an income effect; for a net saver this
implies a potentially higher spending capability.
Higher real interest rates result in higher overall savings through the substitution effect
(future consumption instead of current consumption). A consumer can consume 1+ r
units of consumption one year later versus one unit of consumption where r is the real
interest rate. On the other hand, high real interest rates can also lead to lower savings
through the income effect since a consumer now requires lower savings to achieve a
certain savings amount (due to higher real interest rates).
Our analysis indicates a small negative correlation between real interest rates and savings,
implying that the income effect may have a more pronounced effect versus the
substitution effect. This is surprising for a country such as India with its high propensity to
save and it would be logical to expect the substitution effect to dominate the income
effect. However, the degree of dependence is negligible and hence, it may be
presumptuous to draw any strong conclusions about the impact of real interest rates on
savings. India has never seen an extended period of positive real interest rates and we
would revisit this issue at a later date.
Fiscal policy. The trajectory of public savings closely tracks the revenue deficit of the
central government (see Exhibit 12). We model central GFD/GDP ratio to fall to 3% by
FY2018 and remain around this level or lower until FY2025. Our projected revenue
collections and revenue-capital expenditure mix indicates that if the government
continues on the fiscal consolidation path, revenue deficit can move to revenue surplus
after FY2020. Given the close relation between revenue deficit and public savings, we
expect public savings rate to improve significantly. However, a steady path of fiscal
consolidation is a prerequisite.
12
Strategy
India
Exhibit 12: Public savings closely tracks the revenue deficit of the central government
Comparison of revenue deficit and public savings as proportion to GDP, March fiscal year-ends, 1973-2025E
(%)
Revenue deficit/GDP
Public saving/GDP
8
6
4
2
2025E
2021E
2017E
2013
2009
2005
2001
1997
1993
1989
1985
1981
1977
(2)
1973
(4)
(6)
We appreciate the important role of states in managing Indias long-term fiscal health.
The states have generally had a stable fiscal deficit over the past few years (see Exhibit 13
for key data for state financials). The combined revenue deficit of the states has remained
at neutral levels over the past five years. The Fourteenth Finance Commission has put a
limit of 3% for a states fiscal deficit (along with 25% ceiling for debt-to-GSDP ratio). This
somewhat reassures us that state fiscal deficit numbers will stay broadly within the
forecast range.
Exhibit 13: States have had stable fiscal deficit over the past few years
State fiscal accounts as proportion of nominal GDP, March fiscal year-ends, 2005-15 (%)
Total revenue receipts
Total own revenue
Own tax revenue
Own non tax revenue
Total transfers from the union
Tax devolution
Grants-in-aid
Total expenditure
Revenue expenditure
Capital expenditure
Fiscal deficit
Revenue deficit
Primary deficit
Outstanding debt & liabilities
2005
11.2
7.0
5.6
1.4
4.1
2.4
1.7
14.7
12.4
2.3
3.3
1.2
0.6
31.1
2006
11.6
7.0
5.7
1.3
4.6
2.6
2.0
14.4
11.8
2.5
2.5
0.2
0.2
30.5
2007
12.4
7.4
5.9
1.6
5.0
2.8
2.2
14.3
11.7
2.5
1.6
(0.7)
(0.6)
28.2
2008
12.5
7.3
5.8
1.5
5.2
3.1
2.2
14.2
11.6
2.6
1.4
(0.9)
(0.6)
26.0
2009
12.3
7.1
5.7
1.4
5.1
2.9
2.3
14.9
12.1
2.8
2.4
(0.2)
0.6
25.5
2010
11.7
7.0
5.6
1.4
4.8
2.5
2.3
14.9
12.3
2.5
3.0
0.6
1.2
24.8
2011
12.0
7.1
5.9
1.2
4.9
2.8
2.1
14.1
12.0
2.2
2.1
0.0
0.5
23.0
2012
12.2
7.3
6.2
1.1
4.9
2.8
2.1
14.3
11.9
2.3
1.9
(0.3)
0.4
21.9
2013
12.4
7.6
6.5
1.2
4.8
2.9
1.9
14.4
12.2
2.2
1.9
(0.2)
0.4
21.6
2014
13.2
7.8
6.6
1.2
5.4
2.9
2.5
15.8
13.2
2.6
2.5
0.0
1.0
21.4
2015BE
14.2
7.7
6.5
1.2
6.5
3.0
3.5
16.7
13.9
2.7
2.4
(0.3)
0.9
21.0
Source: Fourteenth Finance Commission, Kotak Institutional Equities
We have not explicitly modeled the effect of tax rate changes but have factored in some
buoyancy in tax collections based on efficiency gains after GST is implemented. However,
even if we were to factor in direct tax rate cuts, the savings would likely increase over the
long term as the consumption boost would taper out once the initial impetus of higher
disposable income wears off. A higher income would translate into savings, eventually,
against higher consumption.
13
India
Strategy
FINANCIAL SAVINGS: HIGHER SHARE OF EQUITIES OF A BIGGER PIE

Deposits will continue to dominate household financial savings even as we expect retirement products and
equity to gain ground. We expect the share of equity in household financial savings to rise. We anticipate
equity inflows of `62 tn over the next decade due to(1) higher insurance penetration, (2) higher equity
allocations in government-managed retirement programs from nil currently and (3) increased household
ownership of equities.
Financial savingsbottom-up model
Exhibit 14 shows our estimates of household financial savings over the next decade. We
model household financial savings (annual flow) to rise almost 6.5X to around `56 tn by
FY2015 from `8.6 tn in FY2015. In terms of outstanding stock, we expect household
financial assets (stock) to rise to `709 tn, a 4.5X increase over the next 10 years. Exhibit 15
has our estimates of growth and the breakdown of financial assets over the next 10 years.
Exhibit 14: Gross household financial savings will increase 6.5X over the next 10 years
Projected nominal GDP and saving inflows across products, March fiscal year-ends, 2010-25E (Rs tn)
80
Currency
Provident and pension funds
Household liabilities
70
Deposits
Shares and debentures
Nominal GDP (RHS)
450
Life insurance funds

Others
400
60
350
50
300
40
250
30
200
20
150
10
100
(20)
2025E
2024E
2023E
2022E
2021E
2020E
2019E
2018E
2017E
2016E
2015E
2014
2013
2012
2011
(10)
2010
50
0
Source: Kotak Institutional Equities estimates
Thousands
Exhibit 15: Shares and debentures will constitute a larger proportion of household financial wealth by FY2025
Breakdown of household financial assets into various categories of savings, March fiscal year-ends, 2014-25E (Rs tn)
800
Currency
Deposits
Others
700
600
500
400
300
200
100
0
2014
2015E
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
2024E
2025E
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Strategy
India
We model household financial savings to rise to around 14% of GDP by FY2025. We
expect households to favor financial savings over physical savings due to positive real interest
rates over the next decade and likely lower returns on physical assets. We note the decisive
shift in the RBIs monetary policy towards positive real interest rates and that it is keen to
maintain a positive real interest rate of 150-200 bps. Physical savings will ebb to 11.8% of
GDP from 15.7% in FY2015.
We analyze the different categories of household financial savings in India and anticipate
their trajectories over the next decade based on a bottom-up approach. We model each
segment separately with a focus on the growth drivers for the individual segments of overall
financial savings.
Deposits will continue to dominate financial savings. As per our projections, deposits
will form a smaller share of overall household financial assets in FY2025 (down to 31%
from 35% in FY2014) although they will remain the dominant financial asset for a long
time (see Exhibit 16). We expect the share of deposits in total financial savings to remain
at 45-50% over FY2015-25.
Exhibit 16: Deposits will constitute a smaller proportion of household financial wealth in 2025E
Proportional breakup of total financial assets into various categories of savings, March fiscal year-ends, 2014-25E (%)
Currency
Deposits
Others
100
90
80
31.1
34.4
35.5
36.2
36.5
36.8
37.4
38.0
38.3
38.5
38.8
38.9
35.3
33.2
33.3
33.2
33.2
33.3
33.1
32.9
32.5
32.2
31.9
31.6
2015E
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
2024E
2025E
70
60
50
40
30
20
10
0
2014
We assume that a rising credit-to-GDP ratio over the decade will translate into a strong
growth in deposits (see Exhibit 17). We estimate a credit-to-GDP ratio of 70% in FY2025
versus 49.8% in FY2014. We expect household credit, which roughly constitutes 38% of
the total credit, to keep pace with deposit growth (see Exhibit 18).
15
India
Strategy
Exhibit 17: Household sector deposits have been around 58% of total deposits in the past few years
Total and households' bank deposits outstanding, March fiscal year-ends, 2006-25E (Rs tn)
Total deposits
Household deposits
400
350
300
250
200
150
100
50
2025E
2024E
2023E
2022E
2021E
2020E
2019E
2018E
2017E
2016E
2015E
2014
2013
2012
2011
2010
2009
2008
2007
2006
Source: RBI, Kotak Institutional Equities estimates
Exhibit 18: Household sector credit has accounted for around 38% of total offtake in the past few years
Total and households' bank deposits outstanding, March fiscal year-ends, 2008-25E (Rs tn)
Total credit
Household credit
300
250
200
150
100
50
2025E
2024E
2023E
2022E
2021E
2020E
2019E
2018E
2017E
2016E
2015E
2014
2013
2012
2011
2010
2009
2008
Source: RBI, Kotak Economic Research estimates
However, the share of deposits in overall financial savings may drop further if the
corporate bond market develops over the next few years. Bond issuances by companies
have been largely driven by tax benefits on certain types of bonds (typically by
government companies in the infrastructure sector). This has restricted bond issuances to
a narrow set of companies having such tax benefits. The government has progressively
increased the number of government-owned companies that can issue tax-free bonds.
Exhibit 19 lists government-owned companies that can issue tax-free bonds and their
issuance limits of such bonds.
16
Strategy
India
Exhibit 19: The number of companies authorized to issue tax-free bonds has increased
Limits of companies authorized to issue tax-free bonds, March fiscal year-ends, 2013-14 (Rs bn)
Limits
Company
Cochin Ship Yard (CSL)
Ennore Port (EPL)
Indian Infrastructure Finance Company (IIFCL)
Indian Railway Finance Corporation (IRFC)
National Highways Authority of India (NHAI)
Housing and Urban Development Corporation (HUDCO)
Power Finance Corporation (PFC)
Rural Electrification Corporation (REC)
National Housing Bank (NHB)
Indian Renewable Energy Development Agency (IREDA)
NHPC
NTPC
IFCI
Jawaharlal Nehru Port Trust
Dredging Corporation of India
Number of companies raising tax-free bonds
2013
NA
10
100
100
100
50
50
50
50
NA
NA
NA
NA
20
5
10
2014
3
5
100
89
50
50
50
60
40
10
10
23
4
NA
NA
13
Source: Central Board of Direct Taxes, Kotak Institutional Equities
We believe the share of bonds could rise over the next few years. The Indian bond market
is evolving and we expect the ingredients to fall in place over the next 2-4 years for a
rapid growth of the bond market. We highlight the following prerequisites for the
development of a robust bond market in India.
Greater participation of institutional players in the market (more buyers). The
bond market would require greater participation by entities such as banks, insurance
companies and mutual funds. However, insurance companies and mutual funds are
largely owned by banks and their greater participation in the corporate bond market
will conflict with their parent banks lending business.
Banks are unlikely to be large players in the bond market unless there is a strong
business case for investing in corporate bonds. Banks typically prefer to lend to
companies given higher spreads in the case of corporate lending compared to retail
lending. Also, banks do not have to worry about MTM losses (bonds would have to be
marked to market on a regular basis) in their loan portfolios and their loans as these are
protected by legal and policy measures such as CDR (Corporate Debt Restructuring) and
SARFAESI (the Securitization and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002). Bond holders have no such protection.
However, banks may begin to look at bonds more favorably as the share of household
credit rises over a period of time and the bond market develops. Exhibit 20 shows that
the proportion of household credit has declined over the past few years with banks
increasing their focus on infrastructure lending. More recently, rising impaired assets in
corporate loans are making banks look anew at retail lending in a more favorable light.
17
India
Strategy
Exhibit 20: Household credit could reverse as banks focus on this segment aggressively
Proportion of household credit in India, March fiscal year-ends, 1997-2015E (% of total credit offtake)
Household credit (%)
45
40
35
30
25
20
15
10
5
2015E
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
Source: Kotak Institutional Equities
Also, the development of a credit default swap (CDS) market would be important for
potential bond subscribers to be in a position to buy protection in the cause of a
default by the issuer. This would encourage hitherto reluctant participants such as
insurance companies and even retirement funds to participate in the corporate bond
market. We note that the EPF rules allow the EPF to put a portion of its funds into
bonds issued by public sector financial institutions. A CDS market will also help in the
better pricing of bonds.
More players to develop a proper repo market for corporate bonds (more
intermediaries). The low liquidity of corporate bonds dilutes their attractiveness for
institutional holders. Most institutions such as the EPF prefer to hold their bonds to
maturity. The RBI is keen to develop the bond market and has thus, encouraged greater
participation of foreign institutional investors through periodic increases in foreign
ownership limits.
Higher number of issuers. Companies have historically borrowed from banks.
However, the large amount of NPLs and restructured loans in the Indian banking system
(10% of loans are impaired assets), the high leverage of the borrowers and low capital
adequacy ratios of the public sector banks will likely force the companies to look at the
bond and equity markets more aggressively. Finally, we do not see a rating of bonds as
an issue at all. India has several rating agencies and the rating system is quite developed.
Share of currency to stay high but decline gradually. We expect the greater
penetration of debit cards to shrink currency in circulation in India to global levels (see
Exhibit 21). We anticipate currency to stabilize at 10% of M3 by FY2025 from 13.1% in
FY2014. We note that the share of currency in transactions is quite high given (1) the low
access of a section of the population to bank accounts and (2) the use of cash for
transactions by households with undisclosed income and assets.
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Strategy
India
Exhibit 21: Currency with the public should remain stable compared to overall money supply
Money supply and currency outstanding and currency/M3 ratio, March fiscal year-ends, 2006-25E (Rs tn)
Money supply (M3)
Currency
Currency/M3 (%, RHS)
2025E
2018E
2024E
2023E
2022E
2
2021E
50
2020E
2019E
100
2017E
2016E
150
2015E
2014
200
2013
10
2012
250
2011
12
2010
300
2009
14
2008
350
2007
16
2006
400
Source: RBI, Kotak Economic Research estimates
We note the governments efforts to combat the use of cash in large transactions (above
a certain value) may also reduce the use of cash in the economy. The finance minister in
his recent budget speech announced the governments intentions to introduce encourage
the use of electronic transactions and discourage cash transactions. Government
measures could include (1) incentives for electronic payments through credit or debit
cards and (2) lower limits for high-value cash transactions (already implemented).
Life insurance assets to reach almost `100 tn (4.3X) as penetration stabilizes by
FY2025E. Life insurance is currently the second largest source of financial savings (after
deposits). The industry manages total assets of `22 tn and we expect this to grow 4.3X
over the next decade. We believe insurance penetration will move up to 3.5% of GDP
(from 3.1% in FY2014) over the period (see Exhibit 22). Insurance density is likely to
improve meaningfully as well. On a proportional basis, life insurance assets will remain
stable at 13% of household financial assets. Equity assets currently constitute 26% of the
total assets under management.
Exhibit 22: We expect insurance penetration to stabilize near global levels; insurance AUM to
increase 4.3X over 10 years
Life insurance assets under management and insurance penetration, March fiscal year-ends, 2010-25E
Life insurance AUM (Rs tn, LHS)
Insurance penetration (% of GDP, RHS)
2025E
2024E
2023E
2022E
2021E
2020E
2019E
2018E
20
2017E
2016E
40
2015E
2014
60
2013
2012
80
2011
2010
100
Source: IRDA, World Bank, Kotak Institutional Equities estimates
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India
Strategy
Retirement assets will constitute 8% of total household assets in FY2025E.

Provident and pension funds attract a significant proportion of household financial
savings globally. In FY2014, these financial products attracted `1 tn (0.9% of nominal
GDP). This equates to 9% of Indian household financial savings. We model retirement
assets (EPF and NPS) to grow to `55 tn (`7 tn as of end-FY2015) on the back of(1) new
enrolments, (2) higher participation levels and (3) capital appreciation due to marginally
higher exposure to equities.
We note that only 30 mn of the 88.8 mn subscribers of EPF are actively contributing to
the fund at present. We anticipate the total subscriber base to increase to 20% of the
total population by FY2025 even as contributing accounts increase from 33% currently.
Exhibit 23 shows our projection of retirement assets over the course of the next decade.
Exhibit 23: Retirement funds could manage Rs55 tn of assets by 2025E
Cumulative assets of the EPF and the NPS, March fiscal year-ends, 2014-25E (Rs tn)
Debt
60
Equities
50
40
30
51
41
20
2025E
2024E
33
2023E
2022E
2020E
21
2021E
2019E
2016E
14
2018E
12
17
10
2017E
2015E
2014
10
26
Shift to retirement and equity products imminent. We expect retirement products such
as pension and provident funds to gain traction over our forecast period due to government
initiatives, regulatory and policy shifts and higher financial literacy. Equities will gain via
direct or indirect channels, which we discuss separately.
The Employment Provident Fund (EPF) may increase equity allocations to 5% of
AUM. Historically, Indias EPF, which is the main retirement-savings system for
employees, has not allocated assets to equities. However, we anticipate EPF mandates
being relaxed over time with progressively higher shares of equities in incremental funds.
The government recently decided to allow the EPF Organization (EPFO) to invest 5% of
its incremental flows into equities (more precisely, exchange traded funds). In addition,
the government is also considering making EPF contributions optional for low wage
earners. Exhibit 24 shows that a substantial portion of the EPFs assets are allocated to
central and state government securities.
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Strategy
India
Exhibit 24: EPF does not invest in equities

Composition of EPF assets, September 2013
Assets
(Rs bn)
1,163
693
129
541
1,505
700
4,731
Category
Central government securities
State government securities
Government gauranteed securities
Special deposit scheme
Public sector financial institutions/bonds
Public account
Total
(%)
25
15
3
11
32
15
100
Source: EPFO Annual Report, Kotak Institutional Equities
Recently, the EPF mandate was relaxed to allow higher allocation to equities.
Additionally, we expect greater uptake of the National Pension Scheme (NPS) to result
in a higher share of retirement funds being allocated to equities. The NPSs investment
mandate allows up to 15% of the allocations to be deployed in equities. As of March
2014, equities made up 9% of the schemes total allocations (see Exhibit 25). We
estimate the NPSs assets to reach `24 tn by FY2025 (see Exhibit 26). Total equities
owned by the scheme will amount to `3 tn. We model allocation to equities for the NPS
scheme to remain at 10%.
Exhibit 25: Almost 10% of NPS assets is deployed in equities
Composition of EPF assets, March 2014
Mandate
(%)
55
40
5
15
Government securities
Debt
Money markets
Equity
Cash & equivalent
Total
AUM
(%)
51
35
2
9
3
100
(Rs bn)
247
169
9
41
14
481
Source: PFRDA, Kotak Institutional Equities
Exhibit 26: The National Pension Scheme will own equities worth Rs3 tn by FY2025E
National Pension Scheme composition of assets, March fiscal year-ends, 2014-25E (Rs tn)
Debt
30
Equities
25
20
15
10
5
2025E
2024E
2023E
2022E
2021E
2020E
2019E
2018E
2017E
2016E
2015E
2014
Source: PFRDA, NSDL, Kotak Institutional Equities estimates
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India
Strategy
Our assumed share of equity in retirement funds is still very low versus global levels. The
share of equity in retirement funds is high in developed countries, see Exhibit 27. We
doubt India will reach such levels but we do not rule out the government progressively
relaxing the limits on the share of equity in retirement funds. Exhibit 28 shows the
change in the proportion of debt and equity in the US post changes in regulations and
introduction of 401(k) schemes in the late 1970s, which allowed greater choice to
subscribers in choosing the nature of their investments.
Exhibit 27: Half the world's pension fund assets are deployed in equities
Asset allocations of global pension funds (% of total assets), calendar year-end, 2013
Equity
Bonds
Other
Cash
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
World
Australia
Canada
Japan
UK
US
Source: Tower Watson, Kotak Institutional Equities
Exhibit 28: Equity ownership has doubled since 1970; indirect ownership via mutual funds has gone up
Breakdown of US retirement assets into various assets (% of total financial assets), 1970-2014
Corporate equities
Mutual funds
Debt & others
100
80
60
40
20
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
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
Source: US Federal Reserve Flow of Funds, ICI, Kotak Institutional Equities
22
Strategy
India
Household ownership of equities set to risedirectly and indirectly. We estimate
cumulative inflows of `62 tn into equity markets from households over FY2015-25.
Although a majority of these inflows will be through direct channels (i.e. shares, mutual
funds, etc.), a substantial portion will arise from indirect channels such as life insurance
and retirement benefit funds (see Exhibit 29). We expect the ownership of equities by
households (ex-promoters) to increase to 18% of all household financial assets by FY2025
versus about 10% at end-FY2015.
Exhibit 29: We estimate household savings of Rs62 tn to move into equities over the next 10 years
Total direct and indirect household financial saving flows into equities, March fiscal year-ends, 2015-25E
(Rs tn)
Households
Life Insurance
Provident & Pension
14
12
10
8
6
4
2
2025E
2024E
2023E
2022E
2021E
2020E
2019E
2018E
2017E
2016E
2015E
23
India
Strategy
EQUITIES: EATING THEIR WAY INTO HOME PIES

We expect equities to emerge as a more meaningful portion of household savings. Indian savings behavior
has been largely conditioned by low financial literacy and high inflation, which has resulted in a preference
for bank deposits (safe savings) and physical assets (gold and real estate). We expect savings behavior to
evolve as households appreciate the concept of returns and risks for various financial asset classes. Favorable
policies may help quicken the transition.
Equities: Corpus set to become 5X over 10 years
Exhibit 30 shows our projections for the corpus of equities over the next 10 years. We
discuss the key assumptions below.
Exhibit 30: Household equity corpus to grow 5X over the next decade
Total direct and indirect equity stock of households, March fiscal year-ends, 2015-25E (Rs tn)
Households
350
Life Insurance
Provident & Pension
300
250
200
150
100
50
2025E
2024E
2023E
2022E
2021E
2020E
2019E
2018E
2017E
2016E
2015E
2014
Notes:
(a) Households ownership comprises of retail, mutual funds (retail portion) and promoter holdings.
Higher share of financial savings in overall savings and of GDP. As discussed in the
previous two sections, we see several factors that can result in a higher share of equities
in household savings from a top-down macro perspective. We expect (1) nominal GDP to
multiply 3X over FY2015-25, (2) household savings to grow rapidly over the 10 years
(3.7X) and (3) the share of financial savings to rise in total household savings (14% from
6.7% in FY2015E. We see several other specific drivers for equities over the next 10 years.
15% CAGR for the broad market. We assume net profits of Indian companies to grow
at 15% CAGR led by (1) nominal GDP growth of 12%, (2) higher market share of the
listed entities versus unlisted players and (3) moderate operating leverage. We assume
market multiples will sustain as (1) the cost of equity in India declines due to lower
inflation and better macro-economic parameters and (2) investors gain more confidence
about Indias structural story and execution.
Higher financial literacy and younger workforce to drive more financial savings
into equities. We expect a financial-literate generation and Indias younger workforce to
look at equities more favorably than the older generation. The older generation has been
largely content with bank deposits and physical savings. Post-tax returns in deposits are
well below CPI inflation (see Exhibit 31 for a historical perspective). In fact, we wouldnt
be surprised to see a more favorable attitude towards equities as nominal rates on
deposits decline due to lower inflation over the next few years.
24
Strategy
India
Exhibit 31: Post-tax returns in deposits rarely exceed CPI

Trend in post-tax FD returns and CPI (IW), March fiscal year-ends, 1991-2015 (%)
FD (post-tax)
CPI (IW)
16
14
12
10
8
6
4
2
2014
2015
2012
2013
2010
2011
2008
2009
2006
2007
2005
2003
2004
2001
2002
1999
2000
1997
1998
1996
1994
1995
1992
1993
1991
Source: Government of India, Kotak Institutional Equities
Exhibit 32 traces the difference between annual returns on equity (post-tax is same as
pre-tax assuming holding period of more than one year) and one-year term deposits
(post-tax) over various time periods for the past two decades. As can be seen, returns on
equity have far exceeded returns on fixed deposits. The low returns from equities (same
as FD) over the FY2010-14 period may have forced households to look elsewhere.
However, returns in the FY2010-15 period are about 3.5% per annum ahead of the
return on fixed deposit, which highlights the simple point that returns in one good year
can make up for a few years of weak returns in the case of equities. The same is unlikely
for fixed deposits given more sticky deposit rates.
Exhibit 32: Equities have given higher returns than fixed deposits over all periods
Comparison of equity and term deposits (post-tax) returns over various time periods, March 2015
Equity
Fixed deposit (Post-tax)
20
15.4
15
12.2
10
9.8
11.3
9.5
6.2
5.3
5.3
5.8
6.2
6.3 6.2
0
5-yr CAGR
10-yr CAGR
15-yr CAGR
20-yr CAGR
25-yr CAGR
2010-14
Source: BSE, CEIC, Kotak Institutional Equities
25
India
Strategy
Greater allocation of retirement funds to equities. We have discussed this in detail in

the previous section.
Rising penetration of life insurance to contribute to equities corpus. The likely
increase in penetration of life insurance from current low levels will result in strong
growth in annual insurance premium over the next several years. Life insurance
companies are more inclined to invest in equities and equities now account for a quarter
of their assets under management.
Have Indians missed the bus on equities?

Exhibit 33 shows that almost 25% of the Indian stock market (BSE-200 Index) is owned by
foreign investors. Indian retail investors own only 7.1% of the market directly and another
10.1% through life insurance companies and mutual fundsthis figure has not changed
much over the past few years. The share of FIIs has risen consistently over the past two
decades while the share of retail investors has remained stagnant. Over the past 13 years,
the share of FIIs has gone up by 10% (to almost 25% from 15% as of December-2008)
while the share of Indian households (direct plus through insurance and mutual funds) has
gone down by 10% to 17%. This would suggest that retail investors have not really
benefited from the wealth creation in the Indian stock market.
Exhibit 33: Ownership pattern over the past 52 quarters; FII share has gone up 10%, households (ex-promoters) down 10%
Analysis of BSE-200 stocks taking market capitalization at the end of each quarter
Indian promoters (non-Govt)
FIIs+ADR/GDR
Retail
Foreign promoters
MFs
Others
Govt
BFIs
32
28
24
20
16
12
8
4
Dec-14
Jun-14
Dec-13
Jun-13
Dec-12
Jun-12
Dec-11
Jun-11
Dec-10
Jun-10
Dec-09
Jun-09
Dec-08
Jun-08
Dec-07
Jun-07
Dec-06
Jun-06
Dec-05
Jun-05
Dec-04
Jun-04
Dec-03
Jun-03
Dec-02
Jun-02
Dec-01
Source: BSE, NSE, Capitaline, Kotak Institutional Equities
The ownership pattern of Indias largest companies (by market capitalization) reveals a
similar picture. Foreign portfolio investors, foreign majority shareholders (promoters) or
Indian majority shareholders dominate the shareholdings of such companies. In fact, foreign
shareholdings (direct plus institutional) are well above 50% in Indias largest (and best
companies). Exhibit 34 gives the foreign ownership (both FDI and FII) in top companies by
market capitalization.
26
Strategy
India
Exhibit 34: Top private Indian companies have high foreign ownership
Foreign ownership (foreign promoters + foreign institutions + foreign non-institutions) pattern of major private companies, December 2014 (%)
90
80
70
60
50
40
30
20
10
SSLT
ACEM
HUVR
SIEM
UNSP
HDFC
BOS
MSIL
IIB
ICICIBC
Z
CAIR
INFO
DRRD
AXSB
ITC
CIPLA
IDEA
HDFCB
TTMT
HCLT
MSS
MM
BHARTI
HMCL
KMB
TECHM
HNDL
LPC
ARBP
ADE
GCPL
EIM
BHIN
SUNP
RIL
UTCEM
SRCM
LT
TTAN
DABUR
TATA
BJAUT
APNT
ADSEZ
TCS
NEST
WPRO
CDH
HZ
Source: BSE, Kotak Institutional Equities
In our view, India will see massive wealth creation over the next decade as it evolves into a
middle-income economy over the next 10 years from a low-income one. Equities are
typically a very good play on the growing income levels in a country as companies capture (1)
higher household spending and (2) infrastructure creation, in the form of higher net profits
while (3) banks and other financial institutions capture the related growth in household
financial savings in the economy.
However, the low ownership of equities by Indian households may prevent them from
participating fully in the likely growth in value of Indian equities. Ironically, while Indian
households invested about US$207 bn in gold over the past seven financial years, foreign
investors invested US$103 bn in Indias equity market. It seems that Indians have bought
foreign gold (India imports its entire gold consumption) while foreigners have purchased
Indian equity. The next 10-20 years will be quite telling in terms of which set of investors
made the right decision.
27
India
Strategy
GOLD: NO GOLD BILLIONAIRES

We expect investment in gold to deliver modest returns over the next few years. We base our cautious view
on (1) likely low global and domestic inflation, which may reduce the appeal of gold as a store of value, (2)
relative higher returns on financial assets versus on gold due to Indias better macro-environment position
and (3) the governments tough measures to reduce undisclosed income and assets, which will reduce the
appeal of gold as a repository of black money.
Returns on gold likely to be modest over the next few years
We expect investment in gold to deliver modest return over the next few years for the
following reasons.
Low global inflation. We do not expect global inflation to increase meaningfully over
the next few years despite efforts of the global central banks to increase inflation in their
respective countries/regions. A slow recovery in most parts of the developed world will
keep global demand subdued. Also, a likely slowdown in China will free up large
capacities in several sectors, which will likely keep commodity prices muted.
Households generally find gold less attractive as an investment during periods of low
inflation. Gold is assumed to be a store of value given its inert chemical properties and
has been so considered over the past 5,000 years. Exhibit 35 shows the movement in
gold prices with global inflation. Gold prices have been stable over the past 12 months on
the back of growing concerns about global GDP growth and consensus on low global
inflation.
Exhibit 35: Gold prices have been very stable the past few years
Gold prices and global inflation, calendar year-ends, 2005-2014
Avg gold price (US$/OZ, LHS)
2,000
Avg. global inflation (%, RHS)
7
6
1,600
5
1,200
4
3
800
2
400
1
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
Source: Bloomberg, Kotak Institutional Equities
Low domestic inflation and positive real interest rates. We believe inflation in India
will likely be lower over the next few years compared to the high inflation seen in the
FY2010-15 period. The RBI has stated its intention to bring down CPI inflation to 6% by
March 2016 and to 4% by March 2018. The projected inflation trajectory will be
significantly lower than CPI levels of the past few years (see Exhibit 36).
28
Strategy
India
Exhibit 36: Average CPI inflation likely to trend down

Headline and core CPI inflation (%)
CPI inflation
Core CPI inflation
8
7
March 2016: 5.7
6
5
March 2016: 5.6

4
Mar-16
Jan-16
Nov-15
Sep-15
Jul-15
May-15
Mar-15
Jan-15
Nov-14
Sep-14
Jul-14
May-14
Mar-14
Jan-14
Also, real interest rates will likely stay positive, as discussed previously, which will enhance
the appeal of financial savings and investment in financial assets. Gold has hardly given
domestic investors any returns over the past four years despite the fact that domestic gold
prices have been supported by an increase in import duties on gold (now at 10% versus 2%
in 2012) over the past 2-3 years. Gold prices would be even lower at nil or lower import
duties and returns even lower.
Longer-term returns on gold are also quite moderate in the context of inflation (see
Exhibit 37). Gold prices went up sharply in the 2005-11 period but have largely been flat
for extended periods before that and now over the past four years. We note that
domestic historical price movements in gold reflect both (1) INR depreciation since gold is
entirely imported and (2) inflation trends and expectations in India. Global gold prices
have been even more stable except for the 2005-11 period when all commodity prices
rallied led by financial investments in commodities and strong global GDP growth
(commodity super-cycle).
Exhibit 37: Returns on gold are also quite moderate in the context of inflation
Comparison of gold and inflation over various time periods, March 2015 (%)
Gold
CPI (IW)
15
12.6
11.9
12
10.0
9
8.3
9.0
7.8
6.8
8.8
7.2
7.9
0
5-yr CAGR
10-yr CAGR
15-yr CAGR
20-yr CAGR
25-yr CAGR
Source: BSE, CEIC, Kotak Institutional Equities
29
India
Strategy
Government policy on undisclosed income and assets. The government is getting

progressively tougher on undisclosed income and assets; legislation and policies to this
end will increasingly reduce the attractiveness of holding black money in the form of gold.
Undisclosed income has been historically used to purchase gold and real estate in India
since such transactions are typically done in cash and are thus more difficult to track. On
the other hand, the purchase of financial assets requires a plethora of disclosures. This
makes it difficult to purchase such assets through cash or undisclosed income.
The government has tightened the disclosure standards for transactions (both purchase
and sale) involving gold and real estate (see Exhibit 38). We expect these standards to be
made stricter over the next few years and penalties for avoidance of tax on undisclosed
income and assets tougher. The current government has declared the detection of
undisclosed income and assets (both domestic and foreign assets) as a key economic
policy. It has drafted The Undisclosed Foreign Income and Assets (Imposition of Tax) Bill,
2015, which will shortly be introduced in the parliament for legislation. Although the bill
deals with foreign income and assets, it highlights the governments intentions on this
issue.
Exhibit 38: The government is tightening disclosure standards for gold and real estate transactions
Measures taken by Government for disclosure of transactions in gold and real estate
Gold
Introduction of gold monetazion scheme
Introduction of Sovereign Gold Bond as an alternative to purchasing physical gold by Finance Minister in
the Union Budget 2015
Disclosure of PAN compulsory for payment to a dealer (a) of an amount of Rs0.5 mn or more at any one
time; or (b) against a bill for an amount of Rs0.5 mn or more for purchase of bullion or jewelry
Introduction of stringent Know Your Client (KYC) norms for purchase of bullion, jewelry and precious
stones as part of amendment to the Prevention of Money Laundering Act, 2002
Real estate
Consistent increase in ready reckoner rate
Introduction of Tax Deduction at source (TDS) for real estate transactions over Rs5 mn
Disclosure in Annual Information Return (AIR) if purchase or sale transaction in immovable property
exceeds Rs3 mn
Source: Government of India, Media reports, Kotak Institutional Equities
We expect the government to implement several measures for greater disclosures on

purchase and sale of gold as also monetize the extant store of gold with Indian
households.
Disclosure of PAN while buying gold and jewelry to apply to lower-value
purchases. In due course, we expect the government to lower the limit for disclosure of
PAN for purchase of gold and jewelry. The Finance Act 2015, passed recently by the
parliament, makes it mandatory for a customer to disclose the PAN for purchase or sale
of any good with a value exceeding `0.1 mn. This will cover gold and jewelry as well.
Importantly, the proposed limit for disclosure of PAN is well below the current limit of
`0.5 mn for gold and jewelry. We expect this figure to decline further as the
penetration of credit and debit cards increases in the country and the government
provides some incentive for electronic transactions.
30
Strategy
India
Inclusion of gold and jewelry under GST. The governments efforts to curb black
money will receive a big boost if gold is brought under the ambit of the domestic tax
system. Currently, there is no domestic tax on purchase and sale of gold jewelry. We
see no reason for the purchase and sale of jewelry to be kept out of GST or be exempt
from domestic taxes forever. Gold jewelry or studded jewelry is a normal consumption
item and it should be treated no differently from any other good or service. Imposition
of a domestic transaction tax and lower disclosure limit or PAN or other stringent KYC
norms may affect the consumption of gold and also reduce the use of cash for purchase
of gold jewelry. The government has imposed a 10% import duty on gold but that has
only resulted in inflating the price of gold in India by 10% versus global levels.
Gold monetization. The government has announced its intention to introduce
measures to monetize the large amount of gold (about 20,000 tons) held by Indian
households. (1) The government will introduce a new gold monetization scheme to
replace the current schemes. Under the new scheme, depositors of gold will earn an
interest in their metal accounts. (2) The government will develop a Sovereign Gold Bond
as an alternative to holding gold in its physical form.
A look into history

We would like to believe that ownership of gold has not created any real wealth. Returns on
gold have been in line with inflation, which means gold has largely been a store of value
rather than a creator of wealth. Given innumerable battles and wars over gold since ancient
times up to the recent past (gold is thankfully pass now as a reason for fighting wars), we
wonder whether gold was and is worth the trouble.
King Midas with his golden touch would certainly vouch otherwise and so would the Inca
rulers who suffered terribly at the hands of the Spanish conquistadors just because they
owned a lot of gold. A remarkable civilization got destroyed in pursuit of the yellow metal.
In our times, it does not look that gold alone has created no billionaires. At least, none of
the global richest lists mentions anybody with wealth based on gold or similar items. Even
if there are some Indian politicians with enough gold to be classified as billionaires, it would
seem rather purposeless to own a lot of gold but be forced to be quiet about it.
31
India
Strategy
"I, Sanjeev Prasad, hereby certify that all of the views expressed in this report accurately
reflect my personal views about the subject company or companies and its or their securities.
I also certify that no part of my compensation was, is or will be, directly or indirectly, related
to the specific recommendations or views expressed in this report."
32
Strategy
India
Kotak Institutional Equities Research coverage universe

Distribution of ratings/investment banking relationships
Percentage of companies covered by Kotak Institutional
Equities, within the specified category.
70%
60%
Percentage of companies within each category for which Kotak
Institutional Equities and or its affiliates has provided
investment banking services within the previous 12 months.
50%
38.0%
40%
30%
24.7%
21.1%
20%
10%
16.3%
4.2%
4.8%
1.2%
1.2%
REDUCE
SELL
0%
BUY
ADD
Source: Kotak Institutional Equities
* The above categories are defined as follows: Buy = We

expect this stock to deliver more than 15% returns over the
next 12 months; Add = We expect this stock to deliver 5-15%
returns over the next 12 months; Reduce = We expect this stock
to deliver -5-+5% returns over the next 12 months; Sell = We
expect this stock to deliver less than -5% returns over the next
12 months. Our target prices are also on a 12-month horizon
basis. These ratings are used illustratively to comply with
applicable regulations. As of 31/03/2015 Kotak Institutional
Equities Investment Research had investment ratings on 166
equity securities.
As of March 31, 2015
33
Disclosures
Ratings and other definitions/identifiers

Definitions of ratings
BUY. We expect this stock to deliver more than 15% returns over the next 12 months.
ADD. We expect this stock to deliver 5-15% returns over the next 12 months.
REDUCE. We expect this stock to deliver -5-+5% returns over the next 12 months.
SELL. We expect this stock to deliver <-5% returns over the next 12 months.
Our target prices are also on a 12-month horizon basis.
Other definitions
Coverage view. The coverage view represents each analysts overall fundamental outlook on the Sector. The coverage view will consist of one of the following designations:
Attractive, Neutral, Cautious.
Other ratings/identifiers
NR = Not Rated. The investment rating and target price, if any, have been suspended temporarily. Such suspension is in compliance with applicable regulation(s) and/or
Kotak Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic transaction involving this company
and in certain other circumstances.
CS = Coverage Suspended. Kotak Securities has suspended coverage of this company.
NC = Not Covered. Kotak Securities does not cover this company.
RS = Rating Suspended. Kotak Securities Research has suspended the investment rating and price target, if any, for this stock, because there is not a sufficient fundamental
basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied
upon.
NA = Not Available or Not Applicable. The information is not available for display or is not applicable.
NM = Not Meaningful. The information is not meaningful and is therefore excluded.
34
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Copyright 2015 Kotak Institutional Equities (Kotak Securities Limited). All rights reserved.
1. Note that the research analysts contributing to this report may not be registered/qualified as research analysts with FINRA; and
2. Such research analysts may not be associated persons of Kotak Mahindra Inc and therefore, may not be subject to NASD Rule 2711 restrictions on
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at nilesh.jain@kotak.com.
Kotak Securities Limited and its affiliates are a full-service, integrated investment banking, investment management, brokerage and financing group. We along with
our affiliates are leading underwriter of securities and participants in virtually all securities trading markets in India. We and our affiliates have investment banking
and other business relationships with a significant percentage of the companies covered by our Investment Research Department. Our research professionals
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Future of Savings in India May15

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Company Report

Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH

OVERVIEW: FINANCIAL SAVINGS SET TO RISE SHARPLY

Source: Source: CEIC, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH

Lower government taxation. On the subject of lower government taxation, we

Source: CEIC, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH

Sale or purchase of any immovable property valued at Rs0.5 mn or more

In an application for telephone connection including cellular telephone

A contract of a value exceeding Rs0.1 mn for sale or purchase of securities

Opening of a bank account

Payment of an amount of Rs50,0000 or more to a company for acquiring shares issued by it

of an amount of Rs0.5 mn or more at any one time; or

Source: Income Tax Department, Kotak Institutional Equities

Equities can be a larger portion of financial savings

KOTAK INSTITUTIONAL EQUITIES RESEARCH

Source: Government of India, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH

KOTAK INSTITUTIONAL EQUITIES RESEARCH

DOMESTIC SAVINGS: STRUCTURAL DRIVERS IN PLACE

Source: CEIC, Kotak Institutional Equities estimates

Physical savings rate

Household savings rate

Source: RBI, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH

Gold savings rate

Physical savings rate including gold

Source: CEIC, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH

Source: CEIC, Kotak Institutional Equities estimates

Understanding the long-term drivers of savings

KOTAK INSTITUTIONAL EQUITIES RESEARCH

Exhibit 9: Dependency ratio to improve steadily

Source: UN Population, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH

Financial deepening. We view financial deepening in the Indian economy as an

Public sector banks

Source: Ministry of Finance, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH

Source: CEIC, Kotak Institutional Equities estimates

Source: Fourteenth Finance Commission, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH

FINANCIAL SAVINGS: HIGHER SHARE OF EQUITIES OF A BIGGER PIE

Life insurance funds

Source: Kotak Institutional Equities estimates

Life insurance funds

Provident and pension funds

Shares and debentures

Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH

Life insurance funds

Provident and pension funds

Shares and debentures

Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH

Source: RBI, Kotak Institutional Equities estimates

Source: RBI, Kotak Economic Research estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH

Source: Central Board of Direct Taxes, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH

Source: Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH