Economy

ECONOMY INSIGHT July 27, 2016

The political underpinnings of inflation Exhibit A: CPI inflation tends to be

higher by 80bps in the two years
leading up to a General Election
in India 12%
The reduction in inflation in India over the past two years and the exit of

(YoY change, in %)
a hawkish RBI Governor has resulted in a widespread expectation of

CPI inflation
8%
more rate cuts. This view ignores the political underpinnings of inflation
in India, whereby a systematic step-up in inflation materialises in the 4%
run-up to General Elections. There appear to be two key drivers which
propel inflation higher, namely: (1) higher subsidy spends being 0%
undertaken in the last two years of a five-year cycle; and (2) the need

1984-89

1991-96

1999-04

2004-09

2009-14
for election funding, leading politicians to collude with promoters who
suppress competition, and then push through price hikes. We retain our
view that limited rate cuts to the tune of 0-25bps are likely to be First three years Last two years
administered in FY17. Furthermore, we highlight the risk of INR volatility
increasing and revex spends rising (either at the cost of public Source: CEIC, Ambit Capital research
investment or at the cost of fiscal discipline) in FY18-19.
Exhibit B: Subsidy payments tend to
Inflation is unlikely to be benign in FY18-19
be higher in the last two years of a
Between 4QF14 and 4QFY16, CPI inflation eased by 290bps, policy rates have five-year election cycle
been cut by 150bps, India’s CAD has been recorded at an average of 0.1% of
GDP and the INR too has been stable. All of this has led investors to perceive
3%
India as a haven of stability in a world where sliding EM currencies are a norm.

Central Govt. Subsidies

Now, with a new RBI Governor about to take charge in September more rate
2%

(as % of GDP)
cuts are being widely expected. This consensus view that inflation is under
control and more rate cuts are on the anvil ignores the political underpinning of
1%
inflation in India whereby a step-up in inflation typically materialises in the run-
up to General Elections (see exhibit in the right hand margin). Our discussions
with our sources in Delhi and in state capitals suggest that the historical pattern 0%

2004-2009
1984-89

1991-96

1999-04

2009-14
is likely to be repeated again.
The political underpinnings of the inflation cycle in India
A historical analysis of inflation cycles in India suggests that average inflation
tends to be higher in the last two years leading up to a General Election. There First three years Last two years
appear to be two key drivers which propel inflation higher in the run-up to
General Elections. Firstly, public finance data suggests that subsidy spends tends
Source: CEIC, Ambit Capital research
to be higher in the last two years in the run-up to a General Election (see exhibit
B on the right side). Secondly, the requirement for election funding becomes Exhibit C: The need for election
acute in the last two years leading to an election. Politicians raise the bulk of this funding drives inflation in India
funding requirement by colluding with a promoter, suppressing competition in
his/her sector and thereby allowing the incumbent corporate to push through
price hikes (see exhibit C on the right side).
Macroeconomic implications
Besides the political economy dynamics that are likely to drive inflation higher in
the run-up to the CY19 General Election, GST implementation will add to
inflation as well (according to the current Chief Economic Advisor, a GST rate of
+15.5% could add to inflation by 30-70bps). We hence retain our view that rate
cuts to the tune of only 0-25bps are likely to be administered in FY17.
There are two other macroeconomic implications of this development. Firstly, Source: Ambit Capital research
history suggests that the INR is prone to heightened volatility in the run-up to
the General Elections. If this were to happen in FY18 and FY19, i.e. the last two Research Analysts
years in the current General Election cycle, then this dynamic coupled with the
Ritika Mankar Mukherjee, CFA
fact that India’s KAS is diminishing quarter after quarter will put pressure on the
INR. Secondly, history also suggests that the Central Government’s spending on +91 22 3043 3175
the rural economy tends to rise in the run-up to a General election. If this ritika.mankar@ambit.co
dynamic were to play out in FY18 and FY19, then it will provide support to the Sumit Shekhar
rural consumer whilst resulting either in compromised public investment growth +91 22 3043 3229
or in fiscal indiscipline.
sumit.shekhar@ambit.co
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
 Economy

Introduction to the “political economy”

“Over the last 30 years, India has seen three waves in its politics, its economy and its
stock market. Each wave has begun with a political reset wherein a new party or
coalition has come to power with a fresh economic ideology which in turn has helped
lift the economy and the stock market.”
-
Ambit’s ‘Invest into India’s Fourth Wave’ thematic,
March 11, 2014
In democratic economies, there exists an umbilical link between the business cycle
Economic outcomes determine the
and political cycle. This is so because economic outcomes (such as changes in
tenure of democratically elected
employment or changes in the standard of living of the electorate) determine the
Governments
tenure of democratically elected governments. On the other hand, incumbents try to
reinforce their position ahead of elections by opting for populist policies which fires-
up specific pockets of the economy (see exhibit below).
Exhibit 1: The political and economic cycles in a democracy are strongly interconnected
Name Details
A theory of political and economic cycles “Political and economic cycles are jointly determined. In our environment, these cycles are driven by three key
(NBER, September 2012 political economy frictions. First, policymakers are not benevolent, and are instead driven by political rents and
http://goo.gl/YHFK6n). by the desire to preserve power. Second, policymakers lack commitment, and once in office, they are not
bound to the promises which they made to citizens. Finally, policymakers have private information about the
tightness of the government budget and their rent-seeking activities.”
“The analysis of key economic variables over the past three decades suggested that new project additions dry
The political economy cycle in India up each time there is a Lok Sabha poll, as businessmen turn cautious and wait to gauge what the future policy
(Livemint, April, 2014 environment will look like. Industrial credit dries up as a result, and consumption of key materials such as steel
http://goo.gl/Eix5Kp) and cement falls.”
“Incumbents might use monetary policy to manipulate the well-known inverse relationship between inflation
Political-Economic Cycles (Oxford and unemployment (i.e. the Phillips curve) to win votes from myopic voters.”
Handbook of Political Economy,
http://goo.gl/8Nxz8k)

“Inflation tends to increase immediately after elections, perhaps as a result of pre electoral expansionary
Political cycles in OECD countries, Harvard monetary and fiscal policies discouraging saving, raising the cost of capital and contributing to political
university, https://goo.gl/cPR98k) instability.”

Source: Various, Ambit Capital research

July 27, 2016 Ambit Capital Pvt. Ltd. Page 2

 Economy

Inflation in India rises in the run-up to

General Elections
Such is the linkage between the political and economic cycle in India that inflation in Average inflation tends to be
India picks up with uncanny regularity in the run-up to General Elections. higher in the last two years leading
In specific, a historical analysis of inflation cycles in India suggests that average up to a General Election
inflation tends to be higher in the last two years leading up to a General Election
(GE). For instance, average CPI inflation was higher by 80bps in the last two years
leading up to a GE in the case of the last 5 election cycles (see exhibit below).
Exhibit 2: In the case of the last 5 election cycles, average CPI inflation was higher by
80bps in the two years leading up to a General Election

12% 10.4% 10.2%

10.2% 10.1%
(YoY change)
CPI inflation

8.6%
7.2% 7.7%
8%
5.0%
3.8% 4.0%
4%

0%
1984-89

1991-96

1999-04

2004-09

2009-14
First three years Last two years

Source: CEIC, Ambit Capital research

Furthermore, excluding the two GE cycles when inflation was recorded at elevated
levels throughout the five-year cycle (i.e., recorded at +10%), the differential was
wider at 140bps.
Average food inflation was higher
An analysis of the constitution of CPI suggests that this differential is largely driven by
by 230bps in the last two years
higher food inflation. Average food inflation was higher by 230bps in the last two
leading up to a GE
years leading up to a GE in the case of the last 4 election cycles (see exhibit below).
Exhibit 3: In the case of the last 4 election cycles, average CPI food inflation was
higher by 230bps in the two years leading up to a General Election

16%
CPI IW food inflation

12.1%
10.9% 11.5%
(YoY change)

12% 10.4% 10.5%

8%
5.2%
4% 3.2%
1.5%

0%
1991-96

1999-04

2004-09

2009-14

First three years Last two years

Source: CEIC, Ambit Capital research, Note: Data for the election cycle spanning 1984-89 has been excluded as
the data for the food component is not available for this period.

This trend of inflation being higher in the run-up to a General Election is reflected in Average WPI inflation was higher
the WPI gauge as well. Average WPI inflation was higher by 110bps in the last two by 110bps in the last two years
years leading to a GE in the case of the last 5 election cycles (see exhibit below). leading up to a GE

July 27, 2016 Ambit Capital Pvt. Ltd. Page 3

 Economy

Exhibit 4: Average WPI inflation was higher by 100bps in the two years leading up to
a General Election in the case of the last 5 election cycles

12% 11.3%
10.7%
WPI inflation
(YoY change)

9.3%
7.8% 7.4%
8% 6.5%
5.6% 5.4%
4.7% 4.4%
4%

0%
1984-89

1991-96

1999-04

2004-09

2009-14
First three years Last two years

Source: CEIC, Ambit Capital research

Under UPA-II, in fact average WPI inflation rose by 390bps in the run-up to the Inflation for agricultural labourers
General Election of 2014. on an average rises by 260bps in
the last two years of a General
A geographical analysis suggests that this trend is more profound in rural India as election cycle as compared to
compared to urban India. Inflation for agricultural labourers on an average rises by 60bps for industrial workers
260bps in the last two years of a General election cycle as compared to 60bps for
industrial workers (see exhibit below).

Exhibit 5: Inflation in rural areas rose by an average of Exhibit 6: Inflation in urban areas rose by an average of
260bps in the run-up to a General Election 60bps in the run-up to a General Election

16% 12%
10%10% 10% 10%
CPI Agri labourers
(YoY change, in %)

CPI Industrial workers

12% 11%
(YoY change, in %)

11% 11% 10%

12% 8%
9% 8%
8% 5%
4%
5% 4%
3% 4% 4%
4% 2%

0% 0%
1984-89

1991-96

1999-04

2004-09

2009-14

1991-96

1999-04

2004-09

2009-14

First three years Last two years First three years Last two years

Source: CEIC, Ambit Capital research Source: CEIC, Ambit Capital research

Once again, excluding the two GE cycles when inflation was recorded at elevated
levels throughout the five year cycle (i.e. recorded at +10%), the average differential
was wider at 290bps for rural areas and 140bps for urban areas.

July 27, 2016 Ambit Capital Pvt. Ltd. Page 4

 Economy

Likely drivers of this phenomenon

In the Indian context, there appear to be two key drivers which drive inflation higher Subsidy spends tends to be higher
in the run-up to a General Election Cycle. Firstly, public finance data suggests that in the last two years in the run-up
subsidy spends tends to be higher in the last two years in the run-up to a General to a General Election.
Election. This in turn pushes up wage inflation and food inflation.
Secondly, politicians often raise corporate funding for elections by suppressing
competition via regulatory means and thereby allowing incumbent corporates to push
through price hikes. Since the need for election funding tends to be most profound in
the run-up to a General Election, this cycle comprising of collusion between
promoters and politicians, following suppression of competition, and resulting
inflation typically drives inflation higher in the years leading to a GE.
Driver#1: The Centre pumps-up subsidy spends in the run-up to General
Elections
A historical analysis of Central public finances suggests that average subsidy spends
as a percentage of GDP tend to be higher in the last two years leading to a General
Election (GE).
For instance, in the case of the last 5 election cycles, average subsidy spends as a
percentage of GDP was higher by 15bps in the last two years leading up to a GE (see
exhibit below).
Exhibit 7: Subsidy payments tend to be higher in the last two years of a five-year
election cycle by an average of ~15bps

3%
2.4%
Central Govt. Subsidies

2.2%
1.9%
2% 1.6% 1.7% 1.6%
(as % of GDP)

1.5%
1.3% 1.3%
1.1%
1%

0%
2004-2009
1984-89

1991-96

1999-04

2009-14

First three years Last two years

Source: Election Commission of India, Ambit Capital research

This is likely to be motivated by the fact that politicians are keen to improve the real Politicians are keen to improve the
income of the electorate via higher subsidy support in the run-up to a GE. This in turn real income of the electorate via
stokes inflation as history points to the existence of positive correlation that exists higher subsidy support in the run-
between: (1) higher subsidy spends and wage inflation; and (2) wage inflation and up to a GE
food inflation (see exhibits below).

July 27, 2016 Ambit Capital Pvt. Ltd. Page 5

 Economy

Exhibit 8: Higher subsidies result in higher wage Exhibit 9: … which in turn leads to higher food inflation
inflation…

3.0% R² = 0.6805 18% R² = 0.4231

Govt. exp. on subsidies

WPi-food inflation
16%
2.5%

(YoY change)
14%
(as % of GDP)

2.0% 12%
10%
1.5%
8%
1.0% 6%
4%
0.5%
2%
0.0% 0%
-5% 0% 5% 10% 15% 20% 25% 0% 5% 10% 15% 20% 25%

Rural wages growth Rural wages growth

(YoY change, in %) (YoY change, in %)

Source: CEIC, Ambit Capital research. Note: (1) Data pertains to FY01-FY16; Source: CEIC, Ambit Capital research. Note: (1) Data pertains to FY06-FY16
(2) Wage data for FY16 is available until Feb 2015. because data for the period spanning FY01-FY05 is not available as per the
new series for WPI; (2) Wage data for FY16 is available until Feb 2015.

Furthermore, there exist structural supply-side bottlenecks in India which renders

supply inelastic. As a result, when the demand for food rises there is usually no When the demand for food rises
concomitant supply-side response, which in turn stokes food inflation in the wake of there is no concomitant supply-side
higher subsidy-fed food demand. The best example of this dynamic is the structural response
problem of high pulses inflation in India (see exhibit below).
Exhibit 10: India perpetually suffers from high pulses price inflation

80%
(YoY change)

60%
WPI pulses

40%

20%

0%

-20%
Apr-05
Oct-05
Apr-06
Oct-06
Apr-07
Oct-07
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
Oct-10
Apr-11
Oct-11
Apr-12
Oct-12
Apr-13
Oct-13
Apr-14
Oct-14
Apr-15
Oct-15
Apr-16

WPI pulses (YoY) WPI pulses (long term average)

Source: CEIC, Ambit Capital research

As highlighted in our note dated December 17, 2015 “A tale of two crops” even
though there exists a severe excess demand situation with regards to pulses in India,
the Government support price structure is distorted in favour of cereals (owing to
political economy reasons since cereal farmers are far greater in number than pulses
formers, supporting the former makes political sense). Therefore, whenever subsidy-
support drives up real incomes, demand for pulses rises but farmers have little
incentive to shift away from cereals production, thereby resulting in high pulses price
inflation (see exhibit below).

July 27, 2016 Ambit Capital Pvt. Ltd. Page 6

 Economy

Exhibit 11: A series of factors renders supply of pulses inelastic

Head
Substitution of pulses by
other crops
Shift in pulses cultivation to
less productive drylands
Stagnant and uncertain
yields
Source: Pulses: Need for production expansion, Economic and Political Weekly, August 29, 2015.
Description
The significant fall in pulses cultivation in the 1960s and in the early 1970s was primarily due to the substitution of pulses
cultivation with high yielding varieties (HYV) of cereals, especially wheat, following the introduction of Green Revolution
technologies. Among all the pulses, substitution was more prominent for chana (gram), as indicated by the fall in land area
cultivated at an average rate of -1.46% and -1.34% per annum, respectively, during the 1960s and 1970s.
Pulses cultivation, as it was substituted by cereals, shifted to rain-fed areas due to the lesser quantities of water required for
cultivation. The improvement in area under cultivation during the late 1970s and 1980s was primarily on account of a shift
in pulses cultivation to the drylands of central and southern regions of the country which are less productive.
Yields have remained unstable and volatile as a majority of pulses have been cultivated under rain-fed conditions, and are
affected by uncertain rains. About 85% of pulses cultivation is still rain-fed. The extent of irrigated area under pulses is only
about 15% in 2011–12 compared to more than 90% under wheat, and close to 60% under rice.

Driver#2: The ‘competition, corruption and inflation’ cycle

Election funding in India is an extremely opaque process. This is largely because the Legal campaign finance limits in
legal campaign finance limits in India are extremely tight. The expenditure limit per India are extremely tight.
Lok Sabha seat set by the election commission of India (ECI) is a mere Rs7mn (or
US$104,000). On the other hand, elections in India are extremely competitive with
more than 1500 political parties competing for 543 Lok Sabha seats (see exhibit
below). As a result, politicians’ need for electoral funding is well in excess of the legal
campaign finance limits.
Exhibit 12: The number of political parties has grown at a rapid pace in recent years
Head FY10 FY11 FY12 FY13 FY14
Average number of candidates per Lok
NA NA NA NA 15
Sabha constituency
Number of Recognized National Parties 7 6 6 6 6
Number of Recognized State Parties 61 51 53 54 54
Number of Registered Unrecognized Parties 1094 1150 1307 1392 1643
Total Number of Political Parties 1162 1207 1366 1452 1703
Growth Rate of Parties NA 3.9% 13.2% 6.3% 17.3%
Source: Election commission of India, Ambit Capital research
To complicate matters, the fact that India’s democratic systems are based on a first-
past-the-post system (as opposed to proportionate representation) intensifies the
extent of competition per seat in India.
From a five-year perspective, political parties’ funding needs tend to be more acute in From a five year perspective,
the last two years of a General Election. Furthermore, it is critical to note that a political parties funding needs tend
higher number and more heavy-weight States’ elections are typically due in the last to be more acute in the last two
two years leading up to a General Election. For instance State Elections were held in years of a General Election
16 of 29 Indian States over CY13-14 (see exhibit below) and these states accounted
for 57% of India’s aggregate GSDP (see exhibit below).
Exhibit 13: A higher number of State Elections are due in Exhibit 14: More heavy-weight States’ elections are due in
the last two years before a General Election the last two years before a General Election

20 58% 57%
17 56%
Number of states going

Share in India's GDP for

16 16
15
states up for election

16 14 56%
13 53%
for elections

54% 53%
12
52% 51%
8 50%
50%
4 48%
0 46%
1999-04 2004-09 2009-14 1999-04 2004-09 2009-14

First three years Last two years First three years Last two years

Source: Election Commission of India, Ambit Capital research Source: Election Commission of India, CEIC, Ambit Capital research

July 27, 2016 Ambit Capital Pvt. Ltd. Page 7

 Economy

Politicians meet this acute need for election funding in the last two years before a GE Politicians meet this acute need for
by colluding with businessmen, suppressing competition in that sector and thereby election funding in the last two
allowing the crony capitalists to push through price hikes. years before a GE by colluding
with businessman, suppressing
Since the need for election funding tends to be most profound in the run-up to a
competition
General Election, this cycle comprising of suppression of competition, corruption and
resulting inflation could be responsible for driving inflation in the years leading to a
GE (see exhibit below).
Exhibit 15: How corruption drives inflation in India in the last two years ahead of a
General Election

Source: Ambit Capital research. For more details on how this cycle works, click here for our May 2014 thematic.

The Comptroller Auditor General’s (CAG) October 2010 report on the

Implementation of the Public Private Partnership for the Indira Gandhi International
Airport, Delhi (also called DIAL) illustrates the working of this cycle most succinctly.
“DIAL is a joint venture consortium of the GMR Group (54% stake), Airports Authority of
India (26%), and Fraport AG and Eraman Malaysia (10% each). GMR is the lead Our channel checks suggest that
member of the consortium. In January 2006, the consortium was awarded the the Government will be able to
concession to operate, manage and develop the IGI Airport following a competitive implement GST only by mid-FY18
bidding process. DIAL entered into an Operations, Management and Development
Agreement (OMDA) on 4 April 2006 with the Airports Authority of India (AAI). The
initial term of the concession is for 30 years, extendable for another 30 years. Besides
upgrading the existing terminals, DIAL commissioned a new runway at IGI Airport on
25 September 2008. It also inaugurated the new domestic departure terminal 1D on
26 February 2009. Now we quote from the CAG report on DIAL: “As per the Business
Plan the original project cost approved by DIAL and communicated to AAI to 18
January 2008 was INR 8975 crore [US$1.5bn]. …The final project cost adopted by the
Airports Economic Regulatory Authority (AERA) for arriving at the Regulatory Asset Base
(RAB) was INR 12502.86 crore [US$2.1bn]…i.e. 43.25% higher than the original
project cost… It was noted in the audit that at the time of financial closure in January
2008 levy of Development Fee [DF] was not contemplated. [However] Large part of the
enhanced project cost was subsequently recovered by DIAL from the passengers using
the airport through levy of DF….as per the original estimates the entire funding was to
be through equity, debt, security deposits and internal accruals. However, this was
reduced to 72.68 per cent of the total fund requirements of the actual project cost. This
financial gap was mainly filled by levy of DF…OMDA did not envisage the funding of
project cost through levy of DF from passengers….the inability of the shareholders of
DIAL to bring in additional funds to the project through additional debt from financial
institutions led to levy of DF on passengers.”
Our channel checks suggest that the Government will be able to implement GST only
by mid-FY18. This coupled with the fact that the last two years of an election cycle is
characterized by higher inflation, the NDA Government will have to deal with a
double whammy on the inflation front while going for elections in CY19.

July 27, 2016 Ambit Capital Pvt. Ltd. Page 8

 Economy

Macroeconomic implications
There are two macroeconomic implications of this phenomenon whereby inflation
tends to pick up in the run-up to an election.
Firstly, history also suggests that the INR is prone to heightened volatility in the run-
up to the General Elections (presumably since higher inflation rates are associated History suggests that the Central
with weaker currencies). If this dynamic were to play out in FY18 and FY19, i.e. the Government’s spending on the
last two years in the current General Election cycle, then this coupled with the fact rural economy also tends to rise in
that India’s KAS is diminishing quarter after quarter will put pressure on INR. the run-up to a General election

Secondly, history suggests that the Central Government’s spending on the rural
economy also tends to rise in the run-up to a General election (presumably to offset
the impact of higher inflation amongst the largest electoral constituency in India). If
this dynamic were to play out in FY18 and FY19, then it will provide support to the
rural consumer whilst resulting in compromised public investment growth or fiscal
discipline.
In light of these dynamics it appears unlikely to us that going forward a new RBI
Governor will be able to find space for meaningful interest rate cuts.
Implication#1: Increased volatility in the currency markets
History suggests that volatility in the INR tends to rise by 90bps on an average in the
last two years of an election cycle (see exhibit below).
Exhibit 16: The INR has been more volatile in the last two years of an election cycle

14%
Coefficient of variation for

11%
12%
10% 9.2%
INR/USD

8% 6.8% 6.7%
6% 5% 5.3%
4.6%
4% 3% 2.4%
2.2%
2%
0%
1984-89 1991-96 1999-04 2004-09 2009-14

First three years Last two years

Source: CEIC, Ambit Capital research

If this dynamic were to play out in FY18 and FY19, i.e. the last two years in the India faces a potential US$25bn in
current General Election cycle, it will put further pressure on the INR. This situation is outflows when FCNR deposits
complicated by the fact that: (1) India faces a potential US$25bn in outflows when raised in 2013 mature
FCNR deposits raised in 2013 mature; and (2) India’s Capital Account Surplus (KAS)
has been diminishing quarter after quarter (see exhibit below).

July 27, 2016 Ambit Capital Pvt. Ltd. Page 9

 Economy

Exhibit 17: India’s KAS hit an 10-quarter low in 4QFY16

8%
Capital account surplus/Net

6%
Balance od payments

4%
(as % of GDP)

2%
0%
-2%
-4%
1QFY12
2QFY12
3QFY12
4QFY12
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
Net BoP KAS

Source: CEIC, Ambit Capital research

Implication#2: Government likely to boost allocations to the lowest income

strata in FY18-19
The allocation to the Ministry of Rural Development tends to shoot up during the last The allocation to the Ministry of
two years of a five year election cycle. An analysis of the last three election cycle Rural Development tends to shoot
suggests that barring the last election cycle (where the Government had to rein in its up during the last two years of an
fiscal deficit), the Government stepped-up rural spending in the last two years of an election cycle
election cycle (see exhibit below).
Exhibit 18: Rural spending picked-up during the last two years of GE cycle 1999-04
and GE cycle 2009-14

80% 75.1%
Allocatio Ministry of

50.1%
rural development

40% 19.5%
(YoY change)

13.4%
0.1%
0%
-2.6%
-40%
1999-04

2004-09

2009-14

First three years Last two years

Source: Union budget documents, Ambit Capital research

The first two years of NDA Government saw revenue expenditure as a percentage of The first two years of NDA
GDP decline compared to the UPA years (see exhibit below). However, in its latest Government saw revenue
budget for FY17 the Government has marginally increased revenue spends and this expenditure as a percentage of
trend appears likely to entrench itself further as the Government is likely to work to GDP decline compared to the UPA
restrict the impact of higher inflation on the lower economic strata. years
Exhibit 19: The restrained growth of revex under the NDA-II in FY15 and FY16 is likely
to come under pressure

14%
13.0%
13%
12.4%
(as % of GDP)

13%
Revex

12% 11.7%
11.4% 11.5%
12%
11%
11%
UPA I UPA II FY15 FY16 FY17 (BE)

Source: Union budget documents, Ambit Capital research

July 27, 2016 Ambit Capital Pvt. Ltd. Page 10

 Economy

Institutional Equities Team

Saurabh Mukherjea, CFA CEO, Institutional Equities (022) 30433174 saurabhmukherjea@ambitcapital.com
Research Analysts
Name Industry Sectors Desk-Phone E-mail
Nitin Bhasin - Head of Research E&C / Infra / Cement / Industrials (022) 30433241 nitin.bhasin@ambit.co
Aadesh Mehta, CFA Banking / Financial Services (022) 30433239 aadesh.mehta@ambit.co
Aakash Adukia Oil & Gas / Chemicals / Agri Inputs (022) 30433273 aakash.adukia@ambit.co
Abhishek Ranganathan, CFA Retail (022) 30433085 abhishek.r@ambit.co
Achint Bhagat, CFA Cement / Home Building (022) 30433178 achint.bhagat@ambit.co
Anuj Bansal Mid-caps (022) 30433122 anuj.bansal@ambit.co
Ashvin Shetty, CFA Automobile (022) 30433285 ashvin.shetty@ambit.co
Bhargav Buddhadev Power Utilities / Capital Goods (022) 30433252 bhargav.buddhadev@ambit.co
Deepesh Agarwal, CFA Power Utilities / Capital Goods (022) 30433275 deepesh.agarwal@ambit.co
Dhiraj Mistry, CFA Consumer (022) 30433264 dhiraj.mistry@ambit.co
Gaurav Khandelwal, CFA Automobile (022) 30433132 gaurav.khandelwal@ambit.co
Girisha Saraf Mid-caps / Small-caps (022) 30433211 girisha.saraf@ambit.co
Karan Khanna, CFA Strategy (022) 30433251 karan.khanna@ambit.co
Kushank Poddar Technology (022) 30433203 kushank.poddar@ambit.co
Pankaj Agarwal, CFA Banking / Financial Services (022) 30433206 pankaj.agarwal@ambit.co
Paresh Dave, CFA Healthcare (022) 30433212 paresh.dave@ambit.co
Parita Ashar, CFA Metals & Mining / Aviation (022) 30433223 parita.ashar@ambit.co
Prashant Mittal, CFA Strategy / Derivatives (022) 30433218 prashant.mittal@ambit.co
Rahil Shah Banking / Financial Services (022) 30433217 rahil.shah@ambit.co
Rakshit Ranjan, CFA Consumer (022) 30433201 rakshit.ranjan@ambit.co
Ravi Singh Banking / Financial Services (022) 30433181 ravi.singh@ambit.co
Ritesh Gupta, CFA Oil & Gas / Chemicals / Agri Inputs (022) 30433242 ritesh.gupta@ambit.co
Ritesh Vaidya, CFA Consumer (022) 30433246 ritesh.vaidya@ambit.co
Ritika Mankar Mukherjee, CFA Economy / Strategy (022) 30433175 ritika.mankar@ambit.co
Ritu Modi Automobile (022) 30433292 ritu.modi@ambit.co
Sagar Rastogi Technology (022) 30433291 sagar.rastogi@ambit.co
Sumit Shekhar Economy / Strategy (022) 30433229 sumit.shekhar@ambit.co
Utsav Mehta, CFA E&C / Industrials (022) 30433209 utsav.mehta@ambit.co
Vivekanand Subbaraman, CFA Media (022) 30433261 vivekanands@ambit.co
Sales
Name Regions Desk-Phone E-mail
Sarojini Ramachandran - Head of Sales UK +44 (0) 20 7614 8374 sarojini@panmure.com
Dharmen Shah India / Asia (022) 30433289 dharmen.shah@ambit.co
Dipti Mehta India / USA (022) 30433053 dipti.mehta@ambit.co
Hitakshi Mehra India (022) 30433204 hitakshi.mehra@ambit.co
Krishnan V India / Asia (022) 30433295 krishnan.v@ambit.co
Nityam Shah, CFA USA / Europe (022) 30433259 nityam.shah@ambit.co
Parees Purohit, CFA UK / USA (022) 30433169 parees.purohit@ambit.co
Praveena Pattabiraman India / Asia (022) 30433268 praveena.pattabiraman@ambit.co
Shaleen Silori India (022) 30433256 shaleen.silori@ambit.co
Singapore
Pramod Gubbi, CFA – Director Singapore +65 8606 6476 pramod.gubbi@ambit.co
Shashank Abhisheik Singapore +65 6536 1935 shashank.abhisheik@ambit.co
USA / Canada
Ravilochan Pola - CEO Americas +1(646) 361 3107 ravi.pola@ambit.co
Production
Sajid Merchant Production (022) 30433247 sajid.merchant@ambit.co
Sharoz G Hussain Production (022) 30433183 sharoz.hussain@ambit.co
Jestin George Editor (022) 30433272 jestin.george@ambit.co
Nikhil Pillai Database (022) 30433265 nikhil.pillai@ambit.co

July 27, 2016 Ambit Capital Pvt. Ltd. Page 11

 Economy

Explanation of Investment Rating

Investment Rating Expected return (over 12-month)
BUY >10%
SELL <10%
NO STANCE We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation
UNDER REVIEW We will revisit our recommendation, valuation and estimates on the stock following recent events
NOT RATED We do not have any forward looking estimates, valuation or recommendation for the stock
POSITIVE We have a positive view on the sector and most of stocks under our coverage in the sector are BUYs
NEGATIVE We have a negative view on the sector and most of stocks under our coverage in the sector are SELLs
Disclaimer
This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Ambit Capital. AMBIT Capital Research is disseminated and available primarily electronically,
and, in some cases, in printed form.
Additional information on recommended securities is available on request.
Disclaimer
1. AMBIT Capital Private Limited (“AMBIT Capital”) and its affiliates are a full service, integrated investment banking, investment advisory and brokerage group. AMBIT Capital is a Stock Broker, Portfolio
Manager and Depository Participant registered with Securities and Exchange Board of India Limited (SEBI) and is regulated by SEBI
2. AMBIT Capital makes best endeavours to ensure that the research analyst(s) use current, reliable, comprehensive information and obtain such information from sources which the analyst(s) believes
to be reliable. However, such information has not been independently verified by AMBIT Capital and/or the analyst(s) and no representation or warranty, express or implied, is made as to the
accuracy or completeness of any information obtained from third parties. The information, opinions, views expressed in this Research Report are those of the research analyst as at the date of this
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Disclosures
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about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly dependent on the specific recommendations or views expressed in this
report.
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