67 - GS Asia Economics Analyst

March 28, 2014
Issue No: 14/13

Asia Economics Analyst

Economics Research
India: Adding 110 million jobs

Indias well-known demographic dividend is yet to be reaped. Employment
growth has stagnated in recent years, with the economy adding only 2m
jobs a year.

Manufacturing employment is weak, the scale of production is small, and
93% of the workforce is in the informal sector. Further, migration from rural
agriculture to urban manufacturing is slow, thus reducing productivity
gains.

Indias stringent labor laws are a key factor constraining employment
growth. We list reforms to labor laws that we believe are urgently needed
to increase flexibility and boost employment.

If labor share in manufacturing were to increase from the most stringent
labor law states to more flexible ones like Gujarat, we estimate that 40
million jobs could be added in manufacturing.

We show that government policies on rural employment guarantees and
rural subsidies are reducing the incentives for surplus labor to migrate
from agriculture to manufacturing and services. Reforms to encourage
urbanization, such as reducing the scope of NREGA and subsidies, can help
in our view.

The gains from reforms can be very large. In our bull case, some 110
million jobs can be added over the next 10 years, the largest for any major
economy. Demographics could contribute 3 percentage points to GDP
growth, from 1.7 ppt currently.

As a new government takes charge from mid-2014, we see labor market
reforms as a critical ingredient to accelerate Indias growth rate.

Andrew Tilton
+852-2978-1802 andrew.tilton@gs.com
Goldman Sachs (Asia) L.L.C.

Goohoon Kwon, CFA
+82(2)3788-1775 goohoon.kwon@gs.com
Goldman Sachs (Asia) L.L.C., Seoul Branch

Tushar Poddar
+91(22)6616-9042 tushar.poddar@gs.com
Goldman Sachs India SPL

Li Cui
+852-2978-0784 li.cui@gs.com

Yu Song
+86(10)6627-3111 yu.song@ghsl.cn
Beijing Gao Hua Securities Company Limited

Mark Tan
+65-6889-2472 mark.tan@gs.com
Goldman Sachs (Singapore) Pte

Chiwoong Lee
+82(2)3788-1722 chiwoong.lee@gs.com
Goldman Sachs (Asia) L.L.C., Seoul Branch

MK Tang
+852-2978-6634 mk.tang@gs.com

Jonathan Sequeira
+852-2978-0698 jonathan.sequeira@gs.com

Maggie Wei
+852-2978-0106 maggie.wei@gs.com

Vishal Vaibhaw
+91(22)6616-9376 vishal.vaibhaw@gs.com
Goldman Sachs India SPL

Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification
and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html.
The Goldman Sachs Group, Inc. Global Investment Research
March 28, 2014 Asia Economics Analyst

Goldman Sachs Global Investment Research 2
India: Adding 110 million jobs
Demographics Disturbed
Indias employment growth in recent years has been anemic. The economy added only
about 2 million jobs each year between FY05 to FY12, compared to 12 million a year in the
5 years before this. Moreover, increasing numbers of workers are leaving the workforce
the labor force participation rate has fallen by 3 percentage points over the same period. As
a labor abundant country, India should be generating jobs in labor-intensive manufacturing.
However, the manufacturing sector saw a net decline of 5 million jobs between FY05 and
FY10, at a time when industrial growth was very strong at over 9% during this period. The
industries which are losing jobs are the most labor intensive ones textiles, electronics,
and apparel. Firms are substituting capital for labor.

Exhibit 1: Anemic employment growth in the last decade

Source: NSSO, Goldman Sachs Global Investment Research
In theory, India can get significant labor market gains from its favorable demographics due
to i) increases in labor input from the young; ii) urbanization - moving labor from low
productivity agriculture to high productivity industry and services; and iii) economies of
scale in operation as a firm grows, it can initially have increasing returns to scale
whereby adding more labor and other inputs leads to a more than proportional increase in
output.
Both supply and demand factors are at work. Stringent labor laws are affecting the demand
for labor, while generous rural programs may be reducing the supply. We argue that labor
laws are leading to a smaller scale of operation as well as taking recourse to informality in
employment. We discuss issues arising from these in Section II. The supply of labor from
agriculture to other sectors is being affected by programs such as NREGA (the National
Rural Employment Guarantee Act), which are reducing the push factor. We discuss this in
Section III. In section IV, we discuss the benefit of demographics.
238
259
245
231
47
60
55
65
112
139
160
177
0
100
200
300
400
500
0
100
200
300
400
500
FY00 FY05 FY10 FY12
In Million In Million
People Employed:
Services Industry
Agriculture Total

I. Labor Demand small scale, mostly informal
Indias employment is remarkable for its small scale and informality. To escape stringent
laws (see Box 1), entrepreneurs keep the scale of their operations small.
1
Most workers are
in small enterprises, with the share of workers in enterprises of less than 6 people 65.6%.
Self-employed are half the workforce. Even in the formal sector, Indias average factory
employs only 75 people, compared to 191 in China. They employ largely contractual
workers the labor force in the formal sector is heavily unionized and protected, consisting
of 7% of workers, while 93% of workers are informal. This informality level is the highest in
the emerging world.
According to research by the World Bank, the value added per worker in the informal
sector is less than half of the value added per worker in the formal sector. Further,
employers have no incentive to invest in skills of contractual workers or in providing
insurance. Moving workers from the informal to the formal sector can unleash productivity
growth. In addition, formal workers in the formal sector pay taxes, so revenue collections
can rise.
Exhibit 2: Informal employment is highest in India

Source: Planning Commission, Goldman Sachs Global Investment Research
Complex labor laws incentivize firms to remain small and in the informal sector. This
allows them to remain under the radar of labor officials and escape stringent provisions.

1
The informal sector is defined as enterprises with less than 10 employees, operated on a proprietary or partnership
basis, as defined by the National Commission for Enterprises
30
40
50
60
70
80
90
100
30
40
50
60
70
80
90
100
India Indonesia Philippines Brazil Mexico Thailand
Percent Percent
Informal sector employment

Exhibit 3: and scale of employment is very small

Source: Fourth All India Census of Micro, Small and Medium Enterprises, 2006-07: Registered Sector; Planning Commission,
12th Five Year Plan Draft, Goldman Sachs Global Investment Research
The large number of laws leads to inspection visits by different officials under different
laws, which increases transaction costs and opens up opportunities for rent seeking. There
is also no standardization of documentation required or time periods for which records
have to be kept. The inflexibility of labor laws has prevented large scale employment
growth in manufacturing, in our view.

94.9
69.2
4.9
26.0
0.2
4.8
0
20
40
60
80
100
0
20
40
60
80
100
Number of enterprises Employment
Percent Percent
Micro, small and medium enterprises:
Micro
Small
Medium

Box1: Indias Stifling Labor Laws

India has some 44 labor laws which are enacted by the central government and enforced by both the central as well as
state governments. In addition there are also labor laws enacted and enforced by the various state governments. Some
laws date from the colonial era. The Trade Unions Act is from 1926, the Workmens Compensation Act is from 1923, and
the Factories Act from 1948.
Industrial Disputes Act (1947) The law deals with firing of workers, strikes, and closure of firms, and affects all firms
that employ more than 100 workers. All firms are required to consult with the government and trade unions, and get
both their approvals before firing workers. India is one of the only countries in the emerging world which not only
needs approval of the trade unions and government, but also has to consider alternatives, prior to considering
dismissal. Even those countries with restrictive labor regulations eg. Bangladesh, Philippines, and Malaysia, do not
require consultation and approval from trade unions. It is even for difficult for a firm to exit. We think that this law has
done more to hold back the growth of Indias manufacturing sector than any other policy. It keeps most of the labor
force in the informal sector, primarily in temporary jobs, preventing employers from investing in their training.
Trade Unions Act (1926) The act stipulates that any 7 or more workers can form a trade union and apply for
registration. Further amendments allow the formation of at least ten unions in an establishment with a size of 70
workers. This means multiple trade unions in an establishment, which affects harmony. Bangladesh reformed its labor
laws in 2006, and requires a minimum membership of 30% of workers to form a trade union.
Contract Labor Law (1970) - Although Indian regulations allow contract workers, central and state governments can
prohibit contract workers in any industry or even a single establishment. In addition, inspection and administrative
hurdles make the enterprises take the course of informal employment. The central and state governments can also ban
the fresh recruitment of permanent workers where contract workers are engaged. Further, the prevalence of contract
labor prevents the firm from investing in the worker, in terms of their training, and in providing social security.
The Factories Act (1948) The act has antiquated provisions e.g., it says the state government may prescribe the
number of latrines and urinals to be provided in any factory. Some rules say the factories must be whitewashed, and
earthen pots filled with water are required. These rules can lead to conflicts between the entrepreneur and officials.
For disputes, the process of conciliation happens at 4 different levels prior to arbitration. In Indonesia and the US, there
is only one level of mediation, which helps in reducing the time to resolve disputes.


Box 2: Liberating Labor Five Reforms

1. Simplify Labor Laws
There are 44 central laws alone, and numerous state laws in addition, some dating from the colonial era. The laws could
be simplified and brought under a few common headings to make it easier to comply with them. A new comprehensive
but simple labor code is overdue.
2. More flexibility to hire and fire
The Industrial Disputes Act should be amended to make it easier to hire and fire workers. This would allow firms to
grow during an upturn and downsize during a downturn. The act also should be amended to allow easier closure of
unprofitable firms to allow for capital and labor to be reallocated. We show the example of how Gujarat has done this
below.
3. Self-certification by the employers
This would reduce the number of inspector visits and the high costs of compliance that entrepreneurs face. States like
Gujarat, Maharashtra, and Rajasthan have already introduced this. Where possible, all certifications and inspections
should be done online.
4. Amend Trade Unions Act
The Trade Unions Act should be amended to reduce multiplicity of trade unions, and amend the definition so that no
trade union can stop work completely. We also see a need to reduce the scope for members and leadership from
outside the Union. At present 50% of the office bearers can come from outside the Union. The Unions have immunity
from criminal and civil liability, which we believe needs to change.
5. Faster Dispute Settlement
Labor disputes need to be resolved faster. Arbitration can be the quickest way to resolve labor disputes. An effective
way would be to resolve disputes online. An individual could go online to resolve labor disputes, without the need to
approach an arbitrator or judicial forum. The Philippines and Malaysia have started using online dispute resolution
successfully.

Gujarat versus West Bengal
The Gujarat government amended the Industrial Disputes Act in 2004 to allow for greater flexibility in the labor market
for Special Economic Zones (SEZ). It allowed for firms within the SEZ to lay off workers, without seeking the permission
of the government, by simply giving a 1 month notice to the worker. To allow for firm exit, the law was amended such
that the employer can close an undertaking by giving 2 months notice to the government. Contrast this with the normal
legal requirement of getting permission from the government, with the latter giving an opportunity for the employees to
be heard on the issue. The Gujarat Act 12 changed the definition of industrial dispute to exclude the termination of
service of an employee in an SEZ, thereby significantly reducing the scope for litigation.
The West Bengal government, in contrast, made several pro-worker changes. The IDA was amended to be applicable to
more firms those employing above 50 workers. It changed the laws to make it virtually impossible to shut down a
loss-making factory. The employer with the application for closure must contain the particulars of the quantum, mode,
manner and time of payment of compensation to the workmen. The owner is also required to furnish a guarantee to
discharge liability for payment of compensation to the workmen. Most factory owners thus prefer to keep their loss-
making units barely alive, but strip its assets. This prevents the churn of capital and labor, which is at the heart of
modern enterprise.
Gujarat has experienced a 60% growth in manufacturing employment between 2000-12, while West Bengal has seen
only a 22% increase.


Pro-Worker versus Pro-Employer
There is a lot of evidence suggesting that states which implemented pro-worker
amendments to the Industrial Disputes Act faced a decline in output, employment, and
productivity, while those which introduced pro-employer amendments saw an increase in
employment and output
2
. Estimates using plant-level data suggest that firms in labor
intensive industries with flexible labor laws have 14% higher TFP than in states with more
stringent labor laws
3
.
As Exhibit 4 shows, states which are classified as having more liberal labor laws have
generated more manufacturing sector employment. We estimate that if states were to
increase their share of labor in manufacturing to the level of Gujarat currently, some 40
million jobs could be added in manufacturing over the next decade.
There is a trade-off between employment protection and unemployment benefits.
Employment protection helps those who already have a job, creating a labor aristocracy.
To reduce employment protection, generous severance payments and notice periods can
be chosen. To develop a constituency for reform, we believe it is better to provide for
increased severance payments and notice periods as employment protection is reduced.
The Voluntary Retirement Schemes (VRS) which allow for such payments have worked
well in India. A younger population tends to prefer a more flexible labor market regime
where it is relatively easier to find a job, but likewise easier to lose a job.
Exhibit 4: States with more liberal labor laws generated greater employment

Note: States classification on labor laws is based on Economic Freedom of the states of India, 2012. Source: NSSO,
Economic Freedom of States of India, 2012, Goldman Sachs Global Investment Research
2
Can Labor Regulation Hinder Economic Performance? Evidence From India; Besley and
Burgess, 2004
3
Employment Protection Legislation and Plant- level Productivity in India; Dougherty, 2011

0
100
200
300
400
0
100
200
300
400
Gujarat Tamil Nadu Haryana Rajasthan Himachal
Pradesh
Chattisgarh Bihar Jharkhand
Employment per
thousand
(Average FY05-FY12)
Employment per
thousand
(Average FY05-FY12)
Manufacturing sector employment in urban area:
Liberal Labor Laws Stringent Labor Laws

II. Labor Supply not increasing
The movement of excess workers from low productivity agriculture to higher productivity
sectors is critical to increase the supply of labor and for economic growth. In India, the shift
from rural agriculture to urban manufacturing and services is taking place at a slow pace.
The urbanization rate in India was higher than that of China in 1980 at about 20%. Since
then, Chinas urbanization rate has accelerated to over 50%, while India has only moved to
just above 30%. The pace of movement from rural to urban usually accelerates with
economic growth as opportunities increase in other sectors. Therefore, agricultural
employment typically falls quite rapidly during this process. While this trend is also visible
in India, the pace of migration has been slower compared to its East Asian neighbors.

Exhibit 5: Agricultural employment falls with economic growth

Note: t=0 means 1980 for India, China and Thailand and 1969 for Korea. Source: ILO, WDI, Goldman Sachs Global
Investment Research
Low Labor Productivity
Indias labor productivity is one of the lowest in Asia. A key reason is that a large number
of workers are still in low productivity agriculture. We find that labor is 4 times more
productive in industry and 6 times more productive in services compared to agriculture
(Exhibit 7). We measured the impact on GDP of urbanization by looking at productivity
differences between agriculture and the manufacturing and services sector (see Appendix
A for details). We find that in recent years the increase in GDP due to the shift from rural to
urban areas has not increased significantly. The increase in GDP from migration of workers
from agriculture to other sectors was 0.87 ppt of GDP, according to our estimates, between
FY05 and FY12. This was not significantly higher than the contribution of migration
between FY00 and FY05 of 0.73 ppt of GDP. Moreover, the contribution of moving from
agriculture to industry has actually fallen over this period. Compare this with China, where
we estimate urbanization is contributing 2-3 percentage points to GDP growth.
0
10
20
30
40
50
60
70
0
10
20
30
40
50
60
70
t=0 t=2 t=4 t=6 t=8 t=10 t=12 t=14 t=16 t=18 t=20 t=22 t=24 t=26 t=28 t=30
Percent Percent
Agriculture sector employment:
India
China
Thailand
Korea
From years of high agriculture employment

Exhibit 6: Labor productivity is very low in India

Source: Conference Board, Goldman Sachs Global Investment Research

Exhibit 7: Labor is much more productive in industry and services compared to agriculture

Source: NSSO, CEIC, Goldman Sachs Global Investment Research

- 10 20 30 40 50 60 70 80 90 100
India
Philippines
Indonesia
Thailand
China
Malaysia
South Korea
Japan
Taiwan
Hong Kong
Singapore
Thousands US$, in 2013 on PPP basis
Labor Productivity
0
1
2
3
4
5
6
7
0
1
2
3
4
5
6
7
Agriculture Industry Services
Output per labor Output per labor
Labor productivity (Average FY00-FY12)*:
*Industry and services productivity is expressed as a proportion of productivity in agriculture.


III. The Impact of NREGA Tight Labor Markets, Higher Inflation
In our view, government policies to boost rural incomes may have contributed to limiting
urbanization. Rural wages have been growing by 17% on average since FY07 and have
outstripped urban wages. A number of government programs have supported this,
including the NREGA which provides 100 days of employment to a member of each rural
family.
We found evidence to suggest that NREGA has contributed to rural wage growth. To
investigate this, we looked at states which have had the largest share of households
enrolled under NREGA, and compared them to states which have the least. We also looked
at the same state before and after the program. The share of households enrolled in
NREGA was a significant explanatory factor for wage growth. We did the same exercise
for CPI inflation in the states. We found evidence to support the hypothesis that inflation
has been higher in states where NREGA has been implemented to a greater degree.
Not only are agricultural workers not moving to urban areas, the increase in wages,
without an increase in productivity, is fueling inflation. Earlier (see EMMD-India: Targeting
rural wages, February 25, 2014) we showed that rural wages have been driving CPI inflation
rather than the other way around, a finding which has also been corroborated by the RBI
4
.
NREGA has led to workers moving from agriculture to rural construction. The number of
workers in rural construction has jumped from 17 million to 37 million between FY05 and
FY12. This suggests that there is little surplus labor coming out of agriculture which could
drive down wages and inflation. Therefore, there may not be as much slack in the labor
market as output gap measures would suggest.

Policies to encourage Urbanization
We think that government policies should incentivize urbanization. To do this would
require a reduction in rural subsidies, which are fueling inflation without increasing labor
productivity. We think that the scope of NREGA could be reduced to make it applicable only
to women. A possible reform to NREGA could be to have the program focus on women,
and their skill development. This would increase female labor force participation, reduce
the scope for wage inflation, and would not hinder the movement of labor from agriculture
to manufacturing. Further, policies to increase efficiency of land markets, by improving
land records, easier conversion of land use, and land acquisition for industry, could help
incentivize urbanization.

4
Fighting Inflation, Speech by Dr. Raghuram Rajan, February 26, 2014


IV. The Benefits of Demographics
Indias demographics remain extremely favorable. The UN estimates that over the next
decade, another 117 million people will enter working age (15-64). Given current trends in
work force participation rates, the economy will add only 73 million workers, which could
contribute 0.8 percentage points annually to GDP growth. In addition, if current trends in
urbanization continue, it could add another 0.9 percentage points to GDP growth annually.
However, if India were to undertake significant reforms in the labor market, the benefits
could be quite large. In a bull scenario, we project that India could add some 110 million
workers over the next decade. At this level, the number of jobs that India could create
would be larger than that of the US, China, Russia, and Brazil combined. This can add 1.2
percentage points annually to GDP growth. The gains from more accelerated urbanization
could be even greater, adding some 1.8 percentage points to GDP growth. Therefore, labor
supply and demand reforms could increase the annual contribution of demographics to
GDP to 3 percentage points from 1.7 percentage points currently.
Exhibit 8: India could provide the largest increase to global labour force

Source: UN, ILO, WDI, Goldman Sachs Global Investment Research
-20
0
20
40
60
80
100
120
-20.0
0.0
20.0
40.0
60.0
80.0
100.0
120.0
India Brazil US China Korea Japan Russia
Million
Million
Addition to labor force , 2014-23:
GS Projections (High Case)
ILO Projections

Exhibit 9: Demographics could contribute 3 ppt to Indias GDP growth

Source: Goldman Sachs Global Investment Research
The stakes for reforms could not be higher, and a new government provides an excellent
opportunity. We believe a new government could focus on labor market reforms and
boosting urbanization through policies that we have discussed above. Some state
governments have shown the way by easing restrictions. Shrinking inter-state differences
can allow a virtuous cycle of reforms. A young workforce requires urgent reforms to
increase its participation and to move to higher productivity areas.

Tushar Poddar and Vishal Vaibhaw

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0%
Base Case
High Case
Demographics contribution to GDP over next decade*:
Urbanization
Labor Force
*Base case implies 73 million of labor force addition between 2014-2023 and 25 million of inter sectoral relocation from agri to
industry and services. High case implies 108 million labor force addition and 54 million of intersectoral relocation.

Appendix A1: Estimating the contribution of migration of labor to
GDP growth
We used a simple framework developed in our Global Economics Paper No. 152 to
estimate the impact of labor mobility on growth rates. We broke down GDP growth into
three components: 1) the contribution from sectoral increases in labor productivity,
suitably weighted by the sectors share in GDP; 2) the contribution from growth in the labor
force in the sector, in the absence of labor mobility, again weighted by the sectors share in
GDP; and 3) the impact on GDP growth from inter-sectoral labor mobility, in the presence
of differences in sectoral labor productivity levels.

These are summarized in the equation below:

(1)

where:
superscript A stands for agriculture, I stands for industry, S stands for services.
g: GDP growth
s: share of a sector in GDP
n: natural rate of growth of labor force in the sector
l: share of a sector in total employment
: level of labor productivity
: growth rate of labor productivity
m: the net movement of labor between sectors (e.g., m
AS
stands for labor movement from
agricultural to industry).

The contribution of inter-sectoral labor mobility on overall GDP growth is represented by:

(2)
Appendix A2: Estimating the impact of NREGA
To see the impact of NREGA, we used cross-sectional variation among states in the
implementation of the program, and variation across time, as the program started in FY07.
By exploiting these two differences, we construct a difference in difference estimator.
We performed a pooled least squares regression with state-level fixed effects. We tested
for the impact of NREGA on rural and urban construction workers, rural wages and CPI. A
) ( ) ( ) (
) 1 (
) 1 (
IS
I S
I AS
A S
A AI
A I
A
S I A I I A A
S I A I I A A
m l m l m l
n S S n s n S
S S s S g
) ( ) ( ) (
IS
I S
I AS
A S
A AI
A I
A
m l m l m l

NREGA dummy takes a value of 1 from FY07 onwards for the states which have a larger
share of households covered under NREGA employment, with other states assigned a
value of 0. Income per capita is used as independent variable. Our analysis covers 15 major
states for the time period FY00-FY12. There are 8 states which we classify as NREGA and 7
which are not. We used people employed in construction activity per thousand in rural and
urban area from the NSSO. For rural wage, we used wage data for casual workers other
than public work from the NSSO. We used CPI: agricultural labourers from the Labour
Bureau for rural inflation.
As shown in the table below, we find that:
The proportion of rural construction workers in NREGA states is higher, as
suggested by the NREGA dummy which is significant at a 10% level.
The impact of NREGA on urban construction workers is insignificant.
The NREGA dummy with rural wages as the dependent variable is significant at a
1% level, suggesting a higher rural wage growth in the NREGA states.
CPI inflation has been higher for the states with a larger share of households
covered under the NREGA as suggested by a significant NREGA dummy at a 1%
level.
Exhibit A1: Results of difference-in difference estimator

Source: NSSO, CSO, Labour Bureau, Goldman Sachs Global Investment Research

Rural
Construction
Workers
Urban
Construction
Workers Rural Wage CPI
Estimation method
State fixed
effects
State fixed
effects
State fixed
effects
State fixed
effects
Income per capita
0.83
(24.1)*
0.21
(7.9)*
0.96
(53.0)*
7.86
(10.3)*
NREGA dummy
0.07
(1.8)***
0.05
(1.4)
0.06
(3.2)*
2.40
(3.1)*
Sample period FY00-FY12 FY00-FY12 FY00-FY12 FY00-FY12
Observations 195 195 180 180
R- squared 0.95 0.80 0.98 0.61
*/**/*** denotes significant at 1%/5%/10% respectively.
NREGA dummy = 1 assigned after FY2007 onwards to those states which have larger proportion of
households covered under NREGA employment. These are Tamil Nadu, Rajasthan, West Bengal,
Andhra Pradesh, Madhya Pradesh, Kerala, Assam and Odisha.
Note: Dependent and independent variables in natural logarithms.
t-statistic in parenthesis: >2.58/1.96/1.64: significant at 1%/5%/10% level.
Wage for casual workers, Other than public work (INR) is used to see the impact of NREGA wages in
rural area wage rate.

Weekly recap: Moderate recovery amid lower inflation
Data released during March 21-27 suggest that activities in the region recovered
moderately in February and part of March while inflation decelerated further in February.
Exports in Korea and Thailand gained moderately while imports were weak. Chinese Flash
PMI for March was down, weaker than expected.
Moderate recovery in Korea, Thailand and Taiwan
Koreas headline exports rose 8% yoy for the first 20 days of March from 4% yoy for the
first 20 days of February. Per-day exports were flat year-on-year but the sequential
momentum rebounded to a positive 6.5% mom after falling 8.9% mom in January. Daily
imports for the first 20 days were down 6% yoy in March, possibly on low commodity
prices.
In Thailand, exports gained more than expected, growing 2.4% yoy in February compared
to -2.0% yoy in January and Bloomberg consensus of 0.2% yoy. Imports fell 16.6% yoy in
February, well below the consensus.
Industrial production in Taiwan increased 1.2% mom in February after adjusting for
seasonal and Chinese New Year effects, mainly on gains in manufacturing. Production in
the construction and utilities sectors also improved over the previous month. On a year-
over-year basis, manufacturing production expanded 7.6% yoy, up from -1.9% yoy in
January. Our current activity indicator for Taiwan moderated slightly to 5.0% qoq ann from
5.3% qoq ann in January, mainly driven by weak export orders and retail trade in February.
Weak outlook in China
The HSBC PMI flash reading for March suggests continued weakness in growth in China.
The key sub-components, new orders and production, show a similar pattern to that of the
headline numbers. Given that the flash PMI tends to be a lagging indicator (like in 2013 and
2010), a caution is needed for the interpretation. The release of final readings on April 1
would be important since the difference between flash and final readings is often more
informative for current-month activity.
Inflation decelerated further in Singapore
Inflation in Singapore decelerated further in February, to 0.4% yoy, the lowest reading
since December 2009. A 7.1% yoy drop in the "transport" category was the main reason for
the decline while food and accommodation costs also moderated. The Monetary Authority
of Singapore's core inflation measure--which excludes accommodation and private road
transport costs--moderated to 1.6% yoy (0.1% mom seasonally adjusted) from 2.2% last
month. We however still expect the MAS to keep the current SGD appreciation stance
unchanged at the upcoming semi-annual meeting in April, mainly on concerns about a
tight labor market.

Goohoon Kwon


Asia ex-Japan Economics Calendar
Korea industrial production (Mar 28): We expect industrial production to weaken moderately, down by 0.1% mom,
given sequential weakening in Korean exports in February.
Korea CPI (Apr 1): We expect inflation to pick up in March to 1.5% yoy on the erosion of the base effect, compared with
consensus of 1.4% yoy. Our annual inflation forecast of 1.8% yoy, much below the central bank forecast of 2.3% yoy,
reflects the pick-up in inflation since March.
Korea Exports (Apr 1): We expect exports to rise 4.0% yoy and gain moderately sequentially, slightly below the
consensus of 4.3% yoy.
China NBS PMI (Apr 1): We expect the official PMI to inch up to 50.4. The HSBC PMI flash reading was down but it has
not been a reliable indicator of the latest momentum. In July of 2013 and 2010 the HSBC PMI continued to soften despite
obvious signs of a rebound shown by other indicators. We believe underlying growth momentum remains relatively
weak though not necessarily as weak as January February. Furthermore, the official PMI tends to be strong seasonally in
March, unlike the HSBC PMI. In the past the official PMI has always rebounded in March and we believe it is likely to be
the case this year, though the magnitude of the rebound may be smaller than usual.
India central bank policy meeting (Apr 1): We expect the RBI to remain on hold in the April policy meeting. As the
RBI mentioned in the last policy meeting, ... if the disinflationary process evolves according to (the) baseline projection,
further policy tightening in the near term is not anticipated at this juncture. CPI inflation has come down from 8.8% in
Jan to 8.1% in Feb, below the RBI's baseline projections.

Source: Bloomberg, Goldman Sachs Global Investment Research.
Date Country Indicator/Event Period GS Bloomberg Previous
Time (HKT) Forecast Consensus
Fri Mar 28
7:00 Korea Industrial Production Feb -0.1%mom -0.3%mom +0.1%mom
15:30 Thailand Foreign Reserves 14-Mar US$168.6bn
Mon Mar 31
7:00 Korea Current Account Balance Feb US$3.6bn
15:30 Thailand Current Account Balance Feb US$219.1mn
16:30 Hong Kong Retail Sales Feb +14.5% yoy
Tue Apr 1
7:00 Korea CPI Mar +1.5% yoy +1.4% yoy +1% yoy
8:00 Korea Exports Mar +4.0% yoy +4.3% yoy +1.6% yoy
8:00 Korea Imports Mar +3.5% yoy +4.0% yoy
8:00 Korea Trade balance Mar US$3.8bn US$0.9bn
9:00 China NBS manufacturing PMI Mar 50.4 50.1 50.2
9:45 China HSBC manufacturing PMI Mar 48.1 48.1
12:00 Indonesia CPI Mar +7.5% yoy +7.8% yoy
12:00 Indonesia Exports Feb -5.8% yoy
12:00 Indonesia Imports Feb -3.5% yoy
12:00 Indonesia Trade Balance Feb -US$430.6mn
13:30 India Central bank policy meeting 8.0% 8.0% 8.0%
# Thailand CPI Mar +2.2% yoy +2.0% yoy
* Korea Foreign Reserves Mar US$351.8bn
Thu Apr 3
9:00 Taiwan Foreign Reserves Mar US$418.0bn
* Indonesia Foreign Reserves Mar US$102.7bn
Fri Apr 4
9:00 Philippines CPI Mar +4.2% yoy +4.1% yoy
12:00 Malaysia Exports Feb +15.0% yoy +12.3% yoy
12:00 Malaysia Imports Feb +15.0% yoy +7.3% yoy
12:00 Malaysia Trade balance Feb RM9.4bn RM6.4bn
15:30 Thailand Foreign Reserves 21-Mar
# Release time uncertain, time shown (if any) is the approximate typical release time.
* Release date uncertain, date shown is the first possible day of release:
Korea foreign reserves (Apr 1-5)

Forecast Tables

Real GDP Growth (year-over-year)
GS Consensus GS Consensus
Asia ex-Japan 6.3 6.2 6.2 6.7 -
China 7.7 7.3 7.4 7.6 7.3
India 4.6** 5.5** 5.4** 6.5** -
South Korea 2.8 3.7 3.5 3.8 3.7
Hong Kong 3.2 3.7 3.5 4.4 3.6
Taiwan 2.4 3.8 3.3 3.9 3.7
ASEAN 5.0 4.7 4.8 5.5 5.2
Singapore 4.1 3.7 3.8 4.2 4.0
Malaysia 4.7 4.5 5.1 5.2 5.0
Thailand 2.9 3.0 2.8 4.7 4.4
Indonesia 5.8 5.5 5.4 6.0 5.8
Philippines 7.2 6.3 6.5 6.5 6.2
USA 1.9 2.8 2.8 3.2 3.1
Euro area -0.4 1.2 1.1 1.5 1.4
Japan 1.5 1.0 1.4 1.3 1.3
*GS estimates for annualized growth rate of potential output from 2013-16
**Fiscal year basis, 2013 is India FY14 (Q2 2013-Q1 2014).
Source: Consensus Economics, Goldman Sachs Global Investment Research.
0.8
3.7
4.5
4.0
5.0
6.0
6.0
2.3
1.1
7.7
6.0
3.8
4.0
2013
2014 2015 Potential
Growth*
Consumer Prices (year-over-year)
GS Consensus GS Consensus
Asia ex-Japan 4.1 3.9 4.1 4.0 -
China 2.6 2.6 2.9 3.0 3.2
India 9.6* 8.3* 8.3* 7.5* -
South Korea 1.3 1.8 2.1 2.4 2.6
Hong Kong 4.0 3.3 3.9 3.3 3.6
Taiwan 0.8 1.4 1.3 1.8 1.8
ASEAN 4.0 4.6 4.3 4.0 4.0
Singapore 2.4 3.3 2.7 3.5 2.8
Malaysia 2.1 3.0 3.2 2.6 3.5
Thailand 2.2 2.6 2.4 2.9 2.8
Indonesia 6.4 6.8 6.3 5.5 5.3
Philippines 2.9 3.8 4.2 3.5 3.9
USA 1.5 1.6 1.7 1.9 2.0
Euro area 1.4 0.9 0.9 1.5 1.3
Japan 0.4 2.6 2.6 1.7 1.7
**Core inflation target
***ECB aims to maintain inflation rates "below, but close to, 2% over the medium term"
Source: Consensus Economics, Goldman Sachs Global Investment Research.
-
-
0.5-3.0 **
3.5-5.5
*Fiscal year basis, 2013 is India FY14 (Q2 2013-Q1 2014); 8.0% as the inflation target by March 2015 recommended by the
Monetary Policy Framework Committee
2013
2014
2.0
2.5-3.5
-
3.0-5.0
2.0
2.0***
2015 Inflation
Target/Range
3.5
8.0*
-

Forecast Tables (continued)

Policy Interest Rates (percent)
Current
Mar 27 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
Asia ex-Japan
China 3.89 4.00 4.00 4.25 4.25 4.50 4.50 4.50 4.50
India 8.00 8.00 8.00 8.25 8.50 8.50 8.50 8.25 8.00
South Korea 2.50 2.50 2.25 2.25 2.25 2.50 2.75 2.75 3.00
Hong Kong - - - - - - - - -
Taiwan 1.9 1.9 1.9 2.0 2.0 2.0 2.1 2.3 2.3
ASEAN
Singapore - - - - - - - - -
Malaysia 3.00 3.00 3.00 3.25 3.50 3.50 3.50 3.50 3.50
Thailand 2.00 2.00 2.00 2.00 2.00 2.50 2.75 2.75 2.75
Indonesia 7.50 7.50 7.50 7.50 7.50 7.25 6.75 6.75 6.75
Philippines 3.50 3.50 3.75 4.00 4.00 4.00 4.00 4.00 4.00
USA 0.06 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.13
Euro area 0.25 0.25 0.10 0.10 0.10 0.10 0.10 0.50 0.50
Japan 0.07 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10
Policy interest rates: China: 7-day repo, India: repo rate; Korea: 7-day repo; Malaysia: overnight policy rate;
Thailand: 1-day repo, Philippines: repo rate, Indonesia: 1-month SBI rate, Taiwan: rediscount rate; USA: Fed funds effective rate;
Euro Area: Main refinancing operations: fixed rate; Japan: Overnight call rate.
Source: Goldman Sachs Global Investment Research.
2014F 2015F
Exchange Rates (local currency units per USD)
Current 3-Month Horizon 6-Month Horizon 12-Month Horizon
Mar 27 Forward Forecast Forward Forecast Forward Forecast
Asia ex-Japan
China 6.14 6.17 6.16 6.19 6.15 6.21 6.05
India 60.65 61.77 58.50 62.95 61.00 65.19 63.00
South Korea 1077 1082 1080 1086 1080 1093 1100
Hong Kong 7.8 7.8 7.8 7.8 7.8 7.8 7.8
Taiwan 30.6 30.5 29.8 30.4 29.5 30.3 29.0
ASEAN
Singapore 1.27 1.27 1.20 1.27 1.18 1.27 1.15
Malaysia 3.30 3.32 3.18 3.34 3.17 3.37 3.15
Thailand 32.5 32.6 34.0 32.8 34.0 33.1 33.5
Indonesia 11369 11535 11400 11730 11300 12140 11200
Philippines 45.1 45.3 42.3 45.4 41.2 45.6 40.0
Euro area* 1.38 1.38 1.38 1.38 1.40 1.38 1.40
Japan 102.2 102.2 103.0 102.1 107.0 101.9 110.0
* USD per Euro
Source: Goldman Sachs Global Investment Research.

Highlights of Recent Goldman Sachs Global Macro Research

Asia ex Japan
Policy proactivity lies behind the resilience of the INR and IDR Feb 19, 2014
Export-led growth in Asia: Better short-term, challenged long-term Feb 7, 2014
Questions for the 2014 Asia-Pacific economics outlook Jan 3, 2014
Diverging fortunesthe emerging Asia outlook for 2014 Nov 21, 2013
Asian current accounts could adjust faster than you might think Oct 31, 2013
Tooling up to analyze the Asian economies Oct 24, 2013
How emerging Asia reacts to higher US yields Sep 13, 2013
A deep dive into regional financial flows: Possible impact of US Fed tapering Sep 6, 2013
Cyclicality of Asian financial marketsseen from our Global Leading Indicator Jun 3, 2013
A redesigned MAP of emerging Asia data May 10, 2013
Greater China
China: CNY: regime shift or a temporary bout of volatility Mar 24, 2014
China: Revising growth forecasts for China Mar 20, 2014
China: How fast are Chinese exports really growing? Mar 17, 2014
China: The implications of CNY band widening Mar 16, 2014
China: Gauging stress during financial deregulation Feb 18, 2014
A look at CNH flows via Hong Kong banks positions data Feb 5, 2014
China: Cleaner and (probably) slower growth Feb 3, 2014
A matter of trust: Q&A on a potential Chinese trust default Jan 21, 2014
Tracking reforms in China: The balancing act of a credit slowdown Jan 13, 2014
China: Gaining fewer poundsimproving exports allow for slower leverage growth Jan 10, 2014
China: RMB internationalization to power ahead Dec 11, 2013
China outlook for 2014 and beyond: Steady drive on a bumpier road Dec 6, 2013
Transmission of interbank interest rates in China: Limited on bank loan rates Nov 25, 2013
Korea
Korea: Low inflation recovery bodes well for a rate cut Jan 24, 2014
Korea: Changes in our viewrate cut possibly this Thursday Jan 6, 2014
Korea: Less FX appreciation, more equity strength and a steeper curve Nov 15, 2013
Korea: Near-term outlook for the balance of payments and the KRW Oct 24, 2013
Korea: Growth upgrade on improving global demand and investment pickups Oct 4, 2013
Koreas current accountheaded for a 14-year-high surplus of 5% of GDP this year Sep 4, 2013
India
India: No 'banking' on growth Feb 14, 2014
Indiaa step forward for the RBIs policy framework Jan 27, 2014
India 2014 outlook: Focus on inflation, investment, and elections Nov 28, 2013
India: What are the different measures of inflation saying? Nov 7, 2013
A primer on Indias 2014 elections Oct 18, 2013
Indiawhat are the policy options? Aug 26, 2013
ASEAN
Indonesias rebalancing progressing at a faster pace Feb 12, 2014
Thailands political turmoil and its economic consequences Jan 16, 2014
Modeling the probability of Bank Indonesias next hike Dec 9, 2013
Indonesia: The path to sustainability is still fraught with risks Oct 4, 2013
ASEAN markets roiledwhere do we go from here? Aug 22, 2013
ASEANs half a trillion dollar infrastructure opportunity May 30, 2013
Japan (this section is provided by our Japan Economics team based in Tokyo)
Japan: Pulse check on pre-tax-hike surge in demand Feb 14, 2014
Japan: Watch for the large gap between Shunto wage hikes and macro basic wage growth Jan 24, 2014
Japan: 2014 critical for Abenomics: Watch wages, exports, Cabinet approval ratings Jan 10, 2014
Income outflows from Japan due to worsening terms of trade, a cause of sluggish wages Dec 6, 2013
FY2014 Japanese economy: Nominal wages and foreign demand are key Nov 21, 2013
'Visit Japan' project has strong potential but unlikely to be a decisive growth engine Nov 13, 2013

Disclosure Appendix
Reg AC
I, Goohoon Kwon, CFA, 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.

We, Andrew Tilton, Tushar Poddar, Li Cui, Yu Song, Mark Tan, Chiwoong Lee, MK Tang, Jonathan Sequeira, Maggie Wei and Vishal Vaibhaw, hereby
certify that all of the views expressed in this report accurately reflect our personal views, which have not been influenced by considerations of the
firm's business or client relationships.
Disclosures
Global product; distributing entities
The Global Investment Research Division of Goldman Sachs produces and distributes research products for clients of Goldman Sachs on a global
basis. Analysts based in Goldman Sachs offices around the world produce equity research on industries and companies, and research on
macroeconomics, currencies, commodities and portfolio strategy. This research is disseminated in Australia by Goldman Sachs Australia Pty Ltd
(ABN 21 006 797 897); in Brazil by Goldman Sachs do Brasil Corretora de Ttulos e Valores Mobilirios S.A.; in Canada by either Goldman Sachs
Canada Inc. or Goldman, Sachs & Co.; in Hong Kong by Goldman Sachs (Asia) L.L.C.; in India by Goldman Sachs (India) Securities Private Ltd.; in
Japan by Goldman Sachs Japan Co., Ltd.; in the Republic of Korea by Goldman Sachs (Asia) L.L.C., Seoul Branch; in New Zealand by Goldman Sachs
New Zealand Limited; in Russia by OOO Goldman Sachs; in Singapore by Goldman Sachs (Singapore) Pte. (Company Number: 198602165W); and in
the United States of America by Goldman, Sachs & Co. Goldman Sachs International has approved this research in connection with its distribution in
the United Kingdom and European Union.
European Union: Goldman Sachs International authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority
and the Prudential Regulation Authority, has approved this research in connection with its distribution in the European Union and United Kingdom;
Goldman Sachs AG and Goldman Sachs International Zweigniederlassung Frankfurt, regulated by the Bundesanstalt fr
Finanzdienstleistungsaufsicht, may also distribute research in Germany.
General disclosures
This research is for our clients only. Other than disclosures relating to Goldman Sachs, this research is based on current public information that we
consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. We seek to update our research as
appropriate, but various regulations may prevent us from doing so. Other than certain industry reports published on a periodic basis, the large
majority of reports are published at irregular intervals as appropriate in the analyst's judgment.
Goldman Sachs conducts a global full-service, integrated investment banking, investment management, and brokerage business. We have
investment banking and other business relationships with a substantial percentage of the companies covered by our Global Investment Research
Division. Goldman, Sachs & Co., the United States broker dealer, is a member of SIPC (http://www.sipc.org).
Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and our
proprietary trading desks that reflect opinions that are contrary to the opinions expressed in this research. Our asset management area, our
proprietary trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views
expressed in this research.
The analysts named in this report may have from time to time discussed with our clients, including Goldman Sachs salespersons and traders, or may
discuss in this report, trading strategies that reference catalysts or events that may have a near-term impact on the market price of the equity
securities discussed in this report, which impact may be directionally counter to the analyst's published price target expectations for such stocks. Any
such trading strategies are distinct from and do not affect the analyst's fundamental equity rating for such stocks, which rating reflects a stock's
return potential relative to its coverage group as described herein.
We and our affiliates, officers, directors, and employees, excluding equity and credit analysts, will from time to time have long or short positions in,
act as principal in, and buy or sell, the securities or derivatives, if any, referred to in this research.
This research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be
illegal. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of
individual clients. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, if
appropriate, seek professional advice, including tax advice. The price and value of investments referred to in this research and the income from them
may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur.
Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments.
Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors.
Investors should review current options disclosure documents which are available from Goldman Sachs sales representatives or at
http://www.theocc.com/about/publications/character-risks.jsp. Transaction costs may be significant in option strategies calling for multiple purchase
and sales of options such as spreads. Supporting documentation will be supplied upon request.
All research reports are disseminated and available to all clients simultaneously through electronic publication to our internal client websites. Not all
research content is redistributed to our clients or available to third-party aggregators, nor is Goldman Sachs responsible for the redistribution of our
research by third party aggregators. For research or data available on a particular security, please contact your sales representative or go to
http://360.gs.com.
Disclosure information is also available at http://www.gs.com/research/hedge.html or from Research Compliance, 200 West Street, New York, NY
10282.
2014 Goldman Sachs.
No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior
written consent of The Goldman Sachs Group, Inc.

67 - GS Asia Economics Analyst

Caricato da

Informazioni sul documento

Titolo originale

Copyright

Formati disponibili

Condividi questo documento

Condividi o incorpora il documento

Opzioni di condivisione

Hai trovato utile questo documento?

Questo contenuto è inappropriato?

Copyright:

Formati disponibili

67 - GS Asia Economics Analyst

Caricato da

Copyright:

Formati disponibili

March 28, 2014

Issue No: 14/13

March 28, 2014 Asia Economics Analyst

Potrebbero piacerti anche