Vol. 136 18 Aug 2017 th

WHAT WE ARE READING – Vol. 136

✓ Donald Trump threatens North Korea with “fire and fury” Economist ✓ India Economics: Momentous Transitions in a Two-Speed Economy Citi

✓ Rural India : Set for a comeback after three years of hibernation Motilal Oswal ✓ Market Outlook : Precursor to the budget CLSA ✓ How shell companies are used in black money creation, laundering Livemint ✓ Global Macro Briefing : Tracking EM Debt Dynamics Morgan Stanley ✓ What happened when world shifts online? Goldman Sachs ✓ Amazon and Walmart Battle for Retail’s Future Saeculum Research ✓ Learning from Ed Throp Masterinvest.com

Donald Trump threatens North Korea with “fire and fury” As usual, it’s not quite clear whether he meant it https://www.economist.com/news/asia/21726061-usual-its-not-quite-clear-whether-he-meant-it-donald-trump-threatens-north-koreafire-and

Aug 12th 2017| SEOUL

THE Korean Central News Agency (KCNA), the mouthpiece of Kim Jong Un’s bloodthirsty regime in North Korea, is not known for nuance. Its propagandists were kept busier than usual last week, hammering out tirades against economic sanctions imposed by the UN in response to Mr Kim’s unrelenting missile tests. Reports threatened America with “nuclear weapons of justice”. A typical article warned that: “It is a daydream for the US to think that its mainland is an invulnerable Heavenly kingdom.” American presidents used to brush off such bombast. Not so Donald Trump. Speaking off-the-cuff at one of his golf clubs, he chided North Korea for its threats, pledging to meet further provocations “with fire and fury like the world has never seen”. Even the hyperbole-prone hacks of the KCNA seemed to think this was a little strong. They accused America of “war hysteria” and ticked off the president for being “reckless”. Just hours later, the Korean People’s Army claimed to be “carefully examining” a strike on Guam, a Pacific island that hosts a large American military base. North Korea’s neighbours are jittery. Moon Jae-in, South Korea’s president, called for a “complete” overhaul of his country’s armed forces. Japan’s defence ministry published a 563-page report charting how the threat from the North reached a “new stage”. A day after Mr Trump’s outburst, China appealed for calm. The sanctions that sparked this exchange of rhetorical fire were a rare example of co-operation between China, America and Russia. The UN Security Council unanimously endorsed the crackdown a week after North Korea’s second test of an intercontinental ballistic missile (ICBM), which could soon enable Mr Kim to order a nuclear strike on an American city. The new restrictions ban purchases of North Korean coal, iron, lead and seafood (the country’s main exports). According to some estimates, this will deprive the regime of $1bn a year—a third of its foreign earnings. The sanctions also prohibit governments around the world from admitting any more North Korean workers, as the regime pockets most of their wages. Seventh time lucky Yet sanctions have not brought the Kim family to heel in the past. This is the sixth tightening of them since the UN first imposed them in 2006, after Mr Kim’s father, Kim Jong Il, conducted a nuclear test. North Korea has since carried out four more tests. The regime has grown adept at dodging the restrictions, using illicit slush funds in China to finance business partnerships, says John Park of Harvard’s Kennedy School of Government. The higher commissions on offer for such risky transactions simply attract more capable middlemen, he adds. Enforcement has been patchy: of the UN’s 193

members, only 77 have reported on their implementation of the previous round of sanctions, adopted in November. China, which accounts for more than 90% of North Korea’s trade, has promised to apply the new restrictions “fully and strictly”. But they do not include the one measure thought likely to cause Mr Kim real difficulty: a curb on the North’s imports of oil. They are unlikely, therefore, to convince Mr Kim to give up his weapons, but some Korea-watchers hope they may inflict enough pain to bring him to the negotiating table at least. Sanctions will only work if they are part of a “cohesive, clearer strategy”, argues a report by the Brookings Institution, an American think-tank. But analysts accuse the Trump administration of sending mixed messages. Only a week before Mr Trump’s inflammatory remarks, Rex Tillerson, his secretary of state, had reassured North Korea, calling for talks and insisting, “We are not your enemy, we are not your threat.” Mark Fitzpatrick of the International Institute for Strategic Studies, another think-tank, says a response to the nuclear threat requires “carefulness and co-ordination”, which are “not Trump hallmarks”. Far from talking the regime down, Mr Trump’s bombastic (indeed, Kim-like) rhetoric risks making allies nervous while doing nothing to persuade the North Korean leader to take his foot off the missile-testing accelerator. His statement appears to suggest that America is prepared to retaliate against North Korean threats, not just hostile actions, such as an attack on Seoul, points out Evans Revere, a former American diplomat who took part in the most recent negotiations with North Korea. “If we’re going to respond with nuclear weapons every time the North Koreans say something outrageous, there are going to be a lot of nuclear weapons flying through the air,” he says. Mr Trump should follow up the sanctions with an offer of talks, even though the former goal of denuclearisation is now vanishingly remote. On the campaign trail last year, he said he would be willing to chat with Mr Kim over a hamburger. Now that blood-curdling barbs are flying across the Pacific, Mr Fitzpatrick believes, “It’s time to have that hamburger.” This article appeared in the Asia section of the print edition under the headline "Tone Defcon"

Citi Research

Economics 24 Jul 2017 03:03:56 ET │ 54 pages

Emerging Markets Asia

India Economics View Momentous Transitions in a Two-Speed Economy  The curious case of a two-speed economy — A disaggregated study of GDP

components suggests that the widening chasm between consumption and investment growth could be partly explained by the fact that recent consumption growth is higher for services with lower capital intensity. Q1FY18 GDP is expected to improve to 6.7-6.9% but we see downside risk to our full-year FY18 forecast of 7.5%. Success of NPA resolution will be key to the pace of a cyclical recovery.  Inflation surprises on the downside - structural or episodic? — We further

Samiran Chakraborty AC

+91-22-6175-9876 [email protected]

Anurag Jha AC

+91-22-6175-9877 [email protected]

lower our FY18 avg. CPI forecast to 3.0-3.5% despite a rise in CPI in the latter part of the year. Evidence of any structural decline in food retail margins due to policies to improve agri marketing is lacking. However, our econometric study indicates that food inflation is not getting generalized or causing core inflation to rise. Maintain our call for a 50bp rate cut in FY18 as March 2018 CPI is likely to be below 4% (adjusting HRA increase).  Low risk of fiscal slippage despite populist schemes — In our view, monthly

GST collection should be above Rs1trn for fiscal comfort, though it might take a while to discern the trend. The Central government’s fiscal position remains more comfortable than that of the state governments. Despite populist schemes like farm loan waiver, we do not expect state fiscal deficit to go up by more than 0.2% of GDP in FY18. With frontloading of spending by both center and state in FY18, the challenge will be to taper expenditure growth without disruption.  Amber alert on the external front — The recent surge in trade deficits prompts us

to raise our FY18 CAD forecast to 1.5% of GDP. Although still optically low, the rise in CAD in an environment of extremely benign oil prices is a concern. An item-wise analysis of trade data does not reveal an overvalued currency to be the culprit but a sharply declining basic balance makes us cautious about the external sector. We grow less optimistic about INR’s outperformance vs EM peers and expect USDINR to stay range-bound (64.0-65.5) as the RBI adopts an interventionist stance.

Prepared for Varun Goenka

 Carry still attractive but positives priced in rates — Even with shrinking spread

with global rates, Indian fixed-income assets remain attractive on high carry. Bond markets have mostly priced in an August rate cut, and without the RBI becoming more explicit about future cuts, the downward move in yields could be limited. However, our demand-supply assessment suggests the market can absorb Rs0.81trn of OMO sale, keeping a lid on upside moves.  Special focus on GST, urbanization and labor reforms — GST implementation

and wider application of the Insolvency and Bankruptcy Code are two focus areas of the government now. We also analyze the progress of labor reforms and urbanization initiatives of the govt, like the Smart Cities Mission.

See Appendix A-1 for Analyst Certification, Important Disclosures and non-US research analyst disclosures. Citi Research is a division of Citigroup Global Markets Inc. (the "Firm"), which does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Certain products (not inconsistent with the author's published research) are available only on Citi's portals.

India Economics View 24 July 2017

Citi Research

Where are we on the growth cycle? Heat map shows tentative signs of recovery In our April quarterly (India Economics View: Rebuilding Momentum), we expected FY18 growth drivers to be reforms, rains, Pay Commission implementation by state governments and affordable housing. With continued push for reforms (implementation of GST), a normal monsoon season thus far (rainfall 99% of normal) and continued push for affordable housing, the growth outlook appears reasonable. However, we turn less optimistic on the consumption boost from state pay commissions in FY18 on slow progress thus far. The trends in high frequency data in our heatmap for early FY18 suggest 12 out of 17 indicators have green. This compares with only 6 indicators that were in green in the March quarter. Figure 8. Economic Activity Heat Map (quarterly average, actual/estimates, %YoY) Qtr GDP

IIP

Car Sales

CV Sales

2-W Tractor Air Rail Cargo Credit Indirect PMI PMI Rural New corp Diesel Petrol Tax Mfg Svc Wages Project earning Sales Sales sales Sales Traffic Freight Traffic Sep-12 7.5% 0.4% -7.6% 1.7% -3.8% -11.8% -7.1% 1.4% -0.8% 16.9% 17.9% 52.8 55.0 18.8% -53.9% 64.8% 10.3 6.1 Dec-12 5.4% 2.1% -2.0% -4.8% 6.0% 3.9% -5.0% -0.3% -2.7% 16.2% 20.1% 53.7 53.9 18.2% -60.2% 4.8% 4.2 6.7 Mar-13 4.3% 2.2% -20.5% -8.7% -0.6% -1.7% 2.2% -1.1% -1.0% 15.7% 31.1% 53.1 54.3 17.8% -58.1% 5.5% 2.7 5.8 Jun-13 6.4% 1.1% -10.4% -8.1% -0.8% 26.2% 3.5% 1.8% -1.0% 14.0% 0.2% 50.5 52.0 17.0% -12.9% 96.8% 0.8 12.9 Sep-13 7.3% 4.8% 2.2% -21.8% 8.2% 21.2% 13.1% 3.7% 5.8% 16.2% 6.1% 49.4 46.7 15.7% 14.8% -9.4% (2.2) 6.8 Dec-13 6.5% 3.0% -5.5% -24.5% 9.0% 20.6% 6.4% 0.1% 1.1% 15.0% 5.8% 50.5 47.0 16.1% 81.0% 1.5% (1.1) 9.5 Mar-14 5.3% 4.3% -3.2% -25.2% 13.1% 12.0% 2.0% 1.2% 1.4% 14.3% 5.9% 51.7 48.2 12.4% 33.5% -3.4% (1.6) 6.0 Jun-14 7.9% 5.6% 2.2% -16.2% 13.2% -1.4% 7.3% 3.3% 4.3% 13.2% -0.4% 51.4 51.1 10.0% -55.4% 27.2% 0.3 10.5 Sep-14 8.8% 4.4% 6.0% -3.8% 19.0% 0.3% 12.9% 6.3% 3.6% 10.9% 9.7% 52.1 51.5 5.6% 157.7% 4.0% 2.5 11.6 Dec-14 6.1% 3.9% 7.0% 4.6% 1.2% -21.8% 13.2% 7.9% 6.9% 10.6% 7.5% 53.1 51.3 4.4% 162.6% -3.5% 1.1 8.8 Mar-15 7.3% 2.4% 4.3% 4.9% -0.2% -29.9% 16.9% 3.5% 4.0% 9.8% 16.5% 52.1 53.1 5.3% 68.4% -13.2% 2.5 16.3 Jun-15 7.6% 1.2% 8.7% 4.7% 0.6% -16.2% 16.4% 0.9% 4.7% 9.5% 37.6% 51.8 49.9 5.1% 28.8% 0.9% 3.7 12.5 Sep-15 8.0% 2.3% 10.6% 9.5% -1.3% -24.8% 17.1% -2.9% 3.8% 9.0% 31.5% 52.1 51.3 6.0% -19.4% -5.7% 8.5 16.2 Dec-15 7.2% 4.3% 15.1% 11.0% 4.4% -1.6% 17.5% -6.9% 1.3% 9.7% 36.3% 50.0 52.3 5.09% -69.6% -10.0% 7.8 14.5 Mar-16 9.1% 5.8% -1.7% 20.0% 8.6% 7.9% 19.7% -8.4% 7.4% 11.0% 21.5% 51.5 53.3 5.31% 51.5% -14.2% 11.3 15.3 Jun-16 7.9% 7.8% -1.4% 13.0% 14.3% 14.8% 17.3% -8.6% 6.2% 9.2% 34.5% 51.0 51.7 5.77% 32.6% 5.4% 4.7 10.0 Sep-16 7.5% 5.3% 11.5% -0.2% 20.5% 27.7% 21.1% -8.1% 4.1% 9.9% 19.4% 52.2 52.9 4.61% -3.4% 13.9% 1.1 12.1 Dec-16 7.0% 4.4% -2.3% -1.1% -4.6% 17.7% 19.4% -4.8% 12.4% 7.1% 24.2% 52.1 49.3 5.56% 18.5% -6.5% 5.6 12.0 Mar-17 6.1% 2.5% 8.0% 5.7% -2.3% 13.1% 15.9% -0.3% 4.7% 4.7% 15.1% 51.2 50.2 5.99% -14.9% -8.0% (3.8) 1.8 Jun-17 2.8% 3.9% -9.1% 7.8% 17.9% 16.2% 3.4% 5.2% 5.6% 14.3% 51.7 51.8 5.97% -7.7% -12.0% 5.8 10.6 Source: CSO, CEIC, CMIE, Citi Research, Color codes: Dark green - if sequential data improvement is >1 std.devn; light green – if sequential data improvement is 1std.devn, pink – if sequential data deterioration