Macro Business Environment in India &Opportunities for Investment

Gopal KrishnaChicago , October, 2007

Largest Democracy

3

Stable Democratic System

Sub-continental Nation – Religious, Ethnic & Linguistic diversity

Federal structure:

– 28 states

– 18 languages

Multi-party system:

– Changes in government through elections both at Centre and state levels

– Coalition governments at Centre for over 10 years

– Strong independent judicial system

– Free vibrant, strong media (mushrooming growth in print as well as electronic

media)

4

Stable Democratic System

Gradual liberalization

Industrial licensing dismantled

Trade liberalization – tariff/tax reduction

Opening up of FDI

Government regulation to facilitation

Closed economy

Centralized planning

Government permission necessary for Setting up industrial plant

Import of capital goods / technology

Expansion of capacity

Key sectors of economy reserved for public sector only

1990s

Completion of integration with global economy

Financial/capital markets reforms as consolidation

Tariff down to 10%.

To reach ASEAN levels by 2010

Bilateral Comprehensive Economic Partnership Agreements with EU, Japan, ASEAN etc in pipeline

2000-2005Prior to 1990s

Democracy

– Gradual incremental policy changes

– Broad consensus across parties and civil society.

India - a strong and vibrant economy

6

Macroeconomic stability

Trends in Inflation- WPI (%YoY)

Forex Reserves (USD bn)

Steady increase in forex reserves.

Moderate inflation over last few years

5.8 6.420 22

3242

75

141

192

220

0

50

100

150

200

250

FY91

FY92

FY93

FY94

FY95

FY96

FY97

FY 98

FY 99

FY 00

FY 01

FY 02

FY 03

FY 04

FY 05

FY 06

FY 07

FY08 (till A

ug)

13.7

4.45.4

0

2

4

6

8

10

12

14

16

FY91

FY92

FY93

FY94

FY95

FY96

FY97

FY 98

FY 99

FY 00

FY 01

FY 02

FY 03

FY 04

FY 05

FY 06

FY 07

Source: Reserve Bank of India, CMIE

%

7

Economy – high growth rates

Robust GDP growth

Real GDP growth (%)

5.3

9.4

01

2345

6

78

9

10

FY91

FY92

FY93

FY94

FY95

FY96

FY97

FY 98

FY 99

FY 00

FY 01

FY 02

FY 03

FY 04

FY 05

FY 06

FY 07

7

5.15

10.9

11

0

2

4

6

8

10

12

14

FY91

FY92

FY93

FY94

FY95

FY96

FY97

FY 98

FY 99

FY 00

FY 01

FY 02

FY 03

FY 04

FY 05

FY 06

FY 07

Industry growth (%) Services growth (%)

Source: Reserve Bank of India, CMIE

(%)

8

Economy – high growth rates leading to increasing FDI

Increasing FDI trend

Source: RBI, DIPP Source: Reserve Bank of India

USD

mill

ion

97

15726

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

FY91

FY92

FY93

FY94

FY95

FY96

FY97

FY 98

FY 99

FY 00

FY 01

FY 02

FY 03

FY 04

FY 05

FY 06

FY 07

Svgs & Cap Formation % of GDP ( Current prices)

23.126.3

33.832.4

05

10152025303540

Goss domestic savings Gross domestic capital formation

FY91

FY92

FY93

FY94

FY95

FY96

FY97

FY98

FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06

9

Source: Reserve Bank of India

Trade liberalization – reduction in tariffs

Despite a secular reduction in peak tariffs, the tax to GDP ratio is still showing an upward trend

Trend in Peak Custom Duty

ASEAN levels committed to be reached by 2010(%

)

14.213.38

14.52

16.95

15.43

12

13

14

15

16

17

18

FY91

FY92

FY93

FY94

FY95

FY96

FY97

FY 9

8

FY 9

9

FY 0

0

FY 0

1

FY 0

2

FY 0

3

FY 0

4

FY 0

5

FY 0

6

FY 0

7

Tax/ GDP ratio

(%)

150

110

85

6550 45 40 35 30

2012.5 10

0

20

40

60

80

100

120

140

160

FY91

FY92

FY93

FY94

FY95

FY96

FY97

FY 98

FY 99

FY 00

FY 01

FY 02

FY 03

FY 04

FY 05

FY 06

FY 07

Source: Reserve Bank of IndiaSource: FICCI conference, March 14 – 15 th 2007

10

Capital Markets playing an increased role in the economy

Improving ratio of market cap / GDP

Equity Market Reforms

SEBI – Independent Regulator

Corporatization and Demutualisation Scheme of 19 stock exchanges to make them “for profit” entity : FDI flow started in BSE , NSE

Screen-based nation-wide trading

Scripless settlement

Electronic transfer of securities

Market Capitalisation as Percent of GDP (As at end-March))

Source: Reserve Bank of India

India’s market cap to GDP ratio crossed 100% this fiscal year

FII Investments U

SD

Bill

ion

4 mn

1.6 1.52 2.4

1.72.3 2.2 1.8

0.6

10 10.29.3

-0.4

-2

0

2

4

6

8

10

12

FY93

FY94

FY95

FY96

FY97

FY 98

FY 99

FY 00

FY 01

FY 02

FY 03

FY 04

FY 05

FY 06

%

19.54

54.2

3326.8 23.3

43.4

86.5

0102030

4050

6070

8090

100

FY91

FY92

FY93

FY94

FY95

FY96

FY97

FY 98

FY 99

FY 00

FY 01

FY 02

FY 03

FY 04

FY 05

FY 06

FY 07

Source: Reserve Bank of India, SEBI Handbook

11

Credible independent Central Bank Sound professional management

High Degree of autonomy of India’s Central Bank

Macroeconomic stability - Stable currency

Rupee exchange rate

Source: RBI

( IN

R /

US

D)

INR/ USD

17.94

31.3935.47

42.0447.68 45.94 45.29

0

10

20

30

40

50

60

FY91

FY92

FY93

FY94

FY95

FY96

FY97

FY 98

FY 99

FY 00

FY 01

FY 02

FY 03

FY 04

FY 05

FY 06

FY 07

12

Developments in Banking Sector

Banking business growing consistently

– Deposits grew by 17% CAGR

(1998-06)

– Advances grew by 21% CAGR (1998-06) Source: RBI

Deposits

Advances598,

485

2,109,04932

4,07

9

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

1998 1999 2000 2001 2002 2003 2004 2005 2006

INR

Cro

re

Banking Business growing over the years

14.412.7

11.4 10.48.8

7.25.1

3.3

02468

10121416

1998 2000 2001 2002 2003 2004 2005 2006

Gro

ss N

PA

(%)

Gross NPAs declining trend

Improved banking governance exhibited by declining Gross NPAs

Market share in outstanding credit

March 31, 1996 March 31, 2006

9%

9%

82%21%

6%

73%

PSU Banks

Private Sector Banks

Foreign Banks

Share of private sector banks increased from 9% in 1996 to 21% in 2006

Going Forward

14

Going forward

Source: Goldman Sachs, Global Economic Paper No 152, 22 January 2007

India’s GDP (in US$ terms) will surpass that of the US before 2050, to make it the second largest economy

Goldman Sachs has revised its timelines for India’s GDP exceeding the G6’s GDP

New IndiaProjection

Italy France/UK Germany Japan US

Cars indicate when Indian US$GDP exceeds that of the Country

2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Investment Opportunities

16

Investor-friendly, liberal open-market economy

Source: Reserve Bank of India

Government is focused on improving the business and investment environment

– No licensing required, except in five sectors

– 100% FDI permitted in manufacturing (except atomic energy)

– 100% FDI permitted in most service sectors

– Investments, dividends, fees are freely repatriable

– Foreign investments allowed in capital markets

• State Government compete for Investor Friendly Image

17

Large skill and intellectual capital base

Investor-friendly, liberal open-market economy

Strong emphasis on human resource development

– Skills missions being launched

– Up gradation of workers training

– Increased public spending in Education and health

Over 2.5 million graduates added every year

– Most of them English-speaking

– 300,000 Engineers

– 150,000 IT professionals

18

Firms in India – globally competitive

69% of survey respondents report higher profitability averages in India than they do globally

RoE (2007) (%)

Taiwan

Thailand

Singapore

Philippines

Malaysia

Korea

India

Indonesia

Hong Kong

China

1.0

1.5

2.0

2.5

3.0

3.5

4.0

P/B

(200

7) (x

)

12 1 4 1 6 1 8 2 0 2 2 2 4 2 6 2 8

India’s ROE quite high relatively

Source: Prowess, CLSA Asia-Pacific Markets

P/B = Price to Book value

91 percent of MNC’s make profits in India compared to 45- 50 percent in China

19

Indian firms seek global reach

Tata Steel bought Corus Plc

Hindalco acquired Novelis Inc.

Suzlon Energy Ltd. acquired REpower

Dr. Reddy’s acquired Betapharm

United spirits acquired W&M

USD 12.1 billion

USD 6 billion

USD 1.6 billion

USD 0.5 billion

USD 0.5 billion

Acquisition made Tata Steel world’sfifth largest steel producer globally

Acquisition made Hindalco the world's largest aluminum rolling company

Acquired German’s third largestgeneric companies

Acquisition made United Spirits world's second largest spirit company

Acquisition made Suzlon world's third largest wind power company

20

MNCs finding location of R&D in India : Increases global competitiveness

India- Attractive location for R&D

Large R&D facility of major MNCs

– Microsoft

– IBM

– ADOBE

– SAP

– Sony Ericsson

– Dell

– The DaimlerChrysler

– Boeing

– Texas Instruments

Infrastructure Opportunities

22

Infrastructure Opportunities : Indian Telecom Industry

Growth of Indian telecom (wireless) sector…..

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2007

(YTD

)

2010

E

1 2 3 4 6 1333 52

96

166193

417

0

50

100

150

200

250

300

350

400

450

Mob

ile s

ubsc

riber

s in

mn

And participated by global majors …..success stories

Aircel Limited Maxis Communications 74

Tata Tele Temasek Holdings 9.9

Hutchison Essar Vodafone 67

Spice Telecom Telekom Malaysia 49

Bharti Airtel SingTel 35

Direct stake (%)InvestorsCompany

Source: Credit Suisse, Press, Analyst Reports, TRAI

23

Infrastructure Opportunities : Indian Telecom Industry (contd.)

Effec

tive

Mob

ile T

ariff

s (Rs

/min

)

Mobile Subscribers Base (m

illions)

NTP-99

3rd & 4th Cellularoperator

7.2

3.14.2

3.11.9

1.2

14.515.3

10.9 1.2 1.9 3.6 6.4

12.8

33.3

51.5

89.5

147

0

2

4

6

8

10

12

14

16

18

Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Dec-060

20

40

60

80

100

120

140

160

0.9

Lowering of ADC from 30% to 10% of Sector Revenues

Effective mobile tariff

Mobile Subscriber Base

WLLIntroduced

led by conducive regulatory framework……

Going forwards – key issues …..

• Adequate availability of spectrum - A constrain in India

• Infrastructure requirement - 350,000 telecom towers by 2010, as against 125,000 in 2007

• To achieve 500 mn subscribers base by 2010 will require significant investment in telecom equipment manufacturing space

24

Infrastructure Opportunities : Civil Aviation

Delhi-Mumbai being modernized through PPP

New private international airport at Bangalore, Hyderabad become operational- 2008

USD 85 bn to develop Airport infrastructure

Boeing and Airbus have a combined order book of 400 aircraft from India at present

25221917

7050

4032

32

23.721.5

11.6

01020304050607080

2003-04 2004-05 2005-06 2006-0705101520253035

International Domestic % Growth

Units

Units

Airlines Sector Performance

25

Infrastructure Opportunities : Power / Roads / PortsInfrastructure: USD 475 bn in investments planned in next five years

Power

Energy shortage at 7.7% / Peak shortage of 12.3%

Ongoing projects: 52000 MW: Investment US$ 60 bn

Private Ultra Mega Power Projects (4000 MW / USD 4 bn each) thr’ Competitive Bids

Roads

Annual growth 12 -15% in passenger traffic and 15 -18% for cargo

Investment Opportunities US $ 30 billion till 2012

Ports

960 million tonnes of traffic by 2013-2014

7.7 % p.a. growth expected in cargo handling till 2013-2014

Investment opportunities: US $ 20 bn till 2012

26

Roads, 63

Ports, 8

Civil Aviation, 2

Urban Infrastructure,11

Railways, 2

Number of projects

Railways,0.10

Urban Infrastructure,0.22

Civil Aviation, 0.42

Ports,4.65

Roads, 2.99

Estimated Value

(USD Billion)

PPP Projects Awarded

Source : Ministry of Commerce, Government of India

Source: World Bank report and PPPinindia.com

– the study did not include Power sector

Public – Private participation being encouraged

Significant plans to improve the country’s infrastructure

Thank You

www.dipp.gov.in