ECONOMIC ANALYSIS

of
India
 Global FDI trends 2000
 Record FDI flows of US$ 1.3 trillion in
2000
 Developed world still favourite (over 75%
of global share; mainly cross-border
M&A)
 US$ 240 billion to developing countries
 Developing Asia gets US$ 143 billion, of
which China and Hong Kong-China alone
account for US$ 105 billion
 Latin America gets US$ 86 billion
 WHAT WE ARE REALLY LOOKING AT
IS A SIGNIFICANT SHARE OF WHAT
COMES TO ASIA Source: UNCTAD WIR01
 % Share of Selected Countries in Total FDI Inflow in
Developing Countries
1995 1998 1999 2000
Brazil 4.9 15.1 14.1 13.9
China 31.6 23.2 18.2 17.0

India 1.0 1.4 1.0 1.0

Malaysia 5.1 1.4 1.6 2.3
South Korea 1.6 2.9 4.8 4.2
Singapore 7.8 3.3 3.2 2.7

Thailand 1.8 2.7 1.6 1.0

Total Dev. 113.3 188.4 222.0 240.2
Countries
(US$ Bn)
 Ratio of FDI Inflow (%) to Gross Domestic Product
1995 1998 1999 2000
Brazil 0.8 3.6 5.9 5.7
China 5.1 4.6 4.1 3.8
India 0.6 0.6 0.5 0.5
Malaysia 6.8 3.8 4.4 3.9
South Korea 0.4 1.7 2.6 2.2
Singapore 10.5 7.6 8.6 7.0
Thailand 1.2 4.6 3.0 2.0
Sectoral Targets for Achieving 8% GDP Growth ( $7-8 Bn)
Sector FDI Target (US$ Bn)
Telecom 2.5
Power 1.2
Financial Services 0.8
LNG & Oil Exploration 1.0
Food & beverage 0.4
Transportation 0.4
Textiles 0.3
Ports 0.3
Chemicals & Petrochemicals 0.2
Hotels & Tourism 0.2
Real Estate 0.2
Roads 0.2
Civil Aviation 0.2
Dis-investment 0.5
Total 8.9
 Key Economic Indicators: GDP Growth
Rate (1993-94 as base year)

9%
7.6% 7.8%
8%
7%
6.8% 6.40%
Growth Rate (%)

6% 5.1%
5% 5.40%
4.0%
4%
3%
2%
1%
0%
 Key Economic Indicators: External sector
Foreign Exchange Reserves (US$ billion)

80 56
48.8 48.33
70 46.64 49
42.5 43.6 63.93

Exchange Rate (Rs/US$)

60 37.2 42
35.5 54.15
50
33.5 35
42.26
40
38 28
30
30 26 21
22
20 17 14

10 7

0 0
1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03(as
on 11-10-
02)
INDIA: TRACING FIRST GENERATION
REFORMS
• Industrial delicensing
• Liberal FDI regime
• Freedom to invest & expand
• Simplification of investment procedures
• Tax rationalisation
• Current Account convertibility
• Public sector divestment
• WTO compatibility – Patents, etc.
 The Reforms Process Ahead
 Public sector divestment
 Cutting fiscal deficit
 Amendments to crucial economic legislations
 Financial sector reforms
 Labour reforms
 Corporate governance
 Meeting all multilateral commitments in terms of GATT,
GATS, TRIPS, etc.
 INVESTMENT OPPORTUNITIES

INFRASTRUCTURE
INVESTMENT REQUIREMENT: US $ 347 Bn
Sector Present Capacity Investment By
Capacity Addition By 2006
2006 (US $ Bn)
Power 1.1 7Lakh MW 1,11,500 MW 178

Telecom 37 M Lines 52 M Lines 55

Ports 344 MT 350 MT 7

Roads
a. National Highways 58, 112 Kms 23,000 Kms 27

b. State Highways 1,37,119 Kms 60,000 Kms

c. Super N. H. 4,000 Kms

Urban Infrastructure 80
Service

Source: Rakesh Mohan Committee Report (1996-2006)

Economic Scenario : Post Liberalisation
• India - One of the fastest growing economies in the world
• Average GDP growth (1995 -2005) : 6.2 % per annum
• Average annual growth (1995-2005)
Agriculture & Allied : + 2.1 % per annum
Industry : + 6.6 % per annum
Services : + 7.8 % per annum
• Average Per Capita Income growth (1995 - 2005): 3.8 % per annum
• Inflation down to a single digit level continuously for the last ten years
• Foreign exchange reserves increased from US $ 2 b (March 1991)
to US $ 145 b (September 2005)

• Merchandise Exports : +20 % average rate of growth in last three years

• Booming Services Exports from US $ 4.6 b in 1990-91 to US $ 51.3 b in

2004-05
11
Economic Scenario : Post Liberalization
• Balance of Payments surplus (US $ 26 b in 2004-05)

• External Debt Service Ratio down from 26.2 % in 1995 to 6.2 in 2005

• Foreign Direct Investment (FDI) : Average +US $ 5 b pa in the last

five years.

• Foreign Portfolio Investment : US $ 11.4 b in 2003-04 and

US $ 8.9 b in 2004-05

• Reforms continuing and have unleashed dynamic forces –

putting the economy on a trajectory of unparalleled economic
growth in the future

• The Indian Government is working in close co-operation with

industry and trade to mitigate the remaining problems and
constraints

• Broad consensus across the political spectrum on the need for

and direction of the reforms. Some issues still need to be resolved
12
Share Of Services Sector In GDP On The Rise (%)

60 52.4
48.9
50 40.6 43.9
32.2 28.1
40 27.2 27.1
27.2 28.0
30 23.8 20.5
20
10
0
1990-91 1995-96 2000-01 2004-05

Agriculture Industry Services

13
Agriculture

India
• the world’s most irrigated land mass
• world’s 2nd largest exporter of rice & 5th largest exporter of wheat

Food production: India’s Ranking in the World

1st Tea, Milk

2nd Rice, wheat, sugar

14
Manufacturing

• Rate of growth
2003-04 7%
2004-05 9.2%
• Diversified base of world class capabilities
• State-of-the-art technologies
• TQM,TPM, Six Sigma & Lean Manufacturing - part of
everyday practice
• Diversified industrial base with supporting ancillary industries
• Overseas acquisitions worth US$ 500 m

15
Services

• Consistent growth
2003-04 9.1%
2004-05 8.9%
• Sectors Driving Growth
- ITES
- Healthcare
- Financial Services
- Education

Source:Economic survey, 2004 - 05

16
Average GDP growth - India & the World

Average GDP Growth (1990-2001)

9.4
9.5
8.5
7.5
6.2
Growth (%)

6.5 5.5
5.5 4.9 4.7
4.5 3.3
3.5 2.9 2.9
2.0
2.5
1.5
India

Philippines
China

Thailand

USA
Indonesia

Mexico

Brazil
S.Korea

Source: WDI, World Bank, 2003

17
Rising share of India’s external trade in GDP

Target :
To double share of exports from 0.7% to 1.5% of world trade

S hare o f e xte rnal trade in GDP

40 30.3 28.9 31.6 32

25.5 26.9
30 23.1
18.1
20
10
0
1 9 9 1 -9 2 1 9 9 4 -9 5 1 9 9 7 -9 8 1999- 2 0 0 0 -0 1 2 0 0 1 -0 2 2 0 0 2 -0 3 2 0 0 3 -0 4
2000

18
Macro Economic Indicators (2004-05)

• Land Area: 3.29 m sq. km.

• Population: 1.09 b

• GDP: US $ 630 b

• Real GDP Growth: 6.9%

• Gross Domestic Savings: 28.1% (2003-04)

• Gross Domestic Investment: 26.3% (2003-04)

• Per Capita Income: US $ 580

• Inflation Rate: 6.4%

19
Macro Economic Indicators (2004-05)

• Exchange Rate: US $ 1 = 43.75

• Merchandise Exports: US $ 80b

• Merchandise Imports: US $ 106b

• Services Exports: US $ 51b

• Foreign Direct Investment: US $ 5.5b

• Foreign Portfolio Investment: US $ 8.9b

• Direct Investment Abroad: US $ 1.5b

20
Indian MNCs - On a global buying spree

• Number of foreign firms acquired 120

by Indian companies during
2001 - 03

• Total worth US $ 1.6 b

• India - 8th largest investor in the UK

• No of investments 440

• No of Indian companies with 1,441

operations in Singapore

21
Preferred Destination For Foreign Equity Investors
Japan
2,000 1,858
India
1,800
South Korea
1,600
Singapore
1,400
1,105 Australia
1,200 1,054
965 China
1,000
Hong Kong
800
548 Taiwan
600 393
Malaysia
400 263 172
200 36 22 17 8 Sri Lanka
7
0 New Zealand
1 Philippines
Thailand

India attracts second highest private

equity investment in Asia
Total equity flow to India between 1999 and 2004 doubled
Source: NASSCOM 22
from US$ 5.12 billion to US$ 11.50 billion
FDI INFLOWS TO INDIA

7000
6125
6000 5526
5036
5000 4674
4029
4000

3000

2000

1000
*
0
2000-01 2001-02 2002-03 2003-04 2004-05

FDI Inflows ($ million)

23
The India Advantage

Excellent network
Well-developed
of research laboratories
base industries

Proficiency in Pro active

English policy framework

Extensive clinical trial

opportunities
Rich biodiversity

Low manpower Trained manpower

costs and knowledge base

24
Demographics: A strong demand driver

By 2020

Working 30-40 mn
Urban people
age
population joining
population middle
to rise
to rise class
to 40%
to 65% every
year

25
 Growing Knowledge Pool

Partnership Driver - Skilled Manpower

Global Growth in Working-Age Availability of Skilled

Population (15~64) Over the Ne xt Manpower, 2003
Six Y ears (Mln)

37 5 7.4 8.9
83 7.3 7.9
73 7.2 7.3
56 7.1 6.9
41 7.1
6.7
38 7.0
6.7
20 6.6
6.4
13 5.7
5.8
0 .0 4 5.3
Source: UN, Morgan Stanley Source: IMD Competitiveness Yearbook 2003
3.9
-3 4.3
26
ISO:90 01 :20 0 0
The Cost Advantage

Average wage / year (in thousand US dollars)

30 28
25
25
20
15
8.9
10 7.2 8
6.4 6.5 7.2
5.88 6
5 2.4
0

Source: NASSCO M

Costs for offshore work

30 - 50 % lower than in USA / Europe

27
 Low Wages

Total Compensation for Workers in Heavy

Manufacturing (US$ per Hour)
25
20.32
20

15

10 8.35

5 2.27
0.75 0.43 0.35
0
USA Korea Mexico China India Indonesia

28
Source: IMD Competitiveness yearbook, 2003
Import duty Reductions

Reduction in Peak Customs Duties on Manufactured items

160
140
150
120
100
in per cent

110
80
60
40
50 42
20 38.5 30 25 20
0
1991 Mar-92 Mar-95 Mar-97 Mar-00 Mar-02 Mar-03 w.e.f March
2004
29
India - Economic Enablers

10th largest economy in the world - 4th in terms of PPP

Will overtake Japan in PPP terms by 2010, to be 3 rd largest in the world

Large entrepreneurial base and diversified manufacturing structure

Large reservoir of skilled labour at internationally competitive cost

Vast pool of scientifically and technically qualified manpower of 20m

A large domestic market - 300m+ strong middle class population

having substantial purchasing power

Largest democratic set - up

A broad based and transparent legal framework including arbitration

30
India - Economic Enablers

Vast network of bank branches, financial institutions and well-organized

capital and money markets

A network of technical and management institutes of highest

international standards for development of human resources

India has a record of meeting its international financial obligations as

per schedule and has never been a defaulter

No communication barrier, as English is the most prevalent business

language

Strong and vibrant small scale sector that is keen to establish

strategic alliances with their foreign counterparts

31
India - Economic Enablers

Supportive infrastructure base

Strategic location for third country markets, particularly in the rapidly

growing south and south-east Asian countries

The strategic location of India and its easy and efficient access to the
Middle East, East European countries, CIS countries, Africa, South East Asia
and Asia-Pacific countries places it in a unique position as a sourcing ground
for entering into strategic alliances in export-oriented industries

Foreign companies can take advantage of India’s strategic location and tap
the markets of these countries.
India is slowly but surely emerging as an attractive destination for foreign
investment

Liberalized industrial and foreign investment policies

32
 India - Economic Enablers

Sector FDI Limits

• Defence up to 26

• Telecom up to 74%

• Civil Aviation up to 49%

• Real estate & construction sector up to 100 %

• Integrated township development up to 100 %

• Tea plantation up to 100 %

33
 The India Advantage: Infrastructure

• Road length 2.5 m km

Second largest road network in the world

• Railway routes 63,000 km

• Cargo handled 298 m tonnes

• Electricity installed capacity 126,000 MW

Sixth in world electricity generation

• Telephone Connections 77 m lines

• Fixed lines (Dec, 2004) 44.76 m

8th largest telecom network in the world
34
Source: Department of Economics & Statistics, Tata Services Ltd
Growing IT Market

Size (2002 - 03) US $ 24 b

Growth rate 28%

CAGR (since 1999) 46%

Share of IT and BPO 1.4% of GDP

2008 projection 7%

Exports (2003 - 04) + US $ 12 b

Growing at + 30% pa

Employment Over 650,000

Second largest employer in IT services sector

35
Opportunities in Outsourcing

• The Indian Outsourcing industry is moving up the value chain

• It is BPO today but the future is for Knowledge Process Outsourcing

(KPO), Financial Process Outsourcing (FPO) and Legal Process
Outsourcing (LPO)

• It is providing value through domain expertise rather than process

expertise

• India, in the new knowledge economy, is all set to emerge as a global

KPO,FPO and the LPO hub

• It is estimated to capture 71% of the world market by 2010 against

56 % today giving it a market of US $12 b

• There are new opportunities, given that there is a serious shortage of

quality teachers, in the USA

36
Opportunities in Outsourcing

• The remote education market is about US $ 15 b by 2008

• The current leaders are Engineering design – US $ 400 m, basic
data search, integration and management – US $300 m and Biotech and
Pharma – US $ 280 m
• The Compounded estimated annual growth of KPO for India is 50 %
whereas BPO will grow at about 30 %
• KPO is expected to engage 250,000 people by 2010
• It will be in areas such as biotechnology,animation and graphics,design
in aerospace & automotive, health care, pharma research, learning
solutions, data management, customer analytics and entertainment
• FPO will include insurance underwriting, risk assessment, equity
research and corporate market research

37
ITES - BPO Sector

Contribution of IT Enabled Services in total IT

exports
1999-2000
20%
2002-2003
33%
2000-2001
20%
2001-2002
27%

- ITES exports projected to touch US$ 24 b by 2008

- India offers combination of cost-quality-scale advantage

38
Opportunities in Retail Sector

The ongoing buoyancy in India’s spending, arising from the changing demographics
and the resultant rise in income levels, has resulted in a distinct consumer preference
for value-added products across the retail spectrum, providing a platform for the
rapid growth of the retailing sector which could emerge as one of the fastest growing
sector in coming years

• Organized retailing industry to rise from US $ 4b to US $ 15b by 2010

The total retailing industry, estimated at US $ 200b is largely in the unorganized
sector with organized retailing accounting for less than 2% (US $ 4b)

• The organized retailing segment to grow fourfold in 5 years

• According to NCAER, the Indian middle class (household income between US

$ 4,500 – 23,000) currently at 92m, is expected to cross 153m by 2010

• Substantial mall construction:

The number of malls is expected to rise from the current 40 to around 250 by
2010

• Close to 50m sq. ft. of retail space is expected to be developed over the next 5
years
39
 India – The new Asian
Powerhouse
India is currently the world’s fastest growing economy after China

Strong GDP Growth (1) Changing GDP Composition

12 Agriculture Industry Services
Nominal GDP 8.5%
700 9 10
Real GDP Growth 7.8%
600 6.9% 8 8
Nominal GDP (US$ Bln)

5.8% 7

Real GDP Growth (%)

Real GDP Growth(%)

500 6
6
4.4% 4
400 4.0% 5
2
300 $631 4
$550 0
200 $417 $438 $467 3
-2
2
100 1 -4

0 0 -6
FY01 FY02 FY03 FY04 FY05 FY06P -8
• Changing composition of GDP
– Reduced dependence on agriculture and growing industrial and services
sector
• Strong outsourcing growth momentum – IT services, financial services, healthcare
& manufacturing
• Growing Infrastructure investments and corporate Capex
• Strong improvement in external sector and phased fiscal deficit correction
• Attracting large foreign investments

(1) Source : RBI

India – Among the strongest growing
economies
Real GDP Growth(1) BSE Sensex vis a vis
10.0%
International Stock Markets
9.0% 8.1%
8.0%
7.5%
7.0%

6.0% 5.3%
5.0% 5.1%
4.0% 4.7%
3.8%
3.0%

2.0%

1.0%

0.0%
2001 2002 2003 2004E 2005E

India China Malaysia

Hong Kong Thailand Korea

 Indian stock index outperformed

• Second fastest growing international indices:
economy  High growth prospects
• Fourth largest economy in the - Control in inflation,
world in terms of PPP (2) - Strong Rupee,
- Strong FII Inflow,
- Improved corporate earnings

(1)
(1) Source:
Source: EIU
EIU
(2)
(2) Source:
Source: World
World Bank
Bank
 Strong Macro Economic
Fundamentals

Fiscal D eficit as % age to GD P

Booming exports Decreasing Fiscal Deficit
90 7
79.2 6.2
80 5.9
6
70 63.8
U S $ billion

5 4.5 4.5 4.3

60 52.7
4
50 44.6 43.8
40 3
30 2
20 1
10
0
0
FY02 FY03 FY04 FY05E FY06E
FY01 FY02 FY03 FY04 FY05
Expanding Foreign
Increasing FDI Inflows Exchange Reserves
160
7000
6125 140 Forex Reserve
6000 5526 142 139
120
US$ Billion
5036
U S $ m illion

5000 4674
4031
100 113
4000 80
3000 60 71
2000 40 51

1000
20
0
0
Mar-02 Mar-03 Apr-04 Mar-05 'Jan 06
FY01 FY02 FY03 FY04 FY05
 Strengthened Banking Sector
Outstanding Bank Credit (1)
Savings Deposits with
Scheduled Commercial Banks
300 USD bln
120 105.4
253
US $ Billion

250 100 88.2

80 65.6
200 192 57.2
60 47.8
168
40
150 136
20
100 0
2002 2003 2004 2005 Jan'06 FY01 FY02 FY03 FY04 FY05
 Growth and Performance drivers
- Robust retail demand
- Low consumer-finance penetration
- Positive age demographics, rising disposable incomes
- Favorable interest rates and easier availability
- Recovery in key commodity sectors – steel, textiles
- Improvement in corporate financial performance and business outlook
 Strengthening regulatory regime
- RBI aligning prudential banking norms in tune with international standards
- Consolidation to improve intrinsic strength of the sector
- Strong revaluation of banking stocks
(1) Source : RBI, Ministry of Finance, CSO