Macro Business Environment in India Opportunities for

Macro Business Environment in India & Opportunities for Investment Gopal Krishna Chicago , October, 2007

Largest Democracy

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) 3

Stable Democratic System § Democracy – Gradual incremental policy changes – Broad consensus across parties and civil society. Prior to 1990 s 2000 -2005 § Closed economy § Gradual liberalization § Centralized planning § Industrial licensing dismantled § Completion of integration with global economy § Government permission necessary for Setting up industrial plant § Trade liberalization – tariff/tax reduction § Financial/capital markets reforms as consolidation § Import of capital goods / technology § Opening up of FDI § Tariff down to 10%. § Expansion of capacity § Government regulation to facilitation § To reach ASEAN levels by 2010 § Key sectors of economy reserved for public sector only § Bilateral Comprehensive Economic Partnership Agreements with EU, Japan, ASEAN etc in pipeline 4

India - a strong and vibrant economy

Macroeconomic stability Forex Reserves (USD bn) 250 220 § Steady increase in forex reserves. 192 200 141 150 100 75 50 5. 8 6. 4 42 32 22 20 0 FY 08 (till Aug) FY 07 FY 06 FY 05 FY 04 FY 03 FY 02 FY 01 FY 00 FY 99 FY 98 FY 97 FY 96 FY 95 FY 94 FY 93 FY 92 FY 91 Trends in Inflation- WPI (%Yo. Y) § Moderate inflation over last few years 16 14 13. 7 12 % 10 8 6 5. 4 4 2 0 FY 07 FY 06 FY 05 FY 04 FY 03 FY 02 FY 01 FY 00 FY 99 FY 98 FY 97 FY 96 FY 95 FY 94 FY 93 FY 92 FY 91 6

Economy – high growth rates Robust GDP growth Real GDP growth (%) 9. 4 10 9 14 8 12 6 5. 3 10. 9 (%) 5 11 10 7 4 8 7 6 3 5. 15 4 2 1 2 0 0 FY 07 FY 06 FY 05 FY 04 FY 03 FY 02 FY 01 FY 00 FY 99 FY 98 FY 97 FY 96 FY 95 FY 94 FY 93 FY 92 FY 91 Industry growth (%) Services growth (%) Source: Reserve Bank of India, CMIE 7

Economy – high growth rates leading to increasing FDI Increasing FDI trend Svgs & Cap Formation % of GDP ( Current prices) 18000 15726 26. 3 30 23. 1 14000 12000 25 10000 20 8000 15 6000 10 4000 Goss domestic savings Source: RBI, DIPP FY 06 FY 05 FY 04 FY 03 FY 02 FY 01 FY 00 FY 99 FY 98 FY 97 FY 96 FY 95 FY 94 FY 07 FY 06 FY 05 FY 04 FY 03 FY 02 FY 01 FY 00 FY 99 FY 98 FY 97 FY 96 FY 95 FY 94 FY 93 FY 92 0 FY 93 5 97 FY 91 0 FY 92 2000 33. 8 32. 4 35 FY 91 USD million 16000 40 Gross domestic capital formation Source: Reserve Bank of India 8

Trade liberalization – reduction in tariffs Despite a secular reduction in peak tariffs, the tax to GDP ratio is still showing an upward trend Tax/ GDP ratio Source: Peak Custom Trend in Reserve Bank of India Duty 160 150 140 110 100 18 80 16. 95 17 85 16 65 50 60 45 40 35 40 (%) 30 20 12. 5 10 20 15 14 14. 52 14. 2 15. 43 13. 38 13 FY 07 FY 06 FY 05 FY 04 FY 03 FY 02 FY 01 FY 00 FY 99 FY 98 FY 97 FY 96 FY 95 FY 94 FY 93 FY 92 FY 91 Source: FICCI conference, March 14 – 15 th 2007 FY 92 12 0 FY 91 (%) 120 Source: Reserve Bank of India ASEAN levels committed to be reached by 2010 9

Capital Markets playing an increased role in the economy Market Capitalisation as Percent of GDP (As at end-March)) § Improving ratio of market cap / GDP 100 86. 5 90 80 70 % 54. 2 60 50 43. 4 40 30 20 33 26. 8 19. 54 23. 3 10 India’s market cap to GDP ratio crossed 100% this fiscal year 0 FY 07 FY 06 FY 05 FY 04 FY 03 FY 02 FY 01 FY 00 FY 99 FY 98 FY 97 FY 96 FY 95 FY 94 FY 93 FY 92 FY 91 Source: Reserve Bank of India Equity Market Reforms 2 2. 4 2. 3 1. 7 2. 2 1. 8 0. 6 0 -0. 4 FY 06 FY 03 FY 02 FY 01 FY 00 FY 99 FY 98 Source: Reserve Bank of India, SEBI Handbook FY 97 Electronic transfer of securities 1. 5 4 mn -2 § 1. 6 2 FY 96 Scripless settlement 4 FY 95 § 9. 3 6 FY 94 Screen-based nation-wide trading 10. 2 8 FY 93 § 10 10 USD Billion Corporatization and Demutualisation Scheme of 19 stock exchanges to make them “for profit” entity : FDI flow started in BSE , NSE 12 FY 05 § SEBI – Independent Regulator FY 04 § FII Investments 10

Macroeconomic stability - Stable currency Rupee exchange rate ( INR / USD) 60 47. 68 50 45. 94 45. 29 42. 04 40 35. 47 31. 39 30 20 17. 94 10 0 FY 07 FY 06 FY 05 FY 04 FY 03 FY 02 FY 01 FY 00 FY 99 FY 98 FY 97 FY 96 FY 95 FY 94 FY 93 FY 92 FY 91 INR/ USD Source: RBI High Degree of autonomy of India’s Central Bank § § Credible independent Central Bank Sound professional management 11

Developments in Banking Sector Gross NPAs declining trend 16 Improved banking governance exhibited by declining Gross NPAs Gross NPA (%) § 14. 4 12. 7 14 12 11. 4 10. 4 8. 8 10 7. 2 8 5. 1 6 3. 3 4 2 0 1998 2000 2001 2002 2003 2004 2005 2006 Market share in outstanding credit § Share of private sector banks increased from 9% in 1996 to 21% in 2006 March 31, 1996 March 31, 2006 PSU Banks 6% 82% 9% 21% 73% 9% Banking Business growing over the years 2, 500, 000 consistently – Deposits grew by 17% CAGR (1998 -06) Advances grew by 21% CAGR (1998 -06) 2, 109, 049 2, 000 INR Crore – Foreign Banks 1, 500, 000 1, 000 500, 000 0 Source: RBI 598, 485 324, 079 § Banking business growing Private Sector Banks Deposits Advances 1998 1999 2000 2001 2002 2003 2004 2005 2006 12

Going Forward

Going forward Goldman Sachs has revised its timelines for India’s GDP exceeding the G 6’s GDP India’s GDP (in US$ terms) will surpass that of the US before 2050, to make it the second largest economy Italy France/UK Germany New India Projection Japan US Cars indicate when Indian US$GDP exceeds that of the Country 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 Source: Goldman Sachs, Global Economic Paper No 152, 22 January 2007 14

Investment Opportunities

Investor-friendly, liberal open-market economy § Government is focused on improving the business and investment environment – – 100% FDI permitted in manufacturing (except atomic energy) – 100% FDI permitted in most service sectors – Investments, dividends, fees are freely repatriable – • No licensing required, except in five sectors Foreign investments allowed in capital markets State Government compete for Investor Friendly Image Source: Reserve Bank of India 16

Investor-friendly, liberal open-market economy Large skill and intellectual capital base § Over 2. 5 million graduates added every year – Most of them English-speaking – 300, 000 Engineers – 150, 000 IT professionals § Strong emphasis on human resource development – Skills missions being launched – Up gradation of workers training – Increased public spending in Education and health 17

Firms in India – globally competitive 91 percent of MNC’s make profits in India compared to 45 - 50 percent in China 69% of survey respondents report higher profitability averages in India than they do globally India’s ROE quite high relatively 4. 0 3. 5 India Indonesia 3. 0 P/B (2007) (x) § China Singapore 2. 5 Malaysia Taiwan Philippines 2. 0 Thailand Hong Kong 1. 5 Korea 1. 0 12 14 16 18 20 22 24 26 28 Ro. E (2007) (%) Source: Prowess, CLSA Asia-Pacific Markets P/B = Price to Book value 18

Indian firms seek global reach Tata Steel bought Corus Plc USD 12. 1 billion Hindalco acquired Novelis Inc. USD 6 billion Acquisition made Hindalco the world's largest aluminum rolling company Suzlon Energy Ltd. acquired REpower USD 1. 6 billion Acquisition made Suzlon world's third largest wind power company Dr. Reddy’s acquired Betapharm USD 0. 5 billion Acquired German’s third largest generic companies United spirits acquired W&M USD 0. 5 billion Acquisition made United Spirits world's second largest spirit company Acquisition made Tata Steel world’s fifth largest steel producer globally 19

India- Attractive location for R&D MNCs finding location of R&D in India : Increases global competitiveness § Large R&D facility of major MNCs – Microsoft – IBM – ADOBE – SAP – Sony Ericsson – Dell – The Daimler. Chrysler – Boeing – Texas Instruments 20

Infrastructure Opportunities

Infrastructure Opportunities : Indian Telecom Industry Growth of Indian telecom (wireless) sector…. . 450 417 350 300 250 200 166 150 2010 E 2007 (YTD) 2002 33 2007 2001 13 2006 6 52 2005 4 2004 3 2003 2 2000 0 1 1999 50 193 96 100 1998 Mobile subscribers in mn 400 And participated by global majors …. . success stories Company Investors Direct stake (%) Bharti Airtel Sing. Tel 35 Spice Telecom Telekom Malaysia 49 Hutchison Essar Vodafone 67 Tata Tele Temasek Holdings 9. 9 Aircel Limited Maxis Communications 74 Source: Credit Suisse, Press, Analyst Reports, TRAI 22

Infrastructure Opportunities : Indian Telecom Industry (contd. ) led by conducive regulatory framework…… Effective Mobile Tariffs (Rs/min) 16 147 NTP-99 15. 3 140 14. 5 14 12 3 rd & 4 th Cellular operator 10 8 WLL Introduced Lowering of ADC from 30% to 10% of Sector Revenues 3. 1 4 0 Mar-98 Mar-99 1. 9 Mar-00 3. 6 Mar-01 Effective mobile tariff 60 33. 3 3. 1 1. 9 1. 2 100 89. 5 51. 5 4. 2 2 120 80 7. 2 6 0. 9 160 6. 4 40 1. 2 1 12. 8 Mar-02 Mar-03 Mar-04 Mobile Subscribers Base (millions) 18 Mar-05 Mar-06 0. 9 20 0 Dec-06 Mobile Subscriber Base 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 23

Infrastructure Opportunities : Civil Aviation Airlines Sector Performance 80 32 70 60 21. 5 35 30 23. 7 25 20 40 30 20 10 70 11. 6 50 32 17 10 40 19 22 15 Units 50 25 0 2003 -04 2004 -05 International 2005 -06 Domestic 2006 -07 % Growth § 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 24

Infrastructure Opportunities : Power / Roads / Ports Infrastructure: 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 25

Significant plans to improve the country’s infrastructure Public – Private participation being encouraged PPP Projects Awarded Urban Infrastructure, Railways, 2 11 Roads, 63 Civil Aviation, 2 Ports, 8 Urban Infrastructure, Railways, 0. 22 Number of projects 0. 10 Civil Aviation, 0. 42 Roads, 2. 99 Source : Ministry of Commerce, Government of India Estimated Value Ports, (USD Billion) 4. 65 Source: World Bank report and PPPinindia. com – the study did not include Power sector 26

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