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 1990s
1990s
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
42
32
22
20
6.4
0
FY08 (till Aug)
FY 07
FY 06
FY 05
FY 04
FY 03
FY 02
FY 01
FY 00
FY 99
FY 98
FY97
FY96
FY95
FY94
FY93
FY92
FY91
Trends in Inflation- WPI (%YoY)
 Moderate inflation over last few years
16
14
13.7
12
10
8
6
5.4
4.4
4
2
0
FY 07
FY 06
FY 05
FY 04
FY 03
FY 02
FY 01
FY 00
FY 99
FY 98
FY97
FY96
FY95
FY94
FY93
FY92
FY91
6
Economy – high growth rates
Robust GDP growth
Real GDP growth (%)
9.4
10
9
14
8
12
11
10
10.9
7
6
5.3
5
8
4
6
7
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
FY97
FY96
FY95
FY94
FY93
FY92
FY91
FY 07
FY 06
FY 05
FY 04
FY 03
FY 02
FY 01
FY 00
FY 99
FY 98
FY97
FY96
FY95
FY94
FY93
FY92
FY91
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)
40
18000
15726
33.8
32.4
35
26.3
30 23.1
14000
12000
25
10000
20
8000
15
6000
10
4000
Goss domestic savings
Source: RBI, DIPP
FY06
FY05
FY04
FY03
FY02
FY01
FY00
FY99
FY98
FY97
FY96
FY95
FY94
FY 07
FY 06
FY 05
FY 04
FY 03
FY 02
FY 01
FY 00
FY 99
FY 98
FY97
FY96
FY95
FY94
FY93
FY92
0
FY93
5
97
FY91
0
FY92
2000
FY91
USD million
16000
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:
of India
Trend
in Reserve
PeakBank
Custom
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
FY97
FY96
FY95
FY94
FY93
FY 07
FY 06
FY 05
FY 04
FY 03
FY 02
FY 01
FY 00
FY 99
FY 98
FY97
FY96
FY95
FY94
FY93
FY92
FY91
Source: FICCI conference, March 14 – 15 th 2007
FY92
12
0
FY91
(%)
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
FY97
FY96
FY95
FY94
FY93
FY92
FY91
Source: Reserve Bank of India
Equity Market Reforms

FII Investments
SEBI – Independent Regulator
12
10

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
USD Billion

9.3
8
6
4
1.6
2
1.5
2
2.4
2.3
1.7
2.2
1.8
0.6
4 mn

Scripless settlement
0
-0.4
FY 06
FY 05
FY 04
FY 03
FY 02
FY 01
FY 00
FY 99
FY 98
Source: Reserve Bank of India, SEBI Handbook
FY97
FY96
FY95
FY94
Electronic transfer of securities
FY93
-2

10.2
10
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
FY97
FY96
FY95
FY94
FY93
FY92
FY91
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
11.4
12
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
2,000,000
INR Crore
–
Foreign Banks
1,500,000
1,000,000
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 G6’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
•
–
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
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
China
P/B (2007) (x)

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
RoE (2007) (%)
Source: Prowess, CLSA Asia-Pacific Markets
P/B = Price to Book value
18
Indian firms seek global reach
Acquisition made Tata Steel world’s
fifth largest steel producer globally
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
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 DaimlerChrysler
–
Boeing
–
Texas Instruments
20
Infrastructure Opportunities
Infrastructure Opportunities : Indian Telecom Industry
Growth of Indian telecom (wireless) sector…..
450
417
350
300
250
193
200
166
150
96
2010E
2007 (YTD)
33
2007
2002
13
2006
6
52
2005
4
2004
3
2003
2
2001
0
1
2000
50
1999
100
1998
Mobile subscribers in mn
400
And participated by global majors …..success stories
Company
Investors
Direct stake (%)
Bharti Airtel
SingTel
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……
160
147
NTP-99
Effective Mobile Tariffs (Rs/min)
16
15.3
140
14.5
14
12
3rd & 4th
Cellular
operator
10
WLL
Introduced
8
Lowering of
ADC from
30% to 10%
of Sector
Revenues
120
100
89.5
80
7.2
51.5
60
6
4.2
3.1
4
33.3
3.1
1.9
2
0.9
0
Mar-98
1.2
Mar-99
1.9
Mar-00
6.4
3.6
Mar-01
40
1.2
1
12.8
Mar-02
Effective mobile tariff
Mar-03
Mar-04
Mobile Subscribers Base (millions)
18
Mar-05
Mar-06
20
0.9
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
35
70
60
21.5
30
23.7
25
20
40
30
20
10
70
11.6
50
19
17
10
40
32
22
15
Units
Units
50
25
0
5
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
Thank You
www.dipp.gov.in