Economy Update - 2010

8/9/2019 Economy Update - 2010

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Indian Economic & Investment

Scenario

May 2010


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Economic Snapshot

Indias GDP witnessed

high growth and was

the second fastestgrowing GDP after

China

The sound performance

of each industry

segment is leading to

the overall robust

performance of the

Indian economy

Indian economy is the

4th largest in terms ofPPP USD 3.5 trillion

in 2009

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India: Astounding Demographics

2

9

48

221

726

9

17

74

285

710

20

33

120

404

613

2001-02 2005-06 2009-10(E)

Rich (Above 115,000)

High Income (57,000 115,000)

Consuming class (23,000 57,000)

Working class (10,200 23,000)

Needy (Below 10,200)

Annual Household Income

(in USD)

*

Population(milli

on)

Growth in the higher

income categories of

Indias population has

created an affluent

section of society,which has significant

level of purchasing

power

DEMOGRAPHIC TRANSFORMATION OF INDIA

Increasing per capita income coupled

with an emerging middle class has

provided the necessary impetus to

consumerism in India

Increasing per capita

income and large

population moving into

middle class has led to

high level of

consumerism in India

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India: Pacing Ahead to Emerge as a Major Economy in the World

India has been ranked

superior to other major

countries by many

prominent surveys

AT Kearney placed India

among the top three in

its FDI confidence

index

the retail market

Based on Financial Attractiveness, Business

Environment, people skills and availability

Projected GDP Growth Rates for Select Upcoming Economies

0

2

4

6

8

2005-10 2010-15 2015-20 2020-25 2025-30 2030-35 2035-40 2040-45 2045-50

GDPGrowthRate(%)

Brazil China India Russ ia

along with the services

sector has beenattracting the interest of

major players

India is expected to

outperform its rivals in

the BRIC, in terms of

GDP growth rates,

from 2015 onwards

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India: Vibrant Capital Market

India is among the

major destinations

across the globe for

inflow of US Dollar i.e.

FIIs

Market Capitalization (Free Float) of Sensex is 1,278,490 Crores

FIIs augmented support

by infusing large

investments in Indian

stock market

Crossed 14,000 mark

Crossed 10,000 mark2/7/2006

1/12/2007

Resilient Industry

performance

Increased local

investors confidence

Emergence of industry

and confidence of local

investors along with the

FIIs has led to increased

movement of sensex

Crossed 5,000 mark12/30/1999

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Sectoral deployment of bank credit

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India: Attractive Investment Destination

India is ranked third

in AT Kearney FDI

confidence index.

China and USA

being ranked first

and second

respectively.

With improved performance, Indian markets have attracted large investments

erv ces computer

hardware & softwaretopped the list of

inward FDI

Mauritius has been the

largest contributor

towards FDI into

India..

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Road to Recovery India appears to be on the path to recovery evidenced by surprisingly strong Q2 GDP numbers of 7.9% and 16.7% y-o-y IIP growth in

January. Q3 GDP dropped to 6% given the impact of the drought but we expect Q4 GDP to rebound strongly.

The industrial sector as a whole accounts for 25% of the economy and was the main factor in driving GDP growth lower in 2008 and

2009. We believe, the reverse to be true for 2010.

The services purchasing managers index (PMI) continues to show improvement and paints a very encouraging picture of economic

activity. The 60.9 PMI figure for February, is up more than 5 points since November 2009, 20 points since the low in February 2009 and

above the average of 57.9 since it began in December 2005. This supports the strong manufacturing PMI figure for February and is the

main reason for our expectation of a rebound in Q4 GDP.

The following indicators continue to point to an economic recovery already underway:

Motor vehicle sales continue to show a strong growth.

Cement production continues to show improvement in its 3 month moving average growth rate.

Manufacturing Purchasing Managers Index (PMI) has also shown a significant improvement over the last few

months. Since a January 2009 low of 44.4 it has bounced to cycle high of 58.5 in February. PMI modestly dropped to 57.8 in March,

although it was encouraging to see a renewed bounce in export orders to 57.1 from 56.6.

Industrial Production growth has eased slightly, but still registered a very strong 16.7% y-o-y in January 2010.

Capital goods production, in particular, rose by an extraordinary 56% y-o-y, pointing towards strong fixed capital formation and a

vigorous recovery in real investment growth. December 2009 growth was revised up 80bps from 16.8%. The indices of industrial

production for mining, manufacturing and electricity sectors grew 14.6%, 17.9% and 5.6% y-o-y respectively.

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RBI - Macro Economic OutlookThe growth outlook for the Indian economy in the near term remains positive on account of the following factors:

(a) Expectations of satisfactory rabi output, which may offset, partially, the decline in kharif output;(b) Expectations that the industrial sector would remain buoyant;(c) Increase in corporate sales and profitability;

(d) Pick-up in order books and capacity utilization as per different survey results;

(e) Turnaround in exports with improving global conditions;

(f) Pick-up in lead services indicators for transportation, Telecommunication and construction, and Revival in credit demand from

the private sector.

Notwithstanding the overwhelming positive sentiments about stronger growth in the near term, certain downside risks remain:

a) The revival in growth of agriculture during 2010-11 hinges on the assumption of normal monsoon, which entails the usual

uncertainties;

b) While investment demand is showing signs of picking up, it is still much below the rate of growth in the pre-global crisis period;c) the private consumption demand, which accounts for about 60 per cent of aggregate demand, needs to gain significant

momentum;

d) Decline in saving rate last year, led by sharp decline in public sector savings;

e) global economic recovery, though clearly visible, is still weak and thus has implications for sustaining the growth in Indian

exports; and

f) The rising inflation, which may push costs through demand for higher wages and increase in input costs.

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Potential Sectors for investmentBanking and financial sector:

Several factors favor high growth

Demographic profile favors higher retail offtake - 54% of the population is in the 15-35 years age group Capital expenditure by the government and private industry expected to grow at a high rate

Economic growth of about 14% p.a. in nominal terms

SME lending, a largely untapped market, presents a significant opportunity SMEs account for 40% of the industrial output and 35% of direct exports

Regulatory and technological enablers leading to high growth

The banking system is technologically enabled with RTGS and check truncation in place

Improved asset management practices - Gross NPAs to Advances ratio reduced from 24-25% in 1993 to 2.5% in 2006-07

Investment opportunity across all segments in the banking and financial

services sector

Low penetration in the pension market makes it a lucrative business segment

Foreign banks likely to be allowed to acquire local banks after March 2009 when the next stage of banking reforms is propose

Policy:

Reserve Bank of India (RBI), Indias central bank, is the regulator for the banking and financial services industry

RBI approval is required for all foreign investment in this sector

Foreign banks can do business in India either by setting up branches or through a wholly owned subsidiary, after approval by RBI

Indian private banks can be 74% foreign owned, with a 5% cap on ownership by any one entity

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Real Estate and ConstructionPotential

Several factors are expected to contribute to the rapid growth in real estate

Large demand-supply gap in affordable housing, with demand being fuelled by tax incentives and a growing middle class with highersavings

Increasing demand for commercial and office space especially from the rapidly growing retail, IT/ITeS, and hospitality sectors

The recently announced JNNURM expected to provide further impetus

Investment opportunities exist in almost every segment of the business

Office space for IT/ITES: 150 million sq. ft. across urban India by 2010

Commercial space for organized retailing: 220 million sq. ft. by 2010

Hotels and Hospitality: Over 100,000 new rooms in the next 5 years

Investment opportunity of over US$75 billion in the next 5 years

Policy

100% FDI is allowed in real estate development subject to minimum scale norms of either: 25 acres in case of serviced plots or integrated townships; or

50,000 square meters of built-up area for construction development projects

Initial investment is locked-in for a 3 year period

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Power SectorPotential

Large demand-supply gap -All India average energy shortfall of 9% and peak demand shortfall of 14%

The implementation of key reforms is likely to foster growth in all segments Unbundling of vertically integrated SEBs

Open Access to Transmission and Distribution networks

Select distribution circles to be franchised/privatized

Tariff reforms by regulatory authorities

Opportunities in Generation for:

ra ega ower an s pro ec s o eac

Coal-based plants at pithead or coastal locations (imported coal) Natural gas/CNG-based turbines at load centers or near gas terminals

Hydel power potential of 150,000 MW is untapped as assessed by the Government of India

Renovation, modernization, up-rating and life extension of old thermal and hydro power plants

Opportunities in Transmission network ventures - additional 60,000 circuit km of Transmission network expected by 2012

Private sector participation possible through JV and 100% equity mode

Total investment opportunity of about US$ 150 billion over a 5 year horizon

Policy

100% FDI permitted in Generation, Transmission & Distribution the Government is keen to draw private investment into the sector.

Policy framework: Electricity Act 2003 and National Electricity Policy 2005Incentives: Income tax holiday for a block of 10 years in the

first 15 years of operation; waiver of capital goods import duties on mega power projects (above 1,000 MW generation capacity)

Independent Regulators: Central Electricity Regulatory Commission for central PSUs and inter-state issues. Each state has its own

Electricity Regulatory Commission.12


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Auto ComponentsPotential

India amongst the most competitive manufacturers of auto components, especially:

Metal intensive components: forgings, stampings, castings

Skilled labor-intensive components: machining, wiring-harness, other electrical components

Hi-tech components: electronic fuel injectors

Opportunity to address the global auto components market while leveraging Indias large and

rowin domestic market

Opportunity to set up R&D centers in India Indian technical skills acknowledged as among the best in the world

High level of sourcing of auto components from low cost countries (LCCs) to act as a driver

for growth

Potential of over US$5 billion for investment in India

Policy

100% FDI allowed through the automatic route

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IT & IT Enabled ServicesPotential

Indias inherent IT capabilities - talented workforce and world-class companies

Availability of technically skilled and English-speaking labor force at a fraction of the cost compared to US and Europe

Quality orientation, project and process management expertise

Enhanced global service delivery capabilities of Indian companies through a combination of greenfield initiatives, M&A, alliances and partnerships with local

players

International recognition of Indias strengths

Increasing awareness among global companies about Indias capabilities in higher, value added activities and in the global delivery model

Leadin international com anies have identified custom a lication develo ment and maintenance as riorit areas due to a hi h offshoreable com onent

High growth of domestic IT & ITeS market due to several regulatory and technological factors: Increased investments by enterprises in IT infrastructure, applications and IT outsourcing

Demand for domestic BPOs has been largely driven by faster GDP growth and by sectors such as telecom, banking, insurance, retail, healthcare, tourism and

automobiles.

Opportunity to supply to the global market in addition to serving the growing domestic demand

Policy

100% FDI is permitted in this sector under the automatic route

SEZs, EOUs and Software Technology Parks have been set up across India income tax exemptions are available for units in

these designated areas/zones

IT Act, 2000 legalizes the acceptance of electronic records and digital signatures providing a legal backbone to e-commerce

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Thank you

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Documents

Economy Update - 2010