Jan 22 2007

India Emerging

Presentation to IMPM

Tenth most Industrialized country & the fourth largest economy (PPP)

Known strength in software and manufacturing

GDP (2008): USD $5.21 trillion PPP) ~$1.2 trillion

at official exchange rate

Exports USD 163 billion in FY 2007-08

Imports USD 224.1 billion in 2007

FDI of USD 67 billion in 2006

GDP real growth rate (2007-08) 9.1% vs 7.5% in 2004-05

Industry production growth now 8.5%

Strong Equity Market. Capitalization: ~$600 Bn

Corporate earnings growth > 20% last three years.

GDP composition by sector:

agriculture: 17.8% industry: 29.4% services: 52.8%

Poverty rate: 25%; Unemployment rate: 7.2%

India- Fact File

India: Economic Outlook

India- Economic Outlook

Source: CIA, World factbook

G-6, Brazil, Russia and China is expected to slow down over the next 50 years, India’s growth rate to remain above 5% throughout that period

India’s GDP to outstrip Japan’s in 2032

India to raise its per capita income 35 times the current levels by 2050

GS BRICSs Model Projections

China

India

Russia

Brazil

BRICs

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

UK Germany Japan US

Italy France Germany Japan

Italy France Germany

Italy France Germany

G6

* dots indicate when BRICs US$GDP exceeds US$GDP in the G6

The BRICs Verdict on the Indian Economy

Overtaking the G6: When BRICs’ US$GDP will exceed G6

0 5,000 15,000 25,000 35,000 45,000

RussiaIndia

MexicoBrazilChina

CanadaItaly

FranceUK

Germany

JapanUS

GDP (US$bn)

India emerging as the third largest economy, 2050

BRIC Report

Backed by strong fundamentals

5.4

6.6 6.4

5.25.6

6 66.8 6.5

0

1

2

3

4

5

6

7

8

1997 1998 1999 2000 2001 2002 2003 2004 2005

Indian economy in a resilient

mode in terms of GDP growth

Fourth largest economy (PPP)

… has the benefit of low inflation…

…along with rising forex rate

and reserves

Consistently growing GDP (%) 1

Source: Indiastat.com

Declining Inflation levels 3

Among the top 5 economies (PPP) 2005 2

Strong Forex Reserves 4

Source: CMIE and Tata Statistical Outline of India

Source: CMIE

26 29 32 38 4254

74

119140

020406080

100120140160

FY

97

FY

98

FY

99

FY

00

FY

01

FY

02

FY

03

FY

04

FY

05

Forex Reserves

0 200 400 600 800 1000 1200 1400

Population In millions

Source: Goldman Sachs; Dreaming with BRIC's: The path to 2050Source: Industry sources, Economic Survey

Population growth 2000-2015

5 year GDP growth rates

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

2000-2005 2005-2010 2010-2015 2015-2020

India China Brazil Russia

-0.6% -0.4% -0.2% 0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2% 1.4%

2000 2005 2010 2015 2020

GD

P P

er C

apita

(U

S$)

5 ye

ar a

vg. g

row

th

3.7%

7.4%7.5%

468559

804

1149

1280

1049

144

175

48

212

70

62

China

India

Russia

Brazil

S. Korea

Indonesia

Turkey

Thailand

60.00%

120.00%

-50.00%

110.00%

10.00%

110.00%

120.00%

60.00%

China

India

Russia

Brazil

S. Korea

Indonesia

Turkey

Thailand

And expectation of long term potential

One of the fastest growing economies 5 Per Capita GDP to improve by 7% through 2020

6

India houses 17% of global population 7 And will overtake China by 2030 8

Why India?

Why India?

Why India?

• The Political Economy

– Nation and State: India is a federation of 29 states and several small ‘union territories’

– Licensing, Law and Reform: Centre has opened many sectors for foreign investment

– Investment Procedures: RBI for automatic approval and Foreign Investment Promotion Board (FIPB) for streamlining approvals

– Preferential Governmental Policies: Tax holidays for R&D; Industrial Parks and SEZs

• Human Capital and Resources

– The Demographic advantage: Large working-age population; Low cost labour

– Engineering and Managerial Capability: Produces 400,000 graduates

– Raw Materials: Rich reserves of bauxite, copper, iron ore, zinc etc.

– Reliable Suppliers: 75 pharma plants approved by US FDA- largest outside US!

Why India?

• Location

– Gateway to Asian markets such as Japan and Korea

• Large Domestic Market

– Large target customer base and rising income levels

– Increasing consumerism

– Changing age profile: Large proportion of the population relatively young- age group of 20 -59 years

– Changing Lifestyles: Urban consumers more exposed to western lifestyles.

Why India?

• Global Trade

– CII-McKinsey report: Manufacturing exports to increase from US$ 48 billion in 2003 to US$ 300 billion in 2015

– India’s share in world manufacturing to increase from 0.8% to 3.5%

– The Indo-US nuclear deal to provide work for JVs with GE etc.

• Quality Standards

– Adherence to quality standards such as ISO 14001 and TQM make them export ready

– In 2003, 5 out of 8 Deming award (awarded by Union of Japanese Scientists and Engineers [JUSE] for quality) winners were from India

India Growth Story

The factors driving growth

• Population & demographic trends: India’s growth dividend

– Every two years, India would be adding all of Germany’s labor force!

• Human capital

– English-speaking skilled workers: scientists, IT specialists, technicians and engineers

• Rising integration into global trade and investment

– Can also capitalize on Diaspora, especially in USA

• Investment trends: huge potential in infrastructure

– PPP to finance and execute infrastructure projects (rail, airport, seaports)

• Policy and institutional determinants of growth

– Macro policies

– Institutional and regulatory environment

• Vibrant and substantial domestic market

Drivers of Economic Transformation

• Spirit of entrepreneurship

– Unleashed with the IT revolution and emergence of BPO /

outsourcing industry

– Rise of knowledge based industry, taking cue from successful

entrepreneurs in the Silicon Valley

• IT industry leveraged on Modular Development & Global Delivery Model

– Benefits arising out of 24 hr work day and productivity gains

• Technology drove outsourcing of business processes—the death of

distance

• Indian IT Cos devising strategies to move up the value chain

• Other sectors seeing similar transformation are Pharma and Auto-

ancillaries

Towards Greater Value Addition

• Strong rise of IT-ITES industry driving growth of high-value

knowledge process outsourcing (KPO)

• Outsourced Engineering Services a $7-12 Billion opportunity

(NASSCOM)

• Opportunities in R&D, Design and Product Development

• Opportunities in Financial Sector and Pharmaceutical industry

(new drug development, clinical testing)

• Industries can take advantage of India's giant pool of scientists &

engineers to write code and to add value through research

– Automotive, chip-design, pharmaceutical and aerospace sectors

India in Manufacturing: A Snapshot

• It began in the 1980s when the Prime Minister Indira Gandhi told Maruti to build a “People’s car”

• Maruti forged a 50-50 joint venture with Japan’s Suzuki and now has annual sales of $34 billion and $5 billion in exports

• Year 2003 has been crucial for manufacturing productivity; The gradual opening up of the economy and the relative slowdown in growth and profit during 1997-2002 introduced a competitive dynamic forcing the private sector to restructure

• The result: the private sector emerged leaner, fitter and productive

• India manufacturing base is the fourth largest among the emerging economies and the fastest growing: more investments as a proportion of GDP second only to China

• Centre of Monitoring Indian Economy (CMIE) report says: 2,144 listed companies have registered a 33.9% rise in their aggregate net sales in the June 2008 quarter

India is the largest three-wheeler and the second largest two-wheeler market in the world

India’s textile industry is second largest in the world in cotton trade

India as a Manufacturing Hub

• Availability of pool of qualified engineers and technicians to propel skill-

intensive industries requiring advanced technical expertise

– Industries like fabricated metal products, machinery, pharma and telecom equipment

• Cummins, DaimlerChrysler, Toyota, ABB, Honeywell & Siemens here

• Auto-ancillary industry has shown the potential to emerge as a low-cost

outsourcing destination for assembly components

– Exports constitute 15-20% of $10 billion industry in FY06; likely to reach 50% in 5 yrs

• By having a foothold in India, Companies get closer to consumers

– helps identify the pulse of the market quickly and to respond rapidly

• India, as a Regional Marketing Hub, is suitable for most of MNCs, which

use quick model of "design—develop—market”

• Indian communication infrastructure now world class

India as a Manufacturing Hub

• Indian industry has critical skills required for product, process and capital

engineering

– Product Engineering:

• Indian engineers can design quickly, helps reduce development costs & lead times

• Many automakers are now creating engineering and design centers in India to

capitalize on these skills

– Process Engineering:

• Redesign of manufacturing processes to make them more labor intensive and less

capital intensive enabling overall cost reduction

• “De-automating” production processes used in Western factories can cut overall

manufacturing cost by 20%

– Capital Engineering:

• India’s advanced tooling and machinery industry makes it possible to produce capital

equipment locally

Sourcing Components: Toyota Example

• Toyota was the first auto maker to recognize India as a source of

components

• Invested $ 200 million in JVs to help local suppliers scale in their

manufacturing operations

• Focused on localizing content for Qualis and Corolla models

• Turned India into a regional sourcing hub through economies of

scale in manufacturing

• Invested significant amounts in offering training and processes to

bring Indian suppliers up to its global standards

Competition for Talent

• Tremendous competition for talent

– Small layer of world-class talent (e.g., Indian Institutes of Technology); rest have

to be sifted through

– Absence of high-end technical jobs and suitable rewards has resulted in high

rates of emigration of top talent

• India’s late entry into global economy has created a dearth of middle

managers with international experience

• Moving beyond off-shoring hotspots; talent can be tapped in hinterland

– Talent can be nurtured

– Internships and competitions to instill interest in areas of relevance to the

company and also identify talent

• The ties between academia and industry—needed to commercialize

breakthroughs—must be strengthened

– IBM Research Lab in IIT Delhi; Monsanto at IISc; Sun at IIT-Madras

• Metropolitan Area 531 sq km

• 5th largest urban center, fastest growing

• Population (2004) estimated at 6.5 million

• Among top 10 high tech cities of the world

• 4th leading innovation hub along with San Francisco, Austin

(Texas), Taipei (Taiwan)

BANGALORE

• Home for over 100 MNCs

• 130 of Fortune 500 companies located here

• Software exports of Rs. 56,478.16 crore in 2006-07 ($141 billion).

• Important centre for Garment and Granite industry

• Emerging as important Education and Health Care Hub

• Significant presence of Indian government Companies: Aircraft,

Space Research, Machine Tools, etc

Bangalore …

• IT

– Home to over 1400 IT companies

– Two new IT cos set up every week with foreign equity (Investment

US $ 500 m, growth rate: 45%),

– Software exports during 2003-04: ~US $ 4 Bn (growth rate 46%)

– Hardware exports US $ 400 m (growth rate 21%)

• BT

– Fastest growing ‘‘Biocluster’’

– Largest number of Biotech companies (110)

– Growth rate over 2003-04 is 30% (investment approx. US $ 120 m);

exports US $ 73 m US $ 120 m);

– 50% of BT companies of India are in Bangalore

Bangalore …

• The ‘‘Back Office’’ of the World

– Over 60 BPO companies (2004)

– Investment: US $ 144 m

– Annual Exports: US $ 279 m (2004)

– IT Enabled Services (BPO in Banking, Insurance, Medical Transcription, etc)

Employment generation also witnessed in allied sectors—formal & informal

• Hospitality and Services sector also generate employment

• Human Resource sector also growing

– Strong human resource base in Science & Technology

– Pioneer in privatization of higher/technical education leading to, annually

• 40,000 engineers

• 8,000 doctors

• 12,000 lawyers

• 1,50,000 graduates

Bangalore …

India/Bangalore as an R & D hub: The GE Experience

• In last 5 yrs over 100 Cos, including General Motors, Boeing and Mobil,

have chosen India as an R&D hub

• General Electric has its largest R&D center outside the US in

Bangalore

• John F. Welch Technology Center in Bangalore employs about 2,300

scientists, researchers and engineers, double the number in Shanghai

• Local scientists' facility in English and country's superior track record

in IP protection are India’s advantages over China

• GE's Indian researchers have applied for 260 U.S. patents on products

such as synthetic materials & ceramics, with 37 approved by the U.S.

Patent and Trademark Office

The Challenges Ahead: Economy

Several constraints still exist

• Infrastructure remains a critical bottleneck, across sectors

• PSUs still hold monopoly in some sectors

– Aerospace, defense production & nuclear power generation

• Many sectors of the economy still regulated extensively

– Labour reforms slowed down; Temp working not allowed officially

• Slow growth in agriculture, primary occupation of 60% people

– Farmers suicides a major concern

• Urbanization at a rapid pace, but not planned or managed carefully

– Can lead to tremendous impacts on productivity and on the environment

• Challenge to ensure inclusive growth

– Economic gains need to be equitably distributed while evolving right

incentives for growth

The Challenges Ahead: Politics

Several concerns persist

• Decline of major national parties and the rise of coalitions

– Congress & BJP in decline; together have of half of the seats in Parliament;

– Regional parties rising. Organized on “identity” than ideology. Identity includes caste

(BSP), language (Telugu Desam), culture (DMK etc), religion (Akali), dynasty (BJD)

– Corruption, criminal infiltration of politics on the rise

• Coalition politics can lead to political instability and slow down reforms

– Left parties regarded as a crucial roadblock to economic & strategic thrusts

– But coalition politics is ushering in a broad centrism politically; liberalization continues

• Extremism (Naxalites) emerging as a major threat in parts of India

– Armed groups running parallel governments in many regions

• Vulnerability to global terrorism

– India equated with USA and Israel as enemies by Islamic fundamentalists

The Challenges Ahead: Society

• Cultural conflicts

– Indianness and local cultures versus westernization/modernization

– Assaults on freedom of artists and expression

• Resentment against “outsiders”

– In many regions, migrants are targeted

• Caste-based reservations a ticking time bomb

– India historically a highly unequal society—caste proxy for discrimination

– Quotas in educational institutions, parliament, and employment

– Decline of public sector has led to few opportunities for disadvantaged

– Private sector quotas may be embraced by political parties—private sector

affirmative action has not been substantial

• Gender equality still far away

– Missing Girl Child phenomenon; dowry deaths, etc.

The Challenges Ahead: People

Demographic dividend may be a mirage

• Education system hardly capable of catering to 500 million youth

– Few quality institutions of higher education—extraordinary competition

– Primary education highly skewed in favor of wealthy—rural, poor left behind

– Government education delivery declining in quality, access, quantity

• Education infrastructure

– Lots of universities & colleges but system is broke—rote learning; corruption

– Incentive systems do not encourage innovation, critical thinking, creativity

• Government policies archaic

– Policy frameworks impede private universities, foreign universities

– Lots of programs skirt governmental rules (ISB is illegal!)

• Export $4 billion worth of student fees annually

– Mainly to USA, UK, Australia, etc., who aggressively recruit students here

Other Challenges

• Corruption and Bureaucratic hurdles

– High cost of entering and exiting Business

– Compliance with health, safety and environmental standards is costly

– Great deal of corruption and inter-state bureaucracy (but rates better than countries like Brazil)

• Strict labor laws and complex tax system

– Stringent hire and fire policies: Easy to hire, Difficult to fire!

– Unusually complex commercial tax system, especially where Indirect tax is concerned

– Taxes levied by Central and state government sometimes overlap

• Low levels of Foreign Investment

– Regulatory quality and corruption an impediment to investment (World Bank, 2004)

– China averaged US$40 billion Foreign investment annually against US$3 billion in India

• Poor Infrastructure

– Inefficient transport system: bad roads, gridlocked ports and congested air ports

– Shortage of Electricity

Will India Sustain?

Yes, despite poor infrastructure, corruption and bureaucratic hurdles India has a better chance of succeeding when compared to its peers like China or Brazil

Why India is likely to sustain?

• India opens up

– With the onset of reforms in 1990 average tariffs for trade fell to below 15% from as high as 200% as the country began to re-integrate into the global economy

– It provided firms with access to superior inputs, ideas and technology

– The increased competition from imports forced the domestic firms to increase efficiency

– It improved the average productivity by rewarding the efficient firms and penalising the inefficient domestic firms

• The rise of the Financial sector

– Contributed to the jump in productivity by giving credit to the private sector

– Improved resource allocation by channeling savings into investments

• Back-office to the world

– The success of the IT industry has had material impact on productivity

– Has created a pool of technology-skilled labor that industry can tap into

– Has forced the domestic firms to invest in technology thereby boosting productivity

Why India is likely to sustain?

• The Golden Quadrilateral

– The most ambitious project since the building of the Railway network by British in the 19th century

– Connects the four largest cities covering 3,625 miles

• The great migration

– More people living in cities than in the country side

– Rapid urbanization: 140mn rural dwellers to move to urban areas by 2020

• The land factor

– Critical input needed to keep the development process moving

– The creation of new SEZs to boost productivity