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The Indian Economy

July 25, 2000

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Current Situation Overview• Significant all around improvement after turbulent period (1998-99)• 5.7% GDP growth estimated 1999-00 and forecast at 6.3% next year• Inflation, driven by higher fuel prices, up from 4.5%

• Expected to stabilize at 6.5%

• Industrial environment improves in 1999-00, IIP growth around 8% levels• Stronger consumer demand, tentative industrial demand, rising exports• Cement, automotive, home goods & services are the fast growing segments

• Corporate sector reports brisk topline growth of >20% and a slightly slower bottomline growth of 18%• Margins under pressure due to the mild over capacity in most industries

• Resurgence in Portfolio Flows (FII) during 2000, FDI flows expected to pick up speed with greater clarity in policy

3

Current Situation Overview• Foreign Debt Under Control at less than 24% of GDP

• External debt service ratio at < 2% of GDP• Large part of debt 40% concessional and short term part is

only 5% of total debt• Foreign Currency Reserves rise to USD 35 bn (8

months import cover)• Rupee Depreciation only 2.17% in 1999-00, another

2% since April 2000• Annual rate of depreciation estimated to be around 4.5-5%

• Political situation shows greater signs of stability• Wider dispersion amongst partners makes the coalition

less vulnerable

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Current Situation Overview (Concerns)• Fiscal deficit at around 6% continues to be the main

concern• Successful completion of at least one privatization program• Approach to cutting back subsidies

• Investment demand yet to materialize• The much awaited infrastructure boom• Step-up In new industrial capacities• FDI flows to gather momentum (rise to more than 30% of

approvals)

• Water scarcity and drought conditions in several states• Is a concern though it is too early to assess impact• Large government attention needed to manage the crisis

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Near Term Outlook

• Base case growth assuming near normal monsoon is around 6%• Fuelled mainly by the growth in consumer demand

mainly from rural areas

• Benign interest rate regime and a liberal Reserve Bank of India policy of creating adequate liquidity in the market to help investment over the next 12 months

• Large scale investments into infrastructure needed to catapult growth to 8% plus trajectory to make a more meaningful trickle down effect to different parts of the economy

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Current Economic Policies

• Centers around strong domestic industry but trade barriers are being dismantled in accordance with commitments• Increased importance on housing and rural industrialization• Product patents in place, import curbs lifted on several commodities• Attempts to create a rural industrial base (around small industry)• Investments guided by competitive advantages/ economic

considerations rather than licensing restrictions / allowances• Strong industrial growth averaging 7% in the last five years• Significant progress in opening up telecom and power sectors• Privatization of PSUs (GOI holding upto 26%), closure of sick

units, repeal of the Urban Land Ceiling Regulations, etc. • Significant capital flows generated from 1991 to 1998

• FDI - $15 Bn; Portfolio (FII) - $12Bn; • FCY reserves increased from $2Bn in 1991 to over $35Bn as of

April’2000

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Growth Targets & Imperatives• Need to target GDP growth of 8-10%• Liberalize and ease domestic consumption and investment

• India ranked 41st in competitiveness

• Strengthen the contribution from the export markets• Promote and channel private and foreign investments into

infrastructure• Required investment of $120Bn over next five years to sustain

planned growth• Current domestic savings of 24% needs to be augmented by foreign

investments ~ $10Bn p.a.

• Maintain financial and currency stability• Controlled moderate inflation• Cap on fiscal deficit, Bill on fiscal responsibility soon

• Clearer focus on planned government capital expenditure

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Growth Drivers & Bottlenecks• Continued demand for consumer items with rising

income levels• More stable agricultural output & rising activity in services• Moderate inflation would enhancing purchasing power• Increased economic activity in infrastructure sector

•Telecom, power, roads, new homes

• Creation of new logistics infrastructure to drive penetration of consumer goods• Roads, ports and storage facilities

• Red-tape procedure and poor infrastructure still deter foreign investors• FDI levels still low as compared to requirements

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Outlook - 3years - Key Themes• Growth would continue to be led by consumer demand growth

• Infrastructure would start contributing towards the end

• Rural economy to reduce dependence on agriculture• Stabilize the rural consumption patterns• Provide exponential growth window for consumer goods makers

• Government will step in to support investment climate• Fiscal deficit levels would continue to be high• Government expenditure under closer inspection

• Industrial investments guided by competitive advantages/ economic considerations rather than licensing restrictions / allowances

• High growth will continue in:• Infotech, telecom, transport vehicles (mainly personal transport vehicles),

consumer electronics, apparel, convenience foods, pharmaceuticals, financial products (savings products)

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View From The Rating Agencies

Country Moody'sThailand Ba1*

Korea Baa2

Poland Baa1

India Ba2

Argentina B1

Brazil B2

Turkey B1

Russia B3

S&PBBB- (Stable)

BBB (Positive)

BBB (Positive)

* Under review for possible upgrade

Moody's as on April 26, 2000

All ratings for Long term foreign currency borrowings.

BB (Positive)

BB (Stable)

S&P ratings as on April 28, 2000

B+ (Positive)

B+ (Positive)

SD

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Economic Structure

• Significant transition in economic structure

• Agriculture sector employs 75% of the rural workforce

• Industrial sector consolidates through liberalization

• Services sector stabilizes the economy• Also includes PS/ GOI spending and

defense• Economy largely internal driven and

resilient• Imports account for 10% of GDP,

while exports account for 8%

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Economic Indicators - Table

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Economy and outlook

A decade

full of

false

starts

Forecasts :Citibank estimates

•Macro economic overview 1991 - 2001f

14

Economy and outlook

Consol-

-idation

amid

uncertain

policy

direction

•Other Indicators

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Economy and outlook

Falling

yields

and credit

spreads

note :

GOI -S/A yld.

AAA - Ann. yld.

•Interest rate trendsYields in % Sep98 Jun99 Sep99 Mar00 Apr00Yields in % Sep98 Jun99 Sep99 Mar00 Apr00

GOI 1 yr 10.42 10.71 10.45 10.11 9.35

GOI 2 yrs 11.04 10.89 10.61 10.05 9.45

GOI 5 yrs 11.84 11.44 11.03 10.33 9.82

GOI 10 yrs 12.18 11.74 11.62 10.81 10.35

AAA I yr 12.20 11.25 11.10 10.96 10.00

AAA 2 yrs 12.85 11.90 11.75 11.00 10.25

AAA 5 yrs 14.05 12.60 12.35 11.38 11.00

AAA 10 yrs 14.55 13.10 12.85 12.12 11.80

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Spot Rupee- Recent history

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6 month forward premia (in rupees)

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Stock Market and the Rupee

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Nasdaq and BSE

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FX markets• Access

• Through RBI approved authorised dealers• INR trading between 9.00 AM to 4.00 PM• Crosses trading 24 hours• Based on exposures - assets / liabilities in foreign currencies• Limited freedom on the short INR side• FIIs given flexibility and freedom for entry / exit for hedging purposes

subject to some guidelines

• Instruments• Spot and forward INR - liquid till 12 months• Prices available upto 3/5 years, execution on best efforts basis • FCY / INR Currency swaps for managing exposures• Other derivative instruments - swaps and (non-INR) options

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Citibank dealing strengths

• Global presence• Rated number 1 in FX by

Asiamoney and Corporate Finance

• Competitive pricing on entire range of currencies

• Largest overnight limit amongst foreign banks: domestic limits on par with largest nationalised bank

• Ability to handle large volumes

• Late night desk for crosses trading

• 24 hour order book

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Research

• Fundamental and technical research on all major currency pairs

• Focus on Indian Rupee research

• Wide range of customer communication / market updates

• Daily Treasury Letter• Weekly Treasury Letter• Monthly Indian Rupee

Research report • Annual Treasury Letter• G7 Currencies Weekly

Reviews• Monthly Global Economic

Outlook

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Customer support

• Customer orientation• focus on building long

term FX relationships

• Technical support• exposure tracking and

management systems

• Integrated hedging approach• Funds management and

exposure management• Focus on overall portfolio

vs individual transactions

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Derivative Strengths

• Pricing capability on any kind of exotic derivative products

• Ability to quote finest prices on account of large global derivative presence

• Expertise in place for launch of new rupee derivatives

• Focus on creating customised derivative solutions

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Disclaimer

•Although the information contained herein is believed to be reliable, Citibank makes no representation as to the accuracy or completeness of any information contained herein or otherwise provided by Citibank.•The ultimate decision to proceed with any transaction rests solely with the customer. Citibank N.A. is not acting as your advisor. Therefore, prior to entering into any proposed transaction, you should determine the economic risks and merits, as well as the legal, tax and accounting characterizations and consequences of the transaction, and that you are able to assume these RISKS.•The contents of this presentation are proprietary in nature, and may not disseminated in whole or in part without Citibank's written consent.