“INDIAN GROWTH STORY: WILL IT HELP SUSTAIN THE SHIPPING BOOM?”

By Ravi K Mehrotra CBEChairman

Foresight Group, London

At

Indian Shipping Summit

Grand Hyatt Hotel, Mumbai

on

Tuesday 30th October 2007

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When I visited China in late 1980’s

3

When I visited China in 2007

4

When I visited India in late 1980’s

5

When I visited India in the present day

6

WHAT DO THE PREVIOUS FOUR IMAGES TELL US?

India in 1980• Ahead of China esp. in

free enterprise and per

capita earnings

China in 1980• Still struggling with

Communist Egalitarian past and lack of enterprise

India in 2007• Full of vigour but political system

still trapped in clanship management of the Nation instead of taking charge of enterprise

• Very poor infrastructure

China in 2007• Government took charge of

enterprise in late 1980’s, transforming China into a modern industrial nation which increased per capita income by a factor of 6

• Very good infrastructure

How will India’s Industrial Growth look in 2012?

How did China imbibe Entrepreneurship into their

Management?

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Booming Indian Economy : Is it for real and sustainable?

• Grown more than 8% in real terms over the last five years • Moved to a higher growth of 9-10% of GDP and it is

expected to continue for the foreseeable future in spite of poor infrastructure

• In April 2007 its economy crossed USD 1 trillion and it is the 10th largest economy in the world

• Indian foreign trade has quadrupled since 2004. 2004 at $105 billion & April 2007 at $305 billion

• Its industrial production, at best, used to be 6-7% until 2004. Now it is 11-14% and expected to grow to 16-18%

• At present, political governance is only feasible with coalition government. Coalition Parties cannot agree on common program for infrastructural growth, currently infrastructure investment is below 8% of GDP. Therefore growth in India will not be uniform

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Why is India still growing and will continue to grow in the near future?

1) Last few years growth of back office operations and software development increased the number of middle-class in India. Which fuelled the internal consumption and it is still growing.

2) This increase in internal consumption helped the well established Indian industrial companies with surging demands and liquidity

3) Another support came from the Government opening up of Stock Exchanges to foreign competition. Therefore, Indian owners out of necessity had to inject equity in their companies in fear of being bought out by others.

Six reasons why the Indian Economy will continue to grow in near future:

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4) With increased liquidity industrial companies which started growing but not to take head-on competition with China’s manufacturing. But industrial development of high tech nature such as intelligent automotive parts and complicated forgings for industrial production.

5) With 25 million Indians living abroad provided another leg to India’s growth story. Their 50 billion dollars plus remittances and investments helped authorities to relax control on imports in the country. This provided Industrial companies to upgrade their machinery.

6) Final support came from growth in export based oil refining capabilities. Located close to Gulf & cheap labour helped towards a huge surplus of oil refining capacity, thus helping to subsidise its own oil import bill.

Six reasons why the Indian Economy will continue to grow in near future (continued):

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The ‘We can do it’ Mentality

• Future world economy growth will be driven by China & India

• Economic growth, whether it is 3.0 or 5.6% of world GDP, will largely depend upon how these two countries decide to develop their economies over the next 10 years

• Driven by the mentality of has receded any risk of meltdown in India.

• Influence of other leading economies of the world to interfere in these two countries is receding. In fact they are developing methods to insulate their own economies from any negative effect

• Future of economic growth in the world over the next ten years is assured due this new mentality

‘we can also do it’

‘we can also do it’

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Total GDP and PPP GDP 2006/7

1,000,000India (April 2007) 10

1,269,096Canada 9

1,225,750Spain 8

1,852,585Italy 7

2,231,631France 6

2,373,685United Kingdom 5

2,630,113China 4

2,897,032Germany 3

4,367,459Japan 2

13,244,550United States 1

(millions of US

dollars)

Economy (2006) Ranking

Total GDP

1,000,000Russian Federation

10

1,269,096Brazil 9

1,225,750Italy 8

1,852,585France 7

2,231,631United Kingdom 6

2,373,685Germany 5

2,630,113India 4

2,897,032Japan3

4,367,459China 2

13,244,550United States 1

(millions of intl.

dollars)

Economy (2006) Ranking

Total PPP GDP

The total GDP data shown here measured in current US dollars use annual, market exchange rates. This means that the values and derived rankings are subject to greater volatility due to variations in exchange rates. Inter-country comparisons based on GDP at market prices should, therefore be treated with caution.

The PPP method eliminates the effects of differences and changes in relative price levels.

Source: IMF, World Economic Database, 2007

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GDP Growth 2000 to 2050

Source: Goldmann Sachs: The Path to 2050

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

[2003 bn US Dollars]

Germany

Brazil

Japan

Russia

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World Market Shares for Manufactured Exports

0

1

2

3

4

5

6

7

8

1995 2002 2006

Source : World Bank and IFC: India – Investment Climate and Manufacturing Industry, November 2004

China

India

Percentage %

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Infrastructure *) Investments

Source: China Statistical Yearbook, RBI, Morgan Stanley Research

0

5

10

15

20

25

30

35

40

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

[% of GDP]

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China vs. India – FDI Attractiveness

India

China

6%

22%

29%

34%

35%

36%

39%

40%

41%

41%

42%

45%

46%

50%

57%

66%

70%

73%

73%

78%

94%

78%

71%

66%

65%

64%

61%

60%

59%

59%

58%

55%

54%

50%

43%

34%

30%

27%

27%

22%

Market Size

Market Growth Potential

Access to Export Markets

Government Incentives

Production/Labor Costs

Infrastructure

Financial/Economic Stability

Economic Reform

Political/Social Stability

Quality of Life

Tax Regime

Competitor Presence

Consumer Sophistication

Availability of M&A Targets

Regulatory Environment

Cultural Barriers

Transparency

Management Talent

Rule of Law

Highly Educated Workforce

Source: FDI Confidence Index. A.T. Kearney. October 2004. Volume 7

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What are the fundamental difference in these two economies?

• It is focusing on manufacturing • In this during the next 10 years they will try to go up the

value chain • This they will achieve without loosing ground on existing

manufacturing strengths thanks largely to untapped labour from interior of China

• Due to the development of excellent infrastructure of roads, railways and power, interior of China will become

basic manufacturing base.• These new bases will simply feed high tech coastal cities • This is a very sensible decision as instead of overcrowding

coastal belt (big cities) they can move low tech manufacturing to interior who, in turn, will feed high tech

manufacturing bases in the coastal cities.

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• Initial Growth in India came from back office work call centres and software supplies

• This created huge growth in middle classes in India which boomed internal consumption

• Government of India opened Stock Exchanges for international investors.

• This helped to provide growth in orders for finished goods. Liquidity in manufacturing industry increased.

• Owners of industry had to inject more equity to prevent buy-outs. This, in addition to healthy sales, provided huge liquidity to

industry to modernise their plants and expand internationally. • This has helped India increase rapidly its industrial production from

6-7% to 11-14% in 2007. World trade has also jumped from 0.6% to 1.5% in 2006. In US dollar-terms, it is $400 billion per year and

rising by 30%• Today 25 million Indians live abroad and a lot of them remit their

surpluses to India, especially from the Arab countries. This has helped India to ease import restrictions which resulted in $47

billion negative trade balance compared to China’s $175 billion surplus.

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Possible Future Hurdles?

• Biggest problem for China & India is energy security. Shortage of raw materials especially petroleum products will become scarcer and scarcer. How the world will handle this situation?

• It is expected the oil consumption from present 84 mmbbls/day will increase to 120 mmbbls/day by 2025. How this will be achieved?

• Lots of deep water exploration will be required? Do we have the technology?

• What will be the oil price in 2025? Any guess? • Leaving aside other requirements, how the world will mine

10 billion tons of coal and how will it produce 2 billion tonnes of steel?

• What will be the further effect on the climate of our planet by producing and consuming all this raw material?

• How will the world be able to produce safe food and water for human consumption?

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Summary

• By 2025 at least 60% of world population will be living in developed or newly developed world.

• To sustain the wellbeing of the majority of the world’s population political leaderships will have to learn to compromise?

• World technology has to improve fast to provide alternatives for fast depleting reserves in the world such as oil, base metals and coal

• Earlier China & Indian economies were mainly agricultural and self-sufficient in food, as they are getting more industrialised both countries will develop food shortages, how will world food production meet these shortages? Asia is already the only continent which consumes more food than its land can produce

• Climate change will remain a big issue for some time until technology finds answers.

• Water shortage is another crisis. How the world will cope with it?

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Conclusion• The Indian economy will develop fast• India’s growth will be complementary to China’s not

competitive • India’s growth will be focussed on internal consumption to

become the back office of the world. • China’s growth will continue to be based on manufacturing

exports• China has provided the base of shipping growth in the past few

years• With India’s substantially increased imports of oil and coal will

help this shipping boom to prolong, increase in food imports will add to more growth in shipping.

• It is only the southern hemisphere which is capable of meeting these gigantic food shortages of the future, shipping will get further boosts from these tonne-miles.

• The only dark cloud on the horizon will be if we, the ship owners, go and build too many new ships and create our own problems

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As you know I regularly speak at Cambridge University…………….

My nature is to always ask a question to my audience, so this year my question to you is:-

“Is this Indian economic boom going to help

shipping?”

If yes, then which sector of shipping?

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“INDIAN GROWTH STORY: WILL IT HELP SUSTAIN THE SHIPPING BOOM?”

By Ravi K Mehrotra CBEChairman

Foresight Group, London

At

Indian Shipping Summit

Grand Hyatt Hotel, Mumbai

on

Tuesday 30th October 2007