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PART 1: ECONOMIC ANALYSIS OF INDIA

OVERVIEW OF THE INDIAN ECONOMY India, an emerging economy, has witnessed unprecedented levels of economic expansion, along with countries like China, Russia, Mexico and Brazil. India, being a cost effective and labor intensive economy, has benefited immensely from outsourcing of work from developed countries, and a strong manufacturing and export oriented industrial framework. With the economic pace picking up, global commodity prices have staged a comeback from their lows and global trade has also seen healthy growth over the last two years. Global economy is seems to be expanding after a recent shock. Indian Economy, however just felt the blow of the global economic recession and the real economic growth have seen a sharp fall followed by the lower exports, capital outflow and corporate restructuring. It is expected that the global economies continue to stay strong in the short-term as the effect of stimulus is still strong and the tax cuts are working. Due to strong position of liquidity in the market, large corporations now have access to capital in corporate credit markets. Indias Economic Outlook Projection 2009 GDP Growth CPI 2010 2011 2010

9.40%

7.30%

7.60%

8.30%

6.40%

9.30%

5.50%

4.90%

Year 2011 has started on the gloomy note, however the trend reversed from the first quarter of the year, financial markets posted strong gains fueled by huge amount of capital inflows which was set-aside during the economic downturn in search of a higher yield. Number of companies jumped into the equity markets to raise funds to de-leverage themselves, corporate risk have declined. Before the beginning of the economic recession, several companies betted on the better economic future and blindly raised funds thru various options (largely in a way of debt). Real Estate was the hardest hit industry during the recession. Many companies even offloaded their huge amount of stake, in order to meet the deadline to pay-off the short-term debt. Not only the realty companies which have faced that situation, actually many Small & Medium

Enterprises (SMEs) have opted that option to expand themselves aggressively and routed out of the business. As the new year begins, the new wave of optimism has surrounded the economies to expand further from the recent shock, with the expectations of fresh stimulus package, shrink in unemployment rate, expectations of the high inflation, higher interest rates in the emerging economies. Over the next few months, inflation would be a worrisome for the economies. According to the estimates, inflation would likely to reach up to 10%, resulted, the expectations of the monetary policy tightening from the Reserve Bank of India in the second quarter review of monetary policy. Asian economies Chinese economy in particular, along with India are in the strongest place for a sustained recovery. There are increasing signs of a recovery in a private domestic demand. INFLATION IN INDIA Since the global economies are emerging from the lows, in a short run, inflation is expected to rise due to bounce back in demand for commodities. Although, the underlying inflation are still on the downside. Higher unemployment rate in the west will lead to low wage growth and pricing power would be limited for a long time as demand will be very vulnerable to price rises. But, India would buck the trend in inflation due to ample amount of liquidity in the system and rising demand. In financial year 2009-08, average inflation in India was around 4.66 percent. This rate was lower than average inflation of financial year 2008-07. In 2009-08, fiscal high prices of food items were primary cause behind high rates of inflation. That high rate of inflation had to be controlled by banning a number of necessary commodities as well as various financial steps. High prices of oil were responsible for proportionately high rate of inflation in 2010-09 INDIA ECONOMY 2010 OVERVIEW In order to keep the economic growth during the time of worst recession, Federal authorities in India has announced the stimulus packages to prop-up the economic growth. To finance the stimulus packages, Indian Government has raised over $100 billion over the last four quarters in a way to finance the stimulus package. Countrys Public debt, according to the latest data has

zoomed to over 50% of the total GDP and Indias Central bank, Reserve Bank of India has started printing new currency notes.

Central Government Debt

In Rs. Crores (10 Million) Public Debt (Sum of 1 and 2) 1. External Debt 2. Internal Debt

Q3 2010

Q3 2011

% of GDP

2,099,286.23 2,505,450.74 50.71% 237,351.77 294,941.67

1,861,934.46 2,210,509.07

Going forward, India will see sharp rise in supply side inflation, after the effect of large government borrowings, printing of new currency notes, rise in food prices due to huge gap in demand-supply. Interest rates will also expected to rise awkward, as the central bank will take precautionary measure to contain inflation rate and expanding money supply. For the equity markets, investors are still in a quest for a higher return and turned down their investments in Government Bonds/Securities. There is a lot of money which are still available to readily invest into the equity markets. Indian financial markets expected to be range-bound as the fear of higher valuation would be the concern for a short while. Moreover, volatility is expected to come down as the market timings have been extended by an hour in parallel to the other Asian equity markets. This will help the Indian markets to hit newer highs which, we have waited for more than two years. There is no extra concern on the front of equity markets, as the Equity, nowadays, considered as the best asset class to invest in, the main reason would be the overstated potential of precious metals like Gold and Silver, which has seen a sharp rally last year, in a time of gloomy economic picture.

STABILITY IN THE GLOBAL ECONOMY MEANS EXPANSION OF THE INDIAN ECONOMY All of us have seen an unprecedented government intervention during the economic recession by way of announcing huge amount of stimulus package for the economy to prop-up domestic demand. With many recovery tools were used during the crisis, government deficits are in deep red and central bank rates are almost zero in certain countries and the prospect of zero rates over a longer period and deflationary concerns will probably gain the upper hand and send bond yields lower. Hence, there is a low scope of further announcement. As far as the Indian economy is concerned, is suffering from huge debt to GDP ratio, moreover India is the largest net importer of commodities like Oil, Food, metal in relation to the GDP. Sharp decline in oil prices, could cut the subsidy burden and those savings would be use for the fiscal stimulus. Increased and better expenditure with greater focus on improved outcomes in social and physical infrastructure, and safety nets will speed up the recovery consistent with the long-term growth. IMF projections that the Indian economy will expand by 9.4 per cent in 2010 should not surprise anyone as the Fund uses different methodology of calculating growth, says a key official with the multi-lateral lending agency. While most other projections are based on gross domestic product at factor cost, IMF estimates economic growth on the basis of GDP at market price. Whereas GDP based on market price takes into account taxes while calculating value of goods and services in the economy, the factor cost does not. Raising of Indian growth projections to 9.4 per cent in 2010 by IMF, from its earlier estimate of 8.8 per cent, surprised many people because the economy is yet to fully recover from the impact of financial crisis and return to high growth path. Besides, as the Indian economy (based on the conventional factor cost) grew by 8.6 per cent in the first quarter of 2010, the IMF prediction meant that it would have to expand much beyond 9.4 per cent through the rest of the year. The Finance Ministry expects the economy to grow by 8.5 per cent this fiscal, which did not compare that well with the IMF projections of 9.4 per cent for this calendar year.

At the outset, IMF estimates seemed surprising also because the Fund is believed to be too conservative and has been generally pegging India's economic growth at less than the official predictions. In fact, Finance Minister Pranab Mukherjee seemed to be too pleased with even IMF's earlier projections 8.8 per cent growth this calendar year. "This year, my ministry has predicted a growth rate of 8.5 percent. I notice that the IMF has challenged our prediction. For once, however, I am not going to contest the IMF assessment. The IMF believes that the Indian economy will grow at 8.8 percent," Mukherjee had said at the USIndia CEO Forum in Washington. Based on the conventional method, Indian economy grew by 6.7 per cent during 2010-09, while estimated on the basis of market prices, it expanded by just 5.1 per cent. The advance estimates of 2011-10 pegged economic growth at 7.2 per cent based on factor cost, but 6.8 per cent based on market prices. However, actual data revealed that Indian economy grew by 7.4 per cent last fiscal based on factor cost, and 7.7 per cent on market prices. FISCAL POLICY The budget for the 2010-2011 fiscal year projects improvements for the deficit after the fiscal stimulus of last year and the large one-off expenditures of the year before. As a share of GDP, the deficit is expected to reach 7.8% of GDP (including off-budget food, fuel and fertilizer price subsidies of 1.7% of GDP) from 9.6% last year and 11.8% in 2010/2011. The improvement will come from a combination of weaker expenditure growth from reduced subsidies, and greater revenues from the acceleration of economic growth, the reversal of indirect tax cuts that were part of the fiscal stimulus package, the expansion of the tax base and the revival of the privatization program, as well as the onetime sale of G3 licenses, which generated over USD 15 billion. Solvency indicators will improve again, but are expected to remain above comfortable levels, with public debt to GDP reaching 68% by 2014-15. MONETARY POLICY The Reserve Bank of India (RBI, the central bank) continues its tightening cycle as inflation pressures are building, by raising reserve requirements and its two main interest rates by 50 basis points since the beginning of the year. While better monsoon rains will reduce food prices, the upward trend in M2 growth suggests that additional inflation pressure is in the pipeline for the

second half of this year. As such, we expect further tightening going forward, with the wholesale Price Index (WPI), the RBIs target indicator for inflation, increasing to 10.2% y/y in May, while the various consumer price indices are all showing increases around 15% in April. EXTERNAL SECTOR Strong domestic demand and higher energy prices are again putting pressure on thetrade deficit, which totaled USD 27.1bn in Q1-10. While exports are rebounding, up 36% y/y in April, in parts due to weak base effects, imports are rising are rising at a much faster pace, up 43% y/y. However, the trade deficit is supported by strong transfers from abroad, renewed foreign investment inflows, as well as the return of external demand for Indias software services, to a record amount in Q4. Nonetheless, foreign exchange reserves continue to slowly decline since October 2011, falling to USD 261bn at the end of February, which still represent over 8 months of current account debit cover. OUTLOOK Despite the uncertain outlook for developed economies, further monetary tightening in the pipeline and the beginning of pullout of fiscal stimulus, real GDP growth in India will accelerate this year and next, reaching 7.5% this year and 7.9% in 2011. Investment and industrial activity, which is more oriented towards the domestic market, will sustain growth, while consumer sentiment will be dampened by high inflation. The election victory of the Congress Party bodes well for continued economic reforms, with the move towards gradual liberalization and deregulation expected to continue under the current government. While sustained annual doubledigits growth remains a few years away, a return to the 8-9% growth rates seen before the crisis is very likely. ECONOMY INDICATOR 04-08 Average GDP (% Growth, real) Inflation (% year ended) Fiscal Balance (% of GDP) Export (% growth) Imports (growth) 8.5 5.8 -3.9 27.0 33.7 5.7 10.9 -7.7 -17.9 -22.1 7.5 10.7 -6.4 16.1 20.0 2011 2010

Current Account (% of GDP) Reserve (month of imports) External Debts (% of GDP) Debt Service Ratio Current (per USD, year-ended)

-1.1 9.1 17.5 11.09 44.2

-0.8 9.8 17.4 9.8 46.7

-1.0 9.4 15.7 8.0 44.0

Source: EIU, EDC Economics SECTORAL ANALYSIS OF INDIAN ECONOMY The sectoral analysis of Indian economy is a summary of the factors and industry sectors that were reformed or added in the economic growth report of India covering different Indian industries. The sectoral analysis of Indian economy focuses on the key points of the latest reforms of Indian economy as made in the latest Government of India economic policy statement. The sectoral analysis of Indian economy quantifies key parameters of Indian economy. Further, the analysis of different sectors of Indian economy facilitates the government to use it as the reference guide for the enactment of the future Indian economy policy.

The key developments as per the sectoral analysis of Indian economy, 2009-2010 are as follows Gross domestic capital formation in 2007-06 grew by 23.7% FDI amounted to US$12.5 billion and outpaced portfolio investment of US$6.8 billion Central Public Sector Enterprises to invest Rs.165,053 crore in 2009-08 New 162 production sharing contracts awarded to Petroleum and Natural Gas sector SMEs has witnessed increase in outstanding credit Foreign trade and merchandise exports expected to cross US$125 billion by the end of the current fiscal Provision for tourist infrastructure increased to Rs.423 crore Bank's differential rate of interest scheme providing finance at the rate of 4% to weaker sections Regional rural banks to open at least one branch in 80 uncovered districts in 2009-08

PAN made sole identification number for all participants of capital market Seven ultra mega power projects are under process Provision for national highway development program to be increased to Rs.9,945 crore Farm credit target of Rs.225,000 crore for 2009-08 has been set with an addition of 50 lakh new farmers to the banking system

35 projects have been completed in 2008-07 and additional irrigation potential of 900,000 hectares to be created and training of farmers arranged

A pilot programme for delivering subsidy directly to farmers have been arranged Loan facilitation through Agricultural Insurance and NABARD has also been facilitated Corpus of Rural Infrastructure Development Fund to be raised Defense expenditure allocation to increased to Rs.96,000 crore IT allocation for e-governance to increased from Rs.395 crore to Rs.719 crore Exclusive health insurance scheme for senior citizens

According to reports, productivity growth rate of Indian economy is estimated to be around 8% and above until 2020 and at this rate India will become the second largest economy in the world after China. Further, analysis of different Indian sectors suggests that India is one of the top economic reformers worldwide. It simplified business registration, cross-border trade, and payment of taxes, eased access to credit and strengthen investor's interest. Foreign Exchange Reserves
About USD 45 billion were added to the countrys foreign exchange reserves in 2008-07. In the first quarter of this fiscal, forex reserves went up by about 6.5%. An increase in the foreign currency assets by USD 5 billion took the number to USD 206.1 billion. Gold , SDR and reserve position in the IMF remained unaltered. In June 2009, Foreign exchange reserves touched USD 213 billion mark. This accretion in reserves is said to be due to the effect of appreciation in the non US currencies held in reserves.

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Exchange rate Indian Rupee against the USD remained stable between Rs 40.00/41.00. Indian Rupee traded mostly below Rs 41.00 in June 2009. Throughout the month Rupee gained against the USD but remained volatile and crossed Rs 41.00 exceptionally in only one trading session. The rupee ranged between Rs 40.47/41.01 averaging at Rs 40.8 in June 2009, showing weakness towards the last trading sessions of the month. The central bank continues to maintain its limited intervention in the forex market until the inflationary pressures are minimized. In June 2009 INR against the Euro demonstrated less volatility than it did against the USD. It peaked at Rs 55.09 and remained above Rs 55.00 level in the penultimate trading sessions before attaining a level below Rs 55.00. However it averaged at Rs 54.7 in June 2009.

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India as an Economic Superpower During the last decade, a perception is growing in the world that the China and India are becoming the major economic superpower in the world. Consequently Business Firms, as specially the Multinational Corporation, are move towards India and China so as to take advantages of prevent and fast growing market in this two countries. Accompanied with phenomenon is rise of business tycoons in India. According to Forbes List 2010, India Added to its list t16 new billionaires taking its to total 53. The combine worth of these 53 billionaires was of the order of $335 billions equal to one third of the total Indian GDP. Simultaneously, there is the growth of the Indian Middle class which is, according to a study by the National council of the applies economy Research, around the 28.4 million households by 2011-10. The income range of the middle class has been defined as Rs. 2 millions to Rs. 10 millions per annum

India to become Third Biggest Economy by 2050 India registered the fastest growth among the major democracies among over the past 10 years. Suring the 1990s, it growth has been over 7% in four year. Besides, the India is presently the fourth largest economy in term of Purchasing Power Parity

By the years 2050, India is projected to be the Third largest economy in the world, behind china and United state of America, in that order, according to a reported by Goldman Sachs, a globan investment banking and security firm, China, India, Russia and Brazil could outrank the combine

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economy might group of six- the US, Japan, Germany, France, Italy and the United Kingdom by middle of the century, says the report quoted by the Wall Street Journal.

Dominic Wilson, a senior Goldman economist, one of the author of the report, anticipating that the financial power is going to shift from the US and it likely to be number 2 by 2050, and sandwich between china and India. In making this forecast, the Goldman does not focus on the fourth developing nations current economy growth rates ,even though these certainly have not be to tardy. Instead using the demographic projections and a model of the capital accumulation and productivity trends, it calculates likely gain in terms of terms of gross domestic product, per capital income and currently movement.

Over the next 50 years, the model assume that GDP will rise up at an average annual rates of 3.8% in Brazil, nearly 6% in India, 4.7% in China, and 3.2% in Russia, versus the US projected rates of 1.7%. it also assume that the value of the this above fourth currency will also rise, in long run, these economy are going to generate a substantial part of the worlds economy demand growth. Although the US would cease to be most dominant single force in global economy, it would get reap trade benefits from the new power investment hefty gains in spending on goods and services. The forecast assume that China, India, Russia and Brazil maintain policies abd development institution that supporting the growth.

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