important your attention is drawn to the statement on the back cover of this report which affects your rights.
Analyst: Rolf Danielsen. Tel: +46-8-7638392. E-mail:

India appears to weather the global crisis better than many peers but will soon see growth fall below
trend to less than 6% a year. However, some observers express concerns following political turmoil
in Pakistan and the terrorist attack in Mumbay, which the government sees related to its neighbour.

Country Risk Analysis
dêçïíÜ=ÇÉÅÉäÉê~íÉë=Äìí=ëí~óë=ÅäÉ~ê=çÑ=~åó=Åçää~éëÉ=ëÅÉå~êáçK Irom lle record
9,8° grovll rale aclieved in 2006, India's performance las moderaled and is IiIeIy
lo posl no more llan 7,8° in lle currenl year. Since lle summer, indicalors of
induslriaI aclivily lave slovn signs of lraiIing as induslriaI inveslmenls in parlicuIar
lave reacled lo bearisl inveslor senlimenl refIecled in lle sleep faII of India's slocI
marIel, vlicl las moved in paraIIeI vill severaI oller emerging marIels slare
prices. Al lle same lime exporl grovll las veaIened as main marIels, nol onIy in
lle US and Lurope, bul aIso in Clina and lle resl of Asia lave Iosl sleam, vliIe
pIummeling oiI price las senl demand on a dovnvard pall aIso in lle MiddIe Lasl
vlere lle UAL lad become India's main exporl marIel. Tle piclure couId lave
been vorse bul for sliII resiIienl domeslic consumer demand boIslered by a slrong
larvesl in agricuIlure, lle IiveIilood of lle majorily of Indian louseloIds.

~ÅÅçìåí=ÇÉÑáÅáíK Tle
risI of an
unconlroIIed rise of
lle currenl accounl
deficil since Iale 2007
as lle imporl biII
llrealened lo
overlaIe lle exporl
revenues by a vide
margin, appears nov
lo lave moderaled.
WliIe ligl oiI prices
al lle beginning of
2008 viII cIearIy impair lle lrade baIance for lle currenl year, lle lrend lovard an
unsuslainabIe deveIopmenl las IiIeIy been arresled. Tlal is IargeIy due lo lle lurn-
around in gIobaI prices for oiI and oller rav maleriaIs bul on-going expansion of
India's services seclor las aIso proved more resiIienl lo lle lurmoiI in lle gIobaI
economy llan expecled. Tle conlinued infIov of remillances, in parl recorded as
casl-villdravaIs from lle Iarge slocI of non-residenliaI Indian deposils vill
domeslic banIs, las aIso leIped slabiIize lle currenl accounl baIance. NeverlleIess,
GDP growth
2002 2004 2006 2008
Real growth (%) Forecast
SEB Merchant Banking Country Risk Analysis December 11, 2008
lle currenl accounl deficil is sel lo aImosl lripIe lo $34 biII. in 2008 (equivaIenl lo 3°
of GDI), up from $12 biII. in 2007. Tlal increase logeller vill a reversaI of al Ieasl
$10 biII. from lle $70 biII. of accumuIaled porlfoIio infIovs over lle 2003-2007
period, couId lave presenled a major probIem lo lle baIance of paymenls. Ioreign
direcl inveslors lave come lo lle rescue, lovever, doubIing lleir lolaI nel-infIovs lo
an eslimaled $22 biII. in 2008., llus leIping consoIidale lle baIance of paymenls and
reslore caIm in lle forex marIel.

In mid-2008, lle
Indian foreign
exclange marIel
lurned from an
underIying surpIus lo
a deficil posilion.
Tlal came on lle
leeIs of a surge in
porlfoIio and oller
capilaI infIovs in
2007 and in earIy
2008. Tley lad Iifled
lle rupee lo record ligls, breacling lle 40 INR per US$ IeveI nolvillslanding Iarge
cenlraI banI inlervenlions lo slem lle rise. In O2, inveslor senlimenl graduaIIy
clanged and subsequenlIy forced lle cenlraI banI on lle defensive. As in oller
emerging marIels lle pressure increased slarpIy in lle faII, responding lo lle nev
boul of financiaI lurbuIence originaling from lle US. Tle cenlraI banI lad nov lo
supporl lle rupee from dropping loo fasl by seIIing an eslimaled $45 biII. As a
resuIl, since lle beginning of lle year cenlraI banI reserves lave on a nel basis
decIined an eslimaled $30 biII, of vlicl a llird may refIecl vaIualion clanges due lo
clanges of cross exclange rales. Over recenl veeIs lle pressure appears lo lave
abaled Ieaving lle cenlraI banI vill around $250 biII of foreign exclange, sliII an
adequale reserve IeveI vlicl is enougl lo cover 10 monlls of imporls or lle lolaI of
oulslanding foreign debl. Hovever, India's recenl experience vill voIaliIe capilaI
fIovs las lriggered a leaIlly debale aboul lle merils of mainlaining a regime of
capilaI reguIalions and a quile cIoseIy managed exclange rale.
Current account deficit
2003 2005 2007 2009


Current account forecast

fåÑä~íáçå=ÅççäëW= Tle difficuIly in sleIlering domeslic Iiquidily from foreign
capilaI fIovs conlribuled lo an incipienl overlealing in 2007 and earIy 2008 vlicl
lle cenlraI banI evenluaIIy counlered by raising banIs' reserve requiremenls and
liIing inleresl rales. Hovever, in earIy 2008 under lle infIuence of soaring energy
and commodily prices from abroad, lle domeslic price pressure conlinued unliI lle
rale of infIalion reacled an annuaIized 13° in IuIy. Tlal vas in spile of governmenl
efforls lo conlroI domeslic energy prices llrougl subsidies and adminislralive
measures before domeslic fueI prices evenluaIIy vere raised lo lle equivaIenl of
$70/barreI of crude oiI in Iune. Since llen lle effecls of ligller monelary poIicies,
lle lurn-aboul of capilaI fIovs, lle reduclion of inlernalionaI prices incIuding of
food sluff and lle good larvesl in agricuIlure lave inleracled lo damp domeslic
price deveIopmenls. Ialesl slalislics slov lle infIalion rale faIIing slarpIy lovard
8° year on year (YoY), leIping reslore a reasonabIe inleresl rale IeveI in reaI lerms,
aIbeil sliII negalive afler lle cenlraI banI eased monelary poIicies in response lo lle
recenl inlernalionaI Iiquidily squeeze. In generaI one couId be surprised aboul lle

SEB Merchant Banking Country Risk Analysis December 11, 2008
sensilivily of lle domeslic price IeveI lo llese and oller slocIs. Hovever, lle use of
lle domeslic vloIe saIes index (WII) in lle absence of a reIiabIe consumer price
index (CII), may be beguiIing in llis conlexl.

Å~êÇ. Lven llougl recenl
credil and monelary
deveIopmenls never
llrealened lo run off
course in lle reguIaled
marIel, lle slruclure of
lle banIing seclor
represenls an underIying
risI lo India's financiaI
slabiIily. WliIe lle resl of
lle economy conlinued lo
benefil from lle slocI reforms of lle previous decade, lle banIing seclor remained
basicaIIy unclanged. SliII, more llan lvo llirds of il remains dominaled by slale
ovned banIs. Ior many years lley lave been forced lo invesl in governmenl bonds.
As sucl lley may nol be veII prepared lo supporl nev companies and enlerprises.
Moreover, lleir ligll funding silualion may lave molivaled llem lo focus on Iess
capilaI inlensive induslries, incIuding services. WliIe llal may lave been a bIessing
in disguise, an increasing number of observers nov supporl lle concIusions of lle
Commillee on IinanciaI seclor reforms (CISR) of 2007 llal India's financiaI seclor is
in urgenl need of an overlauI.
Tlal is nol onIy lo beller serve manufacluring bul
aIso lo prevenl unreguIaled aclivilies lo laIe loId in a vay llal may undermine
reguIaled financiaI aclivilies of Iicensed banIs. Ior exampIe, llere is abundanl
evidence of a llriving induslry of nev financiaI firms llal operale villoul banIing
Iicense and are under no supervisory aullorily. Tlese are increasingIy inleracling
vill formaI banIs vlen lle Ialler fund lleir aclivilies incIuding in morlgage and
consumer Iending. So far banIs' funding of llese companies lave nol reacled an
aIarming IeveI (onIy 3° of lolaI assels) bul il represenls lle faslesl groving parl of
banIs' baIances. According lo CISR banIing seclor reforms vouId aIso serve lle
purpose of incIuding lle Iarge parl of lle popuIalion llal sliII lave no banI accounls
and are oflen al lle mercy of informaI money Ienders.
(weekly wholesale price index)
Wholesale Pri ces, All Commodi ties, Index, Chg Y/Y PolicyRates, Repo Cut-off Rat e
Source: Reuters EcoWin
06 07 08


Policy interest rate

cáëÅ~ä=éçäáÅáÉë=ïÉ~âÉå=çåÅÉ=~Ö~áå. Sucl a banIing seclor reform, lovever,
vouId require a more rapid resoIulion lo lle governmenl's Iong-slanding budgel
probIems lo free banIs from lleir obIigalions lo buy governmenl debl. As noled
above, il is IiIeIy llal lle consoIidalion of lle fiscaI budgel viII suffer a sel-bacI in
2008-09 (fiscaI year ending Marcl). WliIe eslimales vary, mosl observers expecl lle
deficil of lle lolaI pubIic seclor budgel, incIuding lle federaI governmenl, regionaI
slale governmenls and governmenl off-baIance lransaclions, lo increase by some 2
percenlage poinls of GDI lo 8,5° of GDI. Tlal laIes inlo accounl 1) lle liIe in
pubIic seclor vages by more llan 20° as recommended by lle Sixll Iay
Commission (a commillee meeling once a decade lo sel nev pubIic seclor vages),
2) off-baIance oiI-subsidies mainIy reIaled lo energy, vlicl soared in lle firsl parl of
2008/09 and 3) oller porI barreI poIicies as llis being a pre-eIeclion budgel before

Draft Report of the Committee on Financial Sector Reforms, Government of India Planning
Commission, New Delhi, 2007

SEB Merchant Banking Country Risk Analysis December 11, 2008
generaI eIeclions in ApriI 2009. Tle Ialler incIudes aIso mucl dispuled debl reIief for
farmers vlicl viII cosl lle governmenl some 0,4° of GDI and vas derided as
popuIisl by lle opposilion. Wlal may miligale lle finaI faIIoul, lovever, are lle
recenl drop in lle oiI price, mucl beIov lle presenl reguIaled pump price of
$70/barreI vlicl slouId Iover lle governmenl's off-baIance expenses. Il may aIso
be unfair lo compare lle 2008/09 budgel vill lle 2007/08, as lle slrong resuIl of lle
Ialler vas in parl llanIs lo one-off profils from privalizalion saIes. We nole llal
despile lle increase of lle deficil in 2008-09, lle governmenl debl ralio viII conlinue
faIIing lo 73° of GDI from 79° of GDI of lle preceding year.

eçï=ïáää=fåÇá~=ãÉÉí=íÜÉ=çåÖçáåÖ=ÉÅçåçãáÅ=~åÇ=Ñáå~åÅá~ä=ïçêäÇ=Åêáëáë\= Over
lle recenl lvo decades, and in lle period 2003-2008, India las become a mucl more
open economy. “Openness¨ nov slands al of more llan 25° (counled as exporls
reIalive lo GDI). Tlal is Iover llan Clina's 37° bul aImosl lvice as ligl
“openness¨ as lle US. NeverlleIess, India's diversificalion, incIuding inlo services,
and baIanced slruclure of domeslic demand, in parlicuIar belveen consumplion and
inveslmenls, slouId leIp il vealler lle deepening vorId crisis beller llan peers.
AppIying lle economic vorId modeI deveIoped by lle OLI (Oxford Lconomics) ve
find llal even in a vorsl case scenario GDI grovll slouId remain quile robusl,
never faIIing beIov 5,8° on an annuaI basis, vliIe Clina, in conlrasl, viII drop lo
beIov 5° grovll rales for lvo subsequenl years. Tle Ialler represenls a sleeper
drop in grovll, leslifying lo Clina's ligler dependence on specific exporl marIels
incIuding consumer goods in lle OLCD counlries.

Risk scenarios
2008 2009 2010 2011
China appears more sensitive than India to shocks of a worst case
scenario based on a sharp cut-backs in US/EU consumer demand.



India base case India worst case
China base case China worst case

mçäáíáÅ~ä=ÉîÉåíë=ã~ó=ëÜçÅâ=ãçêÉ=íÜ~å=íÜÉó=áãé~Åí. Tle recenl lerrorisl allacI in
Mumbay, vlicl caused lle deall of severaI veslern foreigners, las focused
allenlion on lle generaI securily probIems of India. Tley prevaiI in lle counlry- side
vlere, lovever, lley creale mucl Iess inlernalionaI media reaclions. So far in 2008,
llis inlernaI lerrorisl aclivily las reporledIy cIaimed severaI llousands viclims.
Hovever, llis is an oId probIem, incIuding lle decades oId NaxaIile movemenl
vlicl adleres lo some Iind of a communisl ideoIogy. Tle various exlremisl
movemenls recruil mainIy from marginaIized ellnic and reIigious groups and lo
some degree from lle Iarge casl-Iess undercIass in lle counlry side. In conlrasl lo
lle more lavIisl allilude of ils predecessor, lle presenl governmenl las pursued a
poIicy of incIusion lovard llese eIemenls of sociely. Nov, lle Mumbay allacIs
couId queslion llis sofl-approacl and pave lle vay for lard-Iine alliludes in lle
fulure. Recenl by-eIeclions, lovever, vere unexpecledIy von by lle incumbenl,
indicaling llal lle eIeclorale may nol favor a clange. Aparl from llal issue, a
coaIilion governmenl from lle presenl rigll of cenler opposilion vouId unIiIeIy

SEB Merchant Banking Country Risk Analysis December 11, 2008
leraId a slarp clange in economic poIicies in principIe bul vouId probabIy sland a
beller clance of impIemenling llem.

m~âáëí~åI=fåÇá~Ûë=çäÇ=åÉãÉëáë: India's cIaim llal groups from IaIislan vere
leaviIy invoIved in lle Mumbay allacIs and aIIegedIy received supporl from
eIemenls villin IaIislan's securily services, seem lo be gallering supporl from US
and oller counlries. Tlal couId once again raise border lensions in lle dispuled
province of Kaslmir, and in lle vorsl of cases oulrigll var belveen lle lvo
nucIear-armed neiglbors. Hovever, llis lension las been on and off for many
decades and ve beIieve llal sucl a silualion may conlinue for a Iong lime sliII, vliIe
never gelling oul of conlroI. Tle vorsl effecl vouId probabIy be lo dislracl lle
allenlion of lle Indian governmenl from oller goaIs, sucl as lle need lo conlinue
economic reforms incIuding of lle financiaI seclor.
Key ratios 2008
IopuIalion (miIIions) 1063
GDP/capita ($) 942
GDP (change) 8%
Inflation 7%
Curr.acc. balance/GDP -3%
Reserves/imports (months) 0
Budget balance/GDP(*) -3%
Government debt/GDP(*) 61%
(*) Central government only
Graph: India's risk profile like Russia's shows strengths
on liquidity and infornation, but other parts of the
pentagon fall in line with or within average, meaning
worse. Our estimate of event risk includes renewed risk of
instability in neighboring Pakistan.
Iilcl: BBB-
Absence of
event risk
Macro balance
India Average EM Russia


SEB Merchant Banking Country Risk Analysis December 11, 2008
Key data: 2003 2004 2005 2006 2007 2008 2009 2010
GDP (bill. US$) 530 615 718 806 1012 1116 1198 1426
GDP/capita (US$) 482 551 633 701 866 942 996 1169
GDP (change) 7,4% 7,2% 9,1% 9,8% 9,3% 7,8% 6,5% 7,7%
Investments/GDP 26% 29% 31% 33% 35% 35% 36% 37%
Budget balance/GDP* -6,1% -4,5% -4,5% -3,7% -3,0% -3,3% -3,2% -2,9%
Govt debt/GDP** 66% 66% 66% 65% 62% 61% 61% 60%
CPI inflation (%) 3,7% 3,6% 4,5% 6,0% 6,5% 7,3% 5,7% 3,8
Money demand (%) 9,1% 11,1% 10,9% 13,5% 15,3% 13,2% 13,1% 11,7%
Stock prices 3859 5567 7396 11442 15535
Interest rates 7,1% 6,2% 6,1% 6,9% 7,7% 7,9% 5,6% 6,3%
Exch. Rate ($) 47 45 44 45 41 43 46 4
Trade/GDP (%) 26% 30% 35% 38% 38% 43% 44% 42%
Oil price (Brent) $29 $38 $54 $65 $73 $96 $50 $53
Millions US $
Export of goods 60 895 77 939 102 175 122 963 151 331 179 992 198 523 229 890
Imports of goods 75 537 105 975 149 430 185 041 230 468 301 677 328 183 371 498
Other: 23 415 28 817 36 970 52 549 67 027 87 981 96 409 109 150
Current account 8 773 781 -10 285 -9 529 -12 110 -33 704 -33 251 -32 458
(% of GDP) 1,7% 0,1% -1,4% -1,2% -1,2% -3,0% -2,8% -2,3%
FDI 2 444 3 592 4 628 6 820 10 094 20 372 10 889 11 617
Loan repayments -14 653 -15 874 -17 809 -10 646 -22 046 -27 719 -30 876 -32 486
Net other capital flows 29 543 43 190 42 183 36 195 92 545 106 196 55 323 76 526
Balance of payments 26 107 31 689 18 717 22 840 68 483 65 145 2 086 23 199
Reserves 84 870 116 559 135 27
6 158 118 226 611 291 755 293 821 317 020
Total debt 109 917 120 055 123 596 141 845 178 677 216 041 228 460 234 356
o/w short term debt 4 685 6 593 8 314 10 777 14 054 17 872 21 415 23 056
Sources: Oxford Economics and SEB estimates.
*) Excludes central government off-budget transactions. **) Excludes regional states debt (about 14%/GDP).
Rating history
Fitch (eoy) BB BB+ BB+ BBB- BBB-
S&P (eoy) BB BB BB+ BB+ BBB-
Type of government: Parliamentary Democracy
Next elections 2009
Latest PC deal None
Latest IMF arrangements 1993/SBA
E x c h a n g e r a t e
S o u r c e : R e u t e r s E c o W i n
0 0 0 1 0 2 0 3 0 4 0 5 0 6 0 7 0 8
3 9
4 0
4 1
4 2
4 3
4 4
4 5
4 6
4 7
4 8
4 9
5 0
S t o c k e x c h a n g e , T A I E X 5 0
S o u r c e : R e u te r s E c o W i n
0 0 0 1 0 2 0 3 0 4 0 5 0 6 0 7 0 8
1 0 0 0
2 0 0 0
3 0 0 0
4 0 0 0
5 0 0 0
6 0 0 0
7 0 0 0
8 0 0 0
9 0 0 0
1 0 0 0 0
1 1 0 0 0
1 2 0 0 0
B S E 1 0 0 : p / e r a t i o
S o u r c e : R e u t e r s E c o W i n
0 0 0 1 0 2 0 3 0 4 0 5 0 6 0 7 0 8
1 0
1 5
2 0
2 5
3 0
3 5
4 0
F o r e i g n R e s e r v e s
S o u r c e : R e u t e r s E c o W i n
0 0 0 1 0 2 0 3 0 4 0 5 0 6 0 7 0 8

5 0
1 0 0
1 5 0
2 0 0
2 5 0
3 0 0
3 5 0


SEB Merchant Banking Country Risk Analysis December 11, 2008


Tle informalion in llis documenl las been compiIed by SLB Merclanl BanIing, a
division villin SIandinavisIa LnsIiIda BanIen AB (pubI) (“SLB¨).

Opinions conlained in llis reporl represenl lle banI's presenl opinion onIy and are
subjecl lo clange villoul nolice. AII informalion conlained in llis reporl las been
compiIed in good faill from sources beIieved lo be reIiabIe. Hovever, no
represenlalion or varranly, expressed or impIied, is made vill respecl lo lle
compIeleness or accuracy of ils conlenls and lle informalion is nol lo be reIied upon
as aullorilalive. Anyone considering laIing aclions based upon lle conlenl of llis
documenl is urged lo base lis or ler inveslmenl decisions upon sucl invesligalions
as le or sle deems necessary. Tlis documenl is being provided as informalion onIy,
and no specific aclions are being soIiciled as a resuIl of il: lo lle exlenl permilled by
Iav, no IiabiIily vlalsoever is accepled for any direcl or consequenliaI Ioss arising
from use of llis documenl or ils conlenls.

SLB is a pubIic company incorporaled in SlocIloIm, Sveden, vill Iimiled IiabiIily. Il
is a parlicipanl al major Nordic and oller Luropean ReguIaled MarIels and
MuIliIaleraI Trading IaciIilies (as veII as some non-Luropean equivaIenl marIels)
for lrading in financiaI inslrumenls, sucl as marIels operaled by NASDAO OMX,
NYSL Luronexl, Iondon SlocI Lxclange, Deulscle B∏rse, Sviss Lxclanges,
Turquoise and Cli-X. SLB is aullorized and reguIaled by IinansinspeIlionen in
Sveden: il is aullorized and subjecl lo Iimiled reguIalion by lle IinanciaI Services
Aullorily for lle conducl of designaled inveslmenl business in lle UK, and is
subjecl lo lle provisions of reIevanl reguIalors in aII oller jurisdiclions vlere SLB
conducls operalions.

SLB Merclanl BanIing. AII riglls reserved.