Indias Macro Economic Evolution Past Present and Future

Indias Macroeconomic Evolution: Past, Present, and Future
R. Gupta B. Khan T. Luedi P. Seth J. Woetzel

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October 2004
710010-R
Copyright 2005 McKinsey & Company. Confidential. Not for further reproduction or distribution.
CONTEXT AND OBJECTIVE OF THIS DOCUMENT
Context:
The phenomenal and continuing

growth of China has surprised several of the worlds leading companies
This document will help you to
Develop a perspective on Indias

economic growth (past, present and future)
Most were late in realizing the

benefits from the Chinese opportunity
Provide answers to your clients

frequently asked questions about India
As a result, most companies

today are looking at the other BRIC countries very seriously, and want to grasp the opportunity well in time
Understand the underlying

strengths and drawbacks of the Indian economy
THE INDIAN ECONOMY: COMMONLY ASKED QUESTIONS

Question Is India a monolithic entity or is it diverse? How robust has been the economic growth in the
past? What has driven this growth?
Answer India is a diverse country with various religions,

languages, income levels, etcetera
Indias growth has accelerated since the 80s, and the

country has grown at 5%-6% consistently for the past 20 years. The growth has been driven by a sustained reform agenda pursued by successive governments
Is the rate of investment high enough to drive

growth? Could there be a lack of financial resources?
Investment rate is high enough. In addition, investment

goes a longer way in India due to high capital efficiency. India has sufficient financial resources for growth
When will Indias much promised middle class

consumption boom materialize?
Consumer spending is already growing rapidly, driven by

an emerging middle class that has created a large market
Given that the service sector leads Indias growth,

would the manufacturing sector constrain growth?
In addition to services, manufacturing is also growing

rapidly, driven by labor productivity increases, and reflected in exports
Would Indias infrastructure be sufficient to sustain Road, rail, telecom, and power infrastructure meet basic
rapid industrialization? needs and are being expanded and modernized
How dependent is Indias economy on the

monsoon?
Agriculture forms less than 25% of the economy and the

correlation between economic downturn and monsoons is low
Show me the crystal ball How will Indias

economy grow and evolve in the future?
Even if the government continues the current pace and

theme of reforms, growth rates of ~6% are expected in future. This could go up to 8% if the government increases the pace of reform 2










monsoon?



INDIA IS A DIVERSE COUNTRY

Overview
Land area
Jammu Kashmir
3,287,263 sq. km; including 57% agricultural land
Himachal Pradesh Punjab Uttaranchal Haryana Uttar Pradesh Sikkim
Arunachal Pradesh
Population 1,030mn people (2001 census)
Rajasthan
Languages
Main towns (Population in millions, 2001 census)
Mumbai (Bombay) - 11.9 Delhi - 9.8 Kolkata (Calcutta) - 4.6 Bangalore - 4.3 Chennai (Madras) - 4.2 Hyderabad - 3.5
Gujarat
Madhya Pradesh
Assam Nagaland Meghalaya Bihar Manipur Tripura Jhark- West hand Bengal Misoram Chattisgarh Orissa
Maharashtra
Political structure
Andhra Pradesh Karnataka
13 officially recognized languages; over 1,700 dialects Hindi national language; English widespread as a second language
Form of state
Federal republic, with 28

states and seven union territories
Religion (1991 census)
Hindu (82%) Muslim (12.1%) Christian (2.3%) Sikh (1.9%) Buddhist (0.8%) Jain (0.4%)
Tamil Kerala Nadu
Head of State
The President (nominal head,

does not have executive power)
The Executive
The Prime Minister (presides

over a council of ministers chosen from elected members of parliament)
Currency
Rupee (Rs) Average exchange rate in

2003: Rs46.59=$1
Bicameral National The Rajya Sabha, or upper Legislature house, has 245 members The Lok Sabha, or lower house, has 545 members
4
Sources: EIU; CIA World Fact Book; census
INDIA IS DEMOGRAPHICALLY DIFFERENT FROM CHINA

Population, 2003 Percent 100% = 6.31bn China
20
Age profile, 2003 Percent 60+ 45-60 30-45 15-30

17 India
8 12 20
10 18 25
Rest of world
63
28 24 32
0-15
23
India Life expectancy, 2003 Years Literacy rate, 2003 Percent
China
Sources of employment, 2001 Percent Agriculture Industry
India
63.6
India
60
58 15 27
India
50 22 28
China
5
China
72.2
China
86
Services
Sources: EIU; CIA World Fact Book; Asian Demographics Report; U.S. Census
DEVELOPMENT HAS DIFFERED BETWEEN REGIONS

Jammu Kashmir
Laggards Wealthy states
Himachal Pradesh Punjab Uttaranchal Haryana Arunachal Pradesh Sikkim Rajasthan Uttar Pradesh Bihar Gujarat Assam Meghalaya Manipur Tripura Mizoram Nagaland
Madhya Pradesh
Jharkhand West Bengal
Chattisgarh Orissa
Wealthy states
Maharashtra
Population, 2003: 530mn % of Indias population, 2003: 49.7% Area: 1,494 (000 sq. km) Primary drivers: manufacturing, services GDP/capita ($) CAGR**
612 267 386 720 80-90 90-00 3.8% 4.7%
Laggards
Andhra Pradesh Karnataka
Population, 2003: 536 million % of Indias population, 2003: 50.3% Area: 1,661 (000 sq. km) Primary economy drivers: agriculture GDP/capita ($) CAGR
264 312 328 80-90 90-00 3.4% 1.7% 189
1980 1990 2000 2003

* Base year = 2002; ** Combined annual growth rate Sources: CSO; WEFA-WMM; team analysis; census
Kerala
Tamil Nadu
1980 1990 2000 2003










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INDIA HAS SEEN STRONG, ROBUST GROWTH OVER THE LAST 20 YEARS
Real GDP growth* $ Billions 5.4% 3.0%
118 159 473
5.7%
558
5.8%
279
4.2%
60
3.2%
86
1950 Population 365 Million
1960 434
1970 548
1980 687
1990 850
2000 1,016
2003 1,066
Real GDP*/capita growth $ 3.6% 2.2%

164 466
4.0% 0.7%
216 231
523
3.6%
0.8%
199
328
1950
* Base year = 2002 Sources: WEFA-WMM; team analysis
1960
1970
1980
1990
2000
2003
8
GROWTH HAS BEEN SPURRED BY THE POSITIVE DIRECTION AND TRACK RECORD OF REFORMS DURING THE PAST 20 YEARS
Green Revolution Further and restrictions nationalisation 1969 1973 Balance of payment crisis in 1991 1991 Liberalization (faster reforms) 1991 to 2000 Narasimha Rao D. Gowda I.K. Gujral Second phase of Continued reform liberalization kickstarted 2000-2004
State controlled industrialisation
Tentative liberalization
Era
1953
1984
2004-
Leaders Jawaharlal Nehru (Prime Minister)
Lal Bahadur Indira Gandhi Indira Gandhi Shastri Morarji Desai Rajiv Gandhi Indira Gandhi Charan Singh V.P. Singh Chandra Shekhar Liberalization Increased Acknowledgment of of agriculture; emphasis on Unprofitability of governmentprivate sector the public sector controlled competitiveness Stifling effect industrial of controls growth Entry barriers Nationalisation Significant lowered for restrictions on of many sectors foreign Banks/ exchange insurance through Foreign Core Exchange sectors Regulation Act Controls on Capital market expansion of large business controls houses
A.B. Vajpayee Manmohan Singh
Context Overcoming colonial legacy
Pace of reforms increased due to pressure from World Bank and IMF
Continued and increased commitment for economic reforms in the country Deregulation in strategic sector such as telecom, petroleum, and power Increased emphasis on disinvestment Rationalization of tariff structure Introduction of value-added tax
Policy
Soviet-style central planning Focus on heavy industry Passive public-sector ownership Virtually closed to international trade
Overhaul of Trade policy Industrial policy Financial sector Tax system Public sector
Source: Team analysis
REFORMS IN INDIA ARE COMPARABLE WITH OTHER EMERGING ECONOMIES (1/2)

Reform Area India Brazil Russia China
1 2
Product reservation for small-scale industry (SSI) Tax and excise duties
Items reserved for SSI

reduced from 873 to 485
No reservation for SSI
Excise duty is a single rate VATs have been

of 16% CENVAT* implemented - ICMS & IPI Corporate tax rate reduced Corporate tax rate is15% from 51.8% in 1992 to 35% in 1998
VAT of 18% Corporate tax rate is 24%
VAT of 13% for agriculturerelated products and 17% for others Corporate tax rate is 33%
Effective regulatory framework and strong regulatory bodies in telecom and power
Independent regulatory
bodies set up for most utilities (e.g., telecom and power) and financial services (e.g., securities and insurance)
Regulatory bodies for

telecom and power sectors set up (e.g., ANEELEnergy; ANATEL-Telecom)

telecom and power sector have been set up (e.g., Russian Ministry of telecom and Federal Energy Commission) construction, and the sale of pharmaceuticals are subject to licensing

telecom and utilities sectors set up (e.g., MII telecom, Ministry of Water Reserve, Elect. Regulatory Commission) service sectors
Licensing and quota restrictions
Licensing quotas and

barriers removed from various sectors like telecom and insurance
The licenses/quasilicensing requirements exist in sectors such as cars, textiles,and electronic gambling machines
Activities such as banking, Licenses required in most Quotas largely removed,

even for imports
Reducing import duties
Import duties range from
Import duties range from Average range of import Average range of import 15% to 40% (basic) 0% to 30% duty is 0% to 20% duties from 0% to 30% Customs duty for Duty for commodities: Steel Duty for commodities: Steel Duty for commodities: commodities: Steel (10%), (4%), Al(6%), Cu(6%) (0%), Al (0%), Cu(5%) Steel (1%-12%), Al (1.5%Al (10%), Cu (15%) 7%), Cu (1%-8%) Almost complete
deregulation: 100% FDI allowed in most sectors, with few restrictions (e.g., insurance, telecom, retail)
Foreign ownership
There are no limits of

foreign ownership for banking, insurance, or retail market
100% foreign ownership

allowed in sectors such as retail, oil, and gas Foreign participation is set at 12% in banking and at 50% in insurance
100% foreign ownership

allowed for retail, textile, electronic and telecom equipment etc. Foreign participation limited to electronic machinery, railway construction, cars Exceptions are common
* Central Value Added Tax Sources: MGI (McKinsey Global Institute) report; press search; PwC; E&Y; team analysis
10
REFORMS IN INDIA ARE COMPARABLE WITH OTHER EMERGING ECONOMIES (2/2)

Reform Area India Brazil held. The land titles and records are difficult to trace Russia land. Companies take land on long term rent. China owned. Companies take land on rent
Unclear real estate titles
Computerization of land
records in some states Removal of Urban Land Ceiling Act
Most of the land is privately Russian government owns All domestic land is state
Property taxes, stamp Stamp duty rate ranges The assessment of Property tax rate is Property taxes are charged duties, and property tax is both on established by regions but on historical cost or current from 5% to 14.7% surcharges cannot exceed 2.2% rental Property taxes are charged market value and historical cost on historical cost rather Property tax based on book Stamp duty range from than market value value 0.5 to 4 Tenancy laws
Tenancy laws favor tenants Tenancy laws favor tenants Tenancy laws favor tenants Tenancy laws favor tenants
and it is difficult for owners to reclaim property in case of disputes and it is difficult for owners to reclaim property in case of disputes and it is difficult for owners to reclaim property in case of disputes and it is difficult for owners to reclaim property in case of disputes
10
Privatization of Public sector undertakings (PSUs)
Government equity
disinvested in PSUs like VSNL*,BALCO**,IBP, CMC, ITDC ~$2.3 earned from disinvestments
Government divested
entities in sectors like utilities and telecom (199294: $8.6bn and 1995-02: $78.6bn)
Private ownership
introduced to more than 130,000 companies but state still accounts for 50% of GDP. Main sectors are utilities, telecom.
Government divested
entities in PSUs, but government still shareholder
11
Labor laws
Entities (>100 workers)
Two-thirds of employees in Employment termination need government approval any Brazilian company only allowed on grounds for employee retrenchment must be Brazilian provided in Labor Code. Removal of restrictions on Notice period is 30 days Notice period is 2 weeks using contract labor in SEZs*** Private participation in
infrastructure permitted (e.g., ports and airports)
Employment termination
allowed on grounds in Labor Code Notice period is 30 days
12
Infrastructure
Government trying to
approve the PPP (PublicPrivate Partnership) law to expand the level of private investment in infrastructure
A large part of
infrastructure belongs to government, but last 2-3 years private companies (especially metals and oil & gas) have started investing in ports and roads
Private participation in
construction; operation and sharing of partnership of infrastructure, such as subway, bridges, ports operation are permitted
* ** *** Sources:
Videsh Sanchar Nigam, Limited Bharat Aluminium Company Special Economic Zones MGI (McKinsey Global Institute) report; press search; PwC; E&Y; team analysis
11










monsoon?



INVESTMENT RATES ARE COMPARABLE WITH OTHER EMERGING ECONOMIES

Percentage of GDP
Savings rate, 2003 China Russia South Korea Japan Taiwan India Germany U.K. U.S.
13% 11% 26% 24% 24% 22% 33% 33% 43%
Investment rate, 2003

46% 18% 30% 24% 18% 24% 18% 16% 15%
Sources: Global Insight; CSO-India; economic survey; planning commission
13
INVESTMENT GOES A LONGER WAY IN INDIA
Incremental capital output ratio (ICOR)*, 2003
10.3 9.3
ICOR measures
6.9
6.8
6.7
6.3 5.4 4.9 4.4
the efficiency of the economy in using capital resources Defined as the units of incremental capital required to generate one additional unit of output The higher the ICOR, lower the efficiency
Brazil
Mexico
Chile
U.S.
Hong Kong
Malaysia Korea
China
India
* Average share of fixed investment in GDP during the previous four years, divided by average growth rate of real GDP in previous four years = ICOR Sources: EIU; team analysis
14
INDIA HAS SUFFICIENT FINANCIAL RESOURCES FOR GROWTH
Forex reserves Percentage of GDP

16.0
Government debt Percentage of GDP
53.0
57.0
4.0
1993
2003
1993
2003
FDI stock Percentage of GDP
Capital markets Percentage of GDP
6.0
35
1.0
45
1993
2003
1995
2003
Sources: Global Insight; EIU; FIBV; team analysis
15
COMPARISON OF INDIAS FINANCIAL RESOURCES WITH OTHER COUNTRIES

Forex reserves, 2003 Percentage of GDP Government debt, 2003 Percentage of GDP
154.6 16.0 15.5 9.8 9.5 0.7 62.4 59.9 58.4 30.6 23.0 13.8
30.1
29.8
China Korea
India
Japan Brazil Mexico U.S.
Japan
U.S.
India
Brazil
China Mexico Korea
FDI stock, 2003 Percentage of GDP
Capital markets, 2003 Percentage of GDP

129.9
49.5
68.8
36.1 23.0 19.0 9.1 5.8 2.0
57.2
47.0
45.2 26.5 19.7
Brazil
China Mexico U.S. Korea
India
Japan
U.S. Japan Korea Brazil
India
China Mexico
Sources: Global Insight; EIU; FIBV; team analysis
16










monsoon?



CONSUMPTION IS ALREADY DRIVING INDIAS GDP GROWTH
Indias real GDP* growth $ Billions CAGR = 5.4% 558 129 429
Sources of GDP Growth Percent
Government spending 20.0 FDI

1.4 53.1 Private consumption
Domestic 29.8 investments
1998
2003
Growth in 5 years
* Net trade contribution 4.3%
* Base year = 2002 Sources: WEFA-WMM; CMIE; EIU; team analysis
18
CONSUMER SPENDING IS RISING SIGNIFICANTLY

1
Increasing earnings
Rising disposable income
GDP/capita*, $
Peak personal income tax rate, percent
Rising consumer spending per capita $ per person

700
523 456 386

50+ 40 30
600 500 400
CAGR 8.0% CAGR 5.1%
1995
1999
2003
Pre 1991 1995
2003
300 200
+
3 Reducing incentive to save
4 Availability of consumer
Deposit interest rate, percent

15 10 5 0 95 96 97 98 99 00 01 02 03
finance Retail asset market**, $ billions
100 0 95 97 99 01 03 05 07 09
CAGR 36%
26 17
Consumer spending per capita comparison, CAGR (2003-2010) U.S. U.K. 3.7% 7.5% 0.8% China 7.7%
10
12
1998 1999 2000 2001 2002 2003
Japan
* 2002 terms ** Includes car finance, housing finance, personal loans, credit cards, two-wheeler credit, commercial vehicle credit, and consumer durable financing Sources: WEFA-WMM; CMIE; CSO; EIU; SSKI report; team analysis
19
INDIAS MIDDLE CLASS IS GROWING RAPIDLY

Percent Household income* distribution CAGR 100% = 164.8 million High income (> $18,000) Upper-middle income ($4,000-$18,000) Middle income ($2,000-$4,000) 180.6 million 199.1 million 1995-2001 2% 2001-2006 27%
1 20
1 26
38 33 41
Lower-middle income ($1,400-$2,000) Low income (< $1,400)
6%
10%
41 27 18 20
1995-96
5%
2%
10 13
2001-02
-5% -5%
-9% -7%
8
2006-07E
* Annual Income at PPP levels (PPP = purchasing power parity); average size of a household is 5.8 people Source: NCAER
20
AS A RESULT, INDIAS CONSUMER MARKETS ARE GROWING FAST AND ALREADY RANK AMONG THE WORLDS LARGEST
TV sales Million units
4.5
EXAMPLE
Key manufacturers
11.5 8.0
Globally 2003 rank 5 2006 rank 3 2006

507
2000
2003
Samsung Sony LG Philips Toshiba Panasonic Nokia Ericsson Motorola Siemens Alcatel Bajaj Hero Honda TVS Yamaha Kinetic Motor Co.
21
Mobile handset sales Million units
16

8.3
2000
2003
Two-wheeler sales Million units 5.4 3.5
2000
Source: Press search
2003










monsoon?



MANUFACTURING SECTOR IS GROWING

Real Industrial Output* $ Billions 136 CAGR 80-85 85-90 90-95 6.3 8.5 7.3 95-00 00-03 4.2 5.5
116
40
6.6
6.8
2.9
3.0
8.9
94
31 17
5.3 10.7 10.2 3.3 4.9
27
66
15
13 23
44 32 Construction Electricity, gas Manufacturing Mining & quarrying 4.9 9.0 9.9 5.8 4.0
17 5
8 46 29
69 61
12 4 15 2 1980
19 4
1985
6
1990
8
1995
8
2000
9
2003
15.7
10.4
5.6
-0.7
4.2
* Base year = 2002 Sources: WEFA-WMM/WIM; Global Insight; team analysis
23
AND MERCHANDISE EXPORTS ARE RISING

$ Billions
Commercial services exports Merchandise exports
CAGR 1980-1995 80.8 8.9% 10.1%
1995-2003 10.1% 18.4%
59.9
26.1
17.5
37.4 6.8 22.6 4.6
54.7 42.4 30.6
8.4%
7.5%
11.5 2.9 8.6 1980
12.4 3.3 9.1 1985
18.0
1990 1995 2000 2003
24
Sources: World Trade Organization; team analysis
LABOR PRODUCTIVITY IS INCREASING AND THERE IS POTENTIAL FOR FURTHER IMPROVEMENT WITH REMOVAL OF BARRIERS
Labor productivity has improved Real GDP per worker*, $ CAGR 3.3% Potential to improve is high
Reform in the automotive industry has led to significant growth in productivity
Index: India = 100 in 1992-93
Labor productivity 256% increase 356
1,477 1,312
Barriers removed Licensing abolished FDI allowed
100
1,118 966
CAGR in percent (1990-2003) 1992-93 Labor productivity growth comparison 1999-00
China South Korea Taiwan India

4.1 4.1 3.3 1.9 1.7 1.3
7.3
1990
1995
2000
2003
U.K. U.S.
* Base year = 2002 Sources: EIU; Global Insight; WEFA-WMM; economic survey of India; interviews; SIAM; annual reports; team analysis
Japan
25
THERE IS ABUNDANT AVAILABILITY OF HIGH-QUALITY, LOW-COST WORKFORCE
Wage rate comparison* $ per hour
Workforce addition each year Thousands
23.0 19.0
Graduates
2,200
8.7
Engineers
295
0.5
China
0.6
India
0.7
1.0
2.1
U.S. Germany
M.B.A.s
60
Russia Turkey Mexico Korea
* Unskilled/semiskilled labor Sources: EIU; Manpower Profile of India; Human Resource Development Ministry
26
INDIA WILL CONTINUE TO HAVE A LARGE POOL OF ECONOMICALLY ACTIVE POPULATION

Population age pyramid for selected countries, 2003
Percent 100% (Million)= 1,066 >65 years 5% 45-64 years 30-44 years 15% 20% 20% 25% 15-29 years 28% 24% 21% 17% 0-14 years 32% 23% India Economically active population* Millions Percentage Employment rate (percent) China 21% U.S. 15% Germany 14% Japan 19% 22% 24% 20% 24% 26% 28% 1,291 7% 290 12% 82 127
18%
19%
672 63% 91**
898 70% 90
193 67% 94
55 67% 90
85 67% 95
27
* Economically active population is aged 15-64 years ** Official statistics; however, a lot of underemployment in India Sources: U.S. Census Bureau; WEFA-WMM; EIU; ILO
INDIA MAINLY TRADES IN MINERALS AND JEWELRY

Top trade partners, 2003 Imports Percent 100% = $69.7bn U.S. Top traded commodity, 2003 Imports Percent 100% = $69.7bn Belgium China 5.3 4.0 UK 4.0 Germany 3.5 3.3 Switzerland 3.0 South Africa 2.6 Japan 2.2 2.1 Korea Malaysia Others
BACKUP
6.4
30
28
Mineral fuels, oils, etc.
Aircraft
Others
63.8
1 2 Inorganic chemicals 2 15 Jewellery 2 3 Optical instruments 3 7 7 Edible oils Organic Chemicals Nuclear reactors, boilers Electrical machinery & equipment
Exports Percent 100% = $54.7 bn Jewellery
Iron and steel
Exports Percent
100% = $54.7 bn U.S.
20
Others
17
Non-knitted 6 apparel
Others 45
UAE
5 Hong Kong
UK Germany 3 China Japan Singapore Belgium
4 3 3
Italy
Mineral fuels, 5 oils, etc. 4 Knitted Fish & crustaceans 4 apparel Cotton 4 Organic Chemicals 4 3 3 3 3 3 Iron and steel Pharmaceuticals Parts of nuclear reactors,boilers Electrical machinery & equipment Cereals
43
Source: CMIE (Indiatrades); WTO; team analysis
28










monsoon?



HISTORICALLY, INFRASTRUCTURE INVESTMENT HAS GROWN WITH GDP

Real Infrastructure Investment*
Percent 100% =
($ Billions) Communication & Storage
CAGR 70-80 80-00 10.7

7%
4.6
3%
6.2
4%
8.2
5%
14.6
10%
17.7
15%
20.6
6.0
4.7
25%
Roads and other transport**
10.2
14.0
45%
46%
41%
32%
31% 35% 29%
5.0
3.0
12%
Railways
10% 9% 6%
11% 14% 10%
3.3
1.6
Electricity, Gas & water supply
38%
40%
44%
50%
49% 41% 41%
7.7
4.3
1970
Infrastructure investment as % of GDP
1975
4.6
1980
5.2
1985
5.2
1990
5.2
1995
4.9
2000
4.4
3.9
* Infrastructure investment is the gross capital formation in the specified sectors; Base year = 2002 ** Includes ports, civil aviation, and inland waterways Sources: CMIE; Global Insight; World Bank
30
GOVERNMENT IS SPENDING ON ROAD INFRASTRUCTURE DEVELOPMENT

National highway system Completed Under implementation Project preparation started
HIGHWAYS
Road density Km of paved road per 1,000 sq. km of area
1,539
However, quality and maintenance not world class
660
646 441 408 152 34 21 11
U.K.
Korea Ger- India U.S. many
MaChina Russia Brazil laysia
National Highway Development Project (NHDP) launched

Indias largest highway project with 4/6 laning of around 13,146 km Total cost of about $12bn 24% of the project has been completed, while another 28% is under implementation Expected completion is by December 2007 Construction of 46,800 km of state highways and district roads also being targeted for 2007 Expressways for high density corridors are planned. Land acquisition and feasibility studies of about 1,000 km of expressways has been planned for 2007
Sources: Planning commission; NHAI; CIA World Fact Book; CMIE Infrastructure Report - 2003
31
THE INDIAN ROAD SYSTEM IS IMPROVING

Old highways
HIGHWAYS
Mumbai-Pune Expressway
State/district roads
New highway infrastructure
32
THE EXTENSIVE RAILWAY NETWORK IS POISED FOR SIGNIFICANT EXPANSION

Existing railway network in India Railroad density, 2002 Km of track per 1,000 sq. km of land
127
RAILWAYS
70 32
21
21 8 7 5 4
Ger- U.K. many
Korea U.S.
India China Ma- Russia Brazil laysia
National Rail Vikas Yojana to remove bottlenecks in

critical sections of rail network Strengthening of network linking major cities to enable running of express trains at higher speeds of 100 kmph Improving rail connectivity to ports Expected to be completed by 2007 with a total investment of $3.3bn
Sources: Planning commission; Indian Railways; India Infrastructure Report 2003; CIA World Fact Book
33
INDIAN RAILROADS ARE EFFICIENT

The hill train on the Shimla route Electrified railroad
RAILWAYS
The Royal Orient Expressluxury train
Calcutta metro
34
INDIA IS A POWER-HUNGRY COUNTRY

Power intensity curve 1960 - 2003 data, in 2002 $ terms
Power consumption kilowatt-hour/capita
POWER
India China Malaysia + Taiwan Korea Thailand x Egypt Japan UK Germany U.S. Brazil Indonesia
14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000
real GDP/capita in 2002 $ Intensity curve for emerging economies high power intensity Very high energyintensive new emerging economies (China, India) y = 1.0945x-41.0 R2 = 0.91 y = 0.4858x-3.9 R2 = 0.93
y = 0.0099x1.33 R2 = 0.86
Intensity curve for developed economies less power intensity
Strong correlation between per capita GDP and power consumption The later an economy develops, the more power hungry it is, as a result of technology advancements (relatively more applications that consume power used) Given Indias current level of development, it is expected that India will continue to follow the very high power intensity curve in the medium term (e.g., up to 2025)
Sources: EIU; WEFA-DRI; team analysis
35
POWER INTENSITY COMPARISON AT COMPARABLE GDP PER CAPITA

POWER
Per capita power consumption, kWh

603
BACKUP
392
269
133 89
China Year 1994
India 2003 523
Egypt 1976 530
Thailand 1972 524
Indonesia 1986 518

36
Real GDP/Capita*, $ 546

* Base year = 2002 Source: WEFA-WMM; team analysis
POWER INFRASTRUCTURE IS CURRENTLY UNDERDEVELOPED

POWER Existing energy generating units
Thermal Hydel Atomic Oil refineries
Energy gap Percent (2002)

Base energy gap* Peaking gap**
20.3
12.6 8.9 7.2 3.1 7.7 6.1 2.4

Northeastern region
5 2.7
Western region
North West South East Northeast
Southern region
Northern region
Eastern region
Energy gap driven by Inadequate generation capacity Inadequate transmission capacity, leaving even available generation unevacuated Inefficient and inadequate distribution capacity with high T&D losses (50%)
37
* Year-round average difference between unconstrained energy requirement and energy supply ** Peak period average difference between unconstrained energy requirement and energy supply Sources: Analyst reports; Ministry of Power
BUT WILL BE SUFFICIENT IF THE GOVERNMENT DELIVERS AGAINST PLANS

Power availability and requirement Billions kWh 65% capacity addition target achieved**
703
POWER Power availability Power requirement
Planned power generation

811
841
523 483 413 366
530
capacity in India is still relatively smaller than China. China is adding the power capacity in one year that India is adding in 5-6 years Planned power generation capacity addition annually is double what was added on average over the past 5 years The governments achievement of planned targets has risen to 80% as observed in the past two years. Its not yet clear if this will be maintained or fall back to ~50% (as seen in previous plans)
1996-97 2001-02 2006-07 End of VIIIth Plan End of IXth Plan End of Xth Plan
2011-12 End of XIIth Plan
*Demand estimation in Services-led growth scenario GDP growth 5.5% CAGR (03-10) **Last five-year average of 65% capacity addition target achievement assumed Sources: Ministry of Power; CMIE; Central Electricity Authority; Global Insight; team analysis
38
GOVERNMENT HAS DELIVERED ON CAPACITY EXPANSION PLANS IN THE RECENT PAST AND IS LIKELY TO CONTINUE DOING SO POWER
Track record of target achievement
Actual capacity addition of 16,423 MW

Generation capacity addition Megawatts vs. target of 30,528 MW (54% target achievement) from 1992-1997 Actual performance from 1997-2002 was power generation capacity addition of 19,015 MW vs. target of 40,245 MW (47% target achievement) because of inability to implement private sector projects because of regulatory uncertainty However, for 2003, target achievement has been 80% in power generation owing to strong project monitoring Planned generation capacity addition
4,891
Hydel
1378
3,441 3,420
4,086
Nuclear & wind
586 1285 294 1127 98
2,927
641 228
2590
Thermal
2928 1862 2195 2057
134 1362
Up to 2012, government's stated plan is to

invest $15bn-$20bn in power sector Plan to add 100,000 MW of generation capacity by 2012, augment transmission network significantly expand or upgrade distribution network Ministry of Powers goal to electrify all villages by 2007 and all households by 2012
1999
2000
2001
2002
2003
Sources: Analyst reports; Ministry of Power; Central Electricity Authority
39
INTERESTINGLY, POWER SHORTAGES IN THE PAST HAVE NOT PREVENTED ECONOMIC GROWTH, AS THE INDUSTRY HAS WORKED AROUND THE POWER ISSUE
Relation between Power shortage** and GDP growth Real GDP growth*
POWER
12%
Growth rates of 5%-6%

10% y = 0.0987x + 0.0476 R 2 = 0.0126 8% 6% 4% 2% 0% 0% 5% 10% 15%
have been consistently achieved during the last 20 years in spite of power shortages
Industry has learned to

work around the power shortage issue Many large manufacturing firms have in-house power plants Most smaller manufacturing or services firms have backup generators
Shortage** as percentage of requirement

* Base year = 2002; ** Shortage is defined as the difference between unconstrained energy requirement and energy availability Sources: CMIE; WEFA-WMM; team analysis
40
TELECOM INFRASTRUCTURE IS STILL UNDERDEVELOPED, BUT IS IMPROVING RAPIDLY TELECOM

Subscriber base, India Millions CAGR Percent 76.2 26.5 U.S. Korea Germany Brazil China India Mobile subscribes per 100 people 54.5 47.6
42.6
Telecom penetration, 2003 Telephone mainlines per 100 people

64.2
49.4
46.5 20.9 20.3 4.6
1.7
74.4
72.4 55.3 23.3 20.8 3.1
41.5
Fixed line
41.2 33.6
Germany Korea 129.1
U.S.
Brazil
China
India
Cellular
6.4
13.0
Internet users per 100 people 64.8 51.4 45.3

7.7 6.1 3.0
March 02
March 03
March 04
Korea
U.S.
Germany Brazil
China
India
Sources: TRAI EIU; ITU; Pyramid Research; Ministry of Information Industry (China)
41










monsoon?



INDIA HAS SHOWN GROWTH IN THE LAST 20 YEARS DESPITE SOME POOR MONSOONS
DROUGHT YEARS
Real GDP growth Percent
12
Years of poor GDP growth monsoon
10
1982 8
GDP growth
3.7% 7.1% 5.6% 4.3% 9.9% 5.3% 4.3%
1983 1985
6 Average 5.7% 4
1987 1988 1992
2002
0 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
* Base year = 2002 Sources: WEFA-WMM; Ministry of Agriculture; Center of Studies in Resource Engineering (IIT-Bombay); team analysis
43










monsoon?



INDIA HAS SHOWN STRONG, ROBUST GROWTH OVER THE LAST 20 YEARS
Real GDP growth* $ Billions 5.4% 3.0%
118 159 473
5.7%
558
5.8%
279
4.2%
60
3.2%
86
1950 Population 365 Million
1960 434
1970 548
1980 687
1990 850
2000 1,016
2003 1,066
Real GDP*/capita growth $ Billions 3.6% 2.2%

164 466
4.0% 0.7%
216 231
523
3.6%
0.8%
199
328
1950
1960
1970
1980
1990
2000
2003
45
GOING FORWARD, GOVERNMENT POLICY IS THE KEY VARIABLE AS IMPLEMENTATION OF ECONOMIC REFORMS WOULD FURTHER UNLOCK INDIAS GROWTH POTENTIAL
MGI study on India Indias growth potential from reforms GDP CAGR Small-scale reservations FDI restrictions India Poor regulation 5.5 (Status quo) High import duties Unequal taxes
Product market barriers
McKinsey Global Institute (MGI)

study focused on estimating growth potential by unlocking barriers to productivity Product market barriers and land market distortions found to be the largest barriers to growth Contrary to popular belief, low labor skills and infrastructure constraints do not have a significant impact on productivity With appropriate training, even illiterate workers can achieve high productivity in sectors like construction Companies have learned to overcome infrastructure constraints e.g., companies build own power generation facilities to overcome power shortage, locate production facilities close to assembly plants to overcome poor roads
2.3
Land market barriers
Unclear titles Tenancy laws Low property taxes

1.3
and low user charges
Government ownership Other barriers: Labor market Roads & ports infrastructure India (complete reforms)
0.7
Central PSUs State PSUs, including

power Municipal services
0.3
10.1
46
Source: McKinsey Global Institute study
IN ANY CASE, INDIA WILL BE A GLOBAL TOP 10 ECONOMY IN 2025

Real GDP* development for worlds biggest economies 2003 $ Billions 2010F $ Billions
10,752 4,089 1,989 1,598 1,438 1,348 1,189 750 669 645 558
CAGR %, 03-10
13,589 4,592 2,244 2,217 1,905 1,670 1,368 930 863 824 811 797 774 725
2025F $ Billions
CAGR %, 10-25
20,718 5,926 5,598 2,879 2,730 2,740 1,834 1,908 1,834 1,568 1,420 1,354 1,205 1,138
U.S. Japan Germany U.K. France China Italy Canada Spain Mexico
India
U.S. Japan Germany China U.K. France Italy Canada

India1
3.4 1.7 1.7 7.4 2.5 2.2 2.0 3.1 6.4 3.6 5.5 2.5 4.8 5.8
U.S. Japan China Germany

India1
2.9 1.7 6.4 1.7 8.0 2.5 2.2 5.9 2.0 4.4 4.1 2.5 3.4 2.4
U.K. France
India2
Italy Mexico
India3
Mexico
India2
S. Korea 490 Brazil Netherlands

454 417
Spain
India3
Canada S. Korea Spain
S. Korea
* Base year = 2002 India 1: High growth at ~8% p.a. India 2: Status- quo growth at ~6% p.a. India 3: Stagnated growth at ~4.5% p.a. Sources:WEFA-WMM; team analysis
47
AVERAGE INDIVIDUAL WEALTH WOULD STILL BE MODERATE

Real GDP/capita*, $
India High growth: GDP grows at ~8% 7.0% 5.0%
523 735 2,026
Comparison with other countries, 2003
2003
Status- quo growth: GDP grows at ~6% 4.1%
523
2010
4.9%
2025
36,890
1,416 691
32,046
2003
Stagnated growth: GDP grows at ~4.5% 3.4%
523
2010
3.2
659
2025
24,103
1,054 10,183
2003
Population
2010
1,174
1.4%
2025
1,347
0.9%
1,032 2,128 2,558 3,960
Million CAGR
1,066
China Thailand Russia Malaysia Korea Germany Japan
U.S.
48
THE SERVICE SECTOR WILL REMAIN THE KEY GROWTH DRIVER IN THE MID AND LONGER TERM
Real GDP* $ Billions, percent 100% = 159 279 473 558 811 1,908
13.2
SCENARIO: STATUS QUO GROWTH

CAGR 2003-10 2010-25 3.0
Agriculture
32.5
31.7
26.2
23.6
19.9 0.5 1.1 12.8 4.0 4.7
Agriculture, hunting, forestry, fishing Mining & quarrying Manufacturing Electricity, gas, and water Construction Wholesale & retail trade, restaurants & hotels Transportation & communications
3.0
4.9
5.5
1.7 1.2 9.3 2.2 10.4 2.8 8.4 15.3 8.0 17.3 12.5 10.5 8.6 14.0 5.2 20.9 3.1 6.6 13.0
1.6 12.4 3.1 7.3
12.1 3.2 6.9
Industry
2.3 7.7 14.2 5.1
21.6 21.8
21.2 10.9 10.3 9.6 27.7 15.8 5.4 19.3
6.8
6.8
Services
9.2
Finance, insurance, and real estate Community, social, and personal services
5.3
4.5
1980
1990
2000
2003
2010
2025 49
* Base year = 2002. Sources: WEFA-WMM/WIM; team analysis

Indias Macro Economic Evolution Past Present and Future

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Indias Macroeconomic Evolution: Past, Present, and Future

R. Gupta B. Khan T. Luedi P. Seth J. Woetzel

CONTEXT AND OBJECTIVE OF THIS DOCUMENT

The phenomenal and continuing

This document will help you to

Develop a perspective on Indias

Most were late in realizing the

Provide answers to your clients

As a result, most companies

Understand the underlying

THE INDIAN ECONOMY: COMMONLY ASKED QUESTIONS

Answer India is a diverse country with various religions,

Indias growth has accelerated since the 80s, and the

Is the rate of investment high enough to drive

Investment rate is high enough. In addition, investment

When will Indias much promised middle class

Consumer spending is already growing rapidly, driven by

Given that the service sector leads Indias growth,

In addition to services, manufacturing is also growing

How dependent is Indias economy on the

Agriculture forms less than 25% of the economy and the

Show me the crystal ball How will Indias

Even if the government continues the current pace and

THE INDIAN ECONOMY: COMMONLY ASKED QUESTIONS

Answer India is a diverse country with various religions,

Indias growth has accelerated since the 80s, and the

Is the rate of investment high enough to drive

Investment rate is high enough. In addition, investment

When will Indias much promised middle class

Consumer spending is already growing rapidly, driven by

Given that the service sector leads Indias growth,

In addition to services, manufacturing is also growing

How dependent is Indias economy on the

Agriculture forms less than 25% of the economy and the

Show me the crystal ball How will Indias

Even if the government continues the current pace and

INDIA IS A DIVERSE COUNTRY

3,287,263 sq. km; including 57% agricultural land

Himachal Pradesh Punjab Uttaranchal Haryana Uttar Pradesh Sikkim

Population 1,030mn people (2001 census)

Federal republic, with 28

Religion (1991 census)

Tamil Kerala Nadu

The President (nominal head,

The Prime Minister (presides

Rupee (Rs) Average exchange rate in

Sources: EIU; CIA World Fact Book; census

INDIA IS DEMOGRAPHICALLY DIFFERENT FROM CHINA

Age profile, 2003 Percent 60+ 45-60 30-45 15-30

India Life expectancy, 2003 Years Literacy rate, 2003 Percent

Sources of employment, 2001 Percent Agriculture Industry

DEVELOPMENT HAS DIFFERED BETWEEN REGIONS

Laggards Wealthy states

Jharkhand West Bengal

1980 1990 2000 2003

1980 1990 2000 2003

THE INDIAN ECONOMY: COMMONLY ASKED QUESTIONS

Answer India is a diverse country with various religions,

Indias growth has accelerated since the 80s, and the

Is the rate of investment high enough to drive

Investment rate is high enough. In addition, investment

When will Indias much promised middle class

Consumer spending is already growing rapidly, driven by