GLG Institute Presentation

India: Economic and Policy Drivers of Growth

Paradeep Agrawal
Professor of Economics, Institute of Economic Growth
Discussion Points

► Indian governments’ economic initiatives

► India and its trading partners
► Evolving business dynamics – M&A and FDI
► Emerging sectors and opportunities

© 2007 Gerson Lehrman Group Inc., All Rights Reserved

Outline of the Presentation
1. Brief Review of Reforms in the Indian Economy since
1991

2. THE GDP: Growth Rates, Important Sectors etc.

3. India’s Trade : Major exports and imports, trading

partners, BOP Situation

4. The inflation worry: Government finances,growth of

money supply and credit

5. Business prospects and GDP growth forecasts

6. Sectors to watch out for

3
Direction of Economic Reforms
since 1991

Increasing the degree of openness of the economy

(globalisation programme)
Shifting resources from the public sector to the private
sector activities (i.e. the privatisation
programme)
Changing the structure of incentives and institutions
such that greater reliance is placed on the market
mechanism and the role of the state is in the
economy is reduced and redefined (marketisation
programme).

Continued… 4
Economic Reforms Implemented
The Reforms thus designed were implemented through
several Sector Reforms viz.,

• Trade and Exchange Rate Reforms,

• Industrial Reforms,
• Financial Sector Reforms
• Reforms relating to Foreign Investment,
• Fiscal Reforms and Public Sector Reforms

5
 Reforms on the way
• Reforms Under way
1. Special Economic Zones may help industry and IT
sectors (but are facing problems in land
acquisition)
2. Government emphasizing Infrastructure
Development which will increase economic activity
and growth.
Next 10 years likely to see major infrastructure
development in India
• Reforms on the wish list (opposed by some within
UPA)
1. Privatization of more public sector enterprises
2. Labour market reform to make hiring and firing
easier

6
 WHY HAVE THE REFORMS BEEN
SO SUCCESSFUL IN INDIA
• India was already a reasonably mature industrial economy with
a strong tradition of entrepreneurship and all market institutions
largely in place along with a genuine democracy, free press and
impartial judiciary (unlike say in former USSR).
• Reforms have unleashed the creative energy of the Indian
Entrepreneurs.
• IT and Telecommunications sectors have seen revolutionary
growth due to the emergence of several very successful
domestic entrepreneurs.
• Banking sector has improved considerably; international money
transfers even more so.
• Doing business outside of one own city or even country has
become easier due to improvements in telecom, banking, IT .

7
 Table 1: Growth Rates – Global Scenario
COUNTRY 2004 2005 2006 2007(P) 2008(P)
ADVANCED ECONOMIES
EUROPE 2.0 1.4 2.6 2.3 2.3
JAPAN 2.7 1.9 2.2 2.3 1.9
KOREA 4.7 4.2 5.0 4.4 4.4
UK 3.3 1.9 2.7 2.9 2.7
USA 3.9 3.2 3.3 2.2 2.8
OECD 3.2 2.5 3.0 2.5 2.7
EMERGING ECONOMIES
ARGENTINA 9.0 9.2 8.5 7.5 5.5
BRAZIL 5.7 2.9 3.7 4.4 4.2
CHINA 10.1 10.4 10.7 10.0 9.5
INDIA 7.5 9.0 9.2 8.4 7.8
INDONESIA 5.0 5.7 5.5 6.0 6.3
MALAYSIA 7.2 5.2 5.9 5.5 5.8
8
 India’s GDP Growth
1. Real GDP Growth of over 6% for last 25 years and about 9% over the last four
years.

2. The drivers of this high growth have been:

IT and Telecom (Low cost)

Construction (home loans at low rates) and Infrastructure development
Manufacturing: Chemicals and Engineering goods (competitive advantage)
Exports: Chemicals, Engineering goods and IT Sectors
3. The recent performance of the economy:

• Quarterly GDP growth

• The sectoral growth performance

• The important sectors of the economy

• The savings and investment rates

9
10
 Growth rates of Industry, Service and GDP

12
11
10
9
Growth rate

8
7
6
5
4
3
2
1997- 1998- 1999- 2000- 2001- 2002- 2003- 2004- 2005- 2006-
98 99 00 01 02 03 04 05 06 07

GDP Industry Service

11
 INDEX OF INDUSTRIAL PROD.:SECTORAL & USE BASED CLASSIFICATION
INDUSTRY WEIGHT IN GROWTH RATE
IIP
APRIL-MAR APRIL-FEBRUARY

2005-2006 2005-2006 2006-2007

SECTORAL
MINING 10.5 1.0 0.9 4.9
MANUFACTURING 79.4 9.1 9.1 12.1
ELECTRICITY 10.2 5.2 5.3 7.2
USE BASED
BASIC GOODS 35.6 6.7 6.5 10.1
CAPITAL GOODS 9.3 15.7 16.3 17.8
INTERMEDIATE GOODS 26.5 2.5 2.4 11.6
CONSUMER GOODS (A+B) 28.7 12.0 12.0 9.5
A.CONSUMER DURABLES 5.4 15.3 14.7 9.8
B.CONSUMER NON- 23.3 10.9 11.1 9.4
DURABLES
12
GENERAL 100 8.2 8.1 11.1
 Trends in Savings and Investment rate
35
33
31
29
27
%of GDP

25
23
21
19
17
15
1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07
Gross Domestic savings Gross Capital Formation
13
India: Trade and foreign investment
1. Global Scenario on Growth of Exports

2. India’s growth of Exports and imports

3. India’s exports by Principal commodities

4. India’s Direction of Exports

5. India’s Imports by Principal Commodities

6. India’s current Account Balance

7. India’s Balance of Payment Position

8. India’s Foreign Exchange Reserves

14
 GROWTH IN EXPORTS- GLOBAL SCENARIO (percent)
Region/country 2005 2006
WORLD 14.0 15.7
INDUSTRIAL COUNTRIES 8.5 12.6
US 10.8 14.5
GERMANY 7.3 15.1
JAPAN 5.2 9.2
DEVELOPING COUNTRIES 21.8 19.7
NON – OIL DEVELOPING COUNTRIES 19.2 19.7
CHINA 28.4 27.2
INDIA 29.6 21.1
KOREA 12.0 14.5
MALAYSIA 12.0 14.0
SINGAPORE 15.6 18.4
THAILAND 14.5 18.7

15
16
 EXPORTS OF PRINCIPAL COMMODITIES (US $ Billion)

COMMODITY GROUP 2005-2006

PRIMARY PRODUCTS 16.4

AGRICULTURE & ALLIED 10.2

ORES & MINERALS 6.2

MANUFACTURED GOODS 72.2

CHEMICALS & RELATED 14.8

ENGINEERING GOODS 21.5

TEXTILES & TEXTILE PROD. 16.3

GEMS & JEWELS 15.5

PETROLEUM PRODUCTS 11.5

TOTAL EXPORTS 103.1 17

 DIRECTION OF INDIA’S EXPORTS (US $ BILLION)
GROUP/COUNTRY 05-06 05-06 (APRIL-NOV.)
06-07

OECD COUNTRIES 45.8 28.7 33.4

EU 22.4 14.0 16.3
NORTH AMERICA 18.4 11.6 13.2
US 17.4 11.0 12.4
OPEC 15.2 9.1 13.6
UAE 8.6 5.1 8.0
DEVELOPING COUNTRIES 39.7 24.6 32.0
ASIA 31.0 19.2 23.8
23.8CHINA 6.8 3.9 4.8
SINGAPORE 5.4 3.6 4.2
TOTAL EXPORTS 103.1 63.9 80.9

18
 IMPORTS OF PRINCIPAL COMMODITIES
COMMODITY GROUP 2005- 05-06 06-07
06
APRIL-NOVEMBER
PETROLEUM $ RELATED PRODUCTS 44 27.8 39.4
EDIBLE OILS 2.0 1.5 1.5
IRON AND STEEL 4.6 32. 4.1
CAPITAL GOODS 37.7 19.6 27.1
PEARLS,PRECIOUS&SEMI PRECIOUS 9.1 6.7 5.0
CHEMICALS 7.0 4.7 5.2
GOLD & SILVER 11.3 8.0 9.6
TOTAL IMPORTS 149.2 93.5 119.4
NON-OIL IMPORTS 105.2 65.7 80.0
NON-OIL IMPORTS(EXCUDING 93.9 57.8 70.4
GOLD&SILVER)
MAINLY INDUSTRIAL IMPORTS 87.5 53.3 64.5
19
20
 India's Balance of Payments (US $ Million)
ITEM 2005-06 2005-06 2006-07
APRIL- MAR APRIL-DECEMBER
PARTIALLY REVISED PRELIMINARY

EXPORTS 105152 74573 91334

IMPORTS 156993 114662 143636
TRADE BALANCE -51841 -40089 -52302
INVISIBLE RECEIPTS 92294 63594 82633
INVISIBLE PAYMENTS 49639 35447 42152
INVISIBLES, NET 42655 28147 40481
CURRENT ACCOUNT -9186 -11942 -11821
CAPITAL ACCOUNT (NET) 24238 13773 27972
FOREIGN DIRECT INVESTMENT 4730 3347 5822
PORTFOLIO INVESTMENT 12494 8161 5170
External COMMERCIAL 2723 -1211 9104
21
BORROWINGS
 Foreign Exchange Reserves of India March 2006
to April 2007 (US $ Million)

210,000
200,000
190,000
US $ million

180,000
170,000
160,000
150,000
140,000
130,000
120,000
0 0 0 0 0 0 0 0 0 0 1 1 1 1
-r 1 r-1 y-1 n-1 l-1 g-1 p-1 t-1 v-1 c-1 n-1 b-1 r-1 r-1
a p u c a p
M A Ma Ju J Au Se O No De Ja Fe M A 22
 International Investment Position of India (US BILLION)
PERIOD MAR 05 MAR 06 JUNE 06 SEPT’ 06
PREVIOUSLY REVISED
PRELIM.
A. ASSETS---$ Billion 168.2 183.5 191.8 199.9
% of GDP (23.5) (22.9)

1.DIRECT INVESTMENT 10.0 13.0 13.6 14.4

2.POTFOLIO INVESTMENT 0.8 1.3 1.1 1.2
2.1 EQUITY SECURITIES 0.4 0.7 0.5 0.5
2.2 DEBT SECURITIES 0.4 0.6 0.6 0.7
3.OTHER INVESTMENTS 15.9 17.6 14.2 18.9
3.1 TRADE CREDITS 2.2 0.4 0.3 2.8
3.2 LOANS 1.9 2.6 1.6 2.3
3.3 CURRENCY& DEPOSITS 8.4 3.5 3.5 3.6
3.4 OTHER ASSETS 3.4 3.5 3.5 3.6
4. RESERVE ASSETS 141.5 151.6 162.9 165.3
23
PERIOD MAR MAR 06 JUNE 06 SEPT’ 06
05
PREVIOUSLY REVISED PRELIM

B. LIABILITIES 210.0 231.3 238.3 245.8

(29.4) (28.9)
1.DIRECT INVESTMENT 44.0 50.7 51.5 54.9
2.PORTFOLIO INVESTMENT (6.2) 55.7 (6.3) 64.6 64.8 67.4
2.1 EQUITY SECURITIES (7.8) 43.2 (8.1) 54.7 52.5 54.8
2.2 DEBT SECURITIES 12.5 9.9 12.4 12.6
3.OTHER INVESTMENTS 110.3 116.0 122.0 123.5
3.1 TRADE CREDITS (15.4)9.6 (14.5)10.5 10.9 12.4
3.2 LOANS 65.7 68.2 70.7 72.2
3.3 CURRENCY& DEPOSITS 33.6 36.2 39.2 37.6
3.4 OTHER LIABILITIES 1.4 1.1 1.2 1.4
C. NET POSITION (A-B) -41.8 -47.8 -46.4 -45.4
(-5.9) (-6.0) 24
 The Inflation Worry
• Recently (March 2007), the inflation has gone up to about 7% which is
above the government and public’s comfort level of under 5%. This has
triggered central bank action , raising interest rates on banks’ short term
borrowing from RBI by 1% and the cash reserve ratio (CRR) from 5.5% to
6.5%.

• This has created a squeeze on credit growth and raised lending rates by
about 2% to 3%.

• However, interest rates are likely to have peaked and may begin to come
down.

• Government finances are in good shape thanks to robust revenue growth

and revenue deficit has declined from 4% in 2002-03 to 1.5 % in 2006-07
while fiscal deficit has declined from 6.7% to 3.5% over same period

• The inflation seems to be largely due to excessive demand which should

cool down once additional capacity is put in place. 25
26
27
 Annualised Growth Rate of Bank Credit

40
30
20
10
0
Mar- Apr- M Jun- Jul- Aug- S Oct- Nov- D Jan- Feb- Mar-
06 06 ay- 06 06 06 ep- 06 06 ec- 07 07 07
06 06 06
2006-07 2005-06
28
29
30
31
32
Business Confidence in India’s Economy
1. Survey of Business confidence in Indian Economy
show a very marginal decline (about 2%) but remains
strong.

2. Real GDP Growth for Indian Economy for 2007-2008

is likely to be about 8.0 to 8.5 vs. 9.2% for 2006-07

3. Firm’s profit growth remain strong but could be

affected to some extent over the next year due to
interest rate increases.

33
NET RESPONSE ON ‘A QUARTER AHEAD‘EXPECTATIONS
PARAMETER RESPONSE OCT- JAN- APR-
DEC’06 MAR’07 JUN’07
1. OVERALL BUSINESS BETTER 51.8 53.7 51.7
SITUATION
2. FINANCIAL BETTER 41.9 44.5 43.8
SITUATION
3. WORK.CAPITAL INCREASE 35.4 36.2 35.3
REQUIREMNT
4.AVAILIBILITY OF IMPROVE 33.04 36.2 35.2
FINANCE
5.PRODUCTION INCREASE 49.7 50.7 47.8

6.ORDER BOOKS INCREASE 46.3 47.3 45.7

7.PENDING ORDERS BELOW -2.1 -2.7 -2.2

NORMAL
8.COST OF RAW MAT. DECREASE -49.2 -41.7 -42.1

9.INVENTORY RAW BELOW -6.1 -7.1 -7.3

MAT. AVG. 34
 TABLE CONTINUED……
10.INVENTORY FINISHED GOODS BELOW AVG. -4.9 -5.2 -4.4
11. CAPACITY UTILISATION INCREASE 33.2 33.3 29.4
12. LEVEL OF CAP.UTILISATION ABOVE. 10.9 12.8 11.5
NORMAL
13.PROD. CAPACITY (ASSESMENT) MORE THAN 5.1 4.8 4.0
ADEQUATE
14.EMPLOYMENT IN COMPANY INCREASE 17.9 18.1 18.3
15.EXPORTS,IF APPLICABLE INCREASE 34.2 32.6 33.4
16.IMPORTS,IF ANY INCREASE 23.4 20.8 21.6
17.SELLING PRICES EXPECTED INCREASE 16.8 14.2 15.5
18.IF INCREASE EXPECTED IN INCREASE 14.5 10.5 12.1
SELLING PRICES

19. PROFIT MATGIN INCREASE 9.2 11.6 359.9

PROJECTIONS OF REAL GDP FOR INDIA BY VARIOUS AGENCIES
AGENCY OVERALL AGRICUL. INDUS. SERV. MONTH
GROWTH
ABN AMRO 7. 6 - - - MAR 07

ADB 8. 0 - - - MAR 07

CII 8. 5 3. 0 9. 3 9. 9 APR 07

CITIGROUP 9. 3 3. 0 10. 9 10. 9 APR 07

CRISIL 7. 9- 8. 4 - - - MAR 07

INDICUS 8. 4 3. 0 9.7 9.7 APR 07

IMF 8. 4 - - - APR 07

ICRA 8. 5 - - - FEB 07

JP MORGAN 8. 0 - - - MAR 07
36
NCAER 8. 3 2. 6 8.7 9. 9 APR 07
 The Promising Sectors
1. India’s firms are on a investing spree due to high
demand and capital goods purchases are likely to be
high though the interest rate hikes may dampen it

2. IT sector should continue its steady performance for

next few years.

3. Large Infrastructure investments will be made in

India over next ten years.

4. Telecom to continue rapid growth for next 2-3 years

and then could slow down

5. Electricity generation capacity likely to double in next

5 years or so due to large shortages and rapidly
increasing demand.

37
 IT and Software export

20000

15000
in US $ million

10000

5000

0
1998 1999 2000 2001 2002 2003 2004 2005

IT and Software export

38
 Telephone Subscriber (per 1000 people)

100

80

60

40

20

0
1997 1998 1999 2000 2001 2002 2003 2004
39
 Per Capita Electricity consumption (KWh)

500

450

400

350

300
1997 1998 1999 2000 2001 2002 2003 2004 2005

Per Capita Electricity consumption (KWh) 40

 Possible Future Government Actions
• Manufacturing, especially textiles, which is seen to have
a huge employment potential could see govt. Action.
Already the SEZs have been approved

• CRR or interest rate increases could see some role back

as they are affecting construction and capital goods

• Petrochemicals industry, currently having administered

pricing, could be deregulated and opened to
competition.

• Organized Retail growing rapidly. FDI, could be

permitted

41
 Conclusion
• Indian Economic fundamentals remain robust. Firms are
investing at record rates and the growth of company
profits remains robust.

• Given the increase in interest rates due to rising

inflation,the economic growth could slow down by
about 1% but will still remain above 8% for next year.

• Interest rates have peaked and are likely to slowly

decline over next year.

• Thus the effect of interest rate increases should run

itself out in 6 months to a year.

42