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OVERVIEW: THE INDIAN ECONOMY The recent crisis in the worlds financial system has caused more change

in 60 days than was seen over the last 60 years. (Nov 2008 at India Economic Summit New Delhi). India was not part of the problem but has been asked by the G 20 to be a part of the solution. When Indias Reserve Bank refused to allow Indian Banks to over leverage their assets the Governor Mr. Y. V. Reddy was described as a dinosaur Recently Joseph Stiglitz has been quoted as saying that if Reddy had been the Chairman of the Fed then none of this would have happened. This is not the first time that India has come out relatively unscathed. India also avoided the meltdown at the time of the Asian currency crisis. Today the Indian banks are robust, not a single bank has failed, and the system is firewalled from external influences. The Indian economy has seen a vast number of changes in the period between 2007 and 2009. Indias cautious approach towards economic liberalisation has stood the country in good stead during the global economic slowdown, insulating it from a full-blown recession. While Indias growth figures were revised from 9% to 6% in 2009, it still managed to account for 2% of the global trade (including export and import of goods and services, World Trade Organisation Report on Global Trade in March 2009); an improvement from 1.5% in the previous year. The Indian Sensexs (Bombay Stock Exchange Sensitive Index) meteoric rise in 2007 to over 20,000 points, and its recovery in 2009 (closing at 15,161 points in June 2009 after falling to 8,316 in November 2008) is another indictor that India is an emerging market where growth is still possible even in times of global economic uncertainty. (Source of closing figures: Reuters Market Data). Indias economic resilience can be attributed largely to the specific characteristics of its demographics. The countrys population now stands at over 1.1 billion, with 60% below the age of 35 (United Nations Economic & Social Commission for Asia and the Pacific, National Commission on Population Government of India). The literacy rate is increasing and there is a vast English-speaking segment skilled in the fields of Engineering, IT and Design all of which are in demand. The high quality and low cost of production and services from this workforce maintains Indias status as a preferred destination for investment. The growth of Indias middle class provides a large and discerning base of consumers which are driving retail markets; while still maintaining their innate tendency to save their earnings and avoid credit dependency. The demand generated by this large local population is leading to a growing focus on catering to domestic markets versus exports to international ones, thereby increasing Indias self-sufficiency. The stability of Indias economy vis--vis those of competing developing countries in the is evident from the Foreign Direct Investment (FDI) figures in 2008-2009, indicating that

investors continue to view India as a favourable destination for long-term investments. According to the Reserve Bank of India (RBI) gross inward FDI was INR 1.52 Trillion (US$ 31.7 billion) during 2008-09 (April-February) as compared with INR 1.32 Trillion (US$ 27.6 billion) in the corresponding period of the previous year (2007-08). As of February 2009, FDI ceiling caps were raised in several sectors in an effort to encourage investment in the country. Indias banking sector remains strong and the rapid development of Indias smaller towns and cities provides new areas of growth for the financial sector via loans, insurance, savings and a variety of other instruments. Microfinance is a growing sector for foreign investment and is contributing in a big way to financial inclusion of Indias rural population and the development of its rural industries. Since the quality of infrastructure is a major concern for foreign companies looking to invest in India the economic slowdown has been a mixed blessing as the Government has increased its infrastructure development spending in an effort to boost the economy. Infrastructure In the Indian Financial Budget announced in July 2009, the Finance Minister said that by 2014 spending on infrastructure would be raised to 9% of the GDP from the current 5%. A third of this figure is estimated to come from private investments. The World Bank has already granted India a INR 145.5 billion loan for infrastructure spending. As a positive indicator, The India Infrastructure Finance Company Ltd (IIFCL) loans to the infrastructure sector had more than doubled in 2008-2009 to INR 31.97 billion from INR 15.41 billion in 2007-2008. The Government has tried to make infrastructure as attractive as possible to private sector players through the provision of Viability Gap Funding (VGF) and the formation of Infrastructure Special Purpose Vehicles (SPV) such as the IIFCL. Privatisation of power services is proving to be the most successful effort in a bid to bridge the gap between demand and supply and subsidies are being given to companies who develop their own power plants and then feed the surplus power into the national grids. Indias new Nuclear Energy Agreement could also provide some respite for the energy sector, but this depends on how soon the new nuclear plants can be completed. Railways The Indian Railways (IR) earnings grew at 14.84% in the period 2005-2009 (ASSOCHAM 20 Point Agenda to the Indian Railways, June 2009). The investment potential in the railway sector is substantial with several metro and monorail projects being announced across the country. There are also two large scale rail manufacturing projects in the pipeline, a diesel locomotive factory at Chapra and an electric locomotive factory at Madhepura, Bihar which are worth a total of INR 300 billion. International companies like Alstom, Siemens and Bombardier Transportation already have a presence in India to tap the potential in this sector.

Rail freight transport has a 30-35% share of volume of Indian freight cargo (Source: Transport Corporation of India) and this figure is set to increase on completion of the Dedicated Freight Corridor in the North-to-West belt of India by 2016. The presence of 13 private payers in the container rail freight service sector has ensured a higher quality of service and more competitive rates to customers, making rail transport a more viable option compared to road transport. Aviation Aviation in India has been in a constant state of flux for the period 2008-2009. The fluctuating fuel costs coupled with the overall drop in global air travel has resulted in huge losses for airlines in India. But despite the global trend of reduced airline traffic, in March 2009 The Centre for Asia Pacific Aviation (CAPA) estimated international traffic to and from India would grow at 15 per cent till 2010. Several new airlines which were awarded licences to start full-service passenger flights have chosen to suspend operations until the industry shows signs of improvement, while others have launched alternative services like Cargo and Logistics or Non-scheduled passenger operations. The ambitious airport modernisation plan for renovating and expanding more than 45 non-metro airports may be delayed due to lack of funds. The new international airports in Bangalore and Hyderabad were opened in 2008, while the airports in Chennai and Kolkata will be completed in 2011. A second airport in Mumbai was approved in July 2009, although the completion date has yet to be announced. Private sector participation has been an important part of the aviation sector development. Indian companies like GMR and GVK and international companies like Siemens Projects Ventures and Malaysia Airports have participated in the development of several new airports. In June 2009, the ministry of civil aviation said that it was even considering allowing foreign airlines to invest in domestic carriers, a move that was not allowed under earlier FDI guidelines. Roads The road network in India is a vital part of the countrys transport and logistics network. According to the National Highways Authority of India (NHAI), the number of vehicles on Indian roads has been growing at an average of 10.16% per annum in the period 2004 - 2009. The Union Minister for Road Transport and Highways Kamal Nath announced in June 2009 that India would undertake a 10-fold increase in road construction, from 2 km a day to 20 km a day i.e. 7,000 km per year. The cost of this is approximated at INR 420 billion with Build-Operate-Transfer (BOT) Toll as the preferred method of model. The Investment Commission of India has predicted the need for INR 4.3 trillion over the next five years to improve the road infrastructure in India.

With regard to existing projects, completion rates for the National Highway Development Projects and Port Connectivity projects are higher in the states of Maharashtra, Andhra Pradesh, Goa and Gujarat. Several international companies from Malaysia, Germany, Dubai, Korea and Japan have acquired equity stakes from 10 51% in the projects of the NHAI and state governments, viewing them as lucrative investment opportunities. Ports Indias merchant shipping fleet is now ranked 17th in the world. There are 55 shipping companies in India, 19 for coastal trade, 29 for overseas trade and the rest who operate in both. As of 30th June 2009, Indias fleet size was 860 ships. The country also has 27 shipyards of which 19 are in the private sector and 8 in the public sector. (Source: Port & Ship International, India & The Press Information Bureau, Ministry of Shipping). The major ports handled a total of 519.24 million tonnes of cargo in 2007-2008, an increase of 11.94 per cent from 2006-07. In 2008-2009, the cargo handled rose only 2.1% to 530.4 million tonnes, 8% below targets of Indian Ports Association. The non-major ports cargo traffic share increased from under 10% in 1990 to over 26% in 2009. The Compound Annual Growth Rate (CAGR) of container cargo has been 16.10% over the last five years. (Souce: Motilal Oswal Infrastructure Sector Report on Indian Ports, May 2009 & The Press Information Bureau, Ministry of Shipping) The Indian government has planned an expenditure of INR 598.4 billion through the National Maritime Development Plan to improve the countrys 12 major ports. An additional INR 437.9 billion will be invested in 111 shipping sector projects by 2015. Foreign investment in the shipping sector was only INR 24.17 billion in 2008-2009, approximately 50% of the figure for 2007-2008. All areas of port operation have also been opened for private sector participation. (Source: Press Information Bureau, Ministry of Shipping & Business.gov.in: Government of India Online Business Knowledge Resource). Indias lack of deep-sea ports has lead to trans shipment from other ports like Salalah and Colombo. Therefore, deep-sea ports are now being developed on both the east and west coasts of India.Several new ports have been developed or are under construction in Andhra Pradesh. Gangavaram Port, Krishnapatnam Port, Machilipatnam Port and VANPIC are all located in this state. A new International Container Transhipment Terminal is being constructed at Vallarpadam Port in Kerala, which upon completion will be the single largest player amongst Indian container terminals. Mundra continues to be the largest private sector port in India. Investment banks with a focus on shipping as well as international shipping and logistics companies are still choosing to set up shop in India, viewing the country as a big potential market in the midst of the economic crisis. These include Doehle Danautic Logistics (DDL), a unit of Peter Doehle Group of Germany, Antwerp-based Ahlers, Norways Hoegh Autoliners and AET Tanker Holding Sdn Bhd of Malaysia.

Mobile telephony The Indian mobile telecom market has constantly surpassed expectations. It registered a growth of 50 % in 2008-2009 and is projected to grow at a CAGR of 12.5 % in 2009 2013, putting the total revenue for this period at more than INR 1.43 trillion. By 2013, it is predicted that the Indian mobile subscriber base will exceed 771 million connections from the current subscriber base of over 350 million. India currently adds 10 million wireless subscribers every month (Source: ICRIER Report: The Impact of Mobile Phones in India) Logistics The logistics sector in India is being driven by the growth of the IT, telecom, manufacturing and speciality retail industries and has great potential for companies looking to form a national network across India, especially within the Cold Chain Storage segment. Agricultural produce worth INR 500 billion is lost every year, including 40% of all fruits and vegetables grown in the country, because of the lack of cold-storage facilities. This figure includes 40% of all fruits and vegetables grown in India. (Source: Directorate of Marketing & Inspection, Ministry of Agriculture). The logistics sector was valued at INR 5.09 trillion as on December 2008 and is estimated to be worth INR 6.1 trillion by 2010 (ASSOCHAM & CII Reports). Approximately 94% of this value is contributed by the unorganised sector (SSKI & Edelweiss Report, November 2006) The cold storage industry in the country is valued at approximately INR 125.9 billion (88% surface storage, 12% mobile transport; Source: Technopak Industries) and is expected to be worth INR 600.4 billion by 2015. The Goods & Service Tax (GST) tabled for introduction in 2010 will incorporate one single state tax across the country, and one central tax. This will serve to eliminate major interstate tax roadblocks and enable free movement of goods across the country. Manufacturing Industries India is a leading manufacturer of textiles, electrical machinery, metals, chemicals and associated products, leather, petroleum products, nuclear fuel and motor equipments and vehicles. In all of these sectors, India is ranked among the top twelve manufacturing countries across the world. Approximately 15% of Indias GDP comes from the manufacturing industries. (Source: India Brand Equity Foundation).

As of July 2009, Indias manufacturing output showed signs of promise as it increased for the fourth month in a row i.e. the Purchase Managers Index (PMI) was above 50 points which indicates growth; below 50 is a sign of contraction. Although this was largely due to domestic demand, the demand from export markets was also improving. The industries likely to make the most positive recovery include metals and products, textiles, machinery, FMCG and cement. (Source: Markit Economics Ltd Report on Purchase Managers Index July 2009, published on Bloomberg.com) India is already known and established as a leading exporter in the areas of automobiles, auto components and textiles. However, the leather manufacturing industry is one of the top ten earners of Indias export revenue. The glass manufacturing industry registered more than 10% growth in the period 2008-2009 with exports constituting 10% of the industrys turnover of INR 43.48 billion. (Source: India Brand Equity Foundation). Major companies that announced the set up or expansion of manufacturing facilities in 2008-2009 include LG Electronics, Samsung, Louis Vuitton, Airbus and Royal Phillips Electronics. Automobile Manufacturing & Auto Components The skilled labour workforce and lower costs of production, along with availability of a large and expanding local market have caused many international auto companies to set up facilities for manufacturing, design and technology development in the country. In retrospect, this proved to be a wise move considering the decline in the auto industry figures in Europe and the US. India is now within the top 5 automobile manufacturing countries and is also the largest tractor and three-wheeler manufacturer and the second largest two-wheeler manufacturer globally. The sector contributes towards 5% of the Indias GDP. India produced 11.17 million vehicles (including passenger vehicles, commercial vehicles, two-wheelers and three wheelers) in 2008-2009, up from 10.85 million in 2007-2008. In 2009-2010, 50 new car models will be launched by international and Indian car brands. (Source: India Brand Equity Foundation, The IndusView Publication Report July 2009: Indian Automobile Sector) The major Indian auto companies include Maruti (JV with Suzuki), Mahindra & Mahindra, Tata Motors, Bajaj Auto, TVS Motors, Hindustan Motors, Reva, Ashok Leyland, Hero Honda and Kinetic. International auto majors present in the country include Fiat, General Motors, Ford, Volkswagen, Skoda, Audi, Honda, Toyota, NissanRenault, Hyundai, Mercedes-Benz, Daimler-Chrysler, Mitsubishi, Yamaha and Kawasaki (JV with Bajaj) The launch of the Tata Nano in the affordable small car segment has opened up the potential to a new market of affordable cars for the Indian middle-class; one which international and Indian auto makers are gearing up for.

As a result of the growing auto industry and the potential investment opportunities available, the Automotive Mission Plan (AMP) 2006-2016 was formulated by the Government with the objective of reaching an output of INR 7.08 trillion in the automobile and auto component industries, accounting for more than 10% of the GDP and creating additional employment for 25 million people by 2016. In a report by Credit Analysis & Research Ltd (CARE) in June 2009 on the Indian Two Wheeler Industry, it was estimated that the CAGR of the two wheeler industry was 8.8%, with an increase in sales to 11.3 million units in 2014 from 7.4 million units in 20082009. Auto Components India was the production centre for large quantities of spare parts for export markets in Europe and the US, a market that has almost entirely collapsed. However, compared to the automobile industrys growth of 2.96% in 2008-2009, the auto component sector grew by 6% during the same time with sales totalling INR 763 billion, largely owing to domestic demand. The reduction of interest rates, recovery of the domestic market and relative stability of fuel costs are expected to maintain the momentum in this sector. (Source: India Brand Equity Foundation) In areas of casting and forging, Indias costs are 25-30% lower than that of the US or Europe. With a view to leverage this advantage, the Investment Commission has set a INR 244.3 billion target for foreign investments in the auto component industry and hopes to raise Indias global market share from 0.9% to 2.5% by 2015. Companies like Skoda Auto India, General Motors, Ford, Toyota and Volkswagen are looking to increase the use of local components in the Indian markets while international auto component majors like Continental Corporation (Germany) and Magna International Inc (Canada) have announced plans for large-scale investments in India to set up new facilities as well as expand existing ones. Heavy Lift Equipment The additional focus on infrastructure spending by the government for the expansion of power and oil facilities has ensured a steady demand for heavy lift equipment. Because of the potential for growth in this sector, some freight forwarders have up divisions dedicated to handling project cargoes while Mundra Port and Special Economic Zone Ltd (MPSEZL) has started development on a facility for handling over-dimensional and heavy project cargoes. A few major players in the equipment rental industry like Quippo, TIL, GMMCO, GREMACH, Gemini Equipment & Rentals Pvt Ltd and Jindal Earthmovers/Infrastructures Pvt Ltd are working towards consolidating the industry and

encouraging government recognition and participation through the formation of the Rental Association of India (RAI). Textiles The Indian textile industry is the second largest employer in the country providing direct and indirect employment to 91 million people. It accounts for 4% of the countrys GDP and 13% of its export revenue. According to an ASSOCHAM Eco Pulse Study on the Indian Textile Scenario in August 2009, textile exports in 2008-2009 were INR 1.06 trillion, falling 1.71% from INR 1.08 trillion in 2007-2008. In terms of investments however, there was a 50% increase during 2008-2009 to INR 496.13 billion from INR 311.61 billion in 2007-2008. As a result of the fall in demand from US and European markets, India is making efforts to grow in new markets where it has the advantage of being able to undertake smallersized orders as compared to countries like Korea and China which are engineered for mass production. Retail Sector Retail trade has a share of 12% of Indias GDP. Indias retail sector is expected to grow at 10% p.a. and reach INR 24.22 trillion in 2011-2012 from INR 488.4 billion in 20062007 (Source: Indian Council for Research on International Economic Relations (ICRIER) Report, May 2008 on the Indian Retail Sector). The ambiguity in the Governments policy on retail is resulting in an erratic growth of the sector, meaning that it can neither be regulated in terms of corporate entry nor protected in terms of unorganised retailers. Currently FDI in retail is not allowed with the exception of single brand products in which a cap of 51% is imposed after government approvals have been granted. The retail FDI policy has affected the entry of large international brands such as IKEA, Carrefour, Currys and Tesco who had earlier announced their intention to enter India if the Government reviewed the FDI caps. New entrants into the organised retail sector need to understand the psyche of Indian middle-class customers, who makes up the largest consumer base. India is still largely a need based market as opposed to a want based market as in the west. Unless there is a definite advantage or requirement for a product or service over those that are already available, it most likely wont succeed in India. Organised retailers should also have the patience and resources to wait until such time that their businesses start to show a profit.

(All currency figures are expressed in Indian Rupees) Exchange Rate: USD1 = 48.58 INR, as on 22nd July 2009