Indian Economy Review

By Mr T Kannan Past Chairman, CII Southern Region August 7, 2004 Coimbatore

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Agenda
1) 2) 3) 4) 5) 6) 7) 8)
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Economy Review Stock Market Review Export Import situation Oil Price review Cement Price Review Commodity Price Review Infrastructure development Consumer Behaviour

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I ECONOMY

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Quarterly GDP Performance: 2003-04

18%

Gross Domestic Product The Indian Economy posted a robust GDP growth of 8.2% in 2003-2004. Agriculture output during Q4 2004 although lower than Q3 but higher than Q1 & Q2. Industry posts higher growth over previous quarters. Services sector growth dips further to 7.6% in Q4 2004 Inflation Manufacturing sector registered the highest levels of inflation with the rates surging above 6.0 % in the first quarter 2004-05. Index for Fuel, Power, Lights & Lubricants category posts a hike due to fuel price rise. 4 Confederation of Indian Industry
16% 14% 12% 10% 5.7% 8% 6% 4% 2% 0%

16.9%
10.4% 8.2%

12%

10%

8.4%

9.8%

10.5% 9.0% 7.9% 7.5% 6.5%

8%

7.6%

7.4%

6%

5.8%

4%

3.0%

1.7%

2%

0%

Q1 Q2 Agriculture Growth Rate Services Growth Rate

Q3 Q4 Industry Growth Rate Quartlery GDP Growth Rate( RHS)

12.0%

Overall Inflation rate

Fuel Power, Light & Lubricants Manufactured Products

Primary Articles

10.0%

8.0%

6.0%

4.0%

2.0%

0.0%

Apr

May Jun

Jul

Aug

Sep

Oct

Nov Dec

Jan

Feb

Mar

Apr

May

Jun

2003

2004

Forex Reserves
120,000 110,000 100,000

US $ in mn

90,000 80,000 70,000 60,000 50,000 40,000 Feb - Mar - Apr - May- Jun - Jul- Aug- Se p- Oct- No v- De c- Jan- Feb - Mar - Apr - May- Jun 03 03 03 03 03 03 03 03 03 03 03 04 04 04 04 04 04

Foreign exchange reserves at $119 billion, adequate for import cover of 17.5 months.

Central Government's Fiscal Deficit: The worrying factor

160000 140000 120000 7 6 5 4 3 2 1 2004-05BE 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 0

Fiscal deficit the only worrying factor. Gross fiscal deficit high at 10% and centre fiscal deficit at 4.4%.

Rupees C

80000 60000 40000 20000 0

Fiscal Deficit

FD as % of GDP

Sour ce: Union Budget 2004-05

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Per Cen

100000

% S ha re of Ind us t rie s

Sectoral Perfomance: Services, Intermediate & Capital Goods recorded high grow th Based on Growth Rates in Production for 2003-04

100.0% 28.6% 80.0% 63.2% 60.0% 42.9% 40.0% 10.5% 20.0% 28.6% 41.7% 28.1% 43.5% 76.7% 33.3% 50.0% 66.7% 34.8%

26.3%

25.0%

13.3% 21.9% 21.7% 10.0%

33.3%

0.0% Services Source: CII Survey 6 Consumer Intermediate Non-Durables Goods Consumer Durables

Capital Goods Basic Goods

Electricity

Excellent

High

Low/ Negative

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Economy: The Good News

Expected GDP growth for 2004-05 around 7% Clear overall demand growth Order books of companies better than before companies have a strong outlook Rising rural demand The recent budget announcements to give further boost Upturn in investment cycle: manufacturing

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GDP projections
Nominal GDP: 2003-04 to 2013-14
6% growth 7.2% growth 8% growth

2200 1800 1400 1000 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

$ 2.1 trillion $ 1.9 trillion

$ 1.7 trillion

$ billion
$ 600 billion

2012-13

200

Exchange rate assumption: $ 1 = Rs 45, GDP deflator assumed to be 5%

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Minimum of 7% growth for doubling real GDP in 10 yrs Aim to sustain 8 % growth With 8% growth, GDP to cross US $ 2 trillion in 10 years At 8 %, per capita income to double in eleven years
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2013-14

600

ECONOMIC FORECAST FOR 2004-05

CII forecast for this fiscal

(%) GDP Agriculture Industry Services

2004-05 Low High 6.6 7 0 2 7 7 9.2 9.2

Given the state of the monsoon, 2% agriculture growth and hence 7% GDP growth seems to be unlikely
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State of Monsoons
As on July 21 2004, 17 of a total of meteorological 36 sub-divisions had deficient/scanty rainfall. As on July 14, this figure was at 16. Though this is not as high as the no. of deficient/scanty sub-divisions in the drought year 2002 (22 of 36), it is still much worse than other years. The extent of deficiency in regions classified as deficient last week, has deteriorated now in several regions including Gujarat,West Rajasthan, Himachal Pradesh, Punjab,Telangana etc.

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No. of subdivisions Excess Normal Total Deficient Scanty Total Total

1999 6 22 28 8 0 8 36

2000 17 13 30 6 0 6 36

2001 17 11 28 8 0 8 36

2002 0 14 14 18 4 22 36

2003 11 20 31 5 0 5 36

2004 4 15 19 17 0 17 36

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II STOCK MARKET REVIEW

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Stock Market- Success story

Indias Attractiveness Proved ! (as per MSCI data) 35 Performance Index of India the best among emerging markets. India ahead in terms of liquidity. Low P/E and higher dividend yield: indicating that Indian stocks will provide good returns.
30 25 20 15 10 5 0

Indian Equity Market Attractiveness: Proved

P/E Dividend Yield (%)

China KOSPI Taiwan Philippines Sanghai Index Taiex Index Composite Composite South Korea

Sensex India

Kuala Lumpur Index Malaysia

Thai SET-50 Nifty - India Index Thailand

Emerging Markets Growth Index Performance (July 30, 2004) 200 180 160 140 120 100 80 60 40 20 0
M exico

Volume Traded (in Thousand) as on May 2004

190.754 129.468 104.248

171.823

South Afr ica Brazil M alaysia Thailand Hong Kong

India ahead in terms of

29.12 9.418
CHINA INDIA INDONESIA KOREA

31.281

China South Kor ea India

Source: MSCI, Cygnus Research

MALAYSIA

BRAZIL

RUSSIA

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

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Reasons for recent turmoil

BSE Sensex Movement: Largest Fall in History
6000

Partial roll-back of transaction tax and good corporate earnings

5000

NDA Government fell: Market sentiments pulldown sensex by 800 Points

4000 Apr-04

May-04

Jun-04

Jul-04

Political Uncertainty kept the markets searching for a new direction. FII become Net sellers during the month , PSUs lose over Rs 2,30,000 Crores in Market Cap. Slow-Down in Chinese economy hits Asian markets. Fears over increasing Oil Prices kept the market bearish. 13

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Resource Mobilization through IPOs & Public Issue

Company Name NTPC Power Grid Corp. of India UTV Software Communications. Hutch TCS Issue Size (Rs. Crores) 1500-2000 500 100 1200-1500 5000 Sector Power Power Media & Entertainment Telecom IT & Software

Sectors Expected to Shine: IT/ITES, Auto Components, Media & Entertainment, Pharmaceuticals, Telecom.
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III EXPORT - IMPORT

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Rs. Crores 100000 90000 80000 70000 60000 50000 40000 30000 20000 10000 0 Q1 2001-02 Q3

Export Import Trend of India

Q1 2002-03

Q3

Q1 2003-04

Q3

Export

Import

Exports during April, 2004 was 20 % higher than that of April,2003. Imports during April, 2004 were 20.8 % over that of April,2003. Trade deficit for April, 2004 is estimated at US $ 1737.29 million which is higher than the US $ 1409.60 million deficit during April, 2003.
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IV OIL PRICES REVIEW

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Global Price Scenario Issues and Trends

Oil Price Movement: 21-year High Prices in July '04

Fear over supply cut from Yukos (supplies 2% of worlds output ) which is facing a financial crisis. Oil Industry in Norway-Worlds third largest oil exporter faces strike which has reduced the production by 3.75 lakh barrel. Political disturbances in Nigeria, Middle east and Venezuela also snags supply. Refinery bottlenecks & historically low US gasoline inventories.
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$ per barrel

World Oil Prices at 21 year high of $43 per barrel on July 30th 2004.

38.00 33.00 28.00 23.00 18.00 Jan Feb

2002

Mar

Apr
2003

May

June
2004

July

World Oil Demand & Supply 82 81 80 79 78 77 76 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 Total Demand Total Supply

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Million Barrels Per Day (mbpd)

Indian Price Scenario Recent price hikes Petrol and diesel prices hiked from 31st July, 2004 : Revision of prices based on new pricing mechanism (mean of past years prices and last three months prices) has resulted in reducing the impact on consumers substantially. Increase in prices of petrol and diesel by Rs 0.57 and Rs 0.92 per litre respectively. Kerosene (SKO) prices remain untouched.
19 Variation in prices in different metros due to different tax structures.
Revised Petrol Prices
Delhi
Rs./Ltr.

36.28 33.71 39.26 36.61 39.53 36.69 41.53 38.83 0 5 10 15 20 25 30 35 40 45

Kolkata

Chennai

Mumbai

Revised Diesel Prices Delhi

Rs./Ltr. 23.66 21.73 25.95 23.99 26.27 24.23 29.54 27.43

Kolkata

Chennai

Mumbai
0 5 10 15 20 25

30

Old

Revised

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Indian Price Scenario

Impact on Govt and Industry: Excise duty cuts to reduce government revenues by Rs 3000 crore leading to increased government borrowing. Further upward pressure on inflation (6.5% week-ended July 30th); higher transportation costs raising prices of primary articles and manufactured products. Price hikes and duty cuts will help Oil companies reduce costs and boost marketing margins. Oil PSU margins are estimated to get eroded by Rs 216 crores in Apr-Jun 2004 vis--vis Rs 360 crores in Jan-Mar 2004.
1stQ FY05 P e rfo rm a n ce of OM Cs 35000
31 547.2 35 984.50

30000

25000 Rs cr

20000
14 553.43

15000

13 660.10

13 835.7

13 116.00

10000

5000
18 50 52 7.0 5 24 7.3 0 41 3.9 14 7.0 0 14 72.20

0 HP CL S a le s 4QF Y04 Ne t Pro fit 4QF Y04 BP CL S a le s 1QF Y05 IO C Ne t Pro fit 1QF Y05

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Future Oil Price Outlook

Global energy demand to rise 54% by 2025-US EIA Growth in global oil demand in excess of 2 million barrels per day (about 2.6%) is expected for 2004 and 2005 U.S. petroleum demand is projected to increase by 380,000 barrels per day, or 1.9 percent, in the current year and by an additional 300,000 barrels per day, or 1.4 percent, in 2005. Motor gasoline demand growth is still projected to average about 2 percent per year through 2005, buoyed by growth in real disposable income and non-farm employment and growing consumer confidence. Summer 2004 demand growth for motor gasoline is projected to be approximately 1.4 percent, about equal to the average for the previous five summers (despite a projected year-to-year 17-percent increase in real fuel costs per mile. 21
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V CEMENT PRICE REVIEW

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Outlook - Cement industry

Rise in prices of cement by Rs 5 per bag (for ACC) is due to rise in price of Coal. Interest rate on housing loan reduced by 25 basis points which might fuel the growth of construction. Better realization have led rise in profits of cement companies. Cement manufactures tops in terms of capacity utilization in cement industry 100%. Demand from gulf also fuels the prices. Retailing and BPO infrastructure to push up cement demand.

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Prices and factors

Consumption of cement in southern region has been declining in the recent months due to rainy season. The high price of cement in the north is due to the high prices of power and fuel. International prices of non-coking coal have nearly doubled in the last 12 to18 months. The cement cartel, which took the price in the country to a five-year high.
Trend of Ce me nt prices (Apr - June 04)
190 180 170 160 150 140 130 120 2/4/2004 23/4/2004 30/4/2004 North South 7/5/2004 East 28/5/2004 West 4/6/2004 25/6/2004 Central

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Trend in dispatches

12 10
Million Tonnes

Monthwise Cement Consumption & YoY growth rates

20 10 5 0 -5
Growth Rates (%)

15

8 6 4 2 0 Oct-02 Feb-03 Jun-03 Oct-03 Feb-04 Volumes % yoy

-10 Jun-04

Trend in Exports

Domestic cement despatches in April 2004 fell by 7.5%, on month-onmonth basis, to 10.45mn ton as compared to 11.3mn ton in the previous month.

1.2 Cement Exports* & 1

Cement in Mn Tn

YoY growth rates (%) 80

60 40 20 0 -20

0.6 0.4 0.2 0

Apr-03 Jun-03 Aug-03 Oct-03 Dec-03 Feb-04 Apr-04 Jun-04 Cement exports YoY growth rate * Includes clinker
l

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Growth rate (%)

0.8

Major contributor countries for Exports are Nepal, South Africa and Sri Lanka U.A.E, Sri Lanka, Bangladesh, Oman and Nepal have been the major contributors to clinker exports.

VI COMMODITY REVIEW
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Commodity Price Review

Launch of Nickel, Copper and tin contracts on 27th May 2004 at MCXIndia. NCDEX launches rubber, jute, guar, pepper and chana (gram) on April 12th and wheat contracts (July 6th), Castor Seed (22nd July).

Commodidy, Crude oil and Energy Ind

110 105 100 95

240 220 200 180 160

Indices Commodity Index Metal Index Energy index Crude Oil Index Agriculture Index

Dec 141.35 109.68 187.60 195.68 84.76

Jun 146.11 106.80 200.23 206.78 83.57

Changes in the Quarter 3% -3% 7% 6% -1%

90 85 80 Mar-04
Metal Index Energy index

140 120 100 Apr-04 May-04

Agriculture Index Crude Oil Index

Jun-04
Commodity Inde x

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3500 3000 2500 2000 1500 1000 500 Dec-03 Copper Jan-04 Feb-04 Mar-04 Apr-04 May-04 Aluminum Zinc Lead Tin (RHS)

16000

10000

4000

-2000 Jun-04 Nickel (RHS)

Slow down of Chinese overheated economy

Nickel China's robust demand for stainless steel has been a major factor driving nickel demand. Terrorist threat-giant mine on the island of Sulawesi Mismatch between supply and demand of nickel there is a gap of 20000 tonne this year Lead The threat of prolonged strike action at Zellidja SA's lead smelter in Morocco is underpinning prices at a time of extremely tight market supplies, and is likely to create further price spikes in the base metal U.S., Doe Run shuts its 137,000 tons-a-year Glover primary lead smelter from Dec. 1, and then closed its Herculaneum plant for two weeks of maintenance at the end of April The global refined lead market could see a supply deficit of up to 100,000 metric tons in 2004 28

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Commodity Price Review

1900 1700 1500 1300 1100 900

15750 13750 11750 9750 7750 5750 3750

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Jan-92 Jan-93 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 11500 9500 7500 5500 3500 1500
1750 1550 1350 1150 950 750 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04

Jan-96

Jan-94 Jan-95 Jan-96 Jan-97 Nickel Price Movement Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04

Aluminum Price Movement

Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Zinc Price Movement Tin price Movement

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Reason for changes in Energy Index

Rise in demand from US, European and Japanese economies fuels the demand. China is importing oil to power its manufacturing and to make gas for its booming car market. Demand for Oil in US further increases due to unusually cold winter Low US gasoline inventories Political disturbances in Nigeria, Middle east and Venezuala also snags supply Political uncertainty and unrest in the Persian gulf and middle east fuels the prices Oil Industry in Norway-Worlds third largest oil exporter faces strike which has reduced the production by 3.75 lakh barrel.
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Rubber
The prices of Rubber have been showing an upward trend. Reasons: Scarcity of raw material is the main driving force behind this uptrend. Low arrivals increases the prices. Early arrival of Monsoon causes the prices to increase as tapping becomes difficult.

Rubber Prices 7000 6500 6000 5500 5000 May June July
% Change 9.38 3.31 22.81 -6.78

In Lac Tonnes Production Consumption Exports Ending stocks

2003-04 7.11 7.18 0.7 1.1

2002-03 6.5 6.95 0.57 1.18

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Indian Cotton Prices

7000

Daily Prices of Varities of Cotton in India

Cotton prices Reasons for softening of prices Record domestic production Huge subsidies granted by the US resulted in massive increases in output, lowering world prices. Lower imports by China. Outlook Cotton prices are likely to firm up in the near future on expectation of good buying by mills & exporters, reduced inflows and spread offerings by some ginners and stockists.
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6000 5000 4000 4/5/2004 27/05/2004 Desi J-34 LRA 19/06/2004 S-6 13/07/2004
Sourc e: Cline

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Rs/qtl

VII INFRASTRUCTURE DEVELOPMENT

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Infrastructure holds the key to achieve targeted 7% GDP growth

(Rs. Bn) Govt Target (2002-07) Road Railways Airports Ports/ Shipping Power Oil & Gas Telecom Total Infrastructure 594.00 607.00 136.40 256.00 1440.00 1035.00 868.00 4936.40

Quantum of Investments Power & Telecom to get more than 70 % of investments and North India to receive most of these investments Southern Region to get 29.4% of the total investments in Pipeline project, sanctioned till 2008. Bangalore and Hyderabad to get 18.04% of the total outlay for Airport infrastructure development. FIs to pool in Rs 40,000 Cr for infrastructure projects FDI in Telecom raised to 74% and 49% for Aviation.
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Investments in Ongoing Projects 473.00 484.00 111.19 229.00 1305.00 855.00 674.00 4131.19

Percentage of Rem aining Inve stm ent (%)

35 30 25 20 15 10 5 0 2 .6 9 11.4 4 11.71 5.54 2 0 .6 9 16 .3 1 3 1.58

Road

Airports

Pow er

Telecom

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ROADS
Union Budget 2004-05 Introduction of more road projects on annuity basis to encourage private sector participation. Funding of infra projects made easier. Companies implementing infrastructure projects allowed to issue infrastructure bonds which are exempt from capital gains tax. Total estimated cost for Road Projects till 2007 is Rs. 1180bn
SOUTHERN STATES KARNATAKA KERALA ANDHRA PRADESH TAMIL NADU
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Road Projects under Execution : 24286 kms

Golden Quadrilateral, 5846 kms Port Connectivity Corridors, 400 kms

North-SouthEast-w est Corridors, 7300 kms

Non NHDP Projects, 10000 kms

LENGTH (Kms) 2269 1600 322 800

PROJECT COST (Rs. Bn) 20.3 33.6 16244 19.22

WORLD BANK FUNDING (Rs. Bn) 16.24 11.7 2675* N.A

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AIRPORTS Proposed investments in airport projects in Southern States.

PROJECTS Bangalore Hyderabad Trichy Coimbatore COST (Rs. Bn) 13 11.6 2.6 4.2 0.5 Cost Incurred FY-04 (Rs. Bn) 0.5 0.3 Expected Capex (Rs. Bn) FY-05 4.5 4 1 1 FY-06 8 7.3 1.6 2.7

AIRPORTS & PORTS

PORTS
The total outlay for Ports Development is Rs. 163.115bn in the Tenth Plan. The sector is likely to attract investment of Rs100bn-120bn from domestic and foreign majors over the next three years. Private Sector leads the race as it contributes approx.69% of the investments to be made in comparison to Government Support of 31%.
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PIPELINES
Build-out of 18,671km of domestic oil & gas pipeline network over FY2004-2008 Estimated Pipeline project to be executed in Southern Region from 2004 to 2007 is 5490 kms. Transportation of petroleum products through pipeline will reduce the cost and will make it cheaper by 70% by road and 50% by Railways.

PIPELINE PROJECTS FY-05(E) Total KM to be COMPANIES IOCL RELIANCE GAIL BPCL ESSAR
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FY-06(E) 8455 % of Total 2% 52% 46%

FY-07(E) 5505 % of Total 4% 87% 9%

4711 % of Total 18% 32% 21% 19%

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POWER
The Tenth Plan envisages a capacity addition of 41,110MW by 2007. Plans for addition of 27852MW, or 70% of the total targeted addition, have already been firmed up. Of the total capacity addition, 62% would be in thermal plants, and 35% in hydropower plants. Electric power survey has projected a peak Demand of 115705 MW by the end of 10th Plan. The country would need additional 55158 MW. Current Financial and State of preparedness, suggests capacity addition of only 41110 MW by the end of 10th Plan, leaving a deficit of 14038 MW. 38
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Power: Continued Utilisation of Hydro Power generation is better in developed nations. Huge potential lies in Hydro power in India. Operating Cost is lower in Hydro power (Rs. 0.60/unit) compared to thermal power (Rs.1.60/unit) Emerging Economies prefer Thermal Power generation than Hydro power Short lead time Low initial capital investment

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VIII CONSUMER BEHAVIOUR

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Consumer Spending Patterns in 2002 and 2003 ( as % of Total Income)

42.0% 47% 12.0% 9.00% 9.0% 7.00% 7.0% 5.00% 7.0% 7.00% 5.0% 6.00% 4.0% 3.00% 4.0% 5.00% 3.0% 3.00% 3.0% 3% 2.0% 2.00% 1.0% 1.00% 1.0% 2% 0% 10% 20% 2002 30% 2003 40% 50%

Grocery Eating Out Personal Care Items Clothing Books & Music Savings & Investments Movies & Theatres Consumer Durable Vacation Entertainment Footw ear Home Textiles Home Appliances

Consumer spending Pattern

(Source: Data from KSA Technopak, Analysis by Cygnus)

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Thank You

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