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Investing in India 1 Jan 07 Contents • Prospects • Policies & Procedures • Problems 2 Prospects Healthy macro-economic fundamentals Average annual growth rate* In the 50s, 60s and 70s – 3.5% In the 80s – 5.7% During 1990-2005 – 6.0% During the last three years – 8% India is now targeting a growth of 9% plus over the next 5 years *Source – Reserve Bank of India3 … contd Inflation moderate and averaging 4-5% pa Forex reserves of about $ 170 bn, i.e. equivalent to almost 15 months of imports Gross fiscal deficit to GDP ratio declining and currently at 3.8% External debt to GDP ratio also declining and in 2005-06 at 15.8% *Source – Reserve Bank of India4 External trade (All figures are in US$ billion) 300 240 250 200 150 100 50 18 24 42 69 32 37 140 100 96 45 51 0 1990-91 1995-96 Exports Imports 2000-01 2005-06 Total trade Source – DGCI&S 5 Foreign investment (All figures are in US$ billion) 25 19.7 20 12.5 15 10 5 2.1 2.7 4.8 5.9 3.3 7.2 2.6 0 1995-96 2000-01 Foreign direct investment 2005-06 Portf olio investments Total f oreign investment FDI equity upto Nov 2006 $7.3 billion .Expected to be US$ 12 billion in 2006-07. Source – Reserve Bank of India 6 Buoyant corporate performance 38.9 40 35 30 26.6 25.2 25 16.6 20 5 15.4 14.4 15 10 16.8 11.2 8.6 10.8 9.9 0.8 2.4 0 -1.1 -5 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 Growth of corporate sales (%) Growth of gross corporate profits (%) Source – CMIE 7 Striking future projections What Goldman Sachs says - India likely to show the fastest growth over the next 30 to 50 years Growth could be higher than 5% over the next 30 years and close to 5% as late as 2050 India’s GDP will exceed Italy’s in 2016, France’s in 2019, Germany’s in 2023 and Japan’s in 2032 India to become the world’s 3rd largest economy by 2032 8 Basis for optimism Supply side Adequate availability of manpower and skills Over 1 billion population – 52% below the age of 25 Median age of India’s population would remain 25 even as late as in 2025 India’s workforce (20-59 age group) would go up by around 263 million by 2050 ,while of China would grow by 94 million and of USA by 11million.Other majors like Japan, Germany ,UK and France would experience a decline. 9 Large intellectual capital base Annual additions to the stock of science and engineering graduates 750000 700000 690000 650000 600000 530000 550000 470000 500000 420000 450000 400000 350000 350000 300000 India C hina J a pa n US A E uro pe a n c o m m unit y Source – Morgan Stanley 10 Cost competitiveness Average annual pay for various jobs in India and China (US$) Position India China HR manager 15,100 32,000 Marketing manager 14,300 25,800 Project manager 10,000 23,400 Software developer 10,300 13,400 Financial analyst 8,400 13,200 Accountant 5,700 9,000 Sales representative 4,700 5,100 Production worker 1,900 2,300 Source – FICCI Compilation 11 Demand side Expanding domestic market Distribution of households by annual household incom e 1989-90 to 2009-10 100% 80% 14.2 28 27 60% 42 48.4 37.4 40% 36.3 36 58.8 20% 34.6 21.7 15.6 2005-06 (Est.) 2009-10 (Proj.) 0% 1989-90 Below US$ 1000 ( Low) 2001-02 US$ 1000 - US$ 2000 ( Lower middle) Above US$ 2000 ( Middle high) Total number of households to increase from 188.2 million in 2001-02 to 221.9 million by 2009-10 Source – NCAER 12 Untapped market potential Figures for 2005 Penetration rate (per 1000 people) Market size (Annual sales in Mn) India China India China Passenger cars 10 14 1.1 3.2 Motorcycles 39 59 5.8 10.5 Cellular subscribers 69 301 28 59 Internet subscribers 6 85 1.1 17 Televisions 104 416 12 87 While the absolute size of the market is large, penetration rates are still low – untapped potential Source – Morgan Stanley 13 Untapped market potential Penetration rates for non-durable products Figures for 2004 Unit India China Skin care US$ spending per person 0.3 2.3 Detergents US$ spending per person 1.4 3.4 Shampoo US$ spending per person 0.3 0.2 Toothpaste US$ spending per person 0.4 0.5 Soft drinks Litres per person 1.3 4.3 Bottled water Litres per person 1.2 7.5 Source – Morgan Stanley 14 Demand Side Contd. • Along with expanding domestic market , export orientation developing in almost all economic activities – external trade already 36% of GDP. • India becoming a hub for export of manufacturing and services – particularly to developed countries where input costs are fast rising. 15 Sectors with Potential 1. Automobiles and auto ancillary 2. Information technology and IT enabled services 3. Pharmaceuticals 4. Biotechnology 5. Food processing 6. Telecommunications 16 Automobiles and Auto ancillary India's automobile sector - Trends Number in million 12 10 8 6 4 2 0 2001-02 2002-03 2003-04 2004-05 2005-06 Automobile production 5.32 6.28 7.24 8.46 9.74 Automobile domestic sales 5.23 5.94 6.91 7.9 8.91 Automobile exports 0.18 0.31 0.48 0.63 0.81 Auto production includes commercial vehicles, passenger vehicles, two and three wheelers Source – Society of Indian Automobile Manufacturers (SIAM) 17 Automobiles and Auto ancillary Production CAGR 2001-02 to 2005-06 Domestic Sales CAGR 2001-02 to 2005-06 Exports CAGR 2001-02 to 2005-06 Commercial Vehicles 24.5% 24.3% 35.9% Passenger Vehicles 18.2% 14.1% 34.8% Two Wheelers 15.5% 13.8% 48.9% Three Wheelers 19.5% 15.8% 49.3% All Automobiles 16.3% 14.3% 44.6% Source – FICCI computation based on data provided by SIAM 18 Automobiles and Auto ancillary The BIG opportunity !!! Car ownership in India is 10 per thousand inhabitants – Brazil (122), Russia (160), UK (400), Japan (502), USA (745) Auto ancillary output projected to go up from US$ 10 billion in 2005-06 to US$ 40 billion by 2015 Auto ancillary exports crossed the US$ 1 billion mark in 2003-04 and projected to touch US$ 25 billion by 2015 With design, engineering and components manufacture facilities India can be an important R&D hub Source – SIAM 19 Information technology and ITeS Industry snapshot CAGR of over 28% since 1999-2000 Contribution to GDP up from 1.9% in 1999-2000 to nearly 4.8% in 2005-06 Currently employs 878,000 people, added 120,000 during the last fiscal Clocked 31% growth in 2005-06, registering revenues of US$ 29.6 billion, up from US$ 22.5 billion in 2004-05 Exports grew by 33% in 2005-06, revenues witnessed a growth of 24% domestic 20 Information technology and ITeS Look at India for Software product development Embedded software Offshore product development / R&D outsourcing IT application solutions ITeS 21 Pharmaceuticals Indian pharma industry Size of the industry – US$ 8 billion Retail sales account for US$ 5 billion and exports account for US$ 2.5 billion (2004)* The industry accounts for 8% of the global market in volume terms and 1.5% in value terms India currently exports pharma products to over 200 countries Strong branded generics market Source – Industry estimates and *Lupin Investor Presentation October 200522 Pharmaceuticals Indian pharma industry Export of domestically produced generics Off-shoring location for R&D Off-shoring location for Manufacturing / support services IPR introduced with effect from January 2005 Generics opportunity in US and other developed country markets Sourcing base for global markets with low costs, skill and scalability Strong research capabilities 23 Pharmaceuticals Look at India for Large potential domestic market The industry's current valuation stands at over US$ 8.0 billion and according to McKinsey this figure is set to increase to US$ 25 billion by 2010 India’s per capita spending on pharmaceutical drugs is one of the lowest in the world - only US$ 3 – Japan (412), Germany (222), USA (191) Leveraging India’s advantages in global markets Collaborative research, custom synthesis, drug development, in-licensing, clinical trials support, API supply, contract manufacturing etc. 24 Healthcare The Indian healthcare industry is presently estimated to be around US$ 18.7 billion – 65% of the market is in the private sector Industry is growing @ 13% annually and is expected to grow @ 15% over the next few years Industry is expected to touch US$ 45 billion by 2012 This growth is likely to require an additional 750,000 beds, 520,000 doctors and an overall investment of US$ 26 – US$ 28 billion of which 80% has been projected as the share of the private sector Source – CII-McKinsey study 2004 25 Biotechnology Indian Biotech Products & Services: $1500m R&D Products & Services Ag Biotech Industrial Biotech Medical Biotech $750m $ 150 $ 150 $ 100 $ 350 $150m 2002 2005 2007 The Indian Biotech business stands at US$750 m today... …and is expected to be $1500 m by 2007… 26 Biotechnology Huge potential from large base of skilled technical personal and the lower costs Number of biotechnology firms in India have increased exponentially over the years Developing biotech based therapeutic products takes 10-15 years and costs $ 500 million to $1 billion. Similar product development cost in India is $ 250 million or even lower Opportunity for new investments is estimated to be in the $ 1.5 to $ 2 billion range 27 Food Processing India - One of the largest food producers of the world Output of the organized segment - US$ 34,827 million Marine and Spices together contribute more than 70% of export earnings Investment requirement is around US$ 15 billion The Indian scientific and research talent - a knowledge source that can be tapped for advantage 28 Food Processing - Projections 2003-04 ($ billion) 2014-15 ($ billion) Total food consumption 205 Processed foods 126 274 Primary processed food 79 136 Value added food 48 138 Share of value added products in food consumption 16% 50% Excluding consumption of alcoholic beverages and out-of-home consumption 29 Telecommunications The 6th largest network in the world with a wide range of services including basic, cellular, internet, paging, VSAT, etc. Network growing at an annual average rate of approximately 22 percent for basic services and more than 100 percent for cellular and internet services The current tele-density of approximately 14 percent is to be increased to 22 percent (250 million telephone connections) by 2007 Investment requirement of approximately 30 US$32 billion between 2005 and 2010 Policy and ProceduresCalibrated globalization Reduction in import tariffs Liberalization of FDI regime Fully convertible current account Moving towards fuller account convertibility capital Complying with WTO norms to plug into the global economy 31 Calibrated globalization Reduction in collection rates Customs duty collection rate (Import revenue / Value of imports) 50 47 Percent 40 29 30 22 21 20 16 15 14 12 200102 200203 200304 200405 10 0 199091 199596 199900 200001 Source – Economic Survey 2005-06 32 Calibrated globalization Pre 1991 1991 1997 2000 Post 2000 FDI allowed selectively up to 40% Up to 51% under ‘automatic route’ for 35 priority sectors Liberalization of FDI policy in India Up to 74/51/50% in 111 sectors under ‘automatic route’ 100% in some sectors Up to 100% under ‘automatic route’ in all sectors except a –ve list More sectors opened; equity caps raised; conditions relaxed 33 Other Policy Measures Industrial Licensing almost done away with – Now limited to Tobacco & Cigarettes, alcohol, explosives and hazardous chemicals and production for defense Reservation for production by Small scale units reduced from over 800 to about 300 items Internal Taxation both direct and indirect being visited year after year for rationalization, simplification and reduction Integration of domestic market fast taking place with removal of geographical trade barriers, introduction of VAT and proposed phasing out of CST 34 Problems needing to be addressed Making the growth process more inclusive • Growth has been urban centric. – – 8 large metros witnessing the revolution in manufacturing and services, though there are over 750 towns and cities. Rural areas which have about 60% of the population remain largely unaffected by the progress. Agriculture , their main stay is growing slowly at about 2% p.a. 35 Making the growth process more inclusive (contd.) • Growth has not been accompanied by significant new employment opportunities. – – – – Agriculture growth at 2% p.a. is supporting over 600 million persons, but with only 20% share of GDP – consequently farm employment not growing. Services growth at 7% plus for last decade , accounting for 54% of GDP, employs only 20% of work force Manufacturing growing at 8% plus , is also not labour intensive in view of the need to remain globally competitive and because of easier availability of capital. Rigidity in labour laws contributing to higher capital intensity. Population increase of about 100 million in last 5 years , which has seen about 50 million new jobs, largely in the unorganized sector. 36 Growth being constrained by inadequate infrastructure • • • • • An estimate that GDP rate of growth being limited by one percent on account of inadequate electricity – admitted energy shortage of 12% and peak time shortage of 20% need for an additional 90 Giga Watts capacity over next 5 years. Transaction costs high due to capacity constraints at ports resulting in delays. Highways network expanding but grossly inadequate – Public Private Partnership Models evolved. Railways network large but expanding very slowly – need for high capacity and high speed passenger and freight trains. Estimated capital requirement in infrastructure US $ 320 billion during 2007-12. FDI seen as a major avenue. 37 Future Growth Dependant on Continued Availability of Skills • • • Indian comparative advantage of high skills and low wages could become minimal if continuous augmenting of skill training facilities is not kept up. While at the top good technocrats are available, skill shortage at the shop floor level likely to arise in five years time particularly in IT , ITeS and many manufacturing operations. Private sector involvement in capacity building is a must and ways and means to devise it still not in place. s 38