The Indian Economy

1
The Indian Economy

• July 25, 2000

2
Current Situation Overview

• Significant all around improvement after
  turbulent period (1998-99)
• 5.7 GDP growth estimated 1999-00 and forecast at
  6.3 next year
• Inflation, driven by higher fuel prices, up from
  4.5
• Expected to stabilize at 6.5
• Industrial environment improves in 1999-00, IIP
  growth around 8 levels
• Stronger consumer demand, tentative industrial
  demand, rising exports
• Cement, automotive, home goods services are the
  fast growing segments
• Corporate sector reports brisk topline growth of
  gt20 and a slightly slower bottomline growth of
  18
• Margins under pressure due to the mild over
  capacity in most industries
• Resurgence in Portfolio Flows (FII) during 2000,
  FDI flows expected to pick up speed with greater
  clarity in policy

3
Current Situation Overview

• Foreign Debt Under Control at less than 24 of
  GDP
• External debt service ratio at lt 2 of GDP
• Large part of debt 40 concessional and short
  term part is only 5 of total debt
• Foreign Currency Reserves rise to USD 35 bn (8
  months import cover)
• Rupee Depreciation only 2.17 in 1999-00, another
  2 since April 2000
• Annual rate of depreciation estimated to be
  around 4.5-5
• Political situation shows greater signs of
  stability
• Wider dispersion amongst partners makes the
  coalition less vulnerable

4
Current Situation Overview (Concerns)

• Fiscal deficit at around 6 continues to be the
  main concern
• Successful completion of at least one
  privatization program
• Approach to cutting back subsidies
• Investment demand yet to materialize
• The much awaited infrastructure boom
• Step-up In new industrial capacities
• FDI flows to gather momentum (rise to more than
  30 of approvals)
• Water scarcity and drought conditions in several
  states
• Is a concern though it is too early to assess
  impact
• Large government attention needed to manage the
  crisis

5
Near Term Outlook

• Base case growth assuming near normal monsoon is
  around 6
• Fuelled mainly by the growth in consumer demand
  mainly from rural areas
• Benign interest rate regime and a liberal Reserve
  Bank of India policy of creating adequate
  liquidity in the market to help investment over
  the next 12 months
• Large scale investments into infrastructure
  needed to catapult growth to 8 plus trajectory
  to make a more meaningful trickle down effect to
  different parts of the economy

6
Current Economic Policies

• Centers around strong domestic industry but trade
  barriers are being dismantled in accordance with
  commitments
• Increased importance on housing and rural
  industrialization
• Product patents in place, import curbs lifted on
  several commodities
• Attempts to create a rural industrial base
  (around small industry)
• Investments guided by competitive advantages/
  economic considerations rather than licensing
  restrictions / allowances
• Strong industrial growth averaging 7 in the last
  five years
• Significant progress in opening up telecom and
  power sectors
• Privatization of PSUs (GOI holding upto 26),
  closure of sick units, repeal of the Urban Land
  Ceiling Regulations, etc.
• Significant capital flows generated from 1991 to
  1998
• FDI - 15 Bn Portfolio (FII) - 12Bn
• FCY reserves increased from 2Bn in 1991 to over
  35Bn as of April2000

7
Growth Targets Imperatives

• Need to target GDP growth of 8-10
• Liberalize and ease domestic consumption and
  investment
• India ranked 41st in competitiveness
• Strengthen the contribution from the export
  markets
• Promote and channel private and foreign
  investments into infrastructure
• Required investment of 120Bn over next five
  years to sustain planned growth
• Current domestic savings of 24 needs to be
  augmented by foreign investments 10Bn p.a.
• Maintain financial and currency stability
• Controlled moderate inflation
• Cap on fiscal deficit, Bill on fiscal
  responsibility soon
• Clearer focus on planned government capital
  expenditure

8
Growth Drivers Bottlenecks

• Continued demand for consumer items with rising
  income levels
• More stable agricultural output rising activity
  in services
• Moderate inflation would enhancing purchasing
  power
• Increased economic activity in infrastructure
  sector
• Telecom, power, roads, new homes
• Creation of new logistics infrastructure to drive
  penetration of consumer goods
• Roads, ports and storage facilities
• Red-tape procedure and poor infrastructure still
  deter foreign investors
• FDI levels still low as compared to requirements

9
Outlook - 3years - Key Themes

• Growth would continue to be led by consumer
  demand growth
• Infrastructure would start contributing towards
  the end
• Rural economy to reduce dependence on agriculture
• Stabilize the rural consumption patterns
• Provide exponential growth window for consumer
  goods makers
• Government will step in to support investment
  climate
• Fiscal deficit levels would continue to be high
• Government expenditure under closer inspection
• Industrial investments guided by competitive
  advantages/ economic considerations rather than
  licensing restrictions / allowances
• High growth will continue in
• Infotech, telecom, transport vehicles (mainly
  personal transport vehicles), consumer
  electronics, apparel, convenience foods,
  pharmaceuticals, financial products (savings
  products)

10
View From The Rating Agencies
11
Economic Structure

• Significant transition in economic structure
• Agriculture sector employs 75 of the rural
  workforce
• Industrial sector consolidates through
  liberalization
• Services sector stabilizes the economy
• Also includes PS/ GOI spending and defense
• Economy largely internal driven and resilient
• Imports account for 10 of GDP, while exports
  account for 8

12
Economic Indicators - Table
13
Economy and outlook

• Macro economic overview 1991 - 2001f

A decade full of false starts
Forecasts Citibank estimates
14
Economy and outlook

• Other Indicators

Consol- -idation amid uncertain policy
direction
15
Economy and outlook

• Interest rate trends

Yields in Sep98 Jun99 Sep99 Mar00 Apr00
GOI 1 yr 10.42 10.71 10.45 10.11 9.35 GOI 2
yrs 11.04 10.89 10.61 10.05 9.45 GOI 5
yrs 11.84 11.44 11.03 10.33 9.82 GOI 10
yrs 12.18 11.74 11.62 10.81 10.35 AAA I yr
12.20 11.25 11.10 10.96 10.00 AAA 2
yrs 12.85 11.90 11.75 11.00 10.25 AAA 5
yrs 14.05 12.60 12.35 11.38 11.00 AAA 10
yrs 14.55 13.10 12.85 12.12 11.80
Falling yields and credit spreads note
GOI -S/A yld. AAA - Ann. yld.
16
Spot Rupee- Recent history
17
6 month forward premia (in rupees)
18
Stock Market and the Rupee
19
Nasdaq and BSE
20
FX markets

• Access
• Through RBI approved authorised dealers
• INR trading between 9.00 AM to 4.00 PM
• Crosses trading 24 hours
• Based on exposures - assets / liabilities in
  foreign currencies
• Limited freedom on the short INR side
• FIIs given flexibility and freedom for entry /
  exit for hedging purposes subject to some
  guidelines
• Instruments
• Spot and forward INR - liquid till 12 months
• Prices available upto 3/5 years, execution on
  best efforts basis
• FCY / INR Currency swaps for managing exposures
• Other derivative instruments - swaps and
  (non-INR) options

21
Citibank dealing strengths

• Global presence
• Rated number 1 in FX by Asiamoney and Corporate
  Finance
• Competitive pricing on entire range of currencies
• Largest overnight limit amongst foreign banks
  domestic limits on par with largest nationalised
  bank
• Ability to handle large volumes
• Late night desk for crosses trading
• 24 hour order book

22
Research

• Fundamental and technical research on all major
  currency pairs
• Focus on Indian Rupee research
• Wide range of customer communication / market
  updates
• Daily Treasury Letter
• Weekly Treasury Letter
• Monthly Indian Rupee Research report
• Annual Treasury Letter
• G7 Currencies Weekly Reviews
• Monthly Global Economic Outlook

23
Customer support

• Customer orientation
• focus on building long term FX relationships
• Technical support
• exposure tracking and management systems
• Integrated hedging approach
• Funds management and exposure management
• Focus on overall portfolio vs individual
  transactions

24
Derivative Strengths

• Pricing capability on any kind of exotic
  derivative products
• Ability to quote finest prices on account of
  large global derivative presence
• Expertise in place for launch of new rupee
  derivatives
• Focus on creating customised derivative solutions

25
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  believed to be reliable, Citibank makes no
  representation as to the accuracy or completeness
  of any information contained herein or otherwise
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