INDIAINDIA

Business Business Environment, Environment,

Opportunities andOpportunities and

IFC’s Role IFC’s Role Iyad Malas

Director, South Asia Department

Frankfurt, October 7, 2005

India – The Growth India – The Growth EnablersEnablers

EconomicEconomic• High growthHigh growth• Strong Capex Growth Strong Capex Growth • Comfortable BOP positionComfortable BOP position• Well developed entrepreneurial Well developed entrepreneurial

classclass• Booming stock market Booming stock market • Increasing international Increasing international

competitivenesscompetitiveness• Resilient economyResilient economy

Political• Strong democracy• Stable secular state• Strong judiciary• Liberalized economy• Reform oriented policy

Geo-political Abundant natural resources

Cultural• Education base• Skilled, low cost work force• Performance oriented• Engg /IT/ English language skills

Demographic• Vast working population• 54% of population < 25 years old• Large domestic market• Size of the Indian middle class larger than that in the entire Europe

GROWTH

Macro TrendMacro Trend

Strong BOP PositionStrong BOP Position

Liberalization firmly on path•Tariff rationalization and tax reforms•Financial sector reforms•Power sector reforms•Telecom sector reforms•Infrastructure development – roads, ports•Capital market rationalization

Favorable indicators•Prime lending rates have fallen from 16% in Nov. 1996 to 10.5% in September 2005•Stable / appreciating currency•Record FDI (US$ 5bn), and •FII (US$8.5 bn) inflows (Jan. to Aug. 2005)

India's Foreign Exchange Reserves($ billion)

144

19

0

35

70

105

140

1993 (March) 2005 (Aug)

India's GDP Projections, US$ Bn (Source: Goldman Sachs)

27,803

4690

7000140002100028000

2000 2050

CAGR 6%

India to be third largest economy by 2050

Robust Financial MarketsRobust Financial Markets

Well-functioning financial markets ensure Well-functioning financial markets ensure liquidity and availability of capitalliquidity and availability of capital

Equity markets-6,897 scrips listed as of Aug 2005, with market capitalization of $ 460 bill-Electronic settlement, increasingly effective regulator, corporate governance

laws-Record of $ 7 billion raised through public issues in 2004

Growing debt and derivatives segments-Average daily turnover for wholesale debt markets (2004-05) of US$ 700 million-Turnover for derivates segment in excess of US$ 27 billion

But Structural Constraints But Structural Constraints RemainRemain • Pressures of Coalition Govt – second generation Pressures of Coalition Govt – second generation

reforms stalled (particularly disinvestment)reforms stalled (particularly disinvestment)• High fiscal deficits crowd out public and private High fiscal deficits crowd out public and private

investment investment • Private investment only 15% of GDP (public 8%)Private investment only 15% of GDP (public 8%)• FDI flows less than 1% of GDPFDI flows less than 1% of GDP• Industry contributes < 25% of GDP Industry contributes < 25% of GDP • Only 7% of total employment in organized sectorOnly 7% of total employment in organized sector• Huge Regional disparities Huge Regional disparities • Severe Infrastructure bottlenecksSevere Infrastructure bottlenecks• Widespread govt. ownership in business, Widespread govt. ownership in business,

dominance in banking dominance in banking

Business Environment -Not Business Environment -Not EasyEasy

DOING BUSINESS REPORT 2005-06 ranks DOING BUSINESS REPORT 2005-06 ranks India 116 out of 155 countries on the “ease India 116 out of 155 countries on the “ease of doing business” because:of doing business” because:

• Rigidities in labor and land marketsRigidities in labor and land markets• Import tariffs, complex tax regimesImport tariffs, complex tax regimes• Excessive regulation increases costs of doing Excessive regulation increases costs of doing

businessbusiness

Possible Risks to InvestmentPossible Risks to Investment

Short to Medium TermShort to Medium Term• Rising crude oil prices (India imports 2/3 of oil Rising crude oil prices (India imports 2/3 of oil

needs)needs)• Global opposition to outsourcingGlobal opposition to outsourcing• Infrastructure bottlenecksInfrastructure bottlenecks

Long TermLong Term• Inflation and interest ratesInflation and interest rates• Policy risk – reforms slowdownPolicy risk – reforms slowdown• Income /regional disparitiesIncome /regional disparities• High fiscal deficitsHigh fiscal deficits• Infrastructure bottlenecksInfrastructure bottlenecks

Still, Indian Industry is Still, Indian Industry is GainingGaining

• Hero Honda is the largest manufacturer of Hero Honda is the largest manufacturer of

motorcycles in the worldmotorcycles in the world

• Fifteen of world’s major automobile firms now Fifteen of world’s major automobile firms now

source components from Indian firmssource components from Indian firms

• Essel Propack is the world’s largest laminated Essel Propack is the world’s largest laminated

tubes manufacturer tubes manufacturer

• Moser Baer is the world’s third largest optical Moser Baer is the world’s third largest optical

media producermedia producer

• TISCO is the lowest cost producer of hot-rolled TISCO is the lowest cost producer of hot-rolled

steel globallysteel globally

Still, Indian Industry is Still, Indian Industry is GainingGaining

• Bharat Forge has the world’s largest single Bharat Forge has the world’s largest single

location factorylocation factory

• India is one of the largest diamond cutting India is one of the largest diamond cutting

and polishing centers. 9 out of every 10 and polishing centers. 9 out of every 10

stones sold in the world pass through Indiastones sold in the world pass through India

• 100 of the Fortune 500 firms have R&D 100 of the Fortune 500 firms have R&D

facilities in India (Delphi, Eli Lilly, GE, HP, facilities in India (Delphi, Eli Lilly, GE, HP,

Heinz, Daimler Chrysler, Microsoft, Intel, Heinz, Daimler Chrysler, Microsoft, Intel,

Motorola, Dell etc)Motorola, Dell etc)

Broad-Based Growth Across Broad-Based Growth Across SectorsSectors

• IT, ITES and BPOIT, ITES and BPO – on track to reach US$ 50 billion of – on track to reach US$ 50 billion of exports by 2008exports by 2008

• Pharmaceuticals and biotechnologyPharmaceuticals and biotechnology – robust export-led – robust export-led growthgrowth

• TextilesTextiles – well-positioned to capture post-MFA growth – well-positioned to capture post-MFA growth along with Chinaalong with China

• Auto and Auto ancillariesAuto and Auto ancillaries – exports to grow ten-fold to – exports to grow ten-fold to $15 billion by 2009$15 billion by 2009

• Construction/Building Materials - Construction/Building Materials - growth driven by growth driven by infrastructure/housinginfrastructure/housing

Broad-Based Growth Across Broad-Based Growth Across SectorsSectors

• ManufacturingManufacturing – some of the largest and lowest – some of the largest and lowest cost (TISCO, Hindalco) producers in the worldcost (TISCO, Hindalco) producers in the world

• RetailRetail and distributionand distribution – second most attractive – second most attractive retail market in the worldretail market in the world

• Engineering based manufacturing - Engineering based manufacturing - capital capital goods industry driven by strong capex goods industry driven by strong capex

Alternative to China for cos looking Alternative to China for cos looking

to source merchandise globallyto source merchandise globally

India has Benefited from the India has Benefited from the Outsourcing WaveOutsourcing Wave

0

10

20

30

40

50

FY9

7

FY9

8

FY9

9

FY0

0

FY0

1

FY0

2

FY0

3

FY0

4

FY0

5E

FY0

6E

FY0

7E

FY0

8E

FY0

9E

Software/ I T BPO/I TES

IT/ I TES exports (US$bn)

0

1

2

3

FY9

7

FY9

8

FY9

9

FY0

0

FY0

1

FY0

2

FY0

3

FY0

4

FY0

5E

FY0

6E

FY0

7E

FY0

8E

FY0

9E

Auto component exports (US$bn)

Source: CLSA Research

India has Benefited from the India has Benefited from the Outsourcing WaveOutsourcing Wave

0

2

4

6

8

FY9

7

FY9

8

FY9

9

FY0

0

FY0

1

FY0

2

FY0

3

FY0

4

FY0

5E

FY0

6E

FY0

7E

FY0

8E

FY0

9E

Pharma exports (US$bn)

0

10

20

30

FY9

7

FY9

8

FY9

9

FY0

0

FY0

1

FY0

2

FY0

3

FY0

4

FY0

5E

FY0

6E

FY0

7E

FY0

8E

FY0

9E

Fabrics Ready made garments

Textiles exports (US$bn)

Source: CLSA Research

IFC Strategic FocusIFC Strategic Focus

Private InfrastructurePrivate Infrastructure• Power generation, distribution, transmissionPower generation, distribution, transmission• Mobile telecomsMobile telecoms• SEZs/ports/airportsSEZs/ports/airports• Water and SanitationWater and Sanitation

Manufacturing and Service Companies Manufacturing and Service Companies • New Growth Sectors: IT, Pharma, Auto PartsNew Growth Sectors: IT, Pharma, Auto Parts• Achieving international competitivenessAchieving international competitiveness• Bring FDI into India through MNCsBring FDI into India through MNCs• Take Indian companies abroadTake Indian companies abroad

AgribusinessAgribusiness Financial InstitutionsFinancial Institutions• Second tier banksSecond tier banks• Micro and SME FinanceMicro and SME Finance

IFC’s India PortfolioIFC’s India Portfolio

• IFC’s 3rd largest exposure with $1.27 billion invested in 79 IFC’s 3rd largest exposure with $1.27 billion invested in 79

companies, and $353 million mobilized through syndicationscompanies, and $353 million mobilized through syndications

• Long-term presence – investor since 1956Long-term presence – investor since 1956

• IFC has played a significant role in creating leading financial IFC has played a significant role in creating leading financial

institutionsinstitutions

• India portfolio has doubled since 2001India portfolio has doubled since 2001

• Record Commitments of $413 million in FY 2004-05Record Commitments of $413 million in FY 2004-05

• Expect to continue to invest $400 - $500 million paExpect to continue to invest $400 - $500 million pa

$3.2 bn Invested in India Since $3.2 bn Invested in India Since 19581958

Outstanding Portfolio: $1.27 billion

Syndications: $353 million

General Manufacturing

& Services 37%

Oil Gas & Mining

9%

Financial Institutions

31%

Others 3%

Infrastructure, Power & Telecom

20%

For more information, please For more information, please contact:contact:

International Finance CorporationInternational Finance CorporationIyad MalasIyad Malas

Director, South Asia DepartmentDirector, South Asia Department

Email: SouthAsia@ifc.org Email: SouthAsia@ifc.org Website: www.ifc.org/southasiaWebsite: www.ifc.org/southasia

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