National Competitiveness Forum

New Delhi, September 25th 2015

India’s growth – a story of resilience

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The Indian elephant has learned how to dance – India's GDP has incre-ased by about 7.5x since 1980, 3 times faster than global expansion

Indexed GDP growth1) [1980 – 2014, 1980 = 1 ]

Source: US Department of Agriculture Economic Research service, Real GDP (2010 dollars) Historical, available at http://www.ers.usda.gov/data-products/international-macroeconomic-data-set.aspx

0

1

2

3

4

5

6

7

8

1995 2000 2005 2010 20141980 1985 1990

GDP

gro

wth,

x ti

mes

World

India

GDP CAGR

1980-1985

1985-1990

1990-1995

1995-2000

2000-2005

2005-2010

2010-2014

India 5.16 5.95 5.08 6.08 6.72 8.31 5.45

World 2.67 3.54 2.09 3.46 3.05 2.59 2.65

Comments

> India’s GDP growth has consistently exceeded 5% over the last 35 years

> Since economic reforms of 1991, India has achieved the following:– Four-fold GDP growth– Poverty alleviation for ~225 mn

Indians– Increase in telecom penetration

from 6 mn in 1991 (1% penet-ration) to 915 mn in 2013 (73% penetration)

– Construction of 45,466 km of national highways between 1991 and 2013 – four times the length of the total Autobahn network!

> Growth has been achieved despite vagaries of global markets, internal strife, and politics – proof of India’s resilience

1) All GDP numbers used for calculation are in 2010 US dollars

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278

2,371

88.4%

6.12%

China’s GDP in 2001

India’s GDP in 2014

2,097

India’s GDP in 1980

While its GDP growth has been much below that of China, consider-ing the 13 year lag in reforms, the difference does not seem so stark

Comments

> China’s GDP has not dipped below 8% in the 6-year periods between 1980 and 2014

> Chinese GDP has increased by a factor of 24 since 1980 levels (compared to 7.5x in India over the corresponding period)

> Key success factors of the ‘Chinese economic miracle’ has been abundant investment in infrastructure and creation of a strong export-focused manufacturing sector

> India’s 2014 GDP was 88.4% of China’s 2001 GDP– China’s economic reforms

took place in 1978, 13 years prior to India’s landmark economic reforms and end of the License Raj

Indexed GDP growth1) [1980 – 2014,1980 = 1 ]Comparison of India’s 2014 GDP with China’s 2001 GDP, accounting for 13-year lag1) [USD m]

Source: USDA, Roland Berger

Comparison of GDP growth: India vs. China, 1980 to 2014 [%]

0

5

10

15

20

25

20142010200520001995199019851980

GDP

gro

wth,

x ti

mes

GDP CAGR

1980-1985

1985-1990

1990-1995

1995-2000

2000-2005

2005-2010

2010-2014

China 9.58 9.80 10.79 9.13 9.76 11.21 7.99

India 5.16 5.95 5.08 6.08 6.72 8.31 5.45

China India

1) All GDP numbers used for calculation are in 2010 million US dollars

time adjusted difference of 12% vs. China & India

4Presentation_NCF_vf.0.pptxSource: www.moneycontrol.com, Economic Times, Roland Berger

1) Standalone company revenue

While the resilience of the Indian economy is encouraging, the growth of India's top 50 companies has been nothing short of spectacular

Consolidated Revenue of India's Top 50 companies in 2014, CAGR 2005-2014 [%]

Overall, India’s top 50 companies have grown at a combined CAGR of 21% between 2005 and 2014!

Sr No Company Revenue

FY05 (INR bn)Revenue FY15 (INR bn) CAGR

1 India Oil Corporation Limited 1,334.07 4,495.09 13%2 Reliance Industries Limited 665.97 3,754.35 19%3 TATA Motors 195.33 2,627.96 30%4 State Bank of India 545.36 2,572.89 17%5 Bharat Petroleum Corporation* 638.57 2,380.87 14%6 Hindustan Petroleum Corporation* 652.18 2,066.26 12%7 Oil and Natural Gas Corporation 597.47 1,608.95 10%8 Larsen & Toubro 597.47 1,608.95 10%9 TATA Steel 159.99 1395.04 24%10 Hindalco Industries 101.05 1,042.81 26%11 TATA Consultancy Services 97.48 946.48 26%12 ICICI Bank 169.17 902.16 18%13 Essar Oil* 6.37 832.06 63%14 NTPC 235.16 806.22 13%15 Coal India Ltd 298.87 741.20 12%16 Adani Enterprises 150.05 645.82 16%17 Mangalore Refinery and Petrochemicals 206.93 574.77 11%18 HDFC Bank 37.31 574.66 31%19 GAIL* 135.91 567.42 15%20 Bharti Airtel* 79.03 554.96 22%21 Punjab National Bank 103.88 548.84 18%22 Infosys Ltd 71.29 533.19 22%23 Maruti Suzuki 110.33 508.01 16%24 Housing Development Finance Corporation 36.89 483.16 29%25 Canara Bank* 91.16 483.00 18%

Sr No Company Revenue

FY05 (INR bn)Revenue FY15 (INR bn) CAGR

26 Bank of India 71.77 479.63 21%27 JSW Steel* 70.35 460.87 21%28 Bank of Baroda 80.44 460.18 (2014) 21%29 SAIL* 325.69 457.11 3%30 AXIS Bank 23.28 438.44 34%31 Chennai Petroleum Corporation 162.96 418.66 10%32 Wipro* 72.36 416.35 19%33 Petronet LNG 19.45 395.00 35%34 Mahindra & Mahindra* 76.96 389.45 18%35 ITC Ltd 76.39 365.07 17%36 Union Bank of India 57.36 356.07 20%37 Motherson Sumi Systems 7.81 350.32 46%38 TATA Power Company 49.55 343.67 21%39 Grasim Industries 94.10 328.47 13%40 Vedanta* 14.09 325.02 37%41 HCL Technologies 33.51 321.44 (2014) 29%42 Idea Cellular 27.95 (2007) 312.79 35%43 Hindustan Unilever 110.61 (Dec 2005) 308.06 11%44 Bharat Heavy Electricals* 106.86 301.83 11%45 IDBI Bank 33.59 297.20 (2014) 27%46 Ruchi Soya Industries 39.08 283.09 22%47 Central Bank of India 61.44 283.03 17%48 Hero Motorcorp 100.86 (2006) 275.85 12%49 Aditya Birla Nuvo Limited 3,1.89 265.16 24%50 Indian Overseas Bank 47.51 260.77 19%

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India Inc.'s innovation focus and need to differentiate has come about as a result of its need to compete in higher margin businesses

Source: Competitive Advantage of Emerging Market Multinationals, Roland Berger

Comparison of China vs. India on competitive advantage

Government-specific advantages (GSA)

Firm-specific advantages (FSA)

China India

Country-specific advantages (CSA)(E.g., land, natural resources, labour, location, climate etc.)

(E.g., physical infrastructure, human capital, educational systems, quality of governance reflected in policy making and execution, etc.)

(E.g., firm-level assets and capabilities that contribute to competitive advantage)

> Strict labour law regulations

> Good pool of talent

> Poor physical infrastructure

> Inconsistent, ineffective government policies

> Ranks low on Ease of Doing Business

> Historically, Indian companies have not competed on cost alone as weak government and infrastructure impact cost competitiveness negatively

> In this environment, a purely operational excellence, low cost manufacturing strategy is insufficient as CSA and GSA prevent Indian companies from achieving the same cost position as their Chinese counterparts

> Innovative, higher margin businesses are a must for survival> Successful Indian companies have had to overcome significant challenges in terms of CSA and GSA

> Professional management> Clear focus on becoming

best-in-class in knowledge-intensive industries

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Rising disposable incomes combined with falling interest rates and increasing net domestic savings show a strong consumption story India Net domestic savings [INR bn], Lending rates [%], PDI per capita1) [INR] and Avg. amount of debt per household [INR]

Source: RBI, World Bank, NSS reports

0

10

20

30

40

50

60

70

80

90

100

1980 1985 1990 1995 2000 2005 2010 2015

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000INRPercent

Personal disposable income per caita , INR

Net domestic saving, INR bn

Lending interest rate, %

1) PDI = Personal Disposable Income

32,522

7,5391,906661

84,625

11,771

3,6181,030

2012200219911981

Urban

Rural

Average amount of debt per household [INR]Select macro-economic indicators of India

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Further, India's labour productivity gains over the period 1999-2007 and 2008-2011 have clearly outpaced increases in salaries

Growth in wages and labor productivity in Asia, 1997-2007 and 2008-11 (%)

Source: Global Wage Report 2012/13, International Labor Organization

-2-10123456789

101112131415

-5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Labour productivity growth (%)

Real

wag

e gr

owth

(%)

IRACDA

CHI

MAC

ISA

KOR

MYA

BAN

SNG

ITHAIND

HKSRI

PHL

NEP

PAKFU

-6

-4

-2

0

2

4

6

8

10

12

14

-4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13

Real

wag

e gr

owth

(%)

Labour productivity growth (%)

CHI

MAC

VN

BANMON

NEP

ISAMYA

HK

IND

THA

SNG

KOR

PHL

IRA

1) China CHI, Cambodia CDA, Indonesia ISA, Islamic Republic of Iran IRA, Republic of Korea KOR, Malaysia MYA, Singapore SNG, Bangladesh BAN, Thailand THA, India IND, Macau (China) MAC, Hong Kong (China) HK, Sri Lanka SRI, Philippines PHL, Myanmar MYN, Mongolia MON, Nepal NEP, Pakistan PAK, Fiji FIJ

45°

1999-20071) 2008-20111)

45°

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India's import and export intensity has also consistently grown over the last 35 years, comparable with China during the last 5 years

Import/Export Share [1980 – 2014, % GDP]

Source: World Bank database

0

5

10

15

20

25

30

35

40

45

50

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

% of GDP

Germany, export India, export China, export India, import Germany, import China, import

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FDI as well as FII flows have grown significantly since 1991, with a cumulative inbound FDI /FII of nearly USD 0.5 trillion since 1993

India FDI & FII inflow [1993 – 2014, USD bn]

Source: Department of Industrial Policy & Promotion, UNCTAD, SEBI

-10

-5

05

10

15

2025

30

35

40

4550

55

60

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

USD bn1)

1) USD billion at current prices and current exchange rates 2) For period Apr 2000 to Jan 2015 3) Except fertilizers 4) INR/USD exchange rate = 60 has been used

FDI inflows by country & Sector, cumulative 2000-20152)

Netherlands

23.0% 6.0%

6.0%

7.0%Japan

9.0% UK

USA

MauritiusSingapore

13.0%

36.0%

Others

17.0%

7.0%

Construction10.0%

4.0%

Automobile

5.0%Drugs & Pharma

5.0%

Computer hardware & software6.0% Telecommunications

Services

Chemicals3)

45.0%Others

FDI inflow in India FII inflow in India4)

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Moreover, India’s outward FDI performance has been impressive – and has grown by 30x since the period 1990-99!

37,224

3,3511528732

1980-891970-791961-69 2007-14

102,850

2000-071990-99

0

10,000

20,000

30,000

40,000

50,000

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Indian OFDI 1961-2014 [USD mn]

Indian OFDI and IFDI [USD mn]

Comments

> Outward FDI in India increased significantly post-2004 due to – key policy relaxations, e.g.,

ceiling on outward FDI was removed, state-owned enterprises were encouraged to invest abroad (e.g., oil and gas companies like GAIL and ONGC)

– restructuring activities of large Indian conglomerates in the 1990s had generated large cash reserves, which they used to acquire international companies

> Knowledge-intensive industries such as pharmaceuticals, information technology, and automotive dominated outward FDI during the period 2004 to 2010

> Source: UNCTAD, The Rise of Indian multinationals, Roland Berger

Overview of India’s Outward FDI (OFDI) and Inward FDI (IFDI)

Inflow Outflow

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Contrary to China's manufacturing-led growth model, India's growth has been propelled by services

GDP split by sectors1) , India vs. China [%]

Source: Planning commission database, ADB Economics working paper "The service sector in India", June 2013

GDP split – India vs. China [2014] Sectoral split in India's GDP Comments

1) Share to total GDP at constant 2004-05 prices

> Financing and business services were the fastest growing categories in the Indian services sector in 1980, while growth in Industry, mining and manufacturing remained stagnant

> Transport, storage and communication services were the main drivers of growth in the services sector in 2000, while growth in Industry and manufacturing remained stagnant

> In 2014, export of software services was the largest contributer to India's services sector, whereas Telecom and software together drive India's global brand image in services

> India's export of financial services too witnessed a high growth of 34.4% in 2013-14

43%

48%

26%

Agriculture14%

Services60%

Industry

China India

9%

50%60%

15%

15%

15%9%

9%

9%28%20%

12%

39%

7%

2000

3%

1980

2%

2%4%

2014

3%

Agriculture Manufacturing

Services

Mining & QuarryingAllied services

Other Industry

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"Make in India" – The government's promise to the world about the changing Indian manufacturing

Source: makeinindia.com; Press research

Vision To facilitate investment, foster innovation, enhance skill development, protect intellectual property and build best-in-class manufacturing infrastructure in India

Mission > Increase manufacturing sector's growth to 12-14% p.a. over the medium term

> Increase manufacturing sector's share in India's GDP from 16% to 25% by 2022

> Create 100 million additional jobs by 2022 in manufacturing sector

Enablers > Eliminating unnecessary processes, laws and regulations> Focusing on time-bound project clearances through a single online

portal > Creation of appropriate skill sets through quality education> Making the govt. more transparent, responsive and accountable> Enhance India's global competitiveness> Increase in domestic value addition and technological depth

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China's rising wage rates creates an opportunity for other Asian economies to replace it as the go-to manufacturing destination

Source: Salaryexplorer, 'Hourly wage rates' retrieved from http://www.salaryexplorer.com/hourly-wage.php , accessed on Sept 14, 2015; Payscale, retrieved from http://www.payscale.com/research/IN/Industry=Manufacturing/Hourly_Rate#by_Years_Experience

Organised Manufacturing1) manpower Hourly Wage rates, 2015 (USD)

5,45,56,77,0

15,5

0

2

4

6

8

10

12

14

16

Philippines

-57%-64%

-55%

Vietnam Indonesia IndiaChina2)

-65%

1) Organised manufacturing wages represented by Factory and manufacturing average wages2) Mainland China Wages

Labour availability (millions) vs. English speaking population (%), 2011

Availability of labour English speaking population %

Source: World Development Indicators, World Bank, 'Labor force, total', available at http://data.worldbank.org/indicator/SL.TLF.TOTL.IN; Wikipedia available at https://en.wikipedia.org/wiki/List_of_countries_by_English-speaking_population;Secondary research

4052116

470

0

100

200

300

400

500

600

700

800 60

50

0

20

10

40

30

Indonesia

10%

India

20%

12%

Vietnam Philippines

56%

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While India focusses on leveraging its cost advantage, the global mfg. industry is gearing up for the next level of industrial revolution

Time

1784 Mechanical weaving loomIntroduction of mechanical production assets based on water and steam power

First industrial revolution

Drivers of this development> Large amount of data

available > Rising demand for

(mass) customized products

> Advanced algorithms allowing better real-time and large data analysis

> More affordable sensor/actor technologies

> Increasing prevalence of communication incl. wireless technology in the factory

1923 Introduction of a "moving" assembly line at Ford MotorsIntroduction of mass production based on division of labour and electrical energy

Second industrial revolution

1969 First program-mable logic controller (PLC)Introduction of electronics and IT for higher auto-matization of production

Third industrial revolution

2014Cyber-physical-systemsIntroduction of intelligent machines, embedded cyber-physical sensors, collaborative technologies, and networked processes

Fourth industrial revolution?

Development stages of industrial manufacturing

Source: Roland Berger

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…the idea has evolved into a means of reindustrialization in EU and is being pursued in a significant way by Germany, France and Italy

Source: PWC, Roland Berger Analysis

Industry 4.0 will reduce cost advantage of low-cost labour countries

Expected cost reductions within next 5 years

CommentsCost advantage India vs. Germany [RB est.]

21%

38%11-20%

41%0-10%

>20% Ø 13.8%

Current cost advantage Industry 4.0

25-30%<15%

> Industry 4.0 promises substantial cost savings for companies, 1 out of 5 firms believe they can save >20% within the next 5 years

> India currently has a cost advantage of 25-30% to developed countries like Germany; China has a cost advantage of 20-22%, and Indonesia 30-34%

> With a more efficient use of resources, these cost advantages will significantly reduce – manufacturing in low-cost countries

Eliminate the need for low cost labour

Eliminate the manufacturing disadvantage

≈

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Indian manufacturing industry has arrived at an inflection point – and is currently not prepared for the changes which Industry 4.0 brings

> Industry 4.0 is – besides other challenges – seriously threatening India's position as a low-cost country

> With increasing digitalization of the manufacturing Industry in EU, cost advantage through availability of cheap labor vanishes

> Low automation rate shows that India is not ready for Industry 4.0 yet – urgent changes are needed!

> India needs to reposition itself, and go beyond current efforts to focus on 'Make in India'

India currently has only 1/8 of automation rate compared to China

Current Automation Rate: Industrial Robots/1,000 Workers

3

3

8

23

60

75

125

140

225

330

490

Brazil

58(Global Average)

India

Russian Federation

United Kingdom

China

Australia

France

USA

Germany

Japan

Republic of Korea

The Leaders

The Aspirers

The Laggards

Source: World Robotics 2013, Roland Berger Analysis

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India remains a laggard in the world of innovation - for every patent India files, China files 35 patents!

0,6

0,8

1,0

1,2

1,4

1,6

1,8

2,0

2,2

-200.000 0 200.000 400.000 600.000 800.000 1.000.000

R&D spend as a % of GDP

Number of Patents

6,846/1.21Brazil

20,907/0.81India

34,065/1.09Russia

734,081/1.98 China

> India spends the lowest, 0.81% of GDP, on R&D within the BRIC nations

> As a consequence, India in 2013, only filed ~21K patents

> China spends ~2.5x (as a % of GDP) on R&D and given the size of its GDP they have overtaken even the US in number of patent filings

> If India is to compete and upgrade itself to innovation driven manufacturing hub, we have a long way to go

Source: WPIO, UNESCO Institute of Statistics

BRIC spending on R&D (% of GDP) vs. international patent filed in 2013 (# of patents)

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Given India’s resilience, performance, and thriving corporate sector, one cannot afford to miss the opportunities of this complex economy

1. India is resilient – long-term GDP growth will exceed 5% until 2030

India has performed – a time-adjusted analysis shows a difference vis-à-vis China of ~12%

2.

Indian companies are conquering the world - Growth of top 50 Indian companies with CAGR of 21% over the last decade with growing global footprint

3.

Manufacturing is a must: However, the window of opportunity is finite!

4.

Source: Roland Berger

Summary