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IACC Indo - US Business Confidence Index

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First Update as on December, 2007

(Abridged version)

INDO-AMERICAN CHAMBER OF COMMERCE

thThe Launch of IIBCI, September 20 , 2007, New Delhi

MaCS IACCThe only bi-lateral Chamber for Indo-US business1

About this document

The Indo American Chamber of Commerce (IACC) appointed ICRA Management ConsultingServices Limited (IMaCS) to design and develop a Business Confidence Index that reflectsIndo-US economic and business relations and captures the sentiments and perceptions of theIndo-US business community.

IMaCS developed the index in September, 2007 based upon an extensive analysis of Indo-USeconomic, financial and business data spanning 10 years, and also conducted a business perception survey amongst stakeholders.

The index was christened as the IACC Indo-US Business Confidence Index (IIBCI).

IMaCS was mandated to carry out an update of the index one quarter after its launch. Thisreport explains the movement in the index and reasons thereof based upon the data analyzed for the quarter October - December, 2007.

This report discusses the updated IIBCI as on December, 2007.

The report uses the phrase “Financial Year” (FY) to indicate a 12 months period ending on March 31. For instance, FY 2002-03 would mean the 12 months period ending March 31, 2003.

All economic/financial data for India corresponds to Financial Year (as defined above), whereas the data for the corresponding periods for the US pertains to the 12 months period ending on the preceding December 31.


A Primer on the IIBCIIndex Design - Key Components & Sub Indices

2

Macro Economic Assessment Index

‘Thrust Sectors’ Group Confidence Index

Firm Competitiveness Index

Consumer Confidence Index

Firm Specific Financial Performance Confidence Index

Business Perception Index

MEAI

TSGCI

FCI

CCI

FPI

BPI

IIBCI


IIBCI-"An overview of the IIBCI trends as seen in September, 2007”

3

?

? IIBCI moved up from a pre-calibrated 100 to 219 as on December 31, 2006.

? The years above refers to the 12 months period ending December 31, (Indian FY ending 3 months later).

? The sub-indices for each period are also shown (except for Business Perception Index).

The last but one column indicates the IIBCI for each year.

Year

Macro -

economic Assessment

Index

- IMPORTS -

Thrust Sector Confidence

Index (Merchandise)

- EXPORTS -


Index (Merchandise)

- IMPORTS -Thrust

Sector Confidence

Index

(Services)

- EXPORTS -Thrust

Sector Confidence

Index

(Services)

Financial Performance

Index

Firm Competitive-ness Index

Consumer Confidence

Index

Business Perception

Index

IACC

Indo-US Business

Confidence Index

YoY Change

1995 51 73 44 43 29 47 NA 51 NA NA NA1996 64 73 47 48 35 51 46 56 NA 46 NA1997 72 80 56 51 38 56 54 61 NA 51 11%1998 72 82 63 60 41 60 59 65 NA 56 10%1999 71 88 69 64 44 65 68 71 NA 61 8%2000 85 76 82 79 50 73 76 77 NA 69 14%2001 85 77 74 75 61 69 82 84 NA 70 1%2002 91 82 90 92 75 81 91 90 NA 83 20%2003 100 100 100 100 100 100 100 100 NA 100 20%2004 121 122 119 189 178 136 113 107 NA 152 53%2005 119 169 143 192 241 121 129 118 NA 183 20%2006 141 229 166 234 287 144 146 128 100 219 20%

MEAI TSGCI TSGCI TSGCI TSGCI FPI FCI CCI BPI OVERALL


U - After 11 years of continuous growth, IIBCI showsa marginal decline in December, 2007.

pdate of IIBCI in December, 2007

4

250

200

150

100

5046 51 56 61 69 70

83100

152

183

219 217

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

0


Trend in Business Perception Index - October - December, 2007

Year

Business

Perception

Index IIBCI

YoY

Change

1995

1996 46

1997 51 11.22%

1998 56 9.64%

1999 61 8.43%

2000 69 13.56%

2001 70 1.17%

2002 83 19.70%

2003 100 19.66%

2004 152 52.61%

2005 183 19.79%

2006 100 219 19.77%

2007 ( E) 95 217 -0.70%

Overall business confidence & stakeholder

perception declined in 2007

marginally

5


Explaining IIBCI Movement over the quarter October - December, 2007.

Marginal dip in overall business confidence with services exports to US contributing significantly to the

said decline in 2007 (IIBCI=217) vis-a-vis 2006(IIBCI=219). Export of services by Indian MNCs to

US registered a fall of 12.3% in value terms compared to the preceding year. Much of this was

contributed by significant appreciation of the rupee making India’s exports less competitive (The

corresponding sub index-TSGCI-Services-Export has 34%weightage in the overall IIBCI construct).

Merchandise trade (both imports and exports) from / to the US registered an increase with

imports from US up by 35.49% and exports by 11.5%. Much of the increase in imports from the US

was on account of enhanced market opportunities for US exporters particularly in electronics, avionics,

aerospace and life sciences space. Increase in military equipment sale to India including the recently

concluded US $ 1 billion Aircraft purchase deal between the Indian Government and a US firm

contributed to increase in imports from the US. On the export front, much of the increase was

contributed by exports of jewelry, pearls and precious stones.


Explaining IIBCI Movement over the quarter October - December, 2007

7

?

?

?

?

The overall macro environment was favorable with the corresponding index (MEAI) up by 9.5

percentage points in 2007. However, select components of the said sub index; FDI, remittances

inflow, etc from US along with most bilateral trade numbers either fell or witnessed similar levels.

Sampled firms revealed decline in profitability numbers with fall in Net Margin & RONW numbers

in 2007. Much of the fall was witnessed by firms belonging to financial services and IT fraternity. The

Financial Performance Index (FPI) saw a decline for the period.

The stakeholder business perception as echoed by the Business Perception Index (BPI) pre

calibrated at 100 in 2006 declined to 95 as on February, 2008. The decline is explained by the

growing concern among stakeholders on investment climate related issues & appreciating rupee.

Firm Competitiveness and Consumer Confidence Indices were maintained at 2006 levels (for 2007

computations).


Updated IIBCI & Sub Indices…1

ABSOLUTE INDEX MOVEMENT ( NOT TO BE INTERPRETED DIRECTLY)IMPORTS EXPORTS IMPORTS EXPORTS

Observation

Moment Year

Macro

Confidence

Index

Thrust

Sector

Confidence

Index (M)

Thrust

Sector

Confidence

Index (M)

Thrust

Sector

Confidence

Index

(Services)

Thrust

Sector

Confidence

Index

(Services)

Financial

Performance

Index

Firm

Competitiv-

eness

Index

Consumer

Confidence

Index

Business

Perception

Index OVERALL

1 1995 51 73 44 43 29 47 NA 51

2 1996 64 73 47 48 35 51 46 56 463 1997 72 80 56 51 38 56 54 61 514 1998 72 82 63 60 41 60 59 65 565 1999 71 88 69 64 44 65 68 71 616 2000 85 76 82 79 50 73 76 77 697 2001 85 77 74 75 61 69 82 84 708 2002 91 82 90 92 75 81 91 90 839 2003 100 100 100 100 100 100 100 100 100

10 2004 121 122 119 189 178 136 113 107 15211 2005 119 169 143 192 241 121 129 118 18312 2006 141 229 166 234 287 144 146 128 100 21913 2007 ( E) 154 310 185 246 251 125 146 128 95 217

YoY Index

Change (2005-06)

35.26% 15.93% 21.41% 18.96% 19.77%

Change (2006 -07)

35.82% 11.51% 5.39% -12.40% -0.70%

MEAI TSGCI TSGCI TSGCI TSGCI FPI FCI CCI BPI IIBCI

Dip in overall business confidence with services exports showing substantial decline in 2007.

Increase in merchandise trade (M&X) offset much of the fall in services export to US.

Sampled firms revealed decline in profitability numbers.

YoY Index


Updated IIBCI & Sub Indices….2

Relative decline throughout all major sub indices,

Business perception index revealed both absolute and relative decline.

IIBCI showed a relative decline of 0.70% for the period 2006-07.

merchandise imports being the only exception.

YEAR on YEAR MOVEMENT OF BUSINESS CONFIDENCE INDICESIMPORTS EXPORTS IMPORTS EXPORTS

Year

Macro

Confidence

Index

Thrust

Sector

Confidence

Index (M)

Thrust

Sector

Confidence

Index (M)

Thrust

Sector

Confidence

Index

(Services)

Thrust

Sector

Confidence

Index

(Services)

Financial

Performance

Index

Firm

Competitiv-

eness

Index

Consumer

Confidence

Index

Business

Perception

Index IIBCI

1995 _ _ _ _ _ _ _ _

1996 24.51% -0.87% 7.55% 11.81% 20.82% 8.90%_ 8.90% _

1997 12.32% 10.43% 18.48% 6.69% 8.01% 8.90% 16.73% 8.90% 11.22%

1998 0.05% 2.25% 12.59% 16.08% 8.33% 7.59% 8.89% 7.59% 9.64%

1999 -0.43% 7.54% 10.57% 7.21% 8.43% 8.76% 16.45% 8.76% 8.43%

2000 18.93% -14.07% 17.66% 24.58% 12.56% 12.12% 10.49% 7.56% 13.56%

2001 0.22% 1.96% -8.96% -6.03% 22.85% -5.86% 8.52% 9.51% 1.17%

2002 6.73% 6.26% 21.36% 23.24% 22.35% 17.85% 10.33% 6.93% 19.70%

2003 10.10% 21.66% 10.44% 8.63% 33.92% 22.98% 10.43% 11.58% 19.66%

2004 20.60% 21.87% 19.11% 88.65% 77.86% 36.34% 12.54% 6.59% 52.61%

2005 -1.57% 38.64% 20.68% 1.98% 35.64% -11.35% 14.70% 10.78% 19.79%

2006 18.79% 35.26% 15.93% 21.41% 18.96% 19.32% 13.01% 8.23% 100 19.77%

2007 ( E) _ 35.82% 11.51% 5.39% -12.40% _ _ _ -4.70% -0.70%


Sub Indices … What is pushing the sub-indices up / down ?

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

NUCLEAR

REACTORS, BOILERS,

MACHINERY

ETC.; PARTS

AIRCRAFT,

SPACECRAFT, AND PARTS

THEREOF

ELECTRIC

MACHINERY ETC; SOUND

EQUIP; TV

EQUIP; PTS

NAT ETC

PEARLS, PREC ETC

STONES, PR

MET ETC; COIN

OPTIC,

PHOTO ETC, MEDIC OR

SURGICAL

INSTRMENTS ETC

FERTILIZERS Others

1.7 1.6

1.1 0.90.7 0.6

3.5

2.3

3.1

1.11.3

0.80.4

4.6

2006

2007

10

Thrust Sector GC index (Merchandise IMPORTS in USD billions)


IndexMerchandise

(Imports)(TSGCI –M)2006 = 2292007 = 310


0.0

2.0

4.0

6.0

8.0

10.0

12.0

PEARLS, PREC ETC

STONES

APPAREL AND

ACCESSORIES

ELECTRIC MACHINERY

ETC

APPAREL , KNIT OR

CROCHET

TEXTILE NUCLEAR REACTORS

Others

5.9

2.1

1.2 1.2 1.1 1.0

9.4

6.5

1.91.4 1.3 1.1 1.0

11.0

2006

2007

11

Thrust Sector GC index (Merchandise EXPORTS in USD billions)


IndexMerchandise

(Exports)(TSGCI -X)2006 = 1662007 = 185

Sub Indices … What is pushing the sub -indices up / down ?


0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Other Private Services

Government Services

Sale of Services by US MNC's

Services by Affiliation

Others

3.3

5.9

5.3

3.3

5.5

3.5

6.2

5.6

3.4

5.7

2006

2007

12

Estimated Figures – Official statistics of ‘services’ for last quarter 2007 available only after March 08


Thrust Sector GC index (Services imports in USD billions)


IndexServices(Imports)

(TSGCI -M)2006 = 2342007 = 246


0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

Other Private Services

Government Services

Sale of Services by

Indian MNC's

Services by Affiliation

Others

5.9

10.0

11.4

4.5

17.9

5.2

8.7

10.0

3.9

15.7

2006

2007


13

Thrust Sector export index (Services in USD billions)


Index-Services ( Exports)( TSGCI –X)2006 = 2872007 = 251

Estimated Figures – Official statistics of ‘services’ for last quarter 2007 available only after March 08


0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

FDI Inflows USA

Bilateral Service

Trade Flows Indo - US

Bilateral Merchandise Trade Flows

Indo - US

Total Trade USA

Total Bilateral

Trade

US Trade / Total Trade

External Debt to GDP

167.9

271.2

177.0

233.4

316.3

73.8 77.5

161.7

271.2

210.8

246.9

265.7

92.9 80.4

2006

2007

14

What is pushing the sub -indices up / down ? (Indexed Numbers)

MEAI Macro Economic Assessment Confidence

Index

2006 = 1412007 = 154


0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

Remittances to India - NRI deposits

Exchange rates (w.r.t. US dollar)

GFCE FII Invst in Cap. (equity) Market

ECB's Outstanding Debt

Foreign Invest/Export

123.2

96.3

147.5

116.3

134.5

108.0

172.3

122.7

89.7

151.8156.4

134.5

103.4

172.3

2006

2007

15

Sub Indices … What is pushing the sub -indices up / down ? (Indexed Numbers)

MEAIMacro Economic

Assessment Confidence

Index2006 = 1412007 = 154


Financial Performance Index

Average Profitability and Net Margins have declined for sampled firms with ROCE at 14.2% and NPM at 5.7% in December, 2007comparison to September, 2007 figures (19.2% & 8.2% respectively)

RONW (%)

NPM (%) [Latest]

Debt -Equity Ratio [Latest]

Financial

Performance

Index

2006 = 1442007 = 125

Financial Performance Index (FPI) … September- December, 2007

- 20.0 -10.0 0.0 10.0 20.0 30.0

0.8

0.5

0.7

0.1

0.2

0.3

0.6

0.5

0.4

0.2

6.4

-15.6

2.5

12.3

6.6

6.3

17.3

6.3

5.7

8.2

22.3

-3.513.4

16.6

16.1

18.6

18.2

15.2

14.2

19.2

Chemicals

Aquaculture

Automobiles

Services

Engineering

Electronics

Pharmaceutical

Others

2007

2006


Business Perception Survey - Key Objectives and Coverage

Business Perception Index (BPI)

?Captures multiple stakeholders’ perceptions

?Industry based confidence (to capture relative growth potential of sectors and sub sectors)

?Confidence based upon firm size and form of ownership

?Output trends

?Employment trends

?Prices (input and output)

?Costs and Competitiveness issues

US respondents constituted 20% of the overall sample size.

Profile of respondents included-academicians, traders, bureaucrats, bankers,

members of industry associations and entrepreneurs based out of India and the US.

BPI was pre-calibrated at 100 as on December 31, 2006.


What is pushing the BPI down ? (Perception Indexed)

18

BPI

BPI moved down from a pre

December 31, 2007 (February 2008).

calibrated 100 in September, 2006 to 95 as on -

Sep --2007

Feb --2008

400350300250200150100500

Inve

stm

ent

clim

ate

Mac

ro s

tabi

lity

FDI

Priv

atizat

ion

Pace

of re

form

s

Bilate

ral Tra

de

Polit

ical s

tabi

lity

Bure

aucr

atic

cont

rols

Tra

de p

olic

ies

Fore

ign

Exch

ange


?Overall stakeholder perception somewhat deteriorated over the last quarter; w.r.tinvestment climate issues

?Most respondents (+75%) opined rising crude prices, 123 Agreement and the sub prime crisis to have minimal repercussion on trade between the two countries.

?Enhanced negative sentiments pertaining to expected exchange rate movements clearly showed up in the survey result, given that India is a net exporter.. (62% respondent were still apprehensive about Rupee appreciation as against 51% in September, 2007).

?On policy and legislative fronts, the overall perception revealed similar results with large systemic improvements warranted by respondents; especially on compliance related issues (no inter -sample differences).

19

Business Perception Survey --- Key Findings…1

.


Business Perception Survey --- Key Findings…2

20

?Sampled firms exhibited positive outlook in their projected operations and

business (despite dip in Firm Profitability Index –FPI).

?US perception on macro/ investment climate issues NOT significantly different from the

overall combined sample (Both Indian and US respondents revealed similar concerns).

?US perception on legislative and regulatory issues significantly differs from the

overall combined sample.

?US perception on firm related issues and overall business outlook seem to be positive

and did NOT significantly differ from the overall combined sample.

ForewordIndo-American Chamber of Commerce (IACC) has conceived the need for an index that reflects the level of economic activity between India and the United States and captures the confidence of stakeholders in the Indo-US business relationships. This is in the context of enhanced economic partnership in recent years between the two countries like business, trade, investment, industry, services and Government. Accordingly, IACC commissioned ICRA Management Consulting Services Limited (IMaCS) to develop such an index.

The IACC Indo-US Business Confidence Index (IIBCI) is intended to be a barometer of prevailing economic activity (symbolized by Indo-US bilateral trade and FDI/FII investment into India) and the business sentiment governed by the overall economic indicators, investment climate parameters, forward looking expectations and perceptions of the stakeholders in the two countries. The IIBCI provides an insight into various entities in both countries -US and India namely investors, corporate, governments and business leaders, who seek an analysis of the business climate that govern the Indo-US bilateral economic relations.

Post India's economic liberalization in the early 1990's Indo-US trade has witnessed superlative growth. Data from the US Department of Commerce states that the bilateral trade in merchandise goods has increased to $ 41.6 billions in 2007 from relatively modest $ 5.7 billions in 1990, representing an impressive 730 % growth in a span of 17 years. Though the business optimism has marginally declined now, on account of fear of slowdown of US economy and appreciating Indian rupee, the Indo US business community has pinned high hopes on the future, these issues notwithstanding.

th The IIBCI was launched on 20 September, 2007 in New Delhi by Mr David Mulford, US Ambassador to India and Mr Montek Singh Ahluwalia, Deputy Chairman of the planning commission at the Indo US Economic Summit.

This updated IIBCI report reflects marginal decline in 2007 to 217 vis-à-vis 219 in 2006. It can be partly attributed to the decline in export of services to US on account of a strong rupee. Not surprisingly, Business perception index revealed both absolute & relative decline. The sampled firms exhibited positive outlook in their projected operations and business, despite dip in Firm Profitability Index (FPI).It seems businesses on both sides have still a bright future to look forward to.

I would like to thank Mr S.K.Mitra, Chairman of the IIBCI community and his team for their painstaking efforts.

Farokh T. Balsara

PresidentIndo-American Chamber of Commerce

About the (IACC)


Head Office1-C, Vulcan Insurance Building, Veer Nariman Road, Churchgate, Mumbai 400020

Tel: 91 22 22821413, 22821485 Fax: 91 22 22046141 Email: [email protected]: www.iaccindia.com

Established in 1968, the Indo-American Chamber of Commerce (IACC) is a non-government, industry led and industry-managed organization, playing a proactive role in India's development process and serves as a much needed link between the business communities of India and the United States of America. IACC is the only bilateral Chamber of Commerce in India, which is committed to development of Indo-US business and trade relations.

The major objective of IACC is to promote Indo-American business, trade and economic relations. IACC promotes bilateral trade, investment and technology transfer, facilitates business collaborations, joint ventures, marketing tie-ups and strategic alliances through a set of proactive business-oriented initiatives.

IACC acts as a catalyst for sustainable growth of business between India and the US. In its four decades of existence, IACC has established operational connectivity with a host of business, research and developmental institutions in India and US in order to leverage each other's capabilities for enhancing Indo-US business relations. The Chamber continuously interacts with the Indian and US Governments, and provides them feedback on bilateral issues relating to trade and investment. In essence, IACC also acts as a forum for its member companies to interact with senior functionaries of both the Governments.

IACC has over 2,600 members who together represent a wide spectrum of business and economic segments: manufacturing, exports, services, et al. IACC member companies are involved in a cross-section of business domains such as manufacturing, engineering, construction, consumer goods, electronics, IT, pharmaceuticals, consulting, travel and tourism, etc. The geographical spread of IACC is unique as it operates through 14 offices located throughout the country. These are in Ahmedabad, Bangalore, Bhubaneswar, Chennai, Cochin, Delhi, Hyderabad, Jaipur, Kolkata, Mumbai, Pondicherry, Pune, Varanasi and Vizag.


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