INDIA Business Environment, Opportunities and IFC’s Role Iyad Malas Director, South Asia Department Frankfurt, October 7, 2005

India – The Growth Enablers Economic High growth Strong Capex Growth Comfortable BOP position Well developed entrepreneurial class Booming stock market Increasing international competitiveness Resilient 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

Economic

High growth

Strong Capex Growth

Comfortable BOP position

Well developed entrepreneurial class

Booming stock market

Increasing international competitiveness

Resilient economy

Political

Strong democracy

Stable secular state

Strong judiciary

Liberalized economy

Reform oriented policy

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

Macro Trend Strong 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 to be third largest economy by 2050 CAGR 6%

Strong 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)

Robust Financial Markets Well-functioning financial markets ensure liquidity 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

Well-functioning financial markets ensure liquidity 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 Remain Pressures of Coalition Govt – second generation reforms stalled (particularly disinvestment) High fiscal deficits crowd out public and private investment Private investment only 15% of GDP (public 8%) FDI flows less than 1% of GDP Industry contributes < 25% of GDP Only 7% of total employment in organized sector Huge Regional disparities Severe Infrastructure bottlenecks Widespread govt. ownership in business, dominance in banking

Pressures of Coalition Govt – second generation reforms stalled (particularly disinvestment)

High fiscal deficits crowd out public and private investment

Private investment only 15% of GDP (public 8%)

FDI flows less than 1% of GDP

Industry contributes < 25% of GDP

Only 7% of total employment in organized sector

Huge Regional disparities

Severe Infrastructure bottlenecks

Widespread govt. ownership in business, dominance in banking

Business Environment -Not Easy DOING BUSINESS REPORT 2005-06 ranks India 116 out of 155 countries on the “ease of doing business” because: Rigidities in labor and land markets Import tariffs, complex tax regimes Excessive regulation increases costs of doing business

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

Rigidities in labor and land markets

Import tariffs, complex tax regimes

Excessive regulation increases costs of doing business

Possible Risks to Investment Short to Medium Term Rising crude oil prices (India imports 2/3 of oil needs) Global opposition to outsourcing Infrastructure bottlenecks Long Term Inflation and interest rates Policy risk – reforms slowdown Income /regional disparities High fiscal deficits Infrastructure bottlenecks

Short to Medium Term

Rising crude oil prices (India imports 2/3 of oil needs)

Global opposition to outsourcing

Infrastructure bottlenecks

Long Term

Inflation and interest rates

Policy risk – reforms slowdown

Income /regional disparities

High fiscal deficits

Infrastructure bottlenecks

Still, Indian Industry is Gaining Hero Honda is the largest manufacturer of motorcycles in the world Fifteen of world’s major automobile firms now source components from Indian firms Essel Propack is the world’s largest laminated tubes manufacturer Moser Baer is the world’s third largest optical media producer TISCO is the lowest cost producer of hot-rolled steel globally

Hero Honda is the largest manufacturer of motorcycles in the world

Fifteen of world’s major automobile firms now source components from Indian firms

Essel Propack is the world’s largest laminated tubes manufacturer

Moser Baer is the world’s third largest optical media producer

TISCO is the lowest cost producer of hot-rolled steel globally

Still, Indian Industry is Gaining Bharat Forge has the world’s largest single location factory India is one of the largest diamond cutting and polishing centers. 9 out of every 10 stones sold in the world pass through India 100 of the Fortune 500 firms have R&D facilities in India (Delphi, Eli Lilly, GE, HP, Heinz, Daimler Chrysler, Microsoft, Intel, Motorola, Dell etc)

Bharat Forge has the world’s largest single location factory

India is one of the largest diamond cutting and polishing centers. 9 out of every 10 stones sold in the world pass through India

100 of the Fortune 500 firms have R&D facilities in India (Delphi, Eli Lilly, GE, HP, Heinz, Daimler Chrysler, Microsoft, Intel, Motorola, Dell etc)

Broad-Based Growth Across Sectors IT, ITES and BPO – on track to reach US$ 50 billion of exports by 2008 Pharmaceuticals and biotechnology – robust export-led growth Textiles – well-positioned to capture post-MFA growth along with China Auto and Auto ancillaries – exports to grow ten-fold to $15 billion by 2009 Construction/Building Materials - growth driven by infrastructure/housing

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

Pharmaceuticals and biotechnology – robust export-led growth

Textiles – well-positioned to capture post-MFA growth along with China

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

Construction/Building Materials - growth driven by infrastructure/housing

Broad-Based Growth Across Sectors Manufacturing – some of the largest and lowest cost (TISCO, Hindalco) producers in the world Retail and distribution – second most attractive retail market in the world Engineering based manufacturing - capital goods industry driven by strong capex Alternative to China for cos looking to source merchandise globally

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

Retail and distribution – second most attractive retail market in the world

Engineering based manufacturing - capital goods industry driven by strong capex

Alternative to China for cos looking

to source merchandise globally

India has Benefited from the Outsourcing Wave Source: CLSA Research

India has Benefited from the Outsourcing Wave Source: CLSA Research

IFC Strategic Focus Private Infrastructure Power generation, distribution, transmission Mobile telecoms SEZs/ports/airports Water and Sanitation Manufacturing and Service Companies New Growth Sectors: IT, Pharma, Auto Parts Achieving international competitiveness Bring FDI into India through MNCs Take Indian companies abroad Agribusiness Financial Institutions Second tier banks Micro and SME Finance

Private Infrastructure

Power generation, distribution, transmission

Mobile telecoms

SEZs/ports/airports

Water and Sanitation

Manufacturing and Service Companies

New Growth Sectors: IT, Pharma, Auto Parts

Achieving international competitiveness

Bring FDI into India through MNCs

Take Indian companies abroad

Agribusiness

Financial Institutions

Second tier banks

Micro and SME Finance

IFC’s India Portfolio IFC’s 3rd largest exposure with $1.27 billion invested in 79 companies, and $353 million mobilized through syndications Long-term presence – investor since 1956 IFC has played a significant role in creating leading financial institutions India portfolio has doubled since 2001 Record Commitments of $413 million in FY 2004-05 Expect to continue to invest $400 - $500 million pa

IFC’s 3rd largest exposure with $1.27 billion invested in 79 companies, and $353 million mobilized through syndications

Long-term presence – investor since 1956

IFC has played a significant role in creating leading financial institutions

India portfolio has doubled since 2001

Record Commitments of $413 million in FY 2004-05

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

$3.2 bn Invested in India Since 1958 Outstanding Portfolio: $1.27 billion Syndications: $353 million

For more information, please contact: International Finance Corporation Iyad Malas Director, South Asia Department Email: SouthAsia@ifc.org Website: www.ifc.org/southasia Godrej Bhavan, 3rd Floor Murzban Road Fort, Mumbai 200 001 Telephone: (22) 231-1235 Facsimile: (22) 231-1236 50-M, Shanti Path Gate No.3, Niti Marg Chanakyapuri New Delhi 110 021 Telephone: (011) 5111-1000 Facsimile: (011) 5111-1002

International Finance Corporation

Iyad Malas

Director, South Asia Department

Email: SouthAsia@ifc.org

Website: www.ifc.org/southasia

THANK YOU