The document provides an overview and analysis of India's political and economic outlook. It can be summarized as follows: 1) The recent election resulted in a stable Congress-led coalition and political stability, which is good for continued reforms and affordable residential development. 2) Macroeconomic fundamentals remain strong with GDP growth estimates of 6.2% in FY2009-2010 and inflation expected to remain benign. 3) Demand for affordable housing is strong and growing, underpinned by a large housing shortage, with many large developers focusing on affordable projects.

1. India Commentary
June, 2009
“Political Stability & Improving Sentiment, Good for Affordable Residential Development”
India Overview Selected Macro Indicators FY07-08 FY08-09 FY09-10E FY10-11E
Consensus GDP Growth Rate 9.30% 6.70% 6.21% 6.93%
India’s surprising General Election outcome resulted in a stable WPI Inflation Rate 5.90% 8.30% 1.00% 4.00%
Congress-led UPA coalition (without the Left parties and with 206 Centre Fiscal Deficit (% of GDP) 3.30% 6.00% 6.00% 5.00%
Forex Reserves (USD bln) 309.80 252.00 260.00 310.00
seats vs 145 in the last term) to continue much needed reforms
Forex USD - INR 43.1 49.0 47.0 44.0
over the next 4-5 years. Manmohan Singh, the Oxford-educated
Forex GBP - INR 78.7 75.0 76.0 70.0
economist, continues as Prime Minister and has put together a
10-Year Govt Yields 8.00% 8.25% 6.20% 5.75%
relatively straightforward cabinet with the addition of Pranab Source: RBI, IMF, Goldman, Merrill Lynch, Cresil, Nomura, JP Morgan, Morgan Stanley & Elysium
Mukherjee as Finance Minister. Mr Mukherjee was previously estimates
Finance Minister under the Indira Gandhi government in 1982-
1984 where the ministry controlled the economy in minute detail.
Mr Mukherjee is a veteran politician and, even with the current
more open economy, should be competent in helping India
achieve its goal of 9% annual growth; impediments to reaching
that goal are mostly political in India.
Consensus GDP - Real Growth Rate
10.00%
USD/INR Weekly 2005-2009 GBP/INR Weekly 2005-2009
8.00%
The equities market rewarded the election results the first trading
6.00% day with an upper circuit shutdown (10% rise) and the market
ending with a 17% gain. The Sensex is currently trading at a 9
4.00%
month high and is expected to outperform this year. Recent
economic data that end-March 2009 GDP growth was 6.7% year-
2.00%
on-year, beating many analyst estimates, has also buoyed the
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E 2011E markets.
Source: RBI, IMF, Goldman Sachs, Merrill Lynch, Crisil & JP Morgan As Indian corporate confidence improves on both political and
economic fronts, we expect to see consumer confidence
The government will deliver its Budget in early July and is not
improving in tandem as well. This bodes well for several sectors
expected to present an expansionary one. The Reserve Bank is
of the economy such as real estate, retail and other consumption-
expected to pursue a soft interest rate regime; India compared to
driven industries. Tax cuts across all levels, including the
most countries has further scope for rate reductions. The
surcharge on corporate taxes and the Fringe Benefit Tax (FBT), will
government has expressed its intent to reduce the structural
also spur consumption.
deficit without reducing capital and infrastructure (physical and
social) spending through actively pursuing disinvestment of The expected re-rating of the Indian market is underway as
government holdings in public sectors. With the Left absent, this investments into India have been historically hobbled by the
is achievable and especially more so with the technocrat Singh government’s lack of headroom on the fiscal front. Additionally,
and the wily veteran politician Muhkerjee at the reins. the GoI’s intention to privatise airlines and financial services,
introduce reforms in the insurance sector to attract long term
Macro Fundamentals Remains Strong capital, deregulate oil and fertiliser (50% cut in FY10) prices and
As the global economic crisis continues, we are hopeful that the sales of 3G spectrum licences will boost the markets and the
worst is over but recognise that there will be more pain in the state’s coffers, covering any higher spending. According to an
near term. India appears to remain partially insulated from the Economic Times Intelligence Group (ETIG) study released in early-
ravages of write-downs, mass layoffs etc. Our argument last year June, the GoI could reduce its fiscal deficit by a third if it lowers its
(Nov 08) that India is a domestic consumption economy, with half stakes in 21 public sector firms (PSUs) including NTPC, NMDC,
the export exposure of China, remains the basis for continued MMTC, Power Grid, Sail and Hindustan Copper to 75%. This is
optimism. With elections over and the accompanying strong achievable without reducing stakes in sensitive oil and banking
showing of the UPA, estimates for the year ending March 2010 PSUs.
GDP growth have been revised upwards by Morgan Stanley, in a
th
May 28 note, to 6.2% from 5.8%. The note said quot;We are now Elections 2009 – No More Excuses
building in higher growth in the services sector - both the Over the last five years, Congress has blamed shortcomings in
financing, insurance, and real estate & business services, and the reform and populist measures on coalition politics. That excuse is
community, and social & personal services segments - than now implausible. The UPA now has a clear mandate to shore-up
previously estimatedquot;. They kept their forecast for the following reforms in education and agriculture, continue
year's GDP growth at 6.8%. infrastructure/capital spending and add 25,000 MW of power per
year, all without expanding the budget. These were Congress’
election promises, though these also featured in the 2004
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2. elections. If Congress does not perform yet again, Indian voters firms are reportedly in negotiations with several offshore PE funds
will move on. looking to move into that space.
India – Still Best Placed amongst the BRICs The GoI has made the affordable housing sector a priority since
India is largely a domestic economy where hinterland last year and is now increasing its participation through Private-
consumption is 58% of the country’s GDP, and with exports, Public Partnerships with developers and introducing schemes to
including software, at 17% of GDP. As such, India has shown provide urban land at affordable costs and reduction of the cost of
itself to be relatively insulated from current global weakness, credit for end-users.
especially in comparison with most other economies. India’s total Elysium Capital has pipelined and is currently planning several
trade constitutes only 32.5% of GDP (half that of China). Thus affordable housing township projects in key Tier 2/3 cities of
India is better protected from fluctuations in global trade than South India. These townships range from 50 to 100 acres and are
other emerging nations. India’s favourable demographic profile priced from INR4 to 15 lakhs per unit, well within the affordable
with a median age of 24.4 yrs (2004 estimates) also gives it a range. Our per ft2 prices range from INR1,400 to 1,700.
distinct advantage. Thus, over the next decade, India will
continue to draw on the benefits of a young and rapidly-growing 80% of all mortgages in India are below INR20 lakhs (USD40k) and
labour force (2/3 of India’s population is under 35) compared to average housing prices in S India are around INR3,000 to 5,000 per ft2.
China’s aging population (current median age of 35).
Conclusion
Inflation Benign As the global financial crisis continues, perhaps more of sliding
Inflation is expected to remain benign over the medium term down a slope than in freefall now, we are more than encouraged
which would allow the RBI to further soften rates and thus help by India’s effort to stabilise and grow its economy. Its people
speed up consumption further and availability of cheaper credit. surprised India watchers with a strong showing at elections and
The RBI has allowed the restructuring of commercial real estate voting back the UPA with a definitive mandate. The technocrats
debt with about INR90 bln in debt rolled over recently. Banks are holding the reins have a strong understanding of what needs to be
increasingly taking a positive viewpoint at new loan done and, with political discipline, should be able to return India
disbursements (mostly in the affordable housing space), a 180 towards a 9% growth rate. Congress fully understands that India
degree reversal from just a few months ago. has had no better chance than now to effect real reforms.
Previous spikes in inflation were mainly a result of price shocks We also feel that the affordable residential segment will have a
from oil and food prices. long life cycle, along with current opportunities in selected
industrial/warehousing and hospitality and other specialised asset
Increased risk aversion by commercial banks led to a comfortable classes. The government is introducing favourable FDI norms to
liquidity situation in the banking system post November 2008. Banks encourage further foreign investments into housing and reforms
have continued to park more funds with the RBI through the reverse underway to clear up or review entitlement issues, transparency
repo window despite the 50 bps reduction in the reverse repo rate in and tax treatment for rental properties are moves in the right
March 2009. Banks could easily meet their short-term demand for direction as India’s real estate market matures.
funds, as is evident from the low call rates, which stayed close to
reverse repo rate during April as per the latest available data (April 16, It is also important that the reader takes a micro-market
2009). Earlier, towards the end of March 2009, call rates had surged to viewpoint to India. Better thought of as a continent, India is a
repo rate levels on account of advance tax outflows and redemption very large and diverse country where driving 200 km could mean
pressures in mutual funds. – Crisil Research Monetary Policy Impact speaking a different language and very different cultural values.
Analysis, April 2009
India is far more than Mumbai and Delhi, it is also Chennai, Kochi
and a series of highly-educated, industrious and wealthy Tier 2
India imports 72% of its oil needs with total oil consumption
and lower cities. Around 60% of India’s wealth is in the Top 30
forming 10% of GDP. With 2009’s oil price forecast at $68/barrel
Tier 2 and 3 cities in India, amongst them the cities on which
(IMF Nov 2008), a reduction of $32/barrel over 2008 actual, India
Elysium focuses.
will be better positioned to deal with oil imports.
We reiterate that residential end-users are still buying at the right
Additionally, gas production from the Krishna Godavari basin D-6
price, providing the location makes sense and has proper
gas field would help in reducing the fiscal deficit and provide
transportation links. We have seen more than reasonable
“some downside protection” to economic growth rate, reports
absorption of affordable projects in and around the metros and
Goldman Sachs. The report added that gas production would
other cities. We expect already favourable demand to gradually
increase the power generation capacity and further expects
increase as India finds its way back towards the 9% growth
production to substitute about 7% of oil consumption in 2009-10
territory.
and 10-11% over fiscal years 2011-1014.
Oliver Ontiveros
Affordable Housing Demand Strong and Growing Chief Investment Officer
We have long maintained that affordable housing (defined as the oliver@elysiumprop.com
≤INR15-20 lakhs per unit price range) in the residential asset class
is where the deeper market is and will continue to show demand The views expressed above are based on information which we believe to be reliable
but are not guaranteed as to accuracy or completeness by Elysium Capital. This
as long as India Inc continues to grow. A substantial (20m+ document is not, nor should it be construed as, an offer or the solicitation of any
homes) housing shortage [in this sector] underpins demand. offer, or as general or definitive advice to buy or sell any investments and
expressions of opinion are subject to change without notice. Sources of data are
Buoyed by recent sales of affordable housing by various available from Elysium on request.
developers and highly marked- down completed properties by the
large developers, companies such as Unitech, DLF, HDIL and
others have lined up over 60 mln ft2 of residential projects this
fiscal year alone (sources: Cushman & Wakefield and other
analysts). Private Equity firms are also returning to the real estate
space with strong interest in affordable housing, to the exclusion
of other asset classes. Unitech, DLF, Tata and other real estate
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