Facts Figures Indian Banking Sector Industry

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					          India. In pictures.

A graphical representation of the Indian economy




                                         http://www.equitymaster.com/
India: Key facts & figures…
Economic Indicators                                        India     China
GDP (US$ bn, 2001)                                        477.3    1,159.0
GDP per capita (PPP US$, 2003)                          2,830.0    4,690.0
Industries (% of GDP, 2002)                               21.5%      51.1%
Agriculture (% of GDP, 2002)                              23.9%      15.4%
Services (% of GDP, 2002)
Exports (US$ bn, 2002)
                                                          54.6%
                                                           52.7
                                                                     33.5%
                                                                     325.7
                                                                                      INDIA,
Imports (US$ bn, 2002)                                     65.2      281.5
Public expenditure on education (% of GDP, 1998-2000)      4.1%       2.1%
Public expenditure on health (% of GDP, 2001)              0.9%       1.9%         SHINING?
Fiscal Deficit (% of GDP, 2003)                            5.4%      -3.0%
Forex Reserves (US$ bn, 2003)                             119.8      439.8
Human Development Indicators
Population (million, 2001)                              1,033.0    1,285.2
Annual population growth (1975-2001)                       2.0%       1.3%
Population density (people per 1sq km)                     324.0      130.0
Population under age 15                                   33.7%      24.3%
Population living below $ 1 a day (1990-2001)             34.7%      16.1%
                                                                              Factors that play a very vital
Unemployment (% of labour force, 2002)                     9.9%       9.0%
Adult literacy rate (15 years and above)                  58.0%      85.8%
                                                                              role in achieving our objective
Female adult literacy rate (15 years and above)           46.4%      78.7%    of a sustainable long-term
Life expectancy (years, 2001)                              63.3       70.6    growth in GDP. We still have a
Infant Mortality rate (per 1,000 live births, 2001)        67.0       31.0    long way to go!
Other Indicators
Telephone mainlines (per 1,000 people, 2001)               38.0     137.0
Internet users (per 1,000 people, 2001)                     6.8      25.7
Cellular subscribers (per 1,000 people, 2001)               6.0     110.0

Source: UNDP, Economist                                                                   http://www.equitymaster.com/
Real GDP growth: 5-year average…
      7.0


      6.0


      5.0


      4.0


      3.0


      2.0
            FY56    FY62         F68       FY74        FY80       FY86         FY92         FY98          FY04




 What this graph means?                                   Our view…

 Gross Domestic Product (GDP), in crude terms, is         The graph indicates that real GDP growth, as
 the output of an economy. Like a company has sales,      calculated on a 5-year moving average basis, has
 an economy has GDP. This graph indicates the 5           been on a constant rise. This clearly indicates that
 year average real GDP growth (GDP net of inflation)      while there have been cycles, the run-rate of our
 over the last fifty years.                               economy’s growth has shown an improving trend.

Source: RBI                                                                             http://www.equitymaster.com/
Real GDP growth & Per capita GDP…
                         Per capita GDP (Rs)               Real GDP growth (RHS, %)
  25,000                                                                                                      10.0


  20,000                                                                                                      8.0


  15,000                                                                                                      6.0


  10,000                                                                                                      4.0


    5,000                                                                                                     2.0


            0                                                                                                 0.0
                 FY97       FY98        FY99        FY00    FY01       FY02       FY03          FY04




 What this graph means?                                    Our view…

 Apart from the growth in GDP, how this growth is          While India boasts of as one of the fastest growing
 shared is also important. If the population growth is     economies in the world, the slow growth in per capita
 higher, then GDP has to grow faster. This will            GDP tells the other side of the story. Though we are
 increase income at the hands of the populace. While       among the top five economies in the world in terms of
 per capita GDP is a good factor, it does not clearly      size, in terms of per-capita GDP, we are lagging way
 reflect the disparities in income levels                  behind.
Source: CMIE                                                                             http://www.equitymaster.com/
Real GDP contributors (%)…
                          Agriculture & allied                    Industry              Services

 60.0


 50.0


 40.0


 30.0


 20.0


 10.0




              1950s            1960s       1970s         1980s        1990s        2000-01        2001-02        2002-03

 What this graph means?                                          Our view…

 GDP basically comprises of output by agriculture,               As can be seen from the graph above, the
 industrial and services sectors. If one were to break           contribution of the services sector has significantly
 this up further, while agriculture includes allied              outpaced the other two. While every economy goes
 activities, the industrial sector includes capital goods,       through this transition, the Indian economy has
 mining, electricity and services includes housing,              missed the industrial transition. We are now a
 banking, transportation, utilities and tourism.                 services led economy. But is services the answer?
Source: RBI                                                                                    http://www.equitymaster.com/
GDP & its constituents (% growth)…
                          Industry               Services        Agriculture           GDP
       14.0



       10.0



        6.0



        2.0



       -2.0



       -6.0
               1996-97    1997-98      1998-99     1999-00    2000-01     2001-02     2002-03      2003-04


 What this graph means?                                      Our view…

 Growth of an economy is a influenced by the                 One of the basic reasons of the underperformance of
 performance of its constituents. Though it is               the Indian economy has been the volatile growth of
 important to understand what contributes to the GDP,        the agricultural sector. Even when the contribution
 it is also important to understand what proportion of       from this sector is around 25% of GDP, the fact that
 the population is dependent on each of these                almost 70% of the population depends on it has
 constituents.                                               affected our economic performance.
Source: CMIE                                                                             http://www.equitymaster.com/
Growth in agricultural production & GDP…
                             Agricultural production (%)                 GDP (RHS, %)
  30.0                                                                                                           9.0


  20.0                                                                                                           8.0


  10.0                                                                                                           7.0


    0.0                                                                                                          6.0


 -10.0                                                                                                           5.0


 -20.0                                                                                                           4.0

               1996-97    1997-98      1998-99      1999-00   2000-01    2001-02     2002-03      2003-04




 What this graph means?                                       Our view…

 The graph is indicative of a high level of co-relation       We have already mentioned in the previous slide
 between India’s GDP growth and growth of                     about the large dependence of India’s GDP growth
 agricultural production.                                     on the performance of the agricultural sector. This
                                                              graph just proves our point. Can we continue to
                                                              ignore this sector?

Source: CMIE                                                                               http://www.equitymaster.com/
Investments by the manufacturing sector…
                         Gross fixed assets (% growth)                      Sales (% growth)
   20.0


   15.0


   10.0


    5.0


    0.0
               1996-97     1997-98        1998-99          1999-00       2000-01       2001-02         2002-03

   -5.0




 What this graph means?                                          Our view…

 Economy functions in cycles i.e. trough, recovery,              The excess investments by the manufacturing sector
 peak and deceleration. Generally, close to the peak,            in the mid-1990s seem to be drying out. Sales growth
 investments in physical assets tend to be on the                has continued to outpace investment in physical
 higher side and vice versa. Investments by the                  assets. Of course, consolidation has played a role.
 manufacturing sector is thus, a crucial factor to watch         But how long can the sector grow sales without
 out for.                                                        additional investments? Investment recovery in sight!
Source: CMIE                                                                                 http://www.equitymaster.com/
Where the Rupee comes from…

 Other Capital Receipts                                                              Tax Revenue
        (17.7%)                                                                        (42.0%)




      Borrowings
        (24.4%)
                                             Non-Tax Revenue
                                                 (15.9%)

 What this graph means?                                Our view…

 The pie chart represents various sources of revenue   While tax revenue accounts for a larger portion of
 for the Indian government. Tax revenue contributes    government’s total revenues, a sedate growth in this
 the largest chunk (42%) followed by borrowings        stream is a cause of concern. Also, the fact that
 (24%) and other capital receipts (17.7%).             borrowings make a large chunk is indicative of the
 Disinvestment receipts is 17.0% of other capital      government’s rising indebtedness.
 receipts.
Source: RBI                                                                         http://www.equitymaster.com/
Where the Rupee goes…

       Other Non-Plan Expenditure
                (18.4%)                                                                 Plan Expenditure
                                                                                             (27.6%)


    Subsidies
     (11.1%)




                                                                                      Interest Payments
                     Defense                                                                (28.1%)
                     (14.9%)
 What this graph means?                                 Our view…

 Any government, like a company, has to spend           The pie indicates that the government spends a big
 towards various aspects to improve competitiveness.    chunk of its total expenditure towards interest
 This graph indicates the areas of expenditure of the   payments (unproductive). However, the plan
 Indian government. The central government’s            expenditure, which includes spending towards
 expenditure can be broadly segregated into revenue     infrastructure development, has a lower share. One
 and capital expenditure.                               of the major reasons for India’s slow rate of growth.
Source: RBI                                                                          http://www.equitymaster.com/
Constituents of tax receipts (% of GDP)…
                                   Direct Tax        Indirect Tax        Expenditure
   20.0



   16.0



   12.0



     8.0



     4.0



     0.0
               1996-97   1997-98      1998-99     1999-00   2000-01     2001-02      2002-03       2003-04

 What this graph means?                                     Our view…

 The graph indicates the Central governments’ major         As we had mentioned in the previous slide, growth in
 sources of revenues – direct and indirect taxes – as a     tax revenues has been inadequate and this has been
 percent of GDP. Expenditure as percent of GDP              a concerning factor. Better tax administration and
 indicates that receipts are not enough for the             widening the tax net are some measures that could
 government to meet its expenditures.                       bridge the gap.

Source: CMIE                                                                            http://www.equitymaster.com/
Constituents of non-plan expenditure (%)…
                             Subsidies           Defense           Interest payments
     35.0

     30.0

     25.0

     20.0

     15.0

     10.0

       5.0

       0.0
               1996-97   1997-98    1998-99      1999-00     2000-01      2001-02       2002-03       2003-04


 What this graph means?                                    Our view…

 The graph shows various constituents of the               The high levels of interest payments, as shown in the
 government’s non-plan expenditure as a percent of         chart above, are a result of the Indian government’s
 the total non-plan expenditure. The biggest expense       rising indebtedness (see the next slide). While
 of 28.1% goes towards interest payments. Among the        subsidies, per se, are not bad, in most of the cases, it
 remaining two, while defense expenditure has been         has failed to serve the purpose.
 falling, that towards subsidies is on a rise.
Source: CMIE                                                                             http://www.equitymaster.com/
Increasing debt burden of the government…
                    Outstanding internal debt (Rs trillion)                % of GDP (RHS)
  12.0                                                                                                         44.0



    9.0                                                                                                        38.0



    6.0                                                                                                        32.0



    3.0                                                                                                        26.0



    0.0                                                                                                        20.0
          1996-97     1997-98    1998-99      1999-00    2000-01    2001-02     2002-03       2003-04




 What this graph means?                                     Our view…

 The above graph indicates the Central government’s         As the previous slide indicated, the biggest burden on
 rising internal debt and the same as a percent of          the Indian government is due to high interest
 GDP. The graph is actually meant to indicate the           expenses. The cause can be found out in the graph
 rising burden on the Indian government towards             above. Though the government has benefited from
 making capital and interest repayments that is likely      the low interest regime, in absolute terms, debt
 to hamper its development expenditure.                     burden has continued to increase.
Source: CMIE                                                                              http://www.equitymaster.com/
Major Deficit Indicators of Central Govt. (%)…
                        Fiscal Deficit            Revenue Deficit              Primary Deficit
 7.0

 6.0

 5.0

 4.0

 3.0

 2.0

 1.0

 0.0
                   2001-02                             2002-03                          2003-04 (BE)



 What this graph means?                                     Our view…

 Deficit simply means the excess of expenditure over        While deficits are unavoidable for a developing
 receipts or the amount that the government borrows         economy, as the govt. has to spend towards various
 in a fiscal . This is a result especially of the           initiatives from a long-term perspective, the case of
 government’s profligacy on various non-plan                India is different. The govt.’s largest expenses are
 expenses like interest payments and subsidies.             towards non-development aspects (as shown in Slide
                                                            10), which is concerning.
Source: RBI                                                                             http://www.equitymaster.com/
Interest rate & Change in money supply…
                              Interest Rate (%)                Money Supply (RHS, %)
      9.0                                                                                                         17.0



      8.0                                                                                                         16.0



      7.0                                                                                                         15.0



      6.0                                                                                                         14.0



      5.0                                                                                                         13.0
               1999-00          2000-01              2001-02              2002-03              2003-04



 What this graph means?                                        Our view…

 In a market-based economy, the price of money                 Despite the Indian government’s high deficit and
 (interest rate) is determined by the demand and               consequently, rising borrowings, the liquidity or the
 supply of the same. The graph shows the effect of             supply of money in the Indian economy has been
 increased money supply in the economy on the                  robust. One major reason for this is the consistent
 interest rates.                                               inflow of foreign capital. High liquidity is one factor
                                                               that has supported the softer interest rate regime.
Source: CMIE                                                                                  http://www.equitymaster.com/
Interest rate & GDP growth…
                             Interest Rate (%)             GDP Growth (RHS, %)
    13.0                                                                                                     10.0



    11.0                                                                                                     8.0



      9.0                                                                                                    6.0



      7.0                                                                                                    4.0



      5.0                                                                                                    2.0
               1996-97   1997-98     1998-99     1999-00   2000-01    2001-02     2002-03      2003-04




 What this graph means?                                    Our view…

 This graph shows the co-relation between interest         As shown in the graph, the softer interest rate regime
 rates and the GDP growth. Interest rate here means        over the past few years has had a lag effect on the
 the bank rate or the rate at which the RBI lends          growth of the Indian economy. Lower interest rates,
 money to commercial banks. Over the past few              apart from helping companies to restructure their
 years, we have had a soft interest rate regime, mainly    existing high-cost debt to low-cost ones, has also
 due to high liquidity (see Slide 15).                     boosted retail demand for money.
Source: CMIE                                                                            http://www.equitymaster.com/
Interest rate & Inflation…
                                      Interest Rate (%)               Inflation (RHS, %)
  9.0                                                                                                                4.4



  8.0                                                                                                                4.2



  7.0                                                                                                                4.0



  6.0                                                                                                                3.8



  5.0                                                                                                                3.6
                    1999-00                  2000-01        2001-02           2002-03             2003-04



 What this graph means?                                           Our view…

 This graph shows the relationship between interest               Despite rising fiscal deficit and strengthening of oil
 rates and inflation. It all happens in a cycle. Across           prices, inflation has remained under check in the last
 the world, the central bankers are concerned about               five years. This was due to low capacity utilisation
 inflation. If inflation goes beyond unacceptable levels,         and lack of significant credit demand from corporates.
 the central bank raises interest rates to slowdown               Adequate liquidity has prevented any upward
 growth.                                                          pressure on interest rates.
Source: CMIE, World Economic Outlook, 2003                                                     http://www.equitymaster.com/
Annual Consumer Price Inflation (%)…
                                 US       Japan           EU         China           India
      20.0


      15.0


      10.0


       5.0


       0.0


       -5.0
                  1995        1996     1997   1998        1999         2000        2001     2002        2003




 What this graph means?                                          Our view…

 Inflation has been a global phenomenon. And when it             One key factor that impacts inflation globally is oil
 rises beyond a point, it becomes a menace. The                  prices. Though inflation is country specific, in the last
 above graph indicates that, when compared to some               few years, crude prices have remained firm. The RBI,
 of the developed and developing economies over the              in its annual monetary policy, has projected inflation
 past few years, inflation in India has been relatively          in India at 5% for FY05 (target for FY04 was 4.0% to
 higher.                                                         4.5%).
Source: World Economic Outlook, 2003                                                            http://www.equitymaster.com/
Rs/US$ rate & Forex reserves…
                         Forex Reserves (US$ bn)                     Rs/US$ rate (RHS)
  120                                                                                                            49.0

                                                                                                                 48.0
  100
                                                                                                                 47.0

    80                                                                                                           46.0

                                                                                                                 45.0
    60
                                                                                                                 44.0

    40                                                                                                           43.0

                                                                                                                 42.0
    20
                                                                                                                 41.0

      0                                                                                                          40.0
               1999-00           2000-01             2001-02             2002-03             2003-04



 What this graph means?                                        Our view…

 The graph indicates rising foreign exchange inflows           A large amount of these forex inflows have come in
 into the Indian economy and the consequent effect             the form of remittances from NRIs. Increased inflow
 on the exchange rate. Rupee has strengthened vis-à-           of FII money has also played its part. However, as
 vis the US dollar. The reason for this is that a large        Mr. Ajit Dayal says, India is a developing country and
 supply of the dollar has led to a fall in dollar value        we need to borrow to invest in assets. In the long-
 thus having a strengthening effect on the rupee.              term, rupee is likely to weaken.
Source: CMIE                                                                                http://www.equitymaster.com/
India: So, what’s the call?
                      India: So, what’s the call?
   Reasons to buy…                             Reasons not to buy…

  The essence of democracy                   Lack of vision among policy makers
  Growing entrepreneurial culture            Bureaucratic hurdles

  Changing population mix (rising middle-    Poverty, illiteracy and inadequate
   class and younger population)               healthcare

  Low penetration levels across sectors      Concerning fiscal situation

  A robust financial sector

  Large low cost talent pool




                                                                       http://www.equitymaster.com/
Key terms…
Fiscal Deficit is the excess of expenditure over government’s receipts in an accounting year.
More simply, it equals the amount of borrowings made by the government in a year.

FD = Total Expenditure – Revenue Receipts – Disinvestment Receipts – Recovery of loans

Higher Fiscal Deficit leads to Increased Govt. Borrowing leads to Increased Spending leads to
Greater Money Supply leads to Inflation leads to Demand for money exceeding supply leads to
Higher Interest Rates

Revenue Deficit is the excess of revenue expenditure over revenue receipts.


Primary Deficit is measured by Fiscal Deficit less interest payments.

Subsidies, as defined by the Economist, are payments, usually made by the government, to keep
prices below what they would be in a free market, or to keep alive businesses that would otherwise
go bust, or to make activities happen that otherwise would not take place. Subsidies can be a form
of protectionism, by making domestic goods and services artificially competitive against imports.
Inflation means rising prices. Inflation erodes the purchasing power of a unit of currency. More simply,
since prices rise, Re 1 spent tomorrow will buy you lesser amount than what it can buy you today.




                                                                                http://www.equitymaster.com/
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