The Indian Economy

July 25, 2000

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Current Situation Overview
• Significant all around improvement after turbulent period (1998-99)
• 5.7% GDP growth estimated 1999-00 and forecast at 6.3% next year
• Inflation, driven by higher fuel prices, up from 4.5%
– Expected to stabilize at 6.5%
• Industrial environment improves in 1999-00, IIP growth around 8%
levels
– Stronger consumer demand, tentative industrial demand, rising exports
– Cement, automotive, home goods & services are the fast growing segments
• Corporate sector reports brisk topline growth of >20% and a slightly
slower bottomline growth of 18%
– Margins under pressure due to the mild over capacity in most industries
• Resurgence in Portfolio Flows (FII) during 2000, FDI flows
expected to pick up speed with greater clarity in policy

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Current Situation Overview
• Foreign Debt Under Control at less than 24% of GDP
– External debt service ratio at < 2% of GDP
– Large part of debt 40% concessional and short term part is only 5% of total
debt
• Foreign Currency Reserves rise to USD 35 bn (8 months import
cover)
• Rupee Depreciation only 2.17% in 1999-00, another 2% since
April 2000
– Annual rate of depreciation estimated to be around 4.5-5%
• Political situation shows greater signs of stability
– Wider dispersion amongst partners makes the coalition less vulnerable

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Current Situation Overview (Concerns)
• Fiscal deficit at around 6% continues to be the main concern
– Successful completion of at least one privatization program
– Approach to cutting back subsidies
• Investment demand yet to materialize
– The much awaited infrastructure boom
– Step-up In new industrial capacities
– FDI flows to gather momentum (rise to more than 30% of approvals)
• Water scarcity and drought conditions in several states
– Is a concern though it is too early to assess impact
– Large government attention needed to manage the crisis

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Near Term Outlook
• Base case growth assuming near normal monsoon is around 6%
– Fuelled mainly by the growth in consumer demand mainly from rural areas
• Benign interest rate regime and a liberal Reserve Bank of India
policy of creating adequate liquidity in the market to help
investment over the next 12 months
• Large scale investments into infrastructure needed to catapult
growth to 8% plus trajectory to make a more meaningful trickle
down effect to different parts of the economy

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Current Economic Policies
• Centers around strong domestic industry but trade barriers are
being dismantled in accordance with commitments
– Increased importance on housing and rural industrialization
– Product patents in place, import curbs lifted on several commodities
– Attempts to create a rural industrial base (around small industry)
– Investments guided by competitive advantages/ economic considerations
rather than licensing restrictions / allowances
• Strong industrial growth averaging 7% in the last five years
• Significant progress in opening up telecom and power sectors
• Privatization of PSUs (GOI holding upto 26%), closure of sick
units, repeal of the Urban Land Ceiling Regulations, etc.
• Significant capital flows generated from 1991 to 1998
– FDI - $15 Bn; Portfolio (FII) - $12Bn;
– FCY reserves increased from $2Bn in 1991 to over $35Bn as of April’2000

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Growth Targets & Imperatives
• Need to target GDP growth of 8-10%
• Liberalize and ease domestic consumption and investment
– India ranked 41st in competitiveness
• Strengthen the contribution from the export markets
• Promote and channel private and foreign investments into
infrastructure
– Required investment of $120Bn over next five years to sustain planned growth
– Current domestic savings of 24% needs to be augmented by foreign
investments ~ $10Bn p.a.
• Maintain financial and currency stability
– Controlled moderate inflation
– Cap on fiscal deficit, Bill on fiscal responsibility soon
• Clearer focus on planned government capital expenditure

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Growth Drivers & Bottlenecks
• Continued demand for consumer items with rising income levels
– More stable agricultural output & rising activity in services
– Moderate inflation would enhancing purchasing power
– Increased economic activity in infrastructure sector
• Telecom, power, roads, new homes

• Creation of new logistics infrastructure to drive penetration of

consumer goods
– Roads, ports and storage facilities
• Red-tape procedure and poor infrastructure still deter foreign
investors
– FDI levels still low as compared to requirements

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Outlook - 3years - Key Themes
• Growth would continue to be led by consumer demand growth
– Infrastructure would start contributing towards the end
• Rural economy to reduce dependence on agriculture
– Stabilize the rural consumption patterns
– Provide exponential growth window for consumer goods makers
• Government will step in to support investment climate
– Fiscal deficit levels would continue to be high
– Government expenditure under closer inspection
• Industrial investments guided by competitive advantages/ economic
considerations rather than licensing restrictions / allowances
• High growth will continue in:
– Infotech, telecom, transport vehicles (mainly personal transport vehicles),
consumer electronics, apparel, convenience foods, pharmaceuticals, financial
products (savings products)

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View From The Rating Agencies
Country Moody's S&P
Thailand Ba1* BBB- (Stable)
Korea Baa2 BBB (Positive)
Poland Baa1 BBB (Positive)
India Ba2 BB (Positive)
Argentina B1 BB (Stable)
Brazil B2 B+ (Positive)
Turkey B1 B+ (Positive)
Russia B3 SD
All ratings for Long term foreign currency borrowings.
S&P ratings as on April 28, 2000
Moody's as on April 26, 2000
* Under review for possible upgrade

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Economic Structure
• Significant transition in economic
structure
• Agriculture sector employs 75% of
the rural workforce
• Industrial sector consolidates through
liberalization
• Services sector stabilizes the
economy
– Also includes PS/ GOI spending and
defense
• Economy largely internal driven and resilient
– Imports account for 10% of GDP, while
exports account for 8%

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Economic Indicators - Table

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Economy and outlook
•Macro economic overview 1991 - 2001f

A decade
full of
false
starts

Forecasts :Citibank
estimates

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Economy and outlook
•Other Indicators

Consol-
-idation
amid
uncertain
policy
direction

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Economy and outlook
•Interest rate trends

Yields
Yieldsinin%% Sep98
Sep98 Jun99
Jun99 Sep99
Sep99 Mar00
Mar00 Apr00
Apr00

GOI 1 yr 10.42 10.71 10.45 10.11 9.35

Falling GOI 2 yrs 11.04 10.89 10.61 10.05 9.45

yields GOI 5 yrs 11.84 11.44 11.03 10.33 9.82

and credit
GOI 10 yrs 12.18 11.74 11.62 10.81 10.35
spreads

note :
AAA I yr 12.20 11.25 11.10 10.96 10.00
GOI -S/A yld.
AAA - Ann. yld.
AAA 2 yrs 12.85 11.90 11.75 11.00 10.25

AAA 5 yrs 14.05 12.60 12.35 11.38 11.00

AAA 10 yrs 14.55 13.10 12.85 12.12 11.80
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Spot Rupee- Recent history

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6 month forward premia (in rupees)

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Stock Market and the Rupee

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Nasdaq and BSE

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FX markets
• Access
– Through RBI approved authorised dealers
– INR trading between 9.00 AM to 4.00 PM
– Crosses trading 24 hours
– Based on exposures - assets / liabilities in foreign currencies
– Limited freedom on the short INR side
– FIIs given flexibility and freedom for entry / exit for hedging purposes subject
to some guidelines
• Instruments
– Spot and forward INR - liquid till 12 months
– Prices available upto 3/5 years, execution on best efforts basis
– FCY / INR Currency swaps for managing exposures
– Other derivative instruments - swaps and (non-INR) options

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Citibank dealing strengths
• Global presence
• Rated number 1 in FX by Asiamoney and
Corporate Finance
• Competitive pricing on entire range of currencies
• Largest overnight limit amongst foreign banks:
domestic limits on par with largest nationalised
bank
• Ability to handle large volumes
• Late night desk for crosses trading
• 24 hour order book

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Research

• Fundamental and technical research on all major

currency pairs
• Focus on Indian Rupee research
• Wide range of customer communication / market
updates
• Daily Treasury Letter
• Weekly Treasury Letter
• Monthly Indian Rupee Research report
• Annual Treasury Letter
• G7 Currencies Weekly Reviews
• Monthly Global Economic Outlook

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Customer support

• Customer orientation
– focus on building long term FX relationships
• Technical support
– exposure tracking and management systems
• Integrated hedging approach
– Funds management and exposure management
– Focus on overall portfolio vs individual transactions

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Derivative Strengths

• Pricing capability on any kind of exotic derivative

products
• Ability to quote finest prices on account of large
global derivative presence
• Expertise in place for launch of new rupee
derivatives
• Focus on creating customised derivative solutions

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