WHY INDIA?

1. WHY INDIA? September 2004

2. Summary • Overall, economic policy is geared towards growth • India is a party to various global trade and tariff agreements • Political risk exists - but the effect is more on specific sector reforms, rather than overall direction • Indian companies and entrepreneurs are now prepared to live – and thrive – in competitive, free markets. • While the outlook for the macro-economy is positive, persistent long-term fiscal deficits could rekindle inflationary pressures and cause the Indian Rupee to resume its historical decline of -3% p.a. Quantum Advisors

3. A Sustainable Growth Story • The rate of growth of GDP has increased from the “Hindu” rate of < 3% p.a. (1950-1984) to a more respectable and sustainable 6% p.a. • The growth rate of 8.2% in FY2004 is the highest in a decade. Quantum Advisors

4. Coalition Politics has not hurt economic growth • There is no proof that coalition governments are bad for GDP growth. In fact, it seems that GDP growth rates have trended higher during coalition rule! * Coalition government Quantum Advisors

5. A Consumption Story… • Low interest rates and a reduction in tax rates since 1991 has increased the supply of goods and services and resulted in a surge in consumption. Quantum Advisors

6. The birth of the Middle-class • Homes are in demand in a country with a population of over one billion which is undergoing a cultural shift – younger people with better job opportunities no longer adopting a “joint-family” model • And demand for automobiles is also increasing Quantum Advisors

7. Motoring Ahead • With annual production of nearly 7 million vehicles (cars, trucks, 2-wheelers) and its low cost labor; India has the potential to develop its export markets and convert a cyclical industry into a secular story Quantum Advisors

8. Increased Demand For Cement CAGR 6.5% • Increase in consumption and infrastructure leads to increase in the demand for cement • India is the 3rd largest consumer of cement in the world after China and USA Quantum Advisors

9. Increased Demand For Steel CAGR 8% • India’s consumption of steel has increased although it is less than 4% of global demand because manufactured exports are not significant. This will change. Quantum Advisors

10. Rising Exports CAGR 9% • Exports are increasing as India integrates with the rest of the world - in line with economic policy initiatives put in place since 1991. Quantum Advisors

11. The Software Story CAGR 35% • Led by exports of software products: from 2% of exports in FY1995 software now accounts for 20% of India’s total exports. • And this was not mandated (or designed) by government: an evolution of market-led demand and supply Quantum Advisors

12. Increasing Imports CAGR 10% • India’s imports are also increasing at 10% annually as Indian industry modernizes (import of capital machinery) and consumers consume Quantum Advisors

13. Oil Imports • Oil continues to be the single-largest imported product: oil’s share of total imports has grown from 20% in FY1995 to 26% in FY2004 and is likely to grow further. Quantum Advisors

14. Foreign Direct Investments (FDI) and Foreign Portfolio Investments (FPI) on the upswing CAGR 13% • The multinationals have made it clear that the future is “India and China” and not “India or China” • Consistent foreign direct investments since liberalization • Robust portfolio investments Quantum Advisors

15. Market Capitalization And Volume • Increased foreign participation has made the stock markets more mature • Market Cap of BSE approx $ 260 billion in FY2004, up from $ 125 billion in 1995. • Average daily volume Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) for the year 2004 is US$ 2 billion/day. Quantum Advisors

16. Healthy Foreign Exchange Reserves • India’s Foreign Exchange Reserves are $ 117 billion as of August 2004 • These reserves have grown from a dismal 6 weeks of imports in 1991 to a healthy 77 weeks in 2004 Quantum Advisors

17. But this higher FX has led to an increase in Money Supply… CAGR 14.2% • A continuous growth in the money supply and… Quantum Advisors

18. Additionally, high Fiscal Deficits... • …the high fiscal deficits at the federal level of 5% (the combined deficits including those of the states is about 10% of GDP) Quantum Advisors

19. Could fuel Inflationary pressures… • Could result in the end of the recent benign inflation period Quantum Advisors

20. …And result in a mild depreciation of the currency • The Rupee has depreciated 3.6% y.o.y. against the US Dollar in the last 10 years Quantum Advisors