The Indian Economy
A perspective
8th Asia Forum Meeting, Frankfurt
November 7, 2002
The views expressed in this paper are the views of the author and do not necessarily reflect the views or
policies of the Asian Development Bank (ADB), or its Board of Directors or the governments they represent.
ADB makes no representation concerning and does not guarantee the source, originality, accuracy,
completeness or reliability of any statement, information, data, finding, interpretation, advice, opinion, or view
presented.
Agenda
Indian economy today
Strong economic fundamentals
Going forward
The ICICI experience
In Summary
2
Indian economy - The transition
Pre-reform era India today
Increasing liberalization of various
Dominance of public
sectors, with entry of new players,
sector in most industries
both domestic and foreign
Sellers’ market with Buyers’ market with increased
limited competition competition
Import substitution with
Liberalized trade facilitating
quantitative and tariff
integration with WTO
restrictions on imports
Regulated financial Liberalized financial markets with
markets emphasis on prudential norms
The dynamic nature of modern India is brought out by
the key characteristics of the economy
3
Indian economy - Key characteristics
l Large domestic market with huge untapped potential
l 4th largest economy (purchasing power parity terms)
l Rich pool of human intellectual capital
l Quality educational institutions (IITs / IIMs)
l Third largest reservoir of engineers
l Huge entrepreneurial pool
l World-class management talent and skilled workforce
l Personnel costs are lower than Western countries
l Large English speaking population
4
Indian economy - Key characteristics
l Presence of a broad and large industrial base
l Information technology, automobile, garments and
agro-food processing
l Stable parliamentary democracy
l Independent judiciary
l Global mindset of corporate sector
l Facilitated by success of Indian IT sector
l Shift in strategy from ”lobbying” to “preparing for
globalization”
… leading to the rise of Indian multinational companies
5
Rise of Indian multinational companies
Infosys
BHEL
NIIT
Tisco
Satyam Reliance L&T
Bharti ITC
Polaris ONGC IOC Dr. Reddy’s
Hindalco
… and many more
These strengths have been facilitated by mature financial
markets
6
Mature financial markets
l Integrated with the global financial markets
l Partial capital account convertibility
l Liberalizing inward capital flows
l Approval for ADR/ GDR issues
l Vibrant capital markets
l Entry of new players
l Increasing role of foreign institutional investors
l Introduction of new instruments
l Derivative trading
l Futures and options on indices and individual
stocks
7
Mature financial markets
l Robust banking sector
l Continued strengthening of prudential norms of
banks
l Alignment with international best practices
l Phased transition to Basle norms by 2006
l Increased adoption of internationally benchmarked
risk management practices
The strength of the Indian banking system is evidenced by
its relatively low recapitalization cost
8
Estimated recapitalisation cost of banking
sector as % of GDP
50% 43%
40%
30%
30% 25%
20%
10%
10% 3%
0%
Indonesia China Thailand Malaysia India
These strengths have resulted in strong economic
fundamentals
9
Agenda
Indian economy today
Strong economic fundamentals
Going forward
The ICICI experience
In Summary
10
Strong economic fundamentals
Forex
GDP
reserves
External debt
Current
Inflation account
deficit
11
GDP growth
GDP growth rates (%)
8
6.5
6.1
6 5.4
4.8
4.0
4
0
1997-98 1998-99 1999-00 2000-01 2001-02
The Indian economy has been consistently growing at a
rapid pace, while keeping inflation under control
12
… keeping inflation under control
Average inflation (%)
15
13.1
10
6.8 7.2
5 3.4 4.3
5.9
4.4 3.3 3.8 3.6
0
1997-98 1998-99 1999-00 2000-01 2001-02
Average Wholesale Price Index
Avearge Cosumer Price Index
… and reducing current account deficit
13
… reducing current account deficit
Current account deficit as a % of GDP
0.5 0.3
0
1997-98 1998-99 1999-00 2000-01 2001-02
-0.5
-0.5
-1
-1.0
-1.1
-1.5 -1.4
… bolstered by rapid growth in export of services, further
increasing forex reserves
14
Forex reserves
Forex reserves (USD in billion)
70 64.10
60 54.10
50 42.30
38.00
40 32.50
29.40
30
20
10
0
1997-98 1998-99 1999-00 2000-01 2001-02 Oct-02
… providing enough cushion for unforeseen external
shocks and sufficient cover for the external debt, which is
also under control
15
External debt under control
External debt / GDP (%)
30 27.9
25 24.3 23.6
22.2 22.3
20
15
10
5 1.3 1.1 0.9 0.8 0.6
0
1997-98 1998-99 1999-00 2000-01 2001-02
Total external debt / GDP
Short-term external debt/ GDP
… also evidenced by decreasing short-term external debt
/ forex reserves ratio
16
External debt under control (cont.)
Short-term external debt / Forex reserves (%)
20 17.2
15 13.2
10.3
10 8.2
5.1
5
0
1997-98 1998-99 1999-00 2000-01 2001-02
While the Indian economy has been growing at a rapid
pace, there is still enough potential for further growth as
evidenced by certain indicators
17
Potential for further growth
(Penetration per 1000)
India China
TV sets 75 292
Telephones 40 250
Personal Computers 3 12
Source: Statistical Outline of India 2001-02
While China’s per capita GDP is only 1.8 times India’s, its
penetration on the above indicators is more than 4 times
India’s, indicating the large untapped potential
18
The economic reform programme undertaken has
been far reaching and while many Asian countries
encountered severe economic and political crises,
the Indian economy exhibited resilience based on its
underlying strengths
However, continued focus on certain key areas
would result in faster growth going forward
19
Agenda
Indian economy today
Strong economic fundamentals
Going forward
The ICICI experience
In Summary
20
Economic growth - Key focus areas
Boost investment in
the economy
Increase productivity of
Focus on key sectors
investment
21
Boost investment in the economy
l Encouraging private investment
l Introduction of private participation in numerous
sectors
l Telecom sector, Insurance, Airlines
l Disinvestment is a strategic objective of the Central
Government
l Aggressive disinvestment targets have been set by the
Government for coming years
l About USD 2.16 billion raised over last 18 months
l Various State Governments have also taken up
aggressive privatization programmes
l Andhra Pradesh, Karnataka, Punjab and Rajasthan
22
Boost investment in the economy (cont.)
l Attracting foreign capital
l Liberalizing FII investments
l Upto 49% ownership allowed
l Encourage Foreign Direct Investment
l Opening up new sectors for foreign participation
l Transparent and speedier clearances
l Raising private sector savings
l Increase household savings further
l Pension reforms - expansion of scope of private
pension funds
l Stress on private corporate sector saving
l Increase operational efficiency
23
Boost investment in the economy (cont.)
l Raising public savings
l Fiscal correction at Centre and State levels
l Introduction of Fiscal Responsibility and Budget
Management Bill in Parliament
l Eliminate revenue deficit over the medium term
l Appointment of Expenditure Reforms Commission
l Ensure better expenditure control
l Revenue mobilization
l Efforts underway to broadbase tax collection
l Rationalization of tax structure to provide greater
buoyancy without increase in rates
l Rationalization of subsidies and user charges have
been identified as key areas
l Petroleum and fertilizer sectors
24
Economic growth - Key focus areas
Boost investment in
the economy
Increase productivity of
Focus on key sectors
investment
25
Increase productivity of investment
l Encourage speedy proliferation of Information Technology
l Increase efficiency along the value chain
l Further increase efficiency of the financial system
l Improve systems for expediting debt recovery
l Foreclosure law
l Infrastructure development
l Framework in place for attracting investment in
key sectors
l Telecom, roads, railways, power and water
26
Economic growth - Key focus areas
Boost investment in
the economy
Increase productivity of
Focus on key sectors
investment
27
Focus on key sectors
l Increase contribution of ‘services sector’
l Currently contributes 54% of GDP
l India has a strong edge in knowledge based
services
l Developed infrastructure of technical & managerial
education
While India has already attained great success in the IT
industry, there are several sectors such as financial
services and pharmaceuticals with high growth potential
in which the same can be replicated
28
Retail financial services - Size
Retail loan disbursements
500 450.00
CAGR
CAGR32%
32%
400 350.00
(Rs. in billion)
220.00
300 260.00
180.00
200 130.00
100 230.00
170.00
130.00
0
2000 2001 2002
ICICI Bank estimates Mortgages Other retail loans
Despite the fast growth, the Indian retail market continues
to be under-penetrated in comparison to its peers
29
Consumer loans outstanding
Retail financial services - Benchmarking
Consumer loans outstanding /
800 75% 80%
700 70%
(USD in billion)
600 54% 60%
53%
500 50%
GDP
(%)
400 34% 40%
300 30%
200 17% 20%
100 2% 10%
0 0%
India Thailand Malaysia Taiwan Korea USA
Total consumer loans outstanding
Consumer loans outstanding / GDP (%)
Source: Salomon Smith Barney
Similarly low penetration levels exist in the insurance
sector
30
Insurance sector - Potential
l Low market penetration
l General insurance premium is 0.6% of GDP
l 2.4% for Japan and 3.1% for South Korea (Source: Swiss
Re)
l Life insurance premium is 1.8% of GDP
l 9.0% for Japan and 9.6% for South Korea (Source:Swiss
Re)
l Increased public and consumer awareness, leading to
increased demand for insurance products
l Swiss Re projects one of the highest real
growth rate of premiums in India between
2001-05
l General insurance at 7.5% p.a.
Like the financial
l Life insuranceservices sector,
the pharmaceutical
at 14.0% p.a.
industry also offers immense growth potential
31
Pharmaceutical sector
l India is already a recognized strong player in the
pharma market
l Among the top five bulk drug manufacturers in the
world
l Among top twenty pharmaceutical exporters in the
world
l Product patent regime to be introduced shortly
l Increase in R&D expenditure and improved margins
expected
l India enjoys natural advantage with low cost of
production and high intellectual capital base
… resulting in the emergence of some key sub-sectors,
where India would have a competitive advantage
32
Emergence of new pharmaceutical
markets
l Contract manufacturing
l Multinational players may outsource manufacturing
activities on account of low cost of materials in India
l Contract research
l Increasing importance of contract research due to
increasing pressure on margins
l Presently only 15-20% of research work is outsourced
l Large untapped potential
l Generic drug manufacturing
l Bulk of generic drugs used in western countries like USA
is imported
There are many other industries whose immense growth
opportunities can be harnessed
33
Agenda
Indian economy today
Strong economic fundamentals
Going forward
The ICICI experience
In Summary
34
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35
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Retail Financial Services Corporate Financial Services
Car Loans Project Finance
Mortgages Working capital
Credit Cards Commercial Bank
Personal loans Investment Bank
Deposits Venture Capital
Life Insurance Genl. Insurance
Mutual funds IT Services
36
Towards leadership in retail finance…
Internet Banking 1200 ATMs
1.5 mn customers Call Centers 550 Outlets India’s largest network
Customized cross-selling
by leveraging relationships, brand and
technology
Fixed deposits Bonds Life insurance Health insurance
Auto loans Consumer loans Mortgages Credit/debit cards
37
Corporate banking and structured finance
l Leveragingcapital base and technology to increase
market share in transaction banking and fee income
l Expanding into new product and client segments
l Leveraging structuring and syndication skills for
Strategy
portfolio management
l Strongfocus on efficient capital utilisation and risk-
adjusted returns
38
Focus on good governance
l Pioneer in adoption of best practices in corporate
governance in India
l ICICI Bank’s corporate governance model
l Board as the nerve centre of corporate governance
ICICI Bank
l Broad-based board with majority of the directors
being non-executive
l Non-executive directors constitute a majority of all
key Board Committees
lAudit and Remuneration committees comprise
only non-executive directors
39
Agenda
Indian economy today
Strong economic fundamentals
Going forward
The ICICI experience
In Summary
40
In summary - The economy
l Re-oriented from a statist, centrally directed and
highly controlled economy to a ‘market-oriented’
economy
l Characterized by certain inherent strengths
l Large domestic market
l Rich pool of human intellectual capital
l Mature financial markets
l Sound economic fundamentals facilitating
sustainable growth
… a vibrant and dynamic economy offering vast
opportunities for rapid growth in various sectors
41
In summary - Opportunities
l Indian has a strong edge in knowledge based and
service industries
l Success of IT industry can be replicated in
numerous other sectors, having large untapped
potential
l Retail financial services
l Insurance
l Pharmaceuticals
42
Conclusion
Sustained reforms combined with patience and
transparency would enable India to unlock its growth
potential and pave the road towards becoming a
global superpower
43
Thank You
44
