1. AVALON Consulting Impact of QE pruning on Indian corporates and what we can do for India Raj Nair, Jan 7, 2014 2014 © Avalon Consulting. All Rights Reserved

2. AVALON Consulting Are there any signs of the tide turning for the Indian economy?  In recent months, there have been some improvements.  The gross domestic product (GDP) numbers for the July-September quarter suggest that the bottom in the economy is behind us.  The September quarter company earnings numbers have been slightly better than expected.  The marked improvement in the current account deficit has stabilized the rupee  lowered the risk from imported inflation. The good monsoons have led to a bountiful harvest and the promise of lower food inflation in future.  The recovery in the West has led to a revival of exports. The results of the state elections have increased the chances of a business-friendly government in New Delhi YES according to Mint 1 Quoted verbatim from Mint, dated December 31, 2013 Then why worry about 2014?

3. AVALON Consulting What is the most worrying thing for 2014? Pruning of QE. But do we fully understand the implications? 2

4. AVALON Consulting What is the most worrying thing for 2014? Story so far: QE =Quantitative Easing = Liquidity pumped into the economy (crudely but not quite that) QE1 Bonds purchased by FED... banks steadied.. Interest rates near Zero… desire for higher returns…shares rise…wealth effect… money rushes to the US …dollar rises. QE2 and QE 3.. MBS and Treasury bonds purchased by FED…money flows out of the US..EM asset prices rise QE by Japan, besides a bit in the EU. The world has been awash with liquidity Now Pruning of QE from $85 Bn to zero in 2014 The problem with pruning: Countries like India which have depended on hot money flows to finance CAD may find it difficult to bridge the gap. The high Fiscal Deficit would suggest that the Country is living beyond its means. This leads to high risk perception which will weaken the currency. That will hurt FDI Borrowing rates for raising foreign currency loans can rise due to higher risk perception Can that happen? We saw last how the Rupee tanked when the FED merely signalled in May that it will consider doing away with QE. Past, present & Future 3

5. AVALON Consulting What are the implications for business? Can hurt business Rupee can tank and imports become expensive India can get downgraded and borrowing rates for forex will rise One man's meat is another man's poison Many businesses will suddenly become competitive Foreign investors will find it attractive to manufacture in India once the Rupee stabilizes as a new low If the government sleeps at the wheel……….. 4

6. AVALON Consulting Any solution possible? Any hope?  Luckily Japan to increase QE and FDI in India  Luckily FED to keep interest rate near Zero till 2015  Luckily they cannot sell their assets to improve their B/S till 2015  We are sitting on reserves of 295 Bn Will India still shoot itself in the foot? Possible but..  We can reduce CAD to near Zero in 2 years  We can keep Fisc Deficit below 4%  The new Government can signal to the world that it will focus on development, invest in infrastructure and be financially prudent  Act very seriously on favorable FDI policies, remove bureaucratic tangles that delay investments, stop mercenary misadventures by the tax dept.  Focus on development instead of solely on distributing goodies Any Hope in 2014?  Stabilize the economy  Could prevent high volatility or steep decline in the Rupee  Could result in serious Japanese FDI and from multi Nationals who are moving from ‘China vs. India’ to ‘China and India’ thinking  Investment cycle by the Private sector can start Outcome 5 One more thing can be done…and by us

7. AVALON Consulting What can you, I and the Chamber do? The world is a dangerous place not because of people who do evil, but because of good people who look on and do nothing about it. Albert Einstein. 6

8. AVALON Consulting What can you, I and the Chamber do? Do you know of the Korean gold story during the collapse of 1997? Can we do our bit in 2014 for the glory of our country and the future of our businesses and our children? Here is what we can do IMC: Project Gold Mohur. A lot! 7

9. AVALON Consulting What can you, I and the Chamber do? Reduce demand for gold from 950 T per annum to 500 TPA Create a powerful video appealing to all Indians to reduce their demand for gold for 5 years (patriotism, show how much they lost in gold value in the past year, dollar strengthening may make gold a poor investment, alternative savings products…or whatever) Like Lal Bahadur Shastri motivate us to skip one meal a week when we ran out of food grains, can inspiring leaders do that to reduce gold demand. Make artificial jewelry high fashion by roping in top designers. Show how artificial jewelry looks good and is safe. Replace imports by supplying from domestic inventory Replace gold in marriages with some other assets. Give the Government and the RBI, a white paper which shows how to attract gold from inventory so that we never need to import. One time: 2000T Perpetually every year, just enough to meet annual demand without having to import.. Twin Objectives of Project Gold Mohur 8