WHY INDIA? September 2004

Quantum Advisors 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.

September 2004 Quantum Advisors 3 A Sustainable Growth Story The rate of growth of GDP has increased from the Hindu rate of < 3% p.a. ( ) to a more respectable and sustainable 6% p.a. The growth rate of 8.2% in FY2004 is the highest in a decade.

September 2004 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

September 2004 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.

September 2004 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

September 2004 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

September 2004 Quantum Advisors 8 Increased Demand For Cement 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 CAGR 6.5%

September 2004 Quantum Advisors 9 Increased Demand For Steel Indias consumption of steel has increased although it is less than 4% of global demand because manufactured exports are not significant. This will change. CAGR 8%

September 2004 Quantum Advisors 10 Rising Exports Exports are increasing as India integrates with the rest of the world - in line with economic policy initiatives put in place since CAGR 9%

September 2004 Quantum Advisors 11 The Software Story Led by exports of software products: from 2% of exports in FY1995 software now accounts for 20% of Indias total exports. And this was not mandated (or designed) by government: an evolution of market-led demand and supply CAGR 35%

September 2004 Quantum Advisors 12 Increasing Imports Indias imports are also increasing at 10% annually as Indian industry modernizes (import of capital machinery) and consumers consume CAGR 10%

September 2004 Quantum Advisors 13 Oil Imports Oil continues to be the single-largest imported product: oils share of total imports has grown from 20% in FY1995 to 26% in FY2004 and is likely to grow further.

September 2004 Quantum Advisors 14 Foreign Direct Investments (FDI) and Foreign Portfolio Investments (FPI) on the upswing 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 CAGR 13%

September 2004 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 Average daily volume Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) for the year 2004 is US$ 2 billion/day.

September 2004 Quantum Advisors 16 Healthy Foreign Exchange Reserves Indias 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

September 2004 Quantum Advisors 17 But this higher FX has led to an increase in Money Supply… A continuous growth in the money supply and… CAGR 14.2%

September 2004 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)

September 2004 Quantum Advisors 19 Could fuel Inflationary pressures… Could result in the end of the recent benign inflation period

September 2004 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