India-ASEAN

Dynamic Asia

Anirudha Dutta
Senior Research Analyst

November 2007

India: what makes it tick?

A sovereign, socialist, secular democratic republic
20,000

A modern stock market

Strong institutional framework including western legal traditions

18,000

16,000

14,000

12,000

10,000

8,000

Strong industrial development and the green revolution

Higher education infrastructure Use of the English language

6,000

4,000

2,000

0 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07

Companies create high value on capital

RoE is amongst the highest in Asia

Entrepreneurship, private sector and corporate governance Large, diversified and well regulated capital markets

28 26 24 22 20 18 16 14 12

(%)

30 2008 RoE (%)

27.0

Return on equity Value created

25 20 15 10.6 14.7 15.1 15.2 15.5 17.3 18.3 19.4 20.7

Current cost of equity

10 5

10 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 08C L 09C L

Cost of Equity

0 HK Sing Korea Phil Malay Thai C hina Taiwan India Indo

2007 CLSA Asia-Pacific Markets (CLSA).

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Economic reforms: the catalysts

1980s: Beginning of reforms
Steps taken to deregulate industry Tax sops, lower interest rate loans to promote exports Reduction in quantitative restrictions on imports Decentralization of administration to the village level Reliance group started emerging as a poster boy of private sector with big growth plans GDP Cagr 4.6%

1990s: Liberalization and capital market reforms

Balance of payment crisis emerged in 1991 India embarked on first phase of reforms
Removal of License Raj Rationalization of tax rates, imports duties Opening up of capital markets Introduction of FDI friendly policies

21st century: A new growth trajectory

Investment friendly policies and reform oriented governments Emphasis on infrastructure development India moved ahead with its nuclear program Focus on the rural and agricultural economy Indian companies are acquiring global scale via organic and inorganic routes GDP Cagr 6.8%

IT received global attention because of Y2K Establishment of SEBI as capital market regulator GDP Cagr 5.8%

2007 CLSA Asia-Pacific Markets (CLSA).

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Growth drivers in place

India is young with median age of 25 years
Distribution of Indian population by age 81+ 71-80 61-70 51-60 41-50 31-40 21-30 11-20 0-10 150 100 50 0 50 100 (m) 150 Average monthly wages for unskilled labourer Male Female Poland Hungary Brazil Malaysia Argentina C hina Thailand Philippines India Indonesia Vietnam 0 100 643 633 625 545 507 343 298 282 256 227 157 200 300 400 500

India has a vast pool of cheap labour

(US$ pm) 600 700

Economic growth to drive employment growth

80m new jobs over FY07-12 IT/ ITES 2% Tourism 25%

US$330bn of investment in manufacturing sector

16,000 14,000 12,000 10,000 8,000 Outstanding manufacturing investments (Rsbn)

State transport 3% Oi & gas 3% Automotive 3% Horticulture 3% Gems & Jewellery 4%

Others 15%

Textiles 15%

6,000 4,000 2,000

Healthcare 8%

Tobacco 8%

Retail 11%

0 95 96 97 98 99 00 01 02 03 04 05 06 07

2007 CLSA Asia-Pacific Markets (CLSA).

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Challenges ahead
High levels of bureaucracy; Multiple clearances required to start business - India ranked 120th after China (83) on the Ease of Doing Business Index Poor social and physical infrastructure; Adequate infrastructure could have raised Indias GDP growth rate by 1-2% Coalition governments limit ability to push reforms; Poor governance The other side of demographic dividend; CLSAs landmark surveys provide evidence of inclusive growth The growth of Chindia is also likely alter the socioeconomic and political balance in the world
2007 CLSA Asia-Pacific Markets (CLSA).
IMPORTANT: The content of this report is subject to CLSA's Legal and Regulatory Notices as set out at www.clsa.com/disclaimer.html, a hard copy of which may be obtained on request from CLSA Publications or CLSA Compliance Group, 18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone (852) 2600 8888.

Big step-up in infrastructure spend over FY08-12

Rsbn Expected investments in 10th plan (2003-07) 1,224 125 779 1,800 3,928 Expected investments in 11th plan (2008-12) 3,624 560 2,296 5,437 11,917 % growth

Roads Ports Railways Power Total

196 348 195 202 203

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India and ASEAN- a discovery

Indias interaction with ASEAN in the cold war era- a tale of missed opportunities; India declined to get associated with ASEAN in the 1960s when full membership was offered The focus on developing strong relationships with the ASEAN came in 1992, along with liberalisation of Indian economy The government introduced the Look-East policy in 1992 to lay thrust on developing ties with ASEAN, China, Japan and Korea Chinas emphasis and success in building relationships with ASEAN was a likely determinant of the shift in Indias foreign policy India has allowed unilateral air connectivity between ASEAN and Indian metros, has entered into FTA with Thailand and CECA with Singapore India's trade with ASEAN rose from US$10bn during FY03 to over US$30bn during FY07 ASEAN is a mini-India/ China
2007 CLSA Asia-Pacific Markets (CLSA). Source: IBEF, CLSA Asia-Pacific Markets
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Macro economic data on China, India and ASEAN

China Population (m) Total land area (m km ) GDP (US$bn) GDP- PPP (US$bn) GDP per capita (US$) GDP per capita (PPP) (US$) Median age (years) Exports (% GDP) Imports (% GDP) Value of trade (% GDP)
2

India 1,129 3.3 1,027 4,164 910 3,688 24.8 12.0 17.9 29.9

ASEAN 568 4.5 1,073 2,957 1,890 5,210 26.6 70.0 61.0 131.0

1,321 9.6 2,527 10,210 1,913 7,729 33.2 38.4 29.7 68.1

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ASEAN-India: opportunities and threats

Opportunities
India is a big potential market for ASEAN for products

Threats
India offers a large pool of cheap labour and competes with some ASEAN countries in attracting FDI India also shares western values, has a larger English speaking population and stable polity Indian companies likely to start competing with ASEAN companies in their own markets

Agricultural and forest produce

Processed food products Furniture Auto and electrical components

ASEAN can also export services

Banking and finance (DBS, Temasek) Telecom (Singtel) Aviation (many intl airlines from ASEAN fly to Indian metros)

Indian companies likely to compete with ASEAN companies in common third country markets; Sectors like engineering and electrical components and textiles at risk

India has a vast pool of cheap labour

Average monthly wages for unskilled labourer Poland Hungary Brazil Malaysia Argentina C hina Thailand Philippines India Indonesia Vietnam 0 100 643 633 625 545 507 343 298 282 256 227 157 200 300 400 500

Tourism (Malaysian, Singapore and Thailand tourism boards have focussed on India)
Indian companies have relevant products to target ASEAN markets ASEAN can attract FDI from India in electrical components, auto/ auto components, banking and financials services and mineral and oil Indian services companies in ASEAN. Eg: ITES
2007 CLSA Asia-Pacific Markets (CLSA).

(US$ pm) 600 700

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Appendices

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ASEAN- not one simple market

While some countries are large by population
Population Indonesia Philippines Vietnam Thailand Myanmar Malaysia C ambodia Lao PDR Singapore Brunei 0 0 50 100 150 200 6 4 (m) 250 14 27 65 57 87 84 222 Brunei Singapore Malaysia Thailand ASEAN Indonesia Philippines Vietnam Lao PDR C ambodia Myanmar 0

Others generate high GDP per capita

GDP per capita 30,213 29,499 5,880 3,168 1,890 1,640 1,352 724 574 512 209 1,000 2,000 3,000 4,000 5,000

(US$) 6,000 7,000

Countries are at different levels of urbanisation

Rate of urbanization- 2005 Singapore Malaysia Philippines Indonesia ASEAN Thailand Myanmar Vietnam C ombodia Laos 10 20 22 22 30 40 50 60 70 80 (%) 90 100 27 32 31 44 48 65 63 100

Demographics of each country are different

Median age Singapore Thailand Myanmar Brunei Indonesia ASEAN Vietnam Malaysia Philippines C ambodia Lao PDR 15 24.4 22.7 21.3 19.0 20 25 30 35 (years) 40 37.8 32.4 27.4 27.2 26.9 26.6 26.4

2007 CLSA Asia-Pacific Markets (CLSA).

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What could India and ASEAN trade?

ASEANs export and import of key commodities compared with Indian imports and exports ASEANs key exports and Indias imports
Product Electric equips and parts Boilers, machinery and equipments Mineral fuels and products C otton, textile and apparels Plastics and artciles thereof Organic chemicals Rubber and rubber articles Vehicles, parts and accessories Optical, photographic; parts and access. Precious and semi-precious stones ASEAN exports Indian imports (US$m) 183,446 106,477 88,246 35,432 18,639 18,542 15,017 14,917 12,311 8,813 (US$m) 14,569 18,614 61,859 2,885 2,958 6,040 1,116 1,360 3,112 22,597 Electric equips and parts Boilers, machinery and equipments Mineral fuels and products Plastics and artciles thereof Organic chemicals Rubber and rubber articles Vehicles, parts and accessories Optical, photographic; parts and access. C otton, textile and apparels Precious and semi-precious stones

ASEANs key imports and Indias exports

Product ASEAN imports Indian exports (US$m) 160,503 106,477 88,246 18,639 18,542 15,017 14,917 12,311 14,249 8,813 (US$m) 4,108 18,614 61,859 2,958 6,040 1,116 1,360 3,112 20,692 22,597

Indias export and import of key commodities compared with ASEANs imports and exports Indias key exports and ASEANs imports
Product C otton, textile and apparels Precious and semi-precious stones Organic chemicals Iron and steel Textiles and apparels Boilers, machinery and equipments Ores, slag and ash Electric equips and parts C otton Vehicles, parts and accessories Indian exports (US$m) 20,692 16,085 5,735 5,599 5,284 5,091 4,875 4,108 3,924 3,766 ASEAN imports (US$m) 14,249 10,388 14,267 20,982 1,262 87,931 1,458 160,503 2,795 16,825

Indias key imports and ASEANs exports

Product Mineral fuels and products Precious and semi-precious stones Boilers, machinery and equipments Electric equips and parts Iron and steel Organic chemicals Ores, slag and ash Aircraft, spacecraft and parts Optical, photographic; parts and access. Plastics and artciles thereof Indian imports (US$m) 61,859 22,597 18,614 14,569 6,131 6,040 5,740 5,264 3,112 2,958 ASEAN exports (US$m) 88,250 8,813 106,478 183,446 4,818 18,542 3,933 3,408 12,311 18,640

2007 CLSA Asia-Pacific Markets (CLSA). Source: ASEAN, DGFT, India

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India in ASEAN
Tata Power owns 30% stake in two Indonesian mines of Bumi Resources Reliance Industries acquired Hualon Corp, 500 kta polyester manufacturer, in Malaysia for US$250m Among the IT companies, Infosys has 400, Satyam 500 and HCL Tech 50 employees based in ASEAN ICICI Bank, SBI, HDFC Bank and Axis Bank have offices and/ or branches in Singapore Tata Steel acquired NatSteel and Millennium Steel that have manufacturing facilities in ASEAN Tata Motors owns Tata Daewoo CV Company (S. Korea) and is setting-up assembly facility for pick-up trucks in Thailand Bajaj Auto and TVS Motors have assembly units for motor cycles in Indonesia Punj Lloyd acquired stake in Sembcorp

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