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The Indian Economy and The Financial Sector Opportunity

The Indian Economy and The Financial Sector Opportunity. July 12, 2005. Agenda. Current Scenario Drivers of Growth Challenges Summary. India : Overview. Country. Country. Population 1,055m GDP (03-04) $ 579 Bn. 3 year CAGR of GDP 6.5% Inflation 5% Savings rate (03-04) 25%

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The Indian Economy and The Financial Sector Opportunity

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  1. The Indian Economy and The Financial Sector Opportunity July 12, 2005

  2. Agenda Current Scenario Drivers of Growth Challenges Summary

  3. India : Overview Country Country Population 1,055m GDP (03-04) $ 579 Bn 3 year CAGR of GDP 6.5% Inflation 5% Savings rate (03-04) 25% Insurance penetration* 2.3% MF Penetration 0.5% Life insurance market Characteristics * Insurance Premiums as % of GDP ** April 2003 – March 2004

  4. Size and Distribution of Savings Share of Financial Savings HH Savings (Rs Mn) Gross Physical Savings 5 Year 20.2% Financial Savings 5 Year 11.6% Mutual Fund Life Insurance Government Small Savings PF & Govt Pension Currency & Deposit Sources: RBI

  5. Opportunities in life insurance

  6. Opportunities in non-life insurance

  7. Retail credit opportunity… Net retail NPA levels are low at about 1.6% for the Indian banking sector as a whole and even lower for many of the leading players

  8. Opportunities in asset management

  9. Opportunities in Credit Card

  10. Agenda Current Scenario Drivers of Growth Challenges Summary

  11. Twin Growth Drivers • Demographic Transition • Economic Surge

  12. Lowering Dependency Ratio …

  13. …leading to growth in Household Financial Savings Reducing dependency could trigger a self-reinforcing savings growth dynamic in the next decade • Expected demographic trends suggest, in light of experience elsewhere, in the next decade India’s national savings could rise to 30% or more • Bulk of the savings contributed by Households • Decline in share of financial savings a negative – however expected to increase with development of financial system and higher awareness

  14. Rising Income levels Increases Target Market CAGR (%) Income 10.1% >140k 70k-140k 7.06% No. of HH (M) -2.31% <70k Income range based on 1998-1999 prices Source:Based on NCAER & Govt Of India estimates

  15. ... Insurance Is Poised For Growth Insurance premium as % GDP INDIA 100 1,000 10,000 100,000 GDP per capita in USD (log scale) • PPP adjusted GDP per capita higher by a factor of ~5-6; lower income categories not shown Source: Swiss Re; NCAER

  16. Twin Growth Drivers Demographic Transition Economic Surge

  17. Drivers of resurgence… • Services sector driving momentum • Established leadership in information technology • Successful forays across knowledge-based sectors • Renewed industrial growth • Operational efficiency and quality focus • Supported by financial restructuring • Progress in infrastructure development • Significant achievements in telecom and roads • Focus on power sector and urban rejuvenation

  18. Services sector driving momentum • Leveraging rich pool of human capital • Quality educational institutions • Large English speaking population • Globally-positioned IT sector • Software exports of US$ 12.2 bn in FY2004 and US$ 7.1 bn in H1-2005 • International services hub • Commenced with IT-enabled services : voice & data • Expanded to all knowledge sectors: pharmaceuticals, biotechnology, engineering design • Growth in financial services, travel & hospitality

  19. Impact of the resurgence Sector Sectoral share of GDP(%) Growth FY2004(%) Services 56.2 9.1 Industry 21.7 6.6 Agriculture 22.1 9.6 GDP 8.5 One of the fastest growing economies in the world with 7.0% growth rate in H1-2005 Source: NAS

  20. Renewed industrial growth • After a prolonged period of restructuring and repositioning growing competitiveness • Increasing deployment of technology • Deleveraging and organic capital generation • Constantly improving quality standards • Emergence of Indian multinationals • Setting up production capacities overseas • Setting up international distribution • Consolidating supply chain • India’s emergence as a global manufacturing hub • Second-most favoured destination for FDI in manufacturing

  21. Progress in infrastructure development • Construction of Golden Quadrilateral and North-South, East-West corridors • 13,000 km long - world’s largest single highway project • Boosting demand for steel, cement, commercial vehicles Roads • Cellular subscriber base of 49 million, growing at over 150% • Positive impact on efficiency of firms & services exports Telecom …missteps in power and urban infrastructure being addressed

  22. India has just started on the journey

  23. Agenda Current Scenario Drivers of Growth Challenges Summary

  24. Challenges of Intermediation in India • Size of the country and dispersed affluent population • Lack of Data – specially the area of Health • Attracting the Talent Pool • Evolving Regulatory Environment

  25. Size & Dispersion of Population • Area : 2973190 sq. Kms. • More than 70% of population in rural areas • More than a third of Mass affluent & rich households in rural areas • 5161 towns & cities comprise urban India

  26. Challenges from lack of Data • No single customer identification number like social security number • Single Mortality table used • No cuts available by geography or customer segment • Very scarce data for annuitants • Health records not available • Health incidence data or morbidity tables not developed • No consolidated medical individual history available • No standard definition of conditions & surgeries

  27. Attracting the Talent Pool • Increasing attrition levels • Poaching within & across industries • Attrition at frontline sales level around 20% • Payhikes • Salary increases grossly out pace inflation • Projected increases to continue at a minimum 10-12% • Premium for “critical skills” with a sudden advent of new industries e.g. Insurance & ITES

  28. Evolving Regulatory Environment • Multiple Regulators • Boundaries in RFS becoming fuzzier • Pension reforms on the anvil • Tax rules in flux • Creates distortions in incentives to invest in various financial instruments • Regulations still evolving as regulators gain maturity

  29. Agenda Current Scenario Drivers of Growth Challenges Summary

  30. Summary • Strong growth prospects for the Indian Economy • Demographic transition should lead to a positive savings growth spiral – fuelling growth of financial savings • Changing structure of savings could lead to increase in allocation to Insurance & Pensions • Need to manage unique intermediation challenges of operating in India

  31. Thank you

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