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Growth set to slow down; FY10 GDP growth forecast at 6.0%

We expect a GDP growth rate of 6.0% during FY10E. Our FY09 growth forecasthas also been revised down to 7.4% from 7.8% earlier. At 6%, the FY10 GDP

growth will be the lowest since FY03.

FY09E FY10E

Real GDP 7.4 6.0

Agriculture+ 3.5 3.0

Industry* 6.0 3.8

Services 9.2 7.9

Source: Edelweiss research

'+: including allied activities like forestry and fishing.

'*: including construction.

Our projection of growth slowdown is against the backdrop of a rapid deteriorationof the global economic scenario. Several advanced economies are almost certain

to face recession in CY09. Business and consumer confidence indices are at multi-

year lows, indicating no possibility of a quick turnaround in either consumer

spending or industrial activity. Weakening demand is also depressing prices of

several commodities.

In India, investment activities, particularly corporate capex, have taken abackseat in recent quarters and are unlikely to improve, at least for the bulk of

FY10. Discretionary consumption demand is likely to stay muted as well. Non-

discretionary consumer demand, however, is likely to be largely unaffected and

will provide GDP some resilience.

Slowdow n across sectors

We expect a modest 5.4% growth in manufacturing in FY09E and a further fall to~3% in FY10E. Overall index of industrial production (IIP) is estimated to grow at

~5.1% and ~3.3% during FY09 and FY10, respectively.

Our projection is factoring in further intensification of slowdown in constructionactivities with base case expectations of 8.5% and 5.0% for FY09E and FY10E,

respectively. This is a sharp slowdown for the construction sector from the

average rate of ~10% over the past 10 years. Despite fears of a sharp drop in

corporate capex and weak demand for housing, we believe risks of further

downside to these projections are limited as a sizeable part of construction

activities are driven by the government (e.g., roads, rail roads, bridges, tunnels,

pipelines, ports, runways, hydro-electric and power projects, etc).

As regards the services sector, we believe the growth rate will dip from thecurrent double-digits to ~9.2% in FY09E and further to ~7.9% in FY10E. Amongst

larger components of services, banking, real estate, and business services is

likely to slowdown markedly from the current 12% plus level to ~9% in FY09E

and further to ~6.5% in FY10E. Our estimates implicitly assume slowdown in

trade, transportation, hotels and restaurants, among others, to the levels of the

most recent low growth phase of FY1999-03. Communication (weight ~5% in

overall GDP), however, is likely to stay strong. The social and community services

segment (~14% of GDP) is likely to hold steady as well, as it is driven largely by

government activities.

Siddhartha Sanyal

+91-22-4040 7505

siddhartha.sanyal@edelcap.com

India Equity Research | Economy

GDP

Slow dow n real i t i es November 10, 2008

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GDP

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Agriculture remains a potential source of uncertainty. In FY03, the year with the worsteconomic activities in the recent past, overall GDP growth dipped to 3.8%. During that

year, growth in services and industry was relatively resilient at 7.5% and 7.1%,

respectively. However, the big shock came in the form of a sharp decline in agriculture (-

7.2%). We have implicitly assumed trend growth rate of ~3% for agriculture in FY10.

However, an assumption of zero growth in GDP instead of ~3% can bring down the

overall GDP growth to ~5.5%.

Policy response to focus on supporting growth

Amidst slowing growth, softening inflation, and scarcity of lendable resources, we expectcontinued monetary accommodation by the Reserve Bank of India (RBI). We expect:

1. The cash reserve ratio (CRR) to be reduced to ~3% by H1FY10E from the current5.5%.

2. The repo and reverse repo rates will be brought down to 6% and 5%, respectively.3. The scarcity of capital for commercial credit is likely to induce reduction of the

statutory liquidity ratio (SLR) by 2-3 percentage points.

We believe the government is set to overshoot its market borrowing target by at leastINR 400bn in the current fiscal. During FY10, the government is likely to step up

expenditure further to combat growth slowdown. Market borrowing requirements arelikely to stay high.

RBI will accommodate the governments market borrowing by way of unwinding of bondsunder the Market Stabilisation Scheme (MSS). Total outstanding bonds under MSS are

~INR 1,650 bn as at October 2008 end. Nevertheless, the reduced SLR norm will be an

additional impediment for the governments borrowing programme.

The large government borrowing will require additional subscription from the bankingsystem. The enhanced liquidity requirement will largely be provided by the RBI through

open market operations (OMO).

In the extreme situation, RBI may start financing deficits of the government, temporarilyviolating the Fiscal Deficit and Budgetary Management (FRBM) Act.

At this moment, amidst heightened economic uncertainty across the globe, outlook forGDP growth in FY11 is relatively less clear. However, with the likelihood of resumption of

stability in financial markets and continued monetary and fiscal stimulus across the globe

including India, FY11 holds promise of a turnaround in overall economic performance.

Sectoral share in real GDP Real GDP grow th rate

0

20

40

60

80

100

1951

1956

1960

1965

1969

1974

1978

1983

1987

1992

1996

2001

2005

2010

(%)

Services Industry Agriculture

Source: CSO, Edelweiss research

(5.0)

(2.0)

1.0

4.0

7.0

10.0

1951

1956

1960

1965

1969

1974

1978

1983

1987

1992

1996

2001

2005

2010

(%)

Real GDP GDP forecasts

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GDP

Edelweiss Securities Limited

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Naresh Kothari Co-Head Institutional Equities naresh.kothari@edelcap.com +91 22 2286 4246

Vikas Khemani Co-Head Institutional Equities vikas.khemani@edelcap.com +91 22 2286 4206

Shriram Iyer Head Research shriram.iyer@edelcap.com +91 22 2286 4256

Recent Research

Rating Interpretation

Buy appreciate more than 20% over a 12-month period

Accumulate appreciate up to 20% over a 12-month period

Reduce depreciate up to 10% over a 12-month period

Sell depreciate more than 10% over a 12-month period

06-Nov-08 Inflation Stays flat

04-Nov-08 Economy NovemberReleaseCalendar

04-Nov-08 Indicator Trade deficit softens on lower importsRelease

04-Nov-08 Vistas Inflation: From dizzying heights toground zero

Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe

Rating Distribution* 94 59 14 8 187

* 10 stocks under review / 1 rating withheld

Market Cap (INR) 75 65 47

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> 50bn Between 10bn and 50 bn < 10bn

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Rating Expected to

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