20130712 indiamkt

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CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION®

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09 July 2013

Asia Pacific/India

Equity Research

Investment Strategy

India Market Strategy STRATEGY

India's better half: The informal economy

Figure 1: India’s economy—Like no other

Source: National Statistics Commission, Credit Suisse estimates

■ Half of India’s GDP and 90% of employment are informal. This makes GDP

calculation as much an exercise in estimation as reporting. The high share of

informal economy (among the highest globally) is a structural problem, as it

drives low tax revenues and deters individual risk-taking, given the lack of a

safety net. The pace of formalisation is likely to remain slow: India had 42 mn

enterprises in 2005, and the average employee count at these was 2.4.

■ GDP likely underestimated by ~15%. But we also believe the recent rapid

productivity gains (detailed in The silent transformation report) are mostly in

this informal economy, and do not fully appear in GDP growth data yet.

These are captured through surveys and only incorporated into GDP series

changes that happen every 9-10 years. When a new series starts next year

(effective FY12), we estimate GDP can rise by almost 15%, implying 2005-

13 CAGR was 1.8% higher, at 9.8%. While this does not materially change

health ratios like CAD as a percentage of GDP, it does change the growth-

inflation commentary.

■ Strong consumption, GDP stability, NBFC share gains. Not surprisingly,

correlating economic trends with the listed companies’ commentary is often

misleading. Sales of all industrial + material companies, for example, add up

to only 25% of GFCF. Trends in the broader economy can thus be very

different from what the larger companies are seeing. From an investment

perspective, in non-consumer sectors, only NBFCs and cement directly benefit

from the informal economy. The CS index of beneficiaries is CSAPINDR.

Research Analysts

Neelkanth Mishra

91 22 6777 3716

[email protected]

Ravi Shankar

91 22 6777 3869

[email protected]

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09 July 2013

India Market Strategy 2

Focus charts Figure 2: Half of India's economy is informal Figure 3: Informal economy as % of non-farm employment

0% 10% 20% 30% 40% 50% 60%

Sub-Saharan Africa

North Africa

Asia

Latin America

Caribbean

Transition economies

India

Informal (excl. Agri) as % of non-Agri GDP Informal as % of GDP

31%33%

42%42%

50%51%

54%60%

62%68%

75%84%

0% 20% 40% 60% 80% 100%

TurkeySouth Africa

BrazilThailand

ArgentinaEgypt

MexicoColombiaSri LankaViet Nam

BoliviaIndia

% informal employment in non-farm sector

Source: J. Charmes (Delhi Group, 2006), Credit Suisse Source: ILO, Credit Suisse

Figure 4: Employees per enterprise had fallen until 2005 Figure 5: The split of 42 mn enterprises in 2005 by sector

2.40

2.50

2.60

2.70

2.80

2.90

3.00

0

10

20

30

40

50

1980 1990 1998 2005

Enterprises (mn) Employees per Enterprise (RHS)

Trade39%

Manufacturing20%

Animal Husbandry

14%

Community Services

13%

Restaurants4%

Business Services

3%

Others7%

Split of 42mn enterprises in 2005

Source: Economic Census (1998, 2005), Credit Suisse Source: Economic Census (1998, 2005), Credit Suisse

Figure 6: GDP revisions during past series transitions Figure 7: Potential revisions to past growth data

0.0%

0.2%

0.4%

0.6%

1980 to 1993 Series 1993 to 1999 Series 1999 to 2004 Series

Annualized revision to GDP at factor cost

0%

2%

4%

6%

8%

10%

12%

14%

2006 2007 2008 2009 2010 2011 2012 2013

Estimated GDP Growth Probable GDP Growth

Source: National Accounts Manual (1993, 1999, 2004), Credit Suisse Source: National Accounts Manual (1993, 1999, 2004), Credit Suisse

Figure 8: India has low variation of quarterly GDP growth Figure 9: Listed companies only a fraction of GFCF

1%

2%

3%

4%

5%

China India S. Africa Korea Brazil Mexico Russia

Std. dev (Since Jun-05) Std. dev (Since Jun-97)

Standard deviation of reported quarterly GDPs

Listed Industrials

13% Listed Materials

12%

Unlisted + Informal

75% Source: Bloomberg, CSO, Credit Suisse Source: CMIE, CSO, Credit Suisse

09 July 2013


India's better half: Informal economy A large informal economy

India’s informal GDP, i.e., economic activity by unincorporated enterprises, is half of total

GDP, among the highest ratios in the world and comparable to sub-Saharan Africa.

Further, 90% of the workforce is in the informal sector. Unlike in the developed economies

where informality is purely a deliberate choice to avoid taxation or regulations, in India it is

more structural: a reflection of the lack of development and limited government reach.

This drives low tax revenues and low risk-taking by individuals who lack labour protection

or access to a financial system. On the other hand, one could claim that the formal part of

India's economy is among the most heavily taxed in the world. It also makes GDP

calculation more of an exercise in estimation than reporting.

The pace of formalisation in India has been slow for most sectors. This is not surprising: in

2005 India had 42 mn enterprises—at least since 1980 enterprises have been growing

faster than employees, and the number of employees per enterprise had fallen to 2.4 by

2005. Therefore, while the number of company registrations is seeing a steady increase,

the share of the informal economy is likely to stay significant for a while.

Estimating informal GDP: Upside?

While the GDP of any country is only an estimate, this can be particularly misleading when

(1) the part being estimated is half of the total, like in India, and (2) when inflection points

in productivity make prevalent heuristics outdated, e.g., the changes we flag in ‘India: The

silent transformation.’ Most of the typical techniques to measure the informal economy like

electricity consumption or cash circulation just do not work in India.

The government therefore uses past surveys for estimation. Inaccuracies creep into these

estimates as the series gets old, because underlying trends change. However, to maintain

continuity, these surveys cannot be refreshed until a new GDP series is started. A new

series starts every 9-10 years, and a new one seems to be on its way in a year.

We note that the past three series changes have coincided with upward revisions to the

GDP, led mostly by services. The revision this time should be higher: the number of

workers in a sector and the Value Added Per Worker (VAPW) may both be revised up for

several services, helped by deeper penetration of appliances and phones.

Tips for investing in informal India

There are very few large listed non-consumption sectors that operate at the borders of the

informal economy. NBFCs and cement are two sectors where we believe demand growth

is likely to hold up even if the formal part of the economy continues to struggle.

A high share of informal GDP also confers significant stability to India’s GDP: the standard

deviation of reported quarterly GDP growth for India is remarkably low compared with

those of other comparable economies, and is only higher than China’s. That almost 36%

of India’s GDP is being estimated based on backward looking data is a possible reason.

But so are the more diverse factors of India’s GDP growth, not captured in the data points

captured from listed companies, but nevertheless as important. In general, the intuitive

habit of drawing macroeconomic conclusions from the corporate feedback (and vice versa)

is fraught with risk. Only a fraction of the formal sector is listed, after all. Even if one adds

sales of all industrials and materials companies in the BSE500, for example (i.e., including

double-counting), these add up to only 25% of India’s GFCF. Listed consumer companies’

sales are only 15% of consumption GDP.

An upward revision of the GDP in the new series by ~15% can help bring down ratios like

CAD as a percentage of GDP and fiscal deficit ratio, but it remains a challenge in the

medium term.

The share of informal

economy in India's GDP and

employment is the highest

globally. This is a problem:

drives lower taxes, and does

not provide social security to

other kids

The GDP of any country is

an estimate, but more so in

India

To estimate many parts of

GDP, past surveys are

used. These are corrected

only when new series start

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09 July 2013


Financial summary Figure 10: Focus list of stocks

Company Category Ticker Rating Market cap Daily trading Performance 1Yr fwd P/E

(US$ mn) (US$ mn) 1M 3M 12M (Consensus)

ITC Ltd Tobacco ITC.BO O 44,871 42.9 4% 18% 37% 31.1

HDFC Bank Financials HDBK.BO O 25,825 38.5 -2% 6% 13% 18.5

ACC Limited Cement ACC.BO O 3,861 6.1 4% 11% -3% 14.2

Shriram Transport Finance NBFC SRTR.BO O 2,520 13.5 -13% -1% 21% 9.6

Emami Ltd Staples EMAM.BO O 1,769 2.9 -5% 18% 47% 27.7

Dish TV India Media DSTV.BO O 1,026 3.3 -5% -15% -17% n.m.

Source: RAVE, I/B/E/S, the BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimates

Figure 11: Credit Suisse India model portfolio—Stay defensive

Sector MSCI weight CS weights CS stance

Financials 31.5 28.6 UW

Materials 6.4 4.7 UW

Industrials 4.6 0.6 UW

Telecom 2.2 3.3 OW

Utilities 4.0 4.5 OW

Health Care 6.3 7.0 OW

Consumer Staples 11.8 12.7 OW

Consumer Discretionary 6.5 7.4 OW

Energy 11.7 14.0 OW

Information Technology 15.0 17.5 OW

Source: RAVE, MSCI, Credit Suisse estimates

09 July 2013


A large informal economy Half of India's economy is informal

India has a large informal economy, with about half of its GDP estimated to be informal,

and 84% of non-agricultural workers work informally. Economic activity by unincorporated

enterprises is called informal, e.g., the economic value-add of the neighbourhood barber

or plumber, the domestic help, that of the numerous small stores that abound all over

India, transportation services by trucks that are largely driver-owned, etc.

As per the last available update (2005), both as a percentage of GDP (Figure 12) and as a

percentage of employment (Figure 13), the informal economy in India is much larger than in

most emerging markets. India's could in fact be the largest informal economy in the world.

Figure 12: Informal economy as % of non-farm GDP Figure 13: Informal jobs as % of non-farm employment

0% 10% 20% 30% 40% 50% 60%

Sub-Saharan Africa

North Africa

Asia

Latin America

Caribbean

Transition economies

India

Informal (excl. Agri) as % of non-Agri GDP Informal as % of GDP

31%

33%

42%

42%

50%

51%

54%

60%

62%

68%

75%

84%

0% 20% 40% 60% 80% 100%

Turkey

South Africa

Brazil

Thailand

Argentina

Egypt

Mexico

Colombia

Sri Lanka

Viet Nam

Bolivia

India

% informal employment in non-farm sector

Source: J. Charmes (Delhi Group, 2006), Credit Suisse Source: ILO, Credit Suisse

Every economy has informal activities, and the national accounts departments try to

estimate them. The size of the informal economy is affected by both1: (1) the extent of

participation (i.e., number of workers, number of informal transactions), and (2) the

intensity of participation (hours worked, value of transactions, etc.). The proportion of this

economy can vary from 0.8% in the US, to well over 50% in sub-Saharan Africa.

In the most developed economies the informality is not so much due to the lack of

development as a deliberate choice by some to avoid taxation and scrutiny. In countries like

India, however, it is mostly the lack of development and limited reach of the government.

The trouble(s) with informal economies

By definition, informal economic activity does not pay taxes, has limited access to formal

credit (our interactions with CSO suggest only 18% of credit to SMEs in India is formal), and

workers in these economies lack normal measures of labour protection. There is also limited

respect for intellectual property, and thus a disincentive for the formal sector to innovate.

Given that half of India's economy is informal, benchmarking its tax to GDP is misleading:

in fact, the formal side of the economy is likely being over-taxed (Figure 14). To increase

tax collection, therefore, the government must expand coverage significantly, and reach

out to the informal sector, instead of raising taxes on current taxpayers.

1 Dan Andrews, Aida Caldera Sanchez, Asa Johansson: Towards a Better Understanding of the Informal

Economy, OECD Economics Department, Working Papers No. 873

Half of India’s GDP and

84% of all non-agricultural

work is informal

Informal economy in India is

much larger than in most

EMs

India informal not by choice

(avoiding taxation/ scrutiny)

but due to structural reasons

Given half of the economy is

informal, the formal

economy is likely being

overtaxed

09 July 2013


Similarly, recently released employment survey results show that even in FY12 only 18%

of Indian workers had regular wages: the rest were either self-employed or casual workers

(Figure 15). Even those with regular wages are not all salaried: they may be working

without contracts. They thus operate without the normal protection given by labour laws,

and the absence of any social security also affects their risk-taking ability and productivity.

Figure 14: Tax to GDP of India's formal economy too high Figure 15: Small % of regular wage/salaried workers

0%

5%

10%

15%

20%

25%

30%

Japa

n

US

A

Indi

a

Chi

na

Indo

nesi

a

Bra

zil

Tur

key

Indi

a (F

orm

al)

S. A

fric

a

UK

50% informal economy for India, implies that the effective tax to GDP is closer to 21%

Self employed52%

Casual30%

Regular Wage/ Salaried

18%

Source: World Bank, Credit Suisse estimates Source: NSSO (2012 Employment Survey), Credit Suisse

Challenges to formalisation

To be sure, the economy has been progressively becoming less informal (Figure 16), but the

pace of the change has been slow. A large part of the broader formalisation seems to have

been driven by the switch away from agriculture: the percentage of informal GDP excluding

agriculture saw a much lower decline. While each sector has seen a drop in the share of

‘informal’ enterprises, other than in real estate and business services, transportation and

mining, the trend of formalisation had been insignificant at least till 2005 (Figure 17).

Figure 16: Percentage of informal GDP in India over time Figure 17: Percentage of informal GDP in India by sector

55%

42%

50%

40%

0%

10%

20%

30%

40%

50%

60%

Informal as % of GDP Non-Agri Informal as % of non-AgriGDP

2000 2005

0% 20% 40% 60% 80% 100%

Public Admin & Defence

Financial Services

Education

Mining

Manufacturing

Transport & Storage

Construction

Hotels & Restaurants

Real Est. & Services

Trade (Retail)

Agriculture

2000 2005

Source: National Statistical Commission, Credit Suisse Source: National Statistical Commission, Credit Suisse estimates

Looking at the share of the informal economy by sector, it is not surprising to find that

agriculture, trade (primarily retail: small stores), hotels and restaurants, construction and

transportation have half or more of the activity in the informal sector, i.e., conducted by

unincorporated enterprises. Public administration (almost completely government-driven),

financial services, education, mining and manufacturing are predominantly formal.

Broader formalization in the

economy has been driven

by the switch away from

agriculture

09 July 2013


Wading through the various Economic Censuses (five conducted till 2005), we note some

striking statistics: India had 42 mn non-agricultural enterprises in 2005, and while this

number has been rising steadily over the decades, the number of employees per

enterprise in fact has been coming down: 2.4 in 2005 (Figure 18). The number of

enterprises has been growing at a pace faster than the growth in the workforce (Figure 19).

Figure 18: Employees per enterprise falling Figure 19: Enterprises growth higher than for employees

2.00

2.10

2.20

2.30

2.40

2.50

2.60

2.70

2.80

2.90

3.00

0

5

10

15

20

25

30

35

40

45

1980 1990 1998 2005

Enterprises (mn) Employees per Enterprise (RHS)

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

1980-90 1990-00 2000-05

CAGR in Enterprises (%) Employees (%)


In fact, almost a fifth of these 42 mn enterprises do not even have premises to operate

from: likely pushcart vendors selling savouries/vegetables, itinerant barbers, etc. Looking

at the split of enterprises by type, it is not difficult to see why the per-enterprise employee

count is so low. Almost 40% of enterprises are in trade (retail, wholesale and repair of

vehicles; Figure 20), and these are typically one-person/family shows (Figure 21).

Figure 20: The split of 42 mn enterprises in 2005 by sector Figure 21: Per enterprise employees, sector-wise

Trade39%

Manufacturing20%

Animal Husbandry

14%

Community Services

13%

Restaurants4%

Business Services

3%

Others7%

1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5

Trade

Manufacturing

Animal Husbandry

Community Services

Restaurants

Business Services

Others

# of Employees per Enterprise (Sector-wise)

Source: Economic Census (1998, 2005), Credit Suisse estimates Source: Economic Census (1998, 2005), Credit Suisse estimates

At first glance, Figure 21 can be surprising to many. How can one have manufacturing

units with three people on average? On the other hand, shouldn't community services,

which include personal activities like haircutting or tailoring, be smaller? Intuitively, both

these are justified questions, and the answer lies in the details.

Once we split manufacturing into formal, informal organisations, and self-owned

enterprises (Figure 22), the low average is easier to understand. Similarly, public

administration (mostly government) and education (i.e., schools) raise the average for

community services (Figure 23).

India has ~42 mn non-

agricultural enterprises, with

an average of just 2.4

employees per enterprise

09 July 2013


Figure 22: Numerous small self-employed manufacturers Figure 23: Pub. adm. & education have more employees

1.52.5

20.0

0

5

10

15

20

Self-employed Informal organizations Formal

# employees per enterprise

# of enterprises (mn)

% share in employment

5.1

30%

2.6

26%

0.6

44%

0 2 4 6 8 10

Public admin.

Education

Health/ social work

Community/ personalactivity

# employees per enterprise

# of enterprises ('000s)

% share in employment

2.6

23%

0.8

13%

1.4

36% 0.6

28%


Recent increase in formalisation: Companies forming

The last available dataset in the analysis conducted by Kolli & Sinharay2 is only 2005,

leaving a big question mark on the trend thereafter. While the above analysis suggests

that formalisation is likely to be a slow process, the steady increase in the number of

registered companies in India (Figure 24) suggests this ratio should have gone up.

Figure 24: Number of registered companies in India Figure 25: Growth primarily in no. of private companies

7

8

9

10

500

550

600

650

700

750

800

850

900

2004 2005 2006 2007 2008 2009 2010 2011

Pvt. Limited Public Ltd. Ratio (Pvt. : Public, RHS)

No. of registered companies ('000s)(x)

FY05-11 CAGR 4.7%

Public1%

Private99%

Share in incremental growth (CY06-10) in registered companies

Source: Ministry of Corporate Affairs, Credit Suisse Source: Ministry of Corporate Affairs, Credit Suisse

Interestingly, if one assumes that smaller companies have fewer shareholders (i.e., private,

vs. public companies that have more than 50 shareholders) the increase in the number of

companies has come primarily from smaller ones: only 1% of the growth in the number of

companies in the four years from CY06 to CY10 came from the larger public companies

(Figure 25).

2 "Share of Informal sector and Informal Employment in GDP and Employment", Ramesh Kolli and Anindita

Sinharay, Journal of Income and Wealth, Volume 33, No.2: July-December 2011.

Rising number of registered

companies indicates slow

but steady formalization

99% of incremental increase

in registered companies

from CY06-10 has come

from small private

companies

09 July 2013


While authorised capital is a rather inaccurate measure of the size of a company, there is

no better data available: we find that while public companies are only 8% of total when it

comes to numbers, they are 69% of the authorised capital (Figure 26).

Figure 26: Public companies are larger in size Figure 27: 75% of registered companies in just six states

8%

69%

92%

31%

0%

20%

40%

60%

80%

100%

By number By capital

Public Ltd. companies Pvt. Ltd. companies

Data as on 31-Dec-12

0%

4%

8%

12%

16%

20%

24%

MH DL WB TN AP GU KA UP RJ KE PB MP HA BI OR CN AS GO JH CG

% share in registered companies (As on 31-Dec-10) % of India's GDP (FY12)

Low share of organized sector in under-developed states (barring Kerala, Punjab)

Source: Ministry of Corporate Affairs, Credit Suisse estimates Source: Ministry of Corporate Affairs, CSO, Credit Suisse estimates

75% of the active incorporated companies in India are in just six states (Figure 27):

Maharashtra, Delhi, West Bengal, Tamil Nadu, Andhra Pradesh and Gujarat. This is likely

because of the preference to headquarter a company in a larger city: the urban centres of

Mumbai, Delhi, Kolkata, Chennai, Hyderabad, etc., are thus the reason for this trend.

75% of the active

incorporated companies in

India are in just six states

09 July 2013


Estimating informal GDP: Upside? Informal GDP estimated by definition; harder in India

It shouldn't be a surprise to anyone that GDP of any country is only an estimate. That most

market participants and observers still intuitively try to correlate macroeconomic data with

that reported by listed companies is also understandable. After all, GDP estimates are also

prepared with a data set that is formal: the estimates are applied only on top of that.

The trouble arises when (1) the part being estimated is as big as the part for which hard

data is available, like in India; and (2) when inflection points in productivity make prevalent

heuristics outdated, e.g., the changes we flag in ‘India: The silent transformation.’

Most of the typical techniques to measure the informal economy just do work in India:

techniques that use demand for currency or electricity consumption are non-starters, given

low penetration of banking and low electrification and low per capita power consumption.

Then how do the heuristics work in India?

Measuring informal GDP: Agri easy, the rest is not

Over the past 50 years the nature of India's GDP has changed, with agriculture rapidly

being outpaced by services (Figure 28). While agriculture's share has dwindled to 14% in

FY13, it is a third of India's informal GDP (Figure 29). After all, almost all of agriculture is

informal (i.e., not done by companies).

Figure 28: Split of India's GDP Figure 29: Split of informal GDP by sector

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 2013

Agriculture Industry Services

Agriculture33%

Trade23%

RE, Business13%

Manufacturing8%

Construction7%

Transport7%

Personal Services

5%

Others4%

5 0% of GDP Informali.e. Rs51tn in FY2013

Source: CSO, CMIE, Credit Suisse Source: National Statistical Commission, CSO, Credit Suisse

However, data availability is not a challenge. This is likely because India's GDP was very

heavily agriculture-dominated a few decades ago, and particularly in pre-Independence

times governments used to primarily rely on taxes on agriculture, While there are

heuristics used that may be further fine-tuned (see Figure 52 in Appendix A, Page 20),

these are unlikely to meaningfully impact GDP estimates.

For the rest, however, such accurate measures of final output are hard to get, and the

CSO uses well-defined and disclosed assumptions based on nation-wide comprehensive

surveys to estimate informal GDP. These are detailed in Appendix A.

Inaccuracies creep into GDP estimates mainly because the underlying surveys start to get

old. In the first few years of a new series of GDP, the most recently collected survey data

is used. These get outdated as the economy changes. However, for the sake of continuity,

till a completely new GDP series is started, these surveys cannot be updated.

There is dearth of reliable

data on informal economy,

which forms 50% of GDP.

Hence the reliance on

estimates/ heuristics

Inflection points in

productivity and a shift in

workforce mix make

heuristics outdated soon

There is better data

availability for estimating

agri. GDP due to the high

importance ascribed to the

sector in the past

Inaccuracies may creep into

GDP estimates as the

underlying surveys start

getting dated


09 July 2013


Corrections occur when a new series is introduced

The start of a new series, which occurs usually every 9-10 years (Figure 30), is therefore

when survey data is refreshed, and assumptions of things like the number of workers for a

particular activity (Employment Survey, Population Census) and the Value Added Per

Worker (VAPW) in that activity (based on Economic Census) are updated.

Figure 30: Seven GDP series since independence; current 2004-05 series nearing the end of its tenure

National Account Series From To Transitioned Tenure (Years)

1948 Series 1948-49 1960-61 Started in 1951 12

1960 Series 1960-61 1970-71 Aug-67 10

1970 Series 1970-71 1980-81 Jan-78 10

1980 Series 1980-81 1993-94 Feb-88 13

1993 Series 1993-94 1999-00 Feb-99 6

1999 Series 1999-00 2004-05 Jan-06 5

2004 Series 2004-05 Now Jan-10 9+

Source: National Accounts & Statistics – Sources & Methods (2012), Credit Suisse

The current series is already nine years old, and is likely to be updated soon. A new

Economic Census (the sixth) was completed in the second half of 2012 (results still being

collated), and the out-of-turn Employment Survey of 2012 was also completed just two

years after the 2010 survey (normally done every five years). A new GDP series is

therefore going to start, with FY12 as the base year.

We note that the past three series changes have coincided with upward revisions to the

GDP: the GDP for 1993-94 in the 1993 series, for example, was revised upwards by 9%

from the corresponding estimate in the 1980 series. The annualized revision, a proxy for

underestimated growth, is shown in Figure 31.

Figure 31: GDP revisions during past series transitions Figure 32: Upward revision to services the most

0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

0.7%


Annualized revision to GDP at factor cost

GDP Revision during series transition

-0.4%

-0.2%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

Agri Industries Services


GDP Revision during series transitionAnnualized change


This revision is for a variety of (positive) reasons: updated data from more recent surveys,

improvements to existing methodology and increased adherence to the widely accepted

SNA (System of National Accounts) standard for reporting national accounts data.

Services the most prone to underestimation

Looking at sector-wise revisions, it is clear that services are the most underestimated as

the series ages (Figure 32). This is understandable. After all, 45% of services GDP are

estimated to be informal, where hard data is unavailable. The estimation for informal GDP

for many services is typically based on the number of workers multiplied by the Value

The current series is already

nine years old, and is likely

to be updated soon.

All the three past series

transitions saw an upward

GDP revision of ~0.3-0.7%

(annualized)

Services GDP is usually

underestimated the most as

the series ages, since 45%

of it is informal

09 July 2013


Added Per Worker (VAPW). Both these estimates can get outdated quickly. This should

particularly be so given the sharp increases in telephone penetration (Figure 34) or even

simpler appliances like cooking gas (Figure 33).

Figure 33: LPG penetration aiding household productivity Figure 34: Telephones per '000 people rose sharply

0

200

400

600

800

1,000

1997 1999 2001 2003 2005 2007 2009 2011

Total cellphone subscribers (Mn) Cellphones per 1,000

Spread of cellphones in India

Source: Ministry of Petroleum, Natural Gas, NSSO, Credit Suisse Source: TRAI, Credit Suisse

What can change in the new 2012 series?

In the past series transitions annualized changes for some services have been quite

dramatic (Figure 35). Going forward too we expect FY2013 GDP estimates could get

revised up by ~15%, implying an upward revision of growth by ~1.8% a year. With this

productivity growth having been concentrated in the last 5 years, the growth adjustment

has been assumed to be higher for the middle years (Figure 36).

Figure 35: Finance/business services revised upwards Figure 36: Potential revisions to past growth data

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

Trade Transport Finance, RE,Business

Community


GDP Revision during series transition: ServicesAnnualized change

0%

2%

4%

6%

8%

10%

12%

14%

2006 2007 2008 2009 2010 2011 2012 2013

Estimated GDP Growth Probable GDP Growth


estimates

For the six largest contributors to informal GDP, i.e., trade (retail, wholesale, motor vehicle

repair), real estate and business services, manufacturing, construction, transport and

personal services, we evaluate assumptions and assess if GDP may again be

underestimated (Figure 37). This is done mainly on two counts:

09 July 2013


(1) Estimating the workforce/units in operation: For several services the number of

workers from the 2005 Employment Survey is projected forward using the growth rate

from 2000 to 2005. However, this growth rate is in many cases higher given changes

to the economy.

(2) The value-added per worker/unit (VAPW): For most services this measure is based

on the 2007 Enterprise Survey, and is kept constant in real terms and inflated at CPI

for nominal GDP. In reality, as individuals adopt new technologies (cellphones,

computers, air-conditioning), and in particular with cellphones, computers and roads

improving in the past decade (Figure 33) VAPW should have changed substantially.

Figure 37: Evaluating assumptions made in the estimation of some key contributors to India's informal GDP

% % of

of informal

Sector GDP GDP Scope for underestimation

Trade 15% 23% Data on trade margins is based on a survey (IOTT) done in 2003-04. Any positive change in margins

driven by the rise in productivity may not be accurately captured.

Real estate, business 11% 13% Due to the acceleration in the workforce growth rate from 2.5% p.a. (2000-05) to 4.6% p.a. (2005-12)

and dated VAPW

Manufacturing 15% 8% Dated VAPW estimate: For informal manufacturing (30% of total), VAPW is merely inflated by CPI. This

underestimates productivity growth in the informal economy.

Construction 8% 8% Apportions 53.4% of all material inputs to factor payments (labour wages, capital) based on the NSS

58th round survey (2002). Given high wage inflation for labourers, this metric is likely to see an upward

revision.

Transport 8% 7% Initial estimate of informal transport inflated by the number of registered vehicles. Does not adjust for

freight or distance travelled

Personal services 8% 5% Due to the acceleration in the workforce growth rate from 2.5% p.a. (2000-05) to 4.6% p.a. (2005-12)

and dated VAPW

Total 64% 63%

Source: National Accounts & Statistics – Sources & Methods (2012), Credit Suisse research

09 July 2013


Tips for investing in informal India Sectors taking advantage of informal GDP growth

A very few large listed non-consumption related sectors operate at the borders of the

informal economy. Non-banking finance companies like Shriram Transport and MMFS

venture into unbanked areas, taking a share from the informal credit systems in the

economy (Figure 38 & Figure 39).

Figure 38: Only 13% rely on bank credit at the lower-end Figure 39: Reliance on non-formal credit sources higher

13%

35%

49% 52%63%35%

20%

12% 12%

6%

52%46%

39% 37%32%

0%

20%

40%

60%

80%

100%

<50k 50-100k 100-200k 200-400k >400k

Banks Money lenders Other sources

0 10 20 30 40 50

Turkey

Brazil

China

India

Russia

Indonesia

South Africa

UK

Korea

USA

From formal financial institutions From family & friends

% adults originating loan (in last 1 year)

Source: RBI Report on Currency & Finance, Credit Suisse Source: Kunt, Klapper (World Bank, 2012), Credit Suisse

High predictability and stability of GDP growth

Almost 36% of India's GDP is estimated based primarily on data which is backward

looking. Some of these numbers are inflated by CPI for the period, but then while looking

at real GDP growth, the GDP deflator would take that impact out. This should give great

stability to reported GDP growth rates, and it does (Figure 40): standard deviation of

reported quarterly GDP growth of India is remarkably low compared with those of the other

comparable economies, and is in fact only higher than China's.

Figure 40: India has low variation of quarterly GDP growth Figure 41: Steel demand vs. cement demand growth

1%

2%

3%

4%

5%

China India S. Africa Korea Brazil Mexico Russia

Std. dev (Since Jun-05) Std. dev (Since Jun-97)

Standard deviation of reported quarterly GDPs

-20%

-10%

0%

10%

20%

30%

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Steel (Y/Y growth) Cement (Y/Y growth)

Steel exposure more to formal economy Cement more exposed to informal

Source: the BLOOMBERG PROFESSIONAL™ service, CSO, Credit

Suisse

Source: JPC, CMAI, Credit Suisse

NBFCs are likely to benefit

as they take their share of

pie from the informal credit

system

A third of India's GDP is

based on backward looking

data. This provides high

predictability and stability to

the GDP

09 July 2013


This ‘estimated’ is, of course, over and above the relative stability of the underlying

economic growth. Look at the difference in demand growth of steel and cement (Figure

41) over the past two decades: while the more formal part of the economy, to which steel

is exposed, has gone through cycles, cement demand growth, with more diverse demand

drivers and heavily exposed to the informal side of the economy through activities like rural

housing, has been relatively quite stable.

Risks of applying corporate data to macro drivers

The intuitive habit of drawing macroeconomic conclusions from the corporate feedback

(and vice versa) is fraught with risk. After all, only half of India's GDP and 10% of India's

employment are in the formal sector. Further, only a fraction of the formal sector is listed.

Let's take investments, for example: investors intuitively apply feedback from large capital

goods and construction companies to form a view on India's investment cycle. This can be

misleading: the tail is unlikely to wag the dog (Figure 42). This chart considers Gross

Value Output (GVO), as against Gross Value Added (GVA), implying that there is

overstatement because of double-counting (e.g., NMDC's iron ore sales to JSW Steel get

added, but then JSW Steel's steel sales are added too, implying the iron ore is double-

counted). And yet the listed companies in BSE500 only add up to a fourth of GFCF.

Or take consumption. Concluding that ‘consumption is slowing’ for the whole economy

based on the feedback from a few listed consumer companies (however large) is like

relying on a 1000-person survey to predict the outcome of India's general elections (Figure

43): the conclusions would appear to be pre-meditated.

Figure 42: Listed companies only a fraction of GFCF Figure 43: Listed companies a small part of consumption

Listed Industrials

13%

Listed Materials

12%

Unlisted + Informal

75%

Listed Staples4%

Listed Discretionary

11%

Unlisted + Informal

85%

Source: CMIE, CSO, Credit Suisse Source: CMIE, CSO, Credit Suisse

A rise in GDP estimates can help some ratios

A change to GDP estimates affects macroeconomic ratios where the numerator can be

measured reasonably accurately (unlike the GDP), and the denominator is the GDP: the

current account deficit (CAD), debt, tax collection or fiscal deficit. These ratios like the

CAD are so high currently that even increasing the GDP by 15% is unlikely to reduce its

severity (Figure 44), but ratios like fiscal deficit (Figure 45) can appear somewhat better.

Steel exposed more to the

"formal" economy has gone

through cycles. Cement

growth with its diverse

demand base (formal +

informal) has stayed

relatively more stable

Drawing macroeconomic

conclusions from the

corporate feedback (and

vice versa) is fraught with

risk

Listed space accounts for

only 25% of all GFCF and

just 15% of all consumption

in India.

Rise in GDP estimates

improves India's health

assessment as indicators

such as CAD to GDP and

fiscal deficit to GDP start

appearing more favourable

09 July 2013


Figure 44: CAD as a % of GDP (pre and post adjustment) Figure 45: Fiscal deficit as a percentage of GDP

-8% -6% -4% -2% 0% 2% 4% 6% 8%

S. Africa

India

India (Projected)

UK

USA

Indonesia

Brazil

China

Korea

Russia

Malaysia Current account balance as % of GDP (2012)

-8% -6% -4% -2% 0%

India

USA

India (Projected)

S. Africa

UK

Malaysia

Brazil

Indonesia

China

Korea

Russia Govt. fiscal balance as % of GDP (2012)

Source: RAVE, Credit Suisse estimates Source: RAVE, Credit Suisse estimates

What this implies is that the reported absolute level of CAD or fiscal deficit is caused by

more economic activity than currently reported. This does not help the near-term

sustainability, as capital flows and tax revenues are unlikely to change materially for the

next few years. But it does improve India's health assessment from a medium- to long-

term perspective.

Policy mismatch and longer-term concerns

An economy where 52% of the workforce is self-employed, a fifth of enterprises work

without premises and the average employee count per enterprise is 2.4 is likely to struggle

to build economies of scale very quickly. Productivity and efficiency gains can therefore

get capped very quickly. While the large number of ‘entrepreneurs’ (notwithstanding if they

are voluntary or forced) on the lookout for new ventures is a positive, the challenge is in

getting them to scale up, and increase the size of their investments.

In the interim, companies and corporations selling into this fragmented base or sourcing

from them are likely to retain the bargaining power.

Given the highly fragmented

and informal nature of the

economy, building

economies of scale is a

challenge

09 July 2013


Appendix A: Estimating India's GDP GDP can be computed by three different methodologies

3:

(1) Production: Sum up all the value added by different economic activities, i.e., final

output minus consumption of intermediates.

(2) Expenditure: This approach is based on final use at the demand side: private

consumption, government consumption, fixed capital formation, change in stock and

net exports of goods and services.

(3) Income: Attributes GDP to the two factors of production (labour and capital) by adding

all employee compensation and gross operating surplus.

The production method is considered to be a more robust method, and is used as a

reference when using the other two methods for calculating discrepancies.

Measurement of services

The share of services in GDP has doubled over the past 50 years, and has risen by ~10

pp since 2001. However, services in our view have the least comprehensive data set to

estimate the size and growth. As per government estimates about 46% of services GDP is

informal (Figure 47).

Figure 46: Split of India's services GDP by sector Figure 47: Split of 46% of services GDP that is informal

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010

Trade Transport Comm. Finance Business Services Govt Others

Trade45%

Business Services

26%

Personal Services

10%

Transport14%

Restaurants3%

Finance2%

Government0%

46% of Services GDP, i.e. 28% of total GDP is Informal

Source: CSO, Credit Suisse Source: CSO, Credit Suisse

Large parts of services GDP like trade (retail stores, repair shops for motor vehicles,

wholesale), business services (real estate has become formalised only in some pockets of

larger cities), transport (a large part of India's trucking fleet is informal) and personal

services (stitching clothes, cutting hair, domestic cleaning, etc.) are informal in nature, as

also discussed in the first section.

Given that these are mainly proprietorships or single-family set-ups that are not

incorporated, the availability of good data with suitable frequency is difficult. For the

informal portion, the product of workforce size and value added per worker (VAPW) is

used to approximate the Gross Value Added. The workforce size is based on the

Employment and Unemployment Survey conducted by the NSSO in 2004-05. For

projecting the workforce in subsequent years, the inter-survey growth rate (that observed

in the 1999-00 survey and the 2004-05 survey) is used. Any acceleration in this rate, given

3 National Accounts & Statistics: Sources and Methods, 2012. Page 24

09 July 2013


the dramatic changes in the economy (move away from agriculture) would mean that the

workforce is likely being underestimated for the informal sub-sector within services.

Similarly, the estimates on the value added per worker are obtained from the Enterprise

Survey of 2006-07. For subsequent years, this is inflated by the CPI. Any improvements in

productivity through the use of roads, cell phone and electricity are likely being

underestimated till data from a more recent survey is made available.

Figure 48: Methodology for services GDP: Higher deviation due to a changing workforce mix and rising productivity

Head Method followed Major data sources Broad approach

Trade, hotels &

restaurants

Production method for public

sector and private organised

sector; labour input method for

private unorganised sector

Budget documents, RBI, paid-up

capital, NABARD, DGCI&S,

Economic Advisor, Min. of Road

Transport, NSS 61st round

Employment Survey (EUS),

Informal Sector Survey (2000),

Enterprise Survey (2007), Input-

Output Transaction Tables (2003-

04)

Public sector: P&L, budget documents to prepare the

components of value added;

Private organised: Inflating results for a sample

covered by RBI in the ratio of the paid-up capital;

Private unorganised: For base year, labour input is

multiplied by the value added per worker; for

subsequent years, a Gross Trading Income (GTI)

index (obtained from multiplying the Marketable

Surplus and Trade Transport Margins) is used

Transport Income method for railways,

labour input for other means

Annual Budget, Min. of Railways,

Index of Cargo Handling

Income method for railways using rail documents; for

other means, multiplying labour input and estimates

of value added per worker (VAPW). For subsequent

years, the number of registered vehicles used to

scale up

Storage &

Warehousing

Production method for

organised; labour input for

unorganised

Budget documents, Annual

Reports, NSS Enterprise Survey

(2006-07), EUS 2004-05, Annual

Survey of Industries (ASI)

Derive GVA from annual accounts of state/central

warehousing corporations and ASI; for unorganised:

multiply workforce with VAPW in the base year; in

later years, use the inter-survey workforce growth

rate to project labour input and inflate VAPW using

CPI indices.

Communication Production/income method for

Indian Post &

Telecommunication

Indian Posts, Department of

Telecommunications, Cellular

operators, TRAI, EUS 2004-05,

RBI

For the organised sector (govt. + corporate), use

annual reports to compute GVA; for the unorganised

sector, same method as the one followed for the

unorganised sector in storage & warehousing

Banking,

insurance

Output for financial

intermediaries valued indirectly

through ‘financial intermediation

services indirectly measured

(FISIM)’

Annual Reports of PSU banks,

pvt. banks, LIC, state finance

corporations, Department of Post

Imputed service charges are computed for banks; for

NBFCs, GVA derived from RBI sample study is

inflated by paid-up capital; unorganised non-banking

financial institutions: one-third the GVA of organised

Real estate Labour input approach and

income method

EUS 2004-05, Enterprise Survey

from NSS 63rd Round, RBI

Multiply workforce with VAPW in the base year; in



CPI indices for the unorganised sector. For the

organised sector, use RBI's estimate of corporate

sector growth (weighted by employee compensation

and operating surplus)

Ownership of

dwellings

For rural, user cost approach

and for urban houses, the

production method


from NSS 63rd Round, 2001

Census Data, All India Debt &

Investment Survey 2002-03, NSS

61st on household consumption

Urban: Gross rental (actual rent paid and imputed

rent for owned dwellings) minus cost of repairs and

maintenance; rural: user cost approach (since 92%

houses are self-owned) to arrive at a notional rent

taking into account all expenditure incurred - repairs,

consumption of fixed capital and net operating

surplus (at 8% of current value of holdings)

Business services For software, the ratio of GVA to

GVO used, labour input

approach for other services


from NSS 63rd Round,

NASSCOM, 2001 Census Data,

RBI




CPI indices

Public

administration

Income method Budget documents of Central and

State Govt., Comptroller &

Auditor General, EPFO

Sum of government's intermediate consumption,

employee compensation, fixed capital consumption,

other taxes less subsidies

Other services GVA through labour input

approach


from NSS 63rd Round




CPI indices


09 July 2013


Measurement of industrial GDP

One would expect this to be relatively straightforward, but there is still a meaningful part of

manufacturing that is informal, particularly so in construction, where broad heuristics

employing the consumption of materials are used to estimate GDP consumption.

Figure 49: Methodology for industrial GDP: More certainty as only 71% is formal; dated survey for VAPW

Head Method followed Major data sources Broad approach

Mining Production method Indian Bureau of Mines, Coal India Ltd.,

Coal Controller of India, Ministry of

Petroleum & Natural Gas

For each of the minerals (major + minor), the

extraction costs are subtracted from the total value of

the output

Manufacturing Production method Registered: NSSO, Annual Survey of

Industries; Unregistered: 4th All India

Census of MSME (2006-07), 62nd NSS

round survey (2005-06) on unorganized

manufacturing units, NSSO 61st round

on Employment (2004-05)

Registered: Value of output at ex-factory prices minus

inputs at purchaser's price; unregistered: product of

workforce (total manufacturing workforce minus those

in registered as per ASI) and value added per worker

(from integrated surveys, NSS 62nd round).

Construction Commodity flow approach

(cement, iron, bricks,

wood) for accounted

construction (AC) and

expenditure approach for

unaccounted construction

(UC)

AC: Budget documents, private sector

P&L, CPWD, cost of construction indices,

NSS 58th round on Housing Conditions,

Cement Manufacturer's Association; UC:

Sample surveys, benchmark estimates,

NABARD, All India Debt & Investment

Survey (2002-03)

Apart from the commodity flow and expenditure

methods (using data from AIDIS, 2002-03), GVA is

also computed as follows; for AC: sum of all factor

payments (estimated at 53.4% of all material inputs);

for UC: GVA = 75% of output (i.e. inputs are 25% of

output)

Electricity, gas

& water

Income method (sum of

all factor incomes) for

electricity and water;

production method for gas

PSUs, budget documents, GAIL, IGL,

Min. of New & Renewable Energy, CEA,

SEBs, KVIC, Municipal Data, NSS 61st

round (2004-05) on employment

Electricity: Gross factor incomes for SEBs,

state/central/private companies; gas: income minus

expenditure of gas companies; water: total

compensation to employees, operating surplus, and

consumption of fixed capital


Measurement of agricultural GDP: Fairly accurate

Agriculture's relative importance has been falling over the decades, and is now less than

14% of GDP (Figure 28 on Page 10). It has four parts: crop production, livestock, forestry

& logging and fishing, but is mostly dominated by the first two (Figure 50). The detailed

split of gross value output of crop production and livestock in 2005 shows that cereals,

milk, fruits and vegetables and oilseeds dominate production.

Figure 50: Split of agricultural GDP Figure 51: Crop and livestock gross output (2005)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009

Crop Production & Livestock Forestry Fishing

Cereals22%

Milk19%

Fruits & Vegetables

18%

Oilseeds7%

By-products7%

Meat & Egg6%

Sugars5%

Pulses3%

Fibres3%

Others10%

Source: CSO, Credit Suisse research Source: National Accounts & Statistics, Credit Suisse research

Likely because India's GDP was so heavily agriculture dominated a few decades ago, and

in pre-Independence times governments used to primarily rely on taxes on agriculture,

despite agriculture being mostly informal, data availability is not a challenge. While there

09 July 2013


are heuristics used (Figure 52) that may need updates, these are unlikely to meaningfully

impact estimates of agricultural GDP.

Figure 52: Methodology for agriculture: Usage of heuristics and dated surveys

Head Method followed Major data sources Broad Approach

Crop production Production method except for

irrigation which uses income

method

Land use statistics, area and out turn

of principal crops, cost of cultivation

studies, National Horticulture Board

GVA obtained by subtracting all inputs from

the gross sector output. Output for 42

different crops; input consists of seeds,

fertilisers, irrigation, electricity,

repair/maintenance of fixed assets, etc.

Livestock Production method Integrated Sample Survey, Technical

Committee of Direction, Basic Animal

Husbandry statistics, Indian Livestock

Census (2007)

GVA equals output (milk, meat, eggs, wool,

hair, etc.) minus the livestock feed

Forestry & logging Production and income method

(since forests are generally

under govt. administration)

State Forest Departments, State / UT

Budgets, NSSO (for firewood in

households)

GVA: Output is the value at the purchaser's

end; inputs are estimated at 15.6% of output

Fishing Production method State Fisheries Departments GVA: Output data from SFDs, input

estimated at 22.5% for marine fish and 10%

for inland fish


09 July 2013


Appendix B: Definition of informal In GDP accounting, according to the international definition adopted in 1993, the informal

sector was a sub-sector of the household sector. The basic characteristic is an

unincorporated enterprise (so also excludes government departments), though some

countries do not use non-registration.

Household production includes:

(1) Production of goods and services by unincorporated enterprises owned by households

(2) Production of goods by households for own final use/capital formation (e.g., own

agricultural production, wood-cutting, water-supply, processing of grains, weaving

cloth, dress-making, construction of dams, etc.)

(3) Production of services by households for own use: paid domestic services (very few

countries have this data however) or housing services (i.e., imputed rent)

Household production in GDP does NOT include:

(1) Unpaid services for own final use (cleaning, decoration, maintenance of dwelling

occupied by the household, preparation and serving of meals, care-giving for children,

elders or the sick and infirm, etc.)

(2) Unpaid domestic services to other households, community, non-profit institutions

serving households, informal help to neighbours and relatives, etc. Even formal/

organised volunteer and community work through the Red Cross or other welfare

organisations do not count

There are two categories of unincorporated enterprises (at least some production should

be marketed):

(1) Informal enterprises of own-account workers, and

(2) Enterprises of informal employers: non-registration of permanent employees and the

size of the economic unit (no. of jobs).

The balance between uses and resources of major products is generally the most

common method used for the estimation of the informal sector in manufacturing activities.

Once consumption and net imports are known, one can estimate manufacturing quantities.

This method therefore requires the availability of data on household consumption.

Once the production of major products is known, assumptions are made on transport costs

and trade margins, which are distributed between the formal and the informal sector: data

on labour force by the industrial sector and anecdotal data on value added and margins in

the informal sector are always used for cross-checking.

For services, the balance method is not always possible and assumptions have often to be

made for productivity of labour, based again on anecdotal data collected on a very small

number of units. In this case the results of informal sector surveys can usefully replace the

anecdotal data.

Once the estimates have been prepared for a base year, there remains the problem of the

variation from one year to the other. The least that can be said is that the national

accountants generally have been short of imagination: trends in the informal sector have

followed population growth for trade and eventually services, while they were tracing those

of the formal sector in manufacturing. In other words, trends of the informal sector in

national accounts are the results of the assumptions of national accountants and are not

generally interesting to analyse in details. In this regard, the measurement of employment

in the informal sector through annual labour force surveys can provide a useful basis for

assessing the trends of its contribution to the GDP, by the industrial sector, as it is the

case in Asian countries where these surveys are carried out on a regular basis.

09 July 2013


The question remains: to what extent is the household production without primary

production, paid domestic services and imputed rents a proxy of production in the informal

sector? Countries like Botswana have no estimate for trade or services in the national

accounts of household production. Similarly, in Sri Lanka there is no estimate for trade.

Several assumptions also may vary across countries. In Mexico where the international

definition was implemented, in 1998 there were 3.5 mn own-account workers and 689,000

employers with 1.26 mn employees. The household sector accounted for 35% of GDP,

against 12.7% for the informal sector strictly defined.

Figure 53: Contribution of informal sector to GDP in various regions

Informal sector Informal sector Informal sector

(incl. agriculture) (excl. agriculture) (excl. agriculture)

% of total GDP % of non-agricultural GDP % of total GDP

Sub-Saharan Africa 54,7% 37,7% 23,7%

North Africa 37,7% 30,4% 26,3%

Asia 23.9% 26,8% 21,5%

Latin America 30.6% 25,9% 23,4%

Caribbean 22,2% 21,2% 19,7%

Transition economies 21,7% 13,9% 11,8%

Source: “Measurement of the Contribution of Informal Sector and Informal Employment to GDP in Developing Countries”, Jacques Charmes.

Regional averages are the arithmetic average of countries.

09 July 2013


Companies Mentioned (Price as of 08-Jul-2013)

ACC Limited (ACC.BO, Rs1256.0) Dish TV India (DSTV.BO, Rs58.85) Emami Ltd (EMAM.BO, Rs476.05) HDFC Bank (HDBK.BO, Rs660.35) ITC Ltd (ITC.BO, Rs346.85) JSW Steel Ltd (JSTL.BO, Rs605.05) Mahindra and Mahindra Financial Services Ltd (MMFS.BO, Rs276.25) NMDC (NMDC.BO, Rs102.55) Shriram Transport Finance Co Ltd (SRTR.BO, Rs678.6)

Disclosure Appendix

Important Global Disclosures

Neelkanth Mishra and Ravi Shankar, each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

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Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:

Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.

Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.

Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.

*An analyst’s coverage sector consists of all companies covered by the analyst w ithin the relevant sector. An analyst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%)

Outperform/Buy* 43% (53% banking clients)

Neutral/Hold* 40% (49% banking clients)

Underperform/Sell* 15% (38% banking clients)

Restricted 3%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

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Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein.

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Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Please refer to the firm's disclosure website at www.credit-suisse.com/researchdisclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names

The subject company (DSTV.BO, EMAM.BO, HDBK.BO) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.

Credit Suisse provided investment banking services to the subject company (DSTV.BO) within the past 12 months.

Credit Suisse provided non-investment banking services to the subject company (HDBK.BO) within the past 12 months

Credit Suisse has received investment banking related compensation from the subject company (DSTV.BO) within the past 12 months

Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (DSTV.BO, EMAM.BO) within the next 3 months.

Credit Suisse has received compensation for products and services other than investment banking services from the subject company (HDBK.BO) within the past 12 months

As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (MMFS.BO).

Important Regional Disclosures

Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.

The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (ACC.BO, DSTV.BO, EMAM.BO, HDBK.BO, ITC.BO, MMFS.BO, SRTR.BO) within the past 12 months

An analyst involved in the preparation of this report has visited certain material operations of the subject company (JSTL.BO) within the past 12 months

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Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.

Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report.

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An analyst involved in the preparation of this report received third party benefits in connection with this research report from the subject company (JSTL.BO)

As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.

Principal is not guaranteed in the case of equities because equity prices are variable.

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To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

Credit Suisse Securities (India) Private Limited .................................................................................................. Neelkanth Mishra ; Ravi Shankar

Important MSCI Disclosures

The MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc. (MSCI). Without prior written permission of MSCI, this information and any other MSCI intellectual property may not be reproduced, re-disseminated or used to create and financial products, including any indices. This information is provided on an "as is" basis. The user assumes the entire risk of any use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing or compiling the information hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of this information. Without limiting any of the

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foregoing, in no event shall MSCI, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. MSCI, Morgan Stanley Capital International and the MSCI indexes are services marks of MSCI and its affiliates.

The Global Industry Classification Standard (GICS) was developed by and is the exclusive property of Morgan Stanley Capital International Inc. and Standard & Poor’s. GICS is a service mark of MSCI and S&P and has been licensed for use by Credit Suisse.

For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at www.credit-suisse.com/researchdisclosures or call +1 (877) 291-2683.

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