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1 © Confederation of Indian Industry
IndianEconomyReview
By
Mr T KannanPast Chairman, CII Southern Region
August 7, 2004Coimbatore
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Agenda
1) Economy Review
2) Stock Market Review
3) Export Import situation
4) Oil Price review
5) Cement Price Review
6) Commodity Price Review
7) Infrastructure development
8) Consumer Behaviour
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I
ECONOMY
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Gross Domestic Product The Indian Economy posted arobust GDP growth of 8.2% in2003-2004. Agriculture output during Q4 -2004 although lower than Q3 buthigher than Q1 & Q2. Industry posts higher growth over previous quarters.
Services sector growth dipsfurther to 7.6% in Q4 2004Inflation Manufacturing sector registeredthe highest levels of inflation withthe rates surging above 6.0 % in thefirst quarter 2004-05. Index for Fuel, Power, Lights &Lubricants category posts a hike
due to fuel price rise.
Quarterly GDP Performance: 2003-04
1.7%
7.4%
16.9%
10.5%
5.8%
3.0%
6.5%
7.9%7.6%
9.8%9.0%
7.5%
8.2%
10.4%
8.4%
5.7%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Q1 Q2 Q3 Q4
0%
2%
4%
6%
8%
10%
12%
Agriculture Growth Rate Industry Growth Rate
Services Growth Rate Quartlery GDP Growth Rate( RHS)
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun
2003 2004
Manufactured Products
Fuel Power, Light & Lubricants
Primary Articles
Overall Inflation rate
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Foreign exchange
reserves at $119 billion,adequate for import cover of 17.5 months.
Fiscal deficit the onlyworrying factor. Gross fiscal
deficit high at 10% andcentre fiscal deficit at 4.4%.
Central Government's Fiscal Deficit: The worrying factor
0
20000
40000
60000
80000
100000
120000
140000
160000
1 9 9 5 - 9
6
1 9 9 6 - 9
7
1 9 9 7 - 9
8
1 9 9 8 - 9
9
1 9 9 9 - 0
0
2 0 0 0 - 0
1
2 0 0 1 - 0
2
2 0 0 2 - 0
3
2 0 0 3 - 0
4
2 0 0 4 - 0
5 B E
R u p e e s
0
1
2
3
4
5
6
7
P e r C e
Fiscal Deficit FD as % of GDPSource: Union Budget 2004-05
Forex Reserves
40,000
50,000
60,000
70,000
80,000
90,000
100,000
110,000
120,000
Feb-
03
Mar-
03
Apr-
03
May-
03
Jun-
03
Jul-
03
Aug-
03
Sep-
03
Oct-
03
Nov-
03
Dec-
03
Jan-
04
Feb-
04
Mar-
04
Apr-
04
May-
04
Jun-
04
U S $ i n m n
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6 © Confederation of Indian Industry
Sectoral Perfomance: Services, Intermediate & Capital Goods recorded high growth
28.6% 26.3% 25.0% 21.9% 21.7%10.0%
42.9%
10.5%
41.7%
28.1%
43.5%
13.3% 33.3%
28.6%
63.2%
33.3%
50.0%
34.8%
76.7%66.7%
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
Services Consumer
Non-Durables
Intermediate
Goods
Consumer
Durables
Capital Goods Basic Goods Electricity
Excellent High Low/ NegativeSource: CII Survey
Based on Growth Rates in Production for 2003-04
%Share
o f
Ind us tries
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• Expected GDP growth for 2004-05 around 7%
• Clear overall demand growth
• Order books of companies better than before
companies have a strong outlook
• Rising rural demand – The recent budget
announcements to give further boost
• Upturn in investment cycle: manufacturing
Economy: The Good News
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GDP projections
200
600
1000
1400
1800
2200
2 0 0 3 - 0 4
2 0 0 4 - 0 5
2 0 0 5 - 0 6
2 0 0 6 - 0 7
2 0 0 7 - 0 8
2 0 0 8 - 0 9
2 0 0 9 - 1 0
2 0 1 0 - 1 1
2 0 1 1 - 1 2
2 0 1 2 - 1 3
2 0 1 3 - 1 4
6% growth 7.2% growth 8% growth
$ billion
Nominal GDP: 2003-04 to 2013-14
Exchange rate assumption: $ 1 = Rs 45, GDP deflator assumed to be 5%
$ 600 billion
$ 2.1 trillion$ 1.9 trillion
$ 1.7 trillion
• Minimum of 7% growth for doubling real GDP in 10 yrs• Aim to sustain 8 % growth
• With 8% growth, GDP to cross US $ 2 trillion in 10 years
• At 8 %, per capita income to double in eleven years
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(%)Low High
GDP 6.6 7
Agriculture 0 2Industry 7 7
Services 9.2 9.2
2004-05
ECONOMIC FORECAST FOR 2004-05
Given the state of the monsoon, 2% agriculture growth andhence 7% GDP growth seems to be unlikely
CII forecast for this fiscal
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State of Monsoons• As on July 21 2004, 17 of a total of meteorological 36 sub-divisions had
deficient/scanty rainfall. As on July 14, this figure was at 16.
• Though this is not as high as the no. of deficient/scanty sub-divisions in the
drought year 2002 (22 of 36), it is still much worse than other years.
• The extent of deficiency in regions classified as ‘deficient’ last week, hasdeteriorated now in several regions including Gujarat,West Rajasthan,
Himachal Pradesh, Punjab,Telangana etc.
No. of sub-
divisions
1999 2000 2001 2002 2003 2004
Excess 6 17 17 0 11 4Normal 22 13 11 14 20 15
Total 28 30 28 14 31 19Deficient 8 6 8 18 5 17Scanty 0 0 0 4 0 0
Total 8 6 8 22 5 17
Total 36 36 36 36 36 36
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II
STOCK MARKETREVIEW
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Stock Market- Success storyIndia’s Attractiveness – Proved !
(as per MSCI data)
Performance Index of India thebest among emerging markets.
India ahead in terms of liquidity. Low P/E and higher dividend
yield: indicating that Indianstocks will provide good returns.
Emerging Markets Growth Index Performance (July 30, 2004)
9.418
29.12
129.468
31.281
104.248
171.823190.754
0
20
40
60
80100
120
140
160
180
200
CHINA INDIA INDONESIA KOREA MALAYSIA BRAZIL RUSSIASource: MSCI, Cygnus Research
Volume Traded (in Thousand) as on May 2004
0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000
India
South Korea
China
Hong Kong
Thailand
Malaysia
Brazil
South Africa
Mexico
India ahead in terms of
Indian Equity Market Attractiveness: Proved
0
5
10
15
20
25
30
35
China
Sanghai
Composite
KOSPI
Index -
South Korea
Taiwan
Taiex Index
Philippines
Composite
Sensex -
India
Kuala
Lumpur
Index -
Malaysia
Thai SET-50
Index -
Thailand
Nifty - India
P/E
Dividend Yield (%)
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13 © Confederation of Indian Industry
Reasons for recent turmoil
• Political Uncertainty kept the markets searching for a new direction.• FII become Net sellers during the month , PSU’s lose over Rs 2,30,000 Crores in Market Cap.• Slow-Down in Chinese economy hits Asian markets.• Fears over increasing Oil Prices kept the market bearish.
4000
5000
6000
Apr-04 May-04 Jun-04 Jul-04
BSE Sensex Movement: Largest Fall in History
NDA Government fell: Market sentiments pulldown sensex by 800 Points
Partial roll-back of transaction tax and good corporate earnings
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Resource Mobilization through IPO’s & PublicIssue
Sectors Expected to Shine: IT/ITES, Auto Components,Media & Entertainment, Pharmaceuticals, Telecom.
Power 500Power Grid Corp. of India
IT & Software5000TCS
Telecom1200-1500Hutch
Media &Entertainment100UTV SoftwareCommunications.
Power 1500-2000NTPC
Sector Issue Size (Rs.Crores)
Company Name
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IIIEXPORT - IMPORT
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Exports during April, 2004 was 20 % higher than that of April,2003.
Imports during April, 2004 were 20.8 % over that of April,2003. Trade deficit for April, 2004 is estimated at US $ 1737.29 million which is higher than theUS $ 1409.60 million deficit during April, 2003.
Export Import Trend of India
0
10000
20000
30000
40000
5000060000
70000
80000
90000
100000
Q1
2001-02
Q3 Q1
2002-03
Q3 Q1
2003-04
Q3
Export Import
Rs. Crores
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IV
OIL PRICES REVIEW
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•World Oil Prices at 21 – year high of $43 per barrel on July 30th
2004.
•Fear over supply cut from Yukos
(supplies 2% of world’s output )which is facing a financial crisis.
•Oil Industry in Norway-Worldsthird largest oil exporter faces
strike which has reduced theproduction by 3.75 lakh barrel.
•Political disturbances in Nigeria,Middle east and Venezuela alsosnags supply.
•Refinery bottlenecks &historically low US gasolineinventories.
Global Price Scenario – Issues and TrendsOil Price Movement: 21-year High Prices in July '04
18.00
23.00
28.00
33.00
38.00
Jan Feb Mar Apr May June July
$ p e r b a r r e l
2002 2003 2004
World Oil Demand & Supply
7677
78
79
80
81
82
1Q03 2Q03 3Q03 4Q03 1Q04 2Q04
M i l l i o n
B a r r e
l s P e r
D
a y
( m b p
d )
Total Demand Total Supply
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19 © Confederation of Indian Industry
Indian Price Scenario – Recent price hikes
Petrol and diesel prices
hiked from 31st July, 2004 :
•Revision of prices based on
new pricing mechanism(mean of past year’s pricesand last three months prices)has resulted in reducing the
impact on consumerssubstantially.
• Increase in prices of petrol
and diesel by Rs 0.57 andRs 0.92 per litre respectively.
•Kerosene (SKO) pricesremain untouched.
Variation in prices in different metros due to different
tax structures.Revised Petrol Prices
38.83
36.69
36.61
33.71
41.53
39.53
39.26
36.28
0 5 10 15 20 25 30 35 40 45
Mumbai
Chennai
Kolkata
Delhi
Rs./Ltr.
Revised Diesel Prices
27.43
24.23
23.99
21.73
26.27
25.95
23.66
29.54
0 5 10 15 20 25 30
Mumbai
Chennai
Kolkata
Delhi
Rs./Ltr.
Old Revised
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20 © Confederation of Indian Industry
Indian Price Scenario
Impact on Govt and Industry:
• Excise duty cuts to reduce government revenues by Rs 3000 crore leading toincreased government borrowing.• Further upward pressure on inflation (6.5% week-ended July 30th); higher transportation costs raising prices of primary articles and manufactured
products.• Price hikes and duty cuts will help Oil companies reduce costs and boostmarketing margins.•Oil PSU margins are estimated to get eroded by Rs 216 crores in Apr-Jun2004 vis-à-vis Rs 360 crores in Jan-Mar 2004.
1stQ FY05 Pe rformance of OMCs
14553.4313835.7
31547.2
527.05 413.9
1850
13660.1013116.00
247.30 147.00
1472.20
35984.50
0
5000
10000
15000
20000
25000
30000
35000
HPCL BPCL IOC
R s c
Sales 4QFY04 Net Profit 4QFY04 Sales 1QFY05 Net Profit 1QFY05
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Future Oil Price Outlook
Global energy demand to rise 54% by 2025-US EIA
Growth in global oil demand in excess of 2 million barrels per day
(about 2.6%) is expected for 2004 and 2005
U.S. petroleum demand is projected to increase by 380,000 barrels
per day, or 1.9 percent, in the current year and by an additional
300,000 barrels per day, or 1.4 percent, in 2005.
Motor gasoline demand growth is still projected to average about 2
percent per year through 2005, buoyed by growth in real disposable
income and non-farm employment and growing consumer confidence.
Summer 2004 demand growth for motor gasoline is projected to be
approximately 1.4 percent, about equal to the average for the previous
five summers (despite a projected year-to-year 17-percent increase in
real fuel costs per mile.
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V
CEMENT PRICEREVIEW
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Outlook - Cement industry
• Rise in prices of cement by Rs 5 per bag (for ACC) is due to risein price of Coal.
• Interest rate on housing loan reduced by 25 basis points whichmight fuel the growth of construction.
• Better realization have led rise in profits of cement companies.
• Cement manufactures tops in terms of capacity utilization incement industry – 100%.
• Demand from gulf also fuels the prices.
• Retailing and BPO infrastructure to push up cement demand.
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Prices and factors
Trend of Cement prices (Apr - June 04)
120
130
140
150
160
170
180190
2/4/2004 23/4/2004 30/4/2004 7/5/2004 28/5/2004 4/6/2004 25/6/2004
North South East West Central
Consumption of cement in southern region has been declining in therecent months due to rainy season.The high price of cement in the north is due to the high prices of power and fuel.International prices of non-coking coal have nearly doubled in the last
12 to18 months.The cement cartel, which took the price in the country to a five-year high.
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25 © Confederation of Indian Industry
Monthwise Cement Consumption & YoY
growth rates
-10
-5
0
5
10
1520
Jun-04Feb-04Oct-03Jun-03Feb-03Oct-02
G r o w t h R a t e s ( % )
0
2
4
6
8
1012
M i l l i o n T o n n e s
Volumes % yoy
Trend in dispatches
Cement Exports* & YoY growth rates (%)
00.2
0.4
0.6
0.8
1
1.2
Apr-03 Jun-03 Aug-03 Oct-03 Dec-03 Feb-04 Apr-04 Jun-04
C e m e n t i n M n T n
-20
0
20
40
60
80
G r o w t h r a t e ( % )
Cement exports YoY growth rate* Includes clinker
Trend in Exports
Domestic cementdespatches in April 2004 fellby 7.5%, on month-on-
month basis, to 10.45mnton as compared to 11.3mnton in the previous month.
Major contributor countriesfor Exports are Nepal, SouthAfrica and Sri Lanka•U.A.E, Sri Lanka,Bangladesh, Oman andNepal have been the major contributors to clinker exports.
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VI
COMMODITYREVIEW
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Commodity Price Review
-1%83.5784.76Agriculture Index
6%206.78195.68Crude Oil Index
7%200.23187.60Energy index
-3%106.80109.68Metal Index
3%146.11141.35Commodity Index
Changesin theQuarter JunDecIndices
80
85
90
95
100
105
110
Mar-04 Apr-04 May-04 Jun-04
100
120
140
160
180
200
220
240
C o m m o
d i d y ,
C r u d e o i l a n d E n
e r g y I n
Metal Index Agriculture Index Commodity Index
Energy index Crude Oil Index
• Launch of Nickel, Copper and tin contracts on 27th May 2004 atMCXIndia.
• NCDEX launches rubber, jute, guar, pepper and chana (gram) on April12th and wheat contracts (July 6th), Castor Seed (22nd July).
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28 © Confederation of Indian IndustryCommodity Price Review
• Slow down of Chinese overheated economyNickel• China's robust demand for stainless steel has been a major factor driving nickel demand.• Terrorist threat-giant mine on the island of Sulawesi• Mismatch between supply and demand of nickel – there is a gap of 20000 tonne this year Lead
• The threat of prolonged strike action at Zellidja SA's lead smelter in Morocco is underpinning prices at a time of extremely tight market supplies, and is likely to create further price spikes in the base metal• U.S., Doe Run shuts its 137,000 tons-a-year Glover primary lead smelter from Dec. 1, and then closed itsHerculaneum plant for two weeks of maintenance at the end of April• The global refined lead market could see a supply deficit of up to 100,000 metric tons in 2004
500
1000
1500
2000
2500
3000
3500
Dec-03 Jan-04 Feb-04 Mar-04 Apr-04 May-04 Jun-04
-2000
4000
10000
16000
Copper Aluminum Zinc Lead Tin (RHS) Nickel (RHS)
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Aluminum Price Movement
90011001300150017001900
J a n - 9
6
J a n - 9
7
J a n - 9
8
J a n - 9
9
J a n - 0
0
J a n - 0
1
J a n - 0
2
J a n - 0
3
J a n - 0
4
Tin price Movement
1500
35005500
7500
9500
11500
J a n - 9 6
J a n - 9 7
J a n - 9 8
J a n - 9 9
J a n - 0 0
J a n - 0 1
J a n - 0 2
J a n - 0 3
J a n - 0 4
3750
5750
7750
9750
1175013750
15750
J a n - 9 2
J a n - 9 3
J a n - 9 4
J a n - 9 5
J a n - 9 6
J a n - 9 7
J a n - 9 8
J a n - 9 9
J a n - 0 0
J a n - 0 1
J a n - 0 2
J a n - 0 3
J a n - 0 4
Nickel Price Movement Zinc Price Movement
750
950
1150
1350
1550
1750
J a n - 9 2
J a n - 9 3
J a n - 9 4
J a n - 9 5
J a n - 9 6
J a n - 9 7
J a n - 9 8
J a n - 9 9
J a n - 0 0
J a n - 0 1
J a n - 0 2
J a n - 0 3
J a n - 0 4
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Reason for changes in Energy Index
•Rise in demand from US, European and Japanese economiesfuels the demand. China is importing oil to power its manufacturingand to make gas for its booming car market.
•Demand for Oil in US further increases due to unusually coldwinter
•Low US gasoline inventories
•Political disturbances in Nigeria, Middle east and Venezuala alsosnags supply
•Political uncertainty and unrest in the Persian gulf and middle east
fuels the prices
•Oil Industry in Norway-Worlds third largest oil exporter facesstrike which has reduced the production by 3.75 lakh barrel.
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-6.781.181.1Ending stocks
22.810.570.7Exports
3.316.957.18Consumption9.386.57.11Production
%
Change2002-032003-04In Lac Tonnes
Rubber
The prices of Rubber have beenshowing an upward trend.
Reasons:•Scarcity of raw material is themain driving force behind thisuptrend.
•Low arrivals increases the prices.
•Early arrival of Monsoon causesthe prices to increase as tapping
becomes difficult.
Rubber Prices
5000
5500
6000
6500
7000
May June July
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Indian Cotton Prices
Cotton pricesReasons for softening of
prices Record domestic production Huge subsidies granted by
the US resulted in massiveincreases in output,lowering world prices.
Lower imports by China.
Outlook Cotton prices are likely to
firm up in the near future onexpectation of good buyingby mills & exporters,reduced inflows and spreadofferings by some ginnersand stockists.
Daily Prices of Varities of Cotton in India
4000
5000
6000
7000
13/07/200419/06/200427/05/20044/5/2004
R s
/ q t l
Desi J-34 LRA S-6 Sourc e: Cline
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33© Confederation of Indian Industry
VII
INFRASTRUCTUREDEVELOPMENT
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Infrastructure holds the key to achieve targeted 7% GDP growth
Quantum of InvestmentsPower & Telecom to get morethan 70 % of investments andNorth India to receive most of
these investmentsSouthern Region to get29.4% of the total investmentsin Pipeline project, sanctioned
till 2008.Bangalore and Hyderabad toget 18.04% of the total outlayfor Airport infrastructuredevelopment.
FI’s to pool in Rs 40,000 Cr for infrastructure projectsFDI in Telecom raised to 74%and 49% for Aviation.
4131.194936.40Total Infrastructure
674.00868.00Telecom
855.001035.00Oil & Gas
1305.001440.00Power
229.00256.00Ports/ Shipping
111.19136.40Airports
484.00607.00Railways
473.00594.00Road
(2002-07)
Investments inOngoingProjects
Govt Target(Rs. Bn)
Percentage of Remaining Investment (%)
2 .69
11.4 4 11.71
5.54
3 1.58
20 . 6 9
16 .3 1
0
5
10
15
2 0
2 5
3 0
3 5
Road Airports Power Telecom
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35
© Confederation of Indian Industry
ROADSRoad Projects under Execution : 24286 kms
Non NHDP
Projects, 10000
kms
Port
ConnectivityCorridors, 400
kms
Golden
Quadrilateral,
5846 kmsNorth-South-
East-w est
Corridors, 7300
kms
Union Budget 2004-05• Introduction of more road projects onannuity basis to encourage private sector participation.• Funding of infra projects made easier.• Companies implementing infrastructureprojects allowed to issue infrastructurebonds which are exempt from capitalgains tax.
Total estimated cost for Road Projectstill 2007 is Rs. 1180bn
2675*16244322 ANDHRA PRADESH
N.A 19.22800 TAMIL NADU
11.733.61600KERALA
16.2420.32269KARNATAKA
WORLD BANK FUNDING
(Rs. Bn)
PROJECT COST
(Rs. Bn)LENGTH (Kms)SOUTHERN STATES
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© Confederation of Indian Industry
AIRPORTS & PORTSProposed investments in airport projects in Southern States.
2.710.54.2Coimbatore
1.612.6Trichy
7.340.311.6Hyderabad
84.50.513Bangalore
FY-06FY-05FY-04 (Rs. Bn)
Expected Capex(Rs. Bn)Cost Incurred
COST(Rs. Bn)PROJECTS
PORTS• The total outlay for Ports Development is Rs. 163.115bn in the Tenth Plan.
• The sector is likely to attract investment of Rs100bn-120bn from domestic andforeign majors over the next three years.
• Private Sector leads the race as it contributes approx.69% of the investments to bemade in comparison to Government Support of 31%.
AIRPORTS
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PIPELINES
9%ESSAR
19%BPCL87%46%21%GAIL
52%32%RELIANCE
4%2%18%IOCL
% of Total% of Total% of TotalCOMPANIES
550584554711Total KM to be
FY-07(E)FY-06(E)FY-05(E)
PIPELINE PROJECTS
•Build-out of 18,671km of domestic oil & gas pipeline network over FY2004-2008•Estimated Pipeline project to be executed in Southern Region from 2004 to 2007is 5490 kms.•Transportation of petroleum products through pipeline will reduce the cost and willmake it cheaper by 70% by road and 50% by Railways.
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POWER
The Tenth Plan envisages acapacity addition of 41,110MW by 2007. Plans for
addition of 27852MW, or 70%of the total targeted addition,have already been firmed up.Of the total capacityaddition, 62% would be inthermal plants, and 35% inhydropower plants.
Electric power survey has projected a peak Demand of 115705 MW by theend of 10th Plan.The country would need additional 55158 MW.Current Financial and State of preparedness, suggests capacity addition of only 41110 MW by the end of 10th Plan, leaving a deficit of 14038 MW.
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Utilisation of Hydro Power generation is better in developed nations.Huge potential lies in Hydro power in India.Operating Cost is lower in Hydro power (Rs. 0.60/unit) compared to thermalpower (Rs.1.60/unit)Emerging Economies prefer Thermal Power generation than Hydro power -
• Short lead time• Low initial capital investment
Power: Continued……
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VIIICONSUMER
BEHAVIOUR
Consumer Spending Patterns in 2002 and 2003
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p g
( as % of Total Income)
2%
1.00%
2.00%
3%
3.00%
5.00%
3.00%
6.00%
7.00%
5.00%
7.00%
9.00%
47%
1.0%
1.0%
2.0%
3.0%
3.0%
4.0%
4.0%
5.0%
7.0%
7.0%
9.0%
12.0%
42.0%
0% 10% 20% 30% 40% 50%
Home Appliances
Home Textiles
Footwear
Entertainment
Vacation
Consumer Durable
Movies & Theatres
Savings & Investments
Books & Music
Clothing
Personal Care Items
Eating Out
Grocery
2002 2003
Consumer
spendingPattern
(Source: Data fromKSA Technopak,
Analysis by Cygnus)
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