INDIA MACRO POST ELECTION UPDATE (MAY '09)

Election results spring a positive surprise

The Indian voters have delivered a surprise again! We went in to elections expecting a hung Parliament with all political
parties scrambling various permutations & combinations to form the government. However, the electorate delivered its
most polarized verdict since 1991 and brought the Congress-led UPA back to power with close to majority (262) seat count.
This is the highest seat count for any party since the Congress won 244 seats in 1991.

So what does this mean?

We believe that a near majority to the UPA provides a couple of strong positives:
a. Free hand on Reforms As is largely believed, having the Left as its partner in the government for the last 5 years, the
Congress government has not been able to push a lot of reforms which it wanted to. With the near majority that it has been
given now, one can now expect a lot of these reforms to be carried out. Some of the areas that we believe may get immediate
attention include:
a. Disinvestment of Government companies to make good the fiscal deficit
b. Increased private sector participation in infrastructure projects
c. Increasing FDI through further opening up of the economy encouraging foreign investment in Greenfield projects
d. Banking & Insurance sector reforms
e. Labour reforms
b. Stable government for 5 years - The political uncertainties associated with India for the past decade since the
advent of coalition politics will go down significantly. The Government will be able to implement its policy decisions
faithfully without the pulls and pressures of its disparate coalition partners as was evident in the past.

India's position only gets better to attract foreign capital

As we have always said in the past Capital ultimately will
chase Returns.
We believe that the recent election verdict would lead to a
re-rating of the Indian equity market and put it a notch higher
as against many other emerging markets. Our belief is
primarily driven by the fact that a clear majority should
enable the government to take certain decisive steps in the
following areas:
a. Managing the fiscal deficit - Over the last few years
while the GDP growth accelerated, the consolidated fiscal
deficit increased to 12.4% in FY 2009 from 6.8% of GDP in FY
2008. The rise in fiscal deficit has primarily been on two
accounts stimulatory fiscal policy in response to global
events by increasing social spending and lack of augmenting
its own resources by reducing taxes on one hand and
complete hold on disinvestments of government
companies on the other, under influence of Left parties.
We believe that, with the recent verdict, the government
should be in a position to take steps in the right direction
to correct the growing fiscal deficit and in turn improving
the sovereign rating.
b. Increase in share of stable capital inflows-About 85% of
the total US$207 billion capital flows that India received over
the four years ending March 2008 were in the form of less
stable non-FDI flows. This compares with the ratio of 31% for
other top ten emerging markets. The improved sentiment for
the country's macro outlook should help India to increase its
overall share in capital flows allocated to emerging markets.
Moreover, we believe that the increase in pace of reforms will
enhance the country's ability to attract stable capital inflows,

improving the mix. Growing capital inflows should also

result in Rupee appreciating against Dollars in the near
future, making Dollar investment in the country even
more attractive.
c. Thrust on infrastructure-Although the government had
taken some efforts over the last couple of years, the actual
infrastructure spending was lagging way below the required
9-9.5% of GDP for sustaining 8-9% GDP growth. As per Morgan
Stanley estimates infrastructure spending in India would have
been about 6.3% of GDP in F2009. The low spending has
primarily been on account of government's own inability to
raise resources and a restrictive FDI policy in many
infrastructure segments. We believe, the government can't
fund all the infrastructure growth and would need to roll out
policies to make infrastructure investment attractive for
foreign fund inflows. With the near majority in place, we
believe, the government should be in a position to create a
right atmosphere for higher infrastructure spending, in turn
setting a direction to achieve higher growth of 8-9%.
d. Boosting consumer spending-The National Rural
Employment Guarantee Act (NREGA) provides to eligible
rural families Rs. 100 per day per family for at least 100 days
of work in a year thereby enhancing the disposable income of
the rural population. Sensing that social initiatives such as
NREGA are essential for 'inclusive' growth and also electoral
prospect boosters, we believe the new Government shall
continue to promote similar initiatives that place more
disposable income directly in the hands of weaker and poorer
sections of the society and the same in turn providing
significant momentum to the consumer economy.

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In summary
Our investment strategy
to focus on infrastructure
'enablers' has been
re-validated.
Good governance and development have been the key success factors
for UPA's convincing victory in the elections and we believe that there
would be an increased thrust on infrastructure building especially in
the areas of roads, railways, power & water amongst others. Our
strategy of backing high value added infrastructure 'enablers' with
growth capital has thus been re-validated.

CONTACTS

Sandeep Daga
sandeep@nineriverscapital.com
+91 98210 33326

Kunal Kumthekar
kunal@nineriverscapital.com
+91 98200 63821

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