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The Changing Indian Investment Climate:

How are India’s States Faring?

A NCAER-PRI Video Dialogue Tuesday, December 20, 2016 New Delhi,India Tokyo, Japan

Presentation.1 Title:The NCAER-State Investment Potential Index(N-SIPI) Speaker:Ms. Mythili Bhusnurmath, Sinior Economist , NCAER At the very outset, I would like to emphasize that India is really a very diverse nation. In fact, we think of ourselves more like the European Union rather than the United States of India. The only difference is that we are also a political unit, not just an economic unit. But yes, we are very diverse, and any investor looking to invest in India must be able to understand the nuances and the differences between the different states and which state shows more potential now, which state is doing better, so that you know where to put your money. Japanese money and technology is welcome in India. We look forward to opportunities to work with Japanese companies, but you, on your part, must know where to invest. So with that preamble I am going to start my presentation and hopefully will be to answer some of your queries. I’m going to start with a little of the background of India’s social, political, and economic dynamics, things that are very familiar to an Indian audience but I think it’s important for any non-Indian audience to understand just how different India is and what is the basic kind of social, political, and economic dynamics. Then I shall go on to the methodology of index, how we arrived at the index, what are the various factors that we considered in drawing up the index, how do the various states perform, and which states look impressive today and which states show massive improvement. All this, of course, relates to the present position.. So it is not necessarily a judgment for all-time for some, but which are the states that today look as if they show most promise. With that I will plunge into my presentation. India, as all of you, perhaps, will know, is a union of 29 states and seven, what we call, union territories. These union territories do not have full legislatures like the states, so they are essentially much more in the center’s domain than the individual states, which, as per the constitution of India, have much greater freedom, particularly as far as their own taxes, their own laws, legislations, et cetera, are concerned. We are a democracy, but we are the Westminster type of democracy, not like the US which is a presidential form. Democracy is based on universal adult franchise. Every Indian above the age of 18 has a right to vote regardless of caste, creed, gender, anything. Every Indian has an equal right to vote as long as he or she is over the age of 18. The present government, which is led by a party known as Bharatiya Janata Party, or BJP, has got a complete majority, a single-party majority, in the lower house of parliament, which we call Lok Sabha, and that is the house which basically decides the laws of the country.

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Now in India, today we have a government, as I repeat, which has a majority on its own, and this is after two decades when we had coalition governments. You in Japan are very familiar with coalition governments, and, unlike Italy, your coalition governments have been much more stable. In India, too our coalition governments have been relatively stable, but a coalition does tie down the hands of the government, so the fact that after more than two decades we finally have a government which has a majority in the lower house of parliament is a significant development. [Page.4] As I mentioned, it is the first time since 1984 that we have a single party in parliament with a majority, and this is why there is hope that the Indian economy will, perhaps, do much better than it has in the past because we have a government which is quite firmly in the saddle. With that, let me go on to the dynamics of the states. As I said before, India is a union of many states, 29 states and seven union territories, and the different states have very disparate income levels. There are differences , not only in terms of economic development, but also in terms of their social and human dynamics, so if you look at this slide which you have in front of you, you can see the different states are at very disparate levels in terms of per capita income, which I think is perhaps the best indicator – I won’t say 100 percent direct indicator, but for want of anything better – of economic development. Delhi, which is a union territory and is the capital of the country, has the highest per capita GDP, and whereas Bihar, which is to the east, has the lowest per capita income in the country. So as you can see, from the difference between the highest and the lowest, there are some parts of India which are economically very prosperous, of course by the standards of a developing country, and there are some spots of India which are poorer, even by the standards of third-world African countries. So economically we are very, very diverse. To repeat, as you can see from the map, there are large parts of India which are doing well, but there are substantial parts of India, particularly if you see the red part in the map which is mostly the eastern part of the country, that has been lagging behind the rest of the country. By and large, you can see the south and the west are doing reasonably okay; the eastern part of the country is much poorer. That is the unfortunate part of the India story– that we are not developing in a balanced fashion. Regionally there are huge disparities. [Page.5] It is not just in terms of the economy, but if you look at the social dynamics also you will find that India is equally diverse when it comes to social dynamics. So you have some parts of India as an aside, I thought this was an interesting map because it compares the different states of India to the different countries in the world, so you have some idea of how we’d fare if we were to assess our human development indicators vis-à-vis the rest of the world. So if you look at the south you will see the two southern states on the extreme left and the extreme right, Tamil Nadu and Kerala, where the human development indicators are not bad at all. By some measures, Kerala’s human development indicators are comparable with those of the Scandinavian countries. But if you look at quite large parts of India, if you look particularly at the center and the east once again, you will again find that our social development indicators, human development indicators, things like maternal mortality and infant mortality, education, these are all very, very backward. Very broadly there is a mapping between economic prosperity and social development, but it is not a one-to-one mapping, so you will find that it is not necessarily true that the most prosperous part of India economically is also the most advanced socially and in terms of human development indicators. Both these slides basically demonstrate the kind of diversity we have in India.

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[Page.6] But if you look at India overall, growth has been pretty good. This chart shows you how India compares with the other countries in the world as per IMF data. What are the IMF projections this year, as well as the next year? And it’s interesting to find that at the time when the IMF has lowered the projections for the advanced world for 2016, from its July estimate of 1.8 to 1.6 for the advanced countries, India’s growth estimate has actually gone up from the April to October 2016 Outlook from 7.4 it has gone up to 7.6. Of course this was as per the IMF’s World Economic Outlook in October. Subsequently, we have had two very dramatic developments in the world. One is the election of President Elect Trump in the US, which has changed the dynamics of how the global economy will fare, and the second is what we call demonetization. It is not exactly demonetization; rather it is merely the withdrawal of the legal tender status of two high-value currency notes: Rs 500 and Rs 1,000. But this has caused a fair amount of economic upheaval in India, and I am reasonably certain – to the extent that an economist can ever be certain about the future – that the 7.6 % growth rate will not be achieved. We will perhaps be closer to 7.1 for 2016, but even at 7 or 7.1 we would be the fastest-growing economy in the world, faster than China, and that is something that is not to be scoffed at. However, even though we like to compare ourselves with China, the fact is that China is a far more prosperous country than India. China is more prosperous, whether you look at total GDP or whether you look at per capita GDP, but our growth rate has overtaken that of China, and the hope is that sometime in the future, in the not-too-distant future, we will catch up with China. [Page.7] , Now I’ve come to something that is closely related to the topic before us for discussion which is the investment potential in India. The biggest investment potential obviously has to be in manufacturing. Services does not call for much investment, and services really is not of very much interest to us, especially given that we have what we like to call the demographic dividend ie a large number of people in the younger, working age-group. However, the fact is this demographic dividend is likely to become a liability unless we can provide jobs to our people. And these jobs have to come in the manufacturing sector, so we will have to ensure that the manufacturing sector does well; in in agriculture there is already too much pressure of the population. We have to move people away from agriculture to some other sector. The only place you can move them to is manufacturing, and this is the area where we are looking for Japanese investment, for Japanese technology. This is where the present Prime Minister Narendra Modi has also put a great deal of focus through what he calls the ‘Make In India’ program, which runs along with what he calls the ‘Skill India’ program because we are very aware that no foreign investor would like to come into India unless we have skilled labor to provide to the investors. Capital can come from overseas but you cannot bring Japanese workers to work in India. You will have to employ local talent. So if you bring the capital, we have to provide investment opportunities and commensurate human labor, commensurate human capital, which has the right qualifications, which has the right degree of skill, which is why we are trying to match the Make In India program with the Skill India program, so that no investor looking to invest in India turns away because he says I do not have people I can employ. We have the people, we only need to skill them, so the government is working on that. Today India’s share of manufacturing in its GDP is clearly very low at 15 percent of GDP, way below China’s for instance, and this is what has contributed to China’s success. China has virtually become the factory to the world, the manufacturer to the world. India has been more of a service provider to the world. But we want jobs. It is not enough to be service providers. So we also want to be able to provide manufacturing goods, manufactured goods to the rest of the world, in which case

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we need to increase our share of manufacturing GDP. The government has a target of raising the share of GDP coming from manufacturing to 25 percent. That is a very tall order and that is what we really need to work on with your help. [Page.8] Within the global context how do we perform in terms of growth and competitiveness? It is a fact that India is the largest market in the world. This is one of our strengths. Any investor looking to India as a source, as a destination for investment, does not have to really a worry about the market. The market is there, and unlike many other countries where there is no demand, there is no dearth of demand in India. There is enormous demand in India. So we want investment to meet that demand. A classic example of the success of a Japanese company in India is that of Suzuki. Suzuki, as you know, is an outstanding success in Indo-Japanese cooperation. India is the largest market for Suzuki cars, and we like to think of Suzuki as no longer as a Japanese company but an Indian company in many ways. We have adopted Suzuki and made it our own. The good thing is, as you see in the fourth bullet point, is that in terms of competitiveness, we have actually moved up. Our position in the Global Competitiveness Index is way above our position in many other areas. So our rank in the Global Competitiveness Index is 39 even though, in terms of ease of doing business, we are still very low - currently we are only at 130 . But this government does want to see that India moves up to the top 50 ranks in ease of doing business as well. So we have to work much harder in improving the ease of doing business. This is where the different states - because they have a fair amount of flexibility and autonomy to lay out their good policies - are working very hard to improve their ease their ease of doing business. [Page.9-14] The N-SIPI, the NCAER State Investment Potential Index, focuses on what the different states are doing in terms of policy. At the same time unlike the ease-of-doing-business index of the World Bank and also the government’s own ease-of-doing-business that focus only on policy , it also looks at what is the level of development in each state. This is because, generally speaking, the impact of whatever a government does is also a function of the present state of development , so hypothetically a state like Bihar or a state like Jharkhand which is also in the east has to do a great deal to improve the investment potential to make it easier to do business. The fact is Jharkhand is an backward state. It does not have the skills, does not have the educated manpower, but the government there has been trying hard to improve the investment climate. So where a state is today in terms of economy, in terms of human development, social indicators, is also has a very important factor in determining the ease of doing business, also on the kind of policy initiatives that the state can undertake . Which is why the NCAER index is, I would like to think, a better index because it marries the state of development of the particular state with its policy initiatives. So we look at a number of parameters which indicate where the state is today, and then we look at what are the initiatives that the state has undertaken. We have done this in two ways. We have looked at it by looking at a) as I said, where the state is today, so we have taken a number of parameters to measure for instance, the kind of infrastructure, the labor availability, the level of competitiveness in the state etc And then we’ve done a survey and asked various industries, how easy do you think it is for you to do business in the state? The government says it has done many things. Have these actually translated into the ease of doing business at the ground level? . Based on this we have tried to rank states on a comprehensive score based on five pillars. If you look at the middle column, we shows the state rankings. . The World Bank ranking takes a much larger set of parameters. We have tried to make it easier to understand by taking fewer parameters

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which makes it more comprehensive. At the same time our survey covers the entire country, unlike the World Bank survey which looks at only two centers, Delhi and Bombay. So I like to think that we have done a better job! This slide just tells you what I said earlier, that there is much greater effort on the part of the Modi government to try and allow the states to lead the way, as it were. The different states are trying very hard to reform their own economies in a bid to attract investment. So the N-SIPI basically looks at the competitiveness or the business ecosystem in the states, and it hopes to arrive at a benchmark that future investors, whether Japanese or any other investors looking for a ballpark number to answer the question, where do I invest, know where to go. Do I invest in state A or state B? Before you start the entire process you’d have a rough idea of which of the states to actually look at today, which are the states I should look at tomorrow. This is what we hope to do through the N-SIPI index. [Page.15-20] This is the methodology we have used. We have five figures. We have the factor-driven number where we looked at labor, which is a very important factor. Any investor needs to look at what kind of labor is available to him. When we looked at the efficiency pillar, we looked at the kind of infrastructure in the state. What is the quality of the roads? What is the quality of the ports. What is the quality of the airports? So which state has better infrastructure? Then we look at the economic climate. How well has that state been growing? The fourth pillar is political stability. India, as you know, is a democracy, so many decisions cannot be taken in a vacuum. It is the political economy that decides what decisions get translated into action and which do not.The political economy is very important in a democracy. We are not Singapore. We cannot do what Singapore can do. [Page.21-23] The fifth pillar is the survey where we asked people, how do you find doing business in the state? Which state is it easier for you to do business? And as I said, this is a perception-driven index. We did the survey in 21 states, except for the northeast where we chose just one large state, AssamTo summarise, we did this survey across 21 states which is why we have only one index called N-SIPI 21, which takes into account the survey,, and N-SIPI 30 which does not take into account the survey. Thus there are two types of rankings, N-SIPI 21 and N-SIPI 30. So this is N-SIPI 21. It’s a comprehensive ranking which includes all the parameters, including the survey. Unlike N-SIPI 30 which is without the survey. As you can see, Gujarat does very well. And among the ones that are way behind, is Jharkhand. You can see it’s at the bottom in the last sub-set. However, Jharkhand is a state that is actually trying very hard. It’s trying very hard to catch up. So the overall index as it stands today, may not be a true reflection of how the states might actually perform tomorrow. But if you look at the different overall index using just the four pillars, that is minus the survey, then you see that the ranking change a little bit. [Page.24-25] This just tells you which of the states would be what we call movers and shakers, ie which are the states that are trying very hard, which are the states that are trying very hard to do well. Clearly as you can see, Chhattisgarh, which is the second state, below Andhra Pradesh, in the first table is

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actually a poor state in the eastern part of India, but it has a chief minister who is very dynamic and was doing a great deal to try to improve the way business is done in his state. Rajasthan again is a relatively poor state, in the western part of the country, but there again we have a chief minister who has been trying very hard to bring about reforms, particularly in labor. So as you can see, the movers and shakers are not necessarily those who are actually doing well in just the index. So this is really a statement of intent. So if you look at how our index compares with the World Bank index, then you can see that there are some states which perform well on our index as well as the World Bank index, and some which performed quite different purely because of the methodology adopted is different. Also because our survey is across the country, unlike the World Bank survey, which is much more restricted and which covers only Delhi and Mumbai, and to that extent is not a very correct picture of how it is to do business in India.

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Q&A session [Question.1] You have touched upon Suzuki’s success. Maybe this is not directly to do with this presentation, but I just wanted to know, what could be the reason why Suzuki is so successful in India as well? [Answer.1] This is only a personal view. I think Suzuki’s success is, of course, partly due to the fact that when they started off it was in partnership with the government of India, so that gave it a good starting block, but those were the days before reform, at which point in time it was very important to have government as a partner. Today that is no longer the case, so that is just one reason that historically explains Suzuki’s advantage. But I think the other more important reason is that Suzuki took care to understand the Indian consumers’ needs, Indian consumers are very price-sensitive, they want something that’s competitive, at the same time the Indian consumer is very aware of the price. Suzuki understood Indian consumers’ desire to own a car. So they brought out the cheapest car that was then available. At the same time, ‘cheap’ was not the same as bad, it was a cheap car that was also a good car. And at the same time, I think, Suzuki understood that in India it may not be easy to do business, but if you persevere, the rewards are enormous. A classic example of a company which made a mistake in this context I think is Vodafone in the context of telecom. Vodafone came into India at the time the telecom market was opened. They felt it was very difficult to do business in India. So after a couple of years they sold out and exited. Many years later they came back to India, at a much, much higher price. They had to buy out Ericsson at a much higher price and today they are competing desperately. So I think the success of any overseas investor is to hang in there because the rewards, as I said, are enormous. There is virtually no segment in India, no sector in India, which is satiated. In every sector there is opportunity. But in terms of volumes, not for BMWs, perhaps, though there also the absolute number might be large. But the key to success is in terms of volumes, in terms of understanding the price-sensitive needs of Indian consumers. [Question.2] The question is about the economic dynamics. For example, on page.4, the state of Sikkim can’t really get enough per capita GDP. It shows I think 1.5 to 2 Lakhs. I really want to know the reason why Sikkim cannot get so much GDP because the Japanese company asked me before the same question but I couldn’t answer at all. So please just tell me some advice for this question. [Answer.2] Per capita income is the total income of the state, divided by population, and Sikkim is very sparsely populated, so that explains the high per capita GDP. This is why we say, don’t look only at the economics. Look also things like infrastructure, look at other things like the market, connectivity to the rest of the country, et cetera. So you can’t go by per capita income alone. Your investment decision has to be based on a number of parameters , so it might not be a correct thing to look only at GDP per capita. Sikkim’s advantage is only because it has a small population, In eastern India, you will find that states are very densely populated, and that is part of the reason why the per capita GDP in those states comes down. States like Bihar and UP have not really been able to lower the fertility rate. You in Japan have a problem of very low fertility rates; we have the same problem in the southern part of the country, but in most of the eastern area fertility rates have still not fallen. They are very backward, as you will see from the social indicators, and that explains why the per capita GDP is lower.

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[Question.3] The question is about the N-SIPI. I found it’s a very interesting index, and I want to know the definition of the top guns and close seconds and miles to go. For example, like good, moderate, poor, something like that. I want to know the definition of this index. [Answer.3] In terms of which are the top fliers and which are the close seconds and which are the ones with miles to goes, it’s derived from the ranking of the states, which are the ones who get the highest number , which are the states which come second, and last of all are those that are really struggling behind and have a great deal of catching up to do. So typically, if you are an investor you will look at the top guns, but at the same time you must accept that the top guns today need not necessarily be the top guns tomorrow. So you would also need to look at the others, which are the states that have miles-to-go as well as the close seconds, but are doing a great deal to improve things for the investor. Additionally, smaller states are generally more efficiently governed unlike larger states that are almost ungovernable. UP, for instance, has a population as big as Brazil and you have one person (chief minister) sitting in the capital of UP trying to govern it. Sikkim has only 600,000 people. So the most prosperous states of India are states like Goa, Delhi, Sikkim, so as you can see, by definition they are geographically small and they are also much easier to govern. The problem in India and the rest of India is actually that we are far too centralized for our own good. Also Sikkim acceded to India in the mid-seventies., some basic indicators there were very good to start with. [Question.4] The questions is about business index by N-SIPI. While measuring the political stability, how do you assess the impact of the caste system on each state, and is it an asset or liability when you measure the stability of the society? [Answer.4] I think for political stability we basically went by how many changes in the government have occurred in a state over a particular period of time. How long as the state government continued? We did not assess the caste system. And I think we didn’t go into that at all because I do not think the caste system really plays a very important part in political stability. It influences the outcome of elections, but once a government has been brought into power, I do not think as yet we have seen too much evidence of the caste system affecting the stability of the government that has come to power. Of course, it plays a very important part in the election of a particular government, but not subsequently, so we did not look at the caste composition of the government. [Question.5] Since Mr. Narendra Modi, left Gujarat as the chief minister to move on as the prime minister, some people told me that the business environment, I mean the ease of doing business in Gujarat has been a bit changed. How do you assess anything? Do you think there has been any change since Mr. Modi left Gujarat as chief minister? [Answer.5] On your question on Gujarat, whether the business climate has been impacted after the prime minister moved from the chief ministership of that state to the center, there is a perception to this

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effect. The chief minister who took over from Mr. Modi has now stepped aside. We have a new person. So to that extent, maybe there is a perception that the ease of doing business has been impacted because of the shifting of Mr Modi to Delhi, but I think it’s more because many other states are now catching up with Gujarat. So I do not know whether on the ground there has really been very significant changes as far as ease of doing business in Gujarat is concerned. There is also the issue that in Gujarat there was a very disruptive agitation based, yes, on the question that you asked, on caste, and that to some extent this has created some amount of disquiet on the whether the social fabric in Gujarat is as stable as it was before. For now, that agitation, which is from a community which is overtly backward, but wants caste-based reservation which is our version of affirmative action that the lower castes had in that state, has created some amount of disquiet about the investment climate in that state, but I do not think that it has been impacted significantly. [Question.6] And the third question is about the state of Haryana. According to your index, Haryana is ranked rather poorly on your Page. 22, where it is ranked in the lowest group. But there is growth now in Haryana so there are many Japanese companies who are settled there and there is going to be another new investment, led by Japanese METI, and so what do you think the challenges are for Haryana to move back to the higher ranks? [Anwer.6] Haryana is impacted by a number of factors; In fact I think the detailed report is on the NCAER website, so you could take a look at that. But one of the factors that has affected the perception of Haryana as a destination particularly amongst Japanese investors, is that there has been some amount of labor unrest in factories where there is Japanese participation , not only Maruti Suzuki which you are familiar with, but also in the Hero Honda plant, and both these I think are large investments by Japanese companies in India, and that has affected the view of the labor environment in Haryana, so I think this is a significant factor. I would not say that the labor situation in Haryana has been completely resolved. There is simmering disquiet and that perhaps is one of the factors that has pushed Haryana a little lower, apart of course from the detailed methodology which is there in the report, which maybe you can go through at your convenience.

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Presentation.2 Title：Japanese Companies in India:Expectations, Achievements, & Challenges Speaker：Mr. Tomofumi Nishizawa, Research Manager, Asia & Oceania Div., JETRO [Page.3] JETRO has a global network, 45 offices in Japan but in 55 countries and 75 offices overseas. [Page.4] In India we have five offices, which are in New Delhi and Mumbai, Bengaluru and Chennai, and one office is in Ahmedabad, which is a project office. [Page.5] General information about JETRO. JETRO promotes mutual trade and investment between Japan and overseas, like India of course. [Page.6] We frequently organize the investment seminar in Japan and overseas also, like in India, so you can see the photo and the Maharashtra chief minister, and Abe-san also you can see, which was taken in India, and three talks from CII(Confederation of Indian Industry), FICCI (Federation of Indian Chambers of Commerce and Industry), and ASSOCHAM (Associated Chambers of Commerce and Industry of India). [Page.7] In this slide, let me introduce one example for our recent activities. Actually, we dispatched our delegation to Andhra Pradesh this year, which was headed by the staff minister of METI, you can see in the center. In Andhra Pradesh we had a public-private joint conference in Amaravati, which is the new capital of Andhra Pradesh. On the other hand, the coming January, we will participate in Vibrant Gujarat as a partner country, and the organizer, the Japan pavilion in the trade fair. [Page.8] We recognize that Japanese companies should do more business with the Indian IT industry, so in this context we will organize three kinds of seminars in India or in Japan. And also, I put more emphasis on collaborating with India based on the jugaad concept. Jugaad is a famous, now I believe one of the famous concepts, which the US and European companies already realized to utilize this concept as a frugal innovation. So Jugaad, let me introduce it for the Japanese colleagues. Jugaad is a Hindi word translated into frugal innovation in English. [Page.9] This is another project in which we are engaged. We actually strongly promote in Invest Japan for foreign companies which would like to Invest Japan. We provide free consultation and rent temporary offices at low price. So through these services, JETRO has supported around 1,400 companies from the world, but out of these 1,400, only 27 Indian companies we already supported in Japan. [Page.10] Secondly, let me overview the recent Japanese company activity made in India. [Page.11] In India there are around 1,200 Japanese companies. It is as of 2015 October, almost one year ago, so now we calculate the latest number but it’s not official as of now. And out of these 1,200

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Japanese companies, around 85 percent are large enterprises, not SMEs. SMEs are only 15 percent. Around 100 companies are always added year by year. And nearly 400, almost one third of Japanese companies, have a manufacturing base in India. [Page.12] These are the kind of key points which I want to emphasize, so from the top I will go through. First of all, the automobile industry. So the automobile industry is a major industry for Japanese companies in India, so as I just roughly calculate, almost half of Japanese companies are engaged in the automobile industry, and as of now, Mr. Shimada already noted, but multi-Suzuki can enjoy around 45 percent of market share of the automobile industry. Totally they enjoy 60 percent of the four-year market in India. The next point is diversification. Recently, not only the automobile industry but also like home appliances and industrial machinery, for example like ATMs for banks or elevators or medical equipment, we started manufacturing in India, and consumer products, for example internet games or some IT products or pesticides also. Recently we entered a single-brand retail industry. It’s Muji, it’s a Japanese name of the company. They will have a branch in Bengaluru and Mumbai nowadays. And the next point is collaboration with a local Indian company. Japanese companies always prefer to collaborate with local companies; however, sometimes they made a kind of serious program with the local Indian company. Just because the Japanese government wants to save time or save some procedures, sometimes a conflict or some demand will be deferred between the Japanese company and the Indian company. Then sometimes we see some trouble, so we have to be careful for the reason why they want to collaborate with an Indian company.And the next point is set up R&D facilities in India. Cost competitive products, specially designed for India, will be required to explore suggestions in India. We cannot just import from ASEAN or Japan; it might the price will be so high. And the next point I already mentioned, there are very few Japanese SMEs. So it is a really symbolic factor saying that India is a bit difficult market for Japanese SMEs, so we JETRO have to support the SMEs to enter the Indian market. The next point is infrastructure. I think we don’t have to mention so much about this. [Page.13] This slide is made with our recent research. It shows India is simply famous for the market size. Everybody can easily understand. However, tax or infrastructure or administrative procedures, nowadays labor issues also, they are a challenge for Japanese companies in India. [Page.14] This proposal was sourced by our survey, the JETRO survey on business conditions of Japanese companies in Asia and Oceania. So as you can see, the Japanese companies in India, only half of them can get profit as of now, and SMEs can enjoy a lesser amount of profit. So usually we think it will take around ten years to get profit in India. In ASEAN countries we think it is five years, so almost double for getting profit in India. [Page.15] This is for the expansion of business. So the presentation of the Japanese companies in South Asian countries, including India, which want to expand their business very highly compared with other countries. [Page.16] It’s almost a similar slide. India is top in these eight years the Japanese companies want to expand their business in India. [Page.17] According to this survey, export sales to total sales in India is the lowest in Asian countries, simply because most Japanese companies want to see the local market.

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[Page.18] The attitude to the exports of Japanese companies in India is gradually changing. You can see the result of their promises. In 2010, Japanese companies which didn’t export at all is only 61.8 percent, but according to a recent survey it goes down to 50 percent. That means Japanese companies are starting exports from India to other countries, so Japanese companies should use India as an export base, not only for the local market. [Page.19] This is about cost-cutting efforts. Cost-cutting is one of the biggest challenges for Japanese companies in India to succeed in India. In other countries we just focus on the quality, but India tells us that we have to consider the balance between the quality and the price, so to reduce the cost, local procurement is the biggest factor to reduce that cost. [Page.20] I want to talk about the overall procurement. We have a choice, we procure from a local Indian company or procure from the Japanese company in India, but according to the voices of Japanese companies in India, they prefer to procure material from a local Indian company, not Japanese companies. You can see the percentage.Companies which preferred a local company accounts for 93 percent. On the other hand, procurement from Japanese companies is only 49 percent. You can see the difference. [Page.21] India is not so competitive with regard to wages; you can see the result. In most categories the wage in India is almost kind of the middle among the countries, almost similar to China or Thailand. [Page.22] Let me conclude with hints for success in the Indian market for Japanese companies. [Page.23] Look West is our original concept to encourage Japanese companies in India. This concept is collaborating with Indian companies and explores business chances in the Middle East or African countries. So actually, when Mr. Mori came to Japan last month, the Japanese government and the government of India already had a consensus to cooperate to explore business chances in African countries. So first of all, we, JETRO, will organize an African seminar in New Delhi in the coming March, and I will also have a business trip next month to Kenya to meet the NRI in India or the company which invested from India or from Japan. [Page.24] Let me introduce the Japanese industrial townships. To set up a well-maintained manufacturing base in India, we, the Japanese government, and the Indian government identified 12 Japanese industrial townships, which you can see, and the companies located in these areas can enjoy distinguished service by the state government, and sometimes private companies. You can see on the left, the red mark, which is Neemrana, Rajasthan, and Ghilot, Rajasthan, and Mandal, Gujarat. These are the industrial zones where we, JETRO, are deeply engaged with the state governments of Rajasthan and Gujarat. [Page.26] This is the plot of the Neemrana Japanese industrial park, which is almost 2.5 hours from Neemrana, so already 46 Japanese factories are operational in this industrial zone as of December 2016. Japanese SMEs are also having a manufacturing base in this industrial zone because it is much easier to invest here compared to other industrial zones, and almost 80 percent of the companies in

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this industrial zone are engaged in the automobile industry. However, we have Daikin or Unicharm, this type of home appliance or consumer product company is also located in this industrial zone. [Page.27] Just for your information, photos of Neemrana industrial park, on the upper side you can see factory photos, and this below one is a bread shop for Japanese. It’s very, very Japanese quality, Japanese favorite breads we can buy in the Neemrana industrial zone, and right-hand side is a Japanese bar. There are around five to ten bars in Neemrana nowadays. Five years ago, ten years ago, not any Japanese restaurants are there, but now we can choose which we like. [Page.28] This is the Mandal industrial zone. It’s in Gujarat, around 15 minutes from the Honda two-wheeler factory and 30 minutes from the Suzuki automobile factory. Already around five Japanese companies are operational in this industrial zone, and you can see right below the pink-marked areas is phase 2 because phase 1 is already sold out, so the state government already decided to develop phase 2, which you can see on the right-hand side. [Page.29] I want to show you the recent photos of the Mandal industrial zone. On the upper side is factory photos and the lower left corner is a Japanese restaurant near this industrial zone. And on the right-hand side below is phase two, a recent photo. It’s not developed as of now. [Page.30] Let me introduce the major challenges in doing business in India for Japanese companies. So I just want to emphasize the three points. It is the complicated tax system in India, the inadequate infrastructure, and administrative procedure. So we have to tackle these challenges, but we can collaborate with the state government or the local Indian company and the central government, so we are the one, we are always together, and I just request your support also. And I hope GST will be implemented from April 2017.

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Q&A session [Question.1] With regards to the wages, the wages in India you find are as high as in China. Could you elaborate on that? You mean labor cost you are talking about or even the nominal wages in India as high as in China? We normally say that the Chinese labor cost should be higher than the Indians. [Answer.1] Actually this is just the voice of Japanese companies, so this is not based on the exact statistics or something like that, but always China is more expensive than India, but not so high. Some kind of, like non-manufacturing staff is almost, not so close, but in some cases India is close to China, but China is a bit expensive. That’s just the voice of Japanese companies. [Question.2] With regards to wage cost, is this just a survey as you mentioned or is there a problem with the availability of skills, so the classic in Gujarat in India is that there are a lot of cheap untrained people available, but the moment you start demanding a certain level of skillset, then people start becoming very expensive. Is that the feedback you had from your companies there? [Answer.2] As I said, this is purely the voice of Japanese companies, so this is not a statistic. Just we based it on 400 Japanese companies in India and we just calculated these numbers. And the skilled worker, to employ the skilled worker, it’s sometimes a tough problem for Japanese companies. So sometimes they directly go to ITI or some local colleges, local universities, to get directly them from these institutions. Sometimes we have to pay more for skilled workers or management class. This is one of the challenges for Japanese companies in India. [Question.3] What I wanted to ask you was you mentioned that Japanese companies have a preference for procuring from Indian companies and that there is something counter-intuitive about that, but I can’t explain it as well I’m sure, but it’s very useful and if you have explored that question any further. [Answer.3] In the ASEAN countries, Japanese companies usually procure some parts from a Japanese company in that same country, so we have a habit to procure from the Japanese companies, but in India they follow the same practice in India, but their final price went up high and they couldn’t sell well, so they realized that they have to utilize the local Indian company which manufactures the parts at a cheaper price and a reasonable quality. So this mind recollects this result; almost 93 percent of Japanese companies put more importance on the procurement from local companies.

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Presentation.3 Title:Doing Business in India; What has Changed and What has Not Speaker:Mr. Neelkanth Mishra, Credit Suisse Securities India [Page. 2] There are three parts to my presentation. The first is on the importance of state governments:I’ve run through some of my take on why this important, why this is something that has been a problem in India, and why I think it is now starting to get addressed. We are still in the preliminary stages. It will take a long time, maybe 10 or 15 years, for things to get sorted out but I think it’s a good place right now. These are things that I want to highlight. [Page.3] In the second section I will bring up the issue of state capacity and basically the ability of the government to execute what it wants to do. We are actually going through an exercise where I think it’s effectively an indictment of state capacity, that something that the government intends to do, it finds hard to do, and then why that’s a challenge. It is what I call a vicious cycle, and we’ve been stuck in it, but now I think there is a good chance we are getting out of it. And in the last section I’ll highlight some of the challenges. These are in addition to what has already been discussed. [Page.4] Without further ado, if you go slide 4, this is just to repeat what I think a comparison is important for the context I think. These are maps that I have been using now for several years. You can see on the left-hand side a map of India that in front of every state I’ve put in the name of the country that comes closest to its population. Now India is not one country, and as you said, the United States of India, I think that’s a very appropriate way to look at India. These are very, very large provinces. In fact I would say that India’s governance is actually far too centralized. The obsession with Delhi is something that the earlier we get away with it, the better it will be for India. And the second map, the right-hand side map is, as you can see, the smaller states are generally the ones which are much better off, so we have the presentation on now. So we have slide 4. So the largest states of India are actually in more like sub-Saharan Africa.If you can, slide 4. Now if you go to the next slide, slide 5, this is something… [Page.5] On slide 5, there are many variations and most people think of diversity in India as something which is to do with language or food habits or a diet or cultural issues, but I think there are hard infrastructure constraints that exist and that differ between states, so Karnataka has (where Bengaluru is), very poor groundwater but the best roads in terms of kilometers per person in India. And UP on the other hand has, well of course, they have improved a lot in the last five years, but still in terms of kilometers per person it is actually among the worst, but there is no dearth of water. There is a very well developed canal system, irrigated areas, et cetera, et cetera. So the map that you see is to do with average age. The chart on the left-hand side is the fertility rate by state, and you can see that there are some states, especially in the south,the average age, there are actually instances of schools shutting down, so kindergartens are shutting down in Kerala and Tamil Nadu. And you need old age homes, whereas what you need in the northern states is a lot more schools. So there is I think a lot of diversity, it cannot be dealt with from India, from Delhi. [Page.6]

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If you go to the next slide, slide 6, it’s something that shows the scale of, so the left-hand side chart that you see is the number of people in the central government. This is just one metric to show which government really matters. So there are about 3.1 million people in the central government. The railways which is the department of the central government, it’s not really an administrative role, we can discard that. Then there are non-military defense forces, and the guys who pat you down at the airport, they are also a security force, et cetera. If you remove those and the post and telegraph department, the central government in terms of sheer administration is only about 400,000 people. Whereas, if you see the right-hand side pie chart, the state governments all put together have 12 million people. So 30 out of 31 times, when I meet a government employee I am meeting and interacting with a state government employee, so it’s not just that the statesare very large, but also constitutionally empowered to do more administration. On-the-ground things are actually controlled by state governments, so the center’s responsibility is mostly on things that can be done better at the national level, so defense, external affairs, trade, currency, banking, so these are things that the central government controls, but the moment you get down to land, labor, health care, education, law and order, these are things that state governments need to provide. And some of the issues which are availability of infrastructure, and also the point that Japanese SMEs really struggle to invest in India, I think the challenge can be that when you invest in India you need to provide a lot of what you would actually get from a government in other countries. That’s true also for Indian companies as well. If you want a large manufacturing setup, you need to provide your own power, you need to provide your own township, you need to provide schools for the children of people who come and work in your township, and this is something which is struggle to do, and I think this will start to change as you will see as state governments become much more active and their capacity goes up. [Page.7] If you go to slide 7, this is partly I think starting to happen. The left-hand-side chart that you see on slide 7 is the ratio of state government expenditure to central government expenditure, the green line that you see. That ratio as you can see has shot up sharply. In terms of the discretion available to states, we have seen a dramatic change in the last five years, and we are starting to see that show up in the state government budgets,so the drier states are spending a lot more on irrigation. There is a lot more of hiring of staff that is happening in, say, places like UP because they’re increasing their police force by 25 percent this year. So each state is now deciding to spend on whatever matters most to it, and that I think is a much better way to govern India. A lot of this, you can see in the right-hand-side chart, is actually funded from their owntax revenues. We will see some disruption in this in the next 12 to 15 months, but I think once it’s settled down I think this pattern will resume. [Page.8] If you move to the next slide, this is what I meant by state capacity. The Indian government is too small. Most Indians get surprised by it because generally government employees in India are not seen to be doing too much work, which is also true, but you can see the right-hand-side chart, the green bars that you see are the number of policepersons per 1,000 population. Now you can see that Japan has 2, Canada has 2, India has 1.38. This is 2013 data. Now the point is that the average policeperson in Japan and Canada is much better equipped so that they have cars and they have guns and tasers and smartphones and an IT backbone. The average Indian policeman, for those of you who have spent time in India, sits on a plastic chair with a stick. Despite that gap in productivity, the developed economies have 50 percent more police people. And there is a correlation, you can see in the left-hand-side chart, in that the states that have more police people on the whole have higher per capita GDP which is that red dot that you see.

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And as you can see, UP was at less than 1, so you can see that they needed to hire policepeople and this year they are expanding by 25 percent. There are political considerations as to why they’re doing it, but the fact is they need to hire more police because this is starting to change. There are bigger things happening. So if you go to the next slide, and I’ll put in the context here: I think the victory of the BJP in 2014 was I think more of a symptom of the change than the cause of the change that people started to expect. It was a campaign run on jobs and growth and it delivered an absolute majority. The prime minister then took the same message in state government elections later that year, and he got similar success. What that did was it put the fear of god in the minds of every single political party, and India’s political system has been changing quite dramatically in the last 25 years, so from aoverly-centralized, one party at the center, one party at the state, where the constitutional separation of powers was superseded by the political parties’ hierarchy, now we have political parties that belong to the state, and political leaders who know that their political power comes from their own state, and therefore they have started to use their constitutional powers and they are finding much, much better. And what has also started is, after this message that was delivered by the electorate in 2014, that they are now starting to push for more development. So even in a state like UP, Uttar Pradesh, which has as many people as Brazil and is the second-poorest state of India, the chief minister has really accelerated the metro rail project in Lucknow, the Agra Lucknow Expressway, which was built in record time and is of excellent quality, and if you go through some after the anecdotes of how it came about, it’s actually quite exciting as to how governance is starting to change. The states which have come up in many rankings that we have been discussing this morning as well, like Andhra Pradesh, Telangana, the number of steps to just start a company has been collapsing, the number of days to approve a project in Andhra Pradesh is down from 90 in the financial year ’15, like you, our financial years also end in March, so in FY15 it was 90 days in Andhra Pradesh.For FY16 it was 21. The target for this year is 14. The neighboring state, Telangana, which has Hyderabad, they are in deemed approval mode so they want to approve projects in 15 days irrespective of their capacity to approve – if they don't revert in 15 days, the project is automatically approved. There is also a sharp pickup in metro rail projects. There are cities in India where it was unthinkable, like the city I studied in in Kanpur, it’s still hard to make me believe it will have a metro rail but they have inaugurated a project. These are all externally funded. The JICA, your agency, the European Investment Bank, a lot of these are very encouragingly investing in these projects. Every state has one or two metro rail projects. There is almost a reimagining in their team playing out. A state like Telangana for example has now embarked on a project Bhagiratha. The project is about providing piped drinking water to every household. Now for you this may be very obvious and unsurprising:what's great about that. In India, just the fact that some state government is trying to do it is I think it excites us all. We are also seeing a sharp increase in electrification. So Bihar, my home state, it had only 16 percent, onesix percent of households in 2011 had wires going into their houses, and even that 16 percent never got more than eight or ten hours of power. That eight or ten hours of power is now 20-plus and the electrification in five years has gone from 16 percent to more than 50 percent, and by 2019 every household will get electrified. So a state which has as many people as Mexico is going from nearly zero electrification to nearly 100 percent electrification in eight years. And availability of power has also improved dramatically.

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So there are some very dramatic changes which are happening ground-up, which makes me… And this is all happening because the state governments are… And as you know, as you may have heard from your Suzuki projects as well, that when they moved to Gujarat they could actually draw power from the grid, so in Gurgaon and Manesar they have plants where they had to have their own power plants, but in Gujarat they are not having to invest in that because the grid power is reliable and it’s actually much cheaper as well. So these are changes which I think will enable, over the next five, seven, eight years,even SMEs from Japan actually to actually come up and invest in India. [Page.10] If we can move to the next slide, this change in, you see the right-hand-side chart here, the black line sneaking up, that is the trailing, 12 months, trailing four-quarter FDI, and I’ve got net FDI here, so you can see that we have seen a record FDI flow because of all of these changes that are starting to happen at this state level. And I think that this trend should actually continue because we have seen more and more countries. So I heard from the US ambassador to India for example that when American companies come to India, they come armed with state business ranking, so now that that new one is announced, I’m so excited to see that you are all completely familiar with this, that you are investing in a particular state and not really as much thinking about India. [Page.12] If you go to slide 12, we are now moving to the state capacity question. India as an economy has very high informality,so you can see on the left-hand-side chart, the formal sector, the right-most column on the left-hand-side chart has 1.9 million rupees, almost 30,000 dollars per capita of output, so this is very decent. The problem in India is there is still a very high level of informality, so you can see that the informal workforce, even if you remove crop agriculture is only at about 2,000, dollars per capita. It is this informality where we are stuck in what I call a vicious cycle because most of these, now India has 59 million enterprises, so we are where China was in the ‘80s, where there were a large number of microenterprises. [Page.13] The challenge for us, if you go to the next slide 13, is growing them, and there is a vicious cycle here, and the vicious cycle is that if you’re a small enterprise you don’t have much savings to grow, so you don’t have money to invest back into your business. So as you can see on the left-hand-side chart, the funding is mostly no finance or self-finance, and even the guys who get finance, you see the right-hand-size chart, the smaller the ticket size, the higher the interest rate. So this becomes a vicious cycle so you are still small because you’re small. It’s very hard to break out of this. This is very similar to the Jeffrey Sachs vicious circle of poverty where he talked about calories and we are talking about capital, but this has been a very big problem in India. [Page.14] There is a second problem, if you go to the next slide 14. India is what I would call a low equilibrium government. India’s tax to GDP is around the lowest in the world, but if you look at tax to formal GDP, India is very similar to Japan. And so the problem in India is that if you raise the tax rate, you start hitting the Laffer curve, so then your compliance starts to get eroded. So the solution in India has to be that you focus a lot more on formalization. [Page.15] And you see the right-hand-side chart, this is the reason why government expenditure in India is very small. The example I use very often is that the New York metropolitan area has an eight-and-a-half million population; Bangalore has eight-and-a-half million population. New York has 400,000 government employees; Bangalore has 20,000 government employees. So it’s not surprising that basic services on garbage collection, municipal schools, sewage treatment, civic planning, these are all very, very abysmal. And then this is again a vicious cycle, so you have low tax, therefore a small

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government, therefore an inefficient economy, high informality, and therefore low tax again. Economies like Japan, the US, Canada, Hong Kong, they are in the high equilibrium so they have high tax, a larger government, greater efficiency, and therefore higher taxes. [Page.16] So to break out of this, you need a couple of things. If you go to slide 16. The one advantage we have is technology, so it is helping break through the first problem. It is not an immediate solution but I think over the next three to five years you will see this change. You will see technology allowing people to access formal funds. [Page.17] If you go to the next slide 17, in the credit bureau availability, the start of GST,in the first year it will be disruptive, but I think among other things it will generate massive amounts of data, so we expect to see 3 billion invoices coming to the GST network and there will be massive formalization impetus that can happen because of GST, and that leaves I think significant advantages in breaking out of both these vicious cycles. So you have the vicious cycle of small enterprise and the vicious cycle of small government, which GST should be able to break through. If monetization is done well, there is an “if” there, but if monetization is done well I think it can also help us break through or break out of this vicious cycle of small government. [Page.19] The last section on challenges, the big problem right now – and this may not be of particular concern to you if you are thinking 10, 15, 20 years, you do have a very long-term vision – but for the next two to three years I think the capex cycle from the private sector by and large may not be that good, and the reason is, as you can see on the right-hand side chart, the utilization is very low across sectors. So this is a proper business cycle where there’s nothing much that the government can really do to bring the utilization up in a very short space of time. At that time, but I think there are problems with state capacity, as we have seen. There are segments like renewable energy, where there is a lot of capex that needs to happen. Oil demand in India was growing very well. Let’s see what happens in the next two or three quarters, but it should grow from here. [Page.20] If you go to the next slide, this is the challenge I was talking about, state capacity. On national highway construction, the government has been doing that well. You can see on the left-hand-side chart, the pace of ordering had collapsedto 2,000 kilometers a year in FY13. It has spiked up to 10,000 kilometers in FY16. This year’s target was, well, actually, it was much higher. We expected the government to order 12,000 kilometers, but in the first half of this financial year it has actually come down. What you see in the right-hand-side chart is that bitumen demand growth has slowed. Bitumen is only used for road construction, so it’s a proxy for road construction activity. So now we are getting and now recently the national highway, the authority chairman was changed. So we are now hitting the challenge of how much can the government really do? So normally if the government wants to spend, what we are realizing is that it is unable to spend, which in the longer term perhaps is not as bad, but it does create impediments to a growth pickup sometime soon. [Page.21] This is to go with other challenges, so you have a problem with, so in the banking system growth, so in the formal banking system, the credit growth is the lowest in 50 years, five zero years. Some of that is because inflation has started to come down, and you know credit growth is linked to inflation

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in some ways, but it is also a problem of what I mentioned earlier, that the private sector, at least the sectors that are open for private investment, we already have over-capacity, and the investments now need to happen in areas which have not fully been opened up for the private sector, so things like the infrastructure, like metro rail, sewage treatment, power distribution. These are segments which require enormous amounts of capex, but they have not yet been opened up to the private sector to a large extent, and therefore we have seen a pretty dismal credit growth phenomenon. On the right-hand-side chart you can see the formal banking system still has a bad loan problem, and I fear that given this demonetization exercise, this number will also pick up a bit. So these are challenges I think for the government, and this will in the near term perhaps act as a growth impediment, but once we are beyond this hump, I expect that we will have broken out of that vicious cycle and we will be doing much better. [Page.22] there are other challenges over and above the skilling and wages problem, and that you highlighted. India also has a problem in resolving insolvency, so exit policy is always a challenge in India, but not just from the labor perspective but also from banks getting back their money. So the Indian banks are the worst globally in terms of the number of years taken to resolve insolvency, and the recovery rates are pretty bad as well. You can see the right-hand-side chart. Now this, the government has a pass-through policy so there’s a new insolvency code which is effective now. They actually made it effective a few months ahead of that initial plan, but the adoption of this I think will still take some time. So on that note I will close to just summarize what I just said. I think the focus has to be on state governments. It is with the changing politics and the changing aspirations of the people, finally state governments are starting to deliver change and they are the ones that we need to look towards in order to improve the infrastructure that businesses and citizens use, and inspecting and encouraging, and therefore it is not only a person-dependent growth prospect. The second issue is that India has been stuck in vicious cycles of small enterprises and small government, and we are I think on the verge of breaking out of them, which puts us in a great place for the next ten to 15 years. And lastly, that at least the next one or two years may actually be quite challenging. So on that note I’ll stop and thank you for your patience for listening to me.

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Q&A session [Question.1] According to your report, it was very surprising, page 6, governance mainly ihas been provided by state governments, and out of 3.1 million employees of the central government, nearly 90 percent are in the railways. I was just wondering whether the Indian government is going to privatize those railways or public sector undertakings, because according to the stock exchange market, if you are going to privatize and sell all the stocks listed in the Bombay stock exchange, maybe you can wipe out the entire debt of the government right on the spot according to the figures. Could you give your personal opinion on this issue on how the Indian government is going to privatize all those very big giant public sector undertakings? [Answer.1] That’s a very good question and it’s a very important question. I think the problem here is the politics and the political will. So the running joke in India is that every five to seven years the government sets a committee and the committee recommends that there should be a path towards privatization of Railways, and given it’s a very large organization, it has about 1.3 million direct employees,another million or so contract employees, it’s a very large organization, one of the ten biggest employers in the world, in fact, it is going to be too much of a change to move it from a government department to a private enterprise. So step one should be that it should be carved out off the government as a mega corporation out of it. And the first step to doing that would be to separate the pricing authority from political interference, then create organizational bodies and all that, so it’s a very long process. Unfortunately, despite committees sitting on it every five or seven years, we have not even crossed the first hurdle, so while it is desirable and I am absolutely convinced that with the path you mentioned it is the correct one, but it has become politically very difficult. It has been very difficult for the governments to go down that path. Now this government has embarked on some changes which are going to be effective or eight or ten years, so for example, there was this, so the railways, the employees, it almost seemed the senior employees only worked for themselves, so they all came from one college called the SCRA, the Staff College for Railway Apprentices: that college has been scrapped. So from next year there will be engineers coming in from lateral hires. So they are trying to break open that shackle that this organization had, but it’s going to be a slow process, but I don’t see any reason why we could see a listed railway in the next ten years. I think the probability of that is very low. [Question.2] Can I understand that there is competition between the states to invite more foreign direct investment in the states, and my question is, there is going to be more competition, and is what results in the divergence, I mean more of the divergence of each state, I mean between the richerstates and the poorerstates. So there will be more of the Indian quality between the states, that’s the first question. And maybe in some cases, do you think there will be more immigration from one state to another, from poorer states to more rich states where there are more jobs in maybe the manufacturing sector? Maybe that is what happened in China. Do you think that will also be the case in India? [Answer.2] I think one of the necessary conditions for states to be allowed to compete against each other is that you should be okay to see inequality because the way democratic forces work is that you allow for… You know, a lot of people are… To go back to a simple thing like electrification. In places like Bihar

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and UP it was almost accepted that if you are in a village you will not have electricity. It is only when migrant labor went to Gujarat and found that they were getting 24 hours of electricity in every village, people came back and asked, why can’t we be like that? And then aspirations rise and political pressure rises and then the change starts to happen. So I think you are probably right. I think the initial phases as some state governments are better capable of attracting investments, they may grow faster, but I don’t think that’s necessarily a bad thing. In terms of migration it is already happening. Actually, as I said, if Kerala and Tamil Nadu in the south did not have migration their population would be falling right now. And what we have seen, even in the city of Mumbai, is anti-immigrant protests have happened in the past, but what they realized immediately after that is that some of the basic services like providing milk or newspapers or doing the menial tasks, the locals have just moved beyond that, and therefore you need immigrants from other states to be doing those tasks. So there is an interdependency which is not necessarily a bad thing. In Tamil Nadu in the south, where there is a lot of anti-Hindi sentiment, because of their language, they always had some resistance to accepting Hindi, but this time, in 2014, in the elections there were billboards in Hindi, there are so many migrant laborers who speak only Hindi, and there was no resistance. So I think it is inevitable and it is not something that I would particularly be worried about. There are redistribution elements in the way the central government distributes taxes to states, and over time I think that should take care of things. [Question.3] The question is on GST. with the GST council’s meeting, it didn’t come up, and the next meeting is going to be December 22 so the winter session of parliament has finished, so there will be no big chances for the introduction of GST. That’s bad news. But still my question is, the philosophy is revenue neutral while deciding which things should apply, a 12 percent rate or 18 percent rate, or more high rates, , but in reality, for some products they get higher rates and some products get lower rates, and maybe for services the tax rate will go up from 14 or 18 for every service. So at the moment of the introduction of GST, is there going to be a distortional impact on the consumption because that’s what happened in Japan when we raised the consumption tax rate. People rushed to buy things before the rise in the rates, and once the rates rise, there will be a negative impact on the consumption. Do you think that will happen in India? [Answer.3] You’re right. The challenge for the government is to bring about a consensus on some very sticky points like dual control – and this is actually about central-state relationships, especially at the bureaucratic level. Where there is an enterprise, who should supervise it? Should it be a central bureaucrat or should it be a state bureaucrat? These are tough decisions. But I also think they are just bureaucratic decisions. I don’t know why the politicians are getting involved, but anyway, that’s not my choice inmy opinion. The gist is that there is no option but to do it before September, so September 16, 2017 is what I would call a GST cliff. Beyond that, the powers of taxation of state governments on sales tax or the central government on excise and service tax will lapse and there is no way that they will let that happen. So it could happen before September. Now we have a question, if it happens July 1 or September 1.

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As for the rate mapping, as far as the rate mapping goes, I think they have made it very clear, it is going to be a full range structure, plus special rates for gold and some luxury items. They have tried to replicate the current tax as much as possible, so the consumption distortion apprehension that you had I think is something that the government has as well or let’s say the bureaucrats have a well. I think most policy advisors like me would have advised a simpler structure but they are replicating the current rate structure, so anything that is between say 3 to 7 or 3 to 8 is getting taxed at 6 percent, anything above 24 is getting taxed at 28 percent. So they are just bunching together multiple rates into one. I do think that there will be some stocking-destocking. I don’t expect consumption, especially in the services, the thing about services is you can’t consumer advance there, at least not most of it, but I do think that there will be a channeled impact, so sectors which are likely to see a higher tax rate will try to restock or build up as much inventory as much as possible, all tax-based things, and when they are going down they will destock. That gives disruption but that is expected. I think the bigger disruption will be in the informal sector which is now forced to pay tax, so their all P&L, their balance sheet is structured around no tax, and some of them will fail, and their failures will cause a disruption in the economy, so that’s what I’m more worried about. I’m less worried about destocking which is going to be a one quarter problem. [Question.4] The question is about the road construction in the public sector. Do you think there is going to be a revival of the PPP, private public partnership? I understand that now it’s only the road construction funded by the central government budget is down, but do you think it will come back or not? [Answer.4] On road construction, the model that the government is working on right now is a hybrid model, so it is neither EPC, which is government funding everything, not PPP, where the private sector brings in capital, so the government takes on some of the construction risk. Actually, they try to take most of the construction risk. This model has actually been quite successful, so we have seen a lot more build-up of private companies bidding for hybrid projects to the extent that some people are now wondering that they again are bidding too aggressively. So again, capital is not a problem. I think right now the challenge is state capacity, I mean the ability to acquire so much land. So if it’s X number of people, you are going to acquire land for 6,000 kilometers. If you need to acquire land for 10,000 kilometers of construction a year, you need to get 60 percent more people, and I think those are challenges that the government is grappling with. It is a matter of time. I think it takes time. I think they have reset their ambition. Hopefully it will happen. [Question.5] the is about the demonetization. I actually visited your office from the second day, day 2 of the demonetization, and when I was there you explained the windfall gain for the government, about the 3 trillion rupees which you’ve had this year, which never had been… But it seems that the more money is coming back and more old notes are coming back to the banks than we initially expected, so do you think this is going to be failure, that the government is losing the war against dark money? [Answer.5] On demonetization, I don’t think it’s a question that can be answered in one minute but I’ll try to. I think this is indeed an indictment of state capacity, that the government was not able to prevent the money from coming in, and I think this is as much a failure of the banking system as it is of the governments. So there are cases of a massive lack or loss of control at the banks, right from the top to the branch manager to the teller level, where a lot of CEOs, private bank CEOs, are saying, I can’t vouch for the character of every bank teller.

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So there has been a lot of violations, and in many ways, I think that is the biggest risk from demonetization over the next two or three quarters, that even if the government does not really penalize the banks for this, the banks themselves will actually have been quite shocked at the extent of control failure, so their own filing for foreign (SEC) auditors, et cetera. If there is a positive side effect of this we will have much better managed banks a year or two later, but right now I think it will be fairly deceptive. Have they lost the war on black money? I don’t think so. Money laundering is a two-step process. You put your money in and you take it out, I think taking it out, and the fact that there are electronic trails available for every transaction that has happened, which the government is investigating. What I do think has happened is that currency in the black economy will be a little bit constrained for at least a year. It could last longer, and therefore, people have stopped signing files because they are expecting a bribe and they are not getting it in cash. So the black economy has slowed much more sharply than the white side of the economy, which itself actually creates an incentive for some people. So you have large business families which are already always working on cash, some of them, some cousin, some brother, has decided, this is not it, I don’t think I can work like this, so they are making the switch. It’s not 50 percent, it’s 20 to 50 percent, but I think that itself can be considered a meaningful change. But yes, at least in the first leg of stopping money from coming in, I think the government has, you can say, failed.

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Open Discussion India side [Question]: A question was there is a sense which they have no actual basis that Japanese investors perhaps are the most risk-averse in terms of their willingness to enter into not-a-perfect environment, but they have the staying power. For example, look at Maruti Suzuki. They came in a very difficult environment but they stayed, and they are now a huge force in India. And other example is the South Korean companies who have done remarkably well in a number of different segments of the economy. But in thinking about how the investment climate in India has to respond to the opportunities of foreign direct investment, it’s important for state governments for example to understand that different countries have different expectations, cultural, social, economic, and financial, and it is important for a state for example, so Rajasthan clearly has created a mini Japan in Neemrana, and it has been able to do so where it has reached critical mass. The presence of those Japanese bars, it isn’t just a pleasure activity but what it’s really saying is that you’ve created an eco-environment that is catering to the precise needs, both commercial and social, of a foreign direct investor community. Any thoughts on this and anything that we can take back in our dialogue with the DIPP officials here, with chambers of commerce in states, with FICCI, ASSOCHAM, CII, whom we talk to all the time, and say that, look, you need to have this additional element in your thinking in considering the Japanese investment community. Clearly, we want them, need them, for all the reasons we’ve said and have been talking about. So is there a special message we can give that can help them think about what it is that’s so special about the Japanese investor? Japan side[Answer.1]: I would like to respond to your question from two fronts as my personal observation. My first point is that Japanese enterprises or companies tend to make decisions at their headquarters, so it’s a question of how you can mobilize or influence the headquarters’ decision. I think this will be the key and that’s my first point. And the second point is that there are two types of companies in Japan. One is companies that make top-down decisions and the others are bottom-up decision-making companies. In other words, that I think facilitated them to make entries into the Indian market, whereas other companies that make decisions on a bottom-up basis will tend to make decisions at the sites and then ask their headquarters to make the final decision, and that I think leads to the perception that you mentioned, that Japanese companies are risk-averse. Japan side[Answer.2]: When I met a certain person of Maruti, I asked him that what are the crucial factors which made the merger successful. He simply said,it’s “human resources”. At that time, at the beginning of Maruti Udyog, the government sent a lot of the very highly qualified people, public employee, which made the Suzuki merger very successful, not because of O. Suzuki, chairman of Suzuki, but because of the Indian human resources which helps the merger be successful. That’s one of the points. And also, I think we have to have some good understanding about the difference of the psyche or psychology in the two nations. For example, in Japanese we say there are some 16 ways to avoid saying no. We say, I am going to think it over, which sometimes implies that I do not agree with you or I want to take up your suggestion or proposal, but it must be very difficult for your people to understand in this way. And if you take a look at the universities in your country, I understand there are no such hours provided for learning Japanese history, culture, social structure, et cetera. A lot of the American and European people are provided such classes at universities in their countries, but I unfortunately didn’t come across any such opportunities to join any such discussion at any university in your

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country. That’s my personal observation, just scratching the surface of what the differences are between Japan and India. So as Dr. Shah mentioned, the social structure and people’s mindset, psyche,those are totally different, so we start off with this kind of support system. Also we have to discuss about the differences at the same time. Finally, I have to talk about the human resources. It’s hard to understand mutually how we can get the best of the people of the two countries to cope with each other to make any enterprise successful between Japan and India. India side[Question]: In India, Japanese companies make profit after ten years, whereas in the ASEAN countries they do it after five years. This possibly is related to the ease of doing business, the differences, so my question really is that once you have broken even and started making profit, is the rate of growth in profits higher in India, as you would expect given the large domestic base, the market in India, or is it slower than in the ASEAN countries? And the second question is relating to the issue of better awareness of Japanese culture in India. Your point is very well taken, but that I would think is more relevant for Indian companies wanting to enter Japan, that they need to understand the Japanese society. Of course, we certainly need to understand each other better, but for an Indian company entering Japan, understanding of the Japanese culture and society would be more important. So my question is, are there any Japanese universities which have courses on Indian culture, society, and history? Japan side [Answer]: The reason why it takes ten years in India, one reason, yes, ease of doing business is offsetting; in other words, it’s a bit more difficult in India to do business compared with the ones in ASEAN. On the other hand, it’s a very simple answer, but the difference of market size. So in Thailand, like in Indonesia, it’s only like Bangkok, only Jakarta, and then it’s easier to have right access for getting a market in these countries. But India is a large, large country, so as Mr. Mishra already showed us, we have, so to speak, several countries in India, like Brazil, so we have to put more effort to explore that, to get to know of the market in each state in India itself. So it takes time to get the market in India compared with other Aisian countries. The second question that you raised, I think the level of awareness of the Indian market is growing in Japan, and maybe 20 or 30 years ago we never exported our cars to the United States. At that time Suzuki decided, if we are going to America, maybe we cannot challenge the American major such as Ford, Chrysler, General Motors, and Toyota, and Honda, so Mr. Suzuki, the owner of Suzuki, decided to go to India. That’s one of the reasons why Suzuki went to India, I think. But most of the companies have been busy to take care of the Asian countries and China. Now those markets are saturated to some extent. It’s time for the Japanese companies to explore the business opportunities in India, so it’s to cherish the young staff to work with the Indian people, at the same time as your recognition, even Japanese universities are going to open the door to the Indian students, but if you take a look at the number of people who are coming from China, it’s huge, 100 times more than Indian students who are going to come, and most of the Indian students who are coming to Japan are only for studying Japanese history or language, et cetera, not for business. So one of the reasons is language. I was told by the Indian IT person that if you are going to learn Japanese, you will be likely behind the technology which you can easily learn if you are already in the United States because the language is English. So if you can challenge those issues, there are I think a very good scope for the future business opportunities for India and Japan. But it’s up to the

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Japanese government. That’s the reason why when your Prime Minister Modi came to Japan in November, he proposed and our Prime Minister, Abe agreed to exchange young people more than we used to so that we do not depend on our senior people but depend on the young people to get to know more about each other and to exchange those students and broaden the scope of the new business between the two nations. That’s my personal understanding.

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