Ground Reality

31 August 2010

Satyam Agarwal (AgarwalS@MotilalOswal.com); Tel: +91 22 3982 5410

Vibrant GujaratGlimpses of the Gujarat growth story

Recently, we visited Gujarat for a ground reality on the state’s growth story. We met with the seniormanagement of its apex bodies – Gujarat Infrastructure Development Board, Gujarat IndustrialDevelopment Corporation and Gujarat Industrial Extension Bureau. We also interacted withthe teams at Sardar Sarovar Narmada Nigam and the ambitious GIFT City. And to top it all, we gotseveral insights from the very occupant of Gujarat’s Corner Office, Mr Narendra Modi.

We capture glimpses of the Vibrant Gujarat growth story in the following pages.

GIFT CityGIFT (Gujarat International

Finance Tec-City) is positioned

as an International Finance

Center with a strategic

location and world class

infrastructure. The Master

Plan for the 62msf project is

complete. The initial

phase of 4msf is

targeted to be

completed in 2012.

The target segment

is core financial

services,

capital

market &

trading.

At the forefront of industrial developmentWe were amazed to note the pace of industrial and

infrastructure development. The Blueprint for

Investment in Gujarat 2020 (BIG 2020) envisages

investment of Rs11,809b in 19 infrastructure

sectors. The vision is to make Gujarat a

globally preferred place to live in and to do

business through accelerated, balanced,

inclusive & sustainable growth.

Sardar Sarovar Narmada NigamWe met the top management for a

reality check on the tangible

benefits of the project. We came

back impressed with how the

project is proving to be a game-

changer for Gujarat and India. The

Rs700b project, expected to be

ready in 2012, will have 75,000km

of feeder canals and will generate

1,450MW of hydro power.

thethethethetheCCCCCorner orner orner orner orner OOOOOfficefficefficefficefficeOur interaction with Chief

Minister Mr Narendra Modi

threw up insights on

various subjects.

31 August 2010 I 2

Ground Reality

Narendra Modi, Chief Minister, Gujarat

We met the Chief Minister of Gujarat, Mr Narendra Modi. The interaction threw up insights on

various subjects. Gujarat has several records to its credit, including one of the highest

agricultural GDP growth rates of 9% against a national average of 2%. The state is

increasingly becoming a preferred choice for industry due to a stable policy regime and high

quality infrastructure. Human development, including education, employment and health, is

a key focus area. Gujarat is fast emerging as a role model of economic and social development.

Several impeccable records Gujarat is probably the only Indian state in which the ground water level has increased

over the past 10 years, driven by state government efforts towards interlinking of rivers,etc. The state’s agriculture economy has also reported robust GDP growth of 9% overpast several years and this is much higher than all-India average of 2%. This has led toeconomic development including better quality of lives for masses, including in ruralareas, etc.

Development and fiscal health can go hand in hand. Ten years ago, Gujarat had a fiscaldeficit of Rs67b but today it has a budget surplus of Rs5b. Also, over 10 years, Gujarat’sstate electricity boards have turned in a profit of Rs4b from a loss of Rs25b, despite notariff hikes in the past 10 years and post discounts of Rs9b towards promotion of newsectors.

Gujarat has been the pioneer in terms of starting the model of professionalizing PSUsas opposed to closure or privatization.

Role model for other states: focus on inclusive growth River interlinking is a key issue facing India. Access to water will lead to increased

ground water level, improve the quality of lives and create jobs in rural areas. Thisinitiative can lead to a 400bp change in GDP growth. Gujarat has been a pioneer in thiswith the Sardar Sarovar project interlinking most of the rivers in the state.

Gujarat has recommended state government companies use 30% of profits for socialpurposes.

Models for land acquisition are being formulated in which a farmer becomes a partnerin the development of the land.

Gujarat has been at the forefront in terms of development models for improving thequality of lives, including in villages. Several of these schemes are being studied andadopted by other states as well, including: Tribal Development Model: most states in India have studied the Gujarat example. Jyotigram Yojana (making available 24 hours three phase quality power supply toall 18,000 villages): the Indian government has recommended other states follow theexample. Evening Court: the Supreme Court has asked other states to start similar courts. Chiranjeevi (reducing infant mortality): this project is being studied by other Indianstates and the World Bank.

thethethethetheCCCCCorner orner orner orner orner OOOOOfficefficefficefficeffice

31 August 2010 I 3

Ground Reality

Policy driven state provides assurance to investors: Preferred choicefor industries Gujarat is a policy driven state and the stability of policies provides meaningful assurance

to entrepreneurs. Being policy driven, the scope for interpretation is minimal, reducingscope for corruption.

Gujarat’s focused development methodology adopted for several industries like ceramics,power generation, petrochemicals has made it a national/global hub in many of theseindustries.

Although the policies of the central government are more liberal than those of theGujarat government in solar power, Gujarat is expected to become a global hub forsolar power equipment manufacturing due to the assurance of policies and a focuseddevelopment approach by the government.

The state government is promoting ship building given Gujarat’s coastline and it targetsa market share of 5% in the global ship-building segment.

The state government also intends to enhance value addition in agriculture, which willenable Gujarat to capture a larger pie in the chain.

Interlinking of the Delhi-Mumbai industrial corridor with a netwrok of infrastructurefacilities being developed by the State government is expected to make Gujarat a defaultchoice for industries. Special Investment Regions will promote large-scale developmentof industries in a cluster approach, optimizing infrastructure and resources (such asdisaster management and water treatment for chemical industries, etc) and addressingissues like environment impact and quality of life. This will also check the scattereddevelopment of industries.

Besides better quality infrastructure, Gujarat also has cordial labor relations, with zeromandays lost. In comparison, the second best state is at 13 days.

Human development at the forefront The Chief Minister emphasizes human development, including availability of water, power,

education, health and nutrition. Over the past 10 years, 14 universities have been developed in Gujarat and seats available

in technical institutions have doubled over the past three years. New institutes for marineengineering, forensic science and others like Raksha Shakti University and Children’sUniversity are being planned. Some of them are among the first in the world.

In terms of women’s education, Gujarat was one of the most backward states 10 yearsago. Now it has 100% girl children enrollment, and dropout rates in primary schoolshave declined from 40% 10 years ago to 2% currently.

The government has also focused on skill development, with 2-10 week crash courses,which have boosted employment opportunities. A model is being run on a PPP basis,with payment being made by the government after a person gets a job. For instance,increased airport passenger traffic growth has led to higher demand for ground staffand so, 400 people within a 3km radius of the airport were selected and given 2-10week training.

31 August 2010 I 4

Ground Reality

Gujarat: At the forefront of industrial development

We met the senior management of Gujarat Infrastructure Development Board, Gujarat

Industrial Development Corporation and Gujarat Industrial Extension Bureau, and were

amazed to note the pace of industrial and infrastructure development. The Blueprint for

Investment in Gujarat 2020 (BIG 2020) envisages investment of Rs11,809b in 19 infrastructure

sectors. The vision is to make Gujarat a globally preferred place to live in and to do business

through accelerated, balanced, inclusive and sustainable growth, driven by robust social,

industrial and physical infrastructure.

Gujarat at the forefront of industrial development Gujarat is among India's most industrialized states. It has 5% of India's population but

contributes to 16% of its industrial production, 16% of its industrial investment, 15% ofexports and 30% of India's market capitalization.

Globally, Gujarat has (i) largest centre for polished diamonds, (ii) third largest steelhub, (iii) largest grassroots petroleum refinery and (iv) biggest lined irrigation canal.

Gujarat will be power surplus by the end of CY10 (a meaningful achievement). It hasdoubled seat availability in technical institutions over the past three years (to provideskilled labor), its land bank/project status data will go online from August 2010, enablingonline monitoring by investors. All this provides a conducive infrastructure to promoteindustrial development.

Phases of development of industrial infrastructure in Gujarat Gujarat's stages of industrial development are as follows: Stage 1: 83 product clusters;

Stage 2: 202 industrial estates; Stage 3: 60 SEZs; and Stage 4: investment regions. Going forward, Gujarat plans to create large investment regions including (i) the Delhi-

Mumbai Industrial Corridor, (ii) the Ahmedabad-Dholera Special Investment Region,(iii) a petroleum, chemicals and petrochemical investment region, (iv) GujaratInternational Finance Tech City, (v) a knowledge corridor, and (vi) integrated townships.These will now promote large scale development of industries in a cluster approach.

Industrial Development: A Progressive Approach

31 August 2010 I 5

Ground Reality

Blueprint for investment in Gujarat 2020The Blueprint for Investment in Gujarat 2020 (BIG 2020) envisages investment of Rs11,809b in 19

infrastructure sectors. The vision is to make Gujarat a globally preferred place to live in and to do

business through accelerated, balanced, inclusive and sustainable growth, driven by robust social,

industrial and physical infrastructure.

The framework of action to achieve this vision comprises infrastructure sector visions, strategies and

several projects. These will orchestrate infrastructure development, considering sector priorities and

interlinks with other sectors. The key strategies are:

1. Achieving upper middle class countries' per capita power generation and consumption benchmarks

by building large power generation capacities;

2. Making gas a preferred fuel across Gujarat's urban and industrial landscape;

3. Accelerating industrialization by developing world class and globally competitive industrial

infrastructure;

4. Developing seamless, efficient and high speed integrated transport, conforming to global standards;

5. Becoming a major international player in sea freight logistics;

6. Developing cities that are safe, efficient, clean and green and offer high quality of life;

7. Ensuring safe, reliable and affordable drinking water in Gujarat and providing stable water supply for

agriculture;

8. Making Gujarat a global tourist destination;

9. Creating good healthcare infrastructure to achieve healthcare indices and to reach upper middle

class countries' benchmarks;

10. Creating a network of educational institutions to make Gujarat a globally recognized knowledge

society.

The Delhi-Mumbai Industrial CorridorThe Delhi-Mumbai Industrial Corridor (DMIC) is ahigh impact industrial area of 150km distance oneach side of a Dedicated Freight Corridor (DFC)being laid between Delhi and Mumbai. DFC is anew rail transport system with high axle, multi-nodal features. Gujarat accounts for 38% of theproposed length of the DFC. Six industrial nodesare being planned in Gujarat and the influencearea of the DMIC/DFC comprises 62% of the areain the state and 74% of the population.

The broad targets are to double employmentpotential in the region, triple industrial output andquadruple exports in five years.

DMIC: Proposed Nodes in Gujarat

31 August 2010 I 6

Ground Reality

Sardar Sarovar Narmada Nigam

We met the top management of Sardar Sarovar Narmada Nigam for a reality check on the

tangible benefits of the project, given its much-publicized adverse ecological impact. We

came back impressed with how the project is proving to be a game-changer for Gujarat and

India. The dam across the Narmada River, the largest in the world, will, when complete,

create irrigation potential of 1.8m hectares, ~25% of the target under Bharat Nirman. The

progress of the project so far has helped Gujarat to sustain 9-10% agriculture GDP growth,

create about a million jobs in rural areas, increase rural incomes and led to lower dropout

rates from schools. The Rs700b project, expected to be ready in 2012, will have a 458km

main canal, 75,000km of feeder canals and will generate 1,450MW of hydro power.

Water distribution in Gujarat is skewed towards the southern parts Gujarat has 185 rivers, 8 of which are perennial. All the rivers are located mainly in the

southern part of the state. Gujarat's water resources are distributed as: South Gujarat 71%, North Gujarat 11%,

Saurashtra 10%, Kutch 2%.

A third of the incremental irrigation potential targeted by BharatNirman will come from Gujarat - a key achievement In Gujarat, the irrigation potential is 6.488m hectares. Of this, irrigation potential created

is 3.099m hectares and used is 2.37m hectares. The ultimate irrigation potential to becreated through surface water is 3.94m hectares.

The Sardar Sarovar project has potential to create irrigation potential of 1.845m hectares. To put things in perspective, the irrigation potential being created as part of the project

is ~25% of the targeted irrigation potential under Bharat Nirman for the entire country.Besides, out of the 4.2m hectares of incremental irrigation potential targeted as part ofBharat Nirman, a third will be from Gujarat.

A mammoth project The River Narmada is India's fourth largest, with a length of 1,312km and catchment

area of 88,000sq km. Most of the catchment area originates in Madhya Pradesh. Theriver flows from Madhya Pradesh to Gujarat.

The foundation stone of the project was laid in 1961 by Pandit Jawaharlal Nehru. According to a water sharing treaty, two-thirds of the water from the Narmada River is

to be used by Madhya Pradesh and a third by Gujarat. The Sardar Sarovar project entails 30 major dams and 135 medium dams. The main

concrete gravity dam has a height of 121.9 meters and the canal network will span75,000km. The project also entails a 1,200MW river bed power house and 250MWcanal head power house. The estimated cost of the project is US$8.5b at FY09 prices.

The main canal dam is the largest concrete dam in the world and has a command areaof 8m hectares.

The project includes power and drinking water generation as well as water for irrigation.The project involves integration with states like Madhya Pradesh and Rajasthan. Of theirrigation potential of 1.845m hectares, 75,000 hectares is in Rajasthan. The 1,450MWof power generation is to be shared by Madhya Pradesh (57%), Maharashtra (27%)and Gujarat (16%).

31 August 2010 I 7

Ground Reality

Benefits: meaningful improvement in agricultural GDP growth, inclusivedevelopment Agriculture GDP growth targeted in Gujarat for the Tenth and Eleventh plans were 4%

and 5.5% respectively. But the actual growth over FY01-08 has been 9.6% and compareswith all-India growth of 2.7% during this period. This is a meaningful achievement.

The increase in agricultural produce attributed to the project is 8.7mt a year, valued atUS$430m. The project has provided drinking water to 9,633 villages and 131 towns.More than a million jobs have been created in rural areas.

The share of agriculture in electricity consumption in Gujarat declined from 45% inFY01 to 22% now (had increased from 36% in FY97 to 45% in FY01). Power consumptionhas declined given the increase in the ground water table in the state and the lowerrequirement of ground water due to availability of water through canals. This led toannual savings of ~70BUs of power consumption.

Dropouts in primary schools declined to 2% now from 41% about eight years ago. Theproject has also partly helped in achieving this due to increased rural incomes andinclusive development.

Project status: largely completed The main concrete gravity dam of the project is almost complete, with 97% of concreting

done. 1,450MW of hydro power capacity has been commissioned and the main canallength of 458km has been completed.

About 18,854km of the feeder canal network have been completed and the entire networkof 75,000km will be completed by 2012. In the past few months, tenders of Rs40b havebeen floated and Rs20b projects are yet to be awarded. By October 2010, all tendersare targeted to be awarded.

The total project cost is Rs380b, which, including interest costs, amounts to Rs700b. Ofthe total project cost of Rs380b, Rs280b-290b has been spent.

Rs37b was spent in FY10 and targeted spending in FY11 is Rs40b.

Command area of the Sardar Sarovar Project

The main Narmada canal

31 August 2010 I 8

Ground Reality

Gujarat International Finance Tec-CityA city for the next generation

We met the team behind GIFT (Gujarat International Finance Tec-City) to know more about

the project and its prospects. GIFT is positioned as an International Finance Center with a

strategic location (Gujarat accounts for 30% of India's market cap) and world class

infrastructure. The Master Plan for the 62msf project is complete. The initial phase of 4msf

is targeted to be completed in 2012. The target segment is core financial services, IT/ITES

for financial services and also capital market and trading. IL&FS has signed up as the anchor

tenant. Initial rentals are at Rs50-55/sf per month.

An ambitious project to create an international finance center Gujarat International Finance Tec-City (GIFT) entails development of an international

financial center in Ahmedabad, on the left bank of the River Sabarmati. The target segment is core financial services, IT for financial services, ITES for financial

services and capital market and trading. The objective is to create a finance center that is globally best in class like La Defense

in Paris, Shinjuku in Tokyo, Dockyard in London and Lujiazui in Pudong, China.

GIFT: ambitions to change Ahmedabad's skyline

Why Gujarat? It has the highest number of chartered accountants in India. It has an active capital market and a high share in new initial public offers. Gujarat

contributes 30% to India's market capitalization. Business acumen of local population. 38% urban population.

The GIFT value proposition India's financial services sector employs 3m people, constitutes about 5% of the GDP

and has an estimated market capitalization of over US$200b. The financial sector couldgenerate about 10m jobs and make a GDP contribution of US$350b-400b by 2020.

Several developed countries have established high-tech financial hubs, which, overtime have become international financial service centers. They provide suitable regulatoryregimes and create a business environment to promote talent and increase capitalflow. As they develop they create significant economic value for their domestic economies.

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Ground Reality

Centers like London and New York account for 10% of the GDP and about 5% of jobs.Emerging financial services centers like Singapore and Hong Kong have achieved similarlevels of concentration of economic activity over short periods of time.

GIFT aspires to a market share of 6-8% in the financial services category. The value proposition of GIFT includes: a globally benchmarked financial centre,

strategically located (locally it is near Mumbai, and internationally it is a mid-pointbetween the East and the West), world class infrastructure and scale. To facilitatedevelopers, GUDC has been designated as a single-window area development authority.A separate building code is being written for GIFT.

Target Business SegmentsBusiness Nature of Opportunity

Financial Services Back office of Banking, Insuranceand Asset Management Companies

Financial Services Corporate roles in financial servicescompanies; Eg Accounting, HR, Admin, IT

Select Product Private banking, product development,Market Microfinance, etcCapital Market Includes DCM, ECM, M&A, Commodityand Trading Trading, Private Equity, Hedge Funds,

Institutional BrokerageIT Services Software Application development and

maintenance for BFSI and other verticalsItes / BPO Services Captive BPOs of large global financial

services companies, 3rd party BPO serviceproviders, KPO, etc

Source: GIFT

Employment Opportunities - GIFTFinancial Services Est No of Jobs (in 000)

in Year 2020

Financial Services Operations 125-150Financial Services Corporate Centre 100-125Select Product Markets 10-15Capital Markets and Trading 2-4IT for Financial Services 200-225Ites for Financial Services 75-100Total 500-600

Source: GIFT

Strategically locatedThe site is located on the banks ofthe River Sabarmati, about 12kmfrom Ahmedabad InternationalAirport and 8km from Gandhinagar.GIFT will have easy access from alldirections through 4-6 lane state andnational highways.

Unique Public PrivatePartnership model GIFT is an example of a Public

Private Partnership model, withGujarat Urban DevelopmentCompany (GUDC, Government ofGujarat) owning 50% ofshareholding and InfrastructureLeasing and Finance Services (ILFS) owning the remaining 50%.

While the government of Gujarat will develop the infrastructure outside the city (interms of access roads), GIFT will provide infrastructure within the city. The developmentof real estate within the city (commercial development) will be undertaken by endusers/real estate developers.

31 August 2010 I 10

Ground Reality

World class infrastructure: a zero discharge city The project is located 12km from the Ahmedabad airport and will be connected by a

metro. The initial announcement pertaining to the metro is expected by the end ofCY10.

The project aims to provide easily accessible potable water. Internal infrastructure willinclude metro stations, underground travelators connecting buildings and walk ways.

Power requirement is ~1GW, and the objective is to provide 99.999% reliability (whichentails outages of 5.3 minutes a year). The project also includes social infrastructurelike international school, hotels and hospitals.

Master plan largely complete, ILFS an anchor tenant for initial7.7msf development The master plan for the basic structure of the buildings in the city is largely complete

and development will be on planned lines. GIFT has spent ~Rs1.5b-2b on initial expensestowards the master plan.

The land is in possession and a large part of the area has been fenced. Most of theclearances, including environment and height, have been received.

ILFS will develop two packages initially with planned development of 7.7msf. Thefoundation stone is expected to be laid over 1-2 quarters and the initial phase of 4msfis targeted to be complete by the end of 2012.

Estimated lease rentals in Phase 1 are Rs50-55/sq ft per month.

GIFT: Skyline of artistically designed high rises The skyline along the waterfront is expected tofollow a profile depicted with limited fluctuation

Project details Land allocated for the project is 663 acres, entailing development of 62msf (plus 12msf

below the ground). Of this, 250 acres is earmarked for SEZs and the balance will be fordomestic operations.

The working population in the city is estimated at 500,000, and the residential populationis estimated at 15,000. In terms of development, 67% of the space is targeted atcommercial, 23% residential and 10% for social infrastructure. Thus, GIFT will pre-dominantly target the office segment.

The surrounding areas for development include the GIFT influence zone of 3,000 acresand integrated development zones of 27,000 acres, which will provide residential facilities.

Phase 1 will entail development of 10msf over 2010-13, phase 2 will entail developmentof 22msf over 2012-16 and phase 3 will entail development of 30msf over 2016-20.Phase 1 spending is estimated at Rs10b in terms of basic infrastructure and Rs30b forreal estate development.

31 August 2010 I 11

Ground Reality

Landmark structures

The River Front Development:Designed for entertainment, the riverfront will be dotted with restaurants,craft bazaars and leisure activities,offering fun and relaxation in a sereneambience.

Convention Center: It has severalhalls, auditorium and an opera hall withseating capacity of more than 10,000.Its design is inspired by salt crystals andthe Dandi March. It will also have eightmuseums showcasing the history, art,culture and socio-economic life ofGujarat.

Transport Node: The transport nodeis the urban hub of the city. Thecomplex is designed with hotels, malls,theaters, food streets andmultidimensional transport stations.

The Gateway Towers: The tallarchways of the Gateway Towers framethe majestic Diamond Tower. Astridethe main avenue of the city, the GatewayTowers have elaborate terrace gardensand a rooftop restaurant. The GatewayTowers draw this design inspirationfrom Buland Darwaja and herald India'sarrival in the new millennium.

Diamond Tower: The tallest tower islocated on Fortune Island. The towersymbolizes Gujarat's flourishingdiamond industry and has beendesigned to portray elegant edges ofdiamond facets, with each floor of thetower being different, yet forming alarge diamond.

The Crystal Towers: The glowingcrystals are one of the most stunningbuildings of the city's skyline.Synonymous with their names, the fouroffice Crystal Towers have beautifulterraced gardens and offer spectacularviews of Dream River, Diamond Towerand the Convention Center.

31 August 2010 I 12

Ground Reality

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