CONTENTS. Economy. Sizing India s demographic bomb...3. Prologue...4. Section 1: The four problems confronting India s northern belt 7

ECONOMY April 2016 JOBS JOBS Sizing India s demographic bomb Research Analysts: Ritika Mankar Mukherjee, CFA ritikamankar@ambitcapital.com Tel: +91 22 3043 3175 Sumit Shekhar sumitshekhar@ambitcapital.com Tel: +91 22 3043 3229

CONTENTS Sizing India s demographic bomb.....3 Prologue....4 Section 1: The four problems confronting India s northern belt 7 Problem #1: The already skewed gender ratio in 8 India s Northern Belt, deteriorated further over the noughties Problem #2: The illiteracy threat is more pronounced in India s Northern Belt 9 Problem #3: Unemployment is a larger problem in India s Northern Belt..11 Problem #4: The sector employing the largest proportion of the.11 population of India s Northern Belt i.e. Agriculture has been characterised by a prolonged spell of low growth Section 2: The concomitant social upheaval underway in....13 India s northern belt Section 3: The South is different..17 Charecteristic#1: The South is almost like a middle-income country 18 Charecteristic#2: The Southern States labour markets are in better shape 18 Charecteristic#3: The Southern States public finances are better managed..20 Charecteristic#4: Despite this, political power is concentrated with the..21 Northern States Section 4: Macroeconomic implications.22 Impact#1: Unequal societies are unlikely to deliver sustainable growth.22 Impact#2: High youth unemployment limits consumption growth 23 Impact#3: India could potentially get stuck in a low-income trap..24 Impact#4: South India is better placed to supply medium technology.25 exports to global markets Section 5: Investment implications.26 April 05, 2016 Ambit Capital Pvt. Ltd. Page 2

THEMATIC April 05, 2016 Sizing India s demographic bomb India s rapid economic progress masks its abysmal progress on social indicators. Worryingly, this imbalance between rapid economic progress and stagnant-cum-awful social metrics is particularly glaring in India s Northern Belt (INB; the region spanning Rajasthan in the west to Bihar in the east). Despite the fact that INB is the youngest region in India, the region runs the risk of exploding as millions of barely literate men face a lifetime without jobs and without women. These risks could come to the fore particularly in the run-up to 2HFY17 as Uttar Pradesh and Punjab are scheduled for state elections in 1HCY17. We highlight investment risks to three stocks in this regard namely Punjab National Bank, Havells and Hero as they draw a majority of their revenues from INB. The West benefited from its youthful demographic structure post-world War II Economic theory suggests that when the proportion of young people in a region increases, a significant boost to economic growth should materialise. The post-world War II years saw the West in general and the US in specific benefit from this dynamic as the baby boomers delivered record productivity. We highlight that even as India s demographic profile today is similar to that of the US in 1960 (see exhibit A & B on the right hand margin), contrary to popular belief - a demographic dividend is very unlikely to accrue to India anytime soon. This is mainly because a large share of India s youth today lacks education as well as jobs to deliver this productivity. To add to the imbalance, India s gender ratio is skewed significantly in favour of men. A demographic bomb is ticking away in India s Northern Belt The lethal combination of a youthful demographic structure but no education, no jobs and no women is most pronounced in India s Northern Belt (INB). India as a whole is significantly better off on economic as well as social indicators than INB. Whilst these problems are well known, the noughties have seen: (1) the adverse social conditions are acting as a binding constraint to economic growth; and (2) the political situation becoming more fraught because politicians and riots are now in a symbiotic relationship. With three States of this region (i.e. Uttar Pradesh, Uttarakhand and Punjab) scheduled for State elections in 1HCY17 (see exhibit C in the right hand margin) we highlight that violence and social unrest related risks could come to the fore particularly in the run up to 2HFY17. In contrast, the south is almost like a middle-income country with superior performance (and improving) on a range of socio-economic parameters. Superior literacy levels means that even the southern states labour markets are in better shape as compared to INB, which suffers from an over-supply of under-skilled labour. Investment Implications Given that three stocks, namely Havells, Punjab National Bank and Hero, draw largest of their revenues from INB, we highlight investment risks to these stocks as minor as well as major incidents of social unrest in the INB could deter economic activity in this region over the next five years. On the contrary, stocks such as City Union Bank, TVS and V-guard are likely to benefit as their revenue and production is South-India-focussed and this region is likely to prosper as social as well as economic indicators improve simultaneously. Exhibit A: India s demographic structure today is similar to the US in 1960 Age (in yrs) Source: UNDP, Ambit Capital research Exhibit B: But India lags the US of 1960 on social indicators Source: UNDP, Ambit Capital research Exhibit C: State elections are due in four Northern states in CY17 & CY18 State 65-99 35-64 0-34 Per capita income (US$) Literacy rate Gender ratio UP 690 7 908 Punjab 1,790 77% 893 Himachal Pradesh -3-15% 15% 3 1,842 84% 974 Uttarakhand 2,174 8 963 Source: Ambit Capital research Research Analysts Share in total population India's males in 2014 US's males in 1960 98% 74% Literacy rate 9% Youth Unemployment 1 5 48% % female (out of total population) US in 1960 India in 2014 Ritika Mankar Mukherjee, CFA +91 22 3043 3175 ritikamankar@ambitcapital.com Sumit Shekhar +91 22 3043 3229 sumitshekhar@ambitcapital.com Elections due by May 2017 March 2017 January 2018 May 2017 Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.

Prologue The recent achievements of modern, democratic India are not inconsiderable, and have been widely recognized across the globe over the last decade or more. India s record in pioneering democratic governance in the non-western world is a widely acknowledged accomplishment, as is its basic success in maintaining a secular state, despite the challenges arising from its thoroughly multi-religious population and the hugely problematic history of violence around the ending days of the Raj. To this can be added the achievement of rapid economic growth in the last decade, when India became the second fastest-growing large economy in the world. And yet despite these great achievements if the much talked about glory of today s India is deeply uncertain, it is not because an unblemished sunny day stands in danger of being ruined by a freshly arriving shower The uncertainty arises, rather, from the fact that together with the sunshine, there are dark clouds and drenching showers already on the scene. -Jean Dreze and Amartya Sen, An uncertain glory: India and its contradictions (2013) India grew from being the 14 th largest world economy in CY95 to the 7 th largest in CY15 (see exhibit below). Exhibit 1: India today is the 7 th largest economy of the world Exhibit 2: However, India s progress on the social indicators front has been awfully slow Number of countries with nominal GDP more than that of India 14 12 10 8 6 4 2 0 13 12 12 8 6 CY80 CY85 CY95 CY05 CY15 No. of countries with HDI worse than India 70 60 50 40 30 20 10 0 58 52 46 29 CY90 CY00 CY10 CY1 4 Source: IMF, Ambit Capital research Source: IMF, Ambit Capital research Despite the rapid economic advancement India experienced over the nineties, its progress on the social indicators front has been appalling. Whilst only 6 countries today have economies that are larger than that of India s, our country is at the bottom of the league tables on social indicators with only 58 countries having an HDI rank worse than that of India s (see exhibit below). Exhibit 3: EM peers like Russia, Turkey and Mexico have significantly superior Human Development Index (HDI) scores as compared to that of India Despite the rapid economic progress India experienced over the nineties, its progress on the social indicators front has been appalling 0.9 HDI in CY15 0.8 0.8 0.7 0.7 0.6 Argentina Chile Russian Federation Malaysia Turkey Sri Lanka Mexico Brazil China Thailand Egypt Indonesia Philippines South Africa India Source: UNDP, Ambit Capital research April 05, 2016 Ambit Capital Pvt. Ltd. Page 4

This imbalance between rapid economic progress and stagnant-cum-awful social metrics has arisen mainly owing to the drag created by India s Northern Belt (INB), which comprises the region spanning Rajasthan in the west to Bihar in the east (see exhibit below). Exhibit 4: India s Northern Belt spans from Rajasthan in the west to Bihar in the east Source: Ambit Capital research. Please note J&K: Jammu and Kashmir, HP: Himachal Pradesh, PB: Punjab, HR: Haryana, UT: Uttarakhand, UP: Uttar Pradesh, BH: Bihar, RJ: Rajasthan, MP: Madhya Pradesh, GJ: Gujarat, MH: Maharashtra, KR: Karnataka, AP: Andhra Pradesh, TN: Tamil Nadu, KL: Kerala Even as INB is the youngest region in India demographically speaking, the State Governments in the region have almost completely failed in providing healthcare, education and jobs to this region, which accounts for 45% of India s population (see exhibits below). Exhibit 5: INB lags the rest of India in terms of per capita income Per capita net NSDP 2,200 1,800 1,400 1,000 INB India ex-inb India Source: Census of India, Ambit Capital research, Note: The data pertains to FY15 Exhibit 6: and also on the social indicators front Life expectancy at birth/infant mortality 80 82% 65.6 67.4 66.1 8 60 78% 40 76% 74% 20 72% 7 0 68% INB India ex- INB India Life expectancy at birth (In years, Left scale) Infant mortality (per 1000 live births, Left scale) Literacy ratio (as % of total population, Right scale) Source: Census of India, Ambit Capital research Literacy rate April 05, 2016 Ambit Capital Pvt. Ltd. Page 5

As is evident from the exhibit above, India ex-inb is better off than INB on both economic and social indicators. In other words, An average person in INB earns a per capita income of US$1,183 (which is less than that earned by an average citizen of Pakistan or Bangladesh). This average person survived the infant mortality rate of 45 and is now expected to live for 67 years (which is less than the life expectancy of an average citizen of Bangladesh or Nepal). Of every 100 people in INB, 36 are in the age group of 15-35 years and hence comprise the youth. Of these 36 young persons, only 66% or 24 number of persons are literate which is defined in India to mean any person who can read or write his/her name. Of these 36 young persons, only 46% or 17 persons have jobs. Of these 36 young persons, only 47% or 17 are women. On the contrary, An average person in South India earns a per capita income of US$2,014. This average person survived a much lower infant mortality rate of 28 and is now expected to live for 69 years. Of every 100 people in South, 34 are in the age group of 15-35 years and hence comprise the youth. Of these 34 young persons, only 72% or 25 numbers of persons are literate which is defined in India to mean any person who can read or write his/her name. Of these 34 young persons, only 57% or 19 numbers of persons have jobs. Of these 34 young persons, only 5 or 17 are women. Worryingly, the population of INB is 2x the population of South India. Whilst the above stated problems are well known, the noughties have seen: (1) the adverse social conditions acting as a binding constraint to economic growth and (2) the political situation becoming more fraught because politicians and riots are now in a symbiotic relationship. This turn has meant an increasing incidence of social unrest and violence in INB which has often threatened the smooth functioning of the regional economies (see exhibit below). Exhibit 7: Frequent social unrest have adversely impacted economic activities in INB Month/Year Incident of social unrest in INB Adverse impact on economic activity February, 2016 September, 2013 The Jat reservation agitation Muzaffarnagar riots Source: Media reports, Ambit Capital research Economy The protests were estimated to have caused a loss of Rs340bn (US$5.1bn) in North India. The Northern Railways suffered a loss of Rs2bn (US$30mn) while more than 10 lakh (1,000,000) passengers were affected. By 26 February, 30 people had been killed in the violence (source: http://goo.gl/1wie9j). The riot-hit Muzaffarnagar, known for its Jaggery (Gur) Mandi lost business to the tune of about Rs 20 million per day due to closure. As per Muzaffarnagar Mandi Samiti report, 1.1 million quintal of average annual business was hampered by 20-3 (source: http://goo.gl/zgnygg). The subsequent note is focussed on exploring the roots of this phenomenon in greater detail and discerning the investment implications of the same. Section 1 begins by quantifying the magnitude of INB s backwardness on socioeconomic indicators compared to the rest of India. Section 2 details the concomitant social upheaval underway in India s northern belt owing to the imbalance created by an elite segment of INB prospering even as large parts of INB remain socio-economically destitute. Section 3 highlights how South India is significantly different from North India and is almost like a middle income country. Sections 4 and 5 elaborate on the macroeconomic and investment implications of this dichotomy. April 05, 2016 Ambit Capital Pvt. Ltd. Page 6

Section 1: The four problems confronting India s northern belt The Allahabad university was near collapse. The student body was polarised along caste lines. Shootouts often erupted on the campus. The library was closed to students. Classes tended to be impossibly overcrowded. Hopelessness hung over the hostels, where I met students who had spent long years, some more than a decade, at the university. They were, they said, "preparing" to take the entrance exams to the civil service. But the "coaching centres" in Delhi had long made such preparation an expensive affair, leaving students in provincial universities to fill out the application forms for salt inspector and other lowly, obscure jobs. We define India s Northern Belt (INB) as the 10 states including Jammu & Kashmir, Himachal Pradesh, Punjab, Haryana, Delhi, Uttarakhand, Uttar Pradesh, Rajasthan, Bihar and Madhya Pradesh - Excerpt from Pankaj Mishra s Death of the small town (The Guardian, August, 2007) Geographically, India s Northern Belt (henceforth referred to as INB) is defined as the area comprising three distinct features: The Indo-Gangetic plains (spanning the states of Punjab, Haryana, Delhi, Uttar Pradesh, Madhya Pradesh and Bihar). The Himalayan region which covers large parts of Jammu & Kashmir, Himachal Pradesh and Uttarakhand. The Thar Desert which covers Rajasthan. This region, which has been the seat of India s power for several centuries and, consequently, the epicentre of several historic battles, accounts for nearly half of India s population and a third of India s aggregate GDP (see exhibit below). Exhibit 8: A profile of India s Northern Belt Head Constituent States/Union Territories Region s share in India s GDP 3 Region s share in India s population 45% Source: CEIC, Ambit Capital research Description Jammu & Kashmir, Himachal Pradesh, Punjab, Haryana, Delhi, Uttarakhand, Uttar Pradesh, Rajasthan, Bihar, Madhya Pradesh Despite its rich cultural heritage, the noughties have seen this region deal with the emergence of four dangerous socio-economic problems, namely the persistence of a skewed gender ratio, the emergence of a youth bulge that is largely uneducated and/or unemployed, and GDP growth in the most prominent sector of this region, i.e., agriculture, being consistently low. The noughties have seen this region deal with the emergence of dangerous socio-economic problems In the subsequent section we elaborate on the emergence of these four fatal problems in INB. Note: We have excluded states like Orissa, Chhattisgarh and West Bengal from INB as they appear to be characterised by a different socio-cultural ethos. As regards states like Gujarat and Maharashtra, which are economically two of the best in India we cover these in a segment called Middle India in a subsequent part of this note. April 05, 2016 Ambit Capital Pvt. Ltd. Page 7

Problem #1: The already skewed gender ratio in INB deteriorated further over the noughties India s gender ratio is the poorest among its emerging market peers (see exhibit below). This can be largely attributed to INB s poor gender ratio, which is lower than that of South India and the all-india average (see exhibit below). While INB is known to suffer from a skewed gender ratio compared to the rest of India, the most disturbing point is that after recording an improvement in the nineties INB s weak gender ratio deteriorated in the noughties. Exhibit 9: India s gender ratio is the poorest among the emerging nations Exhibit 10: INB s gender ratio is poorer than the rest of India and has deteriorated further over the noughties No. of females (as % of total) 56% 52% 48% 44% 54% 52% 51%51%51%55 49% 49%48% 48% 47% Russia Sri Lanka South Africa Turkey Brazil Mexico Indonesia Nigeria Pakistan China India INB Number of females (per 1000 males) 1040 1000 960 920 880 840 982 994 933 933 910 2001 2011 South India All India INB 901 Source: World Bank, Ambit Capital research. Note: The data pertains to CY14. Source: Census of India, Ambit Capital research. Note INB includes: Jammu & Kashmir, Himachal Pradesh, Uttarakhand, Punjab, Haryana, Delhi, Uttar Pradesh, Rajasthan, Bihar, Madhya Pradesh and South India includes Kerala, Tamil Nadu Karnataka and Andhra Pradesh Consequently, though INB accounts for 45% of India s total population, it has 57% of the total male population and only 43% of the total female population (see exhibit below). Exhibit 11: INB accounts for only 43% of India s female population compared with 57% of the male population Exhibit 12: INB has the worst child sex ratio in India Share in population (in %) 46% 45% 44% 43% 42% 45% 44% 44% 2001 2011 INB share in total Population INB share in Female population 43% Child sex ratio 960 940 920 900 880 860 840 953 946 927 919 909 888 2001 2011 South India All India INB Source: Census of India, Ambit Capital research. Note INB includes: Jammu & Kashmir, Himachal Pradesh, Uttarakhand, Punjab, Haryana, Delhi, Uttar Pradesh, Rajasthan, Bihar, Madhya Pradesh. Source: Census of India, Ambit Capital research. Note INB includes: Jammu & Kashmir, Himachal Pradesh, Uttarakhand, Punjab, Haryana, Delhi, Uttar Pradesh, Rajasthan, Bihar, Madhya Pradesh and South India includes Kerala, Tamil Nadu Karnataka and Andhra Pradesh. In India, the Child Sex Ratio is defined as the number of females per thousand males in the age group 0 6 years in a human population The roots of this probability-defying gender ratio can be traced to the frequent practice of female foeticide and infanticide, which in turn has meant the child sex ratio in INB is also skewed in favour of males (see exhibit above). The roots of the consistently sub-5 gender ratios can be traced to the practice of female foeticide and female infanticide April 05, 2016 Ambit Capital Pvt. Ltd. Page 8

Problem #2: The illiteracy threat is more pronounced in INB India s youth population ratio is higher than that of most parts of the globe today. Furthermore, this demographic feature is likely to persist for the next few decades (see exhibit below). Exhibit 13: India s youth population ratio is higher than that of most parts of the globe Exhibit 14: and is expected to persist for a few more decades Source: United Nations Population Fund, Ambit Capital research Source: United Nations Population Fund, Ambit Capital research The youthful structure of India s demographic profile can also be attributed to INB (see exhibit below) as this region is characterised by the youngest population structure in the country (see exhibit below). The youthful structure of India s demographic profile can be attributed mainly to INB Exhibit 15: INB has the youngest population structure in the country Exhibit 16: as fertility rates in the region are among the highest in India % of population aged 15-24 2 2 19% 19% 18% 18% 19.5% 19.2% 18.2% INB All India South India Fertility rate (in %) 3 2 1 2.4 2.4 1.8 INB All India South India Source: Census of India, Ambit Capital research. Note INB includes: Jammu & Kashmir, Himachal Pradesh, Uttarakhand, Punjab, Haryana, Delhi, Uttar Pradesh, Rajasthan, Bihar, Madhya Pradesh and South India includes Kerala, Tamil Nadu Karnataka and Andhra Pradesh Source: Census of India, Ambit Capital research. Note INB includes: Jammu & Kashmir, Himachal Pradesh, Uttarakhand, Punjab, Haryana, Delhi, Uttar Pradesh, Rajasthan, Bihar, Madhya Pradesh and South India includes Kerala, Tamil Nadu Karnataka and Andhra Pradesh. Note: Total fertility rate represents the number of children that would be born to a woman if she were to live to the end of her childbearing years and bear children in accordance with current age-specific fertility rates. Even as textbook economics suggests that a youthful demographic structure yields economic benefits, the reality in INB is different owing to the widespread problem of illiteracy. For instance, India has one of the lowest literacy ratios among peers, mainly due to the drag created by INB (see exhibits below). India s Northern belt suffers from youthful demographic structure with widespread illiteracy April 05, 2016 Ambit Capital Pvt. Ltd. Page 9

Exhibit 17: Amongst peers, India s adult literacy ratio is superior only to those of Nigeria and Pakistan Exhibit 18: INB has the worst overall literacy ratio in India 12 85% Adult litercay rate 10 8 6 4 2 10 95% 95% 94% 94% 93% 91% 91% 69% 66% 57% 51% Russia Turkey China Mexico South Indonesia Brazil Sri Lanka India INB Pakistan Nigeria Overall literacy rate (as per census 2011) 8 75% 7 65% 8 74% 71% South India All India INB Source: World bank, Ambit Capital research. Note: Adult literacy refers to proportion of people 15+ who are literate rate. Source: Census of India, Ambit Capital research. Note INB includes: Jammu & Kashmir, Himachal Pradesh, Uttarakhand, Punjab, Haryana, Delhi, Uttar Pradesh, Rajasthan, Bihar, Madhya Pradesh and South India includes Kerala, Tamil Nadu Karnataka and Andhra Pradesh The literacy ratio for women is significantly worse than that of men in INB (see exhibit below). The roots of this can be traced to the fact that access to education available to an average girl child in North India is significantly worse than in South India. The literacy ratio for women is significantly worse than that of men in North India Exhibit 19: Female literacy rates are the appallingly low in INB 11 10 9 8 7 6 5 4 99% 95% 93% 93% 93% 92% 92% 71% 65% 63% 5 Russia China Mexico South Africa Brazil Turkey Indonesi a South India All India INB Nigeria Female literacy rate Source: Census of India 2011, Ambit Capital research. Note: INB includes: Jammu & Kashmir, Himachal Pradesh, Uttarakhand, Punjab, Haryana, Delhi, Uttar Pradesh, Rajasthan, Bihar, Madhya Pradesh and South India includes Kerala, Tamil Nadu Karnataka and Andhra Pradesh The reason for wretched literacy ratios in the INB can be attributed to the poor attendance of teachers in this region compared to rest of India (see exhibit below). Exhibit 20: Teacher attendance in schools is very poor in INB Teacher's attendance 88% 86% 84% 82% 8 78% 76% 74% 87% 84% 85% 81% 8 79% INB South India Middle India Primary Schools Upper Primary Schools Source: NCERT, Ambit Capital research. Note: INB includes: Jammu & Kashmir, Himachal Pradesh, Uttarakhand, Punjab, Haryana, Delhi, Uttar Pradesh, Rajasthan, Bihar, Madhya Pradesh and South India includes Kerala, Tamil Nadu Karnataka and Andhra Pradesh and Middle India includes Gujarat and Maharashtra April 05, 2016 Ambit Capital Pvt. Ltd. Page 10

Problem #3: Unemployment is a huge problem in INB Unemployment too is a bigger problem in INB than in the rest of India a fact that does not augur well for North India in light of its youthful demographic structure. Exhibit 21: INB is characterised by the worst labour force participation ratio Exhibit 22: as well as the worst unemployment ratio in the country Labour force participation rate (per 1000 persons) 600 560 520 480 440 570 525 455 Unemployment rate (per 1000 persons) 70 60 50 40 30 20 10 64 49 36 400 South India All India INB 0 INB All India South India Source: Ministry of Labour, NSSO, Ambit Capital research. Note INB includes: Jammu & Kashmir, Himachal Pradesh, Uttarakhand, Punjab, Haryana, Delhi, Uttar Pradesh, Rajasthan, Bihar, Madhya Pradesh and South India includes Kerala, Tamil Nadu Karnataka and Andhra Pradesh. Even as the veracity of official statistics on unemployment in India has been questioned by academicians (mainly because these statistics inadequately measure the large informal sector in India), they do capture the fact that the employment situation is far worse in India s Northern belt than it is in South India. Problem #4: Agriculture is the biggest employer in North India and the sector has seen low growth for two decades Agriculture accounts for the largest share of employment in INB (see exhibit below). Also, agriculture accounts for a larger share of income in this region than in the rest of India (see exhibit below). Source: Ministry of Labour, NSSO, Ambit Capital research. Note INB includes: Jammu & Kashmir, Himachal Pradesh, Uttarakhand, Punjab, Haryana, Delhi, Uttar Pradesh, Rajasthan, Bihar, Madhya Pradesh and South India includes Kerala, Tamil Nadu Karnataka and Andhra Pradesh Exhibit 23: Agriculture accounts for the lion s share of employment in INB Exhibit 24: Agriculture accounts for nearly a fifth of GDP in INB 65% 25% Share of agricultural employment in total employment 6 55% 5 45% 46% 52% 6 Share of agriculture in GSDP/GDP 2 15% 1 5% 19% 14% 11% 4 South India All India INB INB All India South India Source: Source: NSSO, Ambit Capital research. Note INB includes: Jammu & Kashmir, Himachal Pradesh, Uttarakhand, Punjab, Haryana, Delhi, Uttar Pradesh, Rajasthan, Bihar, Madhya Pradesh and South India includes Kerala, Tamil Nadu Karnataka and Andhra Pradesh. Source: Planning Commission, Ambit Capital research. Note INB includes: Jammu & Kashmir, Himachal Pradesh, Uttarakhand, Punjab, Haryana, Delhi, Uttar Pradesh, Rajasthan, Bihar, Madhya Pradesh and South India includes Kerala, Tamil Nadu Karnataka and Andhra Pradesh. The data pertains to FY14. To complicate matters, the agricultural sector in India has consistently grown at a slower pace than the industrial and services sectors for the last two decades. April 05, 2016 Ambit Capital Pvt. Ltd. Page 11

Exhibit 25: The farm sector has lagged industries and services in terms of growth for the last two decades YoY growth (in %) 12% 1 8% 6% 4% 2% FY90 FY91 FY92 FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 Agriculture Industries Services FY12 FY13 FY14 Source: CEIC, Ambit Capital research. April 05, 2016 Ambit Capital Pvt. Ltd. Page 12

Section 2: The concomitant social upheaval underway in INB The present Samajwadi Party government in Uttar Pradesh] has ruined the state. The law and order is shattered. Land mafias are grabbing government land. The graph of loot, dacoity and rapes is rising day by day More than 300 communal riots were fanned by BJP and Samajwadi Party for their political benefits in the state. - Nasimuddin Siddiqui, National General Secretary, Bahujan Samaj Party on March 29, 2016 (source: http://goo.gl/tyfubp) The condemnable incident of firing that resulted in the reportedly total loss of vision with over hundred pellets in the brain of a brilliant M.Tech. student Kaleem Ahmad, who had successfully competed in the Railway Engineering Services in North India and was about to join, is beyond horror - Teachers association of Aligarh Muslim University (source: http://goo.gl/iykcrt). Whilst covering the recent rioting by Jats in Haryana, Amy Kazmin of the Financial Times noted on 21 st February 2016, The destructive spree in a business-friendly state housing the corporate offices and factories of many multinational companies is a warning sign of the risks to India s political and social stability from restive youth, struggling to realise their aspirations for a better life in an economy that is failing to create enough jobs for the estimated 1m people entering the work force each month. This explains why the North has now become a regular venue for large-scale rioting and violence (see exhibits below for the three most recent incidences). Whilst the causes vary from riot to riot, what is guaranteed in INB is a steady stream of mob violence owing to the lethal combination of a youthful demographic structure, inadequate jobs, poor status of social indicators and widening inequalities which are systematically exploited by politicians intent on carving out their vote banks. Exhibit 26: India s Northern belt saw the unfolding of three major episodes of rioting over the past three years Riot/Clashes Muzaffarnagar riots in September 2013 The desecration of the Guru Granth Sahib in October 2015 The Jat reservation agitation in February 2016 Description Source: Media reports, Ambit Capital research The clashes between the Hindu and Muslim communities in Muzaffarnagar and Shamli districts of Uttar Pradesh resulted in at least 62 deaths, injured 93 and left more than 50,000 displaced. Approximately 1,000 army troops were deployed and a curfew was imposed in the violence-hit areas. 10,000 Provincial Armed Constabulary (PAC) personnel, 1,300 Central Reserve Police Force (CRPF) troopers and 1,200 Rapid Action Force (RAF) personnel were deployed to control the situation. Around 10,000 to 12,000 preventive arrests were made by the police as of 11 September 2013. They cancelled 2,300 arms licenses, seized 2,000 arms, and filed seven cases under the National Security Act. In September 2013, fresh riots started and around 11 people including a TV journalist were killed and more than 34 were injured after which indefinite curfew was clamped and the army deployed to help maintain law and order. A series of desecration incidents of the Sikh holy book Guru Granth Sahib took place in Punjab in October 2015 and sparked off violence in the region, which resulted in protests throughout the state. Between 13 th and 16 th October 2016, more than 500 protesters were detained by the police. Two protesters died in police firing and as many as 50 were injured, including two police officers. The Jat Reservation Agitation was a series of protests in February 2016 led by the Jat community of North India, especially those in the state of Haryana. The protesters sought inclusion of their caste in the Other Backward Class (OBC) category, which would make them eligible for affirmative action benefits. Besides Haryana, the protests also spread to the neighboring states such as Uttar Pradesh and Rajasthan and also in the National Capital Region. By 22 February, the protests were estimated to have caused a loss of Rs340bn (US$5.1bn) in North India. The Northern Railways suffered a loss of Rs2bn (US$30mn) while more than 10 lakh (1,000,000) passengers were affected. By 26 February, 30 people had been killed in the violence. Even as the domestic press presented a muted version of these events, the foreign press presented a graphic account (see exhibit below). April 05, 2016 Ambit Capital Pvt. Ltd. Page 13

Exhibit 27: The Foreign Press s view on the wave of riots in North India Riot/Clashes The Guardian (September 9, 2013) (source: http://goo.gl/5wf5tz) The Guardian (February 24, 2016) (source: http://goo.gl/uje4di) The Economist (March 19, 2016) (source: http://goo.gl/dl3yp2) Description Source: Media reports, Ambit Capital research Sectarian violence is spreading across northern India, despite an army-enforced curfew put in place after deadly weekend clashes between Hindus and Muslims. Gunfire and street battles that erupted on Saturday in villages around Muzaffarnagar in Uttar Pradesh state have killed at least 28 people and left many more missing, police said. Soldiers in the region have been given orders to shoot rioters on sight, state government official Kamal Saxena said. To the outside world, the idea of caste belongs firmly in the past. It is no secret that the dalit caste, once known as untouchables, were and still are the victims of shocking discrimination, but the community at the centre of the current disturbances, the Jats, are fairly prosperous landowners. (They come from the northern Indian state of Haryana, which surrounds Delhi on three sides.) Though still fairly prosperous, they are feeling the pinch because of population growth, which has reduced the size of their farm holdings, and two successive years of drought and failed crops. Delhi found itself under siege last month. Young men blocked roads and canals that feed people and water into the city. They looted, set fires and dragged women out of cars to rape them. The protesters, from a relatively privileged group of land-owning peasants called Jats, were agitating to be included in India s list of other backward classes, which guarantees university places and government jobs. Faced with dry taps, Narendra Modi s government was eventually forced to concede to the demand. In the next part of this section we quantify the social upheaval underway in India s Northern Belt. Inequality and destitution breeding discontent and violence in North India India has one of the largest populations of impoverished people in the world. As much as 21% of India s population lives on less than US$1.9/day, i.e. much higher than China s 11% and Brazil s 5% (see exhibit below). Once again, India s adverse standing on the poverty headcount ratio is mainly attributable to the widespread economic destitution in INB, which accounts for a much higher share of India s poor population. India s northern belt accounts for the majority of India s poor population Exhibit 28: Within the BRICS and MINT economies, India s poverty ratio is superior only to that of Nigeria Exhibit 29: INB accounts for a significantly higher proportion of poor in India % of population living below $1.9/day 6 5 4 3 2 1 28% 16%17% 21% 11% 3% 5% Russia Turkey Mexico Brazil China Indonesia South Africa India INB 53% Nigeria Proportion of total poor 6% 5% 4% 3% 2% 1% 3% South India 6% INB Source: World Bank, Ambit Capital research. Note data pertains to CY14 The combination of a predominantly young population, large-scale economic destitution and unemployment has resulted in higher crime rates in INB. For instance, INB is characterised by higher juvenile crime rates than southern India. Source: Planning commission, Ambit Capital research. Note INB includes: Jammu & Kashmir, Himachal Pradesh, Uttarakhand, Punjab, Haryana, Delhi, Uttar Pradesh, Rajasthan, Bihar, Madhya Pradesh and South India includes Kerala, Tamil Nadu Karnataka and Andhra Pradesh. The data pertains to FY12. The combination of a predominantly young population, large-scale economic destitution as well as unemployment has resulted in higher crime rates in this region April 05, 2016 Ambit Capital Pvt. Ltd. Page 14

Exhibit 30: North India has a higher juvenile crime rate Total Juvenile crime (as % of total population) 0.003% 0.002% 0.002% 0.001% 0.001% 0.00 CY09 CY10 CY11 INB South India Source: NCRB, Ambit Capital research. Note INB includes: Jammu & Kashmir, Himachal Pradesh, Uttarakhand, Punjab, Haryana, Delhi, Uttar Pradesh, Rajasthan, Bihar, Madhya Pradesh and South India includes Kerala, Tamil Nadu Karnataka and Andhra Pradesh The exhibit below highlights that almost all the major bank robberies in the recent past have taken place in the INB, suggesting that people are being driven to resort to extreme measures in the absence of employment opportunities (see exhibit below). Exhibit 31: The INB has seen a series of bank robberies lately Head Description In one of the biggest heists in India, the driver of an Axis Bank cash van deployed to refill ATMs drove off with INR 22.5 crore Delhi Cash Van Robbery worth cash on 24 November, 2015. The driver was eventually caught and almost all the cash was recovered. (November, 2015 Sonipat Bank Robbery In October 2015 a group of men robbed Punjab National Bank in the northern state of Haryana by building a 125 foot long (October, 2014) tunnel right up to the bank s strong room. The banned group, Khalistan Commando Force (KCF) carried out a series of Bank robberies around the National Capital Serial heists in 2008-09 Region. Source: Media reports, Ambit Capital research The persistence of inequalities and poor employment opportunities has also led to an increase in instances of communal tension in INB. For instance, Uttar Pradesh has experienced a steady build-up in communal tension over the past few years. UP witnessed the highest number of communal incidents among the states in CY10-14. The persistence of large inequalities and poor employment opportunities has contributed to communal tension Exhibit 32: Uttar Pradesh tops the chart with respect to the number of communal incidents over CY10-14 Exhibit 33: The number of communal incidents in UP has risen in the recent past No. of communal incidents 800 600 400 200 0 703 Uttar Pradesh 484 Maharashtra 416 Madhya Pradesh 356 Karnataka 305 Gujarat No. of communal incidents 300 250 200 150 100 50 0 247 121 118 133 84 CY10 CY11 CY12 CY13 CY14 Source: Indiaspend, Ambit Capital research. Data pertains to CY10-14 Source: Indiaspend, Ambit Capital research Besides the increase in crime rates and social tensions, a combination of skewed gender ratio, economic destitution and a large population of unemployed youth has resulted in social unrest and, consequently, explicit economic losses. For instance, Uttar Pradesh has lost as much as 416 man-days in CY13 due to various disturbances such as strikes and lockouts (see exhibit below). The social unrest in turn has resulted in explicit economic losses April 05, 2016 Ambit Capital Pvt. Ltd. Page 15

Exhibit 34: Uttar Pradesh lost more man-days worked due to strikes and lockouts than other Indian states in CY13 Number of man-days lost 450 400 350 300 250 200 150 100 50 0 416 Uttar Pradesh 140 Rajasthan 124 120 Madhya Pradesh 89 15 Haryana Bihar Himachal Pradesh 34 Punjab Source: Ministry of labour, Government of India. Data pertains to CY13. Note: A man-day is defined as a day regarded in terms of the amount of work that can be done by one person within this period. The on-ground evidence is in fact in line with academic research, which points to skewed gender ratios resulting in adverse social and economic consequences. Exhibit 35: Academic studies point to skewed gender ratios resulting in adverse social and economic consequences Name of study Details Source Gender-based Crime and Gender Inequality in India Gender Discrimination and Growth: Theory and Evidence from India This study, using health, empowerment and labour market metrics, reviews gender inequality and genderbased crimes in India at the subnational level. The findings show that gender-based crime rates have grown while general crime rates have decreased over the years. Further, the distribution of states by the gender inequality index (GII) does not follow a pattern. States with low and high GII show similar average rates for gender-based crimes, while moderate GII states show the highest average rates for gender-based crimes. The growth rates for gender-based crimes, however, are lowest for low GII states but remain the highest for moderate GII states. This paper provides theoretical and empirical support for the view that gender discrimination acts as a brake on economic development. We find that a 1 increase in the female-to-male managers ratio in India would increase total output per capita by 2%, while a 1 increase in the female-to-male workers ratio would increase total output per capita by 8%. We find that the effects of gender discrimination are more serious in certain sectors of the economy. In particular, we find that lower ratios of female-to-male workers significantly reduce total output in both the agricultural and the non-agricultural sector, while lower numbers of female-tomale managers reduce output in the non-agricultural sector, but not in the agricultural sector. Source: Various academic publications, Ambit Capital research Paribhasha Sharma (EPW, November 2015) Berta Esteve-Volart (LSE, January 2004) April 05, 2016 Ambit Capital Pvt. Ltd. Page 16

Section 3: The South is different Your grandfather was a weaver. Your father was a clerk. You became an engineer when you were twenty-three. Isn t your story also the story of a rise and of opportunity?... In this small dark man were locked up generations of grief and rage. He was the first in his line to have felt the affront; and, from what he had said, he was still the only one in his family to have taken up the cause. His passion was very great; it had to be respected. - Excerpt from V.S. Naipaul s discussion with Mr. Palani, an average South Indian, in India A million mutinies now (1990) The above excerpt take from V.S.Naipaul s epic travelogue captures the crux of the author s discussions with Mr. Palani, an average South Indian man. His rise despite socio-economic adversities can be generalised as symbolic of the unique dynamics in South India. The opposing forces of a democratic political system and a social system characterised by caste politics have interplayed with each other not to create the INBesque socio-economic destitution but instead a reasonably well-educated and aspirational society in South India. Consequently, most of the problems of the North do not seem to affect the South. The South is almost like a middle-income country with superior performance (and improving) on a range of socio-economic parameters. Superior literacy levels means that even the southern states labour markets are in better shape as compared to INB, which suffers from an over-supply of under-skilled labour. Furthermore, even the southern states public finances are better managed and state-level balance sheets are characterised by lower levels of debt and superior tax collection abilities. Exhibit 36: The South is different Head South India Middle India India s Northern Belt (INB) India J&K, Himachal Pradesh, Haryana, Andhra Pradesh, Punjab, Delhi, Constituent Karnataka, Gujarat, All States and Uttarakhand, Uttar States/Union Territories Kerala, Tamil Maharashtra UTs Pradesh, Rajasthan, Nadu Bihar, and Madhya Pradesh Region s share in India s GDP (in %) 29% 22% 3 10 Region s average GDP growth over FY13-15 6.7% 7.1% 6.1% Region s share in India s population (in %) 21% 14% 45% 10 Share of region s young population (15-35 34% 13% 36% 10 years) CAGR of population growth over CY01-11 1.2% 1.6% 1.9% 1.7% (in % p.a.) Share of region in Lok Sabha seats (in %) 24% 14% 4 10 Per capita income (in US$) 2,014 1,988 1,183 1,600 Literacy ratio (in %) 8 81% 71% 74% Life expectancy (in years) Gender ratio (number of females per 1000 males) Source: CEIC, Ambit Capital research 69 68 67 66 995 932 901 933 Despite this, ironically, political power is concentrated with the northern states as Lok Sabha seats are allocated on the basis of population. The CAGR of population growth in North India is 70bps higher than the more prosperous South. This asymmetry between the regions, whereby the well-performing South is being penalised for its restrained population growth, is likely to create political tension in the years to come as the South resents the growing political dominance of the poor, populous and uneducated North. The well-performing South is being penalised for its restrained population growth this is likely to create political tension April 05, 2016 Ambit Capital Pvt. Ltd. Page 17

Charecteristic#1: The South is almost like a middle-income country South India scores substantially better than North India on several social and economic indicators. Most of the problems of the North do not affect the South Exhibit 37: The South has improved its lead over INB s on gender ratio Exhibit 38: Literacy ratios in the South are also substantially higher Exhibit 39: Fertility ratios and hence population growth in the South is lower Number of females (per 1000 males) 1,040 1,000 960 920 880 840 974 986 995 927 933 933 895 910 901 1991 2001 2011 South India All India INB Literacy rate (as per census 2011) 82% 8 78% 76% 74% 72% 7 8 74% 74% South India All India INB Fertility rate (in %) 3 2 1 2.4 2.4 1.8 INB All India South India Source: Census of India, Ambit Capital research. Note INB includes: Jammu & Kashmir, Himachal Pradesh, Uttarakhand, Punjab, Haryana, Delhi, Uttar Pradesh, Rajasthan, Bihar, Madhya Pradesh and South India includes Kerala, Tamil Nadu Karnataka and Andhra Pradesh Exhibit 40: Over 5 of the population is part of the labour force in the South Source: Census of India, Ambit Capital research. Note INB includes: Jammu & Kashmir, Himachal Pradesh, Uttarakhand, Punjab, Haryana, Delhi, Uttar Pradesh, Rajasthan, Bihar, Madhya Pradesh and South India includes Kerala, Tamil Nadu Karnataka and Andhra Pradesh Exhibit 41: The farm sector accounts for just a tenth of GSDP in the South Source: Census of India, Ambit Capital research. Note INB includes: Jammu & Kashmir, Himachal Pradesh, Uttarakhand, Punjab, Haryana, Delhi, Uttar Pradesh, Rajasthan, Bihar, Madhya Pradesh and South India includes Kerala, Tamil Nadu Karnataka and Andhra Pradesh Exhibit 42: Communal clashes are fewer in the South Labour force participation rate (per 1000 persons) 600 560 520 480 440 400 570 South India 525 All India 455 INB Share of agriculture in GSDP (in %) 25% 2 15% 1 5% 19% 14% 11% INB All India South India No. of communal incidents 800 600 400 200 0 703 Uttar Pradesh 484 Maharashtra 416 Madhya Pradesh 356 Karnataka 305 Gujarat Source: NSSO, Ambit Capital research. Note INB includes: Jammu & Kashmir, Himachal Pradesh, Uttarakhand, Punjab, Haryana, Delhi, Uttar Pradesh, Rajasthan, Bihar, Madhya Pradesh and South India includes Kerala, Tamil Nadu Karnataka and Andhra Pradesh Source: Planning Commission, Ambit Capital research. Note INB includes: Jammu & Kashmir, Himachal Pradesh, Uttarakhand, Punjab, Haryana, Delhi, Uttar Pradesh, Rajasthan, Bihar, Madhya Pradesh and South India includes Kerala, Tamil Nadu Karnataka and Andhra Pradesh Source: Indiaspend, Ambit Capital research. Note INB includes: Jammu & Kashmir, Himachal Pradesh, Uttarakhand, Punjab, Haryana, Delhi, Uttar Pradesh, Rajasthan, Bihar, Madhya Pradesh and South India includes Kerala, Tamil Nadu Karnataka and Andhra Pradesh In fact, the median per capita income of South India is US$2084, which is 1.4 times the per capita income of INB. Charecteristic#2: The southern states labour markets are in better shape Owing to a lower population growth rate (13.4% p.a. over CY01-11 in South India vs 20.2% p.a. in INB) and superior literacy ratio, labour demand and labour supply are better matched in South India. For instance, the non-farm sector, which is characterised by superior wage rates compared to the farm sector, accounts for more than 5 of the employment in South India (see exhibit below). The median per capita income of South India is 1.4 times the per capita income of INB The non-farm sector, which is characterised by superior wage rates as compared to the farm sector, accounts for over 5 of the employment in South India April 05, 2016 Ambit Capital Pvt. Ltd. Page 18

Exhibit 43: The non-farm sector, which has superior wage rates than the farm sector, accounts for more than 5 of employment in South India Share of sectors in total employment (in %) 7 6 5 4 3 2 1 61% 6% INB 47% 2 12% 12% 14% South India 26% Agriculture Manufacturing Non-Manufacturing Services Source: NSSO, Ambit Capital research. Note INB includes: Jammu & Kashmir, Himachal Pradesh, Uttarakhand, Punjab, Haryana, Delhi, Uttar Pradesh, Rajasthan, Bihar, Madhya Pradesh and South India includes Kerala, Tamil Nadu Karnataka and Andhra Pradesh. This is mainly because the South has a better match between labour supply (relatively limited in number and more skilled) and labour demand (generated by the more prominent services and industrial sectors). This is in sharp contrast to INB, which is characterised by oversupply of under-skilled labour. Labour migration data suggests that productive labour is shifting out of North India into Southern India Exhibit 44: Enrolment for higher education is much higher in South India Gross enrolment ratio in higher education (18-23 years) 27 26 25 24 23 22 21 20 19 26 Source: Ministry of human resource development, Ambit Capital research. Note INB includes: Jammu & Kashmir, Himachal Pradesh, Uttarakhand, Punjab, Haryana, Delhi, Uttar Pradesh, Rajasthan, Bihar, Madhya Pradesh; South India includes Kerala, Tamil Nadu Karnataka and Andhra Pradesh and Middle India includes Gujarat and Maharashtra 23 20 South India Middle India INB Exhibit 45: Workers from South India command much higher wages than their counterparts in the North Industrial wages (in INR) 15,000 13,000 11,000 9,000 7,000 5,000 3,000 1,000 FY09 FY10 FY11 FY12 South India Middle India INB Source: Annual Survey of Industries, Ambit Capital research. Note INB includes: Jammu & Kashmir, Himachal Pradesh, Uttarakhand, Punjab, Haryana, Delhi, Uttar Pradesh, Rajasthan, Bihar, Madhya Pradesh; South India includes Kerala, Tamil Nadu Karnataka and Andhra Pradesh and Middle India includes Gujarat and Maharashtra In fact, labour migration data suggests that productive labour is shifting from North India to South India and Middle India (Gujarat and Maharashtra) (see exhibit below). Exhibit 46: Productive labour is shifting out of North India to South India as well as Middle India People moving out of states (in '000 persons) 1,200 1,000 800 600 400 200 0 1,008 674 628 INB Middle India South India Source: Census of India, Ambit Capital research. Note INB includes: Jammu & Kashmir, Himachal Pradesh, Uttarakhand, Punjab, Haryana, Delhi, Uttar Pradesh, Rajasthan, Bihar, Madhya Pradesh; South India includes Kerala, Tamil Nadu Karnataka and Andhra Pradesh and Middle India includes Gujarat and Maharashtra April 05, 2016 Ambit Capital Pvt. Ltd. Page 19