Discovery of IndiaDiscovery of IndiaDiscovery of India BANK Discovery Of INdia... · Conclusion 111. FOREWORD ... FRBM Act passed VAT implemented in April 2005 12th Finance Commission

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Specially prepared for the 16th Asia Society Corporate ConferenceMarch 2006

Discovery of IndiaDiscovery of IndiaDiscovery of IndiaDiscovery of IndiaT H E N E W G R O W T H D E S T I N A T I O N

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Specially prepared for the 16th Asia Society Corporate ConferenceMarch 2006


TABLE OF CONTENTS

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Introduction : The India Growth Story 03

Biotechnology

I T

Health & Educational Initiatives 97

Going Global : The Emergence of Indian MNCs 07

Expanding Horizons : India’s Small, Medium & Emerging Corporates 19

Accessing Consumer Markets at the bottom of the pyramid :

The challenge of Rural Development 29

India’s Financial Markets : From Micro-governance to Micro-management 41

Key Sectoral Developments 55

The Infrastructure Multiplier 57

: Aiming the Growth Curve 69

Converting Agriculture into Agribusiness 77

nformation echnology : Creating seamless world 91

Safeguarding India’s Prosperity :

A renewed Commitment to Corporate Social Responsibility 105

Conclusion 111

FOREWORD

Dear Delegate,

Welcome to the 16th Asia Society Corporate Conference 2006 in Mumbai. As the

Knowledge Partner to this Conference, YES BANK is pleased to present this Report,

titled which provides key

decision encluding information on India's growth opportunities to facilitate meaningful

discussions in this distinguished forum.

While the concept of an is rapidly gaining momentum on the

international and domestic fronts, the country now needs to progress to an

to accelerate towards expeditions development. Areas such as

India's extremely large Rural Sector and key Sunrise Sectors, including Agriculture,

Infrastructure and Biotechnology, require considerable focused attention. India needs

to migrate from

and as a base to multiply agricultural

production. Simultaneously, increasing global opportunities for Large Indian

Corporates, Emerging Local Corporates & Small and Medium Enterprises in sectors

including IT, Media & Entertainment, Textiles & Apperals, Auto Components & Gems &

Jewellery augur well for a more developed, efficient and prosperous India.

Financing will play a key role in enabling the development of these Sunrise Sectors.

The Indian financial sector is taking innovative and adaptive measures to meet this

challenge. The principles of that have been

successfully applied to large-scale Infrastructure Projects now need to be adapted to

“Discovery of India: The New Growth Destination”,

'Emerging India'

'Empowered India'

Agriculture to Agribusiness, develop modern Agri and Rural

Infrastructure employ biotechnology

Public Private Partnership (PPP)


smaller scale Rural and Agri-Infrastructure projects. Finally, another critical ingredient

for safeguarding India's prosperity is the

These multiple requirements, taken together, provide ample

opportunities for private sector participation, enabling corporates to employ

innovative and effective means of fulfilling goals of

I trust that you will find this Report to be both insightful and informative.

We, at , look forward to working with you to develop an

into a global economic force in the years ahead.

Sincerely,

provision of cost-efficient, quality

healthcare.

Corporate Social Responsibility

and Sustainable growth.

YES BANK

RANA KAPOOR

YES BANK Ltd.

'Empowered India'

Founder / Managing Director & CEO

INTRODUCTIONThe Indian Growth Story

Since the initiation of far-reaching economic reforms of deregulation and liberalization

in 1991, the Indian economy and the Indian mindset alike have witnessed a paradigm

shift. Several fundamental and irreversible changes in government policies have led to

the creation of a vibrant business outlook. From a shortage economy of food and

foreign exchange, India has now become a surplus one; from an agro-based economy

it has emerged as a service-oriented one. India is now a front runner in the emerging

knowledge-based global economy and Indian companies have become globally

competitive with “Brand India” beginning to receive global accolades.

India's reform program is characterized by its gradualist approach and has moved

towards an evolutionary transition, as opposed to rapid restructuring. Gradualism is

the inevitable outcome of India's democratic and highly pluralistic polity, wherein

economic reforms can be implemented only if they are based on a sufficiently wide

popular consensus.

In response to a Balance of Payment crisis in July 1991, the Government launched a

package of comprehensive macroeconomic and structural adjustment policies, along

with a shift in the development strategy in favor of market orientation. The underlying

thrust of such a regime shift was to provide an environment that enabled both growth

and stability on a sustained basis.

The key measures that were initiated include:

Rationalization of tax structures and reduction of tax incidence, both of which lead

to increased tax revenue generation through better compliance

Abolition of the industrial licensing system, which led to the opening up of the

manufacturing sector to both domestic and international competition and the

creation of economic capacities to bring about a more efficient industrial base

India's Economic Reforms: A Historical Perspective

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Strengthening of the banking and financial system

Relaxation of export restrictions, along with a gradual reduction of import duties and

import restrictions to integrate India with the world economy

Enablement of foreign capital inflows by allowing FIIs to invest in India; and by

progressively removing the constraints limiting FDI inflows

Change in the monetary and exchange rate policies to complement reforms in other

areas

Fifteen years of economic reforms have altered the structure of the Indian economy,

making it more resilient to economic shocks. Some of the key reforms have been listed

below:

The overall positive impact of the reform measures may be discerned from the fact that

India has maintained impressive growth rates during recent years, with reasonable

price stability, and stable interest and exchange rate regimes. It must be recognised

that this overall performance has been exhibited despite several bouts of adverse

1990 - 95

Industry Reforms

Fiscal Reforms

External Sector Reforms

Financial Sector Reforms

De-reservation of industries -

License Raj ends

MRTP Act abolished

Gradual de-reservation of SSIs

Phased reduction in personal

income tax, corporate tax and

import tariffs

Restructuring of excise duty

Limited disinvestment of Govt.

equity in PSUs

Movement from dual exchange

rate to market exchange rate

Current Account convertibility

Prudential norms for income

recognition & asset classification

introduced

New Private sector banks given

licenses to operate

Capital Adequacy norms

introduces

SLR requirements reduced from

38.5% of net NDTL to 25%

Capital issues Control Act

abolished

FIIs allowed access to Indian

financial markets

Indian companies allowed access

to international capital markets

NSE & OTCEL commence

operations

NSCCL formed

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1995 - 00

Deregulation

Fiscal Reforms



National Telecom Policy'99 paved

way for deregulaion in Telecom

Private players allowed entry into

insurance sector in 1999

Import tariffs continue to fall

Excise duty rationalization

begains

Liberalization of foreign currency

borrowing norms

Companies allowed to invest

oversease

Implementation of FEMA

FDI liberalization begins

Depository services set up

Primary dealership system

adopted

IRDA Act passed

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2000 - 06

Core Sector Reforms


Fiscal Reforms


Reforms on anvil

Electricity ACT passed,

Electricity Policy approved

SEBs reorganized, APDRP

APM dismantled

FDI limits hiked in telecom,

insurance

FDI permitted in retail single

brand, selective real estate

Individuals allowed to invest

overseas

FRBM Act passed

VAT implemented in April 2005

12th Finance Commission

recommendations on new

devolution formula accepted

SARFAESI Act (Asset

Reconstruction Committee

formed)

Basel II Roadmap

NDS - OM

RTGS

CCIL

Government Securities Act

Moving closer towards full CAC

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04

05

exogenous factors that include surges in capital inflows, the East-Asian crisis,

economic sanctions imposed by the US, geopolitical tensions, and more recently,

steep increases in oil prices.

Maintaining the momentum of reforms will enable Indian economy to sustain a growth

of 7-8% in next 10-15 years. However, it is imperative that this growth be underpinned

by significant scaling up of investments in agriculture and physical and social

infrastructure to enable the benefits of growth to reach the poorer segments of society.

Agribusiness and food processing are important sectors impacting the modernization

our domestic economy, which in turn will have a significant multiplier effect. Likewise,

the Sunrise sectors, including IT, Lifesciences & Biotechnology and Auto

Components, have already made their mark on the global map and have the potential

to further develop into global leaders.

A conducive policy environment will provide the necessary impetus to these sectors

and enable India to embark on a higher growth path.

Summary

Macro Parameters 70s 80s 90s 01-06

New Series

Real GDP (0% Growth) 2.9 5.8 5.8 6.7

Agriculture / GDP 42.8 36.4 29.1 22.2

Industry / GDP 16.9 29.5 21.9 19.6

Services / GDP 40.3 44 49 58.2

Fiscal Deficit /GDP 38 6.8 5.9 5.1

Exports / GDP 4.5 4.6 7.8 10.6

Invisible Receipts / GDP 2.2 9 4.8 9

Current Account / GDP -0.1 -1.9 -1.3 0

Foreign Investments / GDP 0 0.1 0.9 1.9

72-82 83-94 95-06

WPI Inflation 10.2 7.9 5.8

WPI Inflation 10.2 7.9 5.8

GDP Moving on higher growth trajectory

Sharp decline in share of agri., needs to grow

Industry share in GDP set to increse

Services dominate in GDP contribution

Fiscal consolidation albeit gradually

Broadening of products and destinations boosts

exports

Services exports a success story

Increasing confidence of foreign investors in

India growth story

Inflation contained, but pressures remain

Inflation contained, but pressures remain

GOING GLOBALThe Emergence of Indian MNCs

GOING GLOBALThe Emergence of Indian MNCs

In the course of the past two decades, Indian companies have begun to set their sights

on the international arena and are rising to the new challenges of globalisation. There

has been a clear shift in the mind-set of Indian firms, with companies such as Tata

Motors, Ranbaxy, Bharat Forge and L&T displaying an increasing interest in global

acquisitions.

The following factors have enabled Indian corporates to look towards the global

markets:

Global exposure, leading to increased competitiveness

Lack of resources no longer being a significant constraint, due to:

Easier access to global financial markets

Buoyant local markets with high liquidity

Increased global acceptance of the “Made in India” brand, especially in the services

sector

Conducive regulatory environment - in January 2004, the Union Government

removed the ceiling of USD 100mn on foreign investment by Indian companies and

raised it to an amount equivalent to their networth

Global opportunities for Indian corporates lie primarily in leveraging India's existing

advantage in sectors which include:

Auto & Auto Ancillaries IT ITES

Pharmaceuticals Textiles &

Gems & Jewellery Engineering

Enabling Factors:

Key Sectors:

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&

Apparels

09

Sectoral Trends

Automotive Components

Automakers in developed markets must contend with twin pressures: to innovate

while simultaneously reducing costs. These factors are encouraging the sourcing of a

greater number of components from lower cost markets. As a result, auto component

exports from low-cost Asian countries have grown rapidly over the last few years.

A joint study by ACMA and McKinsey has highlighted that India and other low-cost

countries could potentially target 42% (estimated at USD 700bn) of the global auto

component market (expected to grow to USD 1.65tn by 2015). India has a potential to

achieve 3-4% i.e. USD 25bn of this opportunity by 2015.

India has emerged as a

significant exporter of auto parts.

Overseas sales of Indian

companies have jumped to INR

61bn (USD 1.4bn) in 2004-05

from INR 12bn (USD 0.3bn) in

1997-98. Exports of auto

components from India have

grown at a compounded growth rate of 19% over the past six years.


10

Export Ramp Up

12 1418

27 2835

45

61

0

10

20

30

40

50

60

70

1997-

98

1998-

99

1999-

00

2000-

01

2001-

02

2002-

03

2003-

04

2004-

05

INR

Bln

Source: ACMA

Source: WARD, SSKI Research

10000

7500

5000

2500

0

1998 1999 2000 2001 2002 2003 2004

India* Taiwan Thailand South Korea China

To increase penetration in key export markets, leading Auto Ancillary Companies in

India have made the following acquisitions in 2004:

The Indian IT Services and, more recently, IT Enabled Services have been among the

fastest growing industries in India and have been responsible for putting India on the

global map. The IT and ITES offshoring model pioneered by Indian companies in the

mid and late nineties has now become globally acceptable. The phenomenal growth

rate that this sector has witnessed over the past several years has made it one of the

largest contributors of foreign exchange. IT & ITES businesses recorded a 34.5%

growth in exports, clocking revenues of USD 17.3bn in 2004-05, with IT Services

accounting for approximately USD 13.0 bn and the ITES sector accounting for USD 5.3

bn, as compared with export revenues of USD 12.8bn in the previous year. The

employee base has now crossed the 1mn mark and India's share in the world market

for IT software and services (including BPO) increased from approximately 1.7% in

2003- 04 to 2.3% in 2004-05 and an estimated 2.8% in 2005-06.

While Indian companies continue to lead in traditional segments within this sector,

they are also gaining ground in newer services such as packaged software

implementation, systems integration, network infrastructure management and IT

consulting. The ITES segment, in particular, retains a huge untapped potential and,

given its small base, the segment is expected to post even higher growth rates in

the future.

According to a NASSCOM McKinsey report, the offshore revenues from India's IT and

BPO sectors are likely to reach USD 60bn by 2010, growing at a CAGR of 28%, as

compared to a CAGR of 29% in the last five years.

Auto Bharat Forge CDP Aluminium Germany Europe EUR 2004

Ancillary Technik GmbH 6.30 mn

& Co KG

Auto Sundaram Dana Spicer UK Europe $ 2.64 mn 2004

Ancillary Fasteners (Forging Business)

Auto Amtek GKW UK UK Europe GBP 5 mn 2004

Ancillary

Auto Amtek Smith Jones US North $ 6 mn 2004

Ancillary America

Industry Indian Company Acquired Country Region Value Year

Information Technology and Business Process Outsourcing

11

Source: NASSCOM McKinsey Report

Thus, the Indian IT / ITES has the potential to reach USD 80bn by 2010 if it can extend

its leadership position in the global offshoring market.

Competition resulting from the influx of MNC IT companies is expected to lead to a rise

in the number of mergers and acquisitions by Indian IT companies in the near future.

Consolidation is anticipated, with an increasing number of Tier-1 Indian IT companies

acquiring global Tier-2 IT companies, in order to enable these companies to expand

their global reach and compete with global IT majors which are establishing a base in

India. Some of the recent acquisitions by Indian IT companies have been listed below:

Wipro American Management US N. America $ 24 mn 2001

Systems

Infosys EIS Australia Australia $ 31 mn 2003

Patni Cymbal US N. America $ 68 mn 2004

ICICI One Source Account Solutions US N. America $ 40 mn 2004

Group LLC

Satyam Citisoft US N. America $ 24 mn 2005

Mphasis El Dorado Computing US N. America $ 16.5 mn 2005

Mphasis Princeton Consulting UK Europe $ 14mn 2005

ICICI One Source Rev IT US N. America $23 mn 2005

Wipro C Mango US N. America $ 20 mn 2006

Indian Company Acquired Country Region Value Year

12

India's offshore IT and BPO exports, US $ Bn.

Projected CAGR2005-2010

> 37%

> 24%Offshore IT

BPO

"ExtendingLeadership"

AdditionalPotential

2010"SustainingLeadership"

20052001

~80

35

45

20

~60

25

35

23

20

17.2

12

5.26.20.9

5

CAGR28%

CAGR29%


Pharmaceuticals

Indian pharmaceuticals are gradually becoming an essential component of the global

pharmaceuticals value chain. With high projected growth rates for generics and an

accelerated emphasis on outsourcing, the Indian pharmaceutical industry is likely to

witness exciting times ahead.

Generic exports have been the primary growth driver for Indian pharmaceutical

players over the last few years. Increased domestic market competition and the

anticipated adoption of the IPR regime in 2005 led Indian pharmaceutical companies

to focus on generic exports to drive growth (CAGR of 18.2% from 2000-05). Till the late

1990s, Indian exports were largely to unregulated markets. However, , the last 7 to 8

years have witnessed a shift in exports to regulated markets, such as the USA and

Europe. India's generic exports were valued at approximately INR 140bn (USD 3.18bn)

in FY05.

Despite pricing pressure, the generics drug industry is witnessing unprecedented

growth that presents a great opportunity for Indian companies. Market estimates

anticipate that drugs worldwide worth USD 100bn are expected to lose patent

exclusivity over the next 5 years, with over USD 20bn going off-patent in 2006 alone.

The size of this market is conservatively estimated to be approximately USD 22bn, after

accounting for a 70-80% fall in prices.

Based on the value of drugs going off-patent, expected price erosion and the potential

of Indian companies, the projected size of the global generics drugs market and the

share of Indian companies by 2010 has been estimated below:

Source: YES BANK Analysis

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80

70

60

50

40

30

20

10

0

US

DB

illio

n

5865

73

5.84.63.5

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alisti

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isti

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India

Global

Scenario Analysis of Potential Generics Drugs Marketby 2010

Globally, is on the rise with large global pharma

companies facing the vagaries of pipeline surges and slowdowns, internal

consolidation, and global expansion. Contract manufacturing is estimated to be a

USD 30bn opportunity (annual growth rate of 10-12%) while the contract research

market is estimated to be USD 6-10 bn (annual growth rate of 16-18%).

India is emerging as an alliance and outsourcing destination of choice for global

pharma companies across the value chain. Companies such as Roche, Bayer, Aventis

and Chiron are in the process of making India the regional hub for Active

Pharmaceutical Ingredients (APIs) and the supply of bulk drugs. Pfizer, Novartis and

Eli Lilly and more recently GSK, which has signed a drug discovery alliance with

Ranbaxy, are all perceived to be establishing India as a global hub for their clinical

research activities.

Globally, services are estimated to be worth USD 25-

30bn and are projected to grow to USD 45bn by 2010. Contract manufacturing is still a

nascent industry in India, with deals worth USD 300mn concluded to date. It presents a

significant opportunity for Indian pharmaceutical companies and is estimated to

generate USD 1bn in revenue in 2010. Cadila Healthcare, Shasun, Divi's, Matrix,

Dishman and Nicholas Piramal are some of the key players in contract manufacturing

in India.

The Indian contract research industry has witnessed the emergence of several CROs

in the area of drug discovery & development over the last decade. New technologies

such as toxicology assays for lead validation, and pharmacogenomic screening in

early clinical development are being applied to address developmental bottlenecks.

This has led to the emergence of specific areas for outsourcing, including

ADME/Toxicology, Drug discovery research and Process chemistry. Contract research

(excluding clinical trials players) in India is estimated to be around INR 1.5bn (USD

34mn) growing at 40-50% annually, whereas India's contract clinical development

industry is estimated to be approximately INR 5bn (USD 113mn) and is also growing at

a CAGR of 50%.

With a view to facilitating rapid market access to meet increasing generic and

outsourcing opportunities, Indian pharmaceutical companies are aggressively

looking to acquire companies in the developed markets. Some of the executed deals

have been listed below:

pharmaceutical outsourcing

pharmaceutical manufacturing

14


Indian Company Acquired Country Region Value Year

Textiles and Apparels

Sun Pharma Caraco US North America $ 42 mn 1997

Wockhardt CP Pharma UK Europe $ 20 mn 2003

Ranbaxy RPG Aventis France Europe $ 84 mn 2003

Dr Reddy's Ltd Trigenesis US North America $ 11 mn 2004

Jubilant PSI Group Belgium Europe $ 16 mn 2004

Jubilant Target Research US North America $ 33.5 mn 2005

Matrix Laboratoires Docpharma NV Belgium Europe $ 255 mn 2005

Dr Reddy's Ltd Betapharm Germany Europe $ 508 mn 2006

India has a natural competitive advantage in Textiles & Apparels due to a strong and

large multi-fibre base, abundant cheap skilled labour and presence across the entire

value chain of the industry ranging from spinning, weaving, and madeups to

manufacturing garments.

The Textiles and Apparels sector is India's largest industry, accounting for nearly 20%

of the economy's industrial output, direct employment of 35mn workers, and 12% of

the total export earnings. India has the second highest spindleage in the world, after

China, and accounts for 38.6mn (22%) of the world's installed capacity of spindles.

India is also one of the largest exporters of yarns in the international market and

contributes approximately 25% of the world trade in cotton yarn.

The global Textile and Apparels industry is worth over USD 4,4bn, with clothing

accounting for 60% of the market and textiles accounting for the remaining 40%.

Global trade in Textiles and Apparels is currently USD 356bn and is expected to grow

to USD 600bn by 2010. The bulk of the increase is expected to be in clothing, which is

projected to grow from USD 199bn to approximately USD 400bn.

India has a share of 5% and 4%

in global exports of Textiles

and Apparels respectively, as

compared to China's share of

18% and 35%, respectively.

Since 1992, Indian textile

exports have increased at a

CAGR of 7-7.5% to reach sales

15

Textile Exports

10.3%13.4%

20.3%

-6.3

%

17.0%

3.2

%

-5.5

%4

.8%

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

1997-

98

1998-

99

1999-

00

2000-

01

2001-

02

2002-

03

2003-

04

2004-

05

Apr

Nov 05

INR

Bln

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Cotton And Products Ready Made Garments Others Growth (%)

16

of USD 12.6bn in FY05. Post January 2005, Indian textile exports to the US and EU

have increased by approximately 25% and 20% respectively in volume, although they

have increased by only 4.8% in value (AprNov 2005), due to decline in product prices.

According to a recent study, the Indian Textile and Apparels industry is anticipated to

achieve a potential size of USD 85bn by 2010, with garments comprising almost

60% of total exports of USD 45bn,

The Indian Gems & Jewellery industry contributes 17.3% of India's merchandise

exports. The share of Gems & Jewellery in India's total exports has increased from 4%

in 1972-73 to 16.6% in FY2004. India's exports of Gems & Jewellery aggregated USD

13.7bn in 2004-05.

India's share of the world's polished diamond market is estimated at 60% in terms of

value, 85% in terms of volume, and 92% in terms of pieces. Exports of cut and polished

diamonds (CPD) have increased at a 5-year CAGR of 11.8%, from USD 6.2 bn in

FY2001 to USD 11.2bn in FY2005. Traditionally, the U.S. has been the largest market

for Indian CPD exports, accounting for 31% of India's CPD exports and 35% of

aggregate Gems & Jewellery exports during FY2004. However, in FY2005, Hong

Kong displaced the U.S. as the largest market for CPD exports from India.

Opportunities for corporates in the diamond jewellery industry is likely to be driven

primarily by the cutting and polishing of medium and large stones, which is currently

dominated by Belgium and Israel, with higher realizations.

Trends in the US market are also expected to favor Indian exporters, with bulk buyers in

the U.S. and the European Union increasingly buying Indian diamond studded

jewellery, because of its affordability. Exports of gold jewellery have also increased at a

5-year compounded annual growth rate of 29.5%, from USD 1.2bn in FY2001 to USD

3.8bn in FY2005.

The long-term outlook for the Indian gem and jewellery industry continues to be

positive. India's competitive advantage is likely to centre on the availability of skilled

labour, combined with a ready adoption of leading-edge technology.

A favourable regulatory environment, greater acceptance of India as an emerging

global player and greater access to resources have provided Indian corporates in a

Gems & Jewellery

Conclusion


number of key sectors with the opportunity to expand globally. While these sectors

continue to hold great potential, industries where India can leverage its specialised

skills, such as Specialty Chemicals, Electronic Goods and Machine Tools also provide

significant growth opportunities in the global market.

17

EXPANDING HORIZONSIndia's Small, Medium & Emerging Corporates

EXPANDING HORIZONSIndia's Small, Medium & Emerging Corporates

Small & Medium Enterprises(SMEs) and Emerging Local Corporates(ELCs)

constitute the most dynamic segment of a number of transition and developing

economies. The SME & ELC segment in India accounts for 40% of the industrial

output and 35% of the country's total exports. The segment has shown significant

growth potential, surpassing both the sectoral and consolidated growth rate of

the economy over the past few years.

Some of the reasons for the recent growth in the SME segment are as follows:

Government and industry initiatives that have resulted in enhanced growth for the

sector:

USD 200mn spending on development of skilled manpower

SIDBI provided assistance of USD 120mn from the World Bank to boost SMEs in

clusters

Robust growth in the domestic market, with several sectors such as Auto

Components, Retail, Specialty Chemicals and IT & ITES capitalizing on domestic

demand

India's growing global competitiveness, due to:

A large technical talent pool

Availability of key engineering skills and an increasing focus on quality

Second largest English speaking population in the world

Increasing drive towards outsourcing by global companies

The SME sector has been a major growth driver for the economy over the last decade,

with some of the contributions of this sector being as follows:

Produce approximately 8,000 products

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Emerging Sectors within the SME Segment

Contribute 40% of the total industrial output and 45% of industrial employment

Account for 35% of exports, with approximately 10% of SME output exported

Largest direct and indirect employer

Entry point for new sectors

However, despite increased growth opportunities, there continue to be some limiting

factors to the growth of the small scale industry, including:

Threat from domestic and international competition

Lack of adequate working capital finance

This sector is primarily dominated by Small & Medium Sized enterprises. The Gems

and Jewellery Export Council has projected that total exports will touch USD 16bn by

2007. India's competitive advantage will centre on its skilled labor, adoption of leading-

edge technology and an increasing degree of vertical integration. The future growth in

the Gems & Jewellery business is likely to be driven by increased exports to the U.S.

and European markets and higher domestic consumption.

The Indian Logistics (including courier) and Supply Chain Management industry is

undergoing a metamorphosis and is likely to witness an exponential growth similar to

the boom in the BPO industry in a few years. A significant number of Indian corporates,

including MNCs and local corporates, are outsourcing their vendor & supply chain

management to third parties who provide professional services, leading to increased

efficiencies and economies of scale. The industry is expected to witness consolidation

and the entry of international players through Joint Ventures.

The retail sector in India has undergone a radical change over the last 5-7 years and is

increasingly looking to be one of the most attractive sectors for investment. This sector

is expected to witness exponential growth, with the development of organized retail

chains, increasing penetration of international chain stores and improved regulatory

norms creating a fertile environment, directly benefiting the SME segment.

Gems & Jewellery

Logistics & Transportation/Equipment Financing

Retailing & FMCG

Auto, Select Manufacturing and Engineering (Goods and Services)

IT & ITES Sector

Media Sector

The last few years has seen several sub-segments of the Indian manufacturing sector

become globally competitive. The manufacturing sector has gained significantly from

a rationalized tax structure and greater emphasis on cost competitiveness and quality

consciousness. This has led to integration of SMEs within the global supply chain.

SMEs account for over 45% of the total IT revenues in the country. The segment is

growing faster than the overall IT industry, with growth rates of 20-25%, as compared to

the average IT industry growth rate of 17%.

An AMI study of SMEs shows that only 3% of Indian SMEs have a Local Area Network

(LAN) at their offices or factories, only 15% have an internet connection, 4% have a

broadband connection and a mere 1% have their own website, demonstrating the size

and scale of the untapped market.

Further, AMI research suggests that SMEs are increasingly realising that investments

in IT can improve their bottom-lines. The study found that over the next 12 to 18

months, 17% of the SMEs would like to invest in a data back up and recovery system,

18% want to interconnect their offices, and approximately 21% want instant messaging

systems to be installed in their offices.

The Indian Media & Entertainment space continues to be extremely attractive due to

the huge potential target audience of more than a billion people and an ever-

increasing propensity to spend on entertainment due to rising disposable incomes

combined with better modes of entertainment.

The Indian M&E Industry is expected to grow at more than double the rate of Global

Industry

* KPMG CII Report

23

5

13

2004 2010(F)

CAGR=18%

In $ Bn

24

There are opportunities for foreign capital investment in projects, production houses,

film and television studios and film facilities, especially post-production, distribution

and exhibition.

The dismantling of the Multi Fibre Agreement is anticipated to unlock tremendous

opportunities for the Indian textile sector. Indian textile companies have the inherent

advantage of cost competitiveness due to easy availability of raw materials and cheap

labour.

The Domestic Market size for the textiles industry is pegged at USD 15bn. with SMEs

accounting for more than 90% of the textile industry.

The global market size is expected to grow from USD 400bn to USD 850bn by 2010,

with Indian exports estimated to grow to USD 80bn. SMEs in the textile sector are well-

positioned to take advantage of the new global trading opportunities.

SMEs will play an integral role in sustaining the future growth of the Indian industry.

However, SMEs will have to align their offerings to the demands of the industry to

emerge successful in the long run, by equipping themselves to meet the following

challenges:

Identifying a defensible niche in nascent verticals such as healthcare, education,

transportation, utilities, e-governance, technology including GIS, embedded

software and web services

Determining initial geography focus and identify critical initial steps

Textiles

Integration of SME with the Global value chain has increased the export potential and

contribution to GDP

Key Challenges for the SME Segment

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400

850

1580

2005 2010

Global Market

Indian Exports

CAGR 16%

CAGR 40%


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Key Government Initiatives

Making clear, strategic choices to secure alliances with Systems Integrators and

build distinctive customer acquisition and retention skills

Ensuring a robust business continuity infrastructure and global delivery network

and building a strong management team to establish credibility and differentiation

Creating greater inroads into the domestic market, as it will act as a test bed for

innovation and new service lines and help in rapid accumulation of value-added

skills through the development of low cost, customised solutions for domestic

companies and the Government

Ensuring funding for growth, including mid-term and long-term finance from Banks,

which often refrain from funding SMEs, due to their unstable cash flows, inadequate

capital structure and low sustenance power

Continual innovation to fuel growth

SMEs in India are usually arranged in geographic clusters, enabling collective

competitive advantages beyond the reach of individual firms. There are an estimated

350 SME clusters in India which contribute directly or indirectly to 60% of India's

exports. Approximately 65% of the clusters are concentrated in cities and metros and

only 13% are located in small towns and rural areas.

In several states, the Government is actively involved in cluster development, and has

taken the following measures to facilitate the development of SMEs:

Identification of existing and potential clusters

Providing strategic information such as benchmarking or trends

Investing in technology and infrastructure

Filling in investment gaps with FDI

Linking firms to training programmes from local universities and centres

Fostering networking, service centres and associations

Future policies related to SMEs are expected to focus on the development of industrial

clusters which have been found in several studies to be efficient in terms of resource

use and in promoting inter-industry and inter-sectoral linkages.

25

26

SIDBI Initiative

SME Rating Agency (SMERA)

NASSCOM SME Initiatives

As the apex Financial Institution for the Small Scale Sector, the Small Industries

Development Bank of India (SIDBI), has been playing a very active role in the evolution

of Venture Capital financing in the country to support the risk capital requirements of

the sector. To this end, the Bank has been investing in several Venture Capital Funds

for onward investments in the SME sector. These include several prominent funds

such as India Leverage Fund, India Advantage Fund and India Development Fund.

The sanctions of the Bank for Venture Capital operations aggregate Rs. 4.6bn (USD

105.2mn) through various routes, making it one of the largest VC players in the

country. The SME Growth Fund distinguishes itself as the largest VC fund dedicated to

the SME segment.

SMERA is a joint initiative between the Small Industries Development Bank of India

(SIDBI), Dun & Bradstreet Information Services India Private Limited (D&B), Credit

Information Bureau (India) Limited (CIBIL) and several leading banks in the country.

SMERA is the country's first rating agency that focuses primarily on the Indian SME

segment. SMERA's primary objective is to provide ratings that are comprehensive,

transparent and reliable, facilitating greater and easier flow of credit from the banking

sector to SMEs.

The National Association of Software and Service Companies (NASSCOM) is the

premier trade body and the chamber of commerce of the IT software and services

industry in India. According to NASSCOM estimates, there will be a sharp increase in

the contribution of SMEs to the revenues of the IT & Software industry, from the current

rate of 10-15% of total revenues to an estimated 50-60% by 2008. With a view to

providing focused attention to the growing SME membership within NASSCOM, a

special SME Forum has been created to address this segment exclusively, with the aim

of addressing their issues and concerns to propel growth.

The forum aims to serve as a platform to address the issues and concerns of the SMEs

and propel their growth. The association has been organizing SME member meets

and focused SME activities to understand their concerns and identify bottlenecks in

their growth.


NSIC Initiatives

Conclusion

The National Small Industries Corporation Ltd (NSIC) has been working to fulfill its

mission of promoting, aiding and fostering the growth of small scale industries and

industry-related small scale services and business enterprises in the country. Over a

period of four decades of transition, growth and development, NSIC has proved its

strength within the country and abroad by promoting modernization, upgradation of

technology, quality consciousness, strengthening linkages with large and medium

scale enterprises and mobilizing exports and products from small scale enterprises. To

enable the small scale industries to gain a competitive advantage and contribute

effectively to the development of the economy, NSIC has restructured its activities to

meet the twin challenges of growth and competition in the small-scale industries. The

corporation has adopted a focused sectoral approach for competence building and

making a tangible contribution to the growth of the small scale sector.

With the economy booming and increasing structural reforms, the Indian SME sector

is growing faster than the economy as a whole and is expected to reap maximum

dividends over next few years, specifically in emerging sectors like Media, Pharma &

Life Sciences, IT/ITES, Auto Ancillary, Textiles and Retailing. The low labor cost,

availability of skilled labour and multiple government initiatives are projected to result

in large scale benefits for the SME sector.

27

ACCESSING CONSUMER MARKETSAT THE BOTTOM OF THE PYRAMIDThe Challenge of Rural Development

The Urban - Rural Divide

Characteristics of Rural India

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As India continues to grow, one of the challenges to the country's dream run is the lack

of development in rural areas. Although the country's economic performance has

progressively improved, it has been largely unbalanced, with the rural areas lagging

far behind the urban centers. Deceleration in the agricultural sector further widens the

gap between the country's rural and urban areas, with rural economy having already

fallen behind its urban counterpart on various social-economic parameters.

In order for India to develop and maintain its growth momentum, there is a critical need

to address the issue of rural development, including infrastructure development and

increasing access to In fact, a study conducted by Datt and

Ravallion (2002) suggests that Indian states with relatively low levels of rural

infrastructure endowments and education were less able to translate growth into

poverty reduction, thus hindering overall development.

A little less than 3/4th of the country's population lives in rural areas with 78% of the

workforce engaged in agriculture and allied activities. However, the contribution of

agriculture to GDP is continuously declining and is currently just below 25%

Most of the landholdings, farms and other properties are small and fragmented.

Small farmers account for78% of theworkforce inagricultureand own32% of thearea

India has over 80,000 bank branches, of which scheduled commercial banks have

32,080 branches, in rural areas while Regional Rural Banks (RRBs) have 11,825

branches and there are also 858 rural co-operative banks. Despite these numbers,

the National Sample Survey (2003) demonstrates that only 57.7% of total rural

credit is sourced from institutional sources

“consumption capital”.

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ACCESSING CONSUMER MARKETSAT THE BOTTOM OF THE PYRAMIDThe Challenge of Rural Development

31�

Datt and Ravallion (2002) as quoted in Asian Development Bank (ADB), India Country Study, Assessing the Impact of Transport and Energy Infrastructure

on Poverty Reduction, ADB.

Rural Development

A New Approach to Rural Development Creating a new consumer market

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An improving growth rate of the Indian economy should ideally result in the alleviation

of poverty and wealth creation. However, this would largely depend on the provision of

quality physical and social infrastructure across the country and a focus on rural

development.

Successive governments have over the years, launched various policy initiatives and

programmes to alleviate poverty and generate employment

, increase access to healthcare

, improve food security

, promote education and

improve rural infrastructure

The Central Government's expenditure on social services, including rural

development, has increased from INR 18.2bn (USD 413.6mn) in 1995-96 to INR

70.9bn (USD 1.6bn) in 2005-06 (BE), indicating increased emphasis on the social

sector.

While rural India represents a huge developmental challenge, which the government

has tried to address through the above mentioned policy initiatives, it also represents a

vast potential consumer market. However, for this market to develop to its potential,

efforts need to be focussed on increasing access to productive capital and to

augmenting the purchasing power in the rural economy.

(National Rural

Employment Guarantee Scheme) (National Rural Health

Mission) (National Food for Work Programme, Antyodaya Anna

Yojana) (Mid Day Meal Scheme, Sarva Shiksha Abhiyan)

(Rural Infrastructure Development Fund, Pradhan Mantri

Gram Sadak Yojana, Bharat Nirman).

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The current UPA Government's eight flagship programmes Sarva Siksha Abhiyan,

Mid-day Meal scheme, Rajiv Gandhi Drinking Water Mission, Total Sanitation

Campaign, National Rural Health Mission, Integrated Child Development Services,

National Rural Employment Guarantee Scheme and Jawarhlal Nehru National

UrbanRenewalMission havebeenaccorded thebulk of theallocations for 2006-07.

The total allocation to the eight flagship programmes for 2006-07 stands at INR 500

bn (USD 11.4 bn) representing an increase of 43.2% over last year's allocation of

INR 349 bn (USD 7.9 bn).

Allocation for education has been increased by 31.5% to INR 241 bn (USD 5.47 bn)

and for health by 22% to INR 125 bn ( USD 2.8 bn).

�

Economic Survey 2005-06, Ministry of Finance, Government of India


32

Source: Prahalad, C.K., Hart, S.L., 'The Fortune at the Bottom of the Pyramid', Strategy + Business, Issue 26, 2002.

Transforming the rural economy entails supplementing the government's efforts with

private participation to deliver long-term, sustainable development solutions that

enhance rural infrastructure, improve delivery and distribution channels, and expand

the availability of financial services.

Public private partnerships are increasingly important, especially in creating and

enhancing rural infrastructure. Banks and Financial Institutions also play a vital role as

they finance more than 70-80% of such projects. From the banker's perspective,

development of micro and medium scale projects based on the principles of Public-

Private Partnerships (PPPs) would improve the risk appetite of such projects and

formally link players through a risk-reward structure. It would also gradually assist in

transforming government support from a subsidy based mechanism to an equity

based mechanism.

In recent times, Governments the world over have changed their approach to

infrastructure development. Government resources are limited and are witnessing a

crowding out of capital expenditure by increasing pressures of interest payments and

salaries. Fiscal consolidation has led to greater emphasis on raising revenues as well

as better management of public expenditure. Hence, the objective of government

spending should be to maximise service to the common man at an affordable price

with the minimum use of government funds.

Increasing Access to Productive Capital Developing Rural Infrastructure

33

The Commercial Infrastructureat the Bottom of Pyramid

Creating BuyingPower

* Access to credit* Income generation

Improving Access* Distribution systems

* Communicationslinks

Tailoring LocalSolutions

* Targeted productdevelopment* Bottom-upinnovation

Shaping Aspirations* Consumer education

* Sustainabledevelopment

The government remains an important stakeholder in the infrastructure sector and its

involvement is often key to developing infrastructure projects. However, private sector

participation has increasingly been solicited in large scale infrastructure projects to

leverage public sector funds and resources, thus creating successful PPPs. There is,

in fact, a need to migrate the PPP principles, which have been successfully used to

establish and operationalise several large scale infrastructure projects, to the Micro

and Medium level by promoting dynamic synergies with like-minded institutions. If

suitable modifications are made, the reach and efficacy of programs such as the

“Bharat Nirman” Project can be enhanced, while simultaneously creating

The Bank has conceptualised an important

rural entrepreneurship and infrastructure development program by the name of the

(SKK) model. The SKK is a holistic solution that

will provide the entire gamut of product, service and information needs of the farming

community, with the project being managed by Agri Management Graduates. The

model envisages participation from various stakeholders, including government

research & extension agencies, agri-input companies, banking institutions and agri

trading and processing companies, in a PPP framework which will encourage rural

entrepreneurship through the creation of a service delivery channel by enabling the

development of rural infrastructure.

The Bank is also working with organisations such as the “Small Scale Sustainable

Infrastructure Development Fund” (S IDF), which is primarily focused on small-scale,

often rural, infrastructure and related investments.

While infrastructure development is essential for overall rural development, the

incidence of poverty also needs to be reduced, thereby increasing income and

augmenting buying power in the rural economy. Thus, augmenting capital formation in

the rural economy through the promotion of sustainable livelihoods is critical to attain

comprehensive growth. Increasing access to organised finance plays an essential role

and one of the key tools to enable this is Microfinance.

“Rural

Entrepreneurship”.

Rural Infrastructure and YES BANK:

“Sampoorna Krishaksewa Kendra”

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Increasing Access to Consumption & Growth Capital

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The NHDP Program using BOT ApproachLarge Scale Infrastructure Projects-


34

Microfinance�

The provision of a broad range of financial services such as deposits, loans, payment

services, money transfers, and insurance to poor and low-income households and their

micro-enterprises. Microfinance services are provided by three types of sources:

Institutional microfinance includes microfinance services provided by both formal and

semiformal institutions, whereby Microfinance Institutions are defined as institutions whose

major business is the provision of microfinance services.

Formal institutions, such as rural banks and cooperatives

Semi-formal institutions, such as nongovernmental organizations

Informal sources such as money lenders and shopkeepers

Micro-finance, as a concept, finds its roots in Asia. The concept was

pioneered by Prof Muhammad Yunis through the Grameen Bank initiative

established in Bangladesh and has been hugely successful.

Nirdhan Uttan Bank Limited (NUBL), a Grameen replicator, started out as an

NGO and later incorporated as a not-for-profit development bank. NUBL operates

in seven districts in southern Nepal, identifying destitute households and

motivating women from such households to form small groups to whom credit is

provided without collateral.

Bank Rakyat Indonesia (BRI), a state-owned commercial bank that

began as an agricultural development bank, started offering microfinance services,

Unit Desas (UD), for rural and urban clients. While it now maintains a commercial

focus, it is still largely focused on rural banking services, particularly to the

agricultural markets. By the end of 2002, BRI-UD had total assets of USD 3.2bn

including a loan portfolio of USD 1.3bn, and savings deposits of USD 2.6bn. Its

portfolio at risk > 30 days was 4.37%. It had a 6.58% return on assets and 111%

return on equity. BRI-UD accounts for the lion's share of BRI's total profit.

Accion Communitaria del Peru (ACP) began operations as a non-

profit NGO focused on community development. In the early 1980s, ACP focused

its activities on the provisioning of credit to micro-entrepreneurs in the capital city of

Lima. The NGO later transformed into MiBanco, the first for-profit fully licensed and

regulated Bank dedicated to microfinance in Peru. With a portfolio at risk of 3.1% in

2002, MiBanco is one of the soundest banks in the Peruvian financial system, and is

fully profitable.

Bangladesh:

Nepal:

Indonesia:

Latin America:

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International Experiences in Microfinance

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Asian Development Bank (ADB), (2000), Finance for the Poor: Microfinance Development Strategy, ADB. 35

The Indian Microfinance Experience

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Traditionally, the Indian banking industry has been focused on serving the upper

income groups with the Bottom of the Pyramid market being regarded as less credit-

worthy and therefore unviable. The ratio of agriculture credit to Agri GDP is 9%, with

only 16% of the 147.9 mn rural households indebted to banks. Thus, the rural economy

is not only underbanked but largely unbanked. This represents a significant market

that can be served using long-term sustainable financial solutions.

The microfinance industry in India can be seen to have developed in the following

phases with the Government making various efforts to increase access to credit at

the BOP

The Government focused on providing subsidised agriculture credit to

small and marginal farmers to raise productivity and incomes

Micro-enterprise credit came to the fore, extending credit to poor women

engaged in small business ventures, aimed at raising overall household incomes

NABARD launched its microfinance programme linking Self-Help Groups,

predominantly comprising of women members, to banks. This model continues to

dominate the Indian microfinance landscape with India having the largest SHG-

linkage base in the world.

According to Economic Survey (2005-2006), 554 banks (47 commercial banks,

177 RRBs and 330 co-operative banks) are now actively involved in this

programme

The 5,39,365 new SHGs credit-linked during 2005-06 represent an increase of

49% over the previous year and as on 31 March, 2005, the total of 1.6mn SHGs

credit-linked by banks covered an estimated 24.2mn poor families, with an

average loan disbursement per family of INR 3,044 (USD 69.2).

In areas which have sound microfinance programmes, the quality of life of the poor

goes up significantly. A sample analysis of MFIs has concluded that nearly 78% of the

membership of MFIs is rural and almost 95% of the members are women, categories

which have previously been underserved . Impact assessment studies find that

microfinance has been able to achieve institutional credit deepening (capacity of a

household to absorb credit) to a great extent.

Microfinance initiatives such as

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- 1950s - 70s:

- 1980s:

- 1990s:

It has become easier to access credit as entry barriers such as remote location

and collateral requirement have been overcome.

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Prahalad, C.K. (2005), The Fortune at the Bottom of the Pyramid, Wharton School Publishing

EDA Rural Systems, July 2003, Impact Assessment of Microfinance: Interim findings of the national study of MFIs in India

Puhazhendi, V. & Badatya, K.C, Jan 2002,.SHG-Bank Linkage Programme for rural poor - an impact assessment , NABARD


36

Shramik Bharti and Cashpor in Uttar Pradesh, SKS, Share and Spandana in Andhra

Pradesh, Sanghamitra, Association of Women Entrepreneurs, Bharat Swamukthi

Sanstha in Karnataka, Bharat Sewak Samaj, Evangelical Social Action Forum, and

Bodhana in Kerala, The Activists for Social Alternatives, League for Education And

Development, IASC and DHAN in Tamil Nadu, RGVN in the North Eastern states,

Asmitha, Adarsha and CYSD in Orissa, Village Welfare Society (VWS) and Bandhan in

West Bengal, Adithi and Nidan in Bihar, Nav Bharat Jagriti Kendra and Holy Cross

Social Service Center in Jharkhand are successfully servicing underdeveloped

regions such as poor districts and urban slum areas where the majority of people have

very little access to institutional finance.

Today, references to the penetration of microfinance in India are largely with respect to

credit products with the presence of savings or deposit products in select pockets.

Some progressive micro-finance institutes have tried to make their approach more

holistic by introducing services like insurance, backed by a variety of support services,

which include motivating and organising the poor, extending financial training, helping

them build forward and backward linkages as well as with other support institutions.

Providing a complete range of financial products not only enhances a household's

capacity to generate income but also enables it to protect itself from external shocks,

benefit from profitable investment opportunities, expand its economic activities,

reduce risk and enhance economic growth.

Savings offering savings products through microfinance helps in generating more

financial savings, and also provides a greater capacity for investments, thereby

reducing vulnerability to risk, increasing overall income and empowerment.

Credit making credit available not only helps to satisfy consumption demand but

also augments capital formation through investments in productive assets. This, in

turn, increases a poor household's income, opens up other opportunities for

income generation and reduces its vulnerability to risk and enhances social

inclusion.

Insurance insurance facilities, bundled with savings and credit, allow for a reduction

in risks and vulnerability to external shocks thereby securing financial flows and

efficient circulation of money resulting in sustainable development.

The Product Suite

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37

However, this product mix still does not cover rural development comprehensively.

The next section (“The Road Ahead”) suggests other products and services that need

to be made available to rural customers through microfinance services for more

holistic national growth.

The Bank has initiated its microfinance practice, using

the Bottom of the Pyramid approach in taking banking services to previously

unbanked or underbanked segments of society to create sustainable livelihoods. The

Bank's microfinance model, comprising both debt and equity instruments, will offer the

triad of services (credit, insurance and savings) aimed not only at satisfying

consumption demand but also geared towards capital formation. The model also

targets introducing and developing other innovative mechanisms to deliver more

holistic financial services in the rural sector.

The growth and long-term sustainability of the Indian microfinance industry depends

on the following key factors:

Microfinance and YES BANK:

- there is a need to augment the pool of

funds currently available to MFIs, thus allowing them to tap local and international

markets and private capital in the form of both debt and equity investments. The

recently announced Union Budget for the year 200607 proposes allowing the

NBFCs focusing on microfinance to tap External Commercial Borrowings as a

source of funding.

- MFIs need to increase efficiencies in terms of

performance, operations, management and governance to be able to provide

competitive (un-subsidized) interest rates to rural borrowers. The operational

efficiencies shall support launching new innovative products and services like

insurance, savings schemes, and micro and small investment solutions, thereby

creating long-term sustainability.

- There is already an

increased participation of private sector banks in the micro-credit space, prompted

by the excellent performance of some leading micro-finance institutions like Share

Microfinance, Basix, Spandana and others. However, there is a further need to

provide more competitive broad-based financial solutions, aligned with the

comparative urban market offerings. This could result in more robust Bank-MFI &

Availability of New Sources of Funds

Operational Efficiencies

Increased Private Commercial Bank Participation

The Road Ahead

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38

Bank-SHG partnerships and even direct Bank Borrower linkages, increasing the

viability of such operations. There are limitations on private banks' ability to provide

savings products to the rural markets, due to lack of reach through branches.

Though steps are being taken by the Reserve Bank of India (RBI) to allow innovative

methods of reaching the rural populace, demand for savings products and

providing convenient access in the rural areas is the greatest challenge for the

banking system. On the risk management front, only a few players like ICICI

Lombard (Weather Insurance) and Oriental Insurance Company (Comprehensive

Crop Insurance) have taken initiatives to meet the requirements of this market.

- There is an urgent need to evolve new products,

such as credit cards and smart cards, mobile banking, rural ATMs and kiosks as

well as the technology to increase outreach, reduce operational costs and increase

operational efficiencies.

- The biggest challenge however, is to provide venture

capital for promoting rural and village enterprise. It is only through the promotion of

village level entrepreneurs, either in the form of individuals or co-operatives, that

Rural India can be economically independent.

- Extending the Indian growth story to rural India extends

beyond providing access to superior products and services. Today, there are no

products or mechanisms through which an average rural household can invest in

India's growth through debt or equity capital markets, as the small transaction size

makes the proposition uneconomical. Providing such access will allow access to

unprecedented sources of funds.

New Products and Technology

Lack of Venture Capital

Share in India's Growth

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39

INDIA'S FINANCIAL MARKETSFrom Micro-governance to Macro-management

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INDIA'S FINANCIAL MARKETSFrom Micro-governance to Macro-management

Since liberalization, India's policy makers have brought about rapid transformation in

the financial sector. These reforms, introduced against the backdrop of the 1991 BoP

crisis, have followed a gradualist approach and have been aimed at increasing stability

and efficiency of the system. Towards this end, the regulatory and supervisory

framework has moved from micro-governance to macro-management, imparting

greater freedom to both institutions and markets in terms of resource allocation,

pricing and risk management.

Our markets however, still remain small by regional standards. Taking stock of the

major initiatives that have been taken to reform the financial markets in India in the past

and reflecting on the present scenario would help us articulate the future course of

reforms.

In recent years, technological developments have made a major presence in the

Indian financial and banking space. Development of technology is an integral part of

reforming the financial markets, especially in the context of providing a superior

dealing and settlement system, which form the backbone of the financial markets

architecture. In this regard, the RBI has provided unstinted support to the development

of the technological infrastructure in the financial markets for ensuring greater

efficiency and transparency in operations as well as risk-free settlement.

In the process, the central bank has introduced Real Time Gross Settlement System

(RTGS) and has encouraged the setting up of Clearing Corporation of India Limited

(CCIL). As part of NDS-PDO computerization project, the Negotiated Dealing System

(NDS), which is a system that provides for screen-based trading of Government

Securities, has also commenced its operations since Feb-02. The setting up of the

Technology, Settlements & Institutional Development

43


Institute for Development and Research in Banking Technology (IDRBT) in 1996, an

autonomous centre for development and research in banking technology has

facilitated these technological advancements.

On the institutional development side, the CCIL commenced its operations in Feb-02

and has worked to put in place the NDS Order matching Module (NDS-OM). CCIL has

also started facilitating the settlement of cross currency trades through the Continuous

Linked Settlement (CLS) initiative. As part of the development of new instruments

offered through CCIL, the most significant accomplishment pertains to Collateralized

Borrowing and Lending Obligation (CBLO).

The establishment of CCIL has paved the way for entry of non-bank participants for

repos market and repos in corporate debt instruments, thereby improving liquidity in

the debt markets. It has not only promoted the use of electronic platforms but also

increased the efficiency and stability of markets. The reduction in the number of

transactions for settlement with RBI has brought down the associated risk, cost and

time in completion of settlement.

Let us evaluate the developments in the Indian stock markets. Over the 1990s, a series

of changes to the market design has taken place, triggered by the stock market scam

of 1992. Prior to 1992, the pricing and volume of securities were controlled by the

Government; IPO requirements were loose given the lack of adequate accounting,

disclosure and listing requirements; and all securities were treated at par regardless of

firm size, liquidity, trading volume, performance, and so on. In order to improve the

infrastructure needed to develop a sound capital market, the Government empowered

the Securities and Exchange Board of India (SEBI) as a regulatory body in 1992.

The following changes sum up the transformation of the structure of the equity markets

over the past decade, which seem largely complete when one makes comparisons

with the markets in developed economies.

All exchanges in India switched from floor trading to

electronic trading. With the setting up of the National Stock Exchange (NSE), the

first nationwide screen-based stock exchange, competition among the existing 22

stock exchanges intensified.

1995: NSE formed the National

Securities Clearing Corporation Limited (NSCCL) to eliminate counterparty and

Electronic Trading - 1994:

Risk Containment at the Clearing Corporation -

Evolution of the Stock Markets

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44

payment risks. Other exchanges also substantially improved their risk containment

mechanisms.

National Securities Depository Limited (NSDL),

dispensed with the need for physical share certificates by setting up a system of

computer records of ownership of securities. Today, almost all equity settlement

takes place at the depository.

In 2000-01, equity derivatives trading commenced,

with index derivatives and derivatives on some individual stocks.

Futures-style

settlement was banned in favor of rolling settlement.

The primary challenge that now faces the equity market is that of improvements to

investigation and enforcement at SEBI.

Institutional and technological changes over the years such as the establishment of

CCIL, NDS, RTGS and DvP (delivery versus payment) mode of settlement in

government securities have lowered transaction costs, reduced settlement risks,

enhanced transparency and facilitated the ease of transaction. With regards to greater

transparency, the Government's market borrowing program is announced at the

beginning of the year. Based on this, a calendar of Treasury Bills is pre-announced to

the market. Similarly, near real-time data is available with regard to auctions of

Treasury Bills and dated Government Securities. The RBI also publishes all relevant

data pertaining to the Government Securities market on daily, weekly, monthly and

annual basis.

The following summarize the key milestones in the Indian debt markets since

liberalization:

Some measure of transparency came about through

the Wholesale Debt Market (WDM) at NSE. WDM marked an important a step forward

insofar as it revealed valuable data about prices and traded quantities.

Move towards

computerization of the SGL and implementation of a form of a DvP system.

The Primary Dealership system was adopted from

advanced countries that used it to widen and deepen markets. The system was

Depository Services - 1996:

Derivatives Trading - 2000:

Elimination of leveraged trading on the cash market - 2001:

Trade Reporting System - 1994:

Improvements to Subsidiary General Ledger (SGL) - 1995:

Primary Dealership - 1996:

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Post-Liberalization Changes in the Debt Markets

45

expected to absorb Government Securities in primary markets, to provide two-way

quotes in the secondary market and help develop the retail market.

The Module provides for screen-based electronic dealing system for

trading in Government Securities and money market instruments, including repos and

electronic bidding in the primary auction of Central & State Government Securities and

Treasury Bills.

RTGS has facilitated funds settlement at real time gross basis.

An important recent development in the

money market has been the increase in the size of the collateralized segment vis-à-vis

the uncollateralized segment. The combined average daily transactions of market

repo and CBLO have been higher than those in the uncollateralized call/notice money

market.

To further widen the market, FIIs have been allowed to invest in Government Securities

and T-bills, both in primary and secondary markets, subject to certain ceilings.

Through the introduction of screen-based trading, the Government Securities market

has also been thrown open to retail investors.

While commendable measures have been initiated in the debt markets, with regards to

technological and institutional developments, a fair deal still needs to be done,

especially in terms of introduction of new products. While the RBI introduced rupee

interest rate swaps many years ago (1999), the evolution of new benchmarks has

remained sluggish. Popular benchmarks include Overnight Index, FX implied (MIFOR)

benchmark, and INBMK (G-sec) benchmark. In reality, most of these benchmarks

have failed to act as a good hedge due to large basis risks between the underlying

exposure of the banks / corporates. Further, interest rate futures were introduced but

failed in the absence of STRIPS and a complex product design. An active STRIPS and

interest futures market is essential for a more efficient market and also future

introduction of interest rate options.

With respect to external sector policies, India faces tough challenges as it integrates

with the global economy. Liberalization has brought in substantial inflow of foreign

capital into the country. Also facilitating the integration of domestic economy with

global economy has been the concurrent dismantling of trade barriers. This

integration with the global economy makes Capital Account Convertibility (CAC) an

NDS-OM - 2002:

RTGS - 2003:

New Products through CCIL (CBLO) - 2003:

Evolving Trends in the Foreign Exchange Markets


46

unavoidable process and not a choice. Nevertheless, a gradualist approach has been

adopted by policy makers whilst initiating this process and rightly so. Increasing CAC

would hasten the process of integration of the Indian financial markets with the

international markets. Some of the necessary preconditions to this as suggested by

the Tarapore Committee report are already being met. However, increasing

convertibility also carries the risk of removing the insularity of the Indian markets to

external shocks such as the SE Asian crisis, but appropriate management of the

transition should speed up the growth of the financial markets and the economy.

A brief historical perspective is in order to help us recall the significant changes that

have taken place in the external sector over the past few years. Soon after

independence, a complex web of controls was imposed for all external transactions

through the Foreign Exchange Regulation Act (FERA), 1947, which were put into a

more rigorous framework of controls through FERA, 1973. Restrictions on current

account transactions persisted through the mid 90s when relaxations were made in

the operations of FERA, 1973.

Consistent with the philosophy of economic reforms, vital changes with regards to the

broad approach to reforms in the external sector took place. In 1993, exchange rate of

rupee was made market determined. Thereon, in Aug-94, India adopted current

account convertibility. In Jun-00, a legal framework, with implementation of FEMA, has

also been put into effect to ensure convertibility on the current account. And so, the

approach shifted from that of conservation of FX to one of facilitating trade and

payments as well as developing an orderly FX market.

CAC aims at liberalizing controls that hinder the international integration and

diversification of domestic savings in a portfolio of home assets and foreign assets and

allows participants to reap the advantages of diversification of assets in the financial

and real sector. However, the benefits of capital mobility come with certain risks, which

should be managed prudently. By simply lifting all capital controls, markets of a

developing country do not get as deeply integrated as those of a developed country,

and each country needs to decide its own path of capital account liberalization. The

three critical preconditions laid out by the Tarapore Committee to achieving capital

account convertibility include (i) fiscal consolidation, (ii) a mandated inflation target

Historical Perspective - Progression from FERA to FEMA

Capital Account Convertibility

47

and, (iii) strengthening of the financial system. The RBI has thus far done well by taking

small steps to achieving CAC. This gradual approach has been received well and kept

India insulated from the 1997 Asian crisis.

The current approach to liberalization can be characterized

by greater transparency, data monitoring and information dissemination and to move

away from micro-management of FX transactions to macro-management of FX flows.

The emphasis of the RBI has been to ensure that procedural formalities are reduced so

that participants are able to concentrate on their core activity rather than engaging in

unnecessary paper work, while ensuring observance of Know-Your-Customer (KYC)

guidelines, which are part of the anti-money laundering measures.

Indian has been on the path of gradual progress

towards CAC since the early 90s. The emphasis has been shifting away from debt

creating to non-debt creating inflows, with focus on more stable long-term inflows in

the form of FDI. Here's a quick run-down of the significant policy measures:

The year 1991 saw modifications to the limits for raising ECBs to avoid

excessive dependence on borrowings. The list of sectors allowed to raise ECBs has

expanded ever since. The thrust of the new policy is to encourage investment in the

real sector including infrastructure, while restricting debt flows for purposes other than

those adding to the country's capital stock.

India's FDI policy has been to encourage investments in the core and

manufacturing industries. Initially, investments up to 51% were allowed through the

automatic route in 35 priority sectors. Save certain sectors such as Retail Trading,

Atomic Energy, and certain Agri-based sectors, FDI norms have been liberalized over

the past decade, with more sectors being opened up for foreign investment. Where

there is a dire need for investments, FDI under the automatic route is allowed up to

100% - this list currently includes 22 sectors.

Foreign Institutional Investors (FIIs) registered with SEBI and

Non-resident Indians are eligible to purchase shares and convertible debentures

under the Portfolio Investment Scheme subject to certain limits.

In 1992, Indian companies were encouraged to issue ADRs/GDRs to

raise foreign equity, subject to rules for repatriation and the end use of funds. Currently,

the raising of ADRs/GDRs/FCCBs is allowed through the automatic route without any

restrictions.

Recent Policy Initiatives:

Developments in Capital Flows:

ECBs:

FDI:

Portfolio Investment:

Foreign Equity:


48

Non-Resident Deposits:

Remittances:

Capital Outflows:

There have been significant changes in the policy

framework for NRI deposits held by the Indian banking system, which constitute a

major portion of external debt for India. The interest rate on the deposits have been

rationalized and linked to international benchmark LIBOR.

In order to provide hassle free remittance facility based on a

declaration, since 2004, resident individuals have been allowed to remit up to $25,000

pa for any permitted purpose both under current and capital account or combination of

both.

Outflows associated with these inflows such as interest, profits,

sale proceeds and dividend are free of any restriction. All current earnings of NRIs in

the form of dividends, rent, etc. have been made fully repatriable. The recent Budget

proposal to raise domestic MFs' foreign investment limit is a welcome step as this

would help MFs invest in sought-after companies such as the likes of Google & Apple

or any other company with unique business proposition that can be a valuable

addition to their portfolio.

The aforementioned reforms have set in motion the process of the development of the

FX derivatives markets. Globalization of trade and free movement of financial assets

necessitates risk management through derivative products, especially as Indian

businesses become more global in their approach. And so, evolution of a broad-

based, active and liquid FX derivatives markets is required to provide Indian

businesses with a range of hedging products for effectively managing their FX

exposures.

The rupee forward market has been growing rapidly with increasing participation from

corporates, banks and financial institutions. Till Feb-92, forward contracts were

permitted only against trade-related exposures and these contracts could only be

cancelled except where the underlying transactions failed to materialize. Since Mar-

92, so as to provide operational freedom to market participants, unrestricted booking

and cancellation of forward contracts for all genuine exposures, trade-related or

otherwise, were permitted. Banks are also allowed to enter into forward contracts to

manage their assets-liability portfolio. These developments, and recent measures

such as the increase in the FII debt limit, have ensured that rupee interest rates, implied

by the forwards market, are gradually moving towards the fundamentals of interest

FX Derivatives

49

rate parity. Permitting banks a higher level of foreign borrowings (above the current

cap of 25% of Tier I capital) or encouraging higher inflows of foreign currency deposits

would also aid the process.

Following the introduction of INR options in Jul-03, which enabled Indian FX market

participants to better manage their exposures by hedging USD-INR risk, the market

has seen tremendous growth in volumes given the active participation by corporates.

However, what is missing is an active inter-bank market to ensure good liquidity and

thereby lower bid-offer spreads. Liquidity could also improve manifold if more market

participants would be allowed to write options. Introduction of barriers is also an

important event, which would add the necessary depth and liquidity to the market.

A large number of market participants have been taking positions on FCY-INR swaps,

which allow them to convert their rupee-based exposures to foreign-currency

exposures and vice-versa. These instruments have had a significant impact on the

underlying FX market, although regulations on bank limits, rebooking and tenors have

kept a lid on the activity. A less restrictive environment is necessary to allow players to

actively manage their books by taking exposures in the desired global FX and interest

rate benchmarks.

Corporates have been actively using the G7 markets to better manage their risks

though options as well as swaps. This has been due to better liquidity and product

flexibility (such as barriers in the case of G7 options) relative to the USD-INR market.

This is an important case in point for the Indian markets, especially in terms of product

development, depth and liquidity.

The Indian FX derivatives market is still at a nascent stage but offers enormous growth

potential. Further development of the FX derivatives market in India would be largely

dependent upon the growth in the underlying spot and forward markets, growth in the

INR derivative markets along with the evolution of a supportive regulatory system.

Increasing convertibility on the rupee and regulatory impetus for new products should

see a host of innovative products and structures, customized to meet business needs.

Apart from further development of the interest rate futures market, possibilities include

currency futures, exotic options and interest rate options. As the basic structure of a

cash market falls in line, the logical next step for market development is the

commencement of exchange-traded financial derivatives. Currency futures, since

FX Derivatives Market: Way Forward


50

they are traded on organized exchanges, bestow benefits such as providing a

transparent venue for price discovery. Furthermore, margin requirements are minimal

and credit risk is mitigated by daily marking to market of all futures positions.

The Insurance business in India remained confined to the public sector until the late

90s. Following the passage of the Insurance Regulation and Development Act (IRDA)

in 1999, several changes have been initiated, including allowing newer players to

undertake the insurance business on a risk-sharing/commission basis. Today, 28

insurers operate in the market as against only 5 Public Insurance companies pre-

liberalization. The introduction of the private insurance companies has stirred up the

industry and has brought about fast paced changes in the market. The increased

competition and awareness over the years have helped stabilize the infrastructure

requirements that are required for agent training, policy issuance, customer service,

and so on. This has led to a sharp surge in the growth rates for the sector and at the end

of all the key beneficiary of this liberalization has been the Customer.

Liberalization of entry norms in the insurance segment has brought about rapid

changes in product composition. Earlier, tax incentive was the major driving force of

the insurance industry, in particular, the life insurance industry. More recently however,

the emerging socio-economic changes including increased wealth, education and

awareness about insurance products have resulted in introduction of various novel

products to the Indian market. Apart from this, there have also been improvements in

consumer service, driven primarily by the impact of new technology, better technical

know-how as a consequence of foreign collaboration and focused product targeting,

dovetailed to specific sections of the populace as well as cross-selling of products

through bancassurance.

Amongst all countries across the world, India, along with China, is likely to lead in

terms of growth through the next decade. All medium to large scale global Insurance

majors have shown keen interest in the Indian market. Some await the increase of the

foreign equity cap to 49%.

Going forward, the key drivers of growth in the Insurance sector are likely to be:

Large insurable population (approximately 650 million)

Low penetration

Low Insurance density

Insurance Sector

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51

High GDP growth (8%)

High savings rate (about 30%)

The comprehensive financial sector reforms, which included interest rate decontrols,

cuts in reserve and liquidity requirements, an overhaul of priority sector lending,

deregulation of entry barriers, strengthening of prudential regulations, and

capitalization and partial privatization of public sector banks, have immensely

benefited the banking sector. These reforms, together with technology, have swiftly

changed the face of banking in India, heralding a new age banking system.

Some aspects of new age banking include online banking, phone banking, mobile

banking. Financial liberalization has allowed banks to introduce new products,

including personalized retail banking, consumer-durables financing, electronic

banking, currency and interest-rate swaps, cash management systems and custodial

services. Portfolio Management Services are also provided to corporates, as well as to

individuals, to help better manage their financial portfolio.

With most banks especially aggressive in treasury operations, the gradual

liberalization of foreign exchange and money markets throws open new opportunities

and the client can now avail a wide range of foreign exchange products like spot,

forward, swaps, currency options and interest rate derivatives.

The Indian banking system has also made considerable progress with regards to the

implementation of the Basel-II framework for capital adequacy. This has helped banks

gear up with international banking standards with respect to capital adequacy

requirements on account of credit, market and operational risks.

The RBI has issued a report on the roadmap for the presence of

foreign banks in India. The report hints at a level playing field for foreign banks and

domestic private banks from Apr-09. The RBI clearly wants to ascertain that Indian

banks are capable of withstanding the competitive pressure and provide some more

time to prepare for global competition. So whist enhanced competition among diverse

players has been encouraged, the approach thus far has been gradual so as to ensure

that the entry of foreign banks into the country be co-terminus to greater capital

account convertibility.

However, a significant step towards deeper engagement between India and SE Asia in

the banking arena has been India's signing of the Comprehensive Economic

Foreign Banks:

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Banking Sector Developments


52

Cooperation Agreement (CECA) with Singapore. As per the agreement, Singapore will

offer Qualified Full Bank (QFB) status to 3 Indian banks, which India will reciprocate.

This implies that Indian banks already operating in Singapore would be allowed

electronic fund transfer, clearance and use of local ATMs. The 3 Singaporean banks

meanwhile can open 15 branches in India in the next 4 years.

high-interest high-potential: The Indian securitization market has

begun to gather pace since 2000, especially so during the past couple of years after

the government passed the legislation governing securitization and reconstruction of

financial assets (SARFAESI) in 2002. The law permits banks and financial institutions

to turn their assets into securities, set up asset reconstruction companies (ARCs) for

their poor assets and assign the ARCs the right to securities in the event of client

default.

In the Indian context, the benefits of securitization are tremendous. It is needless to

stress the advantages of an opportunity that permits effective use of available capital in

a capital-constrained economy. Moreover, the ability to diversify one's funding base by

reaching out to new investor markets, without having to increase financial leverage, is

also of significant value. Effective balance sheet management and the reallocation of

risks in a planned and transparent manner are some of the other advantages.

Asset securitization is an important building block in creating an efficient and broad-

based financial system. The concept is highly relevant to in the Indian context, given

the capital constraints India faces. An appropriate regulatory framework can make

securitization an important catalyst in further mobilizing domestic savings as well as

attracting foreign capital, which can be of immense value, especially in the context of

capital requirements to develop the country's infrastructure sector.

Indian financial markets have improved their operations in recent years, with turnover

and liquidity rising from once low levels. Technology has changed the face of banking

while the Insurance business has been transformed into a competitive market in both

life and non-life segments. Our exchanges have introduced derivatives following the

lifting of official restrictions, and retail investors have become avid users of futures and

options (F&O). The market for initial public offerings (IPOs) has shown signs of sharp

revival in FY04 and has continued its strong performance since, in tandem with the

robust performance of the stock market. In terms of credit, nationalized banks and

Securitization:

Conclusion

53

financial institutions remain the primary sources, although other forms of financing,

such as securitization, also seem to be coming of age.

Thus far, the reforms process has furthered efficiency, enhanced transparency

standards, improved liquidity, and strengthened prudential norms; all reflective of the

growing sophistication of the system. This process is likely to continue on an ongoing

basis keeping in mind the overall framework of financial stability. Still, a lot needs to be

done, especially in terms of product innovation, to make the Indian markets a more

dominant force in the global economy. Exotic options could be introduced in phases,

depending on the speed of development of the market as well as comfort with

competencies and Risk Management Systems of market participants. A further

development in the derivatives market could also see derivative products linked to

commodities, weather, and so on.


54

KEY SECTORAL DEVELOPMENTS

THE INFRASTRUCTURE MULTIPLIER

THE INFRASTRUCTURE MULTIPLIER

The importance of infrastructure for sustained economic development is well

recognized. High transactions costs arising from inadequate and inefficient

infrastructure can prevent the economy from realizing its full growth potential,

regardless of the progress on other fronts. Physical infrastructure, inclusive of

transportation, power and communication through its backward and forward linkages,

facilitates economic growth whereas social infrastructure, including water supply,

sewage disposal, education and health, has a direct impact on the quality of life.

The Government has embarked on an ambitious programme, involving inter alia

increase in budget outlay for infrastructure sectors, policy initiatives for encouraging

private sector participation & foreign direct investment and tax holidays, to revamp and

expand India's aging infrastructure network. The ambitious reform programme

initiated by the Government in 1991 has been continued by all the successive

Governments irrespective of the political affiliations. Major policy initiatives taken by

the Government over the last decade include increased private sector participation to

meet investment needs, mobilization of funds from multi-lateral agencies and using

innovative modes of funding for projects.

These initiatives have resulted in a paradigm shift in development across various

infrastructure sectors, facilitating India's increased competitiveness in the global

economy and a growth rate in excess of 6% over the last decade. Despite these

significant achievements, there remains a wide gap between the potential demand for

infrastructure for achieving sustainable high growth and the availability of

infrastructure. Unfortunately, India continues to lag far behind China and other South-

East Asian economies in infrastructure development.

59


60

India's Infrastructure - International Comparison

1. Roads

India China Indonesia Malaysia Thailand

Period Averages 1996-00 1996-00 1996-00 1996-00 1996-00

Electric Power consumption

(Kwh per Capita) 359 717 319 2,378 1,349

Roads, paved (% of total roads) 20 22 46 75 98

Railways

(bn ton-km per PPP $ mn of GDP) 141 306 8 7 8

India's future growth prospects hinge critically on providing industry with world-class

physical infrastructure. The following sections describe recent developments and

opportunities in transportation viz. Roads, Ports, Railways and Power sectors in India.

Roads occupy an eminent position in the transportation sector, as they account for

85% of the passenger traffic and almost 70% of the freight traffic in the country. Due to

road bottlenecks, the average distance traveled by trucks in India is only about

200kms per day, as compared to the global norm of approximately 400kms per day.

This forces industry to hold large inventories, which reduces competitiveness in the

international markets.

The focus of both State and Central Governments on improving road connectivity

across the country has brought about significant investments in road development.

The Tenth National Plan (2002-2007) envisages a growth of 57% in the investment in

roads, as compared to the Ninth Plan, and has assigned a high priority to the National

Highway Development Programme (NHDP). The NHDP programme, comprising of

the Golden Quadrilateral (GQ), North South East West (NSEW), port connectivity and

other projects, has seen rapid progress with 6271kms completed and 6179kms under

construction, as on November 30, 2005. The cumulative expenditure incurred on the

same has been INR 294.9 bn (USD 6.7bn).

Key Developments & Initiatives

61

Progress of NHDP November, 2005

In KM GQ NSEW NHDP Total Port Others Total

Phase I& II Phase III connectivity NHs

Total Length 5846 7300 4015 17161 356 801 18318

4 laned 5097 788 - 5885 99 287 6271

Under

implementation 749 3962 926 5637 251 291 6179

Length to

be awarded - 2441 3089 5530 7 223 5760

Source: Economic Survey 2005-06

A variety of contractual structures have been exploited under the NHDP. Projects in

Phase I with expenditure exceeding INR 58bn (USD 1.3bn) were implemented through

a public private partnership (PPP) including INR 23.5bn (USD 0.5bn) in the Build

Operate Transfer (BOT) annuity mode and INR 34.4bn (USD 0.8bn) in the BOT-toll

mode. In Phase II, PPP projects account for an expenditure of approximately INR

116bn (USD 2.6bn). Projects under NHDP Phase III-A are being taken up only on BOT

(Toll) basis with the Government providing the required viability gap funding, limited to

40% of the project cost of each sub-project. The Special Accelerated Road

Development Programme (SADRP) in the North Eastern Region is estimated to cost

INR 121.2bn (USD 2.8bn) and is expected to be partially funded to the extent of INR

21.7bn (USD 0.5bn) through private sector participation.

The Government has set ambitious plans for upgradation of roads in a phased manner

in the years to come under NHDP Phase III to VII. It is expected that Phase I will be

largely complete by June 2006 and the North-South and East-West corridors will be

completed by December 2008. Phase IIIA is targeted to be completed by December

2009.

The ambitious programme presents various challenges in terms of funding and

resources. The first two phases of NHDP have been partly funded by fuel cess, as well

as funding from multilateral agencies. A recent World Bank Study estimates that the

cumulative funding shortfall for road projects over the ten year period is estimated to

be INR 1032 bn (USD 23.5bn), approximately 39% of total requirements. The

programme thus calls for innovative measures to be taken to meet this shortfall. This

Future Outlook

also offers immense opportunity to the private sector to participate in developing

viable road projects.

Along the extensive Indian coastline of 7,517 km, there are 12 major ports. Eleven

major ports are Port Trusts, governed by the provisions of Major Port Trust Act, 1963

and the twelfth, Ennore Port, is the first major corporate port. In addition, there are 185

minor and intermediate ports spread across the nine coastal states.

The world over, the

ownership of ports

has traditionally been

dominated by the

p u b l i c s e c t o r .

However, privatisation

of port facilities and

services has begun to gather momentum in India. Ports have witnessed steady

reforms in the regulatory and commercial framework over the years, resulting in

implementation of successful privatization initiatives. The key developments being

witnessed in the Indian port sector include:

Following the liberalisation of the Indian economy in the early 1990s, there has been

a significant increase in India's maritime trade, with traffic increasing from 165mn

Tons Per Annum (MTPA) in 1991 to over 500 MTPA in 2004-05. Container traffic has

grown at 14.2% p.a. for the five years ending in 2004-05

The average turnaround time has reduced from 6.5 days in 1997-98 to 3.4 days in

2004-05. The pre berthing time at major ports reduced to 6 hours in 2004-05 from 30

hours in 1997-98

In the recent past, 18 private or captive projects worth INR 61.9bn (USD 1.4bn) have

beenapproved.Of these,13projects worth INR25.7bn (USD0.6bn) areoperational

In 1997, TAMP was established as an independent tariff regulator for major ports

During 2000, the Major Ports Trust Act was amended to facilitate private sector

participation

Key Developments

& Initiatives

2. Ports

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62

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3. Airports

Corporatisation of select major port trusts is currently being pursued by the Ministry

of Surface Transport

The Government has fixed an ambitious target of USD 150bn for exports by the year

2008-09 to double India's share in world exports from nearly 0.8% to 1.5%. Further, the

Ministry of Shipping projects the port traffic to grow to a level of 650 MTPA by 2008. As a

result, the Indian ports require large-scale capacity expansion. As opposed to a

growth of 3.5-4% in global trade, India has been registering a 10.4% growth in

containerised cargo and a 6% growth in bulk cargo. To cater to increasing cargo

growth, the following initiatives are being undertaken:

Enhancement in port capacity to handle traffic of about 565 mn tonnes by FY 2007

National Maritime Development Programme (NMDP) is being implemented which

includes several projects to be completed over the next 10 years through public private

partnership (PPP). These projects include port development activities, such as the

construction of jetties & berths, procurement, replacement or upgradation of port

equipment and deepening of channels for improvements in drafts. The estimated

investment for these projects is INR 596.7bn (USD 13.6bn)_of which approximately

INR 388bn (USD 8.8bn)_will be mobilised from the private sector.

With air travel becoming more affordable, air traffic in India is witnessing rapid growth

and there has been a spurt in airline services to both metro and non-metro airports.

During April December 2005, domestic and international passenger traffic grew by

24.2% and 18% respectively. During the same period, domestic and international

cargo grew by 6% and 11.7% respectively. This growth is the second highest in the

world, after China, for the second consecutive year. Rapid growth has resulted in

constraints in parking and terminal space for aircrafts, delays in passenger

clearances, and congestion at airports.

To cope with increasing pressure on airport infrastructure and develop international

quality airports, the Government has been successful in attracting private sector

participation for developing the airports at Mumbai and Delhi. It is estimated that

capital investment to the tune of INR 80.00 bn and INR 60.00 bn will be required for

Future Outlook


63

Delhi and Mumbai Airports respectively over a period of 20 yeaINR Construction work

on two greenfield airports at Bangalore and Hyderabad has also commenced and the

airports are likely to be operational by the middle of year 2008. Due to the monopoly

nature of airports, efforts are also underway to set up an independent Airport

Economic Regulator for tariff setting and monitoring of performance standards.

With the modernization of the Delhi and Mumbai airports underway, various private

and governmental agencies have already firmed up plans for airport development

across the country. Total investment opportunities in the sector are estimated to be INR

130bn (USD 3bn)_and State Governments are being encouraged to set up greenfield

airports with private sector participation. In-principle approvals have been awarded for

a greenfield airport in Goa and new international terminals at Ahmedabad and

Trivandrum. Proposals to set up greenfield airports in Navi Mumbai, Kannur in Kerala,

Ladhowal near Ludhiana and Pakyong near Gangtok are in the pipeline.

In addition, the Airports Authority of India (AAI) is also considering development of non

metro airports at Amritsar, Guwahati, Lucknow, Madurai, Jaipur, Mangalore and

Udaipur. The terminal building and associated infrastructure like car parks, roads and

air side work will be taken up by AAI at an estimated cost of INR 14.5bn (USD

0.3bn)_for Phase I over 2006-08.

Indian Railways (IR) is the 4th largest railway system in world and the largest in Asia,

with a network of 63,000 route kms. The monopoly status and social obligations have

strained the railways leading to freight subsidizing passenger traffic and non-

realization of costs, creating severe capacity constraints on key trunk routes, safety

concerns and deterioration in the quality of services. The high density network

connecting the four metros is also saturated at most locations.

Over the last few years, however, there have been significant efforts at rationalization of

fare and freight structures. These include reducing the number of classes for freight

tariff from 59 to 19. Further, there has been no across-the-board increase in freight

rates in the last four years. With a view to further developing the railway network and

attracting private sector participation, Rail Vikas Nigam Ltd (RVNL) has been

Future Outlook


4. Railways


64

established. Most of the projects of RVNL will be executed through SPVs under the

BOT model, with Indian railways paying an access charge to the SPVs for use of the

project stretches.

Total investment opportunities in the sector are estimated to be INR 260bn (USD

5.9bn), providing opportunities for private sector participation in the development of

railway infrastructure and improvement in the quality of passenger services. These

include projects identified under the National Rail Vikas Yojana at an estimated cost of

INR 135bn (USD 3.1bn)_to be implemented by RVNL. These include gauge

conversions, strengthening and the construction of bridges. The Indian Railways also

plans to link all major ports, mines, oil refineries and metropolitan cities across India by

dedicated rail freight corridors in various phases. In the first phase, a dedicated

corridor between Delhi and Mumbai will be built, followed by another between Delhi

and Kolkata. In the second phase, the railways plan to connect Chennai to Kolkata and

Mumbai through a rail fright corridor. To improve facilities for passengers,

infrastructure at railway stations will be developed to give the stations a modern look.

Major stations will also have facilities such as cyber cafes and food courts.

India's installed capacity in the power sector has grown from 1,712 MW in 1950 to

123,901 MW. Despite the growth in the sector a lot yet needs to be done, as currently

the overall deficit of energy in India is 8% and peak demand deficit is approximately

11.6%. This is the case at the current per capita consumption of electricity, which is far

below the world average. An anticipated GDP growth rate in excess of 8% p.a. would

require power availability to increase by 12-13% p.a.

The Electricity Act 2003 has been enacted with the objective to introducing

competition, protecting consumer interests and providing power for all. The Act

provides for a National Electricity Policy, rural electrification, open access in

transmission, phased open access in distribution, mandatory State Electricity

Regulatory Commissions (SERCs), license-free generation and distribution, power

trading, mandatory metering and stringent penalties for the theft of electricity.

The Government of India approved a scheme called “Accelerated Power Development

Future Outlook


5. Power Sector

65


and Reforms Programme (APDRP)” in March 2003 to accelerate distribution sector

reforms with the objectives of reducing Aggregate Technical & Commercial (AT&C)

losses, increasing commercial viability in the power sector, reducing outages &

interruptions and increasing consumer satisfaction. A significant number of states

have unbundled their State Electricity Utilities into separate entities for generation,

transmission and distribution and, in some cases, have invited Private Sector

Participation in varying degrees for the operation of these entities, making them easier

to manage and more accountable. A large number of states have constituted

independent State Electricity Regulatory Commissions which have passed tariff

orders.

The Government of India has a stated intention of adding 100,000 MW of new

generation capacity by 2012, of which renewable energy sources shall contribute

10%. Future developments in the sector will include:

Investment in fresh additional capacity - 100,000 MW by 2012

a) Reliance on private sector to meet the shortfall (approximately 50,000 MW)

b) Ranking of hydropower sites of 50,000 MW by the Government

c) Emphasis on augmenting Renewable Energy by 10,000 MW

15,000 MW of capacity is expected to be augmented through repair & maintenance

(R&M) of 25,000 MW thermal capacity

Investing and operating distribution zones being offered to private players in states

Significant customer functions being outsourced, such as billing & metering, street

lighting, transformer maintenance, energy auditing and energy efficiency studies

Establishing a generation linked transmission project that caters exclusively to the

evacuation of power from the project.

The total size of the market in the power sector is estimated to be INR 6230bn (USD

141.6bn).

Robust growth of the Indian economy has resulted in increased demands on the

country's already stretched infrastructure. The pace of infrastructure growth in India is

expected to accelerate in the near future because:

Future Outlook

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6. Conclusion

66

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Years of under-investment in infrastructure is acting as limiting factor for growth

Willingness to encourage private participation to quicken the pace of development

Easy access to long term finance is making large sized investments possible

Improved policy environments, nomination of implementation authorities and state

government initiatives also act as a catalyst for the infrastructure development

67

BIOTECHNOLOGYAiming the Growth Curve

BIOTECHNOLOGYAiming the Growth Curve

Global Overview

The Indian Biotechnology Industry

The Life Sciences industry has traditionally been classified as consisting of

Pharmaceuticals & Healthcare. Over the last few decades, the area of Biotechnology

has evolved as an important contributor to the pharmaceutical, agricultural and

industrial sciences industry. Biotechnology today, has significant overlaps with the

traditional classification of life sciences in the area of pharmaceuticals / diagnostics,

with increasing linkages due to the changing nature of drug discovery, research and

manufacturing.

The biotech sector has shown rapid growth in the last 5 years, with global revenues

rising from USD 22.7bn in 2000 to USD 44.3bn in 2004, as the strongest growth sector

in the pharmaceutical market. There are more than 600 biotech companies listed on

stock exchanges worldwide and about 3,800 private firms dedicated to this sector.

While the United States has led the global industry, biotech hotbeds are emerging in

Europe and the Asia-Pacific region, particularly in Japan, India, and China. Korea and

Singapore are creating niches in areas such as stem cell research and manufacturing,

enabling the global industry to meet challenges such as restrictive public policy and

drug pricing pressures.

The Indian Biotechnology industry is still at a nascent stage and needs significant

Government and private sector support and investment to achieve its full potential.

While there has been progress over the last few years in terms of infrastructure

development and increasing awareness, a lot remains to be done in areas such as

human resource development, innovation & funding and regulatory issues. The

Department of Biotechnology (DBT) is the nodal government agency established to

71

promote and encourage the biotech sector in India. Several state governments have

taken proactive initiatives to promote biotechnology by formulating state level

biotechnology policies focused on establishing Biotech Parks, Incubators, Centers of

Biotech Excellence and providing fiscal incentives.

India is rapidly attaining a critical mass, in terms of skills and capabilities to become a

truly global player, in the biotechnology sector. The Indian biotech industry crossed

the USD 1bn mark in 2004 and is currently at 2% of the world market, with a projected

growth rate of 25 -30 % over the next 5 years, outperforming the global expected

growth of around 12 to 16%. The market for modern biotechnology products and

services in India is estimated to grow to USD 2bn by 2008.

The Indian biotechnology

industry earned revenues of INR

47.5bn (USD 1.1bn) in 2005. The

industry recorded 36.55%

growth compared to the

previous year. As many as five

biotech firms clocked revenues

of over INR 1mn (USD 22,727)

for the year ended March 31,

2005. These include Biocon

(INR 5.6bn), Serum Institute of India (INR 5.1mn), Panacea Biotec (INR 2.2mn),

Venkateshwara Hatcheries (INR 1-9mn) and Novo Nordisk (INR 1.4mn).

These companies accounted for 53.87% of the INR 44.8bn (USD 1.1bn) raked in by the

biotech sector in FY '05. The Department of Biotechnology (DBT), Government of

India, estimates that the Indian biotechnology sector will achieve INR 221.5bn (USD

5bn) in revenue by 2010 (CAGR of 35.9%).

The top 20 bio-pharma companies, which had sales of INR 29.8bn (USD 0.7bn),

registered a year-on-year rise of 26.67%. Biocon leads the tally of bio-pharma

companies with an 18.74% market share, followed by Serum Institute of India with

17%. Panacea Biotec, has a mere 7.32% share, followed by Venkateshwara

Hatcheries at 6.26%.

Current Scenario

Source: Bio Spectrum- ABLE industry survey 2005


72

Source: Bio Spectrum- ABLE industry survey 2005

BioPharma corners three-fourth of Indian market($811 million out of $1070 milion)

Biotech Industry in 2004-05

Segment Revenues (in Rs. Crore) Market Share (%) Growth

2003-04 2004-05 2003-04 2004-05 (%)

BioPharma 2752 3570 79.19 75.24 29.72

BioServices 275 425 7.91 8.96 54.55

BioAgri 130 330 3.74 6.95 153.85

BioIndustrial 238 320 6.85 6.74 34.45

BioInformatics 80 100 2.30 2.11 25.00

Total Industry Size 3475 4745 100.00 100.00 36.55

Exports vs Domestic Sales

Biotech exports have a major share in the total biotech business of India, contributing

42.17% (INR 20bn) of the total business. The domestic business accounted for INR

27.4 bn. The exports and the domestic business were mainly driven by the BioPharma

sector which registered a 73.15% (INR 14.7bn) of the total exports and 73.15% (INR

27.4bn) share of the total domestic biotech business. The next significant contributor

was the BioServices segment.

The market segmentation of the biotechnology market in India is given below:

As shown in the diagram above, Bio-pharmaceuticals have the biggest share of

biotechnology in India.

73

Biotech exports contribute 42% of industry revenues.Exports reach $455 million (Rs 2,001 crore)

Exports vs Domestic Business in 2004-05

Segment Revenues (in Rs. Crore) Market Share (%) Growth

2003-04 2004-05 2003-04 2004-05 (%)

BioPharma 1463.70 2106.30 3570 41.00 59.00

BioServices 391.00 34.00 425 92.00 8.00

BioAgri 23.10 306.90 330 7.00 93.00

BioIndustrial 51.20 268.80 320 16.00 84.00

BioInformatics 72.00 28.00 100 72.00 28.00

Total Industry Size 2001.00 2744.00 4745 42.17 57.83

Players in the market

AgriculturalBiotech

INR 2.16 bil

Total Market Size: INR 36 bil

Bio PharmaINR 27.36 bil

Bio ServicesINR 2.88 bil

Bio InformaticsINR 0.72 bil

INR 2.88 bil

IndustrialBiotech

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Opportunity Areas

India is becoming one of the most favored destinations for collaborative

as a

result of growing compliance with internationally harmonized standards such as Good

Laboratory Practices (GLP), current Good Manufacturing Practice (cGMP) and Good

Clinical Practices (GCP). A well defined regulatory framework, along with an emerging

stringent IPR regime is also contributing to this trend. India stands to gain over other

developing nations by focusing on its inherent strengths.

Select opportunity areas are detailed below:

Indian pharmaceutical manufacturing has come of age

and an increasing number of generic companies are sourcing from India. Key

advantages for Indian companies are process development, synthesis skills and

quality cost effective manufacturing facilities. In the area of biological

manufacturing, some Indian companies have established capacities for

manufacturing recombinant therapeutics and vaccines.

There is a clear realization that small

volume intermediates can be economically sourced from countries like India

without any compromise on quality. This opportunity is expected to grow as the

product patent regime has kicked in and global players are targeting the Indian

market for their under-patent products.

This includes areas such as analogue research,

Combinatorial Chemistry, Chiral Chemistry, New Drug Delivery Systems and Phyto-

Medicine. Many of these areas also present themselves as contract services

opportunities for innovator companies (both domestic & international). These

services include bioinformatics, lead discovery, library generation and

optimization, pharmacokinetics and pharmacodynamics (PKPD), and drug

development services including clinical trials.

This is one of the most immediate

opportunities in the area of Contract Services in the Life Sciences space. More than

40% of drug development costs are incurred in clinical trials and India in addition to

its vast and diverse genetic pool has a distinct cost advantage in the area. As per

industry estimates, the cost of conducting clinical trials in India is between 40-60%

of equivalent trials in US or Europe. According to a Confederation of Indian Industry

study, clinical trials in India in 2002 generated USD 70mn in revenues and it predicts

R&D,

bioinformatics, contract research and manufacturing and clinical research,

Contract Manufacturing:

Contract research & Custom synthesis:

Drug Discovery & Development:

Clinical Trials and Research Services:


74

that it would grow to USD 200mn by 2007, and between USD 500mn and USD 1bn

by 2010.

India has the potential to emerge as a key outsourcing hub for the global life sciences &

biotechnology industry. However, in order to reach its full potential, there are certain

key issues that need to be addressed.

While India has had a robust track record in the areas of chemistry and custom

synthesis, there is urgent need to focus on strengthening the human resource

component in relevant fields such as bio-statistics, biochemistry, bio-informatics,

microbiology, fermentation & down stream processing, genetics, cell biology, law and

patent practice.

Our research endeavours need to focus on instilling a “patent culture”, alongwith

increased industry academia linkages and collaborative research. There is a need to

attract eminent Indian scientists back to the country and employ their expertise to drive

innovation.

Biotech India- A SWOT Analysis

Conclusion

Human Resource Development

Innovation

75

STRENGTHS

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Well equipped laboratories

Cheap Research Cost

Rich Biodiversity

Excellent Private and Public Institutions

Skilled & Educated Labor Force

Well developed process engineering

capabilities

WEAKNESSES

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Existing Infrastructure

Lack of Strong Linkages between

Industry and Academia

Image of Indian industry -doubts about

ability of Indian products to meet

international standards of quality

OPPORTUNITIES

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IT & BT

Significant Export Potential

Contract Manufacturing

Arrangements with MNC's

Off-patent drugs

Out sourcing of preliminary research

Targeting agriculture of Asia, Africa &

Latin America

THREATS

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Biotech a fashion statement

Controlling cost and quality

Government Policy

IP leakage

Financing

Infrastructure & Regulatory

Innovative PPP funding models between the Government and the private sector, akin

to SBIC, and technology transfer cells at leading institutions need to be developed.

Early investment in the sector through various fiscal incentives needs to be

encouraged. Better regulatory support and deeper penetration is required for the

innovative government schemes launched in recent past

There is a need to develop a cohesive biotechnology park and incubator strategy to

facilitate R&D efforts in the sector. Licensing and regulatory issues for operation of

biotechnology units to be streamlined. It is also plausible to consider providing

subsidies to biotechnology units to reduce operational expenses.


76

CONVERTING AGRICULTURE INTO AGRIBUSINESSThe Food Processing Sector

CONVERTING AGRICULTURE INTO AGRIBUSINESSThe Food Processing Sector

Indian agriculture is on the threshold of a radical shift in its structure, operations and

aspirations. In addition to the positive demographic trends which are driving increased

consumer demand for high value food products, the inherent supply strength for key

agricultural commodities coupled with recent government sponsored schemes and

initiatives which were aimed at drawing private sector participation in the sector have

helped in the creation of a positive outlook and much-needed vibrancy in the sector.

While new business avenues and growth options are emerging across the value-chain

in each of the sub-sectors in the diverse agribusiness sector, the food processing

sector in particular presents some very attractive investment opportunities.

Contributing to 6.3% of the country's GDP, the Indian food processing sector is

important to the national economy. The importance of the food processing industry is

further underscored by the fact that it contributes to direct employment of

approximately 13mn people and has the propensity to generate 2.4 times more

indirect employment than the direct employment generated. The sector witnessed a

high growth rate of over 7% in the last decade and is poised for higher growth

(expected to reach 10% by 2010).

While the total processed food

industry (including primary

processed foods such as

milled grains) is valued at INR

5300bn (USD 120.5bn), the

h igh va lue added food

segment is estimated at INR

Industry size & structure

79

Table 1 - Market potential and growth rates of key segments

in food processing

Sector Market potential in

2009-10 (in USD bn*)

CAGR

Fruits and Vegetables 3.52 11%

Milk and Milk products 39.32 > 5%

Poultry 0.56 16-20%

Meat and Meat Products 0.91 10%

Edible Oil 15.73 5-6%

* USD 1 = INR 44

Source: Ministry of Food Processing Industries


2000bn (USD 45.5bn). Fruits and vegetable products, milk and milk products,

beverages (both alcoholic & non-alcoholic), poultry and meat products, marine and

aqua products, edible oil and grain and cereal products are the key segments within

the processing industry (Table 1).

Although the industrycontinues

to be dominated by the small

& unorganized players, (Table

2), it is fast transforming into

an organized sector with

increased investments in

processing technologies, equipment and skill development being brought in by large

corporates. Of late, the sector has been witnessing increased participation of reputed

global as well as domestic players (Table 3).

Diverse agro-climatic zones, varying soil types and the presence of major river

systems have contributed to making India one of the largest producers of food

commodities in the world. India is presently the largest producer of milk, tea & several

spices and the second largest producer of horticultural crops in the world. Feedstock

supplies to the food processing industry are therefore assured. Also, India's

comparatively low-cost workforce can be effectively utilized to establish large low-cost

production base for domestic as well as export markets.

The present social structure

is characterised by a large

and growing working

population(2010E:577mn),

increasing disposable

i n c o m e , g r o w i n g

urbanisation, an increased

number of nuclear families,

greater participation of

women in workforce and

Production & Supply Strength

Growth Drivers

Demographic Transition

80

Table 2 - Key statistics - Food Processing Industry

Sector PercentageinTotalfoodconsumption

Total Food Consumption 100

Total Processed foods 60

Primary Processed food 40

Value-added food 16

Organised processing sector 0.19

Unorganised processing sector 99.81


Table 3 - Major players in the Food Processing Industries

Segment Key Players

Juices & Packaged

convenience foods (Fruit &

vegetable products Parle, Nestle

Milk and milk products Nestle, Mother Dairy, GCMMF, Dynamix Dairy

Eggs and Poultry products Godrej Agrovet, Venky's, Suguna

Meat and meat products Allanasons Ltd., Hind Agro Industries Ltd.,

AlKabeer

Marine and Aqua products ITC -IBD., Allanasons Ltd., Suvarna Rekha

Exports Private Limited

Grain and Cereal products ITC -Foods, Cargill, Shakti Bhog Foods Ltd.,

Confectionary and Bakery

products Parry's, Nutrine, Ravalgon, Britannia, Surya

Foods, Bector foods

Snack foods Frito-Lays, Haldiram's, SM Foods, Monginis

Food Ltd., ITC - Foods

Pepsi Foods, Glaxo-SmithKline (GSK) MTR,

Mapro, Hindustan Lever Ltd. (HLL), Dabur,

Cadbury, Nestle, Perfetti,, Joyco, ITC -Foods,

Source: YES Bank Analysis

increased western influence have led to the emergence of the global consumer who is

more willing to experiment with varied foods.

Changing consumer profiles and aspirations have impacted their preferences with

respect to food habits, resulting in greater emphasis on nutritious and healthy eating

and convenience foods. A shift has been observed in the food basket from cereals to a

more varied diet of fruits and vegetables, milk, fish, meat and poultry products. In fact,

the growth rate of the latter is higher than that of grains and pulses.

The retail sector in India is rapidly transforming, on the back of the emergence of

multiple retail formats (hypermarkets, department stores, supermarket, convenience

stores), entry of leading corporates in retail (RPG and Mother Dairy have already

established their presence and the Reliance group which will be foraying into food

retail shortly), pan India expansion of retail chains, emergence of sub-urban retailing

and an increasing preference for multi-brand outlets to single-brand stores. The

emergence of organised retailing has resulted in the creation of quality retail space,

increased availability and increased demand for a variety of processed and fresh

packaged produce of consistent quality.

The liberalized policy regime with incentives for the food processing sector provides a

very conducive environment for investment in the sector. The Government is inviting

private participants and also encouraging private public partnerships to promote the

growth of the processing industries.

The Ministry of Food Processing Industries is the nodal agency responsible for

developing the Indian food processing sector. Additionally, the Agricultural and

Processed Food Products Export Development Authority (APEDA) is assigned the

task of promoting domestic and international food trade partnerships.

Simplification of the existing food laws (the draft Integrated Food Law has been

prepared by the Ministry and is expected to be cleared shortly) will boost corporate

interest in the sector. Amendment of the Agriculture Produce Marketing Committee

(APMC) Act by several State Governments permitting the farmers to sell their produce

outside regulated market yards has allowed private sector units to establish direct

linkages for offtake of raw farm produce. Organised farmer and processor

relationships have facilitated bulk purchases leading to a reduction in procurement

Changing face of Indian retail and food service

Favourable regulatory environment & Support Schemes

81

costs. The marketing of

a g r i c u l t u r a l p r o d u c e ,

previously the exclusive

domain of State APMCs, is

now permitted in the private

sector in certain states. The

State Government support

extended in the area has

presented an opportunity to

evolve innovative marketing

models that enable efficient

integration of the agri-value

chain. For instance, the

proposed Modern Terminal

Markets, for which INR 1.5bn

(USD 340.9mn) have been

earmarked in 2006-07 under

the National Horticulture Mission, is one such initiative. These markets aim at providing

professionally managed competitive alternate marketing structures in the Public-

Private-Partnership mode. The aggregation of demand & supply of produce and the

availability of sorted & graded material at these centres would greatly facilitate the

procurement procedure of exporters and processors by meeting their requirement of

material quality and volume.

A number of fiscal incentives have been provided to encourage value addition to

agricultural produce (Table 4).

While these schemes aim at infusing increased investments and scale of operations in

the sector, budgetary provisions as per the Union Budget 2006-07 such as reduced

duty on packaging machines (15% to 5%), reduced excise duty on ready-to-eat

packaged foods and instant food mixes (16% to 8%) and the total excise duty

exemption on condensed milk, ice cream, preparations of meat, fish and poultry,

pectins, pasta and yeast expect to increase affordability and consumption of

processed foods. The Ministry of Food Processing Industries also plans to provide an

INR 1bn (USD 227mn) subsidy for setting-up of over six Mega Food Processing Parks

around the country.


82

Table 4 - Fiscal incentives provided to

the Food Processing Industry

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No industrial license is required for almost all of the food & agro

processing industries except for some items and items

reserved for small scale industries

Tax incentives for new manufacturing units have been given for

certain years, except for a few industries

Full excise exemption given to agriculture related industry

Substantial reduction in custom duties on plant and

equipment, as well as on raw materials and intermediates,

especially for export production.

Three more equipment added to the list of cold chain

equipment that are exempt from excise duty, to promote the

preservation of fruits and vegetables

No restriction in the import and export except for items in the

negative lists for imports and exports. Capital goods are also

freely importable, including second hand ones in the food-

processing sector.

MRTP (Monopolies & Restrictive Trade Practices Act) rules and

FERA (Foreign Exchange Regulation Act) regulations have

been relaxed to encourage investment and expansion by large

corporate.

Upto a maximum of 24% foreign equity is allowed in SSI sector.

Use of foreign brand names of now freely permitted.


Recognizing the potential and the need for investment in the Food Processing

Industry, the Government of India has also offered it the status of a priority sector for

bank credit. In addition, the setting-up of a NABARD refinancing window for Food

Processing (specially for agro-processing infrastructure and market development)

with a corpus of INR 10bn and a Special Purpose Tea Fund with an expected

contribution of INR 1bn, in the recent budget will further help in providing impetus for

this sector.

In addition, the establishment of National Institute of Food Technology

Entrepreneurship and Management is proposed to harness the available human

capital potential (food technologists) to cater to the emerging needs of the industry.

The Indian Government has

adopted a liberal stance on

foreign participation in the

food processing industries.

Foreign Direct Investment

has been encouraged and

the approval process has

been streamlined for greater

convenience (Table 5).

Only 15% of the milk produced in India (annual production of approx 90.0 MT) is

processed through the organised sector. The per capita availability of milk (229 g per

day) is much lower than the world average (285g per day) and its consumption is

highly skewed towards the urban consumer. Presently, over 46% of the total milk is

consumed in the form of liquid milk, 47% as Indian dairy products and 7% as western

dairy products. Interestingly, while the cost of milk production is amongst the lowest in

the world, the prices of dairy products are amongst the highest.

The dairy sector is expected to witness a growth rate of over 5% per annum, largely on

account of the following factors:

Milk & Milk products

Regulation governing

Foreign Investment

Emerging Trends, Opportunities & Challenges

83

Table 5 - FDI in Indian Food Processing Industry

Agriculture No FDI is permitted in farming. Foreigners or

OCBs cannot own farmland.

FDI in seed industry is permitted without any limits

FDI upto 100% permitted in tea plantations,

but prior government approval required.

Compulsory divestment of 26% equity in

favour of Indian partner or Indian public within

five years is mandatory.

No FDI limit, prior government approval required

FDI limited to 51% with automatic approval for

most products (except in the case of malted

foods and flour, alcoholic beverages and those

reserved for small scale industries wherein

foreign equity ownership up to 24% is allowed).

Higher FDI is allowed on a case-to-case basis on

a prior approval basis

100% FDI allowed with automatic approval to NRI

or OCBs

FDI up to 74% is allowed with automatic approval

for cold storage facilities

Alcoholic Beverages

Food Processing

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High income elasticity of demand for dairy products in India

Changing dietary patterns of the Indian consumer these are expected to cause

a dramatic increase in the demand for packaged, homogenised and pasteurised

milk, flavoured milk, cheese varieties and ethnic Indian dairy products.

Reform of the EU Dairy Policy - in 2003 (in line with the WTO) this measure has

opened significant trade opportunities for dairy producers. Low farm gate prices

and proximity to milk deficit markets provide India with an edge over other

producers

Increased organised private sector participation in dairy production and processing is

likely to occur due to the following reasons:

High profitability of the dairy products business (18-20% per annum)

Prevalence of small-scale or cottage industries which bring out products which

are usually of inconsistent quality and hygiene standards and unable to cater to

market needs. Entry of organised players can help enhance product shelf life

without compromising on food safety and hygiene.

Poor management of most cooperative dairies - though cooperatives have

played a major role in the evolution of the Indian dairy sector, today most bodies

(with the exception of a few in North and West India) are poorly managed and

financially ailing.

Lack of scale in small family run businesses

Low cattle productivity and the absence of adequate quality controls are major causes

of concern in the Indian dairy industry. The poor quality of Indian milk due to the lack of

adequate temperature controlled storage and transport infrastructure and

contamination through equipment. Thus, investment in both bulk cooling equipment

(to preserve and improve milk quality) and high-end processing facilities for high

quality milk and value-added products is required. Ethnic products are largely

produced by the unorganised sector (halwais) wherein product quality and hygiene

standards, storage and packaging norms are sub-standard. Increased penetration by

large scale organised players in this highly attractive segment would enable the much

needed traceability and quality check. Whey and whey products is an attractive option

given the growing importance of whey products in high-end food and non-food

applications in the international markets. Increased imports of intermediate food

products such as cheese powder, casein and lactose are indicative of the market


84

potential for these products and investments for manufacturing the same domestically

will be viable investment options.

Egg & Egg Products - India ranks fifth in the world with an annual egg production of

almost 1.61 mt. presently there are only five egg powder plants in India. These plants

not adequately equipped to scale up and meet increased world demand. Modern

production facilities and technology tie-ups can be secured to meet the increasing

demand of the domestic as well as that of key importing countries such as Japan and

Europe.

Poultry Meat - Poultry meat is the fastest growing animal protein segment in India

(CAGR of 11% through 1991-2003). The sector is characterized by the following:

Prevalence of small and unorganised players with only a few organized players

selling branded, processed products (Eg. Godrej Real Good Chicken, Venky's

Chicken).

High feed and labour costs (which account for almost 60-70% and 20%,

respectively of the total production cost) Despite the low labour cost,

competitiveness of the Indian poultry industry has been adversely affected due

to the high feed costs. (Price of Indian poultry is almost 50% higher than the

world levels).

Indian poultry exports are made mainly to the Middle East and the Maldives until the

recent entry into Japanese markets. Thailand's competitiveness in the international

market has been adversely affected of late due to increasing labour costs thereby

providing an opportunity for India to tread into the highly attractive Japanese market.

Investment in better poultry breeds, adoption of improved management practices,

effective and efficient feed formulations will help derive success in the domestic as well

international markets and are therefore attractive investment options. Investments in

modern abattoirs and processing, packaging and distribution systems are also a need

of the hour and merit investment.

India has the world's largest cattle population (50% of buffalo

population and 1/6 of the total goat population of the world). Most meat production is

undertaken by the unorganized sector. Increased emphasis on quality and changing

consumer tastes require greater investments in modern slaughter facilities and

Poultry & Meat products

Meat & meat products -

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development of cold chains. Changing consumer lifestyles has meant increased

willingness to explore ready-to-eat and semi-processed meat products, thus creating

greater opportunities within the segment.

With a 7500 km coastline, 3 mn hectares of reservoirs and 1.4 mn hectares of brackish

water India offers a huge potential for marine and aqua products. However, though, it

ranks second in terms of inland fisheries, India's production is only 1/6 that of China

(the world leader). Almost, 60% of the fish production is from marine sources and

shrimp is the major component of marine exports.

The existing post-harvest, processing and packaging technologies in the Indian

fishing industry are grossly inadequate. While Individual Quick Freezing (IQF) plants

have recently been established, their capacity is still largely insufficient. Since,

processed IQF marine products fetch better prices than conventional block frozen

materials in the foreign markets, investment in this segment is an attractive option.

Also, the deep sea fishing industry today stands on a very weak footing. Investment in

deep sea fishing vessels for prawns, shrimp, squid, tuna, cuttlefish, octopus, red

snappers, ribbon fish, mackerel, lobster, cat fish etc. is required. Other aspects

requiring greater attention are quality improvement, technology upgradation,

development of value added products, development of infrastructure and improved

methods of handling and preservation.

India accounts for almost 10% of the global production of fruits and vegetables, yet

less than 2% of the production is processed. This in itself is indicative of the vast

potential that the Indian food processing industry holds. The scope for investment in

Indian horticulture is vast and encompasses the following key areas:

Identification and development of varieties that are amenable to specific processing

requirements

Technology tie-ups in areas of post harvest technology, bulk storage (including

temperature controlled warehousing), bulk handling (including packaging) and cold

chain facilities. Availability of sophisticated production protocols for intermediate

products is also largely inadequate.

Development of cost efficient packaging equipment and materials

Marine and Aqua Products

Fruits, Vegetables & Packaged Convenience Foods


86

Large scale production by organised players would result in reduced production costs

(on account of integrated backward linkages) efficient market development and

introduction of superior as well as standardized product offerings.

The deep-routed social aversion to alcohol consumption in the Indian society is fast

changing. The mushrooming pubs and night clubs are evidence to the changing

mindset of the urban consumer. Increased overseas travel and media exposure has

also led the change in consumer attitudes towards alcohol. A number of foreign

brands such as Bacardi, Seagrams and UDV, are now bottled in India. Presently, the

production of alcoholic drinks from non-molasses sources is very small and offers a

huge opportunity for investment. The wine industry although in a nascent stage is

poised for growth.

Inspite of a fast expanding market for alcohol, almost 65% of the Indian population still

prefer non-alcoholic beverages. The Indian consumer has traditionally had a high

preference for Cola, Orange and Lemon flavoured beverages. However, with

increased health consciousness, consumers are now turning to other options such as

fruits juices and drinks. While a few well established companies have forayed into this

very attractive segment which is growing at more than 30%, the potential is largely

untapped and the consumer is largely starved for choice. Tremendous scope exists for

investments in packaged health drinks, fresh fruit drinks, juices, smoothies, energy

drinks, flavoured tea and ethnic Indian drinks (such as thandai, sharbat, nimbu-pani,

aam panna etc).

An estimate of the potential market size of major

segments of the Food processing industry is provided in Table 5. Additionally, Table 6

lists key areas of investment in each segment.

Alcoholic Beverages

Non-Alcoholic Beverages

Select Business Opportunities -

Alcoholic & Non-Alcoholic Beverages

87

Table 5 Market potential for Processed Foods

Market (INR bn)

2003-04 2009-10 2014-15

Fruits and Vegetables 49 155 345

Organised 29 118 288

Unorganised 20 36 56

Dairy 1160 1730 2450



Edible Oil 500 692 925

Organised 50 88 156


Meat and Poultry 27 64 129

Meat 20 40 67

Poultry 7 24 62

Non-Alcoholic Beverages 101 151 198

Tea 78 122 157

Coffee 22 30 41

Grains 1802 2227 2668



Marine 18 30 51

Sugar and Sugar based products 285 383 492

Sugar 265 349 424

Confectionery 12 18 30

Chocolates 8 16 37

Alcoholic Beverages 232 513 1106

Beer 41 73 117

Spirits 190 420 930

Wine 3 20 60

Pulses 402 605 809

Aerated Beverages 80 21 43

Malted Beverages 12 19 27

Total (Approx) 5,300 7,800 11,500



88

Table 6 Investment opportunities in various food segments

Segment Opportunities

Fruits and Vegetables Consumer products - canned fruits and vegetables, frozen

and Packaged vegetables, ready-to-serve/ eat vegetables and meals, soups,

convenience foods pasta, jams and jellies, health drinks and beverages, pastes and

curries

Intermediate products - dehydrated vegetables, paste and powder

(tomato, ginger, garlic, onion), food additives and flavours, fruit

concentrates and pulp, potato flakes, flour

Beverages Alcoholic wine, canned beer, draught beer, non- molasses

based spirits

Non-Alcoholic - Fruits juices/ concentrates/ pulp, smoothies,

ready-to-drink health drinks, energy boosters, flavoured tea/

teabags, instant coffee varieties, ethnic Indian drinks (nimbu

paani, thandai, aam panna)

Dairy Ethnic Indian products - clarified butter, khoya, paneer, curd

Western dairy products - cheese, fresh fruit yogurts,

packaged, homogenized milk, flavoured milk, frozen desserts

Intermediate products - casein, lactose, cheese powder, whey,

protein

Poultry and Meat Consumer products - packaged, semi- processed meat and

poultry, processed ready-to-eat products

Intermediate products- egg powder, albumin, egg yolk powder

Marine and Fish paste, packaged, processed products, fish oils, ready-to-eat

Aqua products products

Technology Integrated abattoirs-cum-meat processing units, post harvest

technology for preservation, packaging technologies and

material, cold storage facilities, bulk storage and transportation

facilities

Source: YES Bank analysis

89

Conclusion

The Indian food processing industry, while still in its nascent stage, presents attractive

as well as diverse investment opportunities. The sector is witnessing an increased

growth rate and also a rapid shift from the low value primary processed products to

high value products. The sector presents attractive investment opportunities in diverse

areas to cater to wide-ranging consumer palates. While a favourable regulatory

environment incentivizes direct investment, the technical expertise of international

players, especially in the high growth segments of dairy, poultry and meat processing,

can also be leveraged symbiotically through strategic partnerships.


90

INFORMATION TECHNOLOGYCreating seamless world

Market Landscape

Indian IT Services and, more recently, IT Enabled Services have been among the

fastest growing industries for India and have been responsible for putting India on the

global map. The IT offshoring model pioneered by Indian companies in the mid and

late nineties has now become globally acceptable.

The phenomenal growth rates witnessed over the past several years has made the

sector one of the largest contributors of foreign exchange, with service exports

projected to be USD 24bn in 2005-06. The Government, having recognized the

potential of the industry, has been supportive by providing tax incentives and

infrastructure support through IT Parks. Proactive state governments have also played

a significant role in attracting large MNCs to establish off-shore development centers in

India to service their global requirements.

As per NASSCOM estimates, the Indian IT-ITES sector is estimated to grow by 28%

over FY 2004-05 and services exports growth is estimated at 32%. The sector revenues

are expected to exceed USD 36bn in FY2005-06, an increase of 28% from the previous

year. Steady demand in traditional areas such as custom application development and

application management is being supplemented by increasing traction in package

implementation and software deployment, as well as relatively new areas such as

remote infrastructure management, IT consulting and software testing.

Complementing the continued growth in IT-ITES exports is a growing domestic

market. Strong demand over the past few years has placed India amongst the fastest

growing IT markets in the Asia Pacific region.

INFORMATION TECHNOLOGYCreating seamless world

93


Recent Trends

The last few months have been eventful for the Indian IT sector. The leading Indian IT

corporates have broken into the USD 1bn plus outsourcing pie. At the same time,

domestic and international venture capital and private equity firms are demonstrating

significant interest in evaluating early and mid stage companies driven by innovation.

The strong interest from the international venture capital community is a significant

acknowledgement of the Indian capabilities on innovation, as compared to plain cost

arbitrage services business models. Such investments will provide the necessary risk

appetite and international exposure for smaller entrepreneurs to create innovative

products, services and business models and get a global perspective of the business

at an early stage.

The industry is also seeing an increasing trend of captive units being set up by MNCs

to leverage the offshore cost advantage, as it is an easier “internal sell” to offshore

processes and retain full control and accountability, as compared to third party

offshoring. The initial experience could result in larger offshoring to captive as well as

third party vendors.

India is now also evolving as an attractive market in itself, given the increasing amount

of IT usage by the Government and the mid tier organizations. Recognizing the role

that IT can play in the country's development, the Indian Government has initiated the

National e-Governance Plan for implementation between 2003-07, which lays out the

blue print for creating an e-enabled India. MNCs present in the country are also

focusing their attention on the domestic market, especially in the so called SMB (Small

and Medium Businesses) in tier II and tier III cities, both in the hardware and the

packaged software space. The large and growing domestic market presents another

enabler for the sustained growth in the industry.

In the hardware arena, there is a growing interest in India with global EMS companies

taking interest in either acquiring or setting up facilities in India. The Government is

taking steps in the right direction in this area and the growing domestic demand,

coupled with cost effective skilled work force, is influencing global companies to

positively evaluate India for large-scale hardware manufacturing.

On the quality front, India has seen a significant jump in improving the prevalent

perceptions of the quality of its services globally and is now accepted as a leader in

providing high-quality cost competitive IT solutions. India has approximately 90

companies at SEI CMM Level 5 assessment. The quality maturity of Indian software

94

and the BPO industry can be measured by the fact that already 275 Indian software

and ITES-BPO companies have acquired quality certifications and about 80 more

companies are in the pipeline.

India has already established itself in customs application development and

application management over the last few years. However, we have seen significant

newer areas emerging in the recent past and believe these will lead growth, going

forward. These include areas like package implementation, software deployment,

embedded software applications and infrastructure management.

Further, there is a significant trend by smaller US based companies to outsource part

of product development to optimize costs and access specific skill sets available in

India. These are typically done through wholly-owned subsidiaries in India or through

outsourcing to mid-sized Indian companies who have the requisite domain knowledge

and technological expertise.

There is a significant domestic opportunity as well, in both the Government and the

corporate sector. The Government is aggressively implementing the national e-

governance plan, leading to large business opportunities. The corporate sector, with a

view to improving efficiencies, is recognizing the need and benefit of IT and is

aggressively increasing IT spends. The booming domestic market and the easy

availability of debt and equity capital are aiding demand as well.

While India is considered, by far, as the best outsourcing destination, one of the

biggest concerns to the industry continues to be the availability of quality talent, to

match the fast-paced growth. The concern is primarily of quality and not quantity. Lack

of quality manpower would result in increased training costs for companies and

increased management bandwidth requirement in hiring and retaining talent, thus

potentially affecting margins. We are already seeing instances of larger Indian IT

vendors looking beyond engineering graduates and recruiting science graduates with

a proficiency in mathematics and investing in training to impart the relevant skill sets.

However, the industry and industry bodies, recognizing the need to augment human

resources to sharpen India's value proposition and extend India's leadership in the

global IT-ITES space, have launched several initiatives to further enhance the

availability of and access to suitable talent for the sector.

Opportunity Areas

Developmental Challenges

95

For India to fully capitalize on the opportunities and sustain a disproportionate lead in

the global IT space, key stakeholders need to focus on areas such as enhancing the

talent pool advantage, strengthening the urban infrastructure in existing and emerging

cities, continued emphasis on proactive regulatory reform to facilitate greater ease of

doing business, driving a philosophy of operational excellence amongst industry

players and catalyzing domestic market development.

Clearly the Indian growth story remains unchanged. In spite of the sporadic skepticism

over the last couple of years, the industry continues on its high growth trajectory. The

Government recognizes the immense current and potential contribution of the sector

towards employment generation and will continue to support the industry in all

possible ways. The compelling advantages offered by India for the sector will enable

India to retain its pre-eminent position in the outsourcing space, at least over the next

few years.

Conclusion


96

SAFEGUARDING INDIA'S PROSPERITYEducation & Health

SAFEGUARDING INDIA'S PROSPERITYEducation & Health

Parallel with the country's accelerated growth, India has made impressive progress

towards reducing income poverty, an important element of Millennium Development

Goals. Continued progress has also been made on many social indicator, particularly

literacy, which rose from 52% in 1991 to 65% in 2001. These improvements are both

real achievements for India, as well as achievements of global significance.

While India's economic and social performance has been impressive on many

accounts, several challenges do exist despite increased public expenditure on health

in the nineties. One of the significant requirements is to improve health indicators,

reducing the incidence of HIV and AIDS and its accelerating rate of infection.

Given the complexity of India's development challenges, human development,

reflected through the provision of better education, health, and social protection

assumes great significance to support specific Millennium Development Goals and

requires a multi-pronged initiative, thereby aligning government priorities and

improving the private market for health care and education.

For the first time since Independence, the absolute number of illiterate citizens in

India declined between 1991 and 2001 and literacy rates rose particularly for

women, and enrollment rates of primary-aged children also increased.

17% of all schools, from pre-primary to higher secondary schools, are in the private

sector, with nearly 9% of schools at the primary level to nearly 60% of higher

secondary schools in the private sector. New regulations governing private

education, including foreign investment and for-profit training are under review.

Foreign investment is encouraged. The investment climate is, therefore, very

Investment Outlook

The Education Sector In India

99

favorable and the regulatory framework is less onerous. Prospects for expansion,

based on demand from the middle and upper classes for quality education, are

significant. Several corporate bodies are also entering the education sector, given

the fiscal benefit from such investments.

There are essentially three categories of recognized schools - private 'unaided'

schools, private government 'aided' schools, and government schools. Unaided

schools are privately funded and face less restriction than the other two categories,

including, at present, the freedom to determine their own fees and admission

criteria, which the other two categories do not have.

At the primary or elementary level, the Indian system has grown to become the

largest in the world, providing educational facilities within 1km walking distance for

94% of its population and, as a result, the literacy rate has steadily been increasing.

Of the students who successfully complete primary schooling, over 80% enter

secondary schools and the enrolment growth rate of this segment has been 7%

over the past 40 years At the tertiary level, a relatively small proportion of total

enrolment has been in the 176 universities and national institutions, while the

remaining enrolments have been in public and private affiliated colleges.

There are three distinct categories of private sector schools in India, governed by

income levels, those for low-income, for middle income, and for upper middle

classes and above. The latter category includes day, international, and boarding

schools. The international schools are high-fee and cater largely to non-resident

Indians and expatriate foreigners, and a few wealthy Indians. Additionally, there are

private boarding schools, the most prestigious of which are those that qualify for

membership of the Indian Public Schools Conference.

The total household expenditure on GDP is put at 1.7% of GNP which is also

equivalent to half the government expenditure on education. These expenditures

are made mainly by householders and cover both, the private costs of publicly

provided education (including government-aided, privately managed institutions)

and the full costs of private (unaided) education.

Education System


100

Regulatory Environment

New Business Models

Education is largely governed by the states in India, with the guiding policies

enshrined in the Constitution of India (education is in the Concurrent List). There are

no major differences in the regulations that govern the private and public

educational sector. The National Council for Educational Research and Training

(NCERT) has evolved a curriculum framework that is broadly followed by all the

school examining boards in the country. Reservations are also evident in the

arrangement whereby the State/Central Governments, through their respective

education boards, reserve the right to 'recognize' a school or college. Therefore,

recognition and affiliation to a state or central board is mandatory. Further, it has

been decided by the central boards, that no school can be considered for affiliation

unless it has a 'not-for-profit' motive actually built into its constitution. Thus the

regulatory environment is restrictive to an extent and the Government of India being

cognizant of this, has recently allowed specialized premier educational institutes in

India to explore cross-border opportunities of offering curricula.

Foreign universities and institutions have been allowed entry into India to establish

franchise center in the country, offering degrees or diplomas. Further, education

tourism has emerged as a lucrative and growing business opportunity with India

being a key contributor. International students contribute nearly USD 12bn annually

to the U.S. economy in money spent on tuition, living expenses, and related costs.

According to the IIE (Institute of International Education), the percentage of Indians

among these has been steadily increasing from 8.2% in 1999-00 to 12.7% (2002-

03). India is now looking at establishing itself as an education destination. For

instance, the Anna University, as a part of its expansion plan is seeking 500 acres of

land from the Tamil Nadu government with investment plans of INR 5bn (USD

133.6mn). Cross-border expansions by some premium institutes provide an

attractive lending and advisory opportunity for India.

Additionally, global corporate e-learning trends indicate that it is expected to reach

revenues of USD 23bn in 2005, growing at a CAGR of 25%. India has a natural

advantage in this area, drawing from Indian IT strength and the easy scalability of the

business. The Indian e-learning business, dominated by corporate trainings & IT

diploma programs, is still in its infancy with an approximate market estimate of USD 65

mn, with 60% of the market share divided among the top five companies.

101

The Healthcare Industry

Overview

Medical Tourism

The Indian healthcare industry is undergoing phenomenal expansion. At present,

the healthcare industry in India is worth INR 1,000bn (USD 22.7bn) and is set to

grow by an enormous 170% to INR 2,700bn (USD 61.4bn) in the next eight years

according to an analysis by the PHD Chamber of Commerce and Industry. The

sector will increase its contribution to GDP from the present 5% to nearly 8.5% by

2012. The private sector share is projected to grow to INR 1600bn (USD 36.4bn),

boosted by increasing penetration of healthcare insurance. Health insurance is

expected to generate a market spending of INR 400bn (USD 9.1bn) in healthcare

services.

Private hospitals and continued investment in the public health programs are

driving the boom. Together, this health infrastructure serves a population of over

1bn, growing at 2% p.a. India's over 300 mn strong middle class, is driving

unprecedented demand for quality healthcare. The combination of high quality

services and low cost facilities is also attracting a regular stream of international

patients. Costs of advanced surgeries in India are 10-15 times lower than anywhere

in the world. Strategic opportunities for foreign investment and collaboration mark

the sector, as leading Indian players outline global expansion plans.

The country is poised to pocket a major chunk of the three trillion dollar global

healthcare industry in the coming years. It employs over 4 mn people, making it one

of the largest service industries in the economy.

CII & Mckinsey predict that medical tourism could account for 2-3% of the total

healthcare delivery market, provided the industry re-orients itself to attract foreign

patients. Indian hospitals, which treated less than 10,000 foreign patients 5 years

ago, are now witnessing a growth of 10-20% in the inflow of such patients, reaching

an all time high of 100,000 in 2005, and generating business worth USD 333 mn. At

its current pace of growth (2% p.a.), healthcare tourism alone could rake over USD

2.3 bn in GDP in the next 5 years.

By leveraging the brand equity of Indian medical professionals across the globe and

making a combined package involving airlines, travel operators, healthcare providers

and insurance agencies, India can surely increase the inflow of foreign patients. The


102

country should evolve a standard in terms of quality and rates for healthcare

procedures and improve the insurance sector to boost medical tourism.

A related area of growing business opportunity is the healthcare BPO. Outsourcing in

imaging, disease management and claim processing are emerging areas. Estimates

show that the revenue till date of the flourishing medical transcription industry in India

is expected to drop from USD 38mn in 2002 to USD 26mn in 2006, a 9% loss p.a.

However, according to the National Association of Software and Services Companies

(Nasscom), by 2005, Indian BPO companies will be able to obtain business worth USD

800mn from US healthcare companies itself.

The main reason behind India emerging as a favorable destination for medical

outsourcing is the quality of the human resource pool. Indian companies can also offer

a large number of value-added services, such as diagnostic analysis by highly

qualified medical professionals at comparatively lower costs. In addition, India is also

witnessing tremendous growth in areas like medical insurance, telemedicine,

laboratory & diagnostic services and medical devices.

To promote this industry and help reach its potential, the Government and certain

private players have laid out an approach involving marketing, promotion,

infrastructure creation and other strategic initiatives. Some of the key opportunities

in this industry, entailing investment of between INR 1000-1400 bn (USD 23-32 bn)

include:

Hospital project design and consulting

Trade in medical equipment and products, including warehousing, selling and

servicing the latest medical electronics equipment, diagnostic kits, reagents and

consumables

Telemedicine systems, for treating patients in remote areas through a satellite

connection.

Corporate health care clinics for providing high quality basic services in

consultation, diagnostics, minor surgeries etc.

Business Process Outsourcing of medical transcriptions and other hospital

management administration tasks.

Joint ventures for offering medical insurance and other insurance services

Investment and Business Opportunities in Healthcare

Healthcare BPO

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103


R&D base for new molecule development, clinical trials, etc., utilizing the high

quality scientific manpower and low costs

By many measures, India has made good progress in reducing poverty and improving

the welfare of its citizens in recent years. The overarching challenge ahead is to

maximize public and private sector resources to dramatically scale up education and

healthcare initiatives to enable India to move closer to achieving the Millennium

Development Goals.

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Conclusion

104

Accountability

Transparency

Involvement

Empowerment

Ethics

A RENEWED COMMITMENT TOCORPORATE SOCIAL RESPONSIBILITY

The role of business in society is undergoing a transformation. In the context of an

“Emerging India”, the key issue is to embrace Corporate Social Responsibility (CSR)

more strategically to address sustainable development, as a critical driver impacting

national, regional, local, sectoral and at the micro-level, organisational

competitiveness.

therefore denotes that is a

basis for developing best practices that further build a company's value proposition

and its business. Companies can therefore address the “new social contract” of giving

back to society by engendering vibrant approaches that foster sustainability whilst

augmenting their own competitive contexts. A dynamic integration and alignment of

sustainability goals within the company's core business focus creates a fully inclusive

and buoyant strategy that addresses risk management and enterprise resilience,

whilst building brand and reputation, and fostering innovation. In the age of the Global

Indian MNC, this approach fosters home-grown best practices, whilst enabling Indian

companies to chart high trajectory growth paths in India and compete internationally at

a “level playing field”.

Operating at the interface of private, public and civic sectors to positively impact socio-

economic development through the adoption of triple bottom-line strategies is the new

challenge and opportunity for Indian businesses. Companies that undertake

fundamental mind-shifts to operate at this new dimension of

enable their own competitive business environments which engender the following:

Thought leadership high pedigree intellectual capital development

Stakeholder engagement strong relationships with multifarious players

Sustainability excellence innovative best practice initiatives

“Mainstreaming sustainability” “intrinsic sustainability”

“public leadership”

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A RENEWED COMMITMENT TOCORPORATE SOCIAL RESPONSIBILITY

107


Accountability

Transparency

Involvement

Empowerment

Ethics

�

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Issue Company Action

Financial partnerships access to high quality capital

New markets expanding customer reach and product offering

Indeed, this is the very underpinning of competitive advantage. There are a significant

number of businesses in traditional sectors that are increasingly competitive through

adoption of sustainability initiatives. At the same time, there is a new domain of

businesses in “knowledge sectors” that are reaping the benefits of integrated

sustainability approaches as well as a host of “emergent” and “supply chain”

businesses across alternative fuels, renewables, eco-construction, water

management and the like that are commercially viable and socially value adding.

Select examples of CSR and Sustainability innovation in Indian companies are

illustrated below:

Community development and Gujarat Ambuja Asian CSR Award 2003 -

integrated rural development Cements poverty alleviation

programmes (IRDP) Asian CSR Award 2004 -

environmental excellence

Employee health and safety Mahindra and First company to institutionalise

Mahindra health and safety at the factory place

Labour standards ITC First company in India to be certified

to the SA8000 social accountability

standard for its Chirala facility

Human capital development Tata Group Tata Index for Sustainable Human

Development - developed with the

UNDP in 2004 to measure

effectiveness of social programmes

and employee effectiveness

Water conservation Godrej Group Invested Euro 235000 in a water

management project, engendered

cost savings of Euro 82000 in the first

year of a 3 year payback period

resulting in 90000m3/annum of water

saved, representing an ROI of 35% p.a

108

Case Study:

Responsible Banking at YES BANK

Sustainable Development is the most pressing challenge, globally, as well as for India,

and for YES BANK this represents an opportunity to catalyse change and create

lasting social and economic value. Traditionally, most banks have tended to view

business purely from the economic perspective in a limited “stock and shareholding

approach” and where “social responsibility” has denoted a focus on philanthropy.

YES BANK's approach to sustainability and CSR is a departure from a philanthropy-

centric approach to what Stuart Hart refers to as “Fourth Generation Sustainability”.

Here, sustainability is addressed a critical business driver and is being

in the core focus of the bank. Overarchingly, YES BANK's approach

to the foregoing is encapsulated by its pioneering business philosophy entitled

YES BANK is infusing triple bottomlines into its business decision making. Indeed,

doing so is not a “run of the mill” piecemeal response to the wave of public demand for

accountability, transparency and Corporate Social Responsibility (CSR) but is actually

a proactive and dynamic basis to evolve through a totally new and

forward looking value proposition; one, that takes into cognisance the rapidly

changing business environment and the need for new ways of thinking that address

the demands of the “New Economy”.

Moreover, this approach makes sound business sense as it engenders

of the bank and furthers the basic principles of financial prudence. An

integral component of this intrinsic sustainability model includes an all encompassing

approach to where “social risks” are addressed in the Bank's risk

and client rating model. Indeed, in the Indian context, where social and environmental

risks are often not given their due in financing, YES BANK's approach to

is one of the key distinguishing features of its cutting-edge

approach to Sustainable Development. This approach enables YES BANK to offer a

superior banking proposition that identifies, recognises and manages social,

environmental and ethical risks in financing.

The bank's focus on sustainability denotes a wider focus than merely viewing social

and environmental issues as risks only. YES BANK sees a focus on the foregoing

issues as the basis to create a competitive sustainability advantage, which entails an

integrated business approach that recognises sustainability opportunities as well as

mainstreamed

“Responsible Banking”.

thought leadership

intrinsic

sustainability

risk management

“sustainability risk”

109

risks. Hence, as a service provider YES BANK believes that long term sustainability

depends on identifying sustainable businesses or “future winners”. Given that the

environmental goods and services market is the fastest growing worldwide (currently

valued at Euro 420 billion and forecasted to reach Euro 560 billion by 2010), it is only

logical to infer that tomorrow's business winners will be those that incorporate a

sustainable development approach to their business practices. Therefore, to tap into

the opportunities that sustainability represents, YES BANK's approach is to operate in

a “Sustainability Zone” to develop bankable projects and provide innovative financial

services.

In the macro picture, YES BANK sees such a focus on sustainability as a means to

promote a fully inclusive business approach that includes promoting national and

sector competitiveness. Accordingly, YES BANK seeks to play a proactive role in its

home market, India, where the Bank seeks to augment its role as a Public Trust

Institution by positively catalysing socio-economic development. Indeed, YES BANK

sees its own proposition as linked with the “Emerging India” success story where it

aims to be the “Bank for Future Businesses”.


Accountability

Transparency

Involvement

Empowerment

Ethics

110

Sustainability Zone -it is not about CHARITY

Sustainability Zone

Economic principals

Social investments

Pure philanthropy

Pure profit

“Sustainability Zone”i’e’ combined economic,

environmental, social benefit

CONCLUSION

India's Emerging Status in Asia

Key Growth Drivers

The IMF forecasts indicate that in 2006, the world GDP is expected to maintain a 4.3%

growth. While advanced economies are likely to clock a 2.3%, it is the Developing Asia

region, including India and China, which are expected to spearhead the global growth

with a growth rate of 7.2%. While India clearly has far to go, in order to match the

Chinese economic performance, recent economic data suggests that India is now in a

position to progress to a higher growth trajectory. Key to this assumption is the

sustainability of the recent growth performance, which in turn will depend upon

significant scaling up investments in agriculture, physical and social infrastructure,

supported by reform-led policy environment. Although India's savings rate is

improving, the capital requirements are large and there is a need to focus on

encouraging FDI participation, especially in infrastructure.

A favourable regulatory environment has enabled Large Indian Corporates to emerge

as global players. Greater access to resources has provided Indian corporates in a

number of key sectors with the opportunity to expand globally. In addition, the sectors

where India can leverage its specialised skills to provide significant growth

opportunities in the global market are Specialty Chemicals, Electronic Goods and

Machine Tools.

Complementing the large corporate players is the Indian SME sector which is growing

rapidly and is expected to reap maximum dividends over the next few years,

specifically in emerging sectors like Media, Pharmaceuticals & Life Sciences, IT &

ITES, Auto Ancillaries, Textiles and Retailing. The low labor cost, large pool of human

capital and multiple government initiatives have yielded large benefits to the SME

sector.

111


Rural India - Unlocking Future Potential

A vibrant Financial Sector - Facilitating Growth

Sectoral Outlook

The huge reservoir of domestic demand is undoubtedly one of India's distinct

advantages. Almost 67% of India's population resides in rural areas. The growth and

long-term sustainability of the Indian economy depends on rural development which in

turn will depend on the ability of the Indian microfinance industry to respond to the

growing needs of the rural economy. Augmenting the pool of funds, innovation in

products and services to provide broad-based financial solutions, and providing

venture capital for promoting rural and village enterprise are some of the key initiatives

to be undertaken by MFIs in India.

The Indian financial markets have matured significantly in recent years, reflect ing the

dynamism of the economy and facilitating growth process. Technology has changed

the face of the financial sector, enabling the introduction of newer and sophisticated

products and services across the financial market segments. A representative

indicator of this transformation is the impressive climb of the stock market indices.

Thus far, the reforms process has furthered efficiency, enhanced the transparency

standards, improved liquidity, and strengthened prudential norms; all reflective of the

growing sophistication of the system. Going forward, reflecting the dynamism of the

Indian economy, we believe that Indian financial markets will respond with more

product and services innovations that will pave way for greater integration with the

global financial markets.

Robust growth of the Indian economy has resulted in increased demands on the

country's already stretched infrastructure. It is estimated that India will require USD

150bn in next 7-8 years to augment and modernize the infrastructure facilites. The

pace of infrastructure growth in India is expected to accelerate with a conducive policy

environment, nomination of implementation authorities and state government

initiatives. These initiatives by the Government will act as a catalyst for accelerating

infrastructure development in India. Furthermore, easy access to long-term finance

will facilitate large sized investments.

The Indian food processing industry, while still in its nascent stage, presents attractive

as well as diverse investment opportunities. It presents attractive investment

opportunities in diverse areas to cater to wide-ranging consumer palates. While a

112

favourable regulatory environment incentivizes direct investment, the technical

expertise of international players, especially in the high growth segments of dairy,

poultry and meat processing, can also be leveraged symbiotically through strategic

partnerships.

Over the years, India has emerged a front runner in the emerging knowledge based

global economy. The success of the Indian IT sector has vindicated this stance. The

compelling advantages offered for the sector have enabled India to retain its pre-

eminent position in the outsourcing space. Recognizing the immense current and

potential contribution of the sector towards domestic employment generation, we

believe that the Government will continue to provide an enabling environment to

consolidate the IT sector's growth and progress.

The Indian Biotech sector has the potential to emerge as a key outsourcing hub for the

global life sciences & biotechnology industry. However, in order to reach its full

potential, there are certain key issues like strengthening the skilled human resource

component, instilling a “patent culture”, development of innovative PPP models and

creation of suitable physical infrastructure, that need to be addressed.

It is imperative that India's economic growth reaches to the vast rural population of our

country. Thus, the overarching challenge ahead is to maximize public and private

sector resources to dramatically scale up education and healthcare initiatives to

enable India to move closer to achieving the Millennium Development Goals.

Developmental Initiatives

113


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(including pharmaceuticals, biotechnology, healthcare, medical equipment and devices,

specialty chemicals, contract research and manufacturing services, nutrition and natural products).

(including pharmaceuticals, biotechnology, healthcare, medical equipment and devices,

specialty chemicals, contract research and manufacturing services, nutrition and natural products).

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