Discovery of IndiaDiscovery of IndiaDiscovery of India BANK Discovery Of INdia... · Conclusion...
Transcript of Discovery of IndiaDiscovery of IndiaDiscovery of India BANK Discovery Of INdia... · Conclusion...
Knowledge Partner
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
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
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)
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
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
External Sector Reforms
Financial Sector 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
External Sector Reforms
Fiscal Reforms
Financial Sector 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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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
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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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.
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Export Ramp Up
12 1418
27 2835
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INR
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Source: ACMA
Source: WARD, SSKI Research
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7500
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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
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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
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India's offshore IT and BPO exports, US $ Bn.
Projected CAGR2005-2010
> 37%
> 24%Offshore IT
BPO
"ExtendingLeadership"
AdditionalPotential
2010"SustainingLeadership"
20052001
~80
35
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~60
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35
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CAGR28%
CAGR29%
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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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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
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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
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Textile Exports
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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
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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.
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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.
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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
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).
�
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).
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Economic Survey 2005-06, Ministry of Finance, Government of India
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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-
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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
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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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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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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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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
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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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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
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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:
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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
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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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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
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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.
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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.
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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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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
Key Developments & Initiatives
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
Key Developments & Initiatives
4. Railways
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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
Key Developments & Initiatives
5. Power Sector
65
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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
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
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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:
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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.
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76
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
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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
Source: Ministry of Food Processing Industries
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.
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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.
Source: Ministry of Food Processing Industries
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
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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
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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
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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
Organised 254 452 825
Unorganised 906 1274 1627
Edible Oil 500 692 925
Organised 50 88 156
Unorganised 450 603 769
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
Organised 609 889 1208
Unorganised 1193 1338 1460
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
Source: Ministry of Food Processing Industries
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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
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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.
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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
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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
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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
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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
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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.
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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
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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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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
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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
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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
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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”.
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
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
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
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
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
YES Ltd is a high quality, technology driven, state-of-the-art private Indian Bank catering to It
has obtained financial support from and 3 other high quality institutional private equity investors -
-New York, -Hong Kong, and San Francisco. It is
YES ’s fullest endeavor to become for the Life Sciences & Biotechnology Sector
through customized knowledge based product offerings. YES offers the full range of Corporate, Investment and
Transactional Banking products (including Structured Trade Finance, Working Capital, Forex and Money market
products, Cross-border financing, Debt Capital Markets, Domestic Payment Services, Derivatives, Structured and
Project Finance, Mergers & Acquisitions, Strategic Advisory solutions, Industry research etc.)
YES Ltd offers the entire spectrum of investment and corporate banking products to the Life Sciences and
Biotechnology sectors
YES BANK Ltd offers the entire spectrum of investment and corporate banking products to the Life Sciences and
Biotechnology sectors
The information and opinions contained in this document have been compiled or arrived at from sources
believed to be reliable, but no representation or warranty, express or implied, is made to their accuracy,
completeness or correctness. This document is for information purposes only. The information contained in this
document is published for the assistance of the reader, but is not to be relied upon as authoritative or taken in
substitution for the exercise of judgment by any recipient. All opinions expressed in this document are subject to
change without notice.
Neither YES BANK Ltd and other legal entities in the group to which it belongs, accept any liability whatsoever for any
direct or consequential loss howsoever arising from any use of this document or its contents or otherwise arising in
connection herewith.
This document may not be reproduced, distributed or published in whole or in part, for any purpose, except with prior
written consent of YES BANK Ltd.
BANK
BANK
BANK
BANK
"Emerging India".
Rabobank CVC-
Citigroup Russel Asian Infrastructure Fund (AIF) ChrysCapital-
the preferred financial partner
(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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