A REPORT ON Indian SMEs – Growth & Opportunities andRecommendations for Future Financing Decisions in 5 Sectors where ICICI has Current Exposures ByHemant Kakkar

  

        

A REPORT ON Indian SMEs – Growth & Opportunities andRecommendations for Future Financing Decisions in 5 Sectors where ICICI has Current ExposuresBy: Hemant Kakkar

Submitted in the partial fulfillment of the requirements of MBA Program ofptuCOMPANY GUIDEMr. Amit BhatiaFACULTY GUIDEMrs. Geetanjali BhatnagarDate of Submission:   

AUTHORIZATION This report is submitted in partial fulfillment of the requirement of MBA program of Punjab Technical University,Jalandhar

                                  Hemant Kakkar

                   

ACKNOWLEDGEMENT In order to complete a project like this, one needs intellectual nourishment,professional help and constant encouragements from many quarters.First of all, I would like to express my sincere gratitude to Mr. Amit Bhatia(Chief Manager, ICICI Bank) for giving me the platform and opportunity todo a project and providing me with an enriching experience, with the rightblend of theoretical as well as practical exposure. He has not only provided me with his valuable inputs out of his experience but has also been a source of inspiration throughout my association with the company. 

providing me the necessary support at all the stages.

Last, but not the least,I would like to thank all others who,in one way or anotherhave helped me so much along the way

Hemant Kakkar

I would like to express my sincere gratitude to my faculty guide,Mrs.Geetanjali Bhatnagar for not only facilitating me to take a meaningful project but also,

       

List of Tables TABLE 1:SMES IN INDIA ................................................................................................................. 5 TABLE 2: MSES PERFORMANCE: UNITS, INVESTMENT, PRODUCTION, EMPLOYMENT & EXPORTS ................... 9 TABLE 3: COMPARATIVE GROWTH RATES .......................................................................................... 10 TABLE 4: CONTRIBUTION OF SMES IN THE GROSS DOMESTIC PRODUCT (GDP) ........................................ 10 TABLE 5: ROAD NETWORK IN INDIA ................................................................................................ 101 TABLE 6: HIGHWAY NETWORK IN INDIA .......................................................................................... 101   List of Figures FIGURE 1: PRODUCTS OF MSES ........................................................................................................ 7 FIGURE 2: EMPLOYMENT IN MSE SECTOR ......................................................................................... 11 FIGURE 3: AUTOMOBILE COMPONENT INDUSTRY GROWTH ................................................................... 34 FIGURE 4: MAJOR EXPORT DESTINATIONS FOR THE INDIAN AUTOMOBILE COMPONENT INDUSTRY WITH THEIR                                                                                                                                        3RESPECTIVE MARKET SHARES ....................................................................................................  7 FIGURE 5 : COMPONENTS OF AUTO COMPONENTS EXPORTS ................................................................. 37 FIGURE 6: TREND OF IT BPO‐  EXPORT REVENUES OVER THE YEARS .......................................................... 52 FIGURE 7: IT INDUSTRY MARKET‐MIX DURING FY 2008 ........................................................................ 52 FIGURE 8: THE CHART SHOWS A RECOVERY AFTER Q2 Q3‐  FY 10. .......................................................... 57 FIGURE 9: HIRING TRENDS: ............................................................................................................. 59 FIGURE 10: BPO REVENUES ........................................................................................................... 64 FIGURE 11: TYPES OF SERVICE PROVIDED BY A TYPICAL LOGISTICS SERVICES PROVIDER ................................. 73      

Table of Contents ABSTRACT ........................................................................................................................................................... 9 Introduction .....................................................................................................................................................  10 PURPOSE ........................................................................................................................................................ 1 SCOPE ............................................................................................................................................................. 1 LIMITATIONS .................................................................................................................................................. 1 SOURCES ........................................................................................................................................................ 2 METHODS OF COLLECTING DATA ................................................................................................................... 2 REPORT ORGANISATION ................................................................................................................................. 2 Chapter 1: The Indian SME Sector ...................................................................................................................... 3 1.1 What are SMEs? ............................................................................................................................................ 4 1.2 Definition of SMEs in India ............................................................................................................................ 4 1.3 Importance of SMEs ...................................................................................................................................... 5 1.4 SMEs in the Global Scenario .......................................................................................................................... 6 1.5 The Indian Context ........................................................................................................................................ 7 1.5 PERFORMANCE OF SMESs ............................................................................................................................. 8 1.6 COMPARISON OF THE MSE SECTOR WITH THE OVERALL INDUSTRIAL SECTOR:........................................... 10 1.7 EMPLOYMENT IN MSE SECTOR  ................................................................................................................... 11 .1.8 Challenges Faced by SMEs ........................................................................................................................... 12 1.9 Impact of Recession on SMEs ...................................................................................................................... 16 1.10 Recent Government Policies and Measures .............................................................................................. 17 1.11 SME Policy Initiatives in 2009 .................................................................................................................... 19 1.12 Budget 2010 Implications on SMEs ........................................................................................................... 20 1.13 The Budget That Wasn’t ............................................................................................................................ 22 1.14 Recommendations .................................................................................................................................... 23 Chapter 2: The Bank Finance Products ............................................................................................................. 28 2.1 Introduction ................................................................................................................................................ 29 2.2 Fund Based Financing .................................................................................................................................. 29 2.3 Non Fund Based .......................................................................................................................................... 30 Chapter 3: The Automotive Component Industry ............................................................................................ 32 3.1 Introduction to Automotive Component Industry ....................................................................................... 33 3.2 Characteristics of the Automotive Components Industry ............................................................................ 33 3.3 Key Trends of Automotive Components Industry ........................................................................................ 39 3.4 Key Drivers of Automotive Components Industry  ....................................................................................... 42 .3.5 Key Inhibitors of Automotive Components Industry .................................................................................... 45 3.6 Impact of Global Economic Slowdown on Automotive Components Industry ............................................. 46   

3.7 Budget 2010 Implications on Automotive Components Industry ................................................................ 47 3.8 Way Forward for Automotive Components Industry ................................................................................... 48 Chapter 4: The Information Technology Industry ............................................................................................ 50 4.1 Introduction to IT Industry .......................................................................................................................... 51 4.2 Characteristics of the IT Industry ................................................................................................................. 51 4.3 Key Trends of the IT Industry ....................................................................................................................... 53 4.4 Key Drivers of the IT Industry ...................................................................................................................... 54 4.5 Key Inhibitors of the IT Industry .................................................................................................................. 55 4.6 Impact of Global Economic Slowdown on the IT Industry ............................................................................ 56 4.7 Budget 2010 Implications on the IT Industry ............................................................................................... 59 4.8 Way forward ............................................................................................................................................... 60 Chapter 5: The Information Technology Enabled Services Industry  ................................................................ 62 .5.1 Introduction to the ITES Industry ................................................................................................................ 63 5.2 Characteristics of the ITES Industry ............................................................................................................. 64 5.3 Indian BPO Segments .................................................................................................................................. 65 5.4 Key Driversof the ITES Industry ................................................................................................................... 66 5.5 Impact of Global Economic Slowdown on the ITES Industry ........................................................................ 67 5.6 Way Forwardfor the ITES Industry ............................................................................................................... 68 Chapter 6: The Logistics Industry ..................................................................................................................... 69 6.1 Introduction to the Logistics Industry .......................................................................................................... 70 6.2 Industry Structure ....................................................................................................................................... 73 6.3 Characteristics of the Logistics Industry....................................................................................................... 74 6.4 Key Trends of the Logistics Industry ............................................................................................................ 79 6.5 Key Drivers of the Logistics Industry ............................................................................................................ 80 6.6 Key Inhibitors of the Logistics Industry ........................................................................................................ 82 6.7 Impact of Global Economic Slowdown on the Logistics Industry ................................................................. 84 6.8 Budget 2010 Implications on the Logistics Industry ..................................................................................... 85 6.9 Way Forward for the Logistics Industry ....................................................................................................... 85 Chapter 7: The Garments & Textiles Industry .................................................................................................. 87 7.1 Introduction to the Garments & Textiles Industry ....................................................................................... 88 7.2 Characteristics of the Garments & Textiles Industry .................................................................................... 89 7.3 Key Drivers of the Garments & Textiles Industry ......................................................................................... 92 7.4 Key Inhibitors of the Garments & Textiles Industry ..................................................................................... 94 7.5 Impact of Global Economic Meltdown ........................................................................................................ 96 7.6 Budget 2010 Implications on the Garments & Textiles Industry .................................................................. 97 7.7 Future Outlook for the Garments & Textiles Industry  ................................................................................. 97 .Chapter 8: The Road Industry ........................................................................................................................... 99   

8.1 Introduction to the Road Industry ............................................................................................................. 100 8.2 Characteristics of the Road Industry .......................................................................................................... 101 8.3 Key Enablers of the Road Industry ............................................................................................................. 106 8.4 Key Inhibitors ............................................................................................................................................ 106 8.5 Budget 2010 Implications on the Road Industry ........................................................................................ 107 8.6 Way Forward for the Road Industry .......................................................................................................... 108 

Attachments .........................................................................................................................  References............................................................................................................................   

            

ABSTRACT  

1 The project undertaken is subdivided into 3 phases which are:

1. Detailed analysis of Indian SMEs2. Bank Financing SMEs – Products3. Detailed Sector analysis of the following:Infrastructure RoadsLogistics Land TransportTextiles & GarmentAutomotive ComponentsIT/ITES

Stage 1: Detailed analysis of Indian SMEs:In this section the India SME sector is studied in detail under the following sub sections:1.2.3.4.5.6.7.8.9.10.11.12.13.14.15.What are SMEs?Definition of SMEs in IndiaImportance of SMEsSMEs in the Global ScenarioThe Indian ContextPerformance of SMEsComparison of the SME Sector with the Overall Industrial SectorEmployment in SME SectorChallenges Faced by SMEsImpact of Recession on SMEsRecent Government Policies and MeasuresSME Policy Initiatives in 2009Budget 2010 Implications and SMEsThe Budget That Wasn’tRecommendations  

Stage 2: Bank Financing SMEs – ProductsThis is the second stage where an overview of the products through which financing is doneare studied briefly. This is done so as to when the live cases are studied, the kind of financinginstruments involved are understood.This section is studied under the following subsections:1.2.3.IntroductionFund Based FinancingNon Fund Based FinancingStage 3: Detailed Sector analysis of the following: -Infrastructure RoadsLogistics Land TransportTextiles & GarmentAutomotive ComponentsIT/ITES

This section is studied under the following subheads:1.2.3.4.5.6.7.8.IntroductionCharacteristics of the IndustryKey TrendsKey DriversKey InhibitorsImpact of Global Economic SlowdownBudget 2010 ImplicationsWay Forward

    

INTRODUCTION PURPOSE ICICI Bank is India’s largest private sector bank. In the SME space also it is the leader. The bank hasexposures in various sectors of which a subset of 5 sectors on which \a detailed analysis is carried out.Analysis is useful for any reader who is dealing with the companies under these sectors as it wouldprovide him/her a detailed 360 degree view of almost all the aspects of the industry.Post  the  sector  analysis,  a  SWOT  analysis  has  been  done  of  live  projects  which  would provide  an  insight  into  the  company  for  which  this  analysis  is  done,  post  which recommendation as to what future course of action should be have been formed. SCOPE The scope of my study is up to 5 sectors for which a detailed analysis is carried out namely: Infrastructure RoadsLogistics Land TransportTextiles & GarmentAutomotive ComponentsIT/ITES

LIMITATIONS •••The study in an industrial analysis and has heavy reliance on data available on theinternet. Unavailability of updated data is a significant drawback.Data regarding live projects is highly confidential for the bank due to which notall important information important for complete analysis will be available.India being a dynamic economy is ever revolving, the research and findingswould be impacted in case of major policy decisions post the completion of theproject.•Also no country in the world works in complete isolation, so external events shallalso impact similarly to internal changes. 1 | P a g e   

SOURCES The report is on:A. Industry Analysis 

The data used for the first area of study have been obtained from secondary data sources which  include  books,  articles  on  websites,  research  papers  published  on  net.   

METHODS OF COLLECTING DATA The  sector  study  has  been  done  by  collecting  literature  material  from  various  web resources, company annual reports and industry research reports along with interactions with the company officials. 

REPORT ORGANISATION The  report  begins  with  a  study  of  study  of  the  Indian  SME’s  and  the  latest  government policies and budget implications. Next section gives an overview of the financial products used in financing SMEs. The next section includes the five sector industry analysis where a preset flow of topics is is adapted to each industry. 

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Chapter 1: The Indian SME SectorThis chapter includes: 1.2.3.4.5.6.7.8.9.10.11.12.13.14.15.What are SMEs?Definition of SMEs in IndiaImportance of SMEsSMEs in the Global ScenarioThe Indian ContextPerformance of SMEsComparison of the SME Sector with the Overall Industrial SectorEmployment in SME SectorChallenges Faced by SMEsImpact of Recession on SMEsRecent Government Policies and MeasuresSME Policy Initiatives in 2009Budget 2010 Implications and SMEsThe Budget That Wasn’tRecommendations  3 | P a g e   

What are SMEs?  Small and medium enterprises (also SMEs, small and medium businesses, SMBs, and variationsthereof) are companies whose headcount or turnover falls below certain limits.The lack of a universal definition for SMEs is often considered to be an obstacle for businessstudies and market research. Definitions in use today define thresholds in terms of employment,turnover and assets. They also incorporate a reasonable amount of flexibility around year-to-yearchanges in these measures so that a business qualifying as an SME in one year can have areasonable expectation of remaining an SME in the next. The thresholds themselves, however,vary substantially between countries. As the SME thresholds dictate to some extent the provisionof government support, countries in which manufacturing and labor-intensive industries areprioritized politically tend to opt for more relaxed thresholds.

Definition of SMEs in India  The MSMED Act 2006, which came into force w.e.f. 02/10/2006, defines the Micro, Small, andMedium Enterprises. As per the Act, the activities are classified into Manufacturing and ServiceCategory. Initially, the MSMED Act 2006 had not defined the ‘Services Sector’ and RBI’sguidelines were awaited. However, subsequently RBI has defined the services sector and theactivities that can be covered under the SME sector.4 | P a g e   

The following chart indicates the threshold investment levels for both Manufacturing sector(INVESTMENT IN PLANT & MACHINERY)* and Services sector (INVESTMENT INEQUIPMENT)* for the above three categories of Manufacturing and Services Enterprises:Table 1: SMEs in INDIA EnterpriseMicro EnterpriseManufacturingNot to Exceed Rs. 25 Lakhs.Rs.25 lakhs - Rs. 5 Crores.Rs.5 Crore - Rs. 10 Crore. Remarks 1. Separate threshold investment limits proposed by the Act for Manufacturing andRs.10 lakhs - Rs. 2 Services Sectors.Crores. 2. Micro EnterprisesRs. 2 Crore - Rs. 5 newly introduced under Crore both the sectors. ServicesNot to ExceedRs. 10 Lakhs.Small Enterprise MediumEnterprise

Importance of SMEs Small and medium-sized enterprises (SMEs) are the backbone of all economies and are a keysource of economic growth, dynamism and flexibility in advanced industrialized countries, aswell as in emerging and developing economies. SMEs constitute the dominant form of businessorganization, accounting for over 95% and up to 99% of enterprises depending on the country.They are responsible for between 60-70% net job creations in Developing countries. Smallbusinesses are particularly important for bringing innovative products or techniques to themarket. Microsoft may be a software giant today, but it started off in typical SME fashion, as adream developed by a young student with the help of family and friends. Only when Bill Gatesand his colleagues had a saleable product were they able to take it to the marketplace and lookfor investment from more traditional sources.The importance of SMEs can be summarized as follows:•Boosting industrial growth: By enhancing existing capacities, and by delivering cost-efficient goods and services as per the requirements of the local markets, SMEs have beendriving industrial growth.Inspiring Consumption and Social Change: SMEs play a defining role by offeringreasonable, yet revolutionary goods and services to cater to the changing marketrequirements. Currently, SMEs have made its presence felt in areas like education, medicalcare, transportation, entertainment and local infrastructure development.Minuscule investment: SMEs need low capital investment, in terms of per unit of output5 | P a g e   ••

••••Increased Employment Opportunities: SMEs generate both direct and indirectemployment opportunities, in 2006-07, for instance, for every ten million rupees invested bythe SME sector spawned employment opportunities for over 150 people. However, the sameamount of investment carried out by the overall economy generated employment for just 37.4 people.Fuelling the local economy: SMEs make use of natural resources and domestic skills tocater to the domestic market. The growth of SME sector also helps in socio-economicupliftment as it generates employment opportunities for untapped masses, living in urban andrural regions.Discourages migration to urban areas: SMEs are synonymous for entrepreneurship. Andthe best part being setting up an SME doesn’t include much risk. If SMEs generateemployment opportunities in rural and semi-urban areas, migration to urban areas can bestemmed to a great extent.Transition from Agriculture Economy to Service-oriented one: SMEs can play a crucialrole in achieving the transition from a dominant agricultural economy to a service orientedeconomy, akin to Japan. Japan’s agricultural workforce has gone done from 68 percent to 4.9percent, in case of United States, from 44 percent to 9 percent.Further, Indian agriculture sector can no longer generate extra employment opportunities tomeet the requirements of the ever-growing population. In such a situation, only SMEs cancome to the nation’s rescue.

SMEs in the Global Scenario Even in the global scenario SMEs have always played a crucial role in their respective country'seconomy. International comparisons reveal that SMEs create the majority of jobs.In the USA, nearly half of the private workforce is employed in small firms, of which three-fifthhave less than five employees. In Japan, 78 percent of jobs are generated by SMEs.The same sector in Korea accounts for 99 percent of all manufacturing enterprises and 69 percentof employment in this sector. Therefore, SMEs must play a central role in the country’semployment strategy. This will require modification of policies and programmes to level theplaying field, improve availability of credit, increase productivity, raise quality consciousnessand competitiveness, and enhance job quality.Recent experiences of different countries in the context of globalization also demonstrate thatSMEs are better insulated from the pressures generated by the volatility of world trade andcapital markets. They are more resistant to the stresses, and more responsive to the demands ofthe fast-changing technologies and entrepreneurial responses. Indeed, they are observed to be a6 | P a g e   

very important vehicle for new technology adoption and entrepreneurial development. Ensuringthe competitiveness of the SMEs is important as it would help in overall growth ofmanufacturing sector as also the national economy.

The Indian Context The micro, small and medium enterprises (MSME) sector contributes significantly to themanufacturing output, employment and exports of the country. It is estimated that in terms ofvalue, the sector accounts for about 45 per cent of the manufacturing output and 40 percent of thetotal exports of the country. The sector is estimated to employ about 42 million persons in over13 million units throughout the country. Further, this sector has consistently registered a highergrowth rate than the rest of the industrial sector. There are over 6000 products ranging fromtraditional to high-tech items, which are being manufactured by the MSMEs in India. It is wellknown that the MSMEs provide the maximum opportunities for both self employment and jobsafter agriculture.Figure 1: Products of MSEs

 Recognizing the contribution and potential of the sector, the definitions and coverage of the MSEsector were broadened significantly under the Micro, Small and Medium EnterprisesDevelopment (MSMED) Act, 2006 which recognized the concept of “enterprise” to include bothmanufacturing and services sector besides, defining the medium enterprises. For collecting andcompiling the data for the MSME sector (including khadi, village and coir industries), the FourthAll India Census of MSMEs with reference year 2006-07, is being conducted in the country. The7 | P a g e   

Census will provide the first database on the MSME sector after the enactment of MSMEDevelopment Act, 2006.

PERFORMANCE OF SMESs As per the quick estimates of 4th All-India Census of MSMEs, the number of enterprises isestimated to be about 26 million and these provide employment to an estimated 60 millionpersons. Of the 26 million MSMEs, only 1.5 million are in the registered segment while theremaining 24.5 million (94%) are in the unregistered segment. The State-wise distribution ofMSMEs show that more than 55% of these enterprises are in 6 States, namely, Uttar Pradesh,Maharashtra, Tamil Nadu, West Bengal, Andhra Pradesh and Karnataka. Further, about 7% ofMSMEs are owned by women and more than 94% of the MSMEs are proprietorships orpartnerships. In view of the MSME sector’s role in the economic and social development of thecountry, the Government has emphasized on its growth and development. It has taken variousmeasures/initiatives from time to time which have facilitated the sector’s ubiquitous growth.No discussion on MSMEs can be complete without a full treatment of the unorganized sector inwhich enterprises are typically established through own funds or funds obtained through non-institutional sources, they lack managerial bandwidth, do not have established channels formarketing and are centered around a single traditional technology. More than 94 per cent ofMSMEs are unregistered, with a large number established in the informal or unorganized sector.The National Commission for Enterprises in the Unorganized Sector (NCEUS) definesunorganized sector as enterprise employing less than 10 workers. It has estimated suchenterprises at 58 million with employment generated of 104 million persons. Of these, more thanhalf the workers are classified as ‘self-employed’. A large segment in this universe of self-employed consists of those who are engaged in non-farm activities. This segment predominantlyconsists of own account enterprises, i.e., where there are no hired workers and are run by selfwith or without the help of unpaid family members. The own account enterprises can bedistinguished into those running within households and those outside the households. Thehousehold enterprises operate on the basis of family labor – organizing production on its own,acquire its own raw material, use its own machinery and tools and market its products. Apartfrom own account enterprises, this segment also consists of enterprises having hired workersbetween 2 to 9. Very often, these enterprises are located in clusters but function independentlywithout inter-firm linkages.8 | P a g e   

The Office of the DC (MSME) provides estimates in respect of various performance parametersrelating to the Sector. The time series data in respect of the Sector on various economicparameters are incorporated in the following Table: -Table 2: MSEs Performance: Units, Investment, Production, And  Employment & Exports * The figures in brackets show the % growth over the previous year.** Projected 9 | P a g e   

COMPARISON OF THE MSE SECTOR WITH THE OVERALL INDUSTRIAL SECTOR: The MSE sector has maintained a higher rate of growth vis-à-vis the overall industrial sector aswould be clear from the comparative growth rates of production for both the sectors during lastfive years as incorporated in the Table given below: -Table 3: Comparative Growth Rates Table 4: Contribution of SMEs in the Gross Domestic Product (GDP) 10 | P a g e   

EMPLOYMENT IN MSE SECTOR The total employment from the MSE sector (including SSSBEs) in the country as per the ThirdAll India Census of MSEs with reference Year 2001-02 was 249.33 lakh numbers. The unitsoperating with fixed premises are treated as MSEs. As per the estimates compiled for the year2007-08, the employment was 322.28 lakh persons in the sector. The share of MSEs in the totalemployment among units engaged in manufacturing and services is around 34.93%.Figure 2: Employment In MSE Sector 11 | P a g e   

Challenges Faced by SMEs Even today, small businesses in India are set up by first generation entrepreneurs. They oftenhave a product or service idea, some money, a zest to hard work but limited knowledge aboutmarkets, Government or bank procedures, cash flows or how to manage labor. This is wherementoring a hand holding support becomes crucial. At times, this comes from an individual suchas friend, relative, an NGO or a parent unit. This is episodic and unable to meet the vastrequirement which the country has. This is sought to be institutionalized throughextension/outreach efforts of central and state Governments. Trained manpower is madeavailable for this task, right down the district levels, to act as the friend, philosopher and guide.These resource persons guide in setting up an evit, making it commercially viable, interactingwith financial institutions and understanding markets, as well as the impact of globalization withadvancements in it. There is a strong more towards linking SMEs with bigger commodity orsupply chain and providing acceptable quality and delivery schedules. The Central Government'sagency for the task, the Small Industry Development Organization, has accordingly moved awayfrom its pre-reform regulatory to a direct promotional role of hand holding, advocacy andfacilitation. This encompasses the legislative support put in place, fiscal incentives andprotection from unequal competition.CreditCredit is the lifeline of business. Small businesses lack access to capital and money markets.Investors are unwilling to invest in proprietorships, partnerships or unlisted companies. As riskperception about small businesses is high. So is the cost of capital, institutional credit, whenavailable, requires collateral which in turn makes the owner of the unit even more vulnerable toforeclosure. Credit guarantee funds which assist lending institution in advancing loans or mutualguarantee systems involving common guarantees from a group of people have not emerged in asignificant manner. Unit finances come under severe stress whenever an occasional event such asa large order, rejection of consignment, and inordinate delay in payment occurs. The commonstereotype about a banker lending an umbrella in sunshine and wanting it back as soon as it rainsgets reinforced in their dealing with small enterprises. It is, therefore, not surprising, that smallenterprises prefer to first tap own resources or loans from friends and relatives and then look forexternalfinance.In India, many of small manufacturing enterprises do not access bank finance and only about16% of total bank credit finds its way to the sector. Despite being a priority sector for lending,small manufacturing enterprises get just about 8% of their annual turnover as working capitalrequirements, as against normative requirements of 20%. Even for this, cost of credit is high.12 | P a g e   

The problem is recognized and is sought to be addressed through various ways:••••••Establishment of ISO 9000 certified specialized SSI bank branches in districts/clusters.Directive for working capital finance @ 20% of annual normative turnover.Waiver of collateral requirements up to Rs. 0.5 million.Setting up of a credit Guarantee Trust to cover loans up to Rs. 2.5 million.Composite loans from a single agency up to Rs. 2.5 million.A national equity fund for equity to SSI units at 5 percent service chargeTechnologyAs mentioned earlier, small enterprises are often regarded for their labor intensity and thecapability to work with local resources. In the part, this has often led to less emphasis ontechnology. Run of the mill technology coupled with functional packaging and inadequatefinishing have at times led to small sector products being labeled as being of poor or substandardquality. This has a cascading impact on competitiveness. As small enterprises realize the need tolink up with large ones, they are having a relook at technology options which would improveproductivity, effectiveness and competitiveness.Market AccessIn today’s world, small enterprises can hardly match the advertising support or distribution reachof a large corporation. In India, small units sell best in limited or neighborhood markets or whenthey are meeting a low volume specialized demand which no large player can effectively caterto. Increasingly, now the endeavor is to build the marketing activity of small units around theircompetitive advantage i.e., products which are labor intensive, items which cater to nichemarkets, low volume high margin products, sub assembly tasks, outsourcing jobs andancillarisation. Sub-contracting exchanges are being established through Government andIndustry associations to promote such interface. After sales service for imported products, AMCson electronic equipment, reverse engineering (to the extent that it is WTO compatible) are theother areas being encouraged, sophisticated marketing is a task best left to large players. Smallenterprises in India are realizing that the term “marketing” perhaps implies different things todifferent people for new SME businesses; head on competition with established giants makeslittle sense.InfrastructureSmall units have traditionally operated from homes or a neighborhood work shed. Slowly, theybegan moving out and clustering together wherever electricity, water, raw materials, markets orlabors were easier to access. Policy makers in India had anticipated the need for suitable13 | P a g e   

infrastructure five decades ago and began a program for setting up industrial estates. Non-assessment of economic viability, tardy implementation and poor maintenance due to drying upof funds affected these adversely. Later in the post reform period, the problem was sought to beaddressed by setting up of such estates exclusively for small business. Almost 50 such estateshave been set up. Because of their better infrastructure such as roads, telecommunication, power,effluent treatment plants, power, banks, watch & ward, and reasonable cost, they have proved tobe popular with small manufacturing for factory accommodation, allotment of sheds on hirepurchase as well as outright sale etc. A concerted move has also now been initiated for upgradingexisting estates.GlobalizationThe globalization of trade & commerce has been given a push by agreements in the WTO andchanged the business environment. It has therefore become necessary to sensitize SMEs aboutthese changes and prepare them for the future. In India, a number of steps have been taken in thisregard. Apart from setting up a WTO cell in the nodal ministry, 28 sensitization workshops wereconducted across the country. Workshops have also been held on intellectual property rights andbar coding. Monitoring of imports in specific sectors where SMEs have a significant presenceand initiation of anti-dumping action where dumping was noticed, are the other steps taken inthis respect.ProceduresGovernment and bank procedures coupled with inspections remain a major hurdle in growth ofsmall units. There are over 60 central, state and local laws which regulate small businesses in theareas of labor, factory maintenance environment, municipal bye laws, taxation, power etc. Theserequire the maintenance of as many as 116 registers and forms. To enforce these, there is anarmy of inspector who visit units leading to harassment, delay, obstruction and increase in costof production. Many small units are one man shows and cannot satisfy the letter of the law. Thestreamlining of such rules and regulations has become necessary if the creative genius of Indianentrepreneurs is to be fully unleashed. Some state governments have exhibited initiative in thisregard. The Central Government has initiated a study to enact a single law for small businesses.This enactment should ease the situation considerably.Exit MechanismLike products, Industries too have life cycles. There are industry segments which have seen theirbest days. Similarly, there are individual units where no amount of additional funds will help.Their bank loans have become bad and non performing. A sound exit policy which alsosafeguards labor interests has therefore, become necessary. It is anticipated that as of 1998, over14 | P a g e   

Rs. 3.8 billion were locked in sick/weak units. An exit policy would help fresh circulation of asignificant amount. The first steps in this regard have been taken recently by India’s central bankwhere by one time settlement of dues as on 31 March, 1997 was allowed. The results have beenencouraging.Strategy Interventions for Revitalization and GrowthSignificant charges in economic environment are being heralded in by the WTO. The removal ofQRS has led to increased competition with imports. Many sectors of industry are facingcompetition from Chinese or Taiwanese imports within the country or from Bangladesh, SriLanka or Nepal in export markets. It is the belief of the Indian Government that promotion andnot protection is the answer to the issues of survival and growth. Thus, while reservation of itemsfor exclusive production continues, the focus must now be on strengthening capabilities. Thisimplies a holistic look at the concerns of industry. As part of this, the following strategicinterventions have been initiatedI.II.III.IV.V.VI.VII.Easing access to general creditIntroduction of options of limited partnership and factoringSubsiding cost of finance for upgrading technologyIndustry specific technology up gradation programmesFund for developing and accessing overseas markets for exportExpanding reach of infrastructure programmesUshering in a regime of self certification in lien of inspections for various regulationsInterventions in the future require that hurdles to growth are removed. They must encourage aseamless movement from small to medium to large. The Indian Government, therefore, isworking on a new vision for the SSI sector through a flexible approach and a motivated team.The advocacy role of Government now involves new dimensions such as building up andarguing cases before the world trade body or dispute redressal for a, articulating needs of smallenterprises before decision makers and other agencies. Credit is increasingly being madeavailable at international rates. Technology upgrades at both the cluster and the individual levelare being assisted. Cluster level technologies will be at Government cost with only user chargesrecovered credit guarantee scheme has been put in place if our market has opened up to due toWTO, we need to enable our small units established foot holds in new markets opened up forthen by globalization. Thus, along with improving quality, they are being given the opportunityof over seas travel, conducting market surveys, test marketing etc. The existing industrial centresare being revamped by involving industry associations with some government assistance andfinally a migration from sunset industries to sunrise industries is being encouraged through acomprehensive and graceful exit policy, which balances interest of labor with those of theowners.15 | P a g e   

ConclusionThe singular contribution of SMEs is on account of their unique characteristics. Their role ineconomic activity is manifest in both tangible and intangible ways. If this contribution is to besustained, then their uniqueness needs to be nurtured in an overt and explicit manner. The Indianexperience has shown that it is possible to design targeted interventions be they area specific likeclusters or be they sector / sub-sector or product-specific. Other countries, be they Asian orOECD, also have policies which aim at similar support. The need of the hour is for us to learnfrom each other, drawing upon experiences and identity" "best practice policies". These in turnhave to meet local conditions and circumstances. A "one size fits all" approach will not work.Nevertheless, there can be no two opinions about the priority that SME policies deserve forachieving the socio-economic goal of employment growth and social justice, along with theindividual "aspirations".

Impact of Recession on SMEs MSME sector in any country including India comprises of almost 90 per cent of all theenterprises. In India, MSME sector accounts for 40 per cent of exports, 45 per cent of theindustrial production and contribute 8 per cent to the GDP. This sector employs an estimated 31million persons and has been growing at the rate of 12 per cent per annum. MSME sector ofIndia has felt the tremors of global crisis in varying manner.The current meltdown of global financial and commodity markets begun with the fall of housingmarkets in USA leading to collapse of the sub-prime market in August 2007. The problems lateron engulfed the entire financial and commodity markets throughout the world leading to aserious liquidity crisis and most of the developed economies going into recession including USA,UK, and Japan. It also led to slowdown in emerging economies like India and China as most oftheir growth was either due to exports to developed markets like USA or due to foreigninvestments. Fall of credit markets in US and Europe resulted in foreign investors pulling backtheir investments leading to a sharp fall in equity indexes around the world.Coupled with this the RBI followed a tight monetary policy by increasing the key rates likeRepo, reverse repo and CRR resulting into a serious liquidity crunch in the domestic markets.The impact on MSME sector of the above can be understood as under:•Slowdown in key markets like USA, Europe and Japan resulted in decline in demand forgoods produced by export oriented enterprises hence directly affecting their revenues andprofitability.16 | P a g e   

•••••••Due to overall increase in risk perception and liquidity crunch in the domestic marketsthe cost of funds has increased considerably for the MSMEs to more than 15% now.Many MSMEs did a lot of capacity building during the boom time, a significant amountof which was financed by debt increasing the interest cost significantly. Such companiesfaced liquidity pressures due to decrease in demand for their products and unavailabilityof alternative sources of finance.The big financial firms in US and Europe were the key clients of Indian BPO and KPOindustry. The collapse of big banks like Lehman Brothers, Bear Sterns etc. led toimmediate cut down of their business seriously affecting the outsourcing industry.Export oriented auto ancillary manufacturers had been the worst affected due to fall indemand of vehicles resulting as a result of high oil prices during the first 9 months of theyear and a general economic slowdown.The first time we heard stories of distress in the most famous diamond cutting &polishing industry in Surat & Navsari in Gujarat. Moradabad brassware industry thatcontributes to almost one-third of all handicraft exports from India has also been facingthe distress like situation over the last two years, accentuated further by the recenteconomic slowdown.The other export oriented sectors dominated by small enterprises, particularly in thereadymade garments, textiles, leather and engineering have also faced considerabledownfall in the last few months of the financial year 2008-09.The energy intensive sectors like foundry, ceramics, re-rolling of metals, electro platingand food processing have faced high degree of turbulence thanks to high fluctuations ofcrude prices and metal during the year. For the month of February 2009 the export figure of India has hovered around 11 billionUS $ where as for the same month in the year 2008 it stood over 15 billion US $. Thestory is similar for the other 5 months of the last financial year.

Recent Government Policies and Measures In addition to the growth potential of the sector and its critical role in the manufacturing andvalue chains, the heterogeneity and the unorganized nature of the Indian MSMEs are importantaspects that need to be factored into policy making and program implementation. There isconsiderable segmentation among the MSMEs in terms of their size and need tailor madepolicies for each size class. The policies and programmes for the micro and small enterprises inthe sector would need to address their survival strategies and should be in the direction ofproviding livelihood alternatives such as social security, skill formation and credit. On the other17 | P a g e   

hand, policies/programmes for the larger sized MSMEs need to address issues relating to growthmarketing, access to raw material, credit, skill development and technology up gradation.Some of the broad policy measures are:•A single comprehensive legislation for the promotion, development and enhancement of thecompetitiveness of the MSME sector - Micro, Small and Medium Enterprises Development(MSMED) Act, 2006 came into effect from October 2006.National Manufacturing Competitiveness Council (NMCC) was set up to energize andsustain the growth of the manufacturing industry.Revised strategy of lending and introduction of newer measures, such as the scheme toestablish Small Enterprises Financial Centres (SEFC) for strategic alliance between branchesof banks and SIDBI located in 388 clusters identified by ministry of SSI.Promotion and financial support for Credit-cum-Performance Rating in MSME sector inIndia, to facilitate greater and easier flow of credit from the banking sector to SMEs.The National Commission for Enterprises in the Unorganized Sector (NCEUS) has been setup as an advisory body and a watchdog for the informal sector to bring about improvement inthe productivity of these enterprises for generation of large scale employment opportunitieson a sustainable basis, particularly in the rural areas.Facilitation of technology transfer through the Technology Bureau for Small Enterprises(TBSE)Accelerating initiatives to address various developmental needs for MSMEs in the 11th FiveYear Plan.“Scheme of Fund for Regeneration of Traditional Industries” [“SFURTI”]Guarantee coverage under Credit Guarantee Fund for Small Enterprises expandedsubstantiallyCredit Linked Capital Subsidy Scheme for Technological Up gradation.New legislation on Limited Liability Partnerships.Emphasis on bi-lateral/ multi-lateral partnerships at multiple levels.Merger of the Ministry of SSI with the Ministry of ARI.Earmarked 40% of net bank credit of public and private sector banks for the priority sector,which include SMEs.Earmarked 32% of net bank credit of foreign banks for the priority sectors, of which 10% isallocated to SMEs.••••••••••••••

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SME Policy Initiatives in 2009 A continuous attention to ongoing schemes to assist MSME has demonstrated success in severalareas. However, the Ministry of MSME and other government departments are still working hardto pull the sector out of the recession and overcome some inherent problems.Several of the schemes started by the Ministry of Micro, Small and Medium Enterprises(MSME) to promote the development of micro, small and medium enterprises in the country sawsuccess last fiscal year. This section outlines some progress areas in 2009 that have made apositive impact on MSMEs, especially during the painful process of recovering from aneconomic recession.Better Credit Flow: The ‘Policy Package for Stepping up Credit to Small and MediumEnterprises (SME)’ was set up by the government in August 2005 for doubling the credit flow tothe MSME sector within a period of five years. Credit flow from Public Sector Banks (PSBs) tothis sector has increased from Rs.67,634 crore at the end of March 2005 to Rs.1,91,307 crore attheendofMarch2009.Skill Development on Priority: Various measures like enhancing the training capabilities of theTool Rooms, MSME Development Institutes and other organizations under the Ministry ofMSME have helped to train nearly 2.61 lakh trainees during 2008-09. The target set for 2009-10is to train 3.2 lakh persons, with several programs organized free of cost for the weaker sectionsof society.Success of Credit Guarantee Scheme: MSMEs are often unable to provide collateral assecurity to procure loans. The government’s credit guarantee scheme has been rather successfulbecause of timely interventions to make the scheme more attractive to lenders and borrowers.For instance, the loan limit was enhanced from Rs.25 lakh to Rs.100 lakh, the one-timeguarantee fee was reduced from 2.5% to 1.5%, etc. Success can be gauged from the data onincreased coverage. From about 40,000 proposals received (for loans of Rs.1000 crore) at theend of March 2004, more than 2.27 lakh proposals (for loans of over Rs.8200 crore) at the end ofNovember 2009.Capital Subsidy Spreads Coverage: Under the Credit Linked Capital Subsidy Scheme forMicro and Small Enterprises (CLCSS), 15 per cent capital subsidy is provided on loan amountsup to Rs. 100 lakh for technology up gradation. From the 47 products/sub-sectors with nearly1400 well-approved technologies/machines for subsidy under the scheme, now 179 newtechnologies machines for pharma sectors have been added to this list. Until October 2009, 7810proposals of subsidy were approved and Rs. 338.68 crore was released to the MSEs under thescheme.19 | P a g e   

Quality Improvement on Priority: The ISO-9000/ISO-14001/HACCP CertificationReimbursement Scheme is an incentive scheme to upgrade technology and improve quality thatprovides for one time reimbursement of charges for acquiring ISO-9000/14001/HACCP (or itsequivalent) certification to the extent of 75% of the cost subject to a maximum of Rs. 75,000/- intotal. Decentralized in 2007, the scheme saw growing popularity in 2009, with about 690 unitsamounting to Rs. 2.88 crore being reimbursed up to November 2009 during 2009-10.Employment Generation: The Prime Minister’s Employment Generation Program (PMEGP)was launched in August 2008 with a total plan outlay of Rs. 4735 crore including Rs. 250 crorefor backward and forward linkages. Around 38 lakh additional employment opportunities in theterminal four years (2008-09 to 2011-12) of XI Plan are expected. The program providesfinancial assistance to set up microenterprises costing up to Rs. 10 lakh in service sector and Rs.25 lakh in manufacturing sector in the form of subsidy up to 25 per cent of the project cost inrural areas and 15 per cent for urban areas. Until March 2009, 2,17,762 applications werereceived under PMEGP, of which 83,454 candidates were selected. About 36,444 projects weresanctioned financial assistance by banks for generating an estimated 3.64 lakh additionalemployment. Loans were disbursed in 25,507 cases by banks giving employment opportunitiesto about 2.55 lakh persons until 31st August 2009. About 4.5 lakh additional employments willbe generated in 2009-10.

 Budget 2010 Implications on SMEs The Small and Medium Entrepreneurs (SMEs) was benefitted in many aspects as the UnionBudget 2010 has given them several tax concessions and benefits. Though there still exists roomfor improvement and many items of the SME wish-list did not find place in the Budget.Tax Rates: From a direct income-tax rate perspective, the proposed reduction of surcharge forIndian companies from 10% to 7.5% is a welcome initiative but provides only marginalrelief. The proposed increase in the basic rate of Minimum Alternate Tax (‘MAT’) on BookProfits from 15% to 18% will put additional strain on small companies. The beneficial revisionof income-tax slabs for an individual will increase the take-home for an individual who carrieshisbusinessinproprietaryorpartnershipform.Provisions relating to Limited Liability Partnership: The Limited Liability Partnership (LLP)under the statute enacted in March 2009 is currently the most tax friendly form of business entityfor SMEs. This is because it stands protected from the levy of Dividend Distribution Tax andMinimum Alternate Tax which are applicable to Companies. With the advent of LLP, several20 | P a g e   

small private limited companies desired to convert into LLP but did not so due in absence ofbeneficial tax provisions. The Union Budget 2010 proposes to introduce several provisions togrant tax neutrality to such conversion subject to certain basic conditions.Income tax holidays: The SME Sector was expecting grant of tax holiday with respect tosupport and services provided to IT / ITes Sector on the same lines as eligible to them forexports. However, the sunset date of 31 March 2011 for the Tax Holiday for exports from STPand EOU units itself has not been extended. This is likely to disappoint the IT / ITes Sectorincluding the SMEs who provide services or support thereto. Further, the competitive advantagethat India has so far which is already facing challenges from several other countries is likely toundergofurtherstraininthisscenario.Withholding taxes and deduction linked thereto: An expense would now be tax deductible solong as the underlying taxes deducted at source in a financial year are deposited on or before therelevant due date for filing of the return of income. It would be more beneficial if such provisionwould have been retrospective in nature. This is a welcome provision though the correspondinginterest levied on belated payments is to be enhanced to 18% p.a. as against the current 12% p.a.Credit Guarantee Scheme Enhancement: The credit support program of the MSME Ministry,which runs the Credit Guarantee Fund Scheme, has got an additional budget of about Rs. 73crore i.e. the planned expenditure under this program has gone up from Rs. 99.12 crore to Rs.172.75 crore.Other provisions:••••••••Extension of packing credit interest subvention of 2% for another year,Raising of Audit requirement limit from Rs. 40 lakh to Rs. 60 lakh, and for professionalsfrom Rs. 10 lakh to Rs. 15 lakh,Exemption from capital gains on conversion from general partnership to limited liabilitypartnership,A one-time grant of Rs. 200 crore to Tirupur Textile Sector,Government initiative to give more banking licenses and extend banking service for theunder-banked and un-banked segments of the society,Agreement signed with ADB for US$ 150 million to implement Khadi Udyog Reform,Doubling of corpus of micro-finance development and equity fund from Rs. 200 crore toRs. 400 crore,Allocation of Rs. 1000 crore to the National Social Security Fund for the employees ofthe unorganized sector.Despite some sporadic initiatives visible here or there in this budget, there clearly seems to be alack of a coherent approach towards a sustained development of the MSMEs.21 | P a g e   

The Budget That Wasn’t The Finance Minister has been considerate by giving attention to the SMEs by proposing relief /rationalization but the Union Budget 2010 could have been more attractive for the SMEs, had itgiven further incentives such as higher or rational tax depreciation on assets, progressive basis oftaxation like individuals and several such benefits.• It was expected that the MSMEs would at least get a 50% reservation out of the total quota of 40% reservation of the priority sector lending.• Internationally, in most of the developed/ developing countries, MSMEs get between 40% and 60% of the banking loans, whereas in India, it languishes between 8 – 10%. This is the biggest reason for MSMEs to not be able to grow, turn sick, or resort to taking money from the parallel economy at much higher rates. There seems to be a lack of this understanding despite the fact that the government has announced that a high-level national council will be formed to oversee the implementation of the recommendations of Prime Minister’s Task Force on the MSME sector.• It is also very sad to see that while a small or medium farmer, who is also a businessman, is extended huge benefits; the unorganized and micro enterprises in the country do not get the same treatment, though they may need the support more than that farmer.• The credit support program of the MSME Ministry, which runs the Credit Guarantee Fund Scheme, has got an additional budget of about Rs. 73 crore i.e. the planned expenditure under this program has gone up from Rs. 99.12 crore to Rs. 172.75 crore. Through this scheme, the guarantee cover is provided for collateral-free credit facility, extended by Member Lending Institutions (MLIs), to the new as well as existing small enterprises on loans of up to Rs. 1 crore. While the objective is laudable, the fact remains that MLIs really have no compulsion or incentive to extend this facility to the needy small entrepreneurs, because in reality, the Credit Guarantee Trust doesn’t move fast enough to settle the issues related to the bad-debts, if any.• The allocation to ‘Quality of technology support institutions and programs’ has been raised from Rs. 251.64 crore to Rs. 333.50 crore. This may not be at all enough to upgrade the tool- rooms and technical institutions of the 24 very important institutions and 4 programs that run under this scheme, namely Credit Linked Capital Subsidy Scheme, ISO Reimbursement Scheme, Schemes of National Manufacturing Competitiveness Program and Vertical Shaft Brick Kiln technology. The conditions of the various tool rooms and technology centres actually have to be seen to be believed. If machines have come, there are no specialists to operate them; and if machines & specialists both are present, then there are no funds to run these centres. Hence, the very purpose of the existence of these centres is defeated.• The National Commission on the Enterprises in the unorganized and informal sector has zero allocation in this year’s budget, though till last year, it had a Rs. 1 crore budget. The Rajiv22 | P a g e   

••Gandhi Udyami Mitra Yojna, which provides handholding assistance to designated nodalagencies, namely Udyami Mitras, for providing handholding support to first-generationentrepreneurs in dealing with various procedural and legal hurdles, has got an allocation ofjust Rs. 7 croreMSME Cluster Development Program, under which, special emphasis has been given tocomprehensive development of clusters, including infrastructural development has seen anincrease of about Rs 25 crore taking the total expenditure to Rs. 50.50 crore. But for acountry of our size, this may be spread too thin and too wide to really have any major impact.The special scheme recommended by PM’s Task Force has got an allocation of just Rs. 1crore in this year’s budget. It has a massive agenda for immediate action to provide relief andincentives to MSMEs accompanied by institutional changes and detailing of programs in atime-bound manner. In addition to this, it also has suggested setting up of appropriate legaland regulatory structures to create a conducive environment for entrepreneurship and growthof MSMEs. It also has a task of setting up a special fund exclusively for micro-enterprises,and introduction of public procurement policy, which mandates government and PSUs toreach a target of 20% purchases from MSMEs. How all this can be achieved with anorganization backed by Rs. 1 crore budget for the whole of 2010-11 is almost impossible tounderstand. 

Recommendations To unleash the Indian manufacturing SME`s, on one hand we need to address the structural andinstitutional weaknesses in the system and on another we will have to equip and provide themassistance for bracing global competition unabashedly.It is believed that manufacturing capabilities and exportability are inter-related and mutuallyreinforcing. Sustainable competitiveness cannot be achieved only by provisioning of short termmeasures such as currency manipulation or hedging or SWAPs. In medium and long term,competitiveness could only be ensured by increasing productivity and reducing transaction costsin economy.There are some key exogenous and endogenous factors that stifle manufacturing growth andlimit exportability. Following are some of the recommendations to the SME groups which havecome out as a result of the analysis of the entire study.23 | P a g e   

The measures suggested aim at improving the current situation of SME`s.1. SME Audit of Laws Constitute a mechanism whereby all laws and bills go through mandatory ‘SME Audit’ (on lines of US and EU) pre-empting negative fallout of existing and emerging regulations.On an average the accounting activities of the SME’s has been found to be fairly slowsince on an average it was found it takes around 50 days to prepare the balance sheet onethe annual account closes. This is primarily because the accounting activities areprimarily taken care by an external CA who seems to be overburden with all the financialand accounting activities of the company. The SME’s can think of keeping a separatesmall accounts team to manage the activities efficiently and quickly. It is recommendedthat all companies should do budgeting for every year & have financial planning forvarious functional areas for each year.2. Labor LawsMany states follow a flawed mechanism of determining Minimum Wages based onsectors in which a worker is employed. Therefore, a worker in engineering sector isentitled to a different rate than the one in food processing sector.Nationally let there be a consensus on three issues:a. Base minimum wages on rational criteria and not sectorally or specific to industry(unlike the current situation in many states where a worker in Engineering sector isentitled to a different rate than the one in food processing sector)b. Allow Contract labor (as already in many states)c. Provide an option to SMEs for using market based mechanism for ESI and PF and afterhaving contributed let them be freed from keeping records and unnecessary formalities.(ESI in particular is one of the schemes where huge contribution goes waste indilapidated ESI infrastructure that nobody uses.)3. Seamless movement of goods across statesEstablish unified Regulatory Agency to ensure seamless movement of goods acrossstates.4. Promotion of Innovation There has been a shortage among most of the SME’ s in tracking and reporting important factors like innovation .Innovation as perceived by most of the SME’s has been launching of completely new products. However tracking and reporting internal innovation in terms24 | P a g e   

of cutting down cost does not seem to be a focus area of majority of the SME’ s. Thisneeds to be taken care.5. Managing attrition This seems to be an area that SME group does not lay much emphasis on. Although SME’s have a lot of contract labors, there have been a significant number of permanent employees who leave the companies. Hence there should be employee friendly policies which would help SME’s retain employees for long.6. Alternative Avenues to SME financing: Highlighting the emergence of risk capital funds and equity funds for SME financing compared to conventional borrowing, adding that there is a need to create more alternative SME financing techniques for sustainable double digit growth. An SME exchange with appropriate framework is needed, besides primary and secondary markets for SME, simplification of NRI investment policy and the Foreign Exchange Management Act, implementation of the MSMED Act and the enactment of Limited Liability Partnership Act (LLP Act), emphasizing the need for increased FDI participation in SME sector through removal of the 24 per cent cap on FDI investment in companies according to present policy.7. Improve Industrial infrastructurea. Step-up building of hard infrastructure. Neither the current outlay and nor theinstitutional and operational mechanisms are commensurate to address huge existing gapsb. Urgently renew focus on creation of industrial areas with basic infrastructure – an areanow languishing for over 15 years because of lack of attention ( Creation of SEZs willnot improve SMEs’ plight)8. Easy access of capital for less matured companies or start ups.Induce massive competition in financial sector opening it up to foreign banks and liftingrestrictions unilaterally. Establish independent Regulatory Authority for Banks andFinance Institutions to induce competition and improve service quality and let RBIconcentrate management of larger macro-economic issues. Deregulation of the RatingCompanies for better service codes, their rating models and pricing. Do not letmonopolies build in this domain.9. Significant improvement in infrastructure needed especially power. a. Improve access to economically priced and adequate Electricity25 | P a g e   

b. Support collective SME initiatives for distribution of electricity in geographicalconcentrations, industrial areas and clustersc. Remove policy impediments in open access particularly levy of subsidy element oncollective initiativesd. Accord top priority on providing electricity to manufacturing units (as has already beendone in a few states)10. The creation of a “Single Window” facility This takes care of all issues concerning water, electricity, labor, land etc and is fast enough to respond to the needs of these SME’s. Take for instance the case of China, where it takes two days to start a new business.11. Provide Representation to SME bodies Provide due representation to SMEs in Prime Minister’s Economic Council, Board of Trade and other Trade related decision making bodies in Ministry of Commerce for better appreciation of their needs in policy decisions (none of SME bodies are represented in these committees).12. Education and Skilled workforce SMEs are suffering from acute skill shortages. Most ITIs have become redundant. The recent ITI up gradation program is not SME need sensitive and is likely to have only marginal impact.a. Fund ‘district-wise skill deficiency mapping’ exercise and invite private parties to trainpeople, develop skills, get them third party rated and pay fee based on success. (There arealready successful initiatives at a few places particularly in Gujarat)b. Fund Audio-visual and print aids for skill enhancement (on lines of US)and create channels for continuous skill development coupling it with distance education.c. Fund massive skill identification and grading program for those not having any formaleducation but possessing requisite skills (on lines of recent UNDP sponsored program forleather craftsmen in Agra wherein 62,000 skilled craftsmen were identified and graded onskill level and ID cards issued to 47000 of them).13. TaxesArea based exemptions create huge disparities with in India. The current dispensationrewards inefficient companies and punish efficient ones. SMEs suffer most in suchconditions.26 | P a g e   

14. Bankruptcy and Insolvency CodesPut in place the modern bankruptcy and insolvency codes reflecting the needs of ruthlesscompetitive markets and uncertainties in globalization so that while entrepreneurs areencouraged to take risk, lenders are confident of quick disposal of cases and repossessionof assets after failure.15. Stamp DutiesHigh stamp duties on transfer of property and on commercial transactions such as onfinancial instruments create huge cascading effect. Harmonize the Stamp Duties acrossstates and drastically reduce them.16. Comprehensive Program for Internationalization of SMEsMany Indian SME`s are unaware of the brand creation. In today’s scenario this areaneeds intensive attention and efforts so as to make Indian firms accepted world wide andenhances its core competencies.27 | P a g e   

Chapter 2: The Bank Finance ProductsThis chapter includes:1.2.3.IntroductionFund Based FinancingNon Fund Based Financing28 | P a g e   

Introduction Financing can be for working capital ( for ongoing business expenditure ) or term loans (forcapital expenditure). Working capital credit can further be segregated into fund based and non-fund based . The terms Fund based limits and Non fund based limits are used in connection withworking capital requirements of a Company.Fund based limits include those where actual funds are proposed to be given. Cash Credit oroverdrafts are the common examples of Fund-based Working Capital Credit Limits. Packingcredit or pre-shipment credit is an example of such Limits where credit is extended to theexporters for purchasing raw materials/goods, processing and packaging for eventual export sale.However the borrower has to submit an irrevocable letter of credit and/or a confirmed exportorder for availing of Pre-Shipment Credit. Advance at pre-shipment stage is to be adjusted bysubmitting export bills. Once the export bills are negotiated/purchased/discounted, pre-shipmentcredit shall extinguish and post-shipment credit would commence. Non Fund based limitsinclude those arrangements where the fund is not actually provided to the borrower for use.These are commercial documents guaranteeing payment by the bank to the beneficiary, who isusually the seller of merchandise, against the underlying transaction.

Fund Based Financing Under Fund based the following facilities are commonly used : -•Cash credit: Cash credit refers to a system of financing where a borrower is provided acredit limit, which could be utilized by him for the purpose of running day-to-day business. Thelimits are decided based on his overall cash requirement of the business. The calculation is basedon the total operating cycle and gap between payment to be received and to be made. Cash creditis used mostly for inland trade.•Overdraft/Line-of-credit: overdraft allows you to draw funds beyond the available limitof your bank account. The maximum amount you can overdraw is your line of credit. The termsand amount depend on the relationship you have with your banker and his/her assessment ofyour credit worthiness. Overdrafts are flexible and simple to operate. You pay interest only onthe amount you have overdrawn. Overdrafts are flexible and simple to operate. You pay interestonly on the amount you have overdrawn.a) Packing credit or pre-shipment credit is an example of such Limits where credit is extended to the exporters for purchasing raw materials/goods, processing and packaging for eventual export sale. However the borrower has to submit an irrevocable letter of credit and/or a confirmed export order for availing of Pre-Shipment Credit. Advance at pre-29 | P a g e   

shipment stage is to be adjusted by submitting export bills. Once the export bills are negotiated/purchased/discounted, pre-shipment credit shall extinguish and post-shipment credit would commence.b) Post shipment credit is provided after shipment of consignment and is adjustable usually on realization of export bills. Such facilities are allowed by way of Foreign bills Negotiation/Purchase/Discounting facilities(FDBP/FUDBP)2 or may be backed by irrevocable Letters of Credit or might even have sub limits against confirmed export orders or against book debts.

Non Fund Based Under Non fund based limits the following are the commonly used arrangements:•A bank guarantee, like a line of credit, guarantees a sum of money to a beneficiary.Unlike a line of credit, the sum is only paid if the applicant, on whose behalf the guarantee hasbeen issued, does not fulfill the stipulated obligations under the contract. This can be used toessentially insure a buyer or seller from loss or damage due to non-performance by the otherparty in a contract. A bank guarantee might be used when a buyer obtains goods from a sellerthen runs into cash flow difficulties and can't pay the seller. The bank would pay an agreed-uponsum [as mentioned in the guarantee bond] to the seller. Similarly, if the supplier was unable toprovide the goods, the bank would then pay the purchaser the agreed-upon sum. Essentially, thebank guarantee acts as a safety measure for the opposing party in a commercial transaction.•Deferred payment guarantee: Typically in case of equipment financing, themanufacturer (by itself/through a financing tie-up) offers credit to the buyers of its equipment atattractive terms to generate additional demand for its products. The Deferred Payment Guarantee(DPG) is a bank facility where the bank it extends a guarantee to the equipment manufacturer onbehalf of its client that the financing extended by the manufacturer (by himself or through itspreferred financier would be repaid as per the terms agreed upon.•Commercial Letter of Credit: Letters of credit accomplish their purpose by substitutingthe credit of the bank for that of the customer, for the purpose of facilitating trade. There arebasically two types: commercial and standby. The commercial letter of credit is the primarypayment mechanism for a transaction, whereas the standby letter of credit is a secondarypayment mechanism.A commercial letter of credit is a contractual agreement between a bank, known as the issuingbank, on behalf of one of its customers, authorizing another bank, known as the advising orconfirming bank, to make payment to the beneficiary. The issuing bank, on the request of itscustomer, opens the letter of credit. The issuing bank makes a commitment to honor drawings30 | P a g e   

made under the credit. The beneficiary is normally the provider of goods and/or services.Essentially, the issuing bank replaces the bank's customer as the payee.There are also structured products used for financing .Some structured products are –•Factoring: It is a structured working capital finance solution that includes finance against theclient’s domestic or export receivables, collection of receivables on due date, creditprotection and credit advisory services. It allows the client to convert the accountsreceivables to cash thereby releasing the cash generation potential of the business.Commercial Paper: (CP) is an unsecured money market instrument issued in the form of apromissory note. Can be issued by corporates, Primary Dealers and the all-India financialinstitutions (FIs) that have been permitted to raise short-term resources under the umbrellalimit fixed by the Reserve Bank of India are eligible to issue CP. Term loans on the otherhand are taken for expenses of a capital nature i.e. benefits from which are to be reaped on along term basis. Term loans are taken for buying machinery, land or for setting up newprojects.•31 | P a g e   

Chapter 3: The Automotive Component IndustryThis chapter includes:1.2.3.4.5.6.7.8.IntroductionCharacteristics of the IndustryKey TrendsKey DriversKey InhibitorsImpact of Global Economic SlowdownBudget 2010 ImplicationsWay ForwardReview 2009-10Increased off-take from OEMs and low baseled to revenue growth of 28 per cent in thethird quarter of 2009-10. Operating marginsimproved by around 500 bps y-o-y on accountof lower raw material and fixed costs.Outlook 2010Auto component sales are expected toincrease by 13 -15 per cent in the fourthquarter of 2009-10 on the back of improvedoff-take from OEMs and stable replacementdemand. Operating margins are expected toimprove by 300 - 350 bps y-o-y in the fourthquarter.32 | P a g e   

Introduction to Automotive Component Industry The Indian automobile component industry manufactures the entire range of parts required bythe automobile industry for various vehicles including cars, jeeps, light and heavycommercial vehicles (LCVs and HCVs), tractors and two/three wheelers. The automobilecomponent industry is an important sector of the Indian economy and a major foreignexchange earner for the countryThe growth and maturity attained by the Indian automobile component industry is in line withthat of the automobile industry in India. The automobile industry is cyclical in nature and isdependent on the growth of the economy and improvements in infrastructure. Factors likeincreased public spending, favourable interest rates and general improvement in per capitaincome lead to higher demand for automobiles. Although, the Indian automobile industry isexpected to grow at a measured pace, the automobile component industry in turn is rapidlyachieving global competitiveness, both in terms of cost and quality and is one of the handfulof industries where India has a distinct competitive advantage.The history of the Indian automobile component industry can be subdivided into variousphases. In Phase I (1960-80) the Industry was predominantly a controlled, restricted and lowgrowth industry. In Phase II (1980-95) with the advent of Maruti, this industry changed to amore quality focused, medium volume industry. Exports started growing although at a lowrate during this period. During Phase III (1995 onwards), the market opened globally. Yet inthis respect, unlike China where this opening up was planned and directed very carefully,India has been different. The opening up of the sector has been haphazard and theconsequence has been the extreme fragmentation.1

Characteristics of the Automotive Components Industry •Size and Rate of GrowthThe Indian automobile component industry has grown from US$ 18 billion during the FY2007-08 to approximately US$ 19 billion, in 2008-092. The industry is likely to grow up toUS$ 20 billion by FY 2009-10 and almost double to approximately US$ 40 billion by FY2015-16.3

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Figure 3: Automobile Component Industry Growth4 The potential Compounded Annual Growth Rate (CAGR) of the Indian automobilecomponent industry has been anticipated to be at 11% during 2008-2015 5 . By 2016, theindustry is likely to contribute 10% of Gross Domestic Product (GDP) and 30-35% of theindustry.6

•StructureThe Indian automobile component industry can be divided into organized and theunorganized categories of manufacturers. The original equipment market is predominantlycatered for by the organized sector of the industry. The organized automobile componentmanufacturers typically supply automobile components to at least one of the OEMs. Theyalso usually have access to technology due to their ties with foreign collaborators or throughAutomotive Vehicle Manufacturers (AVMs). The unorganized sector, on the other hand,predominantly caters to the aftermarket. They operate independently with little investment                                                        45

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and have a small scale of operation. Their primary focus is high volume and low technologycomponents. They generally produce components based on copied drawings and their qualityis sub-standard. These small-scale industries secure direct and indirect tax benefits throughfavourable government policies. A sizeable amount of production of automobile componentscomes from the unorganized sector.According to the Automotive Components Manufacturers Association (ACMA), companieswith an annual turnover of less than Rs. 50 crore can be classified as Small and MediumEnterprises (SMEs).The majority of these units produce internationally competitive components. More and moreSMEs are now looking for foreign partners for technology, skills and to find a potentialmarket for their products. On a turnover basis, it is estimated that SMEs contribute around20% of the total production in India and about 1% globally7

•Sources of Demand8

The demand for automobile components is derived from three sources: the OEMs, thereplacement market and exports. Currently replacement demand accounts for close to 35% oftotal demand, while OEMs account for 50%, with exports accounting for the balance 15%.9

The industry is on the fast track, clocking a CAGR of nearly 28% growth in the last fouryears, and is expected to grow at 13% per annum over the next decade to reach around US$130-159 billion by 2016. 10 This has been propelled by strong domestic demand and anindigenization drive.OEM demand: The pattern of growth in the automobile segment affects the performance ofthe automobile component segment as the content of the components differs significantlyacross vehicle categories. The demand emanating from the automobile segment could have asignificant bearing on the performance of the automobile component manufacturerssupplying this segment. In recent years, the principal drivers of demand for automobilecomponents from the OEM segment have been passenger cars and commercial vehicles. Inaddition to the growth in production (on the strength of rising demand), increasingindigenization levels of the manufacturing operations of most of the OEMs that have enteredthe Indian market have also contributed to the growth in demand from OEMs.Replacement demand: The automobile component supplier also caters to demand from thereplacement market. Historically, the replacement market provided higher margins to                                                        http://www.ibef.org/download/Autocomponent_060109.pdf7

  

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vendors, but now the margins for vendors are declining as OEMs have increased their focusto boost their spare sales. The replacement market is also characterized by the presence of alarge number of unorganized sector players who compete on prices. The five factors thatprimarily influence the aggregate annual demand for replacement parts are:Size of the national vehicle population;Average age of the national vehicle population;Pollution norms and Government regulations;Average number of kilometres driven per vehicle; andRoads and other related conditions.Export demand: India is a significant exporter of automobile components. Exports ofautomobile components from India have clocked a CAGR of 26% during 2003-2008 and thepotential CAGR is expected to be around 27% during 2008-201511.Automobile components manufactured in India are mainly being exported to the US andEuropean markets, which have a high population of automobiles. Neighbouring countries inSouth Asia are the next most significant export destination12. The major export destinationsfor the Indian automobile component industry with their respective market shares aredepicted below13:                                                        1112

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Figure  4:  Major  export  destinations  for  the  Indian  automobile  component  industry  with their respective market shares Exports are targeted at global OEMs, the replacement market and domestic OEMs whoexport vehicles. Currently these exports largely cater to the replacement market, but thisshare is declining.The share of exports as a percentage of turnover has risen from 18.9% in 2003-04 to 20.1% in2008-09. The composition of exports in terms of the proportion of OEM and aftermarket hasalso undergone a sweeping change since the previous decade. The ratio of OEM toaftermarket has changed from 35:65 in the 1990s to 75:25 in 2007.14

The composition of exports is shown in the figure below15: Figure 5 : Components of Auto components ExportsWhile exports have been booming, there has been a sharp rise in imports of automobilecomponents as well, especially in the last few years. Imports of US$ 1,428 million in 2003-04have gone up to US$ 6,360 million in 2008-0916. This is a healthy trend, indicative of risingdomestic demand.17

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•Supply sideIndia has around 575 firms making branded automobile components, with another 6,30018 inthe unbranded space, mostly clustered near the vehicle manufacturing hubs in NationalCapital Region (NCR), Pane-Mumbai and Chennai 19 . Thus, the Indian AutomobileComponent Industry is highly fragmented geographically.OEMs have neglected the aftermarket for a long period due to their focus on mainstreamproducts. This has led to proliferation of unorganized small-scale automobile componentmanufacturers. Presently, these manufacturers have grown in size and numbers beyond thecontrol of OEMs. To counter this, OEMs are undertaking measures such as promotion ofgenuine brands, customer awareness programs, partnerships with local mechanics, brandingof components and holographic packaging to protect against duplication.Long controlled by families and limited to the home market, Indian firms are now lookingoverseas for increasing market shares, economies of scale and to boost profitability byattaining higher skill levels and a global customer base.•TierisationGlobally, the automobile component industry is subject to a four-level tierisation:Tier 0.5 suppliers: design and integrate components, sub-assemblies and systems intomodules placed directly by the supplier in the assembly plants of the OEMs.Tier I manufacturers: assemble the final modular systems and supply directly to the OEMor indirectly through Tier 0.5 suppliersTier II component manufacturers: supplies to Tier I manufacturers, assemble the sub-systems that go into the assembling of the modular systems.Tier III suppliers: supply to Tier II and Tier I players and make the components that go intothe assembly of sub-assembliesTierisation is the result of growing competition among the various automobile componentmanufacturers which forced them to curtail manufacturing costs through tierisation. It helpsin reducing costs substantially by reducing the number of direct suppliers (i.e. purchase cost),providing economies of scale to suppliers through large volumes, sharing design anddevelopment costs of components, reducing time for vendor development, reducing capitalinvestment for assembling sub-systems etc.The process of tierisation entails a greater inter-dependence between the two levels of theindustry. With the industry bending more towards integrated systems, component                                                        1819

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manufacturers are increasingly called upon to be competent and raise their quality standards.The efficiency of vehicle production is therefore crucially dependent on that of the supplierbase. With these changes, the supplier-buyer relations in the automobile industry are alsoevolving in a more complex way.With tierisation taking root, the Indian automobile component industry is expected totransform itself from a low-volume fragmented sector into a highly competitive sectormarked by consolidation and world-class technology. Thus, a strategic shift is likely for theindustry players. Currently, the level of system integration and specialization in the Indianindustry is relatively low as compared with global industry standards. But as economies ofscale and systems integration become key determinants of success for automobile componentcompanies, size (of organization) will become a critical attribute. Accordingly, the IndianAutomobile Component industry can expect a wave of mergers and acquisitions, with the topplayers consolidating their position as the rest are relegated to the Tier II and Tier III levels.The challenges before global OEMs and Tier I players are pressure on sales and margins,stringent regulations driving technology, discerning customer demand, shifts in globalmarkets and disintegration of global barriers. SMEs, that are broadly classified as Tier I andTier II companies, driven by productivity, cost and volume, are beginning to play anincreasingly important and supportive role to the Tier I companies, which are driven bytechnology. However, being small players, it is a challenge for them to avoid issues like delayin follow-up orders, inability to service large orders due to lack of scale and delay inshipments.The tierisation of the Indian Automobile Component industry is also likely to have aconsiderable impact on the unorganized components sector. The weakest link in thetierisation chain is the Tier III vendors. There aren’t enough of them in the market and thosewho exist provide a poor quality of products.

Key Trends of Automotive Components Industry The key trends that have been witnessed in the Indian Automobile Component Industry are asfollows:Outsourcing: Global vehicle manufacturers are facing pressures on account of imperatives tolaunch newer models (as product lifecycles shorten) with additional features whilemaintaining selling prices. Globally, OEMs have identified the potential for cost savingsthrough outsourcing to India, China and South East Asian countries among others. GlobalOEMs such as General Motors, Volvo, and Tier-I companies such as Cummins andCaterpillar have their global purchasing team present in India to source components are usedin their plants across the world. Additionally, some players have announced their plans toincrease the sourcing of components from Asia. While these exports offer higher volumes, 39 | P a g e  

margins may be lower in various cases than domestic sales due to higher costs of logisticsand product liability insurance costs. According to recent estimates, global sourcing ofcomponents from India is to reach up to US$ 33-40 billion by 2015 from the current size ofaround US$ 15 billion20. Globally, according to a recent McKinney analysis, outsourcing inthe Automobile Component sector could be worth US$ 375 billion by 2015. India has thepotential to capture up to US$ 25 billion 21 of this total value to become the developingworld’s top sourcing base.22 India has also emerged as an outsourcing hub for automobileparts for international companies such as Ford, General Motors, Daimler Chrysler AG,Honda and Toyota23.Relocating to India is likely to benefit SMEs as much as the larger companies. Skilled andcheap labour, automation at lower cost and large investments in this sector are attractingglobal OEMs to India on a large scale.Preferred manufacturing base: In the last couple of years, many automobile manufacturershave identified India as a manufacturing base for some of their models. The higher export ofvehicles increases the demand for domestic automobile components.Increasing focus on productivity: The increasing pressure on the margins of OEMs hastranslated into increasing pressure for the component manufacturers to deliver at lower cost.This has forced component manufacturers to enhance productivity through various techniquesthat include tear-down value analysis, lean manufacturing processes, and collaborativeresearch among others.Rising quality consciousness: The average quality of automobile components produced inIndia has been improving gradually, particularly during the past few years. Moreover, theincreasing focus of the Indian automobile component manufacturers to address the stringentquality norms adhered to by global OEMs, has forced Indian companies to upgrade theirfacilities. Additionally, improvement in end-of-line rejection rates and customer rejectionrates, the two measures of quality, point to the improved quality levels. According to anACMA-McKinsey study, 564 automobile component companies in India have ISO 9000certification, 56 have QS 9000, 397 have TS-16949, 186 have ISO 14001 and 60 haveOHSAS 18001 certification. 24

SMEs: As mentioned earlier, according to ACMA, companies with an annual turnover ofless than Rs 50 crore can be classified as SMEs.25 A well-debated issue, the definition ofsmall and medium enterprises in India was very recently ratified. The Micro, Small andMedium Enterprises Bill, 2006, defines the segment on the basis of investments in plant andmachinery. Small enterprises are those with an investment of not more than Rs 50 million in2021

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plant and machinery, and medium enterprises are those with an investment of over Rs 50million but less than Rs 100 million in plant and machinery. This definition has finally putthe segment within a legal framework.26

With India becoming the preferred destination for foreign OEMs, small scale units are set toflourish even further, provided they are prepared to scale up their capacities whilemaintaining high quality levels. With a majority of automobile component units functioningat a turnover of less than Rs 50 crore, it is necessary that timely investments are made, forwhich financing options should be enhanced. It is also necessary that quality levels areimproved, along with the much needed investments in R&D. In general, SMEs, due to lack offunds, are not able to invest in R&D activities to develop techniques that are globallycompetitive. Moreover, attracting the right skills has been a big problem with the small scalesector. In recent years, the entry of large automotive companies has helped build thenecessary capacity and provide the financial strength to expand to a number of smallsuppliers27.On a turnover basis, it is estimated that SMEs contribute around 20% of total production.North India, on the whole, is becoming a hub for auto component companies. And the factthat nearly 35% of auto components exports are from this part of the country makes it anincreasingly important export hub in India 28 . The division of production processes andoutsourcing among global automobile manufacturers has led to a major reorganization of thesupply base within the automobile and auto component industry. This new business modelbeing followed by global companies holds tremendous potential for the growth of SMEs inIndia.The key limitations that the automobile component SMEs faces include:Fluctuations in the cost of production; especially raw materials like steel,aluminium, polymers etc.;Poor negotiation powers due to the fragmented nature of the industry, which in turnlimits pricing power;Dependence on traders and agents to access overseas markets which threatens theircompetitiveness;Product substitutes due to fast-changing technology; etc.Addressing these challenges and risks will be crucial to promoting SMEs in the automobilecomponent industry. The Indian Government has initiated cluster-based development –geographical concentration of enterprises having similar lines of business – which gives riseto external economies and favours emergence of specialized technical, administrative and2627

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financial services. This form of networking of small firms is a means of achieving economiesof scale. Extending this initiative further, the Government is encouraging banks to adopt acluster-based lending approach to ease availability of funds to SMEs.Multinational automobile manufacturers like Magna International of Canada, Delphi andFord of US and some European companies have announced plans to enter the Indian markets.This bodes well for the automobile component industry as it would enable the collectivedevelopment of automobile component SMEs. This will bring in better technology, skills,new products and an assured market. Strategic links and contract manufacturing is anotherway forward for SMEs in the automobile component industry.29

Plant locations in proximity to OEMs: In a bid to facilitate faster delivery and lower freightcharges, automobile component manufacturers are located largely around their OEMcustomers. This is particularly so since a large number of organized sector players supplydirectly to the OEM.Indo-Thai Free Trade Agreement (FTA): The Indo-Thai FTA was signed by India andThailand in 2003. With the signing of the FTA, under the `Early Harvest Programme,' bothsides immediately reduced tariffs on 82 products (which included automobile components),with the objective of reducing them finally to zero by 201030. These 82 items cover 7% of theIndo-Thai trade31. The FTA was expected to boost Indo-Thai trade, especially with regard toautomobile component industries in the two countries. However, subsequent years haveshown there to be several factors holding back the Indian automobile component industry inthe context of the Indo-Thai FTA. These relate to high cost of production, higher importduties, infrastructure service costs and a huge interest rate differential compared withThailand. These internal cost disadvantages are eroding the competitiveness of domesticcompanies with respect to Thai imports. A comparison of the import duties on certain rawmaterials in India and Thailand reveals that inputs such as glass parts and chemicals can beimported duty free into Thailand but attract a 15% duty when imported into India 32 .Nonetheless, the real impact of the FTA will be more apparent over the longer term.Investments: Investments in the automobile component sector have grown from US$ 7.2bnin 2007-08 to US$ 7.7bn in 2008-09.33 . Moreover, the Investment Commission has set atarget to attract Foreign Direct Investment (FDI) worth US$ 5 billion in the next few years.34

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The Indian automobile components industry enjoys competitive advantage primarily on thestrength of the following factors:India has a highly skilled workforce and low labour costs which pull down thetotal cost of production. This gives it an added advantage over the othercompetitors.The Indian automobile components industry has the advantage of the lowestskilled labour cost in the world. Hence, the overall manufacturing costs for firmsin India are highly competitive in comparison to their western counterparts.In-depth understanding of technical drawings and adoption of global automotivestandards (like American, Korean, Japanese and European) by the Indian playershas led to higher efficiencies and better quality.35

Sourcing parts from India is about 10-20% cheaper for American automobilemakers and about 50% cheaper for European makers. Such cost benefits haveplayed a major role in the fast pace development of this sector in India36.Advantage doesn’t come from cost alone. It is about Full Service Supply (FSS)capability. As product cycles and lead times for product development shrink,Indian manufacturers have evolved from “build to print” to customizedofferings.37 The industry is capable of becoming a full-fledged service provider(research, design, development, testing) to global OEMs and scores overcompetitors like China and Thailand more in terms of Information Technologyadvantages.India has relatively less stringent environmental regulations (environmentalregulations have rendered the production of some parts like castings costprohibitive in developed countries).Overseas acquisitions by Indian automobile component manufacturers insituations that offer proximity to global OEMs have been growing. Benefits ofsuch acquisitions include multi-location manufacturing facilities, expansion ofproduct range, access to clients and to new technologies and progress in the valuechain of component supply.The ability to adapt to low-volume production using appropriate technology andautomation and to improve productivity and quality strengthens the industry’sposition in the global arena.                                                        3536

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The industry’s competitive advantage coupled with brand consciousness isincreasing the attractiveness of India as an outsourcing hub and consequently isincreasing the focus on exports.Better growth opportunities are expected to arise for OEMs due to the increasingrush to add high-tech features to vehicles in order to distinguish them and tocomply with safety and emission regulations.Compliance with higher emission norms has led to progress in technology, whichhas established India’s capability in developing cleaner vehicles and components.Using standards equivalent to European levels encourages export of Indianproducts. Components such as catalytic converters, electronic fuel injectiondevices and the design capability for developing cleaner combustion chambersshould soon attract the attention of private R&D centres and institutions for morecollaborative efforts.India’s high designing and engineering capability is evident from statistics, whichrank India second in the world in terms of availability of skilled labour and first interms of availability of qualified engineers in comparison with six other countries,namely Germany, Brazil, China, Mexico, Czech Republic and the US.Government initiatives like automatic approval for foreign equity investment up to100% for the manufacture of automobile components have been very beneficialfor the sector. Manufacturing and imports in this sector are free from licensing andapprovals. There is no local content regulation in the automobile industry. Theengineering export promotion council, under the aegis of the Ministry ofCommerce and Industry, Government of India, has been engaged in promotingexports of engineering goods including auto parts. Some other governmentinitiatives that have been effected recently are:Reduction in the duty of raw material to 8% from the earlier 10% so as to protect vulnerable industries from global economic crisis.38

In the 2009 Budget, excise duty has been reduced from 16% to 12% on small cars, two andthree wheelers, from 24% to 14% on hybrid cars, from 8% to nil on electric cars and 16% tonil on specified parts of electric cars. This has created positive market sentiment towardsautomobile units, especially the ones having exposure to small car producers. The reductionin peak customs duty levels from 10% to 5% on specified raw materials for the tyre industryand a 125% weighted deduction for outsourced R&D should provide some relief toautomobile components producers.Setting up of the National Automotive Testing and R&D Infrastructure Project (NATRIP) tocreate state of the art testing, validation and R&D infrastructure in the country, which wouldhelp in transferring technology from Tier I to Tier III cities. This project, with an investment                                                        http://www.newmediacomm.com/publication/indo_us/julaug08/analysis.html38

 

of US$ 380 million, aims to set up independent automotive centres at Manesar, Chennai,Pune, Indore and Rae Bareily.39

Finalization of the Automotive Mission Plan (AMP) 2016 aims to increase turnover to US$145 billion, export revenues to US$ 35 billion and provide employment for an additional 25million people, thereby making India a preferred destination for design and manufacture ofautomobile and automobile components.40

Key Inhibitors of Automotive Components Industry The key factors that inhibit the growth of the Indian Automobile Component Industry are asfollows:Indian Automobile Component manufacturers are deprived of economies of scale,as too many models are being produced in the market with comparatively lesserdemand. This makes it difficult for companies to invest extensively in R&D anddevelopment. Simultaneously, with pressure on prices of components, theautomobile component manufacturers are not able to recover investments in newequipment and technology.The Indo-Thai FTA has hurt domestic players as they pay a relatively high duty ascompared to the duty being paid by their Asian counterparts. This has led to a hugesurge in imports from Thailand into India while exports from India have notbenefited so much, given the small size of the Thai market.The Indian automobile component industry is marked by high transaction costs,high infrastructure and power costs. This reduces the competitiveness of theindustry with respect to other competitors.The industry also has inadequate facilities/technologies. This prohibits it fromundertaking large export orders. As such India cannot ignore competition fromother outsourcing destinations like China and Brazil. Raw material prices have beengoing up over the past year. For instance, the price of lead, which constitutes 70%of total cost for battery manufacturers, have been sky rocketing for the last year andcompanies like Exide have not been able to pass on the entire cost pressure to theconsumer.413940

                                                         http://www.autocarpro.in/contents/marketTrendDetails.aspx?MarketTrendID=30 www.indiagov.com41

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Most international OEMs enforce a product liability clause, which stipulates thatsuppliers will be charged punitive damages in case of a line stoppage or a productrecall caused by supply of defective components.In the case of export contracts from international OEMs, the lead time from therequest for quotation until the time of commencement of actual supplies can be ashigh as 3-4 years. This could prove disadvantageous for the sector.Counterfeit products account for close to 35% with a market share of Rs. 5,300crore of the current size of Rs. 16,000 crore of the automotive parts to thereplacement market.

Impact of Global Economic Slowdown on Automotive Components Industry The automobile industry is being severely affected by the liquidity crisis. What started offwith the commercial vehicle segment now afflicts almost all segments. With sales belowexpectations, the collections of gross contribution (sales – truly variable costs) are notadequate to pay for total periodic expenses like salaries, rent, etc. This cash crunch is furthercompounded by the compulsion to pay for the raw material currently lying in finished goodsthat have not been sold immediately (in the automaker’s own warehouse or at thedealers/distributors). As a knee-jerk reaction, many companies are cutting back payments totheir suppliers. Payments more than two months overdue (on a credit period of two months),compounded by the reluctance of banks to lend more to small companies; have pushed somecomponent suppliers to the brink of shutting down.The severe working capital issues of suppliers are causing a boomerang effect back on theOEMs. The suppliers are finding it difficult to supply for current (immediate sales) of theOEMs. So we have OEMs stuck with huge finished goods inventory of some products whichare not selling fast and not having components for items which can sell immediately, furtherhindering the flow of liquid assets.Due to the higher risk of carrying high inventory in these uncertain times, distributors anddealers are not accepting the push until they clear their current inventory. This and the currenthuge piles of finished goods (more than two months) with automakers have pushed them tocut production by 30–50 percent a month, which they are ensuring through block plantclosures.Production cuts by customers amplify the production cuts at the suppliers even more, as thesuppliers also have finished goods. Suppliers give workers long breaks, which is a hugebusiness risk as they may not get them back when required, affecting both their business andthat of the OEMs. These are extraordinary times for the global auto industry. The Big Three 

US automakers, GM, Ford and Chrysler are asking for US$ 34 billion from the USgovernment after presenting their restructuring plans to the US Congress.In recent years, growth also accelerated in resource-rich economies such as the Middle East,Russia and Brazil while India posted double-digit growth in 2006 and 2007. Althoughworries associated with sub prime lending had started to surface in August 2007, even at thebeginning of 2008, there were few signs that the situation would escalate to the extent that ithas and that the global economy and the auto industry would fall into a synchronised globalslump.While demand in the US and Western Europe was expected to be sluggish in 2008, demandin emerging markets such as India and China was expected to show healthy growth, whilehigh oil and commodity prices were expected to underpin strong growth in Russia, theMiddle East and Brazil.During the first three quarters of 2008, high energy and commodity prices were the majorcause for concern for countries that relied on oil and commodity imports while commodityproducing countries enjoyed an unprecedented boom. In this environment, the US saw highfuel prices and an economic slowdown that triggered not only a slowdown in demand butalso a shift in demand from large petrol-guzzling SUVs and pick-up trucks to more fuelefficient passenger cars. Initially, the major theme was segmentation shifts but as the yearprogressed, the bigger concern was the collapse in demand for all vehicles.In 2009, tight credit, the virtual disappearance of leasing, rising unemployment levels andmassive reduction in wealth will all combine to hit vehicle sales. The contraction of fivemillion units in the US light vehicle market between 2007 and 2009 means that companieswith high exposure to the US market are facing the biggest challenges.42

Budget 2010 Implications on Automotive Components Industry The proposals in Union Budget 2010-11 will not have a significant impact on the autocomponent and tyre industries. The increase in excise duty on auto components could bepassed on to automobile manufacturers. Even if this is absorbed by the industry, it will beoffset by healthy demand. The interest subvention of 2 per cent will have a marginallypositive impact for SMEs engaged in the export of auto components. For the tyres industry,the 2 per cent increase in excise duty will be fully passed on to the OEM and replacementsegments.The auto parts industry had sought a 10-billion-rupee technology development fund, besidestax holidays for new projects and an increase in customs duties on imported components to                                                        42

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10 percent from 7.5 percent. Tyre makers were hoping for a steep cut in customs duty onnatural rubber.However, these demands were not addressed in the budget.

Way Forward for Automotive Components Industry The Indian Automobile Component industry as a whole has the potential to grow from US$35 billion presently to US$ 145 billion in the next seven years while exports are expected togrow to as much as US$ 35 billion43. Furthermore, exports as a percentage of total sectorrevenue are expected to nearly double over the next few years. To meet the combineddemand from domestic and international customers, the industry will have to makeincremental investment. ACMA has forecasted that the industry will invest close to US$ 20billion by 2015-16 to expand, which translates into a CAGR of 13.6% in investment44.

The industry is expected to witness healthy growth in sales on the strength of strong growthin exports. However, while the export growth potential remains significant, the ability ofautomobile component players to capitalize on their strengths and overcome challengesassumes greater importance. The recent overseas acquisitions by automobile componentcompanies will allow diversification of revenues, thus reducing exposure to cyclicality indomestic market and lending an increased access to new customers and technologies.The Indian Automobile Component Industry needs to put in considerable efforts and incursubstantial expenditure in order to tackle the high degree of competitive pressure andaccordingly align itself with global standards. This might, in the short run, put additionalpressure on margins, which even presently are small.Innovation and cost pruning hold the key to meeting the global challenge of rising demandfrom developed countries and competition from other emerging economies. Several largeIndian automobile component manufacturers are already gearing to this new reality and are inthe process of substantially investing in capacity expansion, establishing partnerships in Indiaand abroad, acquiring companies overseas and setting up Greenfield ventures, R&D facilitiesand design capabilities.The trend of domestic automobile component manufacturers acquiring companies abroad isindicative of the changing business environment in the country. Top automobile componentmanufacturers are gearing up to take bigger risks. Their cross-border vision has establishedthem as global companies. Though the going-global phenomenon is limited to a handful of4344

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companies, the smaller companies are also indirectly gearing to this trend by entering intoformal manufacturing contracts and specialization.45

The Government of India is drawing up an Automotive Mission Plan 2016 (AMP 2016) thataims to make India a global automotive hub. To maintain the high rate of growth of theautomobile industry and to retain the attractiveness of the Indian market and furtherenhancing the competitiveness of Indian companies, the Government has prepared this ten-year AMP. The idea is to draw a futuristic plan of action with full participation of thestakeholders and to implement it to meet the challenges coming in the way of growth ofindustry. Through this AMP, Government also wants to provide a level playing field to theplayers in the sector and to lay a predictable future direction of growth to enablemanufacturers to make more informed investment decisions.46

The industry is transforming, and the boost in demand will see the emergence of several newplayers in the industry. The vast market for automobile components, and the diverse productsand technology involved ensures a place and role for many. At the same time, the entry ofseveral global automobile manufacturers will bring in more regulation into the industry andsee a pruning of the spurious market. Among the smaller players in the unorganized segment,this implies moving away from being standalone companies, to entering into either contractmanufacturing or being ancillary units. The newly defined rules that hold the key to successin the automobile component industry are specialization, development.4546

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Logistics, as defined by the Council of Logistics Management, is "the process of planning,implementing, and controlling the efficient, effective flow and storage of goods, services, andrelated information from point of origin to point of consumption for the purpose ofconforming to customer requirements."Logistics primarily involves transportation, warehousing, order processing, inventory control,and material handling activities of goods and services.61

With business organizations increasingly looking to use logistics services at some point or theother in their routine business, the importance of logistics is increasingly being emphasized.For instance, manufacturers need to move input materials from their origins to their plantsand then distribute the finished product to their clients. Apart from this, they also have tomeet requirements such as storage of input materials and products during the process.There are several current trends in the management of logistics. The principal trend, drivenby competitive pressures and client needs, and enabled mainly by information technology, isto combine and streamline various logistics activities, such as purchasing, storage andtransportation. This trend is occurring both within organisations that handle their ownlogistics requirements in-house, and within the operations of logistics services providers. Forexample, trucking firms often offer storage, packaging and other related services.Consequently, as traditional service providers continue to increase their lines of business,they tend to join the Third Party Logistics (‘3PL’) component by becoming capable ofoffering seamless or integrated services tailored to meet the exact needs of clients. A 3PLservice provider is one that manages all or a significant part of the logistics requirements ofmanufacturers and traders, performing tasks which include transportation, location andproduct consolidation activities, on an outsourced basis.The evolution of 3PLs came to India in the recent past. It has gradually evolved from thestage where the Indian firms outsourced their labour requirements, in order to avoidproblems. Subsequently, basic services such as transportation and warehousing began to beoutsourced as well. In most of the cases, these services were outsourced to different serviceproviders that were essentially 2PLs, i.e., process or functional specialists. With theincreasing demand, the service providers started offering integrated services plus other value-added services that could help organizations to streamline their supply chains. This, coupledwith competition from multinationals has forced the logistics service providers to transformthemselves from mere transportation providers to value-added service providers.61

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INTRODUCTION TO LOGISTICS INDUSTRY

Inhouse Logistics Outsourcin g Transporta3PL With the increasing demand, the service providers started offering integrated services plusother value added services that could help organizations to streamline their supply chain.This coupled with competition faced from multinationals has forced the logistics serviceproviders to transform themselves from mere transportation providers to value added serviceproviders.The 4th party logistics (‘4PL’) services provider is a supply chain integrator that assemblesand manages the resources capabilities and technology of its own organisation with those ofcomplementary service provider to deliver a comprehensive supply chain solution. 4PL isemerging as a path to achieve more than the one time operating cost technology for theirclients in order to allow their clients to totally outsource their logistics management activity.The 4PLs do not compete with 3PLs as they have superior expertise in their respective fieldsby virtue of their investment and specialisation. 4PL providers do not own assets fortransportation or warehousing, but rather leverage the solutions created by 3PL providers.4PLs are still at a nascent stage and the concept has not taken its root in India as yet. 4PLservices are knowledge oriented and require integrating the best possible and cost effectivelogistics solutions for customers. With the integration of global markets and new traderegimes, this concept offers new vistas of opportunities in the logistics arena.Apart from the vast infrastructure, which is critical to the industry, logistics is also acomplicated interplay amongst the components of this infrastructure. This interplay is whatconstitutes the soft assets of logistics service providers, and is highly critical to the success ofthe venture.62

According to the US Council of Logistics Management, “Logistics is one of those parts of thesupply chain process that plans and implements, and controls the efficient, effective, forwardand reverse flow and storage of goods, services and related information between the point oforigin and point of consumption in order to meet customer satisfaction”.The global logistics industry has come to fruition due to the increasing need for businessesacross various sectors to delegate some of their non-core functions to external agencies thatwould specialize in a specific core function. The activity of farming out non-core activities toexternal agencies has come to be called ‘outsourcing’. The companies are then able to focuson their core activities, resulting in empirically large cost reductions.                                                        62

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The road freight industry in India is worth about INR 1.42 trillion and is growing at about 6-8percent year on year. Manpower spends amount to only about 4 percent of sales as against theoverall sector average of 8-10 percent. The industry has traditionally been extremelyfragmented - almost 75 percent of the trucking 'companies' are single truck operators andalmost 90 percent of trucking companies have a turnover of less than INR 10 millionA majority of players in this industry have been small entrepreneurs running family ownedbusinesses. Given their small scale and limited investment capability, most of theirinvestments have been focused on short term gains - direct and immediate impact on the topline / bottom line of the business being the key decision criterion. As a result, investmentsthat pay off in the longer term, such as those in manpower development, have been minimalhistorically. Also, these businesses are typically tightly controlled by the proprietor and his /her family and as such, making it unattractive for professionals. Poor working conditions, lowpay scales relative to alternate careers, poor or non-existent manpower policies andprevalence of unscrupulous practices have added to the segment's woes creating the image ofa segment that holds few attractions for those seeking employment.While industry players have been incapable of investing in manpower development, thegovernment has also not focused sufficiently on the same. There exist very few formaltraining institutions for driver training and practically none for operational training onassociated areas like loading / unloading supervisory, proper handling practices etc.The result has been that in the current scenario, there exist gaps in core technical skills of theexisting set of personnel. For example, the backbone of the trucking industry truck driverslack knowledge of good driving practices and areas associated with driving likeunderstanding of VAT. Taking a level-wise view of the skill issues, it is seen that in the roadsector, skill issues are widespread across the board with the situation being most severe at theoperational level

   

Industry StructureThe logistics industry consists of truckers, air carriers, shipping lines, warehousingcompanies forwarded couriers and third pes,ers,party logistic companies. The chart given belowdepicts the various levels of services offered by logistics service providers.Figure 11: Types of service provided by a typical logistics services provider In this regard, international logistics, i.e. the management of cargo movement from one partof the world to another, has been in the forefront, as most businesses are expanding theiroperations on a global footing and are finding it more economical to outsource their logisticsfunctions to international service providers. The logistic function consist of two primarysub-functions:••Actual movement of goods and services; andManagement of the movementHistorically, the actual movement of goods and services has been out-sourced asset-basedservice providers like airline companies, shipping companies, and road transport companies.These service provider form a small part of the overall logistics functions. For instance, theroad transport company is primarily responsible for transporting the goods from say, themanufacturing facility to the airport, after which the airline will ship them to an airport joininganother location. This has remained the platform around which other allied services aroundprovided

The level of outsourcing of logistics functions has increased primarily due to the outsourcingof the second sub-function: management of the movement of goods and services and alliedactivities. This varies from outsourcing the cargo handling and customs clearance functionsto forwarding to complete suites of out-sourced activities, ranging from transportation, cargohandling, and warehouse management to eventually bills and order processing.Over time this has spawned different set of players in the logistics business offering differentsuites of services with 3PLs offering the entire gamut of services. 3PL companies typicallydo not own the majority of the assets used by them to provide logistics services. Thesecompanies offer the entire suite of logistics services by pooling the services of various thirdparty asset providers under one roof and offer their clients a one-price, one-stop solution fortheir supply chain requirements ranging from international freight to warehousing andpackaging.The emergence of the second generation 3PL has been seen in recent times and has come tobe known as the 4PL provider. This is a new concept in supply chain outsourcing. Throughalliances between ‘best of breed’ 3PLs, technology providers and management consultants,4PL organizations can create unique and comprehensive supply chain solutions that cannot beachieved by any single provider.The important underlying reason for the existence of the logistics industry is that thecustomer is outsourcing the function because it is able to get a better return on its capital byoutsourcing this activity at a price to the service provider rather than carrying out thisfunction on its own. This puts a ceiling limit on the mark-up that a service provider can puton its total cost since the customer will be continuously measuring the cost-benefit ratio ofoutsourcing the function against carrying it out itself. In such a scenario the key determinantsto growth are an increase in the portfolio of services provided and the bulk discounts that onecan generate by consolidating the requirements of clients having similar needs and providingasset providers with a larger volume of business annually.

Characteristics of the Logistics Industry  • Industry statisticsIndia’s real GDP growth rate for the last five years averaged 8.7 per cent. The Indianeconomy has witnessed some moderation in growth in 2007 and 2008. During the financialyear, India’s real GDP grew by 9 per cent compared to 9.6 per cent in 2007 and is expected togrow at around 8 per cent during 2009. In recent times, India has faced the same challenges 

as the world, rising energy prices, resultant inflation and a slight slowing down of theeconomic momentum.63

The Indian logistics sector remains largely unorganised and at lower end of the evolutionstage as compared to the world as well as the Asian markets. The Indian logistics industry isat an inflection point with India’s GDP growing at over 9 per cent per year and themanufacturing sector enjoying double digit growth rates. The logistics industry in India isexpected to reach a market size of over USD 125 bn in year 2010. The sector directly andindirectly employs about 40 mn people. Strong growth enablers exist in India today in theform of over USD 490 bn worth of infrastructure investments, phased introduction of VATand development of organised retail and agri-processing industries. In addition, strongforeign direct investment inflows in automotive, capital goods, electronics, retail, andtelecom will lead to increased market opportunities for providers of 3PL in India.However, as a result of the under-developed trade and logistics infrastructure, the logisticscost of the Indian economy is over 13% of GDP, compared to less than 10% of GDP inalmost the entire Western Europe and North America. However, as the physicalinfrastructure and regulatory changes start making an impact, there is a lot of scope forlowering these costs.64

The Indian logistics industry is highly unorganised with transporters having fleets smallerthan five trucks, account for over two-thirds of the total trucks owned and operated in Indiaand make up 80 per cent of revenues. The freight forwarding segment is also represented bythousands of small customs brokers and clearing and forwarding agents, who cater to localcargo requirements.In order to reduce logistics costs and focus on core competencies, Indian companies acrossverticals are now increasingly seeking and using the services of third-party logistics serviceproviders. In addition, with the advent of large MNCs, the need of outsourced supply chainmanagement along with end to end logistics solutions is on the rise too. The basic logisticsservices require lower capital. As a result, smaller players have swarmed the industry.Integrated logistics solutions business requires higher capital and therefore it serves as aneffective entry barrier.The Indian logistics market is dominated by surface transport. Almost 78 per cent of totalfreight is transported by road in India.65

• Current levels of Outsourcing Low but Growth at a Steady RateThird party or outsourced logistics is the outsourcing of a company's logistics operations to aspecialised firm which provides multiple tactical logistics services for use by customers as                                                        6364

Annual Report Arshiya International Limited - FY 2007-2008 Annual Report Arshiya International Limited - FY 2007-200865

Annual Report Arshiya International Limited - FY 2007-2008

 

opposed to each company having a business unit in-house to oversee its supply chain andtransportation of goods.With increased geographical distribution of wealth in India, the consumer markets areextending beyond the five main cities of Mumbai, Delhi, Bangalore, Chennai and Hyderabad.However, rather than being pre-emptive, the companies are only following with newdistribution outlets. As such, the increased competition across industry verticals is forcingfirms to focus on product distribution, and logistics outsourcing is gaining further momentumwith this.According to Data monitor, outsourced logistics, at just above one-quarter of the entire $90billion Indian logistics market, is slated to grow at a compound annual growth rate (CAGR)of over 16 per cent from 2007-10.66

The level of outsourcing exhibited by Indian businesses is extremely low. The outsourcing oflogistics functions has been limited to the actual movement of goods and certain specificstand-alone services like customs clearance. There are very few businesses in India that areoutsourcing the cargo movement management sub-function to third parties in India. In fact, itis only now that the overall logistics function is being given full operational status in largercompanies.In order to reduce costs and stick to their core competencies, many companies have startedout-sourcing their entire logistics and supply chain management activities.The major factors leading to the growth of the 3PL concept include;Reducing overall costsNeed for expertise in logistics service providersReduction in labor component of the manufacturing costUser companies lack necessary skill sets to drive the changes particularly in logisticsarena to face the competition, andValue added services provided by the 3rd party logistics service providers.• Type of Service Providers in the Indian logistics industryThe concept of logistics, in its present form, is new to Indian companies. In India, traditionaltransporters, freight forwarders and courier companies are fast emerging as integratedlogistics service providers by effectively utilizing their existing infrastructure and experience.Apart from providing prime functions such as transportation, warehousing, clearing andforwarding they have also started to handle other activities like inventory management, orderprocessing, collection of bills, sales and excise duty documentation etc.                                                        66

Source – Annual Report Arshiya International Limited - FY 2007-2008

 

In future, the demand for logistics services providers will continue to accelerate, fuelled bythe increasing appreciation of outsourcing as a business practice.The different types of service providers in the Indian logistics scenario are given in below:Types of Service Providers in the Indian Logistics Industry

Service Providers Traditional Asset Providers •••AirlinesWarehousingCompaniesRoad transportCompanies Profile of operations These companies provide asset based services, wherein they perform specific asset based logistics functions like transportation and warehousingEndeavor to increase asset-utilization marketingintermediariesforForwarders/BrokersBook freight/warehousing space on behalf oftheir clientsProvide market intelligence to asset providers aswell as asset usersDo not take responsibility for cargoCustom House AgentsCargo handlers/StevedoresArrange clearance of import and export cargoLoading and unloading of cargo at the port/airportThird party logistics Take responsibility of goodsproviders/Couriers Manage the entire transportation and customs clearance processProvide the information technology backbone forshipment tracking and tracing throughout thetransit period3PLs in India originate from several business segments with a large amount of functionalsimilarities in their operations. This is in line with global trends.• Industry ParticipantsThe different types of players in the Indian logistics scenario are given below:a) Single location focused players – Fragmented, low value add services local / inter - cityoperators like local and inter - city courier companies, port handling agents for a singlelocation, single port owners, single CFS owners, etc. 

b) Niche players – High value addition but limited to one activity. They cater to a particularsegment in the entire value chain across the country (e.g., CFSs across a region, couriercompanies, bulk truck transporters, etc)c) Regional players limited by their geographical reach – They cater to logistics solutionsin a particular region or segment (port based, road based, etc).d) Integrated players offering total logistics solutions – A one-stop shop for logistics anduse multimodal forms of transportation to deliver anything anywhere with the help of theirtie-ups all over the world.In India, the space for integrated player still remains vacant. Integrated players are at thehigh end of the service spectrum and earn superior margins due to the integrated services.• Revenue ModelThe various services offered by the international logistics service providers revolve aroundthe base line product of managing the international leg of the shipment, by air or sea. Theother services are offered as value added services at either the origin or the destination.As mentioned earlier, it is pertinent to note that in such arrangements it is not possible foreither of the companies to mark-up the other’s services excessively, since this may break theceiling limit chargeable by a service provider. The important underlying criteria for theexistence of the logistics industry is that the customer is outsourcing the function because it isable to get a better return on its capital by outsourcing this activity at a price to the serviceprovider rather than carrying out this function on its own. This puts a ceiling limit to themark-up that a service provider can put on its total cost since the customer will becontinuously measuring the cost benefit analysis of outsourcing the said function.In such a scenario the key determinants to growth are an increase in the portfolio of servicesprovided and whether he is able to make a difference between the prices at which it sellsfreight to the customer and the price at which it buys from the airline/shipping line. Asmentioned earlier, this depends on bulk discounts it is able to command by giving the assetprovider a larger volume of business annually.Operating Model - Global Reach Local PresenceSince the logistics service provider takes custody of the product at the origin (as opposed tothe freight forwarder), it is imperative for it to have a presence of its own or engage anoverseas partner. While most of the multinational companies have their own offices all overthe world, Indian companies enter into alliances with logistics companies for specific regions.These companies also provide value added services to the Indian companies’ client at thedestination like customs clearance etc. If the client so desires and provides reciprocalarrangements for the sales made by the overseas partner. 

Key Trends of the Logistics Industry Growth within the organised sector: The logistics and warehousing sector in India, tillnow, has been highly fragmented and characterised by the presence of numerous unorganisedplayers. A large number of players have been providing services in individual segments liketransportation, warehousing, packaging etc. In 2007, organised players accounted for only 6per cent of the total US$ 100 billion Indian logistics industry However, changing businessdynamics and the entry of global third party logistics players (3PL) has led to the remodellingof the logistics services in India. From a mere combination of transportation and storageservices, logistics is fast emerging as a strategic function that involves end-to-end solutionsthat improve efficiencies.Entry of Large Corporates: Another trend witnessed over the last few years has been theentry of several large Indian corporate houses – such as the Bharti group, Tatas and RelianceIndustries Limited – into the logistics sector. The Indian conglomerates foresee hugepotential for specialised logistics and warehousing facilities, particularly in industries likeretail. Companies like Bharti, Tata Realty & Infrastructure, GE Equipment Services andReliance Logistics cater to the logistics needs of their own group companies as well asprovide services to the other companies.Emerging concept of third party logistics: Third party logistics or 3PL is a concept where asingle logistics service provider manages the entire logistics function for a company.Although still at a nascent stage, the Indian 3PL industry is growing at a rapid pace. Globalsourcing activity and fierce competition amongst manufacturers to cut costs have mademovement of materials rather complex, giving rise to the emergence of several third partylogistics players.Fuelled by the increasing trend of outsourcing, coupled with the rapid growth in the Indianmanufacturing sector, 3PL is estimated to grow at about 30 per cent annually and become aUS$ 30 billion industry by 2010.Rapid growth of the warehousing sector: The role of a warehouse has also transformedfrom a conventional storehouse to an inventory management set-up with a greater emphasison value added services. Warehouses now provide additional services like consolidation andbreaking up of cargo, packaging, labelling, bar coding, reverse logistics etc. It has emerged asa critical growth driver, leading to large investments by logistics companies for thedevelopment of warehouses and logistics parks. Warehousing and related activities currentlyaccount for about 20 per cent of the total logistics industry. Currently, the organisedwarehousing industry in India has a capacity of approximately 80 million metric tonnes (MT)and is growing at 35 to 40 per cent per annum. An investment of approximately US$ 500million is being planned by various logistics companies for the development of about 45million square feet of warehouse space by 2012Logistics parks – One-stop shop for logistics needs: The concept of a consolidated logisticscentre can be traced back to the Foreign Trade Policy of 2004, which led to the developmentof Free Trade Warehouse Zones (FTWZ). While FTWZ were aimed at facilitating import andexport of goods, the need for a one-stop shop that could additionally cater to the domestic 

market led to the development of logistics parks as a part of the infrastructure industry in2005-6. A logistics park is a notified area that facilitates domestic and foreign trade byproviding services like warehousing, cold storage, multimodal transport facility, containerfreight stations etc. This area also acts as a place where a company can unload cargo fordistribution, redistribution, packaging and repackaging.

Key Drivers of the Logistics Industry The Indian logistics sector remains largely unorganised and at lower end of the evolutionstage as compared to the world as well as the Asian markets.CompetitionOf late, India has been an attractive market for the global players because of its size and hugepotential. With the advent of Multi-National Corporations (“MNCs”) in the Indian logisticsindustry, the degree of competition has increased manifold. There is stiff rivalry betweentransporters, freight forwarders and global 3PLs. With the turnover figures of most playersnot being known, it is a little difficult at this stage to estimate the market shares. The playersare competing on the basis of:•••••••Range of services offered,Geographical spread or reach,Experience in the industry,Response time,Service reliability,IT capabilities, andValue for money.MNCs are ahead of the domestic players in terms of information technology andcommunication infrastructure. The domestic players lack financial power and are a littlereluctant towards investing in IT infrastructure. Considering this, it is not going to be an easytask for the domestic players to sustain in the competitive environment. In order to withstandthe competition, they have to be pro-active and adapt to the changes.However, industry experts feel that the MNCs have to depend on the local players to establisha network in the country. This could possibly end up in consolidations, with MNCs joininghands with the domestic players. 

All the key players in this industry have tie-ups with world leaders which enable them toderive synergies from their global counterparts and thus have an edge over others in terms ofthe standard of service provided.Growth in International TradeThe growth in the logistics industry is dependent on the extent of business activities.Historically, the growth in the logistics industry has been dependent on the growth indomestic and international trade. However the recent years have witnessed the growth ofemerging business areas in the new economy such as the services sector, IT industry, andbanking and financial sectors. The growth in these sectors saw the emergence of new valueadded services and boosted the growth of the logistics industry as a whole.Global acceptance of India as an emerging outsourcing location for manufacturing activitiesas well as its fast-growing domestic market have seen the advent of Foreign DirectInvestment in manufacturing-oriented sectors like consumer durables, electronics, auto andauto components. Domestic retail expansion in the agribusiness is also happening at a fastpace, driven by the move towards organized retail and export opportunity. These sectors arethe largest users of supply chain solutions and outsourced logistics services and thus willlikely drive growth in the Indian logistics sector.Therefore, their profitability depends on the volume of shipments managed. Any drop or risein international trade between India and other countries will have an impact on the logisticsservices providers.Quality AspectsInternational trade is highly competitive in today’s age. Therefore when a company ischoosing a logistics service provider, the reliability of the same will be the most importantelement in its mind. The logistics provider needs to continuously invest in upgrading itsoperational processes in order to compete in the market.Cost SensitivityLogistics is a business where quality of service is assumed and price is paramount. Thecustomer will always measure the price charged by the logistics provider carefully, since itsown price per unit depends on it. Further, apart from the money made on trading in freight,all other services provided by a logistics provider are essentially a replacement of aninternally executable activity. For instance, the customer can package the goods on its own oroutsource to a 3PL. In this case, the customer will be fully aware of the opportunity cost,thus not allowing the service provider to over charge it. Therefore it is vital for the serviceprovider to achieve operational cost efficiencies. 

The Retail BoomGlobally, retail sector has been a key driver for the logistics sector. Organised retail sector inIndia has been growing 30% yoy. The total retail industry in India is expected to grow at$421 million by 2010. This growth in retail sector has increased the demand for organizedlogistics.India Fast Emerging as Global Manufacturing HubAccording to CII, India will emerge as one of the global ‘Manufactured Product’ outsourcinghubs and reach revenues of approximately $50 billion by 2015. To remain cost-competitive,contract manufacturers will be required to provide integrated logistics solutions that bolsterthe cost saving potential of outsourcing initiative; this will thereby enhance the growth in thesector to a higher degree.Government of India – incentives and regulationsThe Indian freight and logistics industry is governed by Indian Customs Act 1962 which laysdown the rules and regulations for operating in the industry. The Act also affords someincentives to the players to provide a fillip to the industry and boost the trade. Typically, theplayers also follow International Air Transport Association (IATA) rules. IATA is aninternational autonomous organization which lays down the rules for international cargo andfreight forwarding. Further the Industry also has to strictly adhere to the rules laid down bythe Reserve Bank of India vide its circulars under the Foreign Exchange Management Act.These rules govern the procedures to be followed while making remittances of internationalfreight and other charges payable to agents overseas.Government regulations and its actions can affect the efficiency of the logistics systems in thecountry. Over the last few years, the Indian Government has taken steps towards improvingthe efficiencies in ports and road sectors with a view to attract private investment, improvecapacities and encourage competition.With the introduction of Value-Added Tax (“VAT”), companies are now beginning to movefrom a smaller level godown approach to a national level supply chain system. VAT, whichis expected to replace a plethora of taxes along with government taxes, is also likely toenhance efficiency of the logistics industry. The time in complying with interstate taxrequirements and at check points affects the ability of the logistics industry to achieve a lowerturnaround time. Changes in the regulatory structure like implementation of VAT are likelyto boost the efficiency of logistics companies by lowering transit time and paper work.

Key Inhibitors of the Logistics Industry The following problems existing in the Indian logistics industry make it unattractive forinvestments and also create entry barriers. 

•••••Logistics is a high-cost, low-margin business. The problem of organized players iscompounded by unfair competition with unorganized players, who can get awaywithout paying taxes and following operating norms stipulated in the Motor VehiclesAct such as quality of drivers and vehicles, volume and weight restrictions, etc.Economies of scale are absent in the Indian logistics industry. Even the organizedsector that contributes slightly more than 1% of the logistics cost, is highlyfragmented. Existence of the differential sales tax structure also brought indiseconomies of scale. Though VAT (Value Added Tax) has been implemented sinceApril 1, 2005, failure in implementation of a uniform VAT structure across differentstates has let the problem persist even today.Apart from the non-uniform tax structure, Indian LSPs have to pay numerous othertaxes, octrois, and face multiple check posts and police harassment. High costs ofoperation and delays involved in compliance with varying documentationrequirements of different states make the business unattractive. On an average, avehicle on Indian roads loses 24-48 hours in complying with paperwork andformalities at different check posts en route to a destination. Fuel worth USD 2.5billion is spent on waiting at check posts annually. A vehicle that costs USD 30,000pays USD 7,500 per annum in the form of various taxes, which include the exciseduty on fuel. This is why freight cost is a major component of the cost of a product inIndia.Indian freight forwarders face stiff competition from multi-national freight forwardersfor international freight movement. MNCs, because of their size and operations inmany countries, are able to offer low freight rates and extend credit for long periods.Indian freight forwarders, on the other hand, because of their smaller size and lack ofaccess to cheap capital, are not able to match the same. Moreover, clients of MNCsoften want to deal with a single service provider and especially for FOB (Free onBoard) shipments specify the freight forwarders, which most of the time happen to bethe multi-national freight forwarders. This is sort of a non-tariff barrier imposed onIndian freight forwarders.Poor physical and communications infrastructure is another deterrent to attractinginvestments in the logistics sector. Road transportation accounts for more than 60% ofinland transportation of goods, and highways that constitute 1.4% of the total roadnetwork, carry 40% of the freight movement by roadways. Slow movement of cargodue to bad road conditions, multiple check posts and documentation requirements,congestion at seaports due to inadequate infrastructure, bureaucracy, red-tapeism anddelay in government clearances, coupled with unreliable power supply and slowbanking transactions, make it difficult for exporters to meet the deadlines for theirinternational customers. To expedite shipments, they have to book as airfreight, ratherthan sea freight, which adds to the costs of shipments making them uncompetitive ininternational markets. Moreover, many large shipping liners avoid Indian ports forlong turnaround times due to delays in loading/unloading and hence Indian exportershave to resort to transshipments at ports such as Singapore, Dubai and Colombo,which adds to the costs of shipments and also delays delivery. 

••••Low penetration of IT and lack of proper communications infrastructure also result indelays, and lack of visibility and real-time tracking ability. Unavailability and absenceof a seamless flow of information among the constituents of LSPs creates a lot ofuncertainty, unnecessary paperwork and delays, and lack of transparency in terms ofcost structures and service delivery. For example, a shipper has to pay a higher freightrate if it cannot ensure return load. At present, there is no real time process by which ashipper may know about the availability of trucks and going rates at the destinationmarket. Therefore, it has to pay more. Had the market information been available toboth the shipper and the service provider, the service provider’s cost structure wouldhave been transparent to the shipper and it would have ended paying the actual marketrate. Another example would be that LTL (Less than Truckload) shipments cost morethan FTL (Full Truckload) shipments. Now, when a shipper books a LTL shipment, ithas no idea about the status of its shipment after it leaves the warehouse at the originand before it reaches the warehouse at the destination. The service provider may stillconvert this LTL shipment into a FTL shipment at its own warehouse beforedelivering at the destination. So, the shipper ends up paying LTL rates for a FTLshipment. Had there been visibility during delivery, this problem would not haveoccurred.Since most of the LSPs are of relatively small size, they cannot provide the entirerange of services. However, shippers would like service providers to offer morevalue-added services and a single-stop solution to all their logistical problems. Theinability of service providers to go beyond basic services and provide value-addedservices such as small repair work, kitting/dekitting, packaging/labeling, orderprocessing, distribution, customer support, etc. has not been able to motivate shippersto go for outsourcing in a big way.Service tax levied on logistics service fees (currently 12.36% with educational cess)may make outsourcing costly and outweigh the possible benefits.There is lack of skilled and knowledgeable manpower in the logistics sector.Management graduates do not consider logistics as a prime job. To improve the statusof the industry, service providers have to move beyond the level of brokers andtruckers to attract and retain talent.

Impact of Global Economic Slowdown on the Logistics Industry Bucking the trend and staying relevant is proved to be quite a challenge for logisticscompanies in the times of economic slowdown. With the global credit crunch showing nosigns of easing, margins in the logistics sector are set to come under further pressure.The Indian logistics industry, which was expected to grow annually at the rate of 15 to 20percent, is at 10 percent now. Also, the GDP growth level, which was expected to be 8.5 to 9 

percent, was 7 to 7.5 percent. So, the FDI inflows were be limited in the automotive, capitalgoods, electronics, retail and telecom markets. This, in turn, shrank the market opportunitiesfor the logistics players.Volume growth has been affected and freight rates have declined steadily in India. India hasregistered de-growth in the container trade volume. With reduced trade, container marketshave corroded considerably.Faced with a credit crunch, logistics service providers are reducing resources and trying tooptimize as much as possible to achieve cost benefit. 

Budget 2010 Implications on the Logistics Industry  Allocation for road transport increased by over 13.0% to Rs 19,894crore, this allocation toinfrastructure sector for developing and improvement of road always complements to Autoand logistics sector growth. Finance minister has increased allocation on road transport by13.0% for FY2011 and we believe this will ultimately enable the operational efficiency inmedium to long term for the logistics sector as it provides a larger network of commutation.The Road transport and Highway Minister, Kamal Nath, recently increased the target ofconstructing new road to 20km per day. The increased allocation towards road by the FinanceMinister would help in achieving Kamal Nath’s target for road construction. Apart from this,the Finance Minister has withdrawn service tax on transportation of cereals, and pulses byroad. This would also benefit road transportation companies.

Way Forward for the Logistics Industry Overall, the Indian logistics industry is less developed and more fragmented when comparedwith countries like the US and European nations. It is clearly divided between a few largeplayers with a relatively higher distribution strength, advanced IT capabilities and betterfinancial back-up and offering a wide range of services including value added services, and alarge number of small players with limited infrastructure and a lower level of IT competence.However, in the coming years, the Indian logistics industry is going to witness an increasingcompetitive pressure, with many players changing identities and expanding their serviceportfolios. The increasing need of companies to gain supply chain advantage and better theirservice offerings to customers is going to churn the logistics industry in a major way.The logistics companies thrive on the economies of scale. Therefore the organized sectorcompanies will find it easier catering to higher demand. The semi-organized sector and theun-organized sector companies will find it tough to handle more volumes of shipments. To 

stay in the market these companies will have to strengthen their distribution network andkeep pace with the technological advancements in the rest of the industry. The companies,which can do it, will gradually move into the organized sector and the rest will struggle fortheir existence. The recent merger and acquisition trend is also set to continue in the comingyears to reduce pressure from customers and reduce the costs of operations.With the increasing globalization and changing economic, political, social and technologicalconditions, the logistics industry is likely to face challenges in all respects. Considering this,the logistics service providers in India should look at ways to meet these challenges anddevelop strategies that will take them ahead in the new millennium. 

Chapter 7: The Garments & Textiles IndustryThis chapter includes:1.2.3.4.5.6.7.8.IntroductionCharacteristics of the IndustryKey TrendsKey DriversKey InhibitorsImpact of Global Economic SlowdownBudget 2010 ImplicationsWay ForwardReview 2009-10Topline grew by 21 per cent y-o-y in Q32009-10, faster than the growth witnessed inthe same quarter last year (y-o-y). This wasdue to recovery in the economy, leading topick-up in textile demand. Operating marginsimproved y-o-y, due to decline in rawmaterial cost and other operating expenses.Consequently, net margins increased.However, both operating and net marginsdeclined slightly q-o-q, due to increased rawmaterial expenses.Outlook 2010Topline growth is expected to improve vis-à-vis the same period last year, as demand fortextiles is expected to improve in line withrevival of the economy. Operating marginsare expected to remain at third-quarter levels,but will improve y-o-y, due to lower otherexpenses. Consequently, net margins willalso register a rise. 

 Introduction to the Garments & TextilesIndustry The history of textiles in India dates back to the use of mordant dyes and printing blocksaround 3000 BC. The diversity of fibers found in India, intricate weaving on its state-of-artmanual looms and its organic dyes attracted buyers from all over the world for centuries. TheBritish colonization of India and its industrial policies destroyed the innovative eco-systemand left it technologically impoverished. Independent India saw the building up of textilecapabilities, diversification of its product base, and its emergence, once again, as animportant global player.The Indian apparel industry is identified as a buyer-driven value chain that contains threetypes of lead firms: retailers, sourcing agents and apparel manufacturers. Innovation in theglobal apparel value chain is primarily associated with the shift from assembly to full-package production. Full-package production changes fundamentally the relationshipbetween buyer and supplier giving more autonomy to the supplying firm and creating morepossibilities for innovation and learning. With the globalization of apparel production,competition has intensified as leading apparel retailers across the world have developedextensive global sourcing capabilities.The Indian sourcing market is expected to go up to $35-37 billion by 2011. The trigger forthis growth is likely to come from top global retailers who will seek to take advantage ofIndia’s abundant multi-fiber based raw material, well established production bases, andskilled labor67.Today, the textile and apparel sector employs 35.0 mn people (and is the 2nd largestemployer), generates 1/5th of the total export earnings and contributes 4 per cent to the GDPthereby making it the largest industrial sector of the country. This textile economy is worthUS $37 bn and its share of the global market is about 5.90 per cent. The sector aspires togrow its revenue to US $85bn, its export value to US $50bn and employment to 12 million bythe year 2010 (Texmin 2005)67

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Characteristics of the Garments &Textiles Industry • Industry StatisticsThe total market size of Indian textile and apparel industry was about $52 billion during thefinancial year 2008-09, out of which the domestic industry accounted for $34.6 billion andthe remaining was accounted for by exports68.The Indian Textile sector provides direct employment to over 33.17 million people and is thesecond largest provider of employment after agriculture. 69 Besides, another 54.85 millionpeople are engaged in its allied activities. The sector contributes about 4% to the country’sgross domestic product (‘GDP’), 11% to industrial production, 14% to manufacturing sector,9% of excise collections, 18% of employment in the industrial sector and 12% to thecountry's total exports70. The sector which was growing at 3-4% during the last six decadeshas now accelerated to an annual growth rate of 16% in value terms and is expected to reachthe level of US $115 billion (exports $55 billion and domestic market $60 billion) by 2012.71

Indian textiles, handlooms and handicrafts are exported to more than 100 countries, with theUS being the largest buyer. Readymade garments are the largest export segment, accountingfor almost 41 per cent of total textile exports. The Indian Government aims to increase textileexports from India to $50 billion by 2010 and is taking steps to achieve the desired target.72

The strong international competitiveness of India's textile and apparel industry can beattributed to a number of factors:-•Vertical Integration: India's textile industry is truly vertically integrated fromraw material to finished product, including fiber production, spinning,knitting and weaving, and apparel manufacture. Business and culturallinkages with neighboring countries like Bangladesh, Sri Lanka, Nepal,Thailand, Myanmar and China provide a platform for sourcing from them aswell.Production Variety: Raw material production includes cotton, silk, wool,linen and man-made fibers such as polyester, viscose, acrylic, andpolypropylene. Indian companies have built global scale even in non-• http://www.ibef.org/industry/textiles.aspx http://www.conversationsforabetterworld.com/2009/07/women-and-poverty-indias-textile-industry/70

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traditional areas. Fabric production includes fine dress fabrics, shirting,fabrics for trousers/shorts, worsted suiting, denim, fleece, jersey, flat/woolenknits, technical fabrics, and more. Apparel production includes activesportswear, outerwear, foundation garments, suits, socks, infant wear etc.Production of made-ups includes a wide variety of bed, bath, and tablelinens, kitchen accessories etc.•Labor Force: India's textile and apparel industry directly and indirectlyemploys millions of people. The country has an abundant, low-cost base oflabor which has long-term sustainability and skill in fabric and garmentmaking.Capacity: India's industry has consistently remained flexible in terms ofproduction quantity and lead time and thus presents the possibility ofproducing quantities as low as a few hundred pieces.Operating Environment: The textile and apparel industry is an important oneto India. Import duties on capital equipment are low. Fabrics and other rawmaterials can be imported duty-free if made up into garments and re-exported. The apparel industry can import duty free specified trimmings andembellishments like fasteners, rivets, garment stay, laces, badges, sewingthread, sequin, tape & others for export production.Complete Supply Chain: India has a complete supply chain - from fibres tofinished products. At the start of the supply chain, India is one of the world'sbiggest suppliers of raw cotton. At the end of the chain, India is capable ofsupplying large volumes of apparel and home textiles - and the quality of itsproducts is improving all the time.Flexibility: The industry in India is also highly flexible. Large firms are ableto export basic apparel products which require large-scale production, whilesmall and medium size firms can offer high fashion garments which need tobe manufactured in small quantities and delivered quickly.Growth Opportunities: As well as being a major exporter, India alsoprovides growing opportunities for foreign investment, collaboration andjoint ventures following a liberalization of its foreign direct investment(FDI) policy.Other drivers of investment and collaboration include India's expandingdomestic market for foreign brands and the benefits to be gained frompartnering with competitive Indian firms for selling in overseas markets.•••••• 

 • Textile ExportsIndia’s textile exports can be broadly categorized into two large segments- apparel, whichcontributes nearly half the revenues, and non-apparel exports like yarn and fabrics, bothnatural and man-made.The Indian apparel export sector has witnessed a whole graph of ups and downs till earlynineties. With buying patterns changing, the repercussion of the shift in retail sourcing isbeing felt at the sourcing centres around the world and more so in India. India has alwaysbeen recognized for its traditional skills and exclusivity in garment designs and has been amajor sourcing destination, primarily for the European market, which is much more fashionconscious and has a more evolved retail system.The emphasis is moving away from one centralized buying agency to different buying agents,looking after specific product needs. Over the decade, the abilities of Indian apparel exportershave become regionalized and every region has come to be known for a specific type ofproduct category, which the buyers, over the years, have also come to recognize. In anattempt to capitalize on these strengths, buyers have developed sourcing relations withdifferent buying agents in different regions.India can broadly be divided into two major buying hubs viz. North and South. While theNorthern hub (particularly Delhi) has come to be recognized as a strong centre for value-added and high fashion garments, the Southern hub (particularly Bangalore/Chennai) is morerecognized for its ability to do better in basic garments. The reasons for this growingpolarization of capabilities are influenced by many factors including management attitudes,availability of skilled and disciplined labor, ease in import of fabrics and the emphasis oncompliance and product development.India's textile exports declined by about 2% during the financial year 2008-09 to$21.75 billion due to slump in demand from global economies like the US and Europe whichare reeling under the impact of the financial meltdown73. The worst hit was handicrafts whichsaw a decline of 48% during the year under consideration, followed by cotton yarn and juteproducts which fell by 11.8% and 9.5% respectively.

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Key Drivers of the Garments & TextilesIndustry Some of the key drivers of the Indian Apparel Industry are as under:-Phase-out of MFA: Under the WTO-negotiated agreement on Textiles and Clothing, thewhole global textile and apparel trade is now free of quota restrictions, which allowsproducers to export as much as they can sell. Moreover, it is now considered likely thatinternational retailers will begin sourcing from countries like India and China in order tosurvive the cut-throat pricing war being waged in the Global retail segment74. The Indiantextile industry is witnessing high dynamism after abolition of quota restrictions. CRISILResearch expects garment exports from India to grow at a CAGR of 11-12% to $16 billion by2009-10 while the domestic sale of ready made garment is expected to grow at a CAGR of10-11% to $24 billion by 2009-10.Increasing demand: The increasing demand for branded clothes coupled with higherspending power has pushed up the leading players to set up shops and increase their marketpenetration.75 More than a dozen international retailers have set up shop in India over the lastcouple of years to source their apparel requirements, dispensing with the earlier practice ofoperating through local buying agents. This development coincided with the IndianGovernment's decision to throw open the garment sector to large players some years ago andthe entry of a number of domestic textile majors into the apparel segment in a big way. Theopportunities for Indian manufacturers are huge in ready-made garments. India’s ready-madegarments sector was stripped off its small scale industry status less than four years ago. As aresult, textile firms were able to undertake massive capacity expansion drives over the pastcouple of years. The extension of the textile up-gradation funds scheme (TUFS) will allowfor further expansion.Comparative Advantages: India has several comparative advantages in the textile sector,including an abundant availability of raw material and labor. It is the third largest producer ofcotton in the world after China and USA accounting for about 14% of the world cottonproduction. It has the distinction of having the largest area under cotton cultivation in theworld ranging between 8 million to 9 million hectares and constituting about 26% of theworld area under cotton cultivation 76 . The country also accounts for about one fourth ofglobal trade in cotton yarn besides having high level of operational efficiencies in spinningand weaving. Moreover it ranks fourth in terms of staple fiber production and sixth amongfilament yarn production77.                                                        7475

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Sourcing choices arise from profitability. This includes considering costs, such as, buyingfactors of production, like land, buildings and machines versus factors affecting revenues,including pricing, marketing, and distribution. The issues of labor, material, shipping costsand tariffs structure also affect sourcing choices. Since apparel production is a labor-intensiveactivity, wage rates are also a major factor in sourcing decisions. This gives immediatecompetitive advantage to producers in countries like India and China to export to moredeveloped and high cost countries like the United States and the European Union.78

Good Training Institutions: With the establishment of training institutions like the NationalInstitute of Fashion Technology, many high quality designers who are able to churn outmodern designs and interact with buyers are making an impression. This is a distinctivestrength of Indian companies.Government initiatives: Government policies have played a vital role in the steady growthand development of the Indian apparel export industry. 79 The Government is creating acongenial environment by reducing cost of production, rationalization of excise duty structureand removal of infrastructure bottlenecks.80 Some of the recent reform measures that havebeen undertaken by the Government are as follows:•Creating level domestic market playing field by extending de-reservation,uniform application of excise duties and further reduction in import duties onapparel, textiles and machinery.Revising labor laws (flexible exit policy), improving infrastructure(minimize power outages and port delays) and improving availability of highquality textiles in order to increase foreign direct investment.Establishing bilateral agreements with US and EU under the quota freeregime, to be competitive against other low cost exporters such as Sri Lanka.Setting up institutes for training skilled operators on new technologies so asto speed up production and gain scale.Foreign Trade Policy:-Handicrafts and Handloom sectors, among others, have beenidentified as Special Focus Initiatives;Duty free import of trimmings and embellishments for Handlooms &Handicrafts sectors have been increased from 3% to 5% of Free OnBoard value of exports;                                                        7879

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Import of trimmings and embellishments and samples shall beexempt from Countervailing Duty;Handicraft Export Promotion Council has been authorized to importtrimmings, embellishments and samples for small manufacturers; andEstablishment of a Handicraft Special Economic Zone

Key Inhibitors of the Garments &Textiles Industry Some of the key inhibitors of the Indian Apparel Industry are as under81:Government Policies: Despite all the inherent advantages and the various governmentreforms that have been undertaken lately, the market for textile and apparel exporters has notbeen growing as much as it should have because of the ramifications of policies pursued bythe Government in the past such as reserving garments for small scale industry. 82 Tomanufacture garments for the world market, substantial capital investment in fixed assets andsustained marketing efforts over a period of time are required, which may be beyond thecapabilities of small-scale units. Now that this industry has been opened up for large-scaleunits, it is important to consider and act upon, factors which can expedite its progress. Forinstance, Special Economic Zones (Apparel Parks) could be set up on the same lines assoftware technology parks83.Labor laws: Restrictive labor laws in India have been unfavorable to more rapid expansionin the industry. In the absence of concrete labor policies, the industry has often beenparalyzed by strikes, thereby compromising efficient operations. One thing that holds Indiaback in global competition is its extensive labor laws that are believed to be biased towardsemployees. Overprotection, red tape and bureaucracy make India's work force lessmanageable, less disciplined and thus less competitive than it could be.Logistics: Due to its geographical location, India is further from major markets thancompetitors such as Mexico, Turkey and China, which are closer to major markets such asthe US, Europe and Japan, respectively. This increases shipping costs. Also, internally,relatively poor road connectivity and the inadequacy of ports and other export infrastructurehave adversely affected the Indian apparel sector's competitiveness. One major correctivestep is to facilitate the speedy shipment of finished goods. China is able to ship directly toports on the west coast of the US. In India, two or three ports should be designated, especially                                                        81

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on the west coast, where special facilities for speedy clearance of documents and goodsshould be given to recognized garment exporters84.Quality manpower: A recent study by the Textiles Committee noted that only 6% of theworkforce in the Indian apparel industry has received formal institutional training while at thesupervisory level, only 2% of the workforce is trained. This aspect of the textile industryneeds to be worked upon in order to drive the growth in the future. Three issues must bementioned here: (a) there is a paucity of technical manpower – there exist barely 30programmes at graduate engineering (including diploma) levels graduating about 1,000students – this is insufficient for bringing about technological change in the sector; (b) Indianfirms invest very little in training its existing workforce and the skills are limited to existingproceses (c) there is an acute shortage of trained operators and supervisors in India. It isexpected that Indian firms will have to invest close to Rs. 1,400 billion by year 2010 toincrease its global trade to $50 billion. This kind of investment would require about 70,000supervisors and 1.05 million operators in the textile sector and at least 112,000 supervisorsand 2.8 million operators in the apparel sector. The real bottleneck to growth is thereforegoing to be availability of skilled manpower.Cost constraints: Apart from low-cost labor, other factors that affect competitiveness arerelative interest cost, power tariffs, structural anomalies and productivity levels (affected bytechnological obsolescence). A study by the International Textile Manufacturers Federationrevealed high power costs in India as compared with other countries such as Brazil, China,Italy, South Korea, Turkey and the US. Power's share of the total cost of production for thespinning, weaving and knitting of ring and open-end yarn for India ranged from 10-17%,which is also higher than that of such countries as Brazil, South Korea and China. Capitalcosts as a percentage of total production cost in India were also higher, ranging from 20-29%as compared with 12-26% in China.Fragmentation: Given the fragmented nature of the industry, the Indian players are unable toreap the benefits of economies of scale, in sharp contrast to the Chinese players. Indian firmsare typically smaller than their Chinese or Thai counterparts and there are fewer large firmsin India thereby affecting the cost structure as well as ability to attract customers with largeorders. The central tendency is to add capacity once the order has been won rather than aheadof the demand. This is a major reason, thus far at least, that Chinese textile manufacturershave reaped most of the benefits of the post-quota regime. Indian firms need to develop themanagerial capabilities required to manage large work force and design an appropriate supplychain. For the size of the Indian economy, it will have to have bigger firms producingstandard products in large volumes as well as small and mid size firms producing largevariety in small to mid size batches.Marketing: Another aspect that requires attention is marketing. To exploit global markets itis necessary for the Indian garment industry to have better presence in these markets. This                                                        http://www.rediff.com/money/2005/aug/26guest.htm84

 

can be facilitated by collaboration with marketers and fashion houses in the United States,European and Japanese markets.Processing Houses: There is a scarcity of processing (dyeing and printing) houses in India.Hence, a policy support is needed from the government and big manufacturers to set up largeprocessing houses. Garment manufacturing is labor-intensive, and mostly uses female labor.Seasonal Nature: Garment manufacturing is highly seasonal as people all over the worldtend to buy more new clothes in certain seasons. On the other hand, as fashions tend tochange, it is not possible to manufacture and keep stocks for any length of time. Therefore,the garment industry tends to be highly seasonal. Furthermore, if as a result of any reasonbeyond the control of the manufacturers, the export market takes a dip, the manufacturer willhave to scale down operations. Employment laws in India are not very flexible toaccommodate these special characteristics and requirements of the garment industry.Domestic Market: While the Indian domestic market is very competitive at the low end ofthe value chain, the mid or higher ranges are over priced (i.e., ‘dollar pricing’). Firms are nottaking advantage of the large domestic market in generating economies of scale to delivercost advantage in export markets. The Free Trade Agreement with Singapore and Thailand isexpected to allow overseas producers to meet the aspirations of domestic buyers with qualityand prices that are competitive in the domestic market. Ignoring the domestic market, in thelong run, will peril the export markets for domestic producers. In addition, high retailproperty prices and high channel margins in India will restrict growth of this market. Firmsneed to make their supply chain leaner in order to overcome these disadvantages.

Impact of Global Economic Meltdown  The Indian Textile and Apparel industry has been hit hard by heavy interest rates, lessdomestic consumption, and cancelled export orders. Economic slowdown in the US and EUhas affected the textile business in India, resulting in a drastic decline in the country'sgarment exports. As meltdown has diminished garment sales in the US, Indian suppliers arebeginning to feel the pinch. As the customers of the Western countries curtailed theirexpenses to fight slowdown, export market of apparels in countries like India began to shrink.To sustain themselves in the market, apparel manufacturers chose to go in for cost cutting;thereby opting for lay-offs. As per an estimate, during financial 2008-09, almost 800,000garment and textile employees in India lost their jobs. As economic slowdown branched outduring the year, investments in textiles decreased, ultimately affecting the profitability of theindustry. The industry operated on around 75% of its capacity during the year.

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Budget 2010 Implications on the Garments & Textiles Industry •The Finance Minister has proposed a one-time grant of Rs 200cr to the government ofTamil Nadu towards the cost of installation of a zero liquid discharge system atTirupur to sustain knitwear industry. The dyeing units of Tirupur, which is one of themajor textile hub of India, have been facing problems because of environmentalconcerns.The new environmental regulations require the dyeing units to migrate to a zerodischarge system. The government’s proposal to set up an effluent treatment at thetextiles cluster is expected to offer a much-needed relief to the struggling industry.The Finance Minister has offered extension of existing interest subvention of 2.0% forone more year till March 31st, 2011 for exports covering handicrafts, carpets,handlooms and small and medium enterprises (SME). The export oriented units haveseen massive layoffs and shutdowns in the wake of slowdown and the government’smove is expected to give push to the exports sector with exporters getting access tofunds at cheaper interest rates.The Finance Minister has proposed to launch an extensive skill development programin the textile and garment sector by leveraging the strength of existing institutions andinstruments of the Textile Ministry to train 30 lac persons over 5 years.•••

Future Outlook for the Garments &Textiles Industry Branded marketers have adopted several new strategies which will alter the content and scopeof their global sourcing networks. India needs to strive hard to move up the value chain bymaking the most of the growing synergy between textiles and clothing segments. This willcall for a much higher degree of consolidation in the apparel sector with larger units buyingup the smaller ones and increasing the share of branded items in the total trade.Industry analysts expect that India’s labor cost advantage will result in a market share gainfor Indian exports. Indian textile companies, in the post-quota era, have become aggressiveand some of the big players in the industry have lined up investments to take advantage of theopportunity global market offers. However, as per estimates, Indian companies need to investabout Rs. 49,613 crore in improving technology in the next 2-3 years to become morecompetitive. 

Success will depend on apparel manufacturers going for modernization and scale economiesmore aggressively and improving the supply chain management86. Right quality at the rightprice and at the right time is the key for survival for the Indian apparel export industry. Theend of the quota regime would also see a lot of foreign retail companies moving to India todivert a major part of their sourcing requirements. In a free trade environment, success of thebuying agents will hinge more on factors such as quality, price, delivery schedules andmarketing skills. While one has to be ever vigilant of non-tariff barriers in the post MFAworld, the new market will be won on the basis of capabilities across the supply chain. Policywill need to facilitate this building of capabilities at the firm level and the flexible strategiesthat firms will need to devise periodically.87

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Chapter 8: The Road IndustryThis chapter includes:1.2.3.4.5.6.7.8.IntroductionCharacteristics of the IndustryKey TrendsKey DriversKey InhibitorsImpact of Global Economic SlowdownBudget 2010 ImplicationsWay ForwardReview 2009-10Revenue growth of construction players slowed downin the third quarter of 2009-10, due to delays in projectexecution as compared to the corresponding quarter ofprevious year. During the same period, operatingmargins improved, on account of softening of key rawmaterial prices. Net margins also improved y-o-y, dueto lower interest rate in Q3 2009-10.Outlook 2010The growth in order book of players is expected topick up on the back of new orders expected from theindustrial and infrastructure segments, owing toresolution of some key policy issues, especially in theroads sector. Operating margins are likely to witnesspressure in the next quarter, due to rising prices of keyraw materials such as cement and steel. Net marginsare expected to remain stable, due to improvingliquidity and low interest rates.

   

Introduction to the Road Industry Historically, investments in the infrastructure sector, particularly in the highways, were beingmade by the Government mainly because of the large volume of resources required, longgestation period, uncertain returns and various associated externalities. The gallopingresource requirements and the concern for managerial efficiency and consumerresponsiveness have led in recent time to an active involvement of private sector. Toencourage participation of private sector, the government has also announced severalincentives such as tax exemptions and duty free import of road building equipments andmachinery etc. It has been decided that all the sub projects in NHDP Phase-III to Phase-VIIwould be taken up mainly on Public Private Participation (PPP) route following either BuildOperate and Transfer (BOT) toll mode or BOT (Annuity) mode.An efficient transportation system is critical for sustaining economic growth and theburgeoning demand for passenger and freight movement. Recognizing this, the Governmentof India (GOI) and several state governments have launched initiatives during the past decadeto modernize and improve the transport infrastructure. Starting with the 9th Five Year Plan(1997-2002), road sector expenditures have gone up from 3% of the total Plan expenditure toalmost 12% today. These expenditures were primarily for national highway and rural roaddevelopment programs.The Union Minister for Road Transport & Highways, Kamal Nath said India would belaunching $70 billion in the road sector in the next three years. The private sectorparticipation is expected to be about 40 billion USD. Besides projects under the NHAI, thegovernment also earmarks funds for constructing roads, undertaken by various stategovernment agencies and municipal corporations including “innovative funding” schemes inthe Budget for boosting the country's roads infrastructure development.

         

Characteristics of the Road Industry • Road Network of IndiaIndia, having one of the largest road network of 3.314 million km, consists of NationalHighways, Expressways, State Highways, Major District Roads, Other District Roads andVillage Roads with following length distribution:Table 5: Road Network in India National Highways/ExpresswaysState HighwaysMajor and other District RoadsVillage Roads70,548 km1,28,000 km4,70,000 km26,50,000 kmThe National Highways have further been classified depending upon the carriageway widthof the Highway. Generally, a single lane has a width of 3.75 m and 3.5 m per lane in case ofmulti lane National Highways.The percentage of National Highways in terms of width is as under:Table 6: Highway Network in India 

Single Lane/ Intermediate laneDouble laneFour Lane/Six lane/Eight Lane20,849 km (30%)37,646 km (53%)12,053 km (17%)• Industry StructureThe Indian road construction industry is highly unorganized and fragmented. Only about0.4% of the 250,000 contractors in India can be classed as medium to large firms (based onthe number of people employed per firm). Many of the medium and large construction firmsare still family owned and lack professional management and work culture. While small andmedium contractors have mushroomed in the recent past, large contractors have not grown atthe same rate either in size (turnover) or number. Consequently, on national and statehighway projects there are few contractors to choose from, only about 45-50 Indiancontractors and about 10-12 foreign contractors. Often these contractors form joint ventures 

or consortia among themselves to qualify for most of the medium and large contracts in thecountry. Subsequently, these contractors suffer from insufficient capacity; the result is timeand cost overruns, related disputes and poor quality. As such, there is a critical need forreversing the slow growth of the large contractors and for enhancing the capacity of all sizesof contracting and consulting firms.The overall Indian construction industry, of which the road construction industry is a subset,is highly unorganized. There is no national record of the number of contractors, theirbackground or capabilities. The present capability of delivery of India’s construction industryis estimated at Rs. 3, 1008 billion per year. This works out to 12% of GDP. It is estimatedthat approximately 250,000 contractors provide employment to about 31 million persons(about 10% of the total work force) directly or indirectly. There is an urgent need to build thecapabilities of the contractors and workers. There has been a perceptible capacity buildingand growth of medium and small contractors in the past few years. The trend for largecontractors, however, has remained somewhat unpredictable. On national highway projectsand big state highway projects under way, about 60 contractors, Indian and foreign, areworking. Many form joint ventures (JVs) and consortia among themselves to take up allmedium to large contracts in the country, with insufficient capacity to handle them. This isclearly visible from the delays and cost over-runs in projects. Poor quality is also witnessed insome cases.While the government is providing increasing budgetary allocation for projects in thehighway sector and has undertaken major up gradation initiatives in high-density corridors, ithas not been possible to allocate sufficient funds matching the needs for maintenance ofNational Highways. The physical programmes of road development and removing thefinancial bottlenecks need concerted efforts in the form of mobilization of funds from othersources. In-flow of private sector funds is expected to bridge the gap between the demand andsupply to a certain extent.

         

 Trends of the Road Industry Projects undertaken by the Ministry under Public/Private Partnership BOT (Toll) 

Scheme:  In a BOT project, the concessionaire (private sector) is required to meet the upfront cost and the expenditure on annual maintenance. The concessionaire recovers the  entire  upfront  cost  along  with  the  interest  and  a  return  on  investment  out  of  the future toll collection.  As on April 2008, 79 projects have been taken up valued about Rs.22, 249 crores with alength of about 3,613 kames on Build Operate and Transfer (BOT) basis (Toll basedprojects). Out of this, 29 projects have been completed and 50 projects are under progress.

BOT (Annuity) Scheme:  In  an  Annuity  project,  the  concessionaire  (private  sector)  is required  to  meet  the  entire  upfront  cost  (no  grant  is  paid  by  the  client)  and  the expenditure on annual maintenance. The concessionaire recovers the entire investment and  a  pre determined‐   cost  of  return,  out  of  the  annuities  payable  by  the  client.  The 

tolling is done by the client.  As on April 2008, 24 projects valued about Rs. 9,205.61 crores, with a length of about 1,340kms have been taken on Annuity basis and out of this 8 projects have been completed.

Central  Road  Fund:  The  Central  Government  has  created  a  dedicated  fund,  called Central  Road  Fund  from  collection  of  cess  from  petrol  and  diesel.  Presently,  Rs.  2  per litre  is  collected  as  cess  on  petrol  and  High  Speed  Diesel  (HSD)  Oil.  The  fund  is distributed for development and  maintenance of National Highways, State roads, rural roads and for provision of road overbridges/underbridges and other safety features at unmanned railway crossings as provided in Central Road Fund Act, 2000. Out of the cess of Rs. 2 per liter levied, Rs. 1.5 is being allocated in the following manner:50% of the cess on high speed diesel (HSD) oil for development of rural roads.50% of cess on HSD and the entire cess collected on petrol are allocated thereafter asfollows: i.An amount equal to 57.5% of such sum for the development and maintenance of National Highways ii.An amount equal to 12.5% for construction of road under or over bridges and safety works at unmanned railway crossings iii.An amount equal to 30% on development and maintenance of State Roads. Out of this amount, 10% shall be kept as reserved by the Central Govt. for allocation to States for implementation of State road schemes of inter-state 

connectivity and economic importance to be approved by the Central Government.Balance cess of Rs. 0.5 per liter is entirely allocated for development and maintenanceof National Highways. An allocation of Rs.12,830 crores has been made under theCRF for 2007-08 with the following break-up: State Sector Roads: Since the StateHighways and major district and rural roads are the responsibility of respective Stategovernments, these are developed and maintained by various agencies in States andUnion Territories. However, the funds are also being provided from the Central RoadFund (CRF) by the Union Government for the development of State roads under thefollowing schemes:Improvement of State Roads from the CRF: The funds from the CRF are provided forimprovement of State roads other than rural roads. During the year 2006-07, 605 proposalsamounting to Rs.1, 541.93 crore have been sanctioned for improvement of State roads underCRF. An amount of Rs. 1,565.32 crore has been allocated for the year 2007-08 forimprovement of State roads under CRF.Economic Importance & Inter State Connectivity Scheme: To promote inter-statefacilities and also to assist the State governments in their economic development throughconstruction of road bridges between states and of economic importance, CentralGovernment provides 100% grant for inter-state of connectivity projects and 50% grant forprojects of economic importance. This fund is also provided from the CRF.During the year 2006-07, 14 proposals amounting to Rs.103.32 crores with Central share ofRs. 51.66 crore under EI scheme and 41 proposals amounting to Rs. 239.87 crore under ISCscheme have been accorded in-principle approval by the Ministry. An amount of Rs. 173.93crore (Rs. 164.93 crore for the States and Rs 9.00 crore for UTs) is earmarked under thisscheme for the year 2007-08. 

Rural Roads: Roads are also being developed in rural areas under the Pradhan Mantri GramSadak Yojana (PMGSY). The objective of PMGSY is to link all villages with a population ofmore than 500 persons with all-weather roads by the year 2007. This is being implemented byMinistry of Rural Development.Bharat Nirman Yojana: To upgrade rural infrastructure, the Government has formulated aproposal for providing the road connections to more than 38,484 villages above 1000population and all 20,867 habitations above 500 population in hilly and tribal areas. Toachieve the targets of Bharat Nirman, 1, 46,185 kms. Of road length is proposed to beconstructed by 2009. This will benefit 66,802 unconnected eligible habitations in the country.To ensure full farm-to-market connectivity, it is also proposed to upgrade 1,94,132 kms. ofthe existing Associated Through Routes. A sum of approximately Rs. 48,000 crore isproposed to be invested to achieve this.Research and Development in Road Development: The main thrust of research anddevelopment (R&D) in the roads sector is to build a sustainable road infrastructurecomparable to the best roads in the world. The various components of this strategy areimprovement in design, modernization of construction techniques, introduction of improvedmaterial conforming to latest trends, evolving better and appropriate specifications,encouraging development and use of new technologies etc. The dissemination of thesematters is done through the publication of new guidelines, code of practices,instructions/circulars, compilation of state-of-the-art reports and seminars/presentations etc.The research schemes sponsored by the Department are generally 'applied' in nature, which,once completed, would enable them to be adopted by user agencies/departments in their workin the field. The areas covered are roads, road transport, bridges, traffic and transportationtechniques etc. The Department takes the help of various research institutions, academicinstitutions and universities to implement the schemes. An outlay of Rs 600.00 lakh has beenprovided for R&D in 2007-08. Some of the ongoing major schemes are as follows:•Roads: i.Development of GIS based National Highways information system; ii.Guidelines for soil nailing techniques in highway engineering; iii.Pilot study on effects of overloading on road infrastructure; iv.Investigation on field performance of bituminous mixes with modified binders; v. R&D Studies on performance evaluation of rigid pavements on high density traffic corridors using instrumentation supported by laboratory tests.In addition to the above, the proposal of IIT, Roorkee for establishment of theMinistry's Chair in the institute in the area of development of Highway System hasalso been approved.•Bridges: Creation of complete range of independent testing facility at Central RoadResearch Institute (CRRI ), New Delhi 

Key Enablers of the Road Industry Traditionally, the road projects were financed only out of the budgetary grants and werecontrolled/supervised by the Government. The road sector has attracted very limited privatesector participation in the past. While the traffic has been constantly increasing at a rapidpace, the traditional system of financing road projects through budgetary allocations hasproved to be inadequate. It was in this context that the necessity for exploring the innovativemeans of financing the highly capital intensive road projects was felt.The beginning of a significant private sector participation in road projects was made with thelaunching of India's largest road project - National Highways Development Project (NHDP).To encourage private sector participation, several initiatives have been taken by thegovernment which includes:••••••••Declaration of the road sector as an industry.Provision of capital subsidy up to 40% of the project cost to make projectscommercially viable.100% tax exemption in any consecutive 10 years out of the first 20 years of a project.Provision of encumbrance free site for work, i.e. the Government shall meet allexpenses relating to land and other pre-construction activities.Foreign Direct Investment up to 100% in road sector.Easier external commercial borrowing norms.Higher concession period, (up to 30 years).Right to collect and retain toll.

Key Inhibitors •Investment climate parameters such as availability of skilled staff, operational issues(land, licenses and clearances, governance) and taxation were perceived as the primeconstraints, followed by material costs, contract enforcement and dispute resolution,barriers to entry, and subsidies and fiscal concessions. Foreign contractors who weresurveyed cited as the most critical issues cultural bias in project management style,poor governance, bureaucracy and corruption, risk allocation practices and contractconditions, visa and travel document processing for expatriates, and lack ofinformation on the road construction industry. Besides these, foreign contractors alsoperceived some intangible constraints, such as preference given to domesticcontractors during the bidding process.Delays in pre-construction activities are a recurring problem across all roadconstruction contracts. On average for national highway projects it takes 50% more• 

••time than scheduled to hand over encumbrance free land to the contractors. Often,encumbrances such as the extent of land acquisition, utilities to be shifted and trees tobe removed are not clearly identified and dealt with in a timely manner. Theseactivities are also hampered by cumbersome procedures for obtaining the necessaryclearances, unclear laws and regulations and a lack of coordination between thevarious government departments and levels. There is a distinct lack of a ‘spirit ofpartnership’ between the contractor and the employer. This is critical to effectiveproject execution, as evidenced in other countries. The result is time and cost overrunsand related disputes that invariably end up in litigation.Contractors from other sectors face entry barriers such as strict qualificationrequirements related to previous technical experience in the sector. Rampantcartelization and collusion among contractors in some states also prevent thesecontractors and non-regional bidders from even submitting their bids. Furthermore, itis not possible for small and medium contractors to get a rating that would facilitateeasier access to credit for expanding their business. The lack of a single constructionlaw (such as in China and Singapore) with the requisite legal framework governing allaspects of construction is another barrier to entry for players interested in entering thissector. Such a law would also strengthen the dispute resolution mechanism and reducethe burden on the courts and the ensuing delays in satisfactory resolution of cases.Inadequacy of skilled human resources is a major constraint across the roadconstruction industry. Its slow evolution, the rising appeal of other streams ofengineering such as computer science, the closure of civil engineering specializationin some institutes, the non-availability of suitable jobs upon graduation (in somestates), and the availability of more lucrative jobs in information technology andfinancial services are all draining the industry of civil engineers.

Budget 2010 Implications on the Road Industry •••Allocation for road transport increased by over 13% from Rs 175.20 bn to Rs 198.94bn.An allocation of Rs 7 bn for development of National Highways under Border RoadsOrganization.Specified road construction machinery items are presently fully exempt from customsduty subject to specified conditions. Sale or disposal of such machinery items atdepreciated value is being allowed on payment of customs duties on depreciated valueat the rates applicable at the time of import subject to specified conditions.An allocation of Rs 17.50 bn for Special Accelerated Road Development Project inthe North Eastern Region.An allocation of Rs 94.72 bn for National Highway Authority of India• 

••An allocation of Rs 2.30 bn for Inter-State and Economically Important Roads indifferent States and UTs.An allocation of Rs 45.75 bn for Development of National Highways.

Way Forward for the Road Industry Sustained economic growth in India has resulted in increasing freight and passenger trafficvolumes. To meet current and future demands as well as reduce regional disparities India hasmade significant investments and improved their road networks although following quitedifferent strategies. India has concentrated investments on lower level district and rural roads.The underdeveloped arterial network in India is cause of huge economic losses..In India financing mechanisms for road development and maintenance appear to beinadequate and/or insufficient to meet expected demands in coming years. Private sectorparticipation in road development has been moderate at best, especially when compared toother infrastructure sectors, and is unlikely it will take a much greater role unlessgovernments address private investors' concerns related to traffic risks and pricing structures.India still has much to do in creating policy and regulatory environments that facilitate accessby the private sector to capital markets and provide guarantees for risk mitigation. Reducinggovernment intervention in financial markets should contribute to their deepening andbroadening as well as foster the growth of the investor base, especially institutional investors- a natural source for funding road infrastructure. Easing restrictions on the deployment offunds by institutional investors could significantly improve the flow of capital for roads andinfrastructure development in general. India has created specialized institutions for long-terminfrastructure financing and there are certainly arguments for establishing an Asianinvestment bank in the line of the European Investment Bank. These institutions could indeedplay an important role in mobilizing resources by tapping into global financial markets andchanneling funds to road projects. However, their mere existence will not necessarily increaseinvestments in road infrastructure. As the shortage of viable projects for funding by the IDFCillustrates, the underlying obstacles hindering investor confidence need to be addressed firstto make infrastructure projects attractive. The strong public good characteristics attached tomost of the road network dictate that the public sector should still be the main actor infinancing roads whether through general, earmarked taxes and/or debt. Developing anadequate system of road-related charges and taxes will be central in creating a sustainablemodel for road financing as well as encouraging an efficient allocation of freight andpassenger traffic patterns.There is not only abundant global capital but also large levels of domestic savings in bothcountries to finance the road infrastructure needs of coming years. The key challenge will bedeveloping efficient, stable, and sustainable mechanisms to intermediate those resources andachieving the right balance between international and domestic capital and between privateand public financing. 

 

 

   Books••SME White Book – Business StandardCredit Appraisal, Risk Management &Decision Making – DD MukherjeeWebsites•••••••••••••••••••••www.msme.gov.inwww.sme.icicibank.comwww.smallindustryindia.comwww.google.comwww.sidbi.comwww.smeworl.orgwww.imsme.orghttp://www.autopartsasia.com/sep_inter_s.asphttp://www.google.co.in/search?hl=en&q=indian+automotive+industry+2009%2bacma%2bppt&meta=&aq=f&oq=http://acmainfo.com/docmgr/status_of_auto_industry/status_indian_auto_industry.pdfwww.acmainfo.com

http://www.dnb.co.in/smes/overview.asphttp://www.ibef.org/download/autocomponent_060109.pdfhttp://ibef.org/artdisplay.aspx?cat_id=60&art_id=7335&in=2crisil research – annual review 2008nasscom fact sheet - ‘indian it-bpo industry 2009’delloite- it/ites studyfinancial times – “bfsi sector battered by global downturn: d&b report” dated 26th

nov, 2008http://indiquest.wordpress.com/2009/02/04/the-indian-logistics-sector-%e2%80%93-a-bright-future-prospecthttp://www.ibef.org/industry/textiles.aspxhttp://www.conversationsforabetterworld.com/2009/07/women-and-poverty-indias-textile-industryhttp://www.citiindia.com/indian_overview.asphttp://smetimes.tradeindia.com/smetimes/news/top-stories/2008/oct/13/textiles-industry-achieves-16-percent-growth-rate.htmlhttp://www.india-server.com/news/indias-textile-exports-at-20-5-billion-467.htmlDelloite – IT/ITEs Study