Taking UK-India relationship on the fast-track

Taking UK-India relationship on the fast-track

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Putting the special back into the UK-India saddle

Indian Defense Sector

Indian Financial Services

Indian Education

Engineering and Automotive Industries

Infrastructure

Retail

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Table of content


Putting the special back into the UK-India saddleThe UK-India association goes back a long time in history. Despite the strong legacy it left behind in terms of language, culture, bureaucracy and judiciary, the share of the UK in India’s foreign trade has traditionally lagged behind that of other countries. In 2005, the two governments set up a Joint Economic and Trade Committee (JETCO) to address the challenges affecting trade and investment. The cross-border investment on the corridor also seems to have gained vigour in recent years, particularly with the Tata group acquiring Corus and Jaguar Land Rover, and Vodafone and British Petroleum making large investments in Hutchison India and Reliance, respectively.

Several large UK corporations have been operating in India for a long time and have created strong local brand loyalty, and many more have followed suit. However, the overall UK investment seems marginal in comparison to the companies’ from the USA and Germany. London as a leading financial center, and the perfect gateway into Europe continues to attract several prominent Indian business groups.

The current global economic environment is an interesting one, with mixed signals. In the post-Lehman era, most developed economies such as the US and the European Union kept perilously drifting into an abyss of multi-dip recessions. Global funds moved on to safer havens and showed a clear preference for emerging markets such as India. Over the last five years, governments in developed markets have made several endeavors to revive customer confidence and growth through a slew of measures. Recovery, however, has been slow and has often struggled below the one percent rate, paling in comparison to the sustained Indian growth rate of five percent.

However, the recent turn of events following the speculation around the US government’s withdrawal of the stimulus package has adversely affected the sentiment in emerging markets. The likely improvement in US bond yields seems to be invigorating interest in developed markets and, consequently, drifting capital away from emerging markets. It is important to note that a dominant share of the funds invested particularly in emerging markets such as India were institutional, and only a small tranche actually went into creating tangible assets.

1 Taking UK-India relationship on the fast-track


The combined effect of the flight of capital and a weakening domestic economy is clearly reflecting in the slipping value of the Indian rupee. The recent announcements around liberating foreign investment regulations are definitely welcome but they seem to have come a little late in the day to make a visible impact on the global investor perception of India. The majority of discussions around the likely revival of the Indian economy appear to hinge around the result of the upcoming general elections. In any case, the long-term India story continues to hold promise primarily on account of a robust economic engine that has the benefit of a fundamental fuel-mix of favorable demography and private consumption dominated by a burgeoning middle class. However, the Indian promise continues to be threatened by some serious challenges, which, if unchecked, could have dire consequences:

• Lack of quality infrastructure that can deprive the economy of the chance to grow steadily and speedily: There appears to be a dichotomy between the slow pace of infrastructure build for want of project-finance on the one side and the high rate of Indian savings on the other. The experiment with the public-private-partnership model is taking off slowly due to the policy bias of awarding contracts largely based on price, combined with the government’s apathy to guarantee returns.

• Despite India’s large population, less than 30 percent of Indians have a bank account, leaving a large percentage of savings to idle in the form of cash and gold. The country continues its pursuit of inclusive banking in an attempt to get closer to the paradigm of optimal capital distribution for productive uses.

• An increasing number of Indian business groups has been investing globally, but local banks continue to be found wanting on their ability to service them universally.

• The Indian Ministry of Defense has set a clear goal of indigenizing products and services. However, the new procurement policy involving offsets does not seem to be generating interest among global defense vendors.

• The threat of weak education and skills continues to loom large and is driving the government and local institutions to think creatively. The lack of a favorable ecosystem to promote research and innovation even among premier technology institutes is a serious concern.

There is a great opportunity for the UK and India to combine forces to overcome most of the aforementioned challenges. During his most recent visit to India, the UK Prime Minister David Cameron emphasised on the need for the UK and India to become “partners of choice.” As a first step, he proposed

a joint partnership to develop the 1,000-km BMEC (Bangalore-Mumbai Economic Corridor). The UK and Indian governments are now exploring options to set up a London-listed ’infrastructure debt fund‘ (IDF) to attract international finance for Indian projects. Collaborative initiatives such as these, particularly at a bilateral level, promise to promote a facilitative environment and create promising opportunity channels for investors.

This document endeavors to provide insights and perspectives on a few sectors that are relevant to the UK-India corridor. Both India and the UK possess several skills and experiences that can benefit the industry on either side. Investors are keen to collaborate, but they feel stifled with regulatory issues. This document charts some ideas that can drive industry solutions and also restore investor confidence. The ball is now in the policymakers’ court to bilaterally engage, discuss and resolve issues in the best interest of developing trust, confidence and enthusiasm among investors.

2Taking UK-India relationship on the fast-track


Indian Defense Sector



Indian Defense SectorIndia’s proximity to politically volatile countries and the rise of inland military groups have triggered the demand for increasingly strong, modern and well-equipped armed forces. Perhaps this explains why India continues to be the world’s biggest arms importer for the third consecutive year in 2013. While six of the top 10 defense buyers globally are scaling down their expenditure, India is considering otherwise. This translates into a GBP120 billion-worth opportunity for global and Indian defense manufacturers between 2013 and 20201.

Objectives of India’s Ministry of Defense (MoD)

The Indian MoD aims to develop an indigenous defense manufacturing capability and a skilled force. However, this is easier said than done, as foreign imports constitute more than two-thirds of the country’s total procurement. Domestic production is largely restricted to the development of low-end equipment, which offers limited strategic importance. The latest Defense Procurement Policy (DPP) 2013 focuses on developing indigenous capability. It has also accorded ‘Buy Indian,’ ‘Buy and Make Indian’ and ‘Make Indian’ categories more importance than ‘Buy Global.’ However, it remains to be seen whether the Indian industry is prepared to cater to the significant requirements that emerge from its defense forces’ large procurement programs.

Developing indigenous capability

Several countries have followed some progressive steps to develop indigenous defense production capabilities. These include China and South Korea, which have followed a model similar to the following:

• Production of arms that initially depends on imported technologies or components, such as assembling knock-down kits

• Licensed production of foreign systems, where some or nearly all components and subsystems are manufactured indigenously

• Limited development and production of simple weapon systems indigenously; done along with the co-development of comparatively sophisticated armaments in partnership with advanced foreign arms producers, with incremental improvements in independent R&D capabilities

• Finally, the attempt to design and develop its own advanced weapon systems (along with intellectual property ownership) either across the board or by carving out some lucrative niche segments.

China’s defense development strategy has experienced a gradual shift from being import-driven to reverse engineering to innovation. For over two decades, certain key Chinese weapon systems produced for the domestic market and export were either based on Russian designs or produced under Russian licenses. Moscow assisted Beijing in upgrading its domestic defense industry and achieving self-sufficiency in several

areas. South Korea followed a similar trajectory. The country, which did not produce any defense equipment until the early 1970s, today has one of the most impressive defense industrial bases in the developing world. Extensive foreign assistance and the presence of an established heavy industrial base have contributed to the rapid expansion of South Korea’s arms industry since the 1980s. India, like China and South Korea, could consider leveraging global suppliers to import modern technology to upgrade its industrial base and, consequently, build a robust indigenous defense industry.

India’s development model

India’s model of developing an indigenous capability by setting up organizations such as the Ordnance Factories Board (OFB); the Defense Public sector Undertakings (DPSU); the Defense Research and Development Organization (DRDO) has met with limited success. The majority of indigenous projects have resulted in time and cost overruns. India’s defense production capability in the private sector is limited but growing. Therefore, attempts to indigenize defense production have largely been unsuccessful.

To make India increasingly self-reliant, the MoD has placed high priority on procuring equipment from Indian companies (DPP 2013). India will have to improve its capability and capacity substantially and quickly. It could also collaborate with strategic partner countries to realize this objective. While the US, France, Israel and Russia constitute India’s leading defense suppliers, none of these countries qualify as India’s ‘Strategic Partner.’ Britain, which rightfully boasts an advanced defense sector capability, is one of the major contenders for this spot. The task is not easy and requires both countries to work closely and systematically in the long term.

India-UK defense relations

India and the UK go back a long way in defense collaboration. The Indian armed forces continue to follow the erstwhile British Army’s organizational structure. The UK was India’s largest defense supplier during 1940-64 despite significant differences between the two countries over their foreign and defense policies. It even helped India establish facilities to assemble the Vijayanta tank and other equipment, apart from providing a 10-year loan worth GBP4.7 million toward the reconstruction of the Mazagon Dockyard in Bombay (Mumbai) and the construction of Leander Class Frigates2.



1 Ministry of Defence statistics, Media Articles and KPMG Analysis2 Media Articles and KPMG Analysis

Factors such as the Cold War, British support to Pakistan on the Kashmir issue, and the country’s reluctance to strengthen India’s military against Pakistan dented the India-UK defense relationship during the 1960s. As a result, defense imports from the UK declined, and India’s dependence on the Soviet Union increased.

While geopolitics and a difference of opinion on critical policy matters continue to influence the bilateral relationship, both countries have been trying to strengthen ties by broadening bilateral defense cooperation. This is evident from the formation of the UK–India Defense Consultative Group (DCG) in 1995. Both countries have signed several agreements in the following areas:• Defense Equipments (1997): To encourage defense industrial

partnerships

• Defense Science and Technology Laboratory (2011): Signed between India’s DRDO and the UK’s Defense Science and Technology Laboratory

• Counter-terrorism, through the formation of a Joint Working Group

• Cyber security

• Joint military exercises

Challenges faced by British defense companies in India

British defense companies face unique challenges while doing business in India. Some of these are genuine, while others are a result of skewed public perception. These include:• An unreliable supplier

The UK’s export restrictions following India’s 1998 nuclear tests have affected India-UK defense ties. This has led many people in both countries to believe that the UK can pull the plug on critical defense supplies to India at free will.

• Inadequate support from the UK Government UK defense companies are primarily driven by their own efforts in India. This is in sharp contrast to the US, Russian, French or Israeli defense firms, whose respective governments have built strong strategic relationships with the Government of India (GoI) by routinely holding discussions on important defense issues. Such government-to-government-level engagement has helped India sign several defense deals with the US (worth USD8.4 billion), Russia (USD7.6 billion) and Israel (1.2 billion)3.

• High pricing British defense products are considered sophisticated and expensive. Thus, English companies tend to lose out in India’s tender-based procurement process where the lowest bidder, if technically qualified, wins the contract.

• Less focus on India The Middles Eastern region has traditionally been the primary focus area of UK defense companies; India did not feature on their priority list until recently. This is attributed to the cumbersome and complicated defense procurement process in India.

• No UK defense business chamber. Currently, there is no UK defense-specific business chamber in India. The India-US business chambers and their highly active defense committees have been instrumental in promoting the two countries’ defense ties and advocating policy reforms.

The future of India-UK defense relations, where do we go from here?

The future of India-UK defense relationship relies on the alignment of their objectives and aspirations for mutual benefit. The UK can take some measures to strengthen ties. These include:

Develop an India-focused strategy

The British Government should take its engagement with the GoI and the MoD to the next level by helping UK firms proactively engage with India’s DPSUs, DRDO and private sector companies in the field of research and development. It also needs to ensure that the long-term defense ties do not get hampered by the rapidly changing geo-political situations. It would do well to ensure that incidents such as the cancellation of the UK-India defense secretary-level talks in April 2013 do not recur. Also, Britain should bring about necessary policy changes to ensure export controls do not hamper its broader strategy.

Become India’s ‘Anchor Partner’

Any country that makes indigenization of India’s defense imports the core of its India strategy would be able to establish a long-term, mutually beneficial relationship. The UK should consider becoming India’s ‘Anchor Partner’, as it will help its defense industry cash in on an expanding market (its traditional European and North American markets are trimming their defense budgets). This would also enable British companies create a low-cost production hub in India for global sales, which will help them in the long run.

Co-develop cutting edge technology

The MoD’s Technology Perspective and Capability Roadmap (TPCR) lists key requirements for Indian armed forces and the specific technological capabilities to be developed/acquired over the next 15 years. The UK Government, with defense companies, can select some of these specific technology areas that they would like to co-develop with India. • The governments of the UK and India can then enter

discussions to:

• Identify specific technologies they can co-develop.

• Identify specific Indian entities that may collaborate with UK entities.

• Develop educational and training infrastructure in these specific technologies.

6Challenges faced by British business in India


3 Media Articles and KPMG Analysis

• Market these technologies and products to partner countries.

• One way to collaborate is by establishing special economic zones (SEZs) for aerospace and defense capabilities. British companies and their Indian suppliers can set up manufacturing and research facilities for domestic use and export. British companies can offer to sign the Special Security Agreement (SSA) with India to address the MoD’s concerns on IP protection and confidentiality associated with the co-development of defense technology.

Increase number of touch points

The UK can increase cooperation with the Indian defense sector by:• Conducting joint military exercises, especially in critical areas

such as urban warfare, desert operations, anti-pirates naval operations and UAVs where the UK’s armed forces are fairly experienced

• Imparting skills to Indian paramilitary forces in focused skills such as mega-city policing, cyber crime, bomb defusing, anti-terror communication tracking, critical infrastructure protection and security planning for mega events (sports and concerts)

• Supporting India’s premier institutes and technical training schools by increasing collaboration with UK universities to develop courses in advanced manufacturing engineering related to aerospace and defense

• Facilitating select Indian micro, small and medium enterprises(MSMEs) to become prospective offset partners for UK defense companies

• Imparting training to DPSU and DRDO engineers and scientists at the UK’s research and manufacturing facilities

Set up a UK defense sector forum in India

Establishing a dedicated India-UK defense sector cooperation forum in India that serves as a platform for the UK Government and defense companies to connect with the Indian defense establishment is of paramount importance. The forum would be helpful for sharing the experience of operating in India; discussing issues and challenges; and proposing potential solutions. The forum could either operate under the auspices of UK Trade & Investment (UKTI) or as an independent body.

How can the GoI facilitate increased investment in defense from the UK?

India requires advanced technology and manufacturing capabilities to bridge the existing defense capability gap. To achieve this, it must reform its FDI and procurement policies; increase transparency in procurement procedures; and fast track the decision-making process. These are the common pain points of all defense suppliers, not just the British, dealing with India.

The GoI must also take certain initiatives, including the following:

Raise the FDI limit in defense to 74 percent

The FDI limit of 26 percent is the single biggest factor holding back global OEMs from investing in Indian defense. It is naive to expect global OEMs to transfer technology, research infrastructure, funds and jobs to India in return for a minor holding. Increasing the FDI limit to 49 percent may not help either, as legally, it would not give UK firms greater decision-making power than they currently have at a limit of 26 percent. However, increasing the limit to 74 percent, if not 100 percent, would invite more investments, making India truly self-reliant. In return, a provision could be made to employ 90 percent of Indians at such facilities. This would help Indian executives to acquire superior technological skills and modern manufacturing and business processes, which, in the long term, would also increase the country’s self-reliance. Besides increasing the FDI limit, the GoI could consider encouraging DPSUs to set up joint ventures with leading foreign defense manufacturers.

Clarify the term ‘state-of-the-art technology’

The GoI recently allowed 100 percent FDI in the field of ‘state-of-the-art technologies.’ However, greater clarity is required on the definition of this term. The GoI would do well to consult all stakeholders to eliminate all possible confusion. • Some potential indicators of a ‘state-of-the-art technology’

could be: Technologies that have a patent protection for a relatively long period.

• The owner of a technology, firm/individual, has a dominant market share (say, over 50 percent share in the export market).

Simplify the defense procurement procedure

The Indian MoD has simplified the procurement process significantly over the last decade. However, it is still complex and time-consuming as compared to other countries. In the past, several changes were brought about without consulting relevant stakeholders. This adversely affects long-term business plans of international defense companies operating in or willing to invest in India. A practical, consistent and predictable policy regime with simplified, time-bound procedures would help both India and the global investor community.

The UK is fastidious about transparency in defense dealings. India should take constructive steps toward introducing transparency across all levels of defense procurement processes.



Simplify the Export Control Policy

Global investors in other manufacturing sectors such as automotive and pharmaceuticals have leveraged India’s talent pool, ‘frugal engineering’ skills and other low-cost advantages to set up a global supply base in the country. The defense sector, however, faces simple problems that include confusion on whether the export of equipment designed and produced in India to the global market will be allowed. The Indian market is not equipped to sustain large-scale production by an India-UK joint venture defense company. Since there is no certainty around the periodicity of large orders, which would keep a facility gainfully engaged, global supply could help the JV’s manufacturing plants in India remain sustainable. The GoI should consider allowing exports of Indian-made defense products, subject to reasonable verification of their final destination. In their own interest, global OEMs would not allow Indian products to end up with countries or organizations inimical to the country’s interests.

Simplify restrictions on the movement of foreign domain authorities

Developing an indigenous capability would require significant movement of foreign defense professionals in and out of India. It is the responsibility of the two governments to facilitate the smooth movement of defense sector officials in their respective countries. This can be achieved by:• Relaxing security checks of certified foreign defense officials

• Decreasing taxes levied on payments to these officials

• Introducing fast-track visa approval programs for select defense companies personnel from both countries

• While these measures are important, they should be introduced without compromising India’s legitimate security concerns. In return, the UK Government could consider immediately revoking the GBP3,000 visa bond on select Indian travelers to its country.

Protect intellectual property

The joint development or transfer of technology would require British companies to share their intellectual property with Indian joint venture partners. Therefore, it is the responsibility of Indian companies to protect them. The GoI will have to create an IP protection framework that instills confidence in foreign companies. This will likely increase the volume of technology transfer multifold in future.

Conclusion

Although India and the UK go back a long way, their defense ties leave much to be desired. Evolving geopolitical equations in the 1960s weakened defense cooperation between the two countries. However, the past few years have witnessed a revival of the bilateral relationship in several sectors. It is high time that defense ties were also strengthened. India, the largest arms importer in the world, offers a GBP120 billion-worth business opportunity to global and domestic defense manufacturers4. The country’s security challenges are increasing by the day. Its armed forces are on a modernization drive, and the government is keen to develop a self-reliant indigenous defense production capability. The UK, with its proficiency in defense technology, can leverage this opportunity by assisting India and becoming its ‘anchor partner’ in the sector.

However, this would require the British Government to engage with the Indian administration as closely as other major arms suppliers. The UK would need to develop a long-term India-specific strategy, increase the number of touch points in the Indian defense establishment, and determine ways to co-develop advance defense technologies. This can be achieved by establishing a UK defense sector advocacy forum in India. Meanwhile, the GoI should consider raising the FDI limit in defense production to 74 percent to facilitate indigenization. Moreover, it must simplify its archaic procurement procedure and clearly define the term ‘state of the art technology’ to eliminate confusion among potential investors. Finally, India could consider simplifying its Export Control Policy to leverage competitive advantages and become a global production hub for the defense sector.



4 Ministry of Defence statistics, Media Articles & KPMG Analysis

Indian Financial Services



Indian Financial ServicesDuring 2003–2013, India was one of the fastest-growing economies in the world with an average GDP growth rate of 7.6 percent. However, recent global and domestic factors have slowed down the economy, which is today marred by high inflation and current account deficit. This, however, is a passing phase — India’s high savings and investment rate, coupled with strong domestic demand and rising per capital income, are indicative of a seemingly bright future.

In contrast, the British economy recorded its highest decadal growth in 2012 among the six major European countries (France, Germany, Italy, Spain, Portugal and the UK). While its economy contracted in 2009 following the global economic crisis, it quickly recovered in 20101. Low consumer inflation and lending rates as well as a strong British pound, in comparison with the US dollar, is likely to facilitate Britain’s growth at an unprecedented rate as the global economy recovers in the near future. This can be expected to improve business sentiment, which, in turn, is likely to drive investment and generate employment. The resulting increase in income is also expected to fuel demand and exports.

India’s financial services sector

Both India and the UK have strong financial services sectors, but they have a lot to learn from each other. Although the Indian financial sector faces certain short-term challenges, prudent regulation and effective supervision by regulators (the RBI for banking, SEBI for capital markets, and the Insurance Regulatory and Development Authority (IRDA) for the insurance sector) and other governing bodies has kept the sector strong. Overall drivers for economic growth, the under-penetration of financial services and a facilitative policy framework are expected to boost demand for financial services in India in the near future.

Banking

India was home to 87 scheduled commercial banks with deposits worth USD1,318 billion as on 31 May 2013. Of this, 26 are public sector banks, 20 are private banks and 41 are foreign banks2.

• Key issues facing the Indian banking sector are:

• Deteriorating asset quality

• Capital adequacy ratio with Basel III norms

• Financial inclusion

• Consolidation

• Talent management

Insurance

India is the fifth-largest insurance market in Asia. The players in the sector are categorized under four sub-sectors — life insurance, general insurance, specialist health insurance and re-insurance. Intense competition characterizes the market, with 51 players in the industry (24 in life and 27 in general insurance).The Indian life insurance industry has grown at a healthy rate of about 10 percent during FY08–13 to be valued at approximately USD50 billion in FY13. In fact, new business (API) has grown at a CAGR of about six percent during FY07–13, with a contraction

after FY11 due to regulatory changes related to unit-linked products in September 2010. Life density is expected to increase to USD70 per capita by March 20183.

The general insurance industry has grown from USD2.35 billion in FY02 to USD11.36 billion in FY12 (in terms of gross direct premium), which corresponds to a CAGR of 17.6 percent. Growth in the general insurance industry has kept pace with the nominal GDP growth rate. As a result, general insurance penetration has remained stable in the range of 0.55–0.75 percent over the last 10 years. It is expected to grow at a CAGR of 16 percent, from USD11.36 billion in FY12 to approximately USD38.03 billion by FY204.

Asset management

India has been among the fastest-growing markets globally for asset management since 2005. Assets under management are expected to grow from USD141 billion in July 2009 to USD804 billion in FY204.

There is high potential for growth in future, as the penetration of mutual funds (MFs) in India is lower than in other developed markets. This can be primarily attributed to the fact that despite high savings in India, these are not being invested in mutual funds due to inflationary pressures on household finances and low awareness levels. India-UK collaboration in financial services

Deep historical relations

India and the UK share a strong relationship in the financial services sector. As of 31 March 2013, there were five Indian banks with 30 branches in the UK, while there were four British banks with 158 branches in India. India has been an important market for these banks outside the UK. As of FY12, these four banks collectively accounted for about 42 percent of the total income of all foreign banks operating in India.



1 Economist Intelligence Unit and KPMG in India analysis 2 RBI 3 Insurance Industry – Road Ahead : Path for sustainable growth momentum and increasing profitability4 KPMG in India analysis

In the insurance sector, five British life insurers, one health insurer and two UK general insurers are operating through joint ventures with Indian partners. Many of these companies have been successfully running their operations for about a decade. Even small size companies have witnessed significant growth in their Indian operations due to demand in the domestic market.

Opportunities for British FS companies in India

Banking

• International banks can offer sophisticated products such as spot/derivative products (FX/rates), prop trading, debt syndication (FX and INR) and money market lending and other hedging products.

• Foreign banks have the global network to cater to the financing needs of Indian companies expanding their footprint overseas.

• Increased trade flow with other countries offers great potential for banking services, especially to banks from those countries.

• Wholly owned subsidiary (WOS) conversion: The RBI has proposed a framework that favors the ‘subsidiarization’ model for fresh entrants (foreign banks) while nudging existing large foreign banks to convert from a branch model to a WOS model. This is likely to give foreign banks near-national treatment. Also, the RBI will soon issue guidelines to free rules on setting up bank branches for domestic commercial banks.

• New bank licenses: According to the new RBI governor, Raghuram Rajan, an external committee will be set up soon to screen potential entrants, and RBI hopes to hand out licenses within or after January 2014.

• The RBI will also consider continuous or on-tap bank licensing system for future applicants.

Insurance and pensions

• The pension fund bill: Recently, the Government of India (GoI) cleared the Pension Fund Regulatory and Development Authority Bill (PFRDA) 2011, which aims to create a regulator for the pension sector and extend the coverage of pension benefits to a wider population. The ceiling for FDI has been kept at 26 percent. Pension fund assets in India are about five percent of the GDP, which is significantly low as compared to OECD countries, where average pension fund assets constitute almost 67 percent of the GDP.

• Increase in FDI in the insurance sector: To address capital concerns, the GoI intends to raise the FDI limit in the insurance sector from 26 percent to 49 percent.

This should not only facilitate the expansion plans of existing UK insurers (such as Prudential and Aviva) but also encourage new players to enter the largely untapped Indian insurance market.

• Less stringent capital norms for the health insurance sector make it easy for niche health insurers to enter the market. Therefore, niche British health insurers can consider this.

Other FS areas

• Outsourcing: The British Government’s decision in June 2013 to divest from semi-nationalized large banks in which it had infused equity in the aftermath of the 2008 global financial crisis could trigger a significant trend of outsourcing IT projects to Indian firms.

Opportunities for Indian FS companies in the UK

• The IRDA has allowed insurance companies to set up their offices outside India and conduct business (life, general or re-insurance) overseas.

• New Banks licenses in UK: The Financial Services Authority and the Bank of England have introduced measures and streamlined processes in March 2013 to encourage new entrants.

India-specific opportunities5

• MSME segment: There will be increased credit requirements from the MSME sector that has witnessed 18 percent CAGR from FY08 (USD44.2 billion) to FY12 (USD84.5 billion).

• Infrastructure financing: According to the Twelfth Five Year Plan (FY12–17 Planning Commission), the infrastructure sector requires USD1 trillion, which can be acquired through private player participation. Infrastructure development is a priority for India, and several opportunities for infrastructure financing in roads, ports, railways and airports are likely to emerge in the near future.

• Large and growing retail finance and mortgage books: The purchasing power of the emerging Indian middle class in on the incline; it also has an evolving appetite for debt to acquire assets and support growing lifestyle aspirations.

•Rising rural income: The profile of the rural economy is rapidly changing; it is becoming increasingly diversified and moving beyond agriculture. The share of agriculture in rural GDP reduced from 42 percent in 2001 to 27 percent in 2011. Developing a holistic approach for rural India calls for an understanding of the non-agricultural space, including aspects such as manufacturing, trading, transportation and construction.



5 KPMG in India analysis

Challenges that British FS companies face in India Banking

• Effective 1 April 2013, priority sector lending (PSL) norms stipulate foreign banks with more than 20 branches to increase their priority sector lending to 40 percent within five years. Further, the RBI has kept export finance, which greatly assists foreign banks meet their PSL targets, outside the PSL window. This requires British banks to formulate India-centric strategies on agricultural advances, export credit and small enterprises advances.

• Foreign banks are not allowed to acquire local banks.

Insurance

• Profitability

• Scarcity of capital

Asset management

• Recent volatility in capital markets, thanks to the global financial turmoil, has pushed investors to safer shores such as post office savings and bank deposits.

• Awareness on MF products is quite low among investors.

India-UK collaboration in FS: the role of the government and the regulator

Recently, RBI Governor Raghuram Rajan, announced the RBI’s intention to put the Indian economy back on a high-growth trajectory and further liberalize the financial sector. And, the government and the regulator can consider following measures to boost the confidence of British companies in India:

• Establish a single-window clearance mechanism for investors.

• Pass the Insurance Bill and increase FDI in the insurance sector from 26 to 49 percent.

• India should consider adopting the Prevention of Bribery of Foreign Public Officials and Officials of Public International Organisations Bill.

• Create a strong legal framework for the Corporate Debt Restructuring (CDR) mechanism that would help British companies place their trust in the rule of law.

• Suggest minimum documentation requirements for KYC with respect to all proposed categories of foreign portfolio investors.

• The regulator could deliberate the inclusion of export finance within the PSL norms for foreign banks.

• The effective implementation of some of these measures will further strengthen strategic ties between India and the UK and help the two countries create superior financial infrastructure as well as a well-regulated financial industry.



Indian Education



Indian EducationHigher education in India is poised at a critical but exciting juncture. There are strong indicators of high demand, driven by ambitious targets — such as achieving a 30 percent Gross Enrolment Ratio (GER) by 2020 (which translates to about 40–45 million college-ready students by 2020) and the development of the National Skill Development Plan (NSDP), which aims to impart skills to 500 million people by 2022. The supply side is equally promising, with the growing propensity of the middle class to spend and the ease of acquiring education loans. While these are significant and promising developments, India needs to introduce more reforms in the sector and adopt innovative and bold measures toward investment, collaboration and industry participation.

How the UK can help India

A shortfall in physical infrastructure in India remains a big roadblock in imparting quality education in the country. According to a conservative estimate, India needs 1,000 additional universities and 50,000 more colleges by 20201. The bigger challenge, however, lies is the lack of availability of teachers and the willingness of the youth to pursue teaching as a profession. This, in turn, underscores the lack of quality research scholars in the country. While some quality institutions have been set up in the past decade, their number remains insufficient to cater to the rising number of students aspiring for quality education. It is here that collaboration between the Indian and British governments and UK-based universities and institutions of higher learning can play a pivotal role.

Current collaborations

The UK is one of the most sought-after destinations for Indian students. However, British institutions need to participate in the local Indian market to make a significant impact. On a positive note, India and the UK have recently collaborated on a range of projects in research and higher education. Further, British universities have substantially increased the level of collaboration with their Indian counterparts.As part of the British prime minister’s trade mission to India in February 2013, UK-based and Indian education and research institutions agreed on a range of new joint ventures. The worth of joint UK-India research programs has increased from GBP1 million in 2008 to over GBP100 million in 2013.New deals include establishing a chemical biology and therapeutics institute in India; major collaborations in neuroscience; research partnerships in energy, medicine, business and manufacturing; and English-language training for 1.5 million teachers in India by 20172.

Research2

Research programs can serve as the requisite differentiators for UK institutions. Efforts are being made in this direction. Some of these programs include:• Several joint research programs, including smart energy

grids and energy storage (worth GBP10 million), bio energy

(worth GBP10 million), advanced manufacturing (worth GBP6 million) and livestock (worth GBP10 million).

• The University of Cambridge and the Government of India’s Department of Biotechnology are investing investing GBP11 million over a period of five years to establish a Centre for Chemical Biology and Therapeutics (CCBT).

• A jointly funded program between the UK’s Technology Strategy Board (TSB) and India’s Global Innovation and Technology Alliance (GITA) will support innovative businesses working together on the commercialization of research in areas such as smart energy and healthcare technologies.

• A major new initiative in neuroscience between the University of Edinburgh and the Institute of Stem Cell Biology and Regenerative Medicine in Bangalore is being considered.

• Cardiff University is collaborating with the University of Hyderabad and LV Prashad Eye Institute in Hyderabad to share best practices in teaching optometry in the UK and India.

• The British Library is launching Mewar Ramayana online - a major collaborative partnership with several Indian institutions to create a website that will give researchers and the public access 17th-century manuscripts in their entirety.

• Warwick Business School (WBS) will establish a global energy research center in conjunction with Batra Group. The WBS also plans to open an office in Delhi in 2014 to coordinate research activity.

• There are plans to fund UK-India ‘Knowledge Transfer Partnerships,’ bringing together academic institutions with businesses, granting them access to skills to support UK-India business collaborations.

Education and skills2

While research will remain the core area of collaboration in the long term, the immediate need in India is of learning and skills development. Efforts in these areas would help British institutions gain instant recognition. Following are some efforts in this direction that are seemingly making an impact:



1 National Knowledge Commission 2 GOV.UK: Department for Business Innovation & Skills

• The London School of Economics (LSE) plans to expand its research program on gender equality in collaboration with the Tata Institute of Social Sciences at an investment of about GBP4 million, twice the current amount.

• A new English-language package provided by the British Council will train 1.5 million teachers in India by 2017.

• The Open University is expected to train 1 million teachers in India through its GBP10 million Teacher Education program through the school-based support in India project (TESS-India).

• The Royal Institution of Chartered Surveyors will launch its pioneering RICS School of the Built Environment, Amity University, in April. The School will help equip 15,000–20,000 professionals over the next three to five years.

• International students, including Indians, will now have free access to the UK’s top universities through Massive Open Online Courses (MOOCs). The Universities of Bath, Leicester, Nottingham, Reading and Queen’s University Belfast, as well as the British Library, are the latest institutions to join the program.

• As part of a partnership between the AoC India and the Ministry of Human Resource Development, 25 British colleges will partner with 25 Indian community colleges to build capacity in leadership development, teaching, curriculum development and apprenticeships.

• The University of Warwick will launch a suite of joint PhD and Master’s degrees in engineering in partnership with IIT Bhubaneswar, Odisha.

• The LSE is making 50 new scholarships available to Indian students aspiring to complete their Master’s degrees.

• The University of Exeter is offering 14 full scholarships, collectively worth GBP32,000, for Indian students to attend its International Summer School in July–August 2013.

• Warwick Business School (WBS) has signed an agreement with the Indian Institute of Management, Ahmedabad (IIMA), to allow students pursuing the Postgraduate Program for Executives at IIMA and Warwick MBA to study at each other’s institutes.

• The University of Southampton is working with the Tata Institute of Social Sciences (TISS) in Mumbai, which will host the first-ever International Social Enterprise Camp in April 2014. A group of 30 students from Southampton will visit the subcontinent to work with an equal number of Indian students.

• The Association of Colleges (AoC), India and the Confederation of Indian Industries (CII) have signed an MoU to create partnerships between UK FE Colleges and key Indian industries to facilitate the sharing of best practices in education, training and skills development.

• The UK-India Business Council (UKIBC) is collaborating with Tata to establish a 50,000 capacity skills training center in Orissa, India, supporting both large employers and the supply chain comprising local businesses.

• A4e has exchanged an MoU with Apollo Medskills to skill 5,000 people as patient-care assistants. This is a pilot project catering to candidates aged 18–35 in Hyderabad, Shillong, Bihar and Chennai.

• New College Nottingham (NCN), in collaboration with Batra Group in Gurgaon, Haryana, has established a leading skill development center that offers courses in emerging sectors such as media, hospitality and fashion designing.

Challenges in the sector

• Lack of quality institutions for higher education: By 2020, India expects to have 40–45 million college-ready students. The State has also set an ambitious GER target of 30 percent (presently it is at 15 percent). However, the number of existing higher education institutions is inadequate to achieve this target. With the Foreign Educational Institutions Bill on the anvil, the presence of premier British institutions through collaborations with existing Indian institutions/other Indian partners is expected to improve the student profile. The UK, with its rich resources and pedigree, can help India establish institutions of the same standards of quality as their British counterparts.

• Lack of good faculty: Student enrolment in higher education courses has seen an 11 percent increase, and the number of institutions has grown nine percent in the past decade. Yet, the quality of these institutions has not improved at the same pace. This is due to lack of quality faculty. There is an acute shortage of faculty in central universities (40 percent) as well as state universities (35 percent). Faculty exchange and training programs with the UK could help Indian teachers gain insights into different teaching methods3.

• Lack of accreditations: While various bodies — such as NAAC, AICTE and MCI in practice — maintain standards of higher education in India, a lot is left to be desired in the implementation of the accreditation process. In 2010, about 62 percent of universities and 90 percent of colleges in the country were rated average or below average (NAAC accreditation)3.

• India should encourage private institutions to collaborate with British accreditation bodies and empanel them to accredit Indian universities and colleges.

• Lack of vocational education and training: Only five percent of India’s total workforce has received some form of formal vocational education, and India aims to skill 500 million people by 20204. The UK, with its successful vocational education and training system, could support India in this regard.



3 India lags in higher education enrollment, says report: Business Standard, 5 November 2012 4 Planning Commission of India: Twelfth Five-year Plan

• The UK can help India on two fronts. Government-level collaboration on policies and regulations that govern skill development institutions and industry interactions could add credibility to the fledgling skill development sector in India. Increased focus through bodies such as UKREI and UKCES (UK Commission for Employment and Skills) in the fields of accreditation, certification, training the trainers and content creation. At a different level, the Indian Government should facilitate Further Education (FE) colleges by providing easy access and permission (in terms of investment in India, faculty remuneration and tax procedure).

• Lack of encouraging regulatory framework: Regulatory hurdles, coupled with restrictions on the exit route, deter players from investing in higher education in India. Education is a priority sector and still perceived to be a social subject. The government has yet to warm up to the idea of ‘for-profit’ educational institutions in the country.

• Regulation and coordination for student visas: Facilitating and expediting the issue of UK visas to deserving Indian students is the need of the hour. This is one of the key deterrents for Indian students aspiring to study in the UK.

• Today, British universities are losing out to American and Canadian institutions. Therefore, instituting a UK-oriented scholarship scheme that can identify deserving students from India, can help promote British universities among bright Indian students and encourage them to study in that country.

Opportunities in the sector

Certain specific initiatives could increase collaboration between the UK and India to help improve the latter’s higher education sector. These include:

Commonwealth universities

The UK can help India establish institutions of higher education, which can provide the quality of English varsities at Indian costs. Such a mechanism can extend to emerging economies other than India. In other words, the UK-India partnership can lay the foundations for a series of Commonwealth universities, which would cater to students from all the Commonwealth countries. Such institutions would boast the best of both nations — India’s advantage in terms of costs (both tuition fee and living expenses) and the premium attached to a British university degree.

This could go a long way toward ‘internalizing’ the higher education landscape in India and enabling thousands of Indian students, who go abroad to pursue higher education, to access and avail quality education in their homeland. By attracting international students to India, this model may also fetch FDI (currently allowed up to 100 percent) and give India’s higher

education space much-needed financial impetus. These varsities could be set up in states that are keen to provide incentives such as tax breaks, grants and land at subsidized rates.

A special bilateral arrangement could facilitate identified British institutions in setting up such universities in India. These institutions could be established along the lines of IITs, built through similar collaborations. These institutions could consider reaching out to other Commonwealth countries, which have similar requirements. While the UK could provide quality, content, rigor and brand, the Indian administration could help formulate cost structures and address other constraints in emerging economies.

Assessment in vocational education

The UK is an ideal country to impart vocational education to students and training institutions in assessment and certification processes. In the 2013-14 Budget, the government has proposed that the National Skill Development Corporation (NSDC), a public-private partnership, sets the curriculum and standards for training in various skills. Candidates will be required to take a test conducted by authorized certification bodies. Those who clear the test would be awarded a certificate and a monetary reward of about INR10,000 per candidate. This will motivate them to get skill-trained, which, in turn, will boost employability and productivity.

The UK should augment and support the establishment of the National Skill Qualification Framework (NSQF) to set the benchmark for assessment. This would also encourage UK assessment institutions explore collaboration opportunities in India.

Massive Open Online Courses (MOOCs)

The University of Edinburgh, which announced the first UK MOOCs in July 2012, saw 308,000 students from 167 countries enrolling for subjects ranging from an introduction to philosophy to artificial intelligence planning. A majority of these students were from the US and the UK, and they believed their courses either met or exceeded expectations. This autumn, 21 British universities - including Bristol, Leeds and Southampton - are preparing to launch their own MOOCs in partnership with the Open University5.

British universities should collaborate with Indian universities to offer ‘blended’ courses, with the UK offering MOOC course content. Improved connectivity and the rapid penetration of internet/satellite communication in India will likely facilitate this concept and allow universities to reach out to more students in different geographies. Further, the UK can help Indian educational institutions run their own MOOC courses in collaboration with Indian universities.



5 Moocs are the clever way to keep up to date: The Guardian; 18 June 2013

Teacher Training University

Currently, the quality of faculty in India is not up to the mark, and lifelong learning avenues for teachers in higher education are lacking. In this context, setting up a teacher training university could improve teaching standards at Indian universities. It would be prudent to select faculty from about 20 universities across the country with equal representation from metros, tier-II and tier-III cities for training in instructional capabilities with basic as well as niche courses. While the Government of India can fund such a university, the UK could provide teaching resources. Since the return on investment in training is significant, such a university can prove to be a successful business model in the long run.

Moreover, India should create a special university for faculty and teacher training to supervise all existing teacher training

colleges. The UK can help facilitate this university in the fields of research, resources, content and governance. The ideal way to initiate this process would be to create a faculty exchange program between India and the UK and offer it to existing universities.

Monetizing research

The Indian Government could fund research, identify the top 10 universities in the UK and India, and request research projects on increasing efficiency, profitability and innovation. On the successful completion of research, these projects could be sold to private enterprises and government bodies and departments, thereby monetizing research. This may also help promote research in areas of mutual interest. Research programs by three Canadian Universities - UBC, University of Alberta and University of Toronto - run along similar lines.



Engineering and Automotive Industries



Engineering and Automotive IndustriesTraditionally, India and the UK have shared a strong trade relationship. However, current data suggests a sharp decline in the UK’s position as an export destination for Indian goods and services - currently it is the eighth-largest exports destination, down from the fourth position in 20011. Similarly, India’s import of British goods and services has also declined - down 10 spots from its eighth position in 2001. While this data may seem discouraging, the outlook is seemingly positive. Such statistics indicate the immense potential to strengthen bilateral trade ties.

In recent times, India has strengthened its position among the top investors in the UK. About 700 Indian companies have operations in Britain, and India has signed 89 FDI projects with the UK, which created 7,255 jobs2. Consequently, India became the fifth most important source market for the UK in 2012–132.

The engineering and automotive (EAA) sector, on the whole, constitutes 30 percent of the UK’s global exports and 25 percent of its exports to India3. This underlines the importance of the sector in the two countries’ bilateral ties.

Challenges

At the government level

• Lack of effort in identifying industry-specific capabilities While the UK and India may have certain complementary capabilities in the EAA sector, both countries have yet to ascertain the common focus areas they can collaborate on.

• The challenge of doing business in India India’s low ranking on the ‘ease of doing business’ index bears testimony to the country being a difficult destination to do business at. A complex regulatory structure, several compliance requirements and cumbersome tax laws deter MNCs from entering India and expanding their footprint in the country.

• Inadequate marketing to project India as a profitable investment destination. No efforts are being made to project India as a preferred investment destination to British firms. As the British Prime Minister, David Cameron, mentioned during his recent visit to the subcontinent, India’s perception in the international community has been of ’a difficult country to do business with4.’ Conscious and sustained efforts should be made to change this perception among international players.

At the industry level

• No knowledge of the ground situation Several multinational companies, including British, take decisions for the Indian market in their respective home countries, with either no view or a half-baked perception of the situation on the ground. In many cases, this results in firms missing profitable opportunities and being ill-prepared to take on potential challenges. The absence of an effective decision-making body within the country also compels firms to take decisions that prove counter-productive in the long run.

• Lack of superior manufacturing capabilities Manufacturing processes in India do not match global standards. Further, the inability to manufacture on a large scale as China does has also resulted in Indian manufacturers losing out on cost competitiveness. Consequently, most Indian engineering manufacturing firms, including tier-I Indian auto-component suppliers, have been unable to integrate themselves with the global supply chains of large UK-based companies.

• Low collaboration among SMEs In the UK as well as India, small and medium enterprises (SMEs) play a pivotal role in the economy. British SMEs contribute significantly to national global exports. They are driven by research and development (R&D) and technology and are part of global original equipment manufacturers (OEMs). On the other hand, Indian SMEs seek access to modern technology and global manufacturing practices that can help them achieve global competitiveness. However, there have been limited alliances between the SMEs of both countries. Moreover, Indian SMEs have also not gained from the domain knowledge their British counterparts offer, as the latter’s products or designs are not necessarily relevant for a developing economy such as India.

Collaboration between industry and research institutes

• In the UK, academic institutions are hubs of research and knowledge. These institutions have helped the industry to innovate and generate new products and services. Collaboration between Rolls Royce and University of Cambridge5 or between Procter & Gamble and Durham University6 are some leading examples.

1 International Trade Centre , Trade Data, KPMG in India Analysis2 Inward investment report 2012/13, UKTI3 International Trade Centre, Trade Data, KPMG in India Analysis4 “David Cameron urges India to open up to British business” , http://www.bbc.co.uk/news/uk-politics-21495635 5 http://www.energy.cam.ac.uk/directory/research-themes/conversion/Enginesandturbines6 https://www.dur.ac.uk/chemistry/news/news_archive/?itemno=13716



However, such an ecosystem does not exist in India. There have been some attempts recently - the establishment of the Forbes Marshall Technology center at IIT Madras, modeled along the lines of research parks at Stanford University and the Massachusetts Institute of Technology; however, such examples are still few and far between.

Way forward

The challenges that hamper the strengthening of ties between the two countries are not insurmountable. The need of the hour is for both to align their objectives and aspirations such that it benefits both for years to come. The following are some key steps that can help both India and the UK achieve this objective.

Establishing more platforms for collaborations

The governments of both India and the UK need to collaborate at several levels. They must institute appropriate platforms to facilitate cooperation among government, industry and academia. Such a platform is required to identify areas of cooperation and players with complementary capabilities, suggest policy initiatives to governments and provide guidance to all parties involved in bilateral trade.

Various bodies such as UK Trade & Investment (UKTI), the Investment Commission of India, British Business Group (BBG), the UK India Business Council (UKIBC) and the Confederation of Indian Industries (CII) must also be brought under this platform to tap their understanding of the two countries’ industries and formulate comprehensive business agendas for specific industries.

The expanding network of UKTI and UKIBC in India, along with the CII’s state and zonal offices, can serve as the first points of contact for trade enquiries. The CII could consider extending local support and impart Indian industry knowledge to UKTI and UKIBC. Institutions such as the BBG, which have representation from both UK-based and India-based professionals, can provide requisite focus and facilitate bilateral trade.

Focus on select industries and states

The UK’s global export data indicates that the country’s global capabilities encompass turbojets, diesel engines, electrical equipment, transportation vehicles and other engineering and automotive components. Therefore, it is important to identify in both India and the UK industry participants who can collaborate in these segments.

It is also vital to shift the focus on particular states and regions that can play an exceptional role in promoting business with British companies. States such as Maharashtra, Karnataka, Tamil Nadu and Gujarat, which boast a developed EAA

industry ecosystem, may be ideal for such geography-specific collaboration.

Leverage India’s engineering service outsourcing (ESO) capabilities

The global ESO market is poised to grow at a CAGR of 25.78 percent during 2012–167. India has demonstrated exceptional capabilities in this area, accounting for a 12 percent share of global offshore ESO spending of USD10-15 billion annually8. India is emerging as a key destination in the global ESO market. India (7.4 percent) has been predominantly an off-shoring location for ESO services from the UK, In future, it has the potential to increase its share over other destinations such as the European Union (40 percent), the US and Canada (20 percent) and other European countries (11 percent)10.Concerted efforts are the need of the hour to replicate the success of firms such as Rolls Royce and Jaguar Land Rover in India.

While these companies have forged close association with IT firms in India to exploit the local cost and knowledge base, they have retained operational controls of these entities. A platform can be created for effective and mutually conducive collaboration between Indian ESO firms and potential British customers.

Leverage India’s manufacturing capabilities

Indian has a strong network of tier-I and tier-II auto-component suppliers. The auto-component industry exported goods worth USD9.7 billion in FY139. This indicates that some players have developed capabilities to become suppliers to OEMs for their global requirements.

However, the opportunity for India to consolidate its position as a manufacturing powerhouse in the auto-component industry remains largely untapped. British OEMs must strive to increase the integration of Indian auto-component players with the global supply chain. This can be achieved by working closely with Indian suppliers to develop their capabilities to manufacture high-quality components and improve their product-development capabilities to help them cater to global requirements without time or cost overruns.

Increase collaboration between industry and academia

Research institutions in India and the UK should collaborate with industry to understand its requirements and use their R&D capabilities to drive innovation in the sector. The two governments could drive this collaboration by providing initial funding for research initiatives. Both India and the UK should also consider collaborating through their respective innovation centers.

7 Global Engineering Service Outsourcing Market 2012-2016, Infiniti Research Limited8 Globalization of Engineering Services, The next frontier for India, Nasscom 9 Engineering Services Outsourcing(ESO) in the UK, CBI, Ministry of foreign affairs , 2009, http://www.cbi.eu/system/files/marketintel/Engineering_services_ outsourcing_-_ESO_-_in_the_UK.pdf 10 ACMA



Facilitate investment for R&D in India

The Indian Government and industry should strive to leverage British product-development capabilities to create products and solutions for their respective markets. India should devise a mechanism to fast-track investment for R&D and engineering in the country.

Conclusion

While trade between India and the UK has declined over the past few years, there are ample opportunities for both countries to revive their historic trade ties. For this, companies in both the countries should consider the following mantras:

• Start small: India and the UK should begin by focusing more on leveraging existing ESO capabilities in India, which are fairly strong. They should take their collaboration to the next level when capability building in India increases to an adequate level.

• Aligning focus: Both countries should focus on increasing collaboration between select industries and Indian states. Industry-focused working groups of the two governments can help identify future opportunities such that both countries add value to collaboration.

• Talk less, do more: Both India and the UK must ensure that the various initiatives they discuss see light of day. They must prepare detailed action plans for every planned initiative and assign responsibilities to various stakeholders to drive the equal participation of all relevant stakeholders.



Infrastructure



InfrastructureThe recent global economic slowdown, policy paralysis and a depreciating rupee are magnifying India’s challenges in the infrastructure sector. To address these concerns and fast-track sectoral growth, the Government of India (GoI) has shifted its focus on investments in key infrastructure projects, including airports, ports, rail and energy. The Twelfth Five Year Plan (FYP) (2012–17) envisages investment worth USD1 trillion in the infrastructure sector. Public-private partnerships are likely to drive investments and growth, as about 50 percent investments in the sector is expected to come from the private sector. In recent years, UK firms have invested heavily in several fields in India. These include Vodafone in the telecom space; BP and Shell in oil and gas; Virgin Atlantic in the airline sector. Similarly, Indian firms have made prominent investments in the UK, such as Tata Steel’s acquisition of Corus; Essar Energy’s acquisition of Stanlow Refinery; and Tata Motors’ acquisition of Jaguar Land Rover.

However, the UK-India partnership in the infrastructure sector has witnessed limited traction, since the majority of UK firms largely provide only infrastructure services to Indian project developers. Although UK-based banks have been operating in India for a while now, their exposure to infrastructure financing is limited. Similarly, India’s investments in the UK infrastructure landscape are marginal, as Indian firms have been focusing on the domestic and other emerging markets.

To further strengthen the UK-India partnership, the Prime Minister of the United Kingdom, David Cameron — during his visit to India in February 2013 - proposed a joint partnership for developing a 1,000-km Bangalore-Mumbai Economic Corridor (BMEC). To attract foreign investors to India’s infrastructure sector, the Indian Government is working toward establishing a London-listed feeder fund that would raise funds from overseas investors and invest them in Indian infrastructure debt funds (IDFs). The UK Government is facilitating the finalization of the fund’s structure.

To facilitate infrastructure growth and overcome challenges, the Prime Minister of India-headed Cabinet Committee of Investments (CCI) has provided clearance and fast-tracked 36 infrastructure projects with a total investment of INR1.83 lakh crore , which were awaiting various clearances. Eighteen of these projects are in various sectors such as roads, railways, and petroleum and natural gas, while the remaining 18 concern power plants.

However, to realize these objectives, India must revamp and strengthen its policy and regulatory frameworks. This can help the country address various land- and environment-related roadblocks, which, have have been stalling the implementation of critical infrastructure projects. Consequently, this would also result in increased private investments and restore investor confidence in the Indian infrastructure sector.

While UK-India relationship in the Infrastructure area is currently limited, there is significant potential for the two nations to collaborate in this area:

• Greater alignment - While Bangalore Mumbai Economic Corridor (BMEC) is a good start between the two governments in the infrastructure space, there is a need for greater alignment in what the government is doing along with UK companies and financiers for e.g. Japan is able to get companies and financiers together for the DMIC project . At the moment where UK government could do better is in financing. This is where Japan is gaining access by providing low cost financing. Sources of funding for these projects need to be identified. Additionally, since lot of spending will happen in state governments, UK can also focus on 1 or 2 large infrastructure projects in key states in India.

• PPP framework and governance - Given the challenges that exist in the PPP policy and framework in India, can the UK government provide inputs to the Department of Economic Affairs (DEA) and Planning Commission on their experience on PPP projects, policy and risk sharing approach between the private sector and the government? This will help to modify, adapt and make it more relevant for India. Can Infrastructure UK (IUK) provide inputs which could be of relevance to India for e.g. on policy evolution, infrastructure spending etc.?

• Social Infrastructure - India is lacking behind in social infrastructure development. Given the inclusive growth agenda of the Indian government, the UK can collaborate in areas such as education, healthcare.

• Safe and secure cities – This issue is of utmost priority for India. Is there a way wherein UK companies have expertise in this area can work with India? Also, UK’s recent experience in London Olympics from security and infrastructure perspective could be leveraged.

• Skill development - Given the large skill gap which India is facing in infrastructure and related areas, UK companies can help in transferring knowledge and skills in urban planning, design and construction management amongst others. This can be done across all levels including technical, vocational and management.

There is a significant opportunity and the UK and Indian companies can bring their expertise to leverage on this substantial potential in the infrastructure sector in India.



Opportunities in various infrastructure sectors in India

Ports

Ports are India’s gateways to international trade. They facilitate 90 percent by volume and 70 percent by value of India’s external trade via maritime traffic. The country’s 7,500 km-long coastline has 13 major ports governed by the Centre and about 176 non-major ports (only 60 are operational), governed by state governments and union territories.

The Indian port market has registered an impressive CAGR of 8.4 percent and has grown from 384 mmt in FY02 to 934 mmt in FY13. Following a temporary deceleration in cargo traffic due to the global economic slowdown between FY08 and FY13, cargo traffic across India’s ports is expected to touch 1,304 mmt by FY17 at a CAGR of 8.7 percent; major and non-major ports are expected to grow at CAGRs of eight percent and 10 percent, respectively1.

Way forwardThe outlook for the Indian ports sector is seemingly bright. The key growth drivers of this sector include the fulfillment of the Maritime Agenda 2010–2020, the growth of non-major ports, increased containerization and the development of ports on the east coast.

High investments, increased private sector participation and stringent regulations can go a long way towards the development of superior ports in India. Moreover, improved hinterland connectivity, the enhanced use of IT solutions and quality manpower training would raise the operational efficiency of Indian ports.

The systematic and timely implementation of the Port Regulatory Authority Bill is expected to be a step in the right direction, as it is likely to increase confidence among private investors. The introduction of single-window clearance procedures at central- and state-government levels would encourage greenfield projects.

Thus, innovation and focus are pertinent to help Indian ports gain a competitive edge.

Roads

The Indian road network, which accounts for 60 percent of total freight movement in the country, constitutes the most significant component of the logistics industry2. As the demand for goods - either for mass consumption or industrial

development - extends beyond the metros (conventional demand-supply hubs) to tier-I and tier-II cities, the share of road transport is expected to grow further.

Road freight has increased, from 6 billion tonne kilometers (BTKMs) in 1950–51, to an estimated 1,315 BTKMs in 2012–13, at a CAGR of nine percent. At a GDP growth of eight percent, the sector could grow at a CAGR of 9.6 percent during 2012–17, increasing total road freight to about 1,700 BTKMs3.

However, the development of roads has not kept pace with road freight; it has grown at a CAGR of two percent from about 3.7 million km in 2001 to about 4.7 million km in 20134. While about 50 percent of the country’s total roads network is paved, the state or national highways constitute only five percent5. Consequently, the Indian road network lags behind the world average - road density in the country stands at 2.83 km per 1,000 people and 770 km road length per 1,000 sq km, while the global average is about 6.7 km per 1,000 people and 840 km road length per 1,000 sq km6.

The successful completion of the National Highways Development Programme (NHDP) - aimed at developing 50,000 km-long national highways by 2015 in seven phases at an investment of INR3,000 billion7 - and the modernization of the road cargo transport community are some of the major growth drivers for the road transport sector.

The road aheadThere is increased focus on improving basic road infrastructure and rising technology adoption. The number of expressways and highways is on the rise; the concept of electronic toll collection is becoming popular; the concept of ‘green channel’ is gaining ground; and inter-state check posts are also becoming increasingly automated. Other progressive measures include the development of the Indian Road Transportation Exchange (IRTEX), gradual fleet modernization and the consolidation of the trucking community.

While the quality of road infrastructure is likely to improve, it is important to maintain the pace of infrastructure development to lower economic and environmental losses. It is important to reduce time overruns, since only about 52 percent of the daily target of constructing roads has been achieved to date.

Air cargo

Air cargo serves as a vital link between domestic and international markets. The Indian air cargo sector has grown significantly from 0.7 MMT in FY06 to about 2.9 MMT in FY138.

1 KPMG in India analysis 2 Ministry of Road Transport and Highways (MoRTH) annual report 2011–12; KPMG in India analysis3 Report of the Sub-Group on Passenger and Freight Traffic Assessment in the TwelfthFYP, Sept 2011, Ministry of Road Transport & Highways; KPMG in India analysis4 Ministry of Road Transport and Highways (MoRTH) annual report 2011–12 5 “Road network,” NHAI website, www.nhai.org/roadnetwork.htm, accessed 23 July 20126 “Data,” http://data.worldbank.org, The World Bank website, accessed 24 July 20127 Road and Highways Sector, Crisil Research 20128 Airports Authority of India, KPMG in India analysis



While the total volume of air cargo traffic constitutes about 1 percent of total trade, it accounts for about 29 percent of total trade value9. Between FY06 and FY13, air cargo traffic at Indian airports increased at a CAGR of 11 percent, with domestic cargo growing faster than international cargo (12 percent and 10.4 percent, respectively). Over the next decade, total air cargo traffic is expected to grow at a CAGR of 10.7 percent to reach 5.9 MMT, with domestic and international cargo expected to grow at CAGRs of 11.8 percent and 10 percent, respectively, and contributing 2.4 MMT and 3.5 MMT, respectively, by 202010.

The potential of the air cargo sector remains largely untapped. This is evident from the fact that the total cargo volume of 2.3 MMT, collectively handled by all Indian airports in 2011, was less than the traffic handled at other Asian airports such as Hong Kong (4.6 MMT), Dubai (3 MMT), Incheon [South Korea] (2.7 MMT) and Shanghai (2.6 MMT)11.

The road ahead The air cargo sector continues to demonstrate high growth, with air cargo traffic expected to grow at 1.5 times India’s GDP. This translates into growth of 10–11 percent. As trade activity, especially that of physical goods between India and the Asia-Pacific region increases — and as China, Southeast Asia and Africa emerge as new global trading hubs — several new opportunities are expected to emerge for the Indian air cargo sector.

The growth of end-consumer sectors is also expected to boost air cargo growth over the next five years. The expected growth of electronic components by 25 percent, garment exports of 12–15 percent, the pharmaceutical sector at over twice the global growth of 14 percent, as well as high EXIM volumes in agro-processing products, are likely to contribute to the air cargo sector in future. The development of tier-I and tier-II cities, driven by the shift of manufacturing to these cities, along with investments in supporting airport and logistics infrastructure, can also be expected to drive domestic air cargo. The demand for time-definite service, which is best guaranteed by air, within the domestic economy, is expected to rise. Key enablers that are likely to help realize the potential of air cargo are infrastructure development and process efficiency. It is not surprising then that time-bound plans to expand, invest and operate the air cargo sector could indeed constitute the hi-speed lever of the Indian logistics landscape12.

Rail

Spanning 64,456 km with more than 7,133 railway stations, India’s rail network is the largest in Asia and the second-largest in the world (after the US)13. The Indian Railways operates 19,000 trains daily, transporting 2.65 MMT of freight and 23 million passengers across the country.

Rail freight in the country has grown at a CAGR of about seven percent over the last five years. It is expected to touch the 1 billion ton mark in 2013, with a 31 percent share of total freight movement across all modes of transport. This is in stark contrast to its share of 89 percent in 1951.

While rail traffic has grown more than tenfold between 1951 and 2007, track length has only grown 1.4 times. Further, while trunk routes constitute merely 16 percent of the network, they transport more than 50 percent of total traffic, resulting in major congestion and a low average speed of 25 km/hr for freight trains14. In addition to first right of movement, passenger rates are highly subsidized by freight operations, utilizing up to 60 percent of the network capacity but contributing only 30 percent to revenue.

The road ahead Rail has consistently lagged behind other modes of freight transport in India, both from infrastructure and initiative perspectives. While the Indian Railways straddles various challenges, there is an urgent need to take stock of the growing support the industry seeks from this network.

To drive a fundamental shift in the modal mix, from less efficient, usually uneconomic and environmentally unfriendly road-based transportation to rail, projects similar to the envisioned Dedicated Freight Corridor (DFC) are likely to play an important role in future.

The DFC represents a significant opportunity for rail; however, measures must be taken to minimize future delays in the project. Further, the project must be viewed as part of a larger freight transport system. Thus, connectivity with supporting intermodal facilities and the service of the system must be enhanced for the project to be effectively utilized.

Power

Power is one of the most critical components of economic growth for any nation. Reliable and adequate supply of electricity helps all facets of businesses - agriculture, industry and commercial — in their inclusive growths. The Indian power sector is the fifth largest in the world, with about 225GW of installed capacity, as of May 2013. Of the total electricity-generation capacity, about 70 percent is thermal-based (coal, gas and diesel) with the remaining based on nuclear, hydro and renewables.

The Indian power sector has been one of the primary sectors attracting the highest FDI equity inflows in the country (USD6.7 billion from FY08 to FY13)15.

9 KPMG in India analysis10 Ministry of Civil Aviation, KPMG in India analysis11 Airport’s websites; Airports Authority of India; KPMG in India analysis12 KPMG in India analysis13 www.indianrailways.gov.in, Indian Railways website14 KPMG in India analysis15 “FACT SHEET ON FOREIGN DIRECT INVESTMENT (FDI),” DIPP website, http://dipp.nic.in/English/Publications/FDI_Statistics/2013/india_FDI_April2013.pdf, accessed 16 July 2013.



The road aheadIndia is expected to add about 88.5GW of generation capacity in the Twelfth FYP, with thermal power expected to contribute about 82 percent of the total addition16.

Despite strong capacity addition marked out for the Twelfth FYP plan, the Indian power sector has significant growth potential. According to the World Bank, only 66.3 percent of the country’s population currently has access to electricity. Its per capita electric power consumption is just about 616.2kWh, as compared to 2,974.7kWh of the global average, 2,943.8kWh in China, 5,733.1kWh in the UK and 13,393.9kWh in the US17.

The Indian Government has outlined several policy reforms to drive growth in the sector through the promotion of private investments and measures to improve the financial health of state electricity boards (SEBs). For the latter, the GoI has announced a debt restructuring package of INR1,900 billion (USD35 billion) in September 2012. It also runs a number of initiatives, such as the Ultra Mega Power Projects, Accelerated Rural Electrification Programme and Rajiv Gandhi Grameen Vidhyutikaran Yojana, which are targeted at increasing the installed capacity of power generation, transmission and distribution.

Renewable energy

Renewable energy is gaining momentum across the world and in India. With technological advancement and cost reductions, it has seen increased focus from industry participants and support from state and central governments.

The share of renewable energy in India’s installed capacity has grown from 3 percent in 2002 to 12 percent in 2013. Currently, the country has about 28GW of renewable installed capacity. Wind power is the highest contributor to total renewable energy installed capacity, with a share of about 70 percent, followed by small-hydro, with a 13 percent share.

The road aheadThe renewable sector in India has massive potential, primarily in the wind and solar spaces. Excluding solar, the potential is estimated at more than 140GW, of which approximately only 20 percent has been exploited so far.

The GoI plans to double its renewable energy capacity to 55GW by 2017 to reduce its dependence on fossil fuel by the end of the Twelfth FYP18, under which it has estimated investment

worth INR3,186 billion (USD53 billion) over investments worth INR892 billion (USD15 billion) in the Eleventh FYP19. The Jawaharlal Nehru National Solar Mission (JNNSM), a central government policy, aims to generate 20GW of solar power by 202220. States such as Andhra Pradesh, Tamil Nadu, Rajasthan and Gujarat also have their separate state-level solar policies.Further, there has been an increase in investor interest in the country’s renewable sector. During the first four months of 2013, five deals collectively worth USD500 million (approximately INR300 billion) were signed in the sector21.

Existing UK-India partnership

The collaboration between India and the UK in the infrastructure sector is limited. UK companies in India largely cater to the infrastructure services segment. On the other hand, Indian companies do not enjoy strong presence in the UK’s infrastructure landscape.

UK companies in India

• Balfour Beatty22, a UK-based infrastructure group, is present in India through its professional service arm, Parsons Brinckerhoff. Balfour Beatty focuses on engineering, procurement and construction (EPC) contracts in the rail and power sectors and targets infrastructure investments under PPP and build-own-operate-transfer (BOOT) models. It has recently signed an MoU with Tata Projects to identify opportunities for collaboration in India.

• Mott MacDonald23, a UK-based engineering and development consultancy firm, has a strong presence in India and is currently involved in more than 100 infrastructure projects. It has provided consultancy services to large infrastructure projects, including the metro rail in Delhi and Bangalore; airports in New Delhi and Mumbai; ports at Vishakhapatnam and Goa; and several road and highway projects.

• Serco Group24, a UK-based transportation, healthcare and education service provider, acquired the Indian BPO firm Intelenet in 2011 to access emerging markets and strengthen its offerings in outsourcing services.

• Arup25 provides engineering, design, planning, project management and consulting services and has been in India for more than 40 years. It formally established an office in Mumbai in 2008 to increase presence. The company provides consultancy services to airports in Hyderabad, Bangalore and Mumbai.

16“Highlights of Power Sector, CEA website, www.cea.nic.in/reports/monthly/executive_rep/may13.pdf, accessed 15 July 2013. 17 “Electric power consumption (kWh per capita),” UN Data website, http://data.un.org/Data.aspx?d=WDI&f=Indicator_Code%3AEG.USE.ELEC.KH.PC#WDI, accessed 16 July 2013. 18 “India to have 54,000 MW renewable energy capacity by end of 12th Plan,” Business line, 24 November 201219 “TwelfthFYP, Volume 1,” Planning Commission website, http://planningcommission.gov.in/plans/planrel/12thplan/pdf/vol_1.pdf, accessed 16 July 2013. 20 “Jawaharlal Nehru National Solar Mission, Phase II, Policy Document,” MNRE website, http://mnre.gov.in/file-manager/UserFiles/draft-jnnsmpd-2.pdf, accessed 16 July 2013. 21“Renewable energy sector draws D500 m investments this year,” The Economic Times, 1 May 201322 http://www.balfourbeatty.com/index.asp?pageid=42&newsid=308, http://www.balfourbeatty.com/index.asp?pageid=109&country=india&companyid=BB_India#&count ry=india&companyid=BB_India23 http://www.mottmac.in/projects/24 http://articles.timesofindia.indiatimes.com/2011-06-01/india-business/29607751_1_intelenet-uk-s-serco-serco-bpo25 http://www.arup.com/Global_locations/India.aspx



• Menzies Aviation26, a UK-based company that provides passenger-, ramp- and cargo-handling services, is present in the country through a joint venture with Bobba Group, an India-based firm that provides similar services. Together, they provide ground-handling services at the Bangalore and Hyderabad airports.

Indian companies in UK

• Suzlon, an Indian wind turbine manufacturer, operates in the UK through the acquisition of REpower. It has made significant strides in the UK market and its subsidiary, REpower UK, recently achieved a cumulative sales figure of 1GW in the UK market27.

• GMR, an Indian infrastructure company, acquired InterGen NV, a power company in 2008. It divested its 50 percent stake in InterGen NV in 201028.

Key future infrastructure projects and financing opportunities

• BMEC: The idea of UK-India collaboration to construct a 1,000 km-long BMEC project was mooted by the Prime Minister of the United Kingdom, David Cameroon, during his visit to India in February 2013. The GoI has given in-principle approval for conducting a feasibility study of the proposed project, which could require an investment of up to USD25 billion, according to media reports29. The project would facilitate the development of industrial zones in more than 10 cities and towns in Maharashtra and Karnataka along National Highway (NH) 4 and a National Investment and Manufacturing Zone spread over 5,000 hectares to be set up in Tumkur, Karnataka.

• The Delhi Mumbai Industrial Corridor (DMIC): The GoI has proposed the development of an industrial corridor between India’s capital city, New Delhi, and the country’s financial capital, Mumbai. The GoI has agreed to invest INR17,500 crore in the first phase of the DMIC; further, according to the Minister of State of Commerce and Industry , the development of industrial cities around the DMIC may attract investment worth USD90–100 billion over the next 30 years.

• The Mumbai Trans-Harbor Link (MTHL): The Mumbai Trans-Harbor Link (MTHL): The MTHL is a proposed 22 km-long road bridge between Mumbai and Navi Mumbai at an estimated cost of more than INR9,000 crore. It is expected to be completed by 2019. The sea link will provide direct connectivity between Mumbai, Jawaharlal Nehru Port, Mumbai Port and the proposed Navi Mumbai International Airport30.

• The Navi Mumbai International Airport (NMIA): The NMIA is a proposed greenfield international airport planned in Panvel, near Mumbai. The airport will be based on a PPP model and is being designed to cater to big aircraft such as Airbus A380, Boeing 737 and handle about 60 million passengers on completion31.

Outlook

The UK can collaborate with India by introducing advanced technology, improved project planning and management capabilities, and increased financing through debt funds, infrastructure bonds and PPP for infrastructure projects. Investor sentiment has taken a setback recently thanks to a policy paralysis of sorts in India. This problem has been compounded by the economic slowdown and the declining pace of regulatory reforms. Significant time, cost overruns - due to red tape - problems in acquiring land, and delays in obtaining environmental clearances have also made it tough to operate in India.

The rising cost of capital, inflation, volatile demand and supply-side bottlenecks are also hampering ongoing projects. There is an urgent need to review the bidding and risk-sharing framework of PPP contracts and to establish a robust dispute-resolution mechanism.

The Indian Government has recently adopted several measures to restore investor confidence and put infrastructure back on the growth trajectory. These measures include the setting up of the CCI to monitor the progress of mega projects, the delinking of forest and environment clearances and allowing developers to an early exit from operational projects. The successful implementation of these measures can be expected to boost sector growth and attract unprecedented investment in the country.



26 http://www.menziesbobba.com/index.php27 “Suzlon achieves UK milestone,” India Incorporated website, www.indiaincorporated.com/news-in-brief/item/237-suzlon-achieves-uk-milestone.html, accessed 16 July 2013. 28 “GMR to sell InterGen stake for D1.23 billion,” Financial Express website, www.financialexpress.com/news/gmr-to-sell-intergen-stake-for-1.23-billion/717422, accessed 31 August 2013. 29 http://www.domain-b.com/economy/infrastructure/20130316_feasibility.html30 http://en.wikipedia.org/wiki/Mumbai_Trans_Harbour_Link31 http://en.wikipedia.org/wiki/Navi_Mumbai_International_Airport

Retail



India’s retail market The Indian retail industry, like that of other countries, is divided into the organized sector (also called modern trade) and the unorganized sector (also known as traditional/general trade). While the former refers to trading activities that large, branded chains operated by domestic and/or international players undertake, the latter refers to small, local stores. These usually include neighborhood grocery stores (kiranas), small general stores, cigarette shops, local convenience stores and street and pavement vendors. There are an estimated 12 million1 small retail shops in the unorganized sector in India, and about 84 percent of these sell food and grocery items.

The Indian retail industry is expected to grow at a CAGR of seven percent annually to reach GBP450 billion by 2016. It is highly fragmented, with general trade accounting for about 95 percent of total sales. However, organized retail, which accounts for about five percent of the overall market, is expected to grow at 26 percent, and its market share is projected to increase to approximately 11 percent by 2016. This growth will be largely driven by2:

• Major international retailers such as Wal-Mart, Carrefour and Tesco — which are expanding their operations in India

• Indian retailers such as the Future Group, Tatas, the Aditya Birla Group and Reliance expanding their footprint

• The growth of formats such as cash-and-carry operations in tier-II and tier-III cities

Key growth drivers of retail in India

• Rising disposable income among the middle class, thanks to an increase in employment opportunities for young adults in IT & IT-enabled sectors, as well as telecom, is one of the major factors driving retail growth in India. Per capital income increased by approximately seven percent annually between 2004–05 and 2011–12. It is expected to increase to 12 percent in 2012–133. According to the McKinsey Global Institute, India’s total household consumption is expected to quadruple between 2005 and 2025, and its middle class will be 583 million-people strong by 2025. This would make India the world’s fifth-largest consumer market.

• The rise in nuclear families, an increase in the population of working women and dual incomes are further contributing to increased household consumption. This trend is expected to continue in the next decade.

• A growing workforce and rising consumerism are also key factors driving growth in the Indian retail sector. This is demonstrated by growth in apparel and accessories, household appliances, electronics and cosmetics, and toilets sectors, the majority of which have recorded a CAGR of 10–15 percent (and 20 percent in some cases) in the last decade.

• To expand their footprint across cities and towns and increase profits, retailers are experimenting with sizes and formats. While neighborhood stores continue to dominate the market by catering to consumers’ daily needs, emerging formats such as hypermarkets and cash-and-carry are attracting customers and influencing consumers’ purchasing decisions and habits by offering them an assortment of products at competitive prices and under a single roof.

• Shopping malls are being constructed across the country, including tier-II and tier-III towns. Therefore, it can be concluded that infrastructure development and the availability of retail space are also facilitating the growth of the Indian retail sector.

Potential opportunities for UK retailers

The following segments could potentially encourage British retailers to enter the Indian retail space :

Food and grocery2

The Indian food and grocery market was worth about GBP200 billion in 2011. At present, about five percent of the market is organized, and there is a growing shift toward organized retail in this category.

Apparel2

The Indian apparel industry was worth about GBP22 billion in 2011; it is expected to grow at a CAGR of seven percent to be valued at GBP29 billion by 2016.

Footwear2

The Indian footwear market was worth about GBP3.8 billion in 2011 and is expected to grow at a CAGR of six percent to reach about GBP5 billion by 2016.

Home improvement2

The Indian home improvement market was worth about GBP7 billion in 2011 and is expected to grow at a CAGR of about 15 percent to reach about GBP14 billion by 2016.



1 IBEF Publication 2 KPMG Analysis 3 Euromonitor

Retailer Year of entry Mode of entry Number of stores*

Food and grocery

Tesco 2009 JV NA

Bookers 2009 JV 4

Apparel, footwear and accessories

Marks & Spencer’s 1996 JV 33

Accessorize 2001 Franchisee 36

Mothercare 2006 Franchisee & JV 70+

Jimmy Choo 2006 Franchisee 6

Debenhams 2007 Franchisee 2

Next 2008 Franchisee 3

Tie Rack 2009 Licensing 11

Clarks 2010 JV25 (Exclusive)277 (Multi-brand outlets)

Hackett 2012 JV 3

Cafes/QSR

Costa Coffee 2005 Franchisee 100

Pizza Express 2012 JV 2

* The number of stores is based on information from retailers’ websites, other web articles and primary interactions as on June 2013

The table is an illustrative list of British retailers operating in India



3 India lags in higher education enrolment, says report: Business Standard, 5 November 2012 4 Planning Commission of India:Twelfth Five-year Plan

Challenges that international retailers face in India

Country-level issues

• Adherence to substantial compliance at various levels — country, state, city and municipality — makes it difficult to set up shop and operate in India. Other legal conditions such as finding a local partner in multi-brand retail and mandatory local sourcing leads to delays in finding local vendors and acquiring sites for international players.

• Selecting partners is a daunting task since the majority of large Indian business houses operate independent retail chains. As a result, it is difficult for international players to choose between existing retailers (requires a joint venture or acquisition) or seek ‘new’ players who wish to diversify their businesses. The evolving regulatory landscape requires international players to negotiate their JV/partnerships agreements carefully, with an option to buy or sell shares as and when regulations permit. In other words, it is crucial to select the right partner and route to enter the country.

• Violation of country-specific risk guidelines and other rules — such as the UK Bribery Act — can create several problems for companies, resulting in delays, legal battles and additional expenses.

Operational issues

• Inadequate infrastructure — roads, electricity, retail outlets and difficulties in procuring agro products — hampers retailers from expanding their businesses, especially at a pan-India level.

• Insufficient trained manpower increases training and capability development costs for leading retailers in India. This is also results in high employee turnover, which adds significantly to operational costs.

• Lack of adequate supply chain and cold chain infrastructure is one of the biggest obstacles to growth and leads to operational inefficiencies. This is further compounded by lengthy transportation time for various products. Lack of adequate storage facilities and a fragmented supply chain result in losses for farmers. While 100 percent FDI is permitted in the cold-chain sector through the automatic route, limited FDI in retail affects the logistics and supply chain sectors.

• High real estate costs continue to increase operational expenses for retailers. This extends the break-even period for new stores, thus compelling several retailers to shut their stores in metros in a bid to curb operational losses. A skewed rent-to-revenue ratio leads to inefficiency, as pay-offs come at a much later stage in the operational process.

Other issues

• Multiple levels of taxation with different tax rates add to retailers’ complexities. Moreover, cumbersome tax compliance procedures lead to additional costs (in the form of hiring professionals) and delays.

• High import duties on consumer products lower price competitiveness. The concept of maximum retail price also limits the price that retailers can charge.

• As internet penetration grows in the country, not allowing FDI in e-retailing prohibits international retailers from entering this fast-growing segment, where they could establish international best practices and leverage their global operations.

• Uncertainty around regulations increases risks for international players. Although 51 percent FDI has been allowed in multi-brand retail, it is subject to final decision by state governments. As a result, FDI in multi-brand retail has been approved in just 12 states and Union Territories to date. However, there is ambiguity on whether there will be any change in the policy in these states following the elections. This makes investing in this sector a risky proposition.

• International retailers typically require 18–24 months to set up operations and another 12–18 months to roll out full-scale operations in India. However, for the majority of retailers’ time is invested in the following:

o Obtaining regulatory approvals

o Finding suitable partners and finalizing agreements

o Obtaining suitable real estate

o Developing vendors and local supply chains to meet the sourcing norms

o Recruiting trained manpower and managers

o Instituting supply chain systems

o Establishing front-end operational systems

Benefits of international players to Indian retail

The presence of international retail players is likely to benefit the Indian retail sector in the following ways: Job creation and best practices The growth of organized retail through international retailers is expected to create about 2.5 million jobs by 2021. These jobs are likely to be created in areas such as information system management, supply chain and other management functions. It is anticipated that international players will also introduce best practices in training and the development of manpower to enhance efficiency and productivity. Their entry to India can also be expected to generate employment opportunities in support sectors such as logistics, IT and sourcing and promote local manufacturing by Indian small and medium enterprises.

Development of logistics infrastructure

FDI in multi-brand retail mandates 50 percent (of the first tranche of USD100 million) investment in creating back-end infrastructure. These investments can help improve supply chain infrastructure, which, in turn, could reduce transportation time and losses from damages and wastage.



Inflation

Operational and supply chain efficiencies from back-end logistics and large-scale operations would help transfer cost benefits to consumers. This would keep product prices under control, which, in turn, would keep inflation under control.

Tax collection

The growth of organized retail can help state governments to improve tax collections in the retail sector, which are typically low due to cash transactions in the unorganized retail sector.



The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. The views and opinions expressed herein are those of the interviewees and do not necessarily represent the views and opinions of KPMG in India. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.


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