Doing Business in India – Opportunities and Challenges
• AGENDA
• General Overview of Business Scenario in India
• Brief Description of Indian Institute of Science
• Some Specific Insights into following Industry Sectors
• A Agriculture
• B Biotechnology
• C Clean Energy Clean Technologies
• D Digital Technologies
• E Ecology Energy Environment
• Summing up and Conclusions
The India OpportunityThe India Opportunity
The transformation…
• Slow rate of growth
• Bureaucratic
• Protected and slow
• Small consumer markets
• Weak infrastructure• One of the world’s fastest growing
economies
• Reasonably proactive
• Opening up of sectors for investment
• Promising consumer markets
• Infrastructure needs improvement
Yesterday
Today
India is the world’s largest democracy
India today…
• Has world-class recognition in IT, bio-technology and space
• Is the largest English speaking nation in the world
• Has the world’s largest single-location forging facility
• Has the second largest petrochemical facility in the world
• Is the lowest cost steel producer in the world
• Is the largest 2 wheeler manufacturer in the world
• Is the second largest tractor manufacturer in the world
• Is the fifth largest commercial vehicle manufacturer in the world
• Is among six countries that launch satellites and does so even for Germany, Belgium, South Korea, Singapore and EU countries
• Is one of the few countries that has built its own Supercomputer
Strong fundamentals
34 35 3337
45 44
53
64
39 41 4250 51 51
61
77
0
10
20
30
40
50
60
70
80
90
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04*
US
D b
n
Exports Imports
6.1
4.4
5.8
4.0
8.5
6.9
0
1
2
3
4
5
6
7
8
9
2000 2001 2002 2003 2004 2005
Indian economy in a
resilient mode in terms of
GDP growth…
Growth Oriented GDP (%) 1
Source: Indiastat.com
Increasing International Trade 3
Increasing share of services in GDP 2
Strong Forex Reserves 4
Source: Central Statistical Organisation
…along with rising forex rate and reserves
…and has an increasing
share in international
trade
With Services Sector gaining importance….
… resulting in a transitioning Indian demography
24 MILLION
households
32 MILLION
householdsSource: The Marketing Whitebook, 2003-04 by Business World
1994-95 1999-00 2005-06The Classes
Rich (Above USD 4,600; INR.2,15,000)
Consuming (USD 970 – 4,600; INR. 45,000-2,15000)
Climbers USD 470- 970; INR.22,000 – 45,000)
Aspirants(USD 470 - 347; INR.16,000 – 22,000)
Destitutes (Less than USD 470; INR.16,000)
3 MILLIONhouseholds
6 MILLIONhouseholds
1 MILLION
households
48 MILLIONhouseholds
32 MILLIONhouseholds
33 MILLION
households
29 MILLIONhouseholds
66 MILLION
Households
75 MILLION
Households
66 MILLION
Households
78 MILLION
Households
48 MILLIONhouseholds
17 MILLION
households
Four sectors underline the Indian growth story
Information Technology
Auto-components
Pharmaceuticals
Textiles
• Major hub for outsourcing IT-based business processes
• Driven by cost effectiveness• India’s wealth of man power
• Rapid integration with global industry
• Foreign manufacturers seek to cut costs
• India has high engineering levels and established productions plants
• Entering a paradigm shift with new product patent regime
• Availability of highly skilled scientists
• Removal of quotas will unleash significant potential
• Advantages include availability of raw materials and low-cost production
Today India is well-positioned as an offshore processing destination
Source: NASSCOM – McKinsey 2002
Location Attractiveness
• Time zone• Geopolitical factors• Infrastructure
Hig
h
HighLow
Lo
w
ChinaIndia
UK
Mexico
Philippines
Ireland Australia
Singapore
Note: Size of circle indicates resource availability
People Strength• Skill availability• Language(s)• Cost advantage
Time
• Faster turnaround using
time zone differences (US
10-12 hrs, Europe 4-6 hrs)
• Ability to implement a 24X7
service model
Scale Cost
Scope Quality & Productivity
• 10% - 15% productivity improvements
• Lower error rate, quicker turnaround
• Greater quality visibility
• Large proportion of SEI-CMM, COPC,
ISO9001 certified service providers
and 6-sigma practitioners
• Wide scope of functions - low to
high value skills
• Offshore opportunities span
entire value chain across
industries
• Large, qualified and young
workforce
• Easy availability of skills
• 14 million graduates, 1 million
technical resources
• 40% - 50% net cost savings on labour
and skills intensive activities and
processes
• Additional benefits through low cost
process improvement, consolidation
and automation
Companies enter for
cost, but stay and
expand for quality and
enhanced
competitiveness
India’s value proposition: Cost-effectiveness and high quality
The India ChallengeThe India Challenge
India
GDP: USD 3,319 bn
Area: 3,287,590 sq km
Population: 1,080,264,388
Languages: 18
Per Capita Income: USD 3072
European Union
GDP: USD 11,650 bn
Area: 3,976,372
Population: 456,953,258
Languages: 20
Per Capita Income: USD 25,494
Companies attracted to India must do more than merely transplant strategies…
• India is approximately 82% the size of the EU
• Its population is more than double that of the EU
• Almost the same number of languages (India has several dialects as well)
• India and the EU have large variations in demographics vis-à-vis paying capacity
…given India’s regional diversities of continental magnitude and interstate variation
Challenges companies face in India
Infrastructure and environment
•Complex business environment
•Poor physical infrastructure (roads, ports, airports)
•Weak rural infrastructure
•Bureaucracy
•High cost of and unreliable power
•Low urban penetration levels
•High cost of entry / exit
Regulatory / Governance
•Regulatory changes impacted by coalition politics
•Restrictive labor laws, e.g. exit options
•Laborious and time-consuming process to start a business
•Slow legal process
•Politicization of investment decisions
Market-related
•Under-developed consumer markets
•Low penetration levels due to low urbanization
•Widely varying consumer tastes across regions
• High price / value sensitivity
Navigating through tangles of bureaucracy in business and procedures
A change is taking place in the regulatory environment…
• FDI allowed in almost all sectors
• Import duties rationalised
• Single window clearance
• Expediting clearances through escalatory mechanisms
• Greater transparency brought about through e-governance
Days taken to start business
Level of complexity
According to Transparency International’s ’04 Corruption Perception Index India’s score is 2.8 out of 10. India ranks 90 out of 145 on the
Transparency International Corruption Perceptions.
Coalition politics have impacted the pace of reforms
Note: Rigidity of Employment Index is an average of the following three indices – how difficult it is to hire a new worker, how rigid the regulations are on working hours, and how difficult it is to dismiss a redundant worker. Values are assigned between 0 and 100. Higher values represent more rigid regulations.
• Labour regulation is a disincentive to grow businesses, reduces flexibility in operations, and increases exit costs.
• Business with over 100 workers have to secure the permission of state governments to close businesses or lay off workers
• Difficult to redeploy workers in reorganisations without unanimous agreement of workers.
• Downsizing strategies that include large-scale job cuts are difficult and achievable only with local government support
• Most large manufacturing companies continue to be seriously overstaffed for want of a transparent “hire and fire” policy
• Terms relating to labour conditions, attendance, flexibility, and days lost through disputes vary hugely from state to state.
Rigidity of Employment Index
Restrictive labour policies can impact flexibility in business
While it is difficult to fire workers in India…
Source: Doing Business, The World Bank
While it is difficult to fire workers in India…
Source: Doing Business, The World Bank
• Relatively easier to hire
• Flexibility to work longer hours
• Lower cost of laying-off
Indicator India RegionalAvg (Asia)
Germany
Difficulty of Hiring Index 33 37.0 44
Rigidity of Hours Index 20 36.7 80
Firing costs (weeks of wages)
79 84.7 80
Infrastructure investment has not kept pace with the needs of the economy
In 2003, India’s infrastructure spending was just US$35 billion
Low spend
A meaningful impact on overall growth will require consistent investment of at least US$60-80 bn p.a.
Immediate requirement
In the past 10 years, government has cut capital expenditure as a percentage of GDP5.6% (in F2004) from 9.3%
Low infrastructure development
Private investment (domestic and foreign) in infrastructure projects
Demographic trends can lift household savings and channel them into infrastructure projects
Improvement on the Infrastructure front…
• FDI up to 100% in select projects
• Mega road projects
• Port sector opened for private participation
• Introduction of a regulatory authority framework
• Developing rural distribution networks
• Public Private Partnerships
• The Indian privatization process has been very slow
• Total amount collected in last 14 years was just US$11.9 billion
• Few companies have transitioned into private hands
Weak results from Privatization
• Estimate of market value of government companies (excluding infrastructure assets) ~ US$150–175 bn
Fairly large size of assets
• Privatization has been mired with controversy of being anti-labour and non-transparent
Politicization
The Indian success story has to be objectively viewed from another perspective as well…
Complex group structures – difficult to unwind, ‘hidden’ owners especially other factions of the family -especially true for promoter owned and managed companies
Fiefdoms’ – decision making concentrated
‘Associated companies’ may need to be consolidated which may bring in more liabilities
Minority interests may have a disproportionate amount of power
Unwinding the Corporate Veil might be a challenge
Related party supplier / customer relationships on non-commercial terms
No formal arrangements with related parties
Funds deployment in non-core activities
Sacrifice of shareholders’ interest for promoter gain
Non Arm’s Length Transactions with
Related Parties/Group Companies
Corporate Governance is gaining acceptance, albeit gradually…..
Implementation ranges from academic/ cursory to robust, depending on management philosophy
Reliability of internal and external audit report may be questionable
Statutory audits by small time auditors run the risk of being an eye wash
Spirit behind Implementing Corporate Governance
Measures may be Questionable
Aggressive tax management (tax planning vs. tax avoidance)
Tax litigation is common, Final resolution of issues time consuming
This could result in cash outflows at the outset and inflows later if company
successfully defends: impacts cash flows given lengthy legal process
Continued availability of tax benefits/ incentives post transaction (needs careful
analysis)
Aggressive Tax Positions Continue to Find Favour….
Need to pay attention to the operating environment and to cultural aspects
Foreign Investors should…
• Develop an ‘India’ strategy;
- Have a long term view
- Choose the right Joint Venture partner
- Choose the right regional model
- Use global best practices
- Conceptualise India-specific products
• Optimally blend expatriate management with local talent
In India ‘everything goes’
Source: KPMG research
Faster implementation of reforms needed
Redefinition of roles of public and private sectors.
Urgency to revamp infrastructure
Sun-rise industries establishing themselves internationally.
Reforms consistently moving in the same direction.
Indian manufacturing sector becoming globally competitive
Investment opportunities driven by:
Existence and growth of marketsAvailability of resources and global
competitiveness
In conclusion…
…India today offers an early mover advantage
Top Related