PROJECT
ON
A STUDY ON INVESTMENT OPPORTUNITY IN MANUFACTURING SECTOR
SUBMITTED TO:
PROF.
UNDER THE GUIDANCE OF:
MR.
SUBMITTED BY:
JIVESH VERMA
ID NUMBER: AB9023
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ABSTRACT
India has emerged as one of the world's top ten countries in industrial
production as per UNIDO's new report titled 'Yearbook of Industrial Statistics
2010'. India surpassed Canada, Brazil and Mexico in 2009 to reach the 9th
position from the 12th position it held in 2008.
The Index of Industrial Production (IIP) quick estimates data for October 2010
shows a growth of 11.3 per cent in the manufacturing sector as compared to
October 2009. The cumulative growth during April-October 2009-10 over the
corresponding period of 2008-09 is 11 per cent, according to data by the
Ministry of Statistics and Programme Implementation.
Growth Trends
India is ranked second in terms of manufacturing competence, according to
report '2010 Global Manufacturing Competitiveness Index', by Deloitte Touche
Tohmatsu and the US Council on Competitiveness. The report states that the
country's talent pool of scientists, researchers, and engineers, together with
its English-speaking workforce and democratic regime make it an attractive
destination for manufacturers.
As per the Industrial Outlook Survey conducted by the Reserve Bank of India
(RBI) for October-December 2010 quarter the Indian manufacturing sector
showed positive overall business sentiment in the quarter. The business
expectation index (BEI), which acts as a barometer of the overall health of the
manufacturing sector, has gone up to 126.5 for the assessment quarter, its
highest reading since the April-June 2007 quarter.
The HSBC Markit Purchasing Managers' Index (PMI), based on a survey of
500 companies, posted 58.4 in November 2010, increasing from 57.2 in
October 2010. Incoming new business received by manufacturers in India
increased substantially during the month. Further, the latest expansion in new
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order volumes was the strongest in four months. Panellists also indicated a
marked rise in new export business during November 2010.
Around 50 segments in the manufacturing sector grew by 39 per cent,
entering the 'excellent growth' category, during April-December 2010-11,
according to a survey by the Confederation of Indian Industry (CII) and
ASCON. Segments in the excellent category included air conditioners, natural
gas, tractors, nitrogen fertilisers, ball bearings, electrical and cable wires, auto
components, construction equipment, electric fans and tyre industry.
Further, 22 segments made it to the 'high growth' category, registering a
growth of 17.3 per cent during the first nine months of the current fiscal.
Industries such as utility vehicles, crude oil, power transformers, energy
meters, alcoholic beverages and textile machinery have registered around 10-
20 per cent growth.
Exports from special economic zones (SEZs) grew by over 68 per cent to US$
12.55 billion as compared to the corresponding period of 2009-10. [June 30]
Buoyed by India's response to its super-machines, iconic American superbike
maker Harley Davidson is setting up an assembly unit at Bawal, Haryana.
This will be its second plant outside the US, after Brazil
FieldFresh, the 50:50 joint venture of Bharti Enterprises and Filipino firm Del
Monte Pacific Ltd formed in 2007-end, has inaugurated its R&D and
manufacturing unit at Hosur, Tamil Nadu, set up with an investment of US$
26.14 million.
Doosan Heavy Industries and Construction Co Ltd of South Korea had
expressed interest in setting up a power equipment manufacturing facility in
Haryana, to be fully owned by the foreign company.
SIGNATORY PAGE
TO WHOMESOEVER IT MAY CONCERN
This is to confirm that Jivesh Verma, student of RIMS, Bengaluru, is doing a
live project(Thesis) on the topic “A study on investment opportunity
in manufacturing sector” under my guidance and that the work being
done by the candidate is original and is of the standard expected by an MBA
student.
May god bless Him with all success in him career.
Warm regards
BATCH: MBA/AU/2009-11
TOPIC APPROVAL LETTER
THESIS SYNOPSIS
WORKING TITLE:
A study on investment opportunity in manufacturing sector.
PURPOSE:
The growth rate of manufacturing sector in a country truly reflects its economic potentiality. Most of the developed countries are strong enough in their manufacturing sector.
Though the services sector in India has brought faster economic success, still the manufacturing sector plays an important role on the ground of sustainability.
The growth rate of manufacturing sector in the country has reached at a two-digit percentage growth in the year 2006-07 from April-August. It has around 48% of share in the total composition of Indian economy.
Both government as well as the private sectors has come forward for the development of the manufacturing sector of the country. More investments are being proposed in the sector particularly in the growth rate of capital goods, consumer durables, and some non-durable goods.
Iron and Steel industries
The Iron and Steel Industry in India is one of the fastest growing sectors.India has experienced steady growth in the steel industry. In 1992, India produced 14.33 million tones of finished carbon steels and 1.59 million tones of pig iron. Furthermore, the steel production capacity of the country has increased rapidly since 1991 - in 2008, India produced nearly 46.575 million tones of finished steels and 4.393 million tones of pig iron. With the increased demand in the national market, a huge part of the international market is also served by this industry. Today, India is in seventh position among all the crude steel producing countries.It is expected that India would become the second biggest producer of steel within the year 2016 and the production per year
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would be 137 million tonnes The exports pertaining to the steel industry was 6.26 % during the period 2006-07.
Automobile Sector
The cumulative growth of the Passenger Vehicles segment during April 2007 – March 2008 was 12.17 percent. Passenger Cars grew by 11.79 percent, Utility Vehicles by 10.57 percent and Multi Purpose Vehicles by 21.39 percent in this period.
The Commercial Vehicles segment grew marginally at 4.07 percent. While Medium & Heavy Commercial Vehicles declined by 1.66 percent, Light Commercial Vehicles recorded a growth of 12.29 percent.
Three Wheelers sales fell by 9.71 percent with sales of Goods Carriers declining drastically by 20.49 percent and Passenger Carriers declined by 2.13 percent during April- March 2008 compared to the last year.
Two Wheelers registered a negative growth rate of 7.92 percent during this period, with motorcycles and electric two wheelers segments declining by 11.90 percent and 44.93 percent respectively. However, Scooters and Mopeds segment grew by 11.64 percent and 16.63 percent respectively.
Automobile Exports registered a growth of 22.30 percent during the current financial year.
The growth was led by two wheelers segment which grew at 32.31 percent. Commercial vehicles and Passenger Vehicles exports grew by 19.10 percent and 9.37 percent respectively. Exports of Three Wheelers segment declined by 1.85 percent.
Therefore, investing opportunities seems to be very bright in manufacturing sector in India. Even FDI and FII are directing their focus towards the manufacturing sector as it is an evergreen sector and a more stable market compared to other sectors.
For eg:
Maruti Suzuki India (MSI) reported robust volume growth in November 2009 (of 66.6% y-o-y and 2.8% m-o-m) to 87,807 units. The low base of November 2008 has inflated the y-o-y growth figure. However, by the m-o-m there is an impressive 6.7% domestic sales growth, which is the highest mom growth in November for MSI since FY04. Current channel inventory for MSI is optimal at approximately 3 weeks.
In the home market, volumes were boosted by the A2 segment (+60.1% and +8.9% m-o-m), MPVs (+116.4% y-o-y and 3.8% m-o-m) and the A3 segment (+46.3% y-o-y and -0.7% m-o-m). These are the highest A2 segment monthly sales ever. The A3 segment growth was boosted by the launch of the new version of the SX4. Being a fresh model, SX4 sales are contributing approx 25% to the A3 segment product mix, as compared to approx 10-15% historically.
Export growth continued to be healthy, at 128.6% y-o-y, to 11,448 units.
AIM:
To make specific study of the trend in which investors are putting their funds into manufacturing sector.
OBJECTIVES:
To study the behavior of investors towards manufacturing sector.
To find out the trends and market share of iron & steel industries and automobiles in past and in current period.
To project future trends of stock prices.
To ascertain the key growth drivers of manufacturing sector.
To study the problems prevailing in manufacturing sector such as inflationary pressure, cost of manufacturing.
To recommend buy/sell/hold decision in the future on the above company.
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HYPOTHESIS:
Manufacturing sector is booming sector for investment.
METHODOLOGY:
Source of Secondary data is obtained from:
Data collection of selected sectors from BSE and NSE.
Data from websites like “www.economywatch.com”, “www.siamindia.com” , “ www.cci.in” , “ www.economictimes.com” , “www.nseindia.com” .
Magazines like analyst ( published by ICFAI ), Investors India, Business World.
PROPOSED CONTENT:
Company profile
Research design
Analysis and interpretation
Findings and conclusion
Recommendation
Bibliography
WORK PLAN:
Submission of Synopsis.
Collection of data through various websites, magazines and company’s database.
Analysis of data.
Interpretation of data.
Drawing inference, interpretation and conclusion.
Based on the conclusion suggestions and recommendations will be made.
ACKNOWLEDGEMENT
It is well-established fact that behind every achievement lays an unfathomable
sea of gratitude to those who have extended their support and without whom
the project would never have come into existence.
I express my gratitude to RIMS, Bengaluru for providing me an opportunity to
work on this project as a part of the curriculum.
Also, I express my gratitude to Prof. Balaji on the completion of my project.
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INTRODUCTION
1. Automobile sector
India is an emerging global manufacturing hub for low-cost compact cars. It is
Asia’s third-largest passenger vehicle market and the world’s second-largest two-
wheeler market. It is also the world’s fourth-largest commercial vehicle market.
Changing demographics, rising disposable income and entry of several new players
has expanded the domestic market for passenger vehicles. Low manufacturing costs
due to economies of scale, low R&D and sourcing costs, are increasing affordability
and driving domestic demand.
The Indian automotive industry is expected to be the world’s seventh-largest
automobile market by 2016 and the third largest by 2030, only behind China and the
US. Recent acquisition of Jaguar and Land Rover brands by Tata Motors and launch
of world’s cheapest car, Tata Nano, has placed the Indian automobile market on the
global automotive map. Total value of vehicle exports is estimated to reach US$ 8
billion to US$ 10 billion by 2015. The industry turnover is estimated to reach a level
of US$ 155 billion by 2016. Overall production of automobiles increased from 8.7
million units in 2004–05 to 11.4 million units in 2008–09. Between 2000 and 2009,
the industry witnessed a cumulative foreign direct investment (FDI) flow worth US$
4.3 billion accounting for 4 per cent of the total FDI into the country.
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Opportunities
Govt policies including weighted tax deduction has deduced upto 200% for
inhouse R&D activities in the country.
Increasing production cost, shorter product life cycle and increasing trends of
geographical expansion to deresk dependence on one market are key factors
that influence companies to outsource.
Availability of low cost skilled and educated manpower; proven product
development capabilities and location advantage due to India’s proximity to
emerging markets.
Revenues are estimated to increase from US$ 40 billion in 2002 to US$ 300
billion in 2015, thereby increasing its share from 0.8 percent to 3.5 per cent.
Challenges
Accelerated modification and diversification of the product portfolio
Pervasion of automobiles with digital technology
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Increased pressure for innovation and flexibility in development and
manufacturing
2. Textile and apparels
The textile industry in India provides direct employment to more than 35
million people and is the second-largest employment generator after agriculture. The
textiles industry accounts for 14 per cent of the total industrial production in India. At
current prices, it accounts for 4 per cent of the gross domestic product (GDP)—US$
51.36 billion. Textiles and apparel industry exports, valued at US$ 20.02 billion (INR
963.05 billion), contributed about 11.5 per cent to the country’s total exports in 2008–
09. In addition to the four functional SEZs, there are 13 in-principle approved, 19
formally approved and 12 notified SEZs in India.
Opportunities
material for industrial, agricultural and consumer goods.
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According to the Confederation of Indian Textile Industry (CITI), the potential
size of the Indian textiles industry is expected to reach US$ 110 billion by
2012.
With consumerism and disposable income on the incline, the retail sector has
witnessed rapid growth in the past decade. Several international retailers are
also focusing on India due to its emergence as a potential sourcing destination.
The packtech segment constitutes 38 per cent of the total technical textiles
production in India (2007–08). This industry includes the production of
flexible packaging
Challenges
Scale: Indian firms are typically smaller than their Chinese or Thai counterparts and
there are fewer large firms in India. Some of the Chinese large firms have 1.5 times
higher spinning capacity, 1.25 times denim (and 2 times gray fabric) capacity and
about 6 times more revenue in garment than their counterparts in India thereby
affecting the cost structure as well as ability to attract customers with large orders.
Skills :
1. There is a paucity of technical manpower
2. Indian firms invest very little in training its existing workforce and the skills
are limited to existing proceses.
3. There is an acute shortage of trained operators and supervisors in India.
Domestic Market
The Indian domestic market for all textile and apparel products is estimated at $26 bn
and growing. While the market is very competitive at the low end of the value chain,
the mid or higher ranges are over priced.
3. Healthcare sector
India’s growing population and increasing preference for private health
services over public services is augmenting the growth of the healthcare delivery
market. Among countries outside the US, India has one of the largest numbers of Joint
Commission International (JCI) approved hospitals. The country has 0.5 million
doctors, 0.9 million nurses and about 1 million beds. These factors have transformed
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it into a leading medical tourism destination. Healthcare expenditure in India is
expected to increase by 15 per cent per annum. This segment is expected to constitute
6.1 per cent of the country’s GDP and employ around nine million people in 2012.
The share of tertiary care in the total healthcare market is currently about 11 per cent.
Opportunities
An additional 1.75 million beds are needed for India to achieve the target of
two beds per 1,000 population by 2025.
To maintain the current doctor-to-nurse ratio of 2.2, an additional 1,600,000
nurses will have to be trained by 2025.
India’s changing demographics and the increasing incidence of non-
communicable and lifestyle-related diseases is expected to trigger the need for
more tertiary care hospitals to cater to this demand.
The potential increase in the penetration rate of medical insurance and
employer plans could result in a higher demand for premium healthcare
services in India, and consequently, increase the demand for hospital beds and
medical equipment.
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Challenges:
1. cutting edge technology
2. Research and development
3. new innovate treatment
4. customer service quality
4. IT and ITES sector
Total revenues in India’s IT industry touched US$ 70.5 billion in 2008–09 as
compared to US$ 64 billion in 2007–08, growing at more than 12 per cent. The Indian
IT & ITeS industry is primarily concentrated in seven clusters—Bengaluru, NCR-
Delhi, Hyderabad, Chennai, Pune, Mumbai and Kolkata. The contribution of IT
industry to India’s gross domestic product (GDP) has grown from 1.2 per cent in
1997–2008 to an estimated 5.8 per cent in 2008–09. Total revenues in India’s IT
industry touched US$ 70.5 billion in 2008–09 as compared to US$ 64 billion in 2007–
08, growing at more than 12 per cent. The Indian IT industry has been growing at a
compound annual growth rate (CAGR) of 27 per cent from 2003 to 2008. India’s
software and services exports, including its ITeS-BPO exports, touched US$ 47.3
billion in 2008–09, as compared to US$ 40.4 billion in 2007–08, an increase of 14.3
per cent.
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Opportunities
It is estimated that the overall size of the domestic market grew by 20 per cent
in 2008–09 to reach US$ 24.3 billion by 2010.
Domestic IT BPO spending grew by 40 per cent in 2008–09.
The government is taking up e-governance initiatives and increasing its IT
spend/outlay with an allocation of more than US$ 400 million for the Unique
Identification Authority of India (UIDAI) in 2010–11.
The labour cost arbitrage in this sector is about 60 per cent of that in the US.
The growth drivers include the high productivity of India’s human resources
and outsourcing of knowledge processes by SMEs.
Challenges
1. Dependency on US
2. Indian IT firms are outsourced and off- shored
3. Rupee appreciation and FII
4. Diversification in verticals
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5. Power sector
Thermal power accounts for 64.2 per cent of the power produced in India,
followed by hydro-electric power. India’s total installed capacity, as on March 31,
2010, has been estimated at 159,398.49 MW. The outlay for the sector is US$ 115.56
billion (INR 5,547 billion), according to the Eleventh Plan. The government has
launched an initiative for the development of coal-based ultra mega power projects
(UMPPs), each with a capacity of about 4000 MW. The states contributed 79,391.85
MW to the total installed capacity, while the Central and private sectors contributed
50,992.63 MW and 29,014.01 MW, respectively, as of March 2010. The installed
capacity of the renewable energy industry has been estimated at 13,242 MW (as on
July 31, 2009), which constitutes 9 per cent of the country’s total installed capacity.
Opportunities
Construction, operation and maintenance of transmission lines by private
players.
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Private transmission facilities to be either set up and operated by independent
power transmission companies or joint ventures with state-owned transmission
utilities.
Competitive bidding for multiple transmission projects.
Challenges
Avoiding misconception of the new market arrangements
Keeping anticipation capabilities to adapt and correct policies and processes
(avoiding myopia and sheep behaviour)
Saving minimum core business competency at decision-making level
The environment laws will increase the restrictions to electric engineering
The automation and smart instrumentation presence will be increased
New materials and processes will force a permanent knowledge update
The demand of technical and financial management will increase
The professional competition will increase
The legal aspects will increase in professional activities
6. Financial services sector
The Indian financial market is growing rapidly, with significant potential for
further growth (National Stock Exchange is ranked 18th in terms of value of shares
traded in the world). India has a strong financial regulatory system, administered by
Reserve Bank of India (RBI) and supported by regulatory body such as Securities and
Exchange Board of India (SEBI), which govern capital markets and mutual funds,
among other financial institutions. India’s high savings rate offers significant
opportunity for channelising resources into the financial markets. The NSE and the
BSE are the main exchanges, with the NSE contributing over 70 per cent of the
turnover. There are more than 8,000 brokers in addition to about 44,000 sub-brokers
registered with SEBI. Mutual funds in India had assets under management to the tune
of US$165 billion (INR 7,944 billion) as of December 2009. More than 11,000 non-
banking financial companies (NBFCs) are registered with the RBI. The microfinance
segment in India too is witnessing rapid growth. Market capitalisation of Indian
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companies on the stock exchange has more than tripled between 2004–05 and 2009–
2010.
Opportunities
High GDP growth rate, driven by significant corporate earnings, is expected to
create the need for more intermediaries in the capital market.
Large number of mutual funds and increasing AUM require more distribution
intermediaries and schemes for better market penetration.
Unorganised money lending is a general practice in micro-credit. High level of
professionalism, more transparency and low interest rates brought in by
organised microfinance firms, is expected to expand the market.
Challenges
Adept to face increasing transaction volumes, regulation and the integration of
previously disparate global markets
Agile at identifying and managing risk
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Operationally efficient
Customer – centric
Optimized in both business & technology
7. Steel sector
India is the fifth-largest producer of crude steel in the world (2008), with a
production volume of 54.5 million tonnes. 222 memoranda of understanding (MoUs)
have been signed by various states with an intended capacity of about 275.7 million
tonnes and an investment of more than US$ 229 billion (INR 11,000 billion). India
and China are the only countries to have registered positive growth in steel production
in the period between January and March 2009.
The steel production capacity is estimated to reach 124 million tonnes by 2011–12. In
2008–09, the installed capacity for crude steel was estimated at 64.4 million tonnes,
while production was estimated at 54.5 million tonnes, resulting in an 85 per cent
capacity utilisation. Long-products constituted 57 per cent of the total finished steel
consumption, while the remaining 43 per cent was constituted by flat-products in
2007–08.
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Opportunities
The rising costs of coal and crude oil have resulted in a shift towards the use
of alternate fuels. To leverage this opportunity, companies are investing in
building a pipeline network for gas distribution.
The increasing investments by the state governments in water and sewage
pipes infrastructure management are also expected to augment the anticipated
demand.
Challenges
The condition of the infrastructural facilities of the steel industry in India is
not at all conducive to a sustainable growth and development of the steel
industry of the India.
Even though India is capable of producing steel at a good rate and also
increase the volume of production there is not enough land available to
support such activities. the design institutions in India have not been
successful at recruiting the best of engineers and metallurgists in India. This
has affected the technological aspect of the Indian steel industry.
8. Telecommunication sector
India is one of the biggest telecom markets in the world with 581.81
million subscribers as on January 31, 2010, which are estimated to reach
approximately 700 million by 2012. At the end of January 2010, the overall
tele-density was recorded at 49.5 per cent with a total telephone subscriber
base of 581.81 million. The telecom sector is one of the highest FDI attracting
sectors in India, and has recorded FDI inflows worth over US$ 8.8 billion
between 2000 and 2010. Multiple factors including low tariffs, low handset
prices, effective government regulations, higher incomes and changes in
customer behaviour are the key drivers for growth. Broadband subscribers are
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expected to grow to 30 million, while Internet subscribers are expected to
grow to 45 million by 2012.
Opportunities
By 2012, total telecom penetration in the largely untapped potential rural
markets of India is expected to reach to about 40 per cent as compared to the
current tele-density of about 16.61 per cent as of June 2009.
Despite the low penetration of internet services in the Indian market, it is
expected to grow in the next decade in terms of number of subscribers. India is
expected to feature among the top 10 broadband markets by 2013.
The expansion of wireless networks and growth in subscriber base, both in
urban and rural areas, has led to a boost in the sale of mobile handsets across
India. The mobile handsets sale grew by 7.9 per cent in 2008–09.
Challenges
1. advanced technology for authentication and e-purchase
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2. security measures
3. efficient use of bandwith.
RESEARCH METHODOLOGY
sector.
OBJECTIVES:
To study the behavior of investors towards manufacturing sector.
To find out the trends and market share of iron & steel industries and
automobiles in past and in current period.
To project future trends of stock prices.
To ascertain the key growth drivers of manufacturing sector.
To study the problems prevailing in manufacturing sector such as inflationary
pressure, cost of manufacturing.
To recommend buy/sell/hold decision in the future on the above company.
HYPOTHESIS:
Manufacturing sector is booming sector for investment.
METHODOLOGY:
Source of Secondary data is obtained from:
Data collection of selected sectors from BSE and NSE.
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15
Data from websites like “www.economywatch.com”,
“www.siamindia.com” , “ www.cci.in” , “ www.economictimes.com” ,
“www.nseindia.com” .
Magazines like analyst ( published by ICFAI ), Investors India, Business
World.
PROPOSED CONTENT:
Company profile
Research design
Analysis and interpretation
Findings and conclusion
Recommendation
Bibliography
WORK PLAN:
Submission of Synopsis.
Collection of data through various websites, magazines and company’s
database.
Analysis of data.
Interpretation of data.
Drawing inference, interpretation and conclusion.
Based on the conclusion suggestions and recommendations will be made.
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LITRATURE REVIEW
“The act of committing money or capital to an endeavor with the
expectation of obtaining an additional income or profit is investment.”
It’s actually pretty simple: investing means putting your money to work for you.
The money you earn is partly spent and the rest saved for meeting future
expenses. Instead of keeping the savings idle you may like to use savings in
order to get return on it in the future. This is called Investment. Investment is
a term, which is frequently used in the field of economics, business
management, finance and it means savings or savings made through delayed
consumption. Investment can be divided into different types according to
various theories and principles. In general purview, investment is the
application of money for earning more money. A particular amount of money
is invested in the bank or an asset is bought in the anticipation that some
return will be received from the investment in the future.
There can be a number of definitions of Investment. While dealing with the
various options of investment, the definitional variations of investment need to
be kept in mind.
According to economic theories, investment is defined as the “per unit
production of goods, which have not been consumed, however, will be used
for the purpose of future production.” Examples of this type of investments are
tangible goods like construction of a factory or bridge and intangible goods
like 6 months of on-job training. In terms of national production and income,
Gross Domestic Product (GDP) has an essential constituent, which is called
as gross investment. (http://us.geocities.com/frauline2008/terms.html)
What is investment in terms of Business Management:
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According to business management theories, investment refers to tangible
assets like machinery and equipments and buildings and intangible assets like
copyrights or patents and goodwill. The decision for investment is also known
as capital budgeting decision, which is regarded as one of the key decisions.
(geocities.)
What is investment in terms of Finance:
In finance, investment refers to purchasing securities or any other financial
assets from the capital market or money market or purchasing real properties
with high market liquidity for example, gold, silver, real properties, and
precious items. These are called ‘investment vehicles’. Financial investments
are investment in stocks, bonds, commodities and many other types of
security investments. Indirect financial investments can also be done with the
help of mediators or third parties, such as pension funds, mutual funds,
commercial banks, and insurance companies. According to personal finance
theories, an investment is the implementation of money for buying shares or
mutual funds or purchasing an asset with the involvement of the factor of
capital risk. Here we are going to focus on investment in terms of finance,
only. (geocities.)
WHAT INVESTING IS NOT ?
Investing is not gambling. Gambling is putting money at risk by betting on an
uncertain outcome with the hope that you might win money. Part of the
confusion between investing and gambling, however, may come from the way
some people use investment vehicles. For example, it could be argued that
buying a stock based on a “hot tip” you heard at the water cooler is essentially
the same as placing a bet at a casino. True investing doesn’t happen without
some action on your part. A “real” investor does not simply throw his or her
money at any random investment; he or she performs thorough analysis and
commits capital only when there is a reasonable expectation of profit. Yes,
there still is risk, and there are no guarantees, but investing is more than
simply hoping Lady Luck is on your side.
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(financialhub-sg)
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WHY SHOULD ONE INVEST?
Obviously, everybody wants more money. It’s pretty easy to understand that
people invest because they want to increase their personal freedom, sense of
security and ability to afford the things they want in life. However, investing is
becoming more of a necessity. The days when everyone worked the same job
for 30 years and then retired to a nice fat pension are gone. For average
people, investing is not so much a helpful tool as the only way they can retire
and maintain their present lifestyle. Nowadays, investments are the
foundation of our future financial level. Bad investments can bring us negative
turnovers and therefore decrease our future possibilities. You are looking at
two options for your money, the first you can spend it or save it and second,
invest it.
In short, one needs to invest to:
§ To beat inflation and earn return on your idle resources
§ generate a specified sum of money for a specific goal in life
§ make a provision for an uncertain future / for retirement.
One of the important reasons why one needs to invest wisely is to meet the
cost of Inflation. Inflation is the rate at which the cost of living increases. The
cost of living is simply what it costs to buy the goods and services you need to
live. Inflation causes money to lose value because it will not buy the same
amount of a good or a service in the future as it does now or did in the past.
For example, if there was a 6% inflation rate for the next 20 years, a Rs. 100
purchase today would cost Rs. 321 in 20 years. This is why it is important to
consider inflation as a factor in any long-term investment strategy. Remember
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to look at an investment’s ‘real’ rate of return, which is the return after
inflation. The aim of investments should be to provide a return above the
inflation rate to ensure that the investment does not decrease in value. For
example, if the annual inflation rate is 6%, then the investment will need to
earn more than 6% to ensure it increases in value.If the after-tax return on
your investment is less than the inflation rate, then your assets have actually
decreased in value; that is, they won’t buy as much today as they did last
year.
Investors can learn a lot from the famous Greek maxim inscribed on the
Temple of Apollo’s Oracle at Delphi: “Know Thyself”. In the context of
investing, the wise words of the oracle emphasize that success depends on
ensuring that your investment strategy fits your personal characteristics.
Even though all investors are trying to make money, each one comes from a
diverse background and has different needs. It follows that specific investing
vehicles and methods are suitable for certain types of investors. Although
there are many factors that determine which path is optimal for an investor,
we’ll look at two main categories: investment objectives, and investing
personality. (indian-capital-market-basics.)
INVESTMENT OBJECTIVES:-
The options for investing our savings are continually increasing, yet every
single investment vehicle can be easily categorized according to three
fundamental characteristics - safety, income and growth - which also
correspond to types of investor objectives. While it is possible for an investor
to have more than one of these objectives, the success of one must come at
the expense of others. Generally speaking, investors have a few factors to
consider when looking for the right place to park their money. Safety of
capital, current income and capital appreciation are factors that should
influence an investment decision and will depend on a person’s age,
stage/position in life and personal circumstances. A 75-year-old widow living
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off of her retirement portfolio is far more interested in preserving the value of
investments than a 30-year-old business executive would be. Because the
widow needs income from her investments to survive, she cannot risk losing
her investment. The young executive, on the other hand, has time on his or
her side. As investment income isn’t currently paying the bills, the executive
can afford to be more aggressive in his or her investing strategies.
An investor’s financial position will also affect his or her objectives. A multi-
millionaire is obviously going to have much different goals than a newly
married couple just starting out. For example, the millionaire, in an effort to
increase his profit for the year, might have no problem putting down $100,000
in a speculative real estate investment. To him, a hundred grand is a small
percentage of his overall worth. Meanwhile, the couple is concentrating on
saving up for a down payment on a house and can’t afford to risk losing their
money in a speculative venture. Regardless of the potential returns of a risky
investment, speculation is just not appropriate for the young couple.
As a general rule, the shorter your time horizon, the more conservative you
should be. For instance, if you are investing primarily for retirement and you
are still in your 20s, you still have plenty of time to make up for any losses you
might incur along the way. At the same time, if you start when you are young,
you don’t have to put huge chunks of your pay-check away every month
because you have the power of compounding on your side.
On the other hand, if you are about to retire, it is very important that you either
safeguard or increase the money you have accumulated. Because you will
soon be accessing your investments, you don’t want to expose all of your
money to volatility - you don’t want to risk losing your investment money in a
market slump right before you need to start accessing your assets.
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Personality:-
Peter Lynch, one of the greatest investors of all time, has said that the “key
organ for investing is the stomach, not the brain”. In other words, you need to
know how much volatility you can stand to see in your investments. Figuring
this out for yourself is far from an exact science; but there is some truth to an
old investing maxim: you’ve taken on too much risk when you can’t sleep at
night because you are worrying about your investments.
Another personality trait that will determine your investing path is your desire
to research investments. Some people love nothing more than digging into
financial statements and crunching numbers. To others, the terms balance
sheet, income statement and stock analysis sound as exciting as watching
paint dry. Others just might not have the time to plough through prospectus
and financial statements.
The main factor determining what works best for an investor is his or her
capacity to take on RISK.
Hence, the key to a successful financial plan is to keep apart a larger amount
of savings and invest it intelligently, by using a longer period of time. The
turnover rate in investments should exceed the inflation rate and cover taxes
as well as allow you to earn an amount that compensates the risks taken.
Savings accounts, money at low interest rates and market accounts do not
contribute significantly to future rate accumulation. While the highest rates
come from stocks, bonds, and other types of investments in assets such as
real estate. Nevertheless, these investments are not totally safe from risks, so
one should try to understand what kind of risks are related to them before
taking action. The lack of understanding as how stocks work makes the
myopic point of view of investing in the stock market ( buying when the
tendency to increase or selling when it tends to decrease) perpetuate. To
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understand the characteristics of each one of the different types of investment
can or may help you determine which of them is the right one for your needs.
A Saving Bank account (SB account) is meant to promote the habit of saving
among the people. It also facilitates safekeeping of money. In this scheme
fund is allowed to be withdrawn whenever required, without any condition.
Hence a savings account is a safe, convenient and affordable way to save
your money. Bank deposits are fairly safe because banks are subject to
control of the Reserve Bank of India with regard to several policy and
operational parameters. Bank also pays you a minimal interest for keeping
your money with them.
Features:
The minimum amount to open an account in a nationalized bank is Rs 100. If
cheque books are also issued, the minimum balance of Rs 500 has to be
maintained. However in some private or foreign bank the minimum balance is
Rs 500 or more and can be up Rs. 10,000. One cheque book is issued to a
customer at a time.
Savings account can be opened either individually or jointly with another
individual. In a joint account only the sign of one account holder is needed to
write a cheque. But at the time of closing an account, the sign of the both the
account holders are needed.
Return:
The interest rate of savings bank account in India varies between 2.5% and
4%. In Savings Bank account, bank follows the simple interest method. The
rate of interest may change from time to time according to the rules of
Reserve Bank of India. One can withdraw his/her money by submitting a
cheque in the bank and details of the account, i.e. the Money deposited,
withdrawn along with the dates and the balance, is recorded in a passbook.
Advantages:
It’s much safer to keep your money at a bank than to keep a large amount of
cash in your home. Bank deposits are fairly safe because banks are subject to
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control of the Reserve Bank of India with regard to several policy and
operational parameters. The federal Government insures your money. Saving
Bank account does not have any fixed period for deposit. The depositor can
take money from his account by writing a cheque to somebody else or
submitting a cheque directly. Now most of the banks offer various facilities
such as ATM card, credit card etc. Through debit/ATM card one can take
money from any of the ATM centres of the particular bank which will be open
24 hours a day. Through credit card one can avail shopping facilities from any
shop which accept the credit card. And many of the banks also give internet
banking facility through with one do the transactions like withdrawals,
deposits, statement of account etc. (webindia123.)
Fixed Deposits (FD's):-
A fixed deposit is meant for those investors who want to deposit a lump sum
of money for a fixed period; say for a minimum period of 15 days to five years
and above, thereby earning a higher rate of interest in return. Investor gets a
lump sum (principal + interest) at the maturity of the deposit.
Bank fixed deposits are one of the most common savings scheme open to an
average investor. Fixed deposits also give a higher rate of interest than a
savings bank account. The facilities vary from bank to bank. Some of the
facilities offered by banks are overdraft (loan) facility on the amount
deposited, premature withdrawal before maturity period (which involves a loss
of interest) etc. Bank deposits are fairly safer because banks are subject to
control of the Reserve Bank of India.
Features:-
Bank deposits are fairly safe because banks are subject to control of the
Reserve Bank of India (RBI) with regard to several policy and operational
parameters. The banks are free to offer varying interests in fixed deposits of
different maturities. Interest is compounded once a quarter, leading to a
somewhat higher effective rate.
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The minimum deposit amount varies with each bank. It can range from as low
as Rs. 100 to an unlimited amount with some banks. Deposits can be made in
multiples of Rs. 100/-
Before opening a FD account, try to check the rates of interest for different
banks for different periods. It is advisable to keep the amount in five or ten
small deposits instead of making one big deposit. In case of any premature
withdrawal of partial amount, then only one or two deposit need be
prematurely encashed. The loss sustained in interest will, thus, be less than if
one big deposit were to be encashed. Check deposit receipts carefully to see
that all particulars have been properly and accurately filled in. The thing to
consider before investing in an FD is the rate of interest and the inflation rate.
A high inflation rate can simply chip away your real returns.
Returns: -
The rate of interest for Bank Fixed Deposits varies between 4 and 11 per
cent, depending on the maturity period (duration) of the FD and the amount
invested. Interest rate also varies between each bank. A Bank FD does not
provide regular interest income, but a lump-sum amount on its maturity. Some
banks have facility to pay interest every quarter or every month, but the
interest paid may be at a discounted rate in case of monthly interest. The
Interest payable on Fixed Deposit can also be transferred to Savings Bank or
Current Account of the customer. The deposit period can vary from 15, 30 or
45 days to 3, 6 months, 1 year, 1.5 years to 10 years.
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Duration Interest rate (%) per annum
15-30 days 4 -5 %
30-45 days 4.25-5 %
46-90 days 4.75--5.5 %
91-180 days 5.5-6.5 %
181-365 days 5.75-6.5 %
1-2 years 6-8 %
2-3 years 6.25-8 %
3-5 years 6.75-8
Advantages: -
Bank deposits are the safest investment after Post office savings because all
bank deposits are insured under the Deposit Insurance & Credit Guarantee
Scheme of India. It is possible to get loans up to75- 90% of the deposit
amount from banks against fixed deposit receipts. The interest charged will be
2% more than the rate of interest earned by the deposit. With effect from A.Y.
1998-99, investment on bank deposits, along with other specified incomes, is
exempt from income tax up to a limit of Rs.12, 000/- under Section 80L. Also,
from A.Y. 1993-94, bank deposits are totally exempt from wealth tax. The
1995 Finance Bill Proposals introduced tax deduction at source (TDS) on
fixed deposits on interest incomes of Rs.5000/- and above per annum.
(webindia123)
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LIQUID FUNDS:-
Liquid funds are used primarily as an alternative to short-term fix deposits.
Liquid funds invest with minimal risk (like money market funds). Most funds
have a lock-in period of a maximum of three days to protect against
procedural (primarily banking) glitches. (iloveindia.)
Liquid funds score over short term fix deposits. Banks give a fixed rate in the
range 5%-5.5% p.a. for a term of 15-30 days. Returns from deposits are
taxable depending on the tax bracket of the investor, which considerably pulls
down the actual return. Dividends from liquid funds are tax-free in the hands
of investor, which is why they are more attractive than deposits.
MONEY MARKET FUNDS:-
A money market fund is a type of mutual fund that is required by law to invest
in low-risk securities. These funds have relatively low risks compared to other
mutual funds and pay dividends that generally reflect short-term interest rates.
Unlike a “money market deposit account” at a bank, money market funds are
not federally insured.
Money market funds typically invest in government securities, certificates of
deposits, commercial paper of companies, and other highly liquid and low-risk
securities. They attempt to keep their net asset value (NAV) at a constant
$1.00 per share—only the yield goes up and down. But a money market’s per
share NAV may fall below $1.00 if the investments perform poorly. While
investor losses in money market funds have been rare, they are possible.
It’s an investment fund that holds the objective to earn interest for
shareholders while maintaining a net asset value (NAV) of $1 per share.
Mutual funds, brokerage firms and banks offer these funds. Portfolios are
comprised of short-term (less than one year) securities representing high-
quality, liquid debt and monetary instruments.
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A money market fund’s purpose is to provide investors with a safe place to
invest easily accessible cash-equivalent assets characterized as a low-risk,
low-return investment. Because of their relatively low returns, investors, such
as those participating in employer-sponsored retirement plans, might not want
to use money market funds as a long-term investment option.
(sec.gov) National Savings Certificates (NSC) are certificates issued by
Department of post, Government of India and are available at all post office
counters in the country. It is a long term safe savings option for the investor.
The scheme combines growth in money with reductions in tax liability as per
the provisions of the Income Tax Act, 1961. The duration of a NSC scheme is
6 years.
Features:
NSCs are issued in denominations of Rs 100, Rs 500, Rs 1,000, Rs 5,000
and Rs 10,000 for a maturity period of 6 years. There is no prescribed upper
limit on investment. Individuals, singly or jointly or on behalf of minors and
trust can purchase a NSC by applying to the Post Office through a
representative or an agent. One person can be nominated for certificates of
denomination of Rs. 100- and more than one person can be nominated for
higher denominations. The certificates are easily transferable from one person
to another through the post office. There is a nominal fee for registering the
transfer. They can also be transferred from one post office to another.
One can take a loan against the NSC by pledging it to the RBI or a scheduled
bank or a co-operative society, a corporation or a government company, a
housing finance company approved by the National Housing Bank etc with the
permission of the concerned post master. Though premature encashment is
not possible under normal course, under sub-rule (1) of rule 16 it is possible
after the expiry of three years from the date of purchase of certificate.
Tax benefits are available on amounts invested in NSC under section 88, and
exemption can be claimed under section 80L for interest accrued on the NSC.
Interest accrued for any year can be treated as fresh investment in NSC for
that year and tax benefits can be claimed under section 88.
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Return:
It is having a high interest rate at 8% compounded half yearly. Post maturity
interest will be paid for a maximum period of 24 months at the rate applicable
to individual savings account. A Rs1000 denomination certificate will increase
to Rs. 1601 on completion of 6 years.
Interest rates for the NSC Certificate of Rs 1000
Year Rate of Interest
1 year Rs 81.60
2 year Rs 88.30
3 year Rs 95.50
4 years Rs103.30
5 years Rs 111.70
6 years Rs 120.80
Advantages:
Tax benefits are available on amounts invested in NSC under section 88, and
exemption can be claimed under section 80L for interest accrued on the NSC.
Interest accrued for any year can be treated as fresh investment in NSC for
that year and tax benefits can be claimed under section 88. NSCs can be
transferred from one person to another through the post office on the payment
of a prescribed fee. They can also be transferred from one post office to
another. The scheme has the backing of the Government of India so there are
no risks associated with your investment.
How to start?
Any individual or on behalf of minors and trust can purchase a NSC by
applying to the Post Office through a representative or an agent. Payments
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can be made in cash, cheque or DD or by raising a debit in the savings
account held by the purchaser in the Post Office. The issue of certificate will
be subject to the realization of the cheque, pay order, DD. The date of the
certificate will be the date of realization or encashment of the cheque. If a
certificate is lost, destroyed, stolen or mutilated, a duplicate can be issued by
the post-office on payment of the prescribed fee.
(webindia123.)
POST OFFICE MONTHLY INCOME SCHEME
The post-office monthly income scheme (MIS) provides for monthly payment
of interest income to investors. It is meant for investors who want to invest a
sum amount initially and earn interest on a monthly basis for their livelihood.
The MIS is not suitable for an increase in your investment. It is meant to
provide a source of regular income on a long term basis. The scheme is,
therefore, more beneficial for retired persons.
Features:
Only one deposit is available in an account. Only individuals can open the
account; either single or joint. (two or three). Interest rounded off to nearest
rupee i.e., 50 paise and above will be rounded off to next rupee. The minimum
investment in a Post-Office MIS is Rs 1,500 for both single and joint accounts.
The maximum investment for a single account is Rs 4.5 lakh and Rs 9 lakh for
a joint account. The duration of MIS is six years.
Returns:
The post-office MIS gives a return of 8% interest on maturity. The minimum
investment in a Post-Office MIS is Rs 1,000 for both single and joint accounts.
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Deposit Rs Monthly Interest Amount returned on
maturity
5,000
10,000
50,000
1,00,000
2,00,000
3,00,000
6,00,000
33
66
333
667
1333
2000
4000
5,000
10,000
50,000
1,00,000
2,00,000
3,00,000
6,00,000
Advantages:
Premature closure of the account is permitted any time after the expiry of a
period of one year of opening the account. Deduction of an amount equal to 5
per cent of the deposit is to be made when the account is prematurely closed.
Investors can withdraw money before three years, but a discount of 5%.
Closing of account after three years will not have any deductions. Post
maturity Interest at the rate applicable from time to time (at present 3.5%).
Monthly interest can be automatically credited to savings account provided
both the accounts standing at the same post office. Deposit in Monthly
Income Scheme and invest interest in Recurring Deposit to get 10.5%
(approx) interest. The interest income accruing from a post-office MIS is
exempt from tax under Section 80L of the Income Tax Act, 1961. Moreover,
no TDS is deductible on the interest income. The balance is exempt from
Wealth Tax. .webindia123.)
PUBLIC PROVIDENT FUNDS
PPF is among the most popular small saving schemes. Currently, this scheme
offers a return of 8 per cent and has a maturity period of 15 years. It provides
regular savings by ensuring that contributions (which can vary from Rs.500 to
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Rs.70,000 per year) are made every year. For efficient “tax saving” there is
nothing better than PPF!
But for those who are looking for liquidity, PPF is NOT a good option.
Withdrawals are allowed only after five years from the end of the financial
year in which the “first deposit” is made. PPF does not provide any regular
income and only provides for accumulation of interest over a 15-year period,
and the lump-sum amount (principal + interest) is payable on maturity.
The lump-sum amount that you receive on maturity (at the end of 15 years) is
completely tax-free!! One can deposit up-to Rs 70,000 per year in the PPF
account and this money will also not be taxed and be removed from your
taxable income.
If you are relatively young and have time on your side, then PPF is for you.
How to invest in PPF?
A PPF account can be opened with a minimum deposit of Rs.100 at any
branch of the State Bank of India (SBI) or branches of its associated banks
like the State Bank of Mysore or Hyderabad. The account can also be opened
at the branches of a few nationalized banks, like the Bank of India, Central
Bank of India and Bank of Baroda, and at any head post office or general post
office. After opening an account you get a pass book, which will be used as a
record for all your deposits, interest accruals, withdrawals and loans.
However, be warned: you can have only one PPF account in your name. If at
any point it is detected that you have two accounts, the second account that
you have opened will be closed, and you will be refunded only the principal,
not the interest. Again, two adults cannot open a joint account. The account
will have to be opened in only one person’s name. Of course, the person who
opens an account is free to appoint nominees.
(indiahowto.)
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COMPANY FIXED DEPOSIT
Company Fixed Deposit is the deposit placed by investors with companies for
a fixed term carrying a prescribed rate of interest. Company Fixed Deposit
have always offered interest which is 2-3% higher than Bank Deposit rate,
because they have to pay higher interest to banks for borrowing money.
Interest is paid on monthly/quarterly/half yearly/yearly or on maturity basis and
is sent either through cheque or ECS facility. TDS is deducted if the interest
on fixed deposit exceeds Rs.5000/- in a financial year. At the end of deposit
period principal is returned to the deposit holder.
How to choose a good company deposit scheme?
» Ignore the unrated Company Deposit Schemes. Ignore deposit schemes of
little known manufacturing companies. For NBFC’s, RBI has made it
mandatory to have an ‘A’ rating to be eligible to accept public deposits, one
should go further and look at only AA or AAA schemes.
» Within a given rating grade, choose the company with a better reputation.
» Once you decide on a company, next choose the schemes that have given
a better return. Unless you need income regularly, you should prefer
cumulative to regular income option since the interest earned automatically
gets reinvested at the same coupon rate giving upon better yields. It also
gives you a lump-sum amount at one go.
» It is better to make shorter deposit of around 1 year to 3 years. This way
you not only can keep a watch on the company’s rating and servicing but can
also plan to have your money back in case of emergency.
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» Check on the servicing standards of the company. You should not oblige
companies that care little about investor services like promptly sending
interest warrants or the principal cheque.
» Involve your reputed Financial planner / Investment Advisor like us for
advice in all your transactions. Do not bypass and invest directly just to earn
an extra incentive.
» For investors living in outstation city, check whether the company accepts
outstation cheques and make payment through at par cheques.
Which companies can accept Deposit?
Companies registered under Companies Act 1956, such as:
» Manufacturing Companies.
» Non-Banking Finance Companies,
» Housing Finance Companies.
» Financial Institutions.
» Government Companies.
Upto what limits can a company accept deposit?
A Non-Banking Non-Finance Company (Manufacturing Company) can accept
deposit subject to following limits.
» Upto 10% of aggregate of paid-up share capital and free reserves if the
deposits are from shareholders or guaranteed by directors.
» Otherwise upto 25% of aggregate of paid-up share capital and free
reserves.
A Non-Banking Finance Company can accept deposits upto following limits:
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» Equipment Leasing Company can accept four times of its net owned fund.
»Loan or Investment Company can accept deposit upto one and half time of
its net owned funds.
What is the period of the deposit?
Company Fixed Deposits can be accepted by a Manufacturing Company
having duration from 6 months to 3 years. Non-Banking Finance Company
can accept deposit from 1 year to 5 years period. A Housing Finance
Company can accept deposit from 1 year to 7 years.
Where not to Invest?
» Companies which offer interest higher than 15%.
» Companies which are not paying regular dividends to the shareholder.
» Companies whose Balance Sheet shows losses.
» Companies which are below investment grade (A or under) rating.
There is an old saying “DON’T PUT All YOUR EGGS IN ONE BASKET”.
The company deposits should be spread over a large number of companies.
This will help the investor to diversify his risk among various
companies/industries. Investors should not put more than 10% of their total
Investible funds in one company.
(avdhootinvestment.)
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BONDS AND DEBENTURES
Debt instruments can be further classified into the following categories based
on the different characteristics with which they are floated in the market:
Debentures
Bonds
Debentures
Main characteristics
They are fixed interest debt instruments with varying period of maturity.
Can either be placed privately or offered for subscription.
May or may not be listed on the stock exchange.
If listed on the stock exchanges, they should be rated prior to the listing
by any of the credit rating agencies designated by SEBI.
When offered for subscription a debenture redemption reserve has to
be maintained.
The period of maturity normally varies from 3 to 10 years and may also
be more for projects with a high gestation period.
Types of debentures:
There are different kinds of debentures, which can be offered. They are as
follows:
Non convertible debentures (NCD)
Partially convertible debentures (PCD)
Fully convertible debentures (FCD)
The difference in the above instruments is regarding the redeemability of the
instrument:
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In case of NCDs, the total amount of the instrument is redeemed by the
issuer,
In case of PCDs, part of the instrument is redeemed and part of it is
converted into equity,
In case of FCDs, the whole value of the instrument is converted into
equity. The conversion price is stated when the instrument is issued.
Debentures might be either callable or puttable:-
Callable debenture is a debenture in which the issuing company has the
option of redeeming the security before the specified redemption date at a
pre-determined price.
Similarly, a puttable security is a security where the holder of the instrument
has the option of getting it redeemed before maturity.
BONDS
Bonds may be of many types - they may be regular income, infrastructure,
tax saving or deep discount bonds. These are financial instruments with a
fixed coupon rate and a definite period after which these are redeemed. The
fundamental difference between debentures and bonds is that the former is
normally secured whereas the latter is not. Hence in general bonds are issued
at a higher interest rate than debentures. This avenue of financing is mainly
availed by highly reputed corporate concerns and financial institutions.
The three main kinds of instruments in this category are as follows:
Fixed rate
Floating rate
Discount bonds
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The bonds may also be regular income with the coupons being paid at
fixed intervals or cumulative in which the interest is paid on redemption.
Unlike debentures, bonds can be floated with a fixed interest or floating
interest rate. They can also be floated without interest and are called
discount bonds as they are issued at a discount to the face value and
an investor is paid the face value on redemption, and if offered for
longer terms are known as deep discount bonds.
The main advantage with interest bearing bonds is the floating interest
rate, which is stipulated based on certain mark-up over stock market
index or some such index.
From the point of view of the investor bonds are instruments carrying
higher risk and higher returns as compared to debentures.
This has to be kept in mind while floating bond issues for financing
purposes. With the current buoyancy in capital markets for equity
instruments the demand for corporate bonds is low.
Foreign Direct Investment
Foreign direct investment (FDI) in its classic definition, is defined as a
company from one country making a physical investment into building a
factory in another country. Its definition can be extended to include
investments made to acquire lasting interest in enterprises operating outside
of the economy of the investor.[1] The FDI relationship consists of a parent
enterprise and a foreign affiliate which together form a Multinational
corporation (MNC).
FDI in India has increased over the years due to the efforts that have been
made by the Indian government. The increased flow of FDI in India has given
a major boost to the country's economy and so measures must be taken in
order to ensure that the flow of FDI in India continues to grow.
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Advantages of FDI in
India:
The Indian
government made
several reforms in the
economic policy of the
country in the early
1990s. This helped in
the liberalization and
deregulation of the
Indian economy and also opened the country's markets to foreign direct
investment.
As a result of this, huge amounts of foreign direct investment came into India
through non- resident Indians, international companies, and various other
foreign investors. The growth of FDI in India boosted the economic growth of
the country. Major advantages of FDI in India have been in terms of -
Increased capital flow.
Improved technology.
Management expertise.
Access to international markets.
WHY INDIA
Large domestic market
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India is one of the largest emerging markets, with a population of over one
billion. India is one of the largest economies in the world in terms of
purchasing power and has a strong middle class base of 300 million.
Now India has two major sectors where the market can be spotted. Urban and
Rural markets.
Rural-urban profile
Urban Rural
Population 2001 – 02 (mn house
hold)
53 135
Population 2009-10 (mn household) 69 153
% Distribution (2001-02) 28 72
Market (Towns/Villages) 3,768 627,000
Universe of Outlets (mn) 1 3.3
Around 70 per cent of the total households in India (188 million) resides in the
rural areas. The total number of rural households is expected to rise from 135
million in 2001-02 to 153 million in
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2009-10, this presents the largest potential market in the world. The annual
size of the rural FMCG market was estimated at around US$ 10.5 billion in
2001-02. With growing incomes at both the
rural and the urban level, the market potential is expected to expand further.
India - a large consumer goods spender
An average Indian spends around 40 per cent of his income on grocery and 8
per cent on personal care products. The large share of fast moving consumer
goods (FMCG) in total individual spending along with the large population
base is another factor that makes India one of the largest FMCG markets.
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Consumption pie
Even on an international scale, total consumer expenditure on food in India at
US$ 120 billion is amongst the largest in the emerging.
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Change in the Indian consumer profile
Consumer Profile
1999 2001 2006
Population (millions) 846 1,012 1,087
Population < 25 years of age 480 546 565
Urbanisation (%) 26 28 31
Rapid urbanisation, increased literacy and rising per capita income, have all
caused rapid growth and change in demand patterns, leading to an explosion
of new opportunities. Around 45 per cent of the population in India is below 20
years of age and the young population is set to rise further. Aspiration levels
in this age group have been fuelled by greater media exposure, unleashing a
latent demand with more money and a new mindset.
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Demand-supply gap
Currently, only a small percentage of the raw materials in India are processed
into value added products even as the demand for processed and
convenience food is on the rise. This demand supply gap indicates an
untapped opportunity in areas such as packaged form, convenience food and
drinks, milk products etc. In the personal care segment, the low penetration
rate in both the rural and urban areas indicates a market potential.
FMCG Category and
products
Health care –
Fabric wash (laundry
soaps and synthetic
detergents); household
cleaners (dish/utensil
cleaners, floor cleaners,
toilet cleaners, air
fresheners, insecticides and mosquito repellents, metal polish and furniture
polish).
Food and beverages –
Health beverages; soft drinks; staples/cereals; bakery products (biscuits,
bread, cakes); snack food; chocolates; ice cream; tea; coffee; soft drinks;
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processed fruits, vegetables; dairy products; bottled water; branded flour;
branded rice; branded sugar; juices etc.
Personal care –
Oral care, hair care, skin care, personal wash (soaps); cosmetics and
toiletries; deodorants; perfumes; feminine hygiene; paper products.
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Indian Competetiveness and Comparison With The World
Materials availability
India has a diverse agro-climatic condition due to which there exists a wide-
ranging and large raw material base suitable for food processing industries.
India is the largest producer of livestock, milk, sugarcane, coconut, spices and
cashew and is the second largest producer of rice, wheat and fruits &
vegetables. India also has an ample supply of caustic soda and soda ash, the
raw materials in the production of soaps and detergents – India produced 1.6
million tonnes of caustic soda in 2003-04. Tata Chemicals, one of the largest
producers of synthetic soda ash in the world is located in India. The
availability of these raw materials gives India the locational advantage.
Cost competitiveness
Labour cost comparison
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Apart from the advantage in terms of ample raw material availability,
existence of low-cost labour force also works in favour of India. Labour cost in
India is amongst the lowest in Asian countries. Easy raw material availability
and low labour costs have resulted in a lower cost of production. Many multi-
nationals have set up large low cost production bases in India to outsource for
domestic as well as exports market. The Role of Infrastructure in Industrial
Development
One of the most crucial elements to industrial development is effective
infrastructure especially in power supply, transportation and communications.
A study conducted in 2006 Hulten, Bennathan and Srinivasan (2006) shows
the link between physical infrastructure and increased productivity among
manufacturing firms. While it is implied that manufacturing firms need
physical infrastructure to start and maintain production, this fact is often left
out of most work on industrialization studies (Hulten 2006). Policy makers
when considering re-industrialization in India may often overlook this link as
greater attention is given to investment infrastructure. By recognizing the
need for infrastructure among industry the government can launch more
projects that will be benefit the economy and the public at large.
Another piece of literature in the field looks at the effect of better
infrastructure on developed and developing regions. Most studies indicated
that improving infrastructure does not have an influence on the growth or
productivity of firms in places like the US. However, Lall (2007) shows that
better infrastructure can have positive gains for firms in developing regions.
Because states are at various stages of development within India,
infrastructure can have a serious impact on the success of business. Lall
finds that “transport and communications infrastructure are significant
determinants of regional growth in India” (Lall, page 583), while returns in
power supply development are higher for more advance states. Lall explains
that this inconsistency arises from the lack of other public services and capital
in less developed states, meaning transportation and communications serve
as more basic and necessary infrastructure for industry in developing states.
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These findings and conclusions should not serve to eliminate power supply
from government development projects, rather they should highlight the
importance of diverse public works projects based on the needs of regions
and firms. It is clear from these studies and others that infrastructure
development is a key component of growth in manufacturing, and that
improving public services is a necessary first step in industrial development.
Liberalization, FDI and Current Implications
FDI and trade openness are not new phenomenon in the global market but
India is only recently experiencing the growth effects of liberalization. In the
forty some years after independence the Indian economy was closed off to
the rest of the world, and while some trade did occur across borders, it was
not truly part of the global economy. In 1991, under the pressures of an
economic crisis, the Indian government turned to the World Bank and IMF for
loans. Even though the Indian government never took these loans, the
process of liberalization and privatization required by the World Bank had
already begun, and in a radical move, the Indian government continued these
policies of openness. The government removed numerous licensing
regulations in all industries, began the privatization of many services that were
previously state-run, and most importantly opened the economy to foreign
investments. Opening the markets of India allowed for greater development
and business opportunities for domestic firms, while increasing the
international presence in Indian economics. This liberalization was a huge
step for India, and it ushered in a new period of economic policy that
ultimately shaped India’s stance in the global economy today.
FDI policy in India follows certain regulations on the amount of investment
allowed in certain sectors. While FDI is strictly prohibited in retail trading,
atomic energy, lottery systems and other forms of gambling, most other
sectors are allowed up to one hundred percent invest. A report on FDI policy
put out by the Ministry of Commerce and Industry in 2006 lists the various
industries and permitted levels of investment in each. It is interesting to note
that all manufacturing and heavy industries are allowed one hundred percent
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investment, and most are given automatic entry route. In contrast, the
amount of FDI allowed for telecommunications is capped at seventy-four
percent on basic telecom and Internet service provision (Foreign Direct
Investment Policy). While the current policy allows for more investment in
manufacturing than other sectors, industry is not the most popular sector for
FDI inflows. In the past eight years the highest percentage of FDI in India has
been directed to the service sector at 20.87 percent. This is followed by
computer software and hardware at 11.95 percent, and then
telecommunications at 7.99 percent.
TABLE 1: FDI BY SECTOR
Source: Department of Industrial Promotion and Policy
It is interesting to note that greater liberalization of FDI towards manufacturing
has not helped it garner international investments in India, and rather the
booming IT and computer services has been a major pull for investors abroad.
Over the past eight years, the amount of FDI directed towards services has
risen at a much higher rate then that of construction, as seen in the graph
below. Moreover, the limits on investment in IT indicate that government
would like domestic firms to retain a role in the development of this sector,
whereas manufacturing does not require domestic involvement. This points to
a difference in prioritization of sectors from the government.
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GRAPH 1: GROWTH IN FDI BY SECTOR (Amount US$ in millions)
Source: Department of Industrial Promotion and Policy
Not only is there a clear difference in what sectors attract the most FDI but
also there are marked differences in the regional distribution of FDI. The state
of Maharashtra attracts the largest amount of FDI at 24.9 percent, followed by
the state of Delhi and surrounding states of Haryana and Utter Pradesh at
23.4 percent of total foreign investments. In both cases, the most investments
go to telecommunication, services, electrical equipment (such as computer
software and other components), and to some degree transportation
(Bloodgood 28). It is no surprise that Maharashtra is the richest state in India,
and others with low levels of FDI such as Bihar and Assam severely lag in
development. It is clear that liberalization policy has not had the same impact
all over India and equal growth and investment is necessary for stable growth
in the Indian economy.
TABLE 2: FDI EQUITY INFLOWS
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Source: Competitive Conditions for Foreign Direct Investment in India.
Efficiency of Indian Manufacturing Firms
The efficiency of Indian manufacturing is well behind that of foreign firms,
evidenced by the weak export economy of India. In the context of this
argument, efficiency refers to the ability of a firm to produce reliable goods at
a low cost, in a long term and competitive manner. This is extended to the
overall output of a firm, meaning firms with greater output will be more
efficient. An in depth study of manufacturing efficiency by Kalirajan and Bhide
(2005) describe the growth of manufacturing pre and post reform. Over the
years the manufacturing sector has grown in India the percent of growth has
not been consistent from year to year. Moreover studies on the manufacturing
sector report varying levels of success, with some literature claiming great
strides in industry, and others showing the clear lack of development in the
sector. These discrepancies point to an unstable sector, mainly due to
inefficient and unproductive firms. The authors use a production frontier model
to describe the problems of output among Indian manufacturers. A production
frontier is defined as “the ability of firms to achieve their maximum possible
output from a given set of inputs and technology” (Kalirajan and Bhide 127).
When a firm operates within the production frontier, it depends on an increase
of input to create more output rather then improving the internal structure of
operations. The results of the study show that Indian manufacturing has been
dependant upon this form of growth for many years, and has not broken out of
its current production frontier. Indian firms fail to focus on the overall
improvement of business functions, and are not investing enough in R&D or
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improving the means of production for goods. In addition, lack of efficiency
means that export diversification has not occurred in a significant way.
Manjappa and Mahesha (2008) extend the ideas of production frontiers
by analyzing productivity growth, efficiency change and technical progress
through the use of the Malmquist Index. This formula allows for the
differentiation of productivity measurements within a firm, and the authors
apply this index to the outputs of five capital-intensive and five labor-intensive
industries between 1994 and 2004. The study presents an interesting
dilemma between growth in the two types of industry. In capital-intensive
industries total factor production (TFP) increased as a result of technical
progress within firms. This is perceived as a “shifting of frontier” (Manjappa
and Mahesha, page 177) for firms, but does not indicate an actual
improvement in efficiency of business operations. On the other hand, labor-
intensive industries experienced productivity regress over the years, even
though efficiency has gone up among these firms. The authors speculate the
efficiency growth was offset by the lack in technical progress among labor-
intensive firms. The contrast between the types of industry indicates that each
one depends on both technical efficiency and change for overall output
growth, further emphasizing the need to improve technologies in the sector
and the way they are used.
Another interesting piece of information comes from Venkataramanaiah
and Parashar (2007) who look at the competitiveness of Small and Medium-
Size Enterprises (SMEs) in Indian industry. They explain that about 20
percent of SMEs are able to enter in the supply chain of goods with larger
firms, ensuring a constant stream of clients and markets. However another 20
percent cannot enter the supply chain due to “uncertain erosion of their
market shares. The remaining 60 percent cannot enter the supply system,
even though “there is a strong demand from customers” ” (Venkataramanaiah
and Parashar 231). SMEs have trouble entering the market for of a variety of
reasons, including access to finance and lack of new technology. The authors
promote the use of industrial clusters, which are similar to SEZs, to enhance
the competitiveness of SMEs.
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Das and Pant (2006) show that the efficiency of firms is not limited to
business practices as market imperfections do not encourage competiveness
within the sector. The authors find that the years of protectionist policy
influenced the growth of the sector post-liberalization and limited the entry and
exit of firms. Their data indicates “that entry and exit occur at the lower end of
the market, leaving the market structure unaffected” (Das and Pant 66). This
has caused a “missing middle” phenomenon for the sector, as not enough
firms can grow to medium size, and many small firms and a few large
corporations characterize the sector. This is a detriment to overall growth of
the sector as small and medium size businesses struggle with competition
and Indian manufacturing relies on a few large companies for all export
growth. The difficulty of closing a firm in the sector is a detriment to increased
competition as well. To close down a firm in manufacturing can take up to ten
years, and this prevents a dynamic market from emerging, as owners must
operate with unsuccessful firms for many years rather then re-establishing
business. Finally, capital market imperfections result in very few new
enterprises getting start up loans, and the authors suggest increasing the
scope of Developing Financial Institutions. Doing so will mean that more start
up firms can enter the market thus increasing competition and efficiency of all
corporations.
Kambhampati (2006) looks further at the role of financial institutions
and efficiency of firms. Typically financing from private and government
institutions are highly monitored, putting pressure on companies to increase
output. However the Indian system has a low level of corporate governance,
and government loans are not strictly monitored, giving no real incentive for
firms to be efficient. Kambhampati hypothesizes that Foreign Financial
Institutions (FFIs) are more likely to regulate their loans than the government,
resulting in more efficiency from privately backed firms. While the study
proves that FFIs are more regulatory with their financing, neither institution is
especially effective at increasing productivity of firms. One explanation of this
phenomenon is that prior to liberalization, financing from the public and
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private sector was done on a quota system, and regulation was not given as
much priority as the mere existence of firms. Post-reform little has changed,
despite the influx of foreign capital and reforms in the financing sector. This
indicates that liberalization in itself has not been enough, and that more steps
need to be taken by the government to encourage greater productivity from
firms. With the further opening up of the sector and global pressures it is
imperative that Indian firms increase efficiency in order to be competitive.
Environment-Conscious Manufacturing
India is a fast growing nation, and with comes increased levels of
environmental degradation. Managi and Jena (2008) review Indian
environmental policy and then apply an Environmental Kuznets Curve to
demonstrate a decrease in environmental productivity over a period of twelve
years across high-income and low-income states. In the late 1970s the
government passed legislation that called for a more protectionist stance
regarding the environment. Some years later the Air Act and the
Environmental Protection Act were enacted, giving more legislative authority
to state and central boards. In addition to this, the Department of Environment
(DOE) was created to oversee development projects, facilitate central, state
and local partnerships and monitor pollution levels. Criticisms emerged that
the DOE had limited enforcement powers, nor adequate financial or political
backing. In response the government created the Ministry of Environment and
Forest (MoEF) to further monitoring and promotion of environmental
sustainability. Despite the “Environmental Action Plan” published in 1993, little
action has been taken to significantly reduce the amount of pollution as
economic development and liberalization took precedence. Given this history
of weak environmental policy, the authors explore the “environmental
productivity” of states across India and find an “EKC type relationship exists”
between concern for the environment and income across all states (Managi
and Jena 439). Moreover, environmental productivity has decreased as a
whole across India, something that the government will have to address in a
strong action oriented way.
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An important element of all sustainability discussion is the Kyoto Protocol and
how different countries respond to the stipulations of the agreement. Baetting,
Brander and Imboden (2008) analyze the cooperation levels of signatories,
including India. Using five different indicators of cooperation, including
willingness and promptness in enacting goals of the framework the authors
find that India ranks higher than the US and China in its level of cooperation.
Part of India’s cooperation comes from its implementation of a Designated
National Authority (DNA) to oversee the Clean Development Mechanism
(CDM) stipulated by Kyoto.
Ganapati and Liu (2009) describe India’s development of a DNA following the
ratification of the Kyoto Protocol. Kyoto calls for a DNA to regulate CDM
projects in the host country, and immediately after ratification 2002, the Indian
government created the National CDM Authority. This authority is a “single
window clearinghouse” for the approval of new projects, making the process
of apply for a CDM a relatively streamline process (Ganapati and Liu 50).
Despite this, the DNA is limited in power and function, and cannot create the
necessary political infrastructure to implement better policies. Moreover, there
is inadequate representation of relevant industries on the CDM Authority such
as coal and natural gas, two main causes of the pollutants that need to be
eliminated in India. Another set back to sustainability is the CDM Authority’s
lack of an explicit set of priority areas for CDM projects. This means that
cases are reviewed on a project-to-project basis, leading to inconsistencies in
regulation and higher transaction costs. Without adequate funding or support,
the CDM Authority cannot be expected to significantly lower the costs of
transactions either, another important role of the DNA. Lowering the cost to
implementing a CDM project is a necessary step to increase the amount
foreign investment in sustainable development in India. Despite the problems
of the CDM Authority, there is considerable room for political discourse and
involvement from local NGOs and business, giving it the ability to increase its
overall power through cross industry links.
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If India is successful in implementing better policies to increase its
manufacturing sector, it will face an even greater problem of an increase in
environmental degradation as industrial waste increases. To deter a serious
environmental problem the Indian government must take steps to ensure
growth does not result in further environmental ruin. Not only should the
government give more importance to existing environmental ministries, it must
also help its private sector lead the way in green manufacturing. Perhaps the
problem results from a misconception that environmental responsibility and
economic growth cannot work together in a developing country, something
that many studies and much discussion have shown to be untrue.
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FINDING AND ANALYSIS
World over the significance of productivity and quality in industrial production has
reached its peak today, as a result of the ever-growing competition in industry and
business, primarily because of the pressures of globalization. There is a heightened
need to improvise the cost effectiveness of manufacturing processes, while at the
same time maintaining quality, to withstand the pressures of competition.
Accordingly, it has become imperative for businesses to constantly seek new and
innovative means to production processes and manufacturing techniques, and new
frontiers of technology for enhanced competitiveness of operations. In this context,
this paper seeks to (i) make a macro level review of the manufacturing scenario in the
developing world with special reference to India, (ii) make a micro level study of the
cost management system of a public sector company (Government of Kerala),
KAMCO (Kerala Agro-Machinery Corporation) including benchmarking it with the
industry leader, and (iii) suggest suitable strategies for enhanced cost competitiveness
of the company.
I. MANUFACTURING IN THE DEVELOPING WORLD IN THE ONGOING
GLOBALIZED ERA
1.1. New Manufacturing Context and the Competitiveness Imperative
Growing interest in industrial competitiveness has now currently become a global
phenomenon prominent across all economies–developed and developing, though it
initially originated in the developed world. Wignaraja (2001) has observed,
“Concerns about the process of industrial restructuring in an integrated world
economy have sparked widespread interest in the concept of competitiveness as
applied to national economies and enterprises within them. This interest originated in
the developed world but has recently spilled over into developing countries and
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economies in transition”. The central issue of competitiveness of developing countries
is “the creation of efficient industrial capacity” . Accordingly, a new manufacturing
context is fast emerging in the developing world wherein apart from knowledge and
technological progress, five mutually reinforcing processes are vitally significant, viz.
(i) revolutionary changes in ICT, (ii) emergence of globally integrated value chains,
(iii) increasing global competition associated with falling trade barriers, (iv) new rules
of the game (introduced through WTO and by foreign buyers of output), and (v)
changing consumer demands.
1.2. Stagnancy in Indian Manufacturing and Sectoral Imbalances
In India, enhancement of manufacturing competitiveness has got added significance
in the ongoing LPG regime, particularly in the later years of globalization (viz. 2000s)
because of intensified competition. In fact, even before the LPG era the existence of a
‘relative stagnation’ was conclusively demonstrated by Ahluwalia (1985) , between
FY 1967 and FY 1980, and that this ‘relative stagnation’ continued even after FY
1980. Nagaraj (2006) who has continued this work in the 1980s and found that the
growth rate during 1980-81 to1986-87 is higher than that during 1966-67 to 1978-79;
but comparable to the one during 1959-60 to1965-66 period. The already existing
stagnation problem has been continuing in the ongoing LPG era also, in spite of an
upturn in the eighties. The problem has in fact worsened owing to growing imbalance
between major sectors of the economy, characterized by fast growing share of
services sector, constantly declining share of agriculture sector and stagnating
industry sector (particularly the manufacturing sub-sector within it). This has
prompted the Government of India to set up a specialized body, NMCC (ie. National
Manufacturing Competitiveness Council) to promote competitiveness of Indian
manufacturing. As of FY 2008, the share of agriculture, industry and services are
respectively 17.6%, 29.4% and 53%. As the imbalance between the three major
sectors grows, it is imminent to chalk out urgent policy measures to correct the
imbalance (Table I)
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Financial Year Agriculture Industry Services Total GDPFY 1950-51 59.60 14.50 25.90 100FY 1960-61 55.10 17.30 27.60 100FY 1970-71 48.50 20.70 30.80 100FY 1980-81 41.50 21.60 36.90 100FY 1989-90 33.90 27.00 39.10 100FY 1991-92 26.70 31.30 42.00 100FY 2006-07RE 20.80 26.00 53.20 100FY 2007-08ES 19.90 26.10 54.00 100FY 2008-09RE 18.50 26.40 55.10 100FY 2009-10ES 17.60 29.40 53.00 100
about 27% for the last two decades or more. Of this, the share of manufacturing sub-
sector has been roughly about 17% throughout. However, going by international
standards, this share of manufacturing sector may be observed to be quite low. (Table
II). Iyer, A., Kandaswamy, K., et. al have pointed out, “Without a doubt,
manufacturing is the backbone of the economy in most countries, especially so in fast
growing emerging markets. It is clear that for the Indian manufacturing to
successfully distribute wealth across its population, manufacturing has to grow from
its current 17% of GDP to a number closer to 30% (which is the standard for most
developed economies).”
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Country Agriculture Industry ManufacturingServices
Brazil 5 31 18 64
Russia 6 38 19 56
India 18 28 16 54
China 12 47 33 41
Table II: Composition of GDP in BRIC Countries (as of 2006)
[Source: World Development Indicators 2008, The World Bank, USA., 2008,
pp.202-204)
Indian manufacturing grew only at 6.3% during 1991 to 2003 as against 12% in
China. NSM (2006) formulated by NMCC estimates that to attain the targeted GDP
growth rate of 8 to 10 per cent, the country should target a minimum manufacturing
growth rate of 12 per cent per annum. Besides, the share of manufacturing should be
raised to 30 to 35% by 2020.
II. INDIAN MANUFACTURING AND COST COMPETITIVENESS
2.1. Challenges to Indian Manufacturing – the Issue of Cost Competitiveness
For Indian economy to exhibit a balanced, stable and sustainable growth it is highly
imperative that Indian manufacturing, most importantly the segment comprising of
small and medium enterprises (SMEs), to grow phenomenally primarily through
improving its competitiveness in terms of costs and quality. In the emerging scenario
of global competition, the need for enhancement of productivity and competitiveness
of manufacturing enterprises need not be overemphasized. Robust growth in
manufacturing is an imperative for creation of better employment possibilities and
overall economic development. Besides, competitiveness is central to robust growth
of the manufacturing sector.
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One of the vital means of enhancing productivity and improving quality is through
proper cost management. It is widely recognized that what Indian manufacturing
needs the most today is improvement in cost competitiveness. Regarding cost
competitiveness, Nakagawa (2008) has observed, “it refers to the edge that the
domestic manufacturers need to have in providing quality products at a certain cost”.
Many progressive organizations have adopted cost competitiveness as the central
theme of business strategy. MUL (Maruti Udyog Ltd.) seeks to attain higher cost
competitiveness through enhanced localization, higher productivity etc. It is worth
noting here that, regarding the challenges faced by Indian manufacturing in the
emerging scenario, NSM (2004) points out, inter alia, the following cardinal factors,
(i) ensuring cost competitiveness and stimulating domestic demand, (ii) investing in
innovations & technology, (iii) enabling SMEs to achieve competitiveness etc.
There are evidences for the declining competitiveness of Indian firms vis-à-vis their
international counterparts in the LPG era. A study by The Economic Times (ET) in
2002 has revealed that the competitiveness of 202 Indian companies during FY 1997
to 2001 period has been constantly coming down, from 23.51 (FY 1997) to 20.92 (FY
2001). But, that of 42 MNCs (Multi-National Corporations) has gradually risen during
the period, from 21.47 to 23.18. Gorden & Kato (2006) have observed that the
profitability of domestic manufacturing firms has been adversely affected with the
increase in import penetration during the reforms regime (FY 1992 to FY 2002
period) and that this negative effect has been lesser in respect of firms with larger
size..
The process of liberalization has opened up new vistas for various sectors of
the economy as also posed certain challenges. While on the one hand, it expands the
scope of cross-border transactions, on the other, the new order holds different
perception about protection and safeguards that a global trading system should
provide to its members (SIDBI report-2001). Development is multi-dimensional
phenomenon. Some of its major dimensions includes: the level of economic growth,
level of education, level of health services, degree of modernization, status of women,
level of nutrition, quality of housing and access to communication.2
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Till the 1960 the term ‘economic development’ was often used as a synonym
of ‘economic growth’ in economic literature. Now economic development is no
longer considered identical with economic growth. It is taken to mean growth plus
progressive changes in certain crucial variables which determine the well-being of the
people. There are qualitative dimensions in the development process which may be
missing in the growth of an economy expressed in terms of an increase in the national
product or the product per capita.7 Economic growth is defined as sustained and
substantial rise in product per capita (Kuznets). One must differentiate between level
from the rate of economic growth, the level of economic growth of the country is
measured in terms of the size of national (or per capita) real income where as the
percentage change in this level over a given period of time is rate of economic
growth.7 That is, if we define A1 and A2 as the levels of income in two different
periods and G as the percentage rate of growth then
G=A2-A1/A1x100
As a concept, ‘economic development’ is much broader term than ‘economic
growth’. The economic development of India is highly depending upon various
sectors like agriculture, manufacturing & services. “Economic development, achieved
largely through productivity growth, is very important to both developed and
developing nations. However, even though we know that higher productivity leads to
improved economic outcomes (for example, higher income, more choices to the
consumers, better quality products, etc.), there has been no consensus among
researchers about either the desired path of development or the role of state in
economic development”.5
Research objective and Methodology:
In this research we had examined the effects of industrialization on GDP of
the country and the effect of industrialization on economic development of the
country. This study relies heavily on secondary data sources such as publications and
survey findings by CSO and the World Bank that assess the industry trends and
human capital development efforts at the firm level. For macro-economic data on
India, I have drawn upon most recent surveys reported by the Government of India.
Data have also been adapted from other scholarly publications whenever deemed
necessary.
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The plan of the paper is as follows. Section I summarizes the industrial strategy of
economic development in India. Section II analyses the special role that industries
play in India’s economic growth.
INDIA’S INDUSTRIAL STRATEGY OF ECONOMIC DEVELOPMENT
At the time of independence, India was industrially and economically
backward. The establishment of new industries on a big scale and development of
traditional industries was an essential need of the economy. Large emphasis was laid
on industrialization during the planning period. Huge investments were made in heavy
industries and capital goods sector particularly in iron and steel, heavy engineering
and machine building industries.3 For a predominantly agricultural based country like
India, development of industries is a must for economic growth and development.
There is huge chance for the industrialization of a country like India with a vast
manpower, large and varied resources and sub-continental benefits. After
independence in 1947, a Planning Commission was set up to plan and control Indian
economy. A Five Year Plan was generated to estimate and project various economic
policies.
Prior to the framing of the first five year plan, the major emphasis in industrial
development has been on consumer’s goods industries, while the development of
basis capital goods industries had lagged behind. The very first industrial strategy was
developed or framed under second five year plan, which give emphasis on investment
in heavy industries. Same strategy was carried followed in third five year plan but
after wards the emphasis was shifted on rise in saving and investment rate in the
country, for the impressive development of economic infrastructure, specially in
irrigation, energy, transport and communication etc. The second and third five year
plan accorded a high priority to industrialization, and especially to the development of
basic and heavy industries. But at the end of the third five year plan the economy
faces the recession, the rate of growth in the output of consumer goods industries fall
to 3 per cent in 1966 as compared to 7 per cent in 1965. A broad-based industrial
development and restructuring of manufacturing in tune with emerging demand
pattern is necessary for the accelerated growth of the economy. The first two years of
fourth five year plan were quite promising, with record food grains production and
equally rising industrial production but the remaining three years proved a great
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disappointment with successive failure of monsoon, Indo-Pak war etc. the fourth plan
achieved only 3.4 per cent GNP growth rate. The fifth five year plan was not taken up
seriously. Under sixth five year plan the allocation of industries has generally been 24
per cent of the total pubic sector outlay. In the next three five year plans, outlays on
industries declined steeply and it was only 6.4 per cent in the ninth plan. The target
growth of industry during the Tenth Plan (2002-07) was put at 10 per cent consistent
with an overall GDP growth of 8 per cent.
The strategy of economic development in India meant direct participation of
government in economic activities such as production and selling & regulation of
private sector economic activities through a complex system of control. Economy
Statistics on India’s Economy has shown (Table-1) that the country's economy has
experienced a robust growth in the second quarter of the year 2006-07. In second
quarter of the year 2006-07, the agriculture and allied activities grew at a rate of 1.7
Percent, industries grew by 10.5 Percent, and the services sector grew by 10.7
Percent. The infrastructure industry in the market economy like India grew at a rate of
7.8 percent during the period of April-Nov 2006. The Gross Domestic Product in the
country increased at an impressive rate of 9.2 percent per annum. The GDP Growth
was mainly led by the fast rising industrial production as well as the growth in the
services sector. The Real growth rate of Gross Domestic Product of India over various
quarters for the year 2006-07 is as follows:
Table-1
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An analysis of the post-independence growth experience shows two statistically
significant breaks in the rate of growth of the economy. Since 1950-51, India has
passed through ten five year plans and several annual plans and is now in the eleventh
five-year plan. The first break occurred in the early 1980s when the economy moved
to growth rate of around 3.5 to 5.5 per cent. This followed a policy shift away from
excessive controls and restrictions on private enterprise towards gradual decontrol.
The second break occurred in the mid-1990s with the ushering in of deeper and broad
based reforms at the beginning of the decade. The step up in the GDP growth rate to
6.5 per cent in the late 1990s and further to 7.8 per cent during the Tenth Five Year
Plan, with the last three years averaging over 9 per cent, is evidence of the success of
these policy measures. If this trend persists in the medium term, the economy would
average over 8.9 per cent per annum over the Eleventh Five Year Plan period. If we
achieve the GDP growth target of the Eleventh Five Year Plan, and step up the growth
rate to 9.5 per cent in the succeeding year, the Indian economy would have averaged 9
per cent over a decade. This achievement would put India among the select group of
about a dozen medium large economies (such as China, Singapore, Japan, Taiwan
China, Thailand, South Korea, Portugal, Greece and Hong Kong China) that have
averaged a GDP growth of 9 per cent or more for at least a decade during their growth
trajectory. As seen in the table given below, in the recent years the annual growth rate
of industrial production has a tremendous growth of GDP and per capita income at
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factor cost. GDP at factor cost at constant 1999-2000 prices is projected by the CSO
to grow at 8.7 per cent in 2007-08,which represents a deceleration from the
unexpectedly high growth of 9.4 per cent and 9.6 per cent, respectively, in the
previous two years.
Table-2
THE ROLE OF INDUSTRIES IN ECONOMIC DEVELOPMENT :
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Industries the back bone of any economy play a crucial role in the development of
a country, as these industries by and large represent a stage in economic transition
from traditional to modern technology. This is the reason why many economists
consider industrial development similar to economic development. The role of
industrialization in economic development arises from the basis facts like raising
income, meeting high-income demand, absorbing surplus labor, social transformation
etc. no country can attain an accelerated rate of economic growth and exploit her
natural resources without being self-sufficient in basic and key industries. A broad-
based industrial development and restructuring of manufacturing in tune with
emerging demand pattern is necessary for the accelerated growth of the economy.
Despite best of their efforts and proper economic planning, India still stands
amongst the line of developing countries in the world, due to low quality of industrial
products. India faces lots of hurdles in the path of rapid economic growth like huge
losses suffered by public sector industries, unfavorable balance of trade, limited
foreign reserves. In 1990 India faces the crises, the most visible sign of the country’s
economic crisis was its extremely low foreign exchange reserves which was Rs. 2,400
crores in June 1991. The rapidly growing burden of national debt was 60% of the
GNP in 1991. While the devaluation of 1991 added to the cost push inflation in Indian
economy9. So India has announced a new economic policy in July 1991 which
comprises a number of economic reforms with liberalization, so to gear up the pace of
our economic development. It is a fact worth nothing that the mounting burden of
borrowings, both domestic and foreign brought the Indian economy to the brink of
insolvency in early 1991. As a part of liberalization, a new industrial policy was
announced by the government of India in two parts, on 24 July, 1991 and 6 august,
1991, respectively.
The pace of industrialization is influenced by a combination of factors such as
sound infrastructure, uninterrupted supply of critical inputs, viz. power, credit and raw
materials, proactive entrepreneurs and factors like well established financial
intermediaries, favorable investment climate to attract domestic as well as Foreign
Direct Investment (FDI), wider application of Information Technology and
competitiveness of products in terms of quality and price in both domestic and
international market. Sluggishness in the growth of Indian industry in recent times is
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traced to the lack of domestic demand for intermediary goods, low inventory demand
for capital goods, high oil prices, existence of excess capacity in some sectors and
infrastructure constraints particularly in roads and transports. As the industrial
restructuring and other measures for activating capital markets and banking system
has some inherent adjustment lags, turn around has been rather slow. The factors that
constraint the industrial growth at the national level is equally applicable to the
performance of this sector in the State. Manufacturing sector employed about 13 per
cent of the total work force in the country5.
The economic growth and development of the country is generally calculated
on the basis of Growth rate of GDP, which is highly effected by the industrial growth
and development. Contribution of the industries state-wise is shown in Table-I
indicates, that in the end of year (2003-04) the number of factories at the national
level have increased (in comparison to 1990-91) by about 17 percent. In Goa,
Pondicherry, Dadra & Nagar Haveli (DNH) and Daman & Diu (DD) the number of
factories have more than doubled. On the other hand, the number of factories in Bihar
& Jharkhand (B&J), Chandigarh, Delhi, UP & Uttaranchal (UP&U) and Andhra
Pradesh has reduced. All over India the number of factories has been increased from
1,10,179 in 1990-91 to 1,29,074 in 2003-04.
More over capital employed in 2003-04 is 473331 crore as compare to 133658crore in
1990-91. The factors those constraints the industrial growth at the national level are
equally applicable to the performance of this sector in the State. The state-wise
comparison of per cent growth in number of industries contribution to the economy
can be seen in figure 3. some of the states like Tamil Nadu, Kerela, Gujarat, Rajasthan
show a huge growth rate in number of factories in 2003-04 as compare to 1990-91. A
balanced view of the table and figure suggests that as far as the distribution of number
of factories in the post-globalization period is concerned, disparities among the states
have not increased or decreased appreciably in any meaningful way. Nevertheless, the
scale and size of investment, employment, value addition, etc (and not merely the
number of factories) are appropriate measures to assess the significance of
industrialization.
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Table-3
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On one hand large and heavy industries help in the economic development of
the country, on the other hand small scale industries are as important as other sectors.
Contribution of the sector in terms of generation of employment, output and exports is
quite significant. The importance of the Small & Medium Scale Industries sector is
well-recognised from its significant contribution to the socio-economic objectives of
growth in generation of employment, output, exports and fostering entrepreneurship
(SIDBI report on SSI sector-2001). . It contributed to the over all growth of the
GDP as well as in the terms of employment generation and export. Small Scale
Industries have the advantage of labour intensiveness, low cost technology, low
investment and short gestation period. Therefore, the government accords much
importance for the development of SSI units. The Government of India evolved new
policy initiatives in 1999-2000, an important one being the Credit Insurance Scheme
for providing adequate security to banks and improving flow of investment credit to
SSI units, particularly, export-oriented and tiny units. The working capital limit for
SSI units shall henceforth be determined by the banks on the basis of 20 per cent of
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the annual turnover or upto Rs.5.0 crores whichever is minimum. Performance of the
small scale sector, therefore, has direct impact on the national economy. 2002-03 to
2004-05, the small enterprises sector registered continuous growth in the number of
units, production, employment and exports (Table-4). During this period the average
annual growth in the number of units was around 4.1 per cent and in employment 4.3
per cent annually. Further, the annual average growth in production, at current and
constant prices, was 12.4 per cent and 8.1 per cent respectively. Thus, there has been a
significant increase in the contribution of this sector to the economic development and
employment generation in the country. At the end of March 2006, there were 19.30
lakh registered and 104.12 lakh unregistered SSI units providing direct employment to
around 299.85 lakh persons. This sector manufactures around 8,000 products,
accounts for 95% of the industrial units and contributes about 39% of the value-
addition in the manufacturing sector, nearly 80% of the manufacturing employment
and have production of Rs.4,18,884 crore. The contribution of micro and small scale
industry in exports of the product is Rs. 1,50,242 crore.
Table-4
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The Indian Steel Industry – Performance in H1 of FY2010-11
The inherent resilience of the Indian steel industry has been amply proved once again
post-October 2008. Along with China and its peers in the BRIC combine, India’s steel
sector has successfully bucked the sharp deceleration in production and consumption
seen in other major steel producing nations across the globe. It is now common
knowledge that the industry’s impressive performance in this period owes a great deal
to the economic stimulus packages mooted by the Government – focussed heavily on
steel-intensive activities such as sustaining infrastructure spending and measures to
promote spending on consumer durables and means of transportation. The other
significant factors believed to have saved the day for the Indian economy and also for
its steel industry are – India’s large and growing domestic market coupled with a
relatively inward-looking growth path with low export-dependence and an evolving
competitive market structure that ensures increasing degree of efficiency in allocation
of resources and production. For the Indian steel industry, in particular, one added
advantage has been its inherent comparative advantage of a strong domestic resource
and skills base.
The last few quarters have, however, seen gradual withdrawal of the stimulus
measures by the government as the economy started showing signs of regaining its
growth momentum after the initial shocks of the global economic crisis. For the time
being the world economy seems to have averted the looming spectre of a double-dip
recession – even though the speed of recovery has been painfully slow and significant
weakness persists in the US and the EU, the two major engines of growth for the
world economy so far. Another worry that looms large is the perceived overheating of
the Chinese economy and the measures taken by the country to curb excessive
expansion of economic activities and dangers of inflation. In this backdrop of
uncertainty and mixed signals, we look at the performance of the Indian steel industry
in the first half (7 months spanning April-October 2010).
A. Production Performance (April-October 2010)
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Table 1: Production of Crude Steel (All India), April-October 2010
(Million
Tonnes)
April – OctoberProvisional OctoberProvisional
2009-10 2010-11 Growth
(%)
2009-10 2010-11 Growth
(%)
Main
Producers
13.368 13.613 1.8% 2.034 2.079 2.2%
Major
Producers
7.514 8.139 8.3% 1.047 1.167 11.5%
Others 16.417 17.758 8.2% 2.202 2.549 15.2%
Total (All
India)
37.299 39.510 5.9% 5.283 5.795 9.7%
Source: JPC
Observations:
1) Production from the Main Producers grew marginally by 1.8% in April-
October 2010-11 over the same period last fiscal, in a continuing trend that
reflect slow rate of capacity expansion in that sector. The month of October,
however, has seen some improvement as production grew by 2.2% in
FY2010-11 compared to FY2009-10.
2) Production by the ‘Major’ and ‘Other’ producers, on the other hand showed a
healthy growth of 8.3% and 8.2%, respectively, in April-October 2010-11
compared to the corresponding period in the previous year. These two
producer segments have grown on the back of improved capacity utilization
with the coming on stream of recently installed expanded capacities. In a
further improvement of their performance these two segments have almost
doubled the growth in crude steel production to more than 15% in October
2010 compared to October 2009.
3) Healthy growth in these two segments along with stagnation in the Main
Producing segments imply progressive increase in the share of the private
sector contribution to total steel production in the country. Currently, the share
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of private sector in total crude steel production is in the vicinity of 55%.
However, the share is likely to get reduced with the completion of the capacity
expansion/creation plans of SAIL, RINL and NMDC.
4) Total production of crude steel in the country at 39.51 million tonnes has
shown an overall increase of around 6% in April-October 2010-11 compared
to the same period an year ago – thereby continuing the post-crisis trend of
around 4%-6% monthly growth rate in production of crude steel.
B. Consumption of Finished Steel (April-October 2010)
Table 2: Structure of Consumption of Finished Steel (All India), October-April
2010
(Million
Tonnes)
April-
OctoberProv.
Prod.
For sale
Imports Exports Net
Import
Stocks Real
Consumption*
2009-10 34.082 3.958 1.718 2.240 0.826 31.611
2010-11 35.595 4.819 1.742 3.077 0.065 34.337
Growth (%) 4.4% 21.8% 1.4% 37.4% (-)92.1% 8.6%
OctoberProv. Prod.
For sale
Imports Exports Net
Import
Stocks Real
Consumption*
2009-10 4.870 0.572 0.179 0.393 0.252 4.456
2010-11 5.189 0.327 0.268 0.059 0.110 4.528
Growth (%) 6.6% (-)42.8% 49.7% (-)85.0% (-)56.3% 1.6%
Source: JPC
Note: * denotes after adjusting for double-counting of flat products.
Observations:
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1) For the first 7 months of the year i.e., April-October 2010, cumulative real
consumption of finished steel in India grew by a healthy rate of 8.6%
compared to April-October 2009. In the same time period, production (for
sale) of finished steel grew only half as fast at 4.4% while imports increased at
a significantly high rate of 21.8%. As has been observed in the last few years,
divergence between production and consumption growth rates has been
accompanied by a 37.4% growth in net imports from 2.240 million tonnes to
3.077 million tonnes between April-October 2009 and April-October 2010.
2) The point of concern arises as one looks at the provisional data on
consumption of finished steel compiled by JPC. The data reveals a significant
slowdown in domestic steel use with real consumption of finished steel
registering a very low 1.6% growth in October 2010 compared to October
2009. Another development that draws attention is the downturn in Imports by
a very high (-) 42.8% in October 2010 over October 2009.
3) The question that comes uppermost in one’s mind is whether this portends the
beginning of a downturn in the steel cycle in India – perhaps aggravated by the
gradual withdrawal of the economic stimulus measures. To better gauge the
seriousness of the apparent deceleration in consumption seen in October 2010,
we take a look at the underlying movements in the macro-economic
determinants of steel consumption and track the performance of major end-
using sectors of steel leading up to the month of October. Contrary to the blip
shown in steel consumption data in October 2010, the macro-economic and
sectoral data on some of the major drivers of steel consumption would suggest
sustained growth in steel consumption over the near and medium terms. These
are discussed in the following paragraphs.
a) Healthy Growth in GDP and Steel-using Commodity Sectors
Table 3: Quarterly Performance India’s GDP - Commodity and Service
Sectors (at factor cost and at 2004-05 prices) in Q2 of 2010-11
Percentage change over Previous Year
Commodity 2009-10 2010-11 H1 (April –
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Sectors September)
Q1 Q2 Q1 Q2 2009-10 2010-11
Agriculture 1.9 0.9 2.5 4.4 1.0 3.8
Mining &
Quarrying
8.2 10.1 8.4 8.0 9.1 8.2
Manufacturing 3.8 8.4 13.0 9.8 6.1 11.3
Electricity, Gas
& Water
6.4 7.7 6.2 3.4 7.1 4.8
Construction 8.4 8.3 10.3 8.8 8.4 9.6
Service
Sectors
Trade, hotels
etc.
5.6 8.2 10.9 12.1 6.9 11.5
Finance,
Insurance etc.
11.7 11.3 7.9 8.3 11.5 8.1
Community,
social &
personal
services
7.6 14.0 7.9 7.3 11.0 7.6
GDP 6.3 8.7 8.9 8.9 7.5 8.9
Source: CSO, GOI
It is seen from Table -3 above that the commodity sectors of the economy
(primary and secondary activities) have all recorded fairly robust rates of
growth in H1 of the current over H1 of the preceding year. Quarterly data also
show ‘construction’ growing by 10.3% and8.8% in Q and Q2 of FY2010-11,
respectively. Similarly, ‘manufacturing’ has grown by a very healthy rate of
13.0% and 9.8% in Q1 and Q2 of the current fiscal.
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Furthermore, the overall growth in GDP of the economy which sets the outer
limit for growth in steel demand has also been impressive at 8.9% for the two
quarters of the current fiscal.
b) Continuing growth in steel using industries at a disaggregated level
Data at a disaggregated industry level also establishes accelerated growth in
the major steel consuming industries during April-September 2010 as placed
in Table 4 below:
Table 4: Growth in IIP of Major Steel Consuming Industries, April –
September 2010-11 versus 2009-10
End -Using Industry % growth over previous year
April-Sept 2009-10 April-Sept 2010-11
Metal products and parts
except machinery & Parts
(-)2.6 26.6
Machinery & equipment
except other than
transport equipment
(-)1.8 18.8
Transport equipment &
parts
21.6 27.4
Other manufacturing (-)3.1 24.2
Manufacturing 4.5 11.0
IIP (General) 4.4 10.2
Use-Based Classification
Capital Goods 5.2 24.3
Consumer Durable 18.6 23.2
Source: CSO, GOI
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c) High rate of Gross Fixed Capital Formation (GFCF) indicating
growing steel demand triggered by investments in creation of physical
infrastructure and plant and machinery
Table 5: Recovery in GFCF Rate post-October 2010
GFCF as % of GDP at constant 2004-05 Prices
2009-10 2010-11
Q1 Q2 Q1 Q2
32.4 34.3 35.0 34.4
Source: CSO, GOI
The latest NAS data show a rebound in the rate of Gross Fixed Capital
Formation (GFCF) as a percentage of GDP to levels as high as 35% as shown
in Table 5 above. In fact, the biggest achievement of the Indian economy in
the last decade has been its ability to generate and mobilize adequate internal
savings and attract foreign capital to finance growth-inducing investments –
especially in infrastructure and industrial capacity expansion. The Indian steel
industry benefitted immensely from the heightened investments. The current
accelerated rate of savings and a renewed interest/inflow of overseas capital in
Indian markets indicate that achieving and sustaining progressively higher
investment / GFCF rates is well within the capability of the Indian economy in
the near and medium term. This again will imply sustained increase in domes
4) The answer to our earlier question whether the growth impetus is petering out
as is seen in the October 2010 consumption data - is not a simple one. As is
seen from the tables above, the macro-economic fundamentals and the
production behaviour of the major end-using industries suggest that all is well
with the growth story of steel demand. But the data collected by JPC suggest
otherwise. The answer to the fluctuation in monthly data contrary to
expectations perhaps lies in the inability of available data to capture the
inventory build-up cycles/ re-stocking pattern of steel by the user industries on
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a continuous basis. Apart from the possibility of a temporary slowdown in
production activities, a major reason for the current sluggishness in steel
demand may also be due to the operation of the inventory cycle which has not
been captured fully throughout the data series that introduces an element of
randomness in the series.
C. Behaviour of Prices (April-September 2010)
Comparison of month-wise retail prices (Delhi) year on year show that after
falling sharply and continuously from June 2008 onwards till April 2009, prices were
stable till March 2010 and rose sharply in April 2010. The prices fell subsequently
and recovered thereafter with the current month price being at about the same levels
as last month. The pattern is the same for the representative product categories of
TMT and HR as seen in Graphs 1 to 2.
It is, however, worth noting that flat product prices as represented by HR – are
stronger than the prices of non-flat products. This may be explained by a combination
of slackening in the growth rate of ‘construction’ activities and expanded supply from
the small and medium producers. The flat products prices, on the other hand, benefit
from resurgence in the end-using industries (capital goods and consumer durables)
and a more organized supply side dominated by large producers.
Graph 1: Year-on Year Movement in Retail Market Price for TMT
(10mm) at Delhi Market, 2007-08 till September 2010
TMT (10mm) (Rs/T)
2007-
08
2008-
09
2009-
10
2010-
11
April 32250 46000 34122 40890
May 32075 38200 35438 39420
June 36925 47451 35479 39210
July 30800 43335 33274 36260
Aug 30900 42696 32503 36930
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Sept 29900 41934 32818 35910
Oct 32550 40253 32328
Nov 31925 38846 31940
Dec 32200 36634 32220
Jan 37450 36448 33970
Feb 40200 34639 33310
Mar 43775 32285 35100
GRAPH 2: YEAR-ON YEAR MOVEMENT IN RETAIL MARKET PRICE FOR HR
COILS
(2.5 mm) at Delhi Market, 2007-08 till september 2010
HR (2.5mm) (Rs/T)
2007-
08
2008-
09
2009-
10
2010-
11
April 34525 48500 33608 45090
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May 34850 42000 33689 44940
June 35350 48083 33699 44660
July 33700 44111 33729 43410
Aug 33150 44203 35388 43590
Sept 35500 44211 35633 43610
Oct 34950 43204 35428
Nov 35350 40415 35740
Dec 34700 36174 35720
Jan 34850 34663 35980
Feb 37500 33858 35890
Mar 43800 34818 36810
As far as future outlook on prices is concerned, one remains cautiously
optimistic. As Indian steel market has become globally integrated to a very
large extent, domestic prices will continue to be influenced by landed cost of
imports at the margin. Right now, world steel prices have remained stable with
marginal upward pressure from prospects of rising iron ore prices and cutback
in production and hence supply of steel from the Chinese industry. However,
the international economic scene remains highly uncertain with major world
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economies still not out of the economic morass created by the recent financial
crisis. In a global scenario of oversupply and price volatility and also
considering Indian steel industry’s degree of global integration, much depends
on how the exogenous shocks are handled.
In conclusion, one must say that supported by strong economic
fundamentals and a definite comparative advantage of resource endowment
the Indian steel industry’s medium and long term prospects look robust. The
near term may, however, be rocked by some fluctuations as India’s links with
the global economy are becoming progressively strong. The World Steel
Association (WSA) in its October 2010 Short Range Outlook predicts Indian
steel consumption to grow by 8.2% and 13.6% in CY2010 and 2011,
respectively. It also foresees India to be the third largest user of steel after
China and USA with around 68 Million Tonnes of consumption in 2011.
Observers in India believe that India may be able to achieve a level of
consumption higher than those projected by WSA – if the current economic
growth momentum is sustained.
INDIAN AUTOMOBILE INDUSTRY
The 4 wheeler industry in India has not been able to match up to the performance of
its counterparts in other parts of the world. The main reason for this has been the
regulatory atmosphere that prevailed till the deregulation in the mid 1990s. After the
Liberalisation the passenger car segment saw a boom and many companies from India
as well as foreign entered the market.
However, the smooth sailing was suddenly disrupted in the last quarter of FY1996.
The automobile industry, which contributed substantially to industrial growth in
FY1996, failed to maintain the same momentum between FY1997 and FY1999. The
overall slowdown in the economy and the resultant slowdown in industrial
production, political uncertainty and inadequate infrastructure development were
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some of the factors responsible for the slowdown experienced by the automobile
industry. In FY2000, the sector experienced a turnaround, posted positive growth
rates and witnessed the launch of many new models. But the spectacular growth in
FY2000 was followed by a decline in FY2001 and only a marginal growth of 0.5% in
FY2002. However, since FY2003, industry sales have increased at a 3-year CAGR of
17.4% to 1.14 million in FY2006.
1.2. DEMAND CHARACTERISTICS:
(A) Passenger Cars:
In developed markets, engine capacity and wheel-base are the bases of segmentation
of passenger cars: price does play a role but only up to a point. Since affordability is
the most important demand driver in India, the domestic car market has until now
been segmented on the basis of vehicle price. Price-based competition takes place in a
continuum rather than in segments since nearly all the models are launched in
multiple versions at different price points. As a result, a higher-end variant may
compete with a lower-end variant of a car in a segment above it.
(B) Multi Utility Vehicle (MUVs):
The MUV segment consists of vehicles that are suited to both rural and urban areas.
In rural areas where the roads are usually bad, these vehicles are used as goods
carriers and also for public transportation. Northern and Western India account for
nearly two-thirds of the demand for MUV. Specifically, in States like Rajasthan,
Madhya Pradesh, Uttar Pradesh and Maharashtra, the demand for MUVs is the
largest. There are three segments of buyers for MUVs: the private market,
Government, and the Defence. Until the 1990s, the Government and Defence
segments accounted for the largest share of the market. The reduction in Government
and defence spending since the 1990s has substantially reduced sales to these two
segments. This has pushed private sector purchases into greater prominence.
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There are three sub-segments of the UV / MUV segment: the hard-top, soft-top and
pick-up. The hard-top version consists of the higher-end Sports Utility Vehicles
(SUVs) that have been present in the Indian markets since FY1999. Following the
success of the higher-end SUVs, the share of the hard top segment in total MUV sales
has registered an increase. Soft-top MUVs, which are largely dependent on sales in
the rural and semi-urban markets where the vehicles serve as modes of mass
transportation (maxi taxi); have witnessed a contraction in volumes in recent years.
The declining share of the soft-top sub-segment is attributable largely to the
increasing acceptance of SUVs as an alternative to soft-tops (and even higher end-
cars). That apart, soft-top sale have also been affected by a decline in rural income,
increase in sales tax in some states, increase in diesel prices, enforcement of strict
emission control norms, and restraints on the issue of licences to use soft-top vehicles
as rural taxis.
1.3. INDUSTRY OVERVIEW:
The Indian automobile industry posted a spectacular growth of 32%, powered by
improving economic environment, gradual dissipation of job & business uncertainty,
new offerings and good consumer spending in urban and rural India. The upbeat
market sentiment spanned all segments of motor vehicles, with passenger vehicles,
commercial vehicles, two-wheelers and three-wheelers - all recording decent double-
digit growth.
Passenger vehicles, continuing its good run, stole the limelight by notching up 35%
rise in domestic sales. While Maruti Suzuki remained the leader without much of a
challenge and recorded spectacular sales numbers, new players in the segment such as
Ford Motor, General Motors and Volkswagen too benefited from a robust demand for
their recently launched small cars - Figo, Beat and Polo.
Riding on the continuing strong performance of industry and the increased pace of
infrastructure development, commercial vehicles sustained the momentum of the last
six months during May,2010, growing by a whopping 57.7% in domestic market. The
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smart growth numbers of CVs were, to a great extent, aided by the low base of the
previous year, though.
(A) Maruti Suzuki India Limited(MSIL):
Maruti Suzuki sells one car out of every two cars sold in the country, crossed yet
another landmark, clocking over one-lakh units of sales in a month for the first time.
MSIL sold 102,175 units in May 2010, of which 12,134 units accounted for exports.
Incidentally, the company's domestic sales tally of 90,041 units was also the highest
ever in a month. The previous highest monthly domestic sale was 84,765 units in
February 2010. Maruti Suzuki registered highest ever-domestic sales in A2, A3 and C
segments respectively. A2 segment (comprising of Alto, WagonR, Estilo, Swift, Ritz,
A-Star) grew by 16.6% to clock sales of 62,679 units. A3 segment (SX4, Dzire) rose
by 60.5% to 10,883 units, while domestic sales volume in C segment (Omni, Versa,
Eeco) at 12,953 units soared by 70% y-o-y during the month.
(B) Hyundai Motor India Ltd (HMIL):
Hyundai Motors stayed on course with its domestic sales at 27,151for May,2010,
units growing by 15.5% over the same month last year. HMIL's total sales for May'10
(including exports) stood at 46,808 units as against 43,624 units in May 2009,
registering a 7.3% growth. The exports declined by 2.3% from 20,121 units in May
2009 to 19,657 units in May 2010. The segment-wise cumulative sales of HMIL
during May 2010 were as follows: A2 segment (Santro, i10, Getz & i20) - 42,460
units; A3 segment (Accent & Verna)-4,310 units; A4 segment (Elantra) -1 unit;
andA5 segment (Sonata Transform) - 37 units. The demand for the i20 continues to
swell, as demand has shot up by almost 35% following the launch of the new model
and addition of two trims.
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(C) General Motors India:
Chevrolet Beat bolstered an impressive growth for General Motors India of 61%,
selling 8,225 units against 5,109 units in May last year. The May 2010 sales
comprised of 2,812 units of the Chevrolet Spark, 2,296 units of Chevrolet Beat, 1,418
units of the Chevrolet Tavera, 854 units of the Cruze, 396 Units of Chevrolet Aveo,
312 units of Chevrolet Aveo U-VA, 84 units of the Chevrolet Captiva and 53 units of
Chevrolet Optra.
(D)Tata Motors:
Tata Motors domestic sales of commercial and passenger vehicles in May 2010 were
52,801 units, a 38% growth over 38,392 units sold in May 2009. Of this, commercial
vehicles racked up 31,475 units - up 37% over 23,004 vehicles sold in May last year.
While LCV sales at 13,755 units grew by 26.6% y-o-y. Passenger Vehicles Business
Unit of Tata Motors reported a total sale of 21,477 units in the domestic market
during May 2010, which translates into a good 38.9% increase compared to 15,459
units a year earlier. Domestic sales of Tata passenger cars at 21,326 units surged by
39% y-o-y. Sales of the Tata Nano were 3,550 units. The Indica range sales at 8,468
units witnessed a 15% slide, while the Indigo range logging 6,600 units grew by a
robust 133%. The Sumo/ Safari range accounted for sales of 2,708 units, higher by
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6% over May 2009. Exports of Tata Motors at 3,978 units in May 2010 registered a
growth of 121% compared to 1,804 units in May 2009.
(E) Mahindra & Mahindra Ltd (M&M):
M&M clocked 13,476 units of its UV sales in domestic market during May 2010,
growing by a healthy 67.8% over 8,033 units in May 2009. CV and 3-wheeler sales of
M&M in domestic market were also on a high growth trajectory. While CV sales at
7,796 units were up 43.9%, 3-wheeler domestic sales volume increased by 59.4% y-o-
y to 4,309 units during the month.
1.4. FOREIGN DIRECT INVESTMENT IN AUTOMOBILE INDUSTRY:
FDI Inflows to Automobile Industry have been at an increasing rate as India has
witnessed a major economic liberalization over the years in terms of various
industries. The automobile sector in India is growing by 18 percent per year.
The automobile sector in the Indian industry is one of the high performing sectors of
the Indian economy. This has contributed largely in making India a prime destination
for many international players in the automobile industry who wish to set up their
businesses in India. The automobile industry in India is growing by 18 percent per
year. The automobile sector in India was opened up to foreign investments in the year
1991. 100% Foreign Direct Investment (FDI) is allowed in the automobile industry in
India. The production level of the automobile sector has increased from 2 million in
1991 to 9.7 million in 2006 after the participation of global players in the sector.
1.4.1. Advantages of FDI in the Automobile Sector in India:
The basic advantages provided by India in the automobile sector include, advanced
technology, cost-effectiveness, and efficient manpower. Besides, India has a well-
developed and competent Auto Ancillary Industry along with automobile testing and
R&D centres. The automobile sector in India ranks third in manufacturing three
wheelers and second in manufacturing of two wheelers.
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1.4.2. Opportunities of FDI in the Automobile Sector in India:
Opportunities of FDI in the Automobile Sector in India exist in
Establishing Engineering Centres.
Two Wheeler Segment.
Exports.
Establishing Research and Development Centres.
Heavy truck Segment.
Passenger Car Segment.
1.4.3. Important Aspects of FDI in Automobile Industry:
a) FDI up to 100 percent has been permitted under automatic route to this sector,
which has led to a turnover of USD 12 billion in the Indian auto industry and
USD 3 billion in the auto parts industry.
b) The manufacturing of automobiles and components are permitted 100 percent
FDI under automatic route.
c) The automobile industry in India does not belong to the licensed agreement.
d) Import of components is allowed without any restrictions and also encouraged.
1.5. PESTL ANALYSIS:
A. Political:
• In 2002, the Indian government formulated an auto policy that aimed at
promoting integrated, phased, enduring and self-sustained growth of the
Indian automotive industry
• Allows automatic approval for foreign equity investment up to 100% in the
automotive sector and does not lay down any minimum investment criteria.
• Formulation of an appropriate auto fuel policy to ensure availability of
adequate amount of appropriate fuel to meet emission norms
• Confirms the government’s intention on harmonizing the regulatory standards
with the rest of the world
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• Indian government auto policy aimed at promoting an integrated, phased and
conductive growth of the Indian automobile industry.
• Allowing automatic approval for foreign equity investment up to 100% with
no minimum investment criteria.
• Establish an international hub for manufacturing small, affordable passenger
cars as well as tractor and two wheelers.
• Ensure a balanced transition to open trade at minimal risk to the Indian
economy and local industry.
• Assist development of vehicle propelled by alternate energy source.
• Lying emphasis on R&D activities carried out by companies in India by giving
a weighted tax deduction of up to 150% for in house research and R&D
activities.
• Plan to have a terminal life policy for CVs along with incentives for
replacement for such vehicles.
• Promoting multi-model transportation and the implementation of mass rapid
transport system.
B. Economic:
• The level of inflation Employment level per capita is right.
• Economic pressures on the industry are causing automobile companies to
reorganize the traditional sales process.
• Weighted tax deduction of up to 150% for in-house research and R & D
activities.
• Govt. has granted concessions, such as reduced interest rates for export
financing.
• The Indian economy has grown at 8.5% per annum.
• The manufacturing sector has grown at 8-10 % per annum in the last few
years.
• More than 90% of the CV purchase is on credit.
• Finance availability to CV buyers has grown in scope during the last few
years.
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• The increased enforcement of overloading restrictions has also contributed to
an increase in the no. of CVs plying on Indian roads.
• Several Indian firms have partnered with global players. While some have
formed joint ventures with equity participation, other also has entered into
technology tie-ups.
• Establishment of India as a manufacturing hub, for mini, compact cars, OEMs
and for auto components.
C. Social:
• Since changed lifestyle of people, leads to increased purchase of automobiles,
so automobile sector have a large customer base to serve.
• The average family size is 4, which makes it favorable to buy a four wheeler.
• Growth in urbanization, 4th largest economy by ppp index.
• Upward migration of household income levels.
• 85% of cars are financed in India.
• Car priced below USD 12000 accounts for nearly 80% of the market.
• Vehicles priced between USD 7000-12000 form the largest segment in the
passenger car market.
• Indian customers are highly discerning, educated and well informed. They are
price sensitive and put a lot of emphasis on value for money.
• Preference for small and compact cars. They are socially acceptable even
amongst the well off.
• Preference for fuel efficient cars with low running costs.
D. Technological:
• More and more emphasis is being laid on R & D activities carried out by
companies in India.
• Weighted tax deduction of up to 150% for in-house research and R & D
activities.
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• The Government of India is promoting National Automotive Testing and R&D
Infrastructure Project (NATRIP) to support the growth of the auto industry in
India
• Technological solutions helps in integrating the supply chain, hence reduce
losses and increase profitability.
• Customized solutions (designer cars, etc) can be provided with the
proliferation of technology
• Internet makes it easy to collect and analyse customer feedback
• With the entry of global companies into the Indian market, advanced
technologies, both in product and production process have developed.
• With the development or evolution of alternate fuels, hybrid cars have made
entry into the market.
• Few global companies have setup R &D centers in India.
• Major global players like audi, BMW, Hyundai etc have setup their
manufacturing units in India.
E. Environmental:
Physical infrastructure such as roads and bridges affect the use of automobiles.
If there is good availability of roads or the roads are smooth then it will affect
the use of automobiles.
Physical conditions like environmental situation affect the use of automobiles.
If the environment is pleasant then it will lead to more use of vehicles.
Technological solutions helps in integrating the supply chain, hence reduce
losses and increase profitability.
With the entry of global companies into the Indian market, advanced
technologies, both in product and production process have developed.
With the development or evolution of alternate fuels, hybrid cars have made
entry into the market.
Few global companies have setup R &D centers in India.
Major global players like audi, BMW, Hyundai etc have setup their
manufacturing units in India.
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F. Legal:
Legal provision relating to environmental population by automobiles.
Legal provisions relating to safety measures.
Confirms the government’s intention on harmonizing the regulatory standards
with the rest of the world
Indian government auto policy aimed at promoting an integrated, phased and
conductive growth of the Indian automobile industry.
Establish an international hub for manufacturing small, affordable passenger
cars as well as tractor and two wheelers.
Ensure a balanced transition to open trade at minimal risk to the Indian
economy and local industry.
Political / Legal Economic Social Technological
- Environmental
regulation and
protection
- Economic
growth
- Income
distribution
- Government
spending on
research
- Taxation - Monetary
policy
- Demographics - Government and
industry focus on
technological
effort
- International trade
regulation
- Government
spending
- Labor / social
mobility
- New discoveries
and development
- Consumer
protection
- Policy towards
unemployment
- Lifestyle changes - Speed of
technology transfer
- Employment law - Taxation - Attitudes to work
and leisure
- Rates of
technological
obsolescence
- Government
organization / attitude
- Exchange rates - Education - Energy use and
costs
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- Competition
regulation
- Inflation - Fashions and fads - Changes in
material sciences
- Stage of the
business cycle
- Health & welfare - Impact of
changes in
Information
technology
- Economic
"mood" -
consumer
confidence
- Living conditions - Internet!
1.6. PORTER’S FIVE FORCES MODEL:
Porter’s Five Forces of Competition framework views the profitability of an industry
as determined by five sources of competitive pressure. These five forces of
competition include three sources of “horizontal” competition: competition from
substitutes, competition from entrants, and competition from established rivals; and
two sources of “vertical” competition: the bargaining power of suppliers and buyers.
The strength of each of these competitive forces is determined by a number of key
structural variables, as shown in Figure 3.3.
FIGURE 3.2 Porter’s Five Forces of Competition framework
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1) Competition from Substitutes:
The price customers are willing to pay for a product depends, in part, on the
availability of substitute products. The absence of close substitutes for a product, as in
the case of automobiles, means that consumers are comparatively insensitive to price
(i.e., demand is inelastic with respect to price). The existence of close substitutes
means that customers will switch to substitutes in response to price increases for the
product (i.e., demand is elastic with respect to price).
The extent to which substitutes limit prices and profits depends on the propensity of
buyers to substitute between alternatives. This, in turn, is dependent on their price
performance characteristics. The more complex the needs being fulfilled by the
product and the more difficult it is to discern performance differences, the lower the
extent of substitution by customers on the basis of price differences.
FIGURE 3.3. The structural determinants of the Five Forces of Competition
2) Rivalry between Established Competitors:
For most industries, the major determinant of the overall state of competition and the
general level of profitability is competition among the firms within the industry. In
some industries, firms compete aggressively – sometimes to the extent that prices are
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pushed below the level of costs and industry-wide losses are incurred. In others, price
competition is muted and rivalry focuses on advertising, innovation, and other non
price dimensions. Six factors play an important role in determining the nature and
intensity of competition between established firms: concentration, the diversity of
competitors, product differentiation, excess capacity, exit barriers, and cost
conditions.
3) Threat of Entry:
If an industry earns a return on capital in excess of its cost of capital, that industry acts
as a magnet to firms outside the industry. Unless the entry of new firms is barred, the
rate of profit will fall toward its competitive level. The threat of entry rather than
actual entry may be sufficient to ensure that established firms constrain their prices to
the competitive level.
Economies of Scale – Since Indian automobile market is of order $ 350
billion, the economies of scale are very high. Thus, threat of new entrants is
low.
Product Differences – Since there is hardly any difference in the offerings of
the various providers, so product differentiation is low. So threat of new
entrants is high.
Brand Identity – Since there is no big Retailer like Amazon.com or Wal-Mart
in India. So threat of new entrants is high.
Government Policy – Since the Government Policy has been quite restrictive
till now with respect to the Retail market & FDI, so threat of new entrants is
low.
Capital Requirements – The capital requirements for entering in the
automobile sector are substantially high( high fixed cost and cost of
infrastructure), so only big names can think of venturing into this area So, in
that respect threat of new entrants is low.
Access to distribution – Since in India there is no well established
distribution network. So threat of new entrants is low.
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4) Bargaining Power of Buyers:
The firms in an industry operate in two types of markets: in the markets for inputs and
the markets for outputs. In input markets firms purchase raw materials, components,
and financial and labour services. In the markets for outputs firms sell their goods and
services to customers (who may be distributors, consumers, or other manufacturers).
In both markets the transactions create value for both buyers and sellers. How this
value is shared between them in terms of profitability depends on their relative
economic power. The strength of buying power that firms face from their customers
depends on two sets of factors: buyers’ price sensitivity and relative bargaining
power.
Product Differences – Since there is hardly any difference in the offerings of
the various providers, so product differentiation is low. So bargaining power
of buyers is high.
Buyer Information – Today’s customers are well educated about the various
product offerings in the sector. So bargaining power of buyers is high.
Buyer Switching Costs – Since customers don’t have to pay a fat premium to
be registered for provision of services, so bargaining power of buyers is high.
Brand Identity – High Brand Identity and trustworthiness reduce the
bargaining power of buyers but, otherwise the bargaining power of buyers is
high.
Buyer Profits – Since dealers offers discounts and various bundling services
like 0% insurance, old car sale, etc, on different items. Hence bargaining
power of buyers is high.
5) Bargaining Power of Suppliers:
Analysis of the determinants of relative power between the producers in an industry
and their suppliers is precisely analogous to analysis of the relationship between
producers and their buyers. The only difference is that it is now the firms in the
industry that are the buyers and the producers of inputs that are the suppliers. The key
issues are the ease with which the firms in the industry can switch between different
input suppliers and the relative bargaining power of each party.
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Product Differences – Since there is hardly any difference in the offerings of
the various suppliers, so product differentiation is low. So bargaining power of
Suppliers is low.
Supplier Information – Today’s automobile manufacturers are well educated
about different Suppliers. So bargaining power of Suppliers is low.
Supplier Switching Costs – Since different Suppliers hold resources as per
buyer’s requirements and a large inventory has to be maintained. So
bargaining power of Suppliers is low as they would have to incur a huge cost
on switching. But if they get automobile manufacturers for similar products
who can pay higher Supplier switching cost is low. In such case, bargaining
power of Suppliers is high.
Brand Identity – High Brand Identity and Trustworthiness of a Supplier
increases the bargaining power of Suppliers. But, otherwise the bargaining
power of suppliers is low.
1.7. SWOT ANALYSIS:
I. Strengths:
Large domestic market.
Sustainable labor cost advantage.
Government incentives for manufacturing plants.
Strong engineering skills in design.
Able to achieve significant gains in productivity.
II. Weaknesses:
Low labor productivity.
High interest costs and high overheads.
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Rising cost of production.
Low investment in Research and Development.
III. Opportunities:
Commercial vehicles.
Heavy thrust on mining and construction activity.
Increase in the income level.
Cut in excise duties.
Rising rural demand.
IV. Threats:
Rising interest rates.
Cut throat competition.
Lack of technology for Indian Companies.
1.7. FACTORS CONTRIBUTING TO THE GROWTH OF INDIAN AUTO
SECTOR:
The convergence of government policies, economy’s growth, people’s purchasing
power have all contributed to the phenomenal growth of Indian Auto industry. Some
of the important growth drivers are explained below:
Rise in the industrial and agricultural output indirectly helps Indian Auto
industry - Industrial and agricultural output increase has reflected in higher
GDP and overall growth of the economy which is about 9% in the last three
years. Higher GDP means more purchasing power. Sales of vehicles for
domestic and commercial consumption have seen high growth in these three
years too.
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Growth in the road infrastructure increases demand for vehicles. Indian
highways and roads have improved a lot in quality and connectivity in the last
20 years. Projects like the Golden Quadrilateral aim to make even remote
areas accessible by road. Some of the National Highways are of international
standards. This has made road transport a viable, cost effective and speedy
option both for goods and passenger traffic.
Rise in the Per capita income increases two/four wheeler sales. Industrial
growth in the 70s, IT boom in the 1980s and BPO boom in the 1990s have
transformed the Indian middle class. The present generation is able to earn the
same levels of salary that their parents were earning after years of work. This
has pushed up the demand for two and four wheelers. A rise in per capita
income is also indirectly responsible for the retail boom and industrial boom
for consumer durables. This has pushed up the demand for commercial
vehicles to enable efficient distribution.
Urbanization changes the face of Indian auto industry. Joint families in towns
and villages have given away to migration of the younger generation to cities
in search of better opportunities. The new-age educated migrants and nuclear
families (many with double income couples) have a higher purchasing power.
Presently, the rate of spread of urbanization is 30% which is likely to increase
by 40% in 2030 (UN). Urbanization has promoted infrastructural development
and it is estimated to spread at a rate of $500 billion in the next 5-6 years.
Rising working class and middle class contribute to increased demand of
automotives. Post 1980s, a surging economy has created millions of new jobs
in the private sector. This has lead to a lot of prosperity in the working class
and the middle income households. They are able to provide for food, clothing
and education and also are able to think of owning luxuries like vehicles.
According to the Planning Commission report, between the year 2003 and
2009, 130 million people would have been added to the working population.
According to a finding from McKinsey, the middle income group will grow
from 50 million to 550 million by 2025.
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Exhaustive range of options in price and models of automotives. Indian
consumer in 70s and 80s had to choose between and Premier Padmini or an
Ambassador. Now there are at least 123 different models of cars from 30 odd
manufacturers available. The prices of the compact cars like Tata’s Nano have
made the world sit up and take note of the truly unbeatable price points.
Attractive Finance Schemes for purchase of automotives. Most nationalized
and foreign banks have very tempting finance options and low interest rates
for purchase of cars and two wheelers. There are specialized companies that
finance the commercial vehicles. All this has made the dream of owning a
vehicle an easy reality.
Favorable Government Policies for the auto sector. Apart from a healthy
growing economy, Indian auto industry has a lot to thank the government for
the amazing growth rates. The Indian government has introduced several
industry specific programs.
a. Government support:
Current Industrial Policy: The New Industrial Policy of 1991 delicensed the
Automobile Industry in India, but passenger car was delicensed in 1993. Now,
no license is required for setting up of any unit for manufacture of
Automobiles except in some special cases. Further, 100 per cent Foreign
Direct Investment (FDI) is permissible under automatic route in this sector
including passenger card segment. The import of technology or technological
upgradation on the royalty payment of 5 per cent without any duration limit
and lump sum payment of US $ 2 million is also allowed under automatics
route in this sector. This liberalization has helped this sector to restructure
itself, absorb newer technologies, and keep pace with the global developments
realizing its full potential.
Exim Policy: Removal of Quantitative Restrictions (QRs) from April 1, 2001
has allowed the import of vehicle, including passenger car segment freely
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subject to certain conditions notified by DGFT. To protect India from
becoming a dumping ground for old and used vehicles produced abroad, the
custom duty on the import of second hand vehicles including passenger cars
has been raised to 105 per cent. The custom duty rate on new Completely
Built Units (CBUs) has also been increased to a level of 60 per cent to allow
Indian countries to a fully competitive environment.
b. Recent policy initiatives:
In order to develop and realize the growth potential of this sector both at
domestic and global level, and to optimize its contribution to the national
economy, the Department of Heavy Industry has decided to draw up a 10 year
Mission Plan for the development of Indian Automotive Sector and creation of
global hub.
To put Indian Auto Industry at the global map, National Automotive Testing
and R&D Infrastructure Project (NATRIP) at the total cost of Rs. 1718 crore
has been initiated.
This project principally aims to:
create critically needed automotive testing infrastructure to enable the
government in ushering in global vehicular safety, emission and
performance standard, _ deepen manufacturing in India, promote larger
value addition and performance standards and facilitates convergence
of India's strength and IT and electronics with automotive engineering.
enhance India's abysmally low global outreach in this sector by
debottlenecking exports, and
provide basic product testing, validation and development
infrastructure so that Indian automotive sector would not face any
export obstacle in the foreign market
Exports of auto parts from South Korea and four large ASEAN countries
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Source: UN Comtrade data
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Figure Seven: China’s trade in auto parts
Source: UN Comtrade data
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Figure Eight: Indian auto trade overview
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RECOMMENDATION
Research and Development is useful in all manufacturing industries, whether it can
improve products being made or the methods of production. Even in labor-intensive
industries, R&D can enhance labor and increase output. Despite the positive benefits,
expenditure on R&D does not compromised a large portion of manufacturing budgets
with “industry accounting for only 28% of national R&D expenditure” (Kumar and
Aggarwal 442). Moreover, there are few linkages between research institutes and
industry, even in biotech industries like pharmaceuticals. Once again, the high level of
protectionism has not given incentive to companies to discover new and better ways
of producing goods. With the expected and needed rise in competition the government
must facilitate linkages between industry and institutions.
This linkage can be done be on national, state and local levels. In the example
of Banglore and Pune, city laws have increased the amount of research institutions
creating various incentives for firms. The linkages between industries and institutions
are strengthened by the cities’ infrastructure and strong IT sectors. Cities with no IT
clusters do not have linkages between industry and institutes, indicating that the
benefits of IT development can be extended to domestic industry development,
something that has not happened on a large enough scale for the entire country
(Basant and Chandra 1040). Cities that do not have IT cluster can still promote
linkages through incentives for both industry and research facilities. For example,
governments could “sponsor” development of new techniques through more grants,
with a specific focus on industry related benefits.
Another important aspect of R&D is technology transfer from developed
countries, which often ties in with foreign investment. In exchange for lower taxes
and tariffs, the Indian government could facilitate the transfer of information from
foreign companies to domestic firms. Through consortiums of industry, knowledge
exchange could occur in an effective and guaranteed way, rather then depending on
the potential spillover effects of FDI. Foreign firms may be hesitant to divulge
production methods to competing firms, so incentives such as lower taxes and access
to more markets can help foreign firms stay competitive. The transfer of technology
must be coupled with more investment by state R&D institutes all over the country
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rather than in certain cities or clusters. The combined efforts of national, state and
local level government can aid in the development of better production methods and
goods for industrial firms, making them more competitive domestically and
internationally.
Improve Skills of the Manufacturing Workforce
An important part of firm efficiency is a skilled workforce that knows how to
operate machinery on the production line as well as other factors of production for
certain goods. Much of the labor pool in India is untrained, which is a detriment to
production and workers who run the risk of injury when using unfamiliar and unsafe
machinery. Many small and medium size firms cannot afford to put laborers through
training while no national or governmental skills education exists. One large
construction firm, Larsen &Toubro has opened up its own training center in Calcutta
where laborers can learn the standards of construction and certain specialized skills.
The three-month courses come at no cost to students, and the only requirement for
admission is “the right attitude” (Reina). This training center and the other five to be
built in the near future are out of pocket expenses for L&T, and there is no stipulation
that workers trained at the center must work for the firm. These steps taken by L&T
are a good example of what companies can do to improve the labor pool, however
very few firms in India have the financial backing to support training on this scale, or
even for their current workforce.
In addition to training in the formal manufacturing sector training of informal
participatants will aid in the development of small and medium businesses that rely on
informal workers. One of the most significant needs of informal workers is better
skills and higher levels of human capital. A majority of workers in informal
enterprises are untrained and unfamiliar with new technologies, which creates further
inefficiency in many firms. Giving workers the knowledge and skills necessary for
better production not only helps firms but also improves the human capital of every
person. This increases their marketability in the job market, qualifying them for both
informal and formal employment. Moreover, greater understanding of technologies
especially in labor-intensive industries such as manufacturing will increase safety in
the workplace. Finally, better training and awareness of new technologies also aids
home-based entrepreneurs improve their own production capabilities.
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In the case of India, the existing training infrastructure is “under-utilized,
leading to a colossal waste of resources” (Awasthi 2002). Primarily the government
provides this infrastructure, such as training facilities located in certain cities.
However, these institutions cannot address a wide range of workers, especially those
who need it most as “they do not fulfill some entry conditions like education level,
age, timing of suitability of training or even distance” (Awasthi 2002). The
government led initiatives are also outdated in many regards and links to new industry
and technology is limited. Moreover, most Vocational Training Institutes (VTIs) are
geared to citizens with greater education levels and those already participating in the
formal economy. The reach of government lead initiatives is not large enough, which
is why an NGO-led model would function better in this situation. Early studies
indicate that NGO-led training institutions are more effective in skills formation then
government training groups because of their flexibility with courses. Furthermore,
government operated institutions function with low efficiency and do not have
adequate support from central government to improve the current problems. By
linking the existing infrastructure with decentralized and specialized groups the
government could significantly improve the amount of skilled workers in the informal
economy.
In order for NGOs to better serve the education needs of informal worker
certain tools and methods should be implemented among all grassroots and non-
governmental organizations. An important aspect of better training is offering both
theoretical and practical experience. Instead of trying to upgrade skills only through
conceptual means, NGOs should work with local industry to give students a chance to
practice in an actual firm. These could function as “internships” and allow workers to
receive pay while upgrading their skills. Moreover small and medium size firms that
hire informal workers would be able to increase productivity, and connect to a labor
pool with greater skills sets and human capital. For home-based enterprises, NGOs
could offer a chance to work with new technologies by investing in the necessary
technology. Small entrepreneurs could practice on the new machinery within the
training itself, and make the choice as whether or not they would like to purchase the
new technology. In these cases, NGOs could link them to microfinance organizations
to aid in the purchase and installation of better machinery.
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In addition to real-time training and practice, NGOs should offer shorter
courses for informal participants. Long three-month courses can be a drain on already
impoverished people, and often creates high drop out rates for students. Having
shorter time frames, such as one to two weeks for teaching the use of new machinery
and skills upgrading, and three to four week courses to instruct the basics of industry
specific work to inexperienced students.
Finally, NGOs should implement mobile training and increase their ability to
reach all informal workers. While it is important to be an integral part of a community
to create better human capacity it is equally important to utilize resources so that all
students gain access to training. By using mobile means, NGOs can take training to
workers, rather than expect them to shoulder the costs of transportation and housing
for training facilities far from their homes. Mobile training is a useful element in the
rural and urban settings, and will decrease the need for large facilities and waste
produced by permanent buildings.
Alongside the expansion of the reach of training NGOs can get skills
upgrading to target groups that may not even realize they need such courses. Often
target populations are not aware of changes in technology or their lack of key
marketable skills. Many unemployed or laid off workers have trouble re-entering the
market for a variety of reasons, but very few consider lack of skill to be the cause. By
using mobile training NGOs ensure that these unknowing groups of workers get
access to necessary skills development courses. Moreover, this form of training is
informal in itself, which will increase participation “as people in the informal sector
are often distrustful of authority and formal organizations” (Singh 2000). For this
reason NGOs should stay connected to the communities they work after they finish
course training in a certain area. This will ensure they are more trusted by informal
workers, and that they are not perceived as distant “benefactors.” Creating these
changes in training will increase the number of successful course completions and
improve the human capital of more informal workers.
In order for these recommendations to be successful NGOs must create links
with various groups within India. The first, and perhaps most important of these links
is a link to the government, and already existing government programs. The
government is tied in its ability to help the informal sector due to the amount of
human power necessary to effect real change. Moreover, if the government gives
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direct help to the informal sector it will inadvertently incorporate theses workers into
the formal sector, which could be detrimental to business development. The best way
for the government to aid in the development of the informal sector is to provide
financial support to NGOs in the forms of grants, cheap or free access to technology,
and opening the current training infrastructure for NGO use. Financial aid will be a
critical part of the relationship, and providing money to organizations used to
operating on low budgets will be a well-spent investment in the overall economy.
NGOs must also link to private industry based on the training they aim to
provide. Doing so will increase their knowledge of new technologies and skills that
formal enterprises desire in their employees. Additionally creating such links will help
ensure that students can get hands on training in industry. Forging ties with medium
and large size enterprises will offer another form of financing to NGOs in the form of
sponsorship and vetting of future hires. A secondary part of this link is forging ties
with relevant Research and Design Institutes that create the new mechanisms used by
industry. This will guarantee awareness of new technologies, and can strengthen the
links between industry and R&D.
Environmentally Sustainable Manufacturing
Remanufacturing
The process of remanufacturing breaks down discarded and used goods to basic
components that can be utilized to form new products. This product recovery allows
for the distribution of high quality goods at a much lower cost, bringing added benefit
to the consumer and the environment. As Indians purchase and discard more
technological and electronic goods (in addition to automobiles) more waste is
produced, and “graveyards” of unused products are threatening environmental
stability. The industry of remanufacturing is relatively small in developing
countries, especially in India. If the government were to implement policies to aid in
the development of the sector, it could improve the economy and help the
environment, while leading as one of the few nations with a strong remanufacturing
base.
Remanufacturing is a very labor-intensive process through the various stages
of breakdown required for advanced products. Partially due to large number of
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necessary labor, most if not all remanufacturing occurs in the unorganized sector of
manufacturing (Mukherjee and Mondal 450). While the informal sector is important
in the growth of an overall economy, India could benefit more from creating a formal
remanufacturing sector. The processes of product require would increase a demand
for labor, thus employing more citizens, and help reduce waste in landfills. Moreover,
in remanufacturing businesses see profits of up to 20 percent, and in the auto industry
this is even higher (Mukherjee and Mondal 449). It is important to note that certain
industries, such as the remanufacturing of PCs, are difficult to start up as they require
a high level of technological knowledge that most Indian manufacturing firms do not
have. However, success in other industries can create spillovers, and the continual
efforts of R&D can provide the technology necessary for firms to enter these markets.
Currently, there are no stringent take back laws in India that stipulate
the buy-back or disposable processes for manufactured goods. The lack of these laws
means that few original equipment-manufacturing firms (OEMs) offer a buy-back
scheme nor do they have any incentive to do so. By enacting strict laws requiring all
OEMs to buy back at least 50 percent of their products for remanufacturing, the
government can encourage the growth of a remanufacturing sector within existing
firms. Moreover, this stipulation must be required of foreign firms as well, to ensure
level competition among all producers in the market. One effective way that an OEM
can ensure efficiency of the buy-back scheme is through continual contact with
customers. Mukerjee and Mondal (2008) completed a case study of a photocopier
manufacture in India that offers free service and repair to all customers, thus
guaranteeing long-term contact with consumers. In this way the company can also
monitor individual units and present a buy back scheme to a customer when the
separate machine components still have viability for remanufacturing. Introducing the
legislation that will force companies to remanufacture, while providing information
and logistical support for firms, will start India on a path of greater product recovery.
However, these policies would only apply to existing firms, and not aid in the
development of new remanufacturing firms. Through grants, low-interest loans, and
information support the government could facilitate the creation of more
remanufacturing firms. These firms could be linked to various companies, focusing
solely on the process of stripping down old products, allowing OEMs to receive the
components ready to build with. Depending on the market structure, this outsourcing
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may be more cost-effective for a firm, especially smaller OEMs with limited human
capital.
In addition to the expansion of remanufacturing firms the government much
help in the creation of a market willing to buy remanufactured products. A mass
campaign to promote the “like new” quality of remanufactured goods, at almost half
the cost, would increase the domestic consumption of remanufactured goods, and
make companies more competitive in the market place. Moreover, remanufactured
goods could be exported to other nations, such as the members of ASEAN, where a
majority of the population would appreciate the availability of cheap but reliable
goods. Western consumers may be adverse to the idea of remanufactured goods, but it
is likely that the environmental and economic benefits to buying remanufactured
products will open up more foreign markets for Indian firms. Overall the positive
environmental impact and the profits to firms would aid in the development of the
economy; expanding exports while bolstering the domestic sector.
Environmental Efficiency in Small and Medium Size Enterprises
It is important to recognize the need for environmental regulation in smaller
enterprises as they typically rely on less expensive technologies to produce goods,
technologies that typically result in further environmental degradations. However,
there are many problems associated with implementation of environmentally sound
policies among SMEs, particularly the high costs of converting to green technologies.
Thus the government cannot mandate strict green policies as it will put the viability of
SMEs at risk, and reduce the competitiveness of domestic firms. Thriuchelvam,
Kumar and Visvanathan (2003) propose multiple solutions for increasing eenergy
efficiency in SMEs, and one is particularly useful for the Indian manufacturing sector.
Through the use of energy audits, the government can determine deficits in energy
use, and propose solutions “that can be as simple as insulating hot and cold pipes,
sealing air leaks, tune-up of boiler…which normally result in 10-15% improvement in
efficiency with little or no investment” (Thriuchelvam et. al 982). If the government
expanded the MoEF to included an energy audit board that analyzed the energy use of
all size enterprises it would help firms save money, and implement the first steps to an
effective monitoring system.
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In addition to cutting the energy waste of SMEs the government must call for
the implementation of green technologies and processes in all businesses. As the cost
of these processes can be a burden on less productive firms, the government should
aid in the procurement of better technologies for SMEs that do not have the financial
capability. This can be in the form of government-distributed technologies, or
alternatively in the form of soft loans specifically for purchasing environmentally
sound technologies. Along with financing options, the government must implement
stricter enforcement of environmental and taxation policies. For instance, the “polluter
pays” method has already been implemented in India, calling for extra taxation on
firms that produce levels of pollution over the legal limit. However, like most other
regulations in India, it is not well enforced, and if the government expects
improvement it must take the initiative to ensure payment of fines. Moreover, the
fines and fees associated with environmental factors must be universally applied to all
firms, including foreign owned companies. With the increase on social responsibility
the regulation will not drive away business, and can encourage more FDI for the
sector. The combination of strict legislation and options for financing better
technologies will ultimately help the environment and growth of productive industry,
even if it requires initial costs.
Strengthening Environmental Organizations
It is important to explicitly state the need to bolster the status and power of
many Indian environmental agencies, such as the MoEF and the CDM Authority.
Giving increased power does not mean simply financial support, but rather increased
value in the overall growth of the nation. The Indian government must recognize the
initial short term costs of being “green” will be beneficial in the long run, as India can
lead the way as a sustainable developing economy, thus being more attractive for
socially conscious international firms looking to expand overseas. Being
environmentally conscious in its development will give India an edge over its highly
polluting counterpart, China, and increase her prominence worldwide. Thus
environmental agencies deserve a larger presence in the government, including
expanded authority. Finally, all though it does not relate directly to manufacturing, the
government should recognize the need to clean up the streets, fields and rivers of
India that have been polluted by the general public. Launching a mass campaign for
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environmental responsibility will not only encourage manufacturing firms to be green,
but help in the overall development of a cleaner India.
CONCLUSION
India’s dependence upon agriculture and services puts it in a situation of
unsustainable growth as less people can obtain secure employment in either sector.
The development of a strong Indian manufacturing base is important on many levels,
but especially given the recent economic crisis gripping the world. With more and
more companies shutting down and pulling back from outsourcing from the IT sector
of India, now more then even, the economy must rely less on the whims of foreign
markets and become a strong producer of goods that the world depends upon. As the
agriculture industry shrinks, the government must facilitate the transfer of low or
uneducated laborers to guaranteed jobs. The failure to do so will only increase poverty
and urban sprawl.
The policies proposed in this thesis are designed to work in collaboration with
one another, as a total revamping of the Indian manufacturing sector. I acknowledge
that many factors have not been addressed, such as the large problem of labor
regulation and the powerful presence of trade unions in India, and the resulting effect
on business growth. This problem has been explored in depth, but it is clear that the
strict labor laws are unlikely to change, so the government and business must work
around this problem to find creative ways to be successful. Problems of corruption
have been touched upon, but the greater issue must be addressed in a social context to
effect real change in the government and day-to-day operations. Addressing issues of
corruption will also result in more effectiveness in tax collection, bringing in more
revenue for the government.
It is clear that no progress can be made without first implanting the right
infrastructure for growth. Simply opening up the economy is not enough to create a
wealthy nation. The policies proposed through this paper call for major spending on
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behalf of the government, something it must do if it expects India to grow. This is a
somewhat Keynesian approach to economic development, and it is clear the
government cannot expect to reap rewards without heavily investing in the prosperity
of the country. It is hoped that through increase spending and attention to important
factors of production the government of India can create powerful manufacturing base
that will encourage sustainable development for years to come.
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BIBLIOGRAPHY
1- Chibber Vivek, “Breaching the Nadu: Lordship and Economic Development
in Pre-Colonial South India”, The Journal Of Peasant Studies, Vo1.26, No.1,
October 1998, pp.1-42, PUBLISHED BY FRANK CASS, LONDON.
2- Das Abhiman Reserve bank of India: “Socio-economic development in India:
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313-345.
3- Datt Ruddar & K.P.M. Sundharam, “Indian Economy”, S.Chand & Company
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4- Kuchhal S.C., “The Industrial Economy Of India”, Chaitanya Publishing
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Online at http://mpra.ub.uni-muenchen.de/1231/
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7- Misra S. K. & Puri V. K. “Indian Economy”, Himalaya Publishing House, 24 th
revised edition 2006,pp-5.
8- Ranade Prabha Shastri, “Infrastructure Development and Foreign Direct
Investment on the Western Coast of India”, Foreign Trade Review, pg 39-54.
9- Somashekar N.T., Development Economics Including Environmental
Concept, New Age International Publishers, New Delhi, 2007, Pg-531.
10- http://indiabudget.nic.in
11- "http://en.wikipedia.org/wiki/Economic_development_in_India"
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CONTENT
ABSTRACT...................................................................................... ii
SIGNATORY PAGE.........................................................................iii
TOPIC APPROVAL LETTER.......................................................... iv
ACKNOWLEDGMENT.....................................................................v
APPROVED THESIS SYNOPSIS..................................................vii
1. INTRODUCTION ..................................................................................1
2. COMPANY PROFILE..........................................................................25
3. LITERATURE REVIEW.......................................................................41
4. RESEARCH METHODOLOGY...........................................................57
5. FINDING AND ANALYSIS...................................................................59
6. CONCLUSION....................................................................................71
7. RECOMMENDATION..........................................................................73
8. BIBLIOGRAPHY..................................................................................75
9. ANNEXURE – QUESTIONNAIRE.......................................................76
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