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INDIA’S SERVICES SECTOR: Unlocking Opportunity

INDIA’S SERVICES SECTOR


Unlocking Opportunity

Australian Government
DFAT

Department of Foreign Affairs and Trade


Economic Analytical Unit
©Commonwealth of Australia 2007

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Australia. Dept. of Foreign Affairs and Trade. Economic Analytical Unit.

India’s services sector: unlocking opportunity.

Bibliography.

ISBN 9781921244056.

1. Service industries - India. 2. India - Commerce. 3.

India - Economic conditions. 4. India - Economic policy.

I. Title.

338.470954

Editing by Peter Judge. Typesetting by Lyn Lalor. Production by Jean Penny, Pirion Print and Design.

Cover photo by Adrian Westwood, Firefly Creative.


Executive Summary

executive summaryI

‘In 1991, with India running out of hard currency, Manmohan Singh…decided that India had to
open its economy. “Our Berlin Wall fell…and it was like unleashing a caged tiger… We went
from quiet self-confidence to outrageous ambition in a decade” [Tarun Das, Chief Mentor,
Confederation of Indian Industries].’
(Thomas Friedman, The World is Flat)

Optimism abounds in India. Well it might. Keynote reforms, initiated by the then Finance Minister
Dr Manmohan Singh in 1991, provided the momentum for a major reduction of the role of the public
sector in the economy, a degree of deregulation, and greater integration of India’s economy into
international markets. India’s entrepreneurial spirit was unleashed.

The result has been a shift from India’s traditional annual GDP growth rates of around 3.5 per cent

to a much faster growth trajectory. Between 1991 and 2005 the economy expanded at an annual
average of around six per cent. In the past three years growth has been higher still, at around eight
per cent. Growth for 2006–07 may be even higher, with the economy expanding at an annualised
rate of 9.2 per cent in the third quarter of 2006.

These figures call to mind the performance of the economic success stories of East Asia – Japan,
Taiwan, the Republic of Korea, the high-growth ASEAN economies and, most recently, China.
Extrapolating from macro factors – such as demographics and potential for technological ‘catch-up’
– and assuming an ongoing reform effort, studies by a number of prominent analytical organisations
have projected that India could even outperform these dynamic economies over the next fifty years.
If so, these studies claim, by 2050 India could be the third-largest economy in the world (in market
exchange rate terms) by a significant margin, behind only China and the United States. Such
developments would profoundly shift the world’s economic centre of gravity.

This study does not seek either to substantiate or to disprove these rosy projections. Any such
attempt would be futile. Too much is dependent on factors which cannot be plausibly predicted, such
as the ongoing willingness and ability of Indian governments to sustain a reform program over long
periods; the health of the international economy; new developments in technology; and the shape
of the international trading system. Instead we ask: How might it happen? Is there a plausible path
from today’s India to the projected giant economy of 2050? What opportunities might successful
pursuit of that path generate for Australian services providers? And finally, what factors need to be
taken into account along the way as Australian companies consider whether they should be seeking
to participate directly in India’s growth?


While some contend that growth picked up in the 1980s, Panagariya (2005) points out that growth was patchy. Growth was
strong over 1988–89 to 1990–91, but this was largely a reflection of the liberalisation and deregulation measures under Prime
Minister Rajiv Gandhi as well as expansionary policies that ended in the economic crisis of June 1991. It was the more systematic
and deeper reforms commencing in 1991 that helped sustain India’s economic growth.

P A G E iii
INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY

Why services?

This report focuses specifically on the services sector because of the central importance of services
to India’s current economic expansion. Whereas the East Asian economies’ success has largely been
built on the development of export-oriented manufacturing, India’s recent growth has been led by the
dynamism of its services sector – particularly high-end, knowledge-intensive services exports. Services
have consistently grown at a faster pace than the economy as a whole since 1991, when the reform
effort was kicked off in earnest. They now occupy some 60 per cent of India’s GDP, based on the
WTO definition of services which includes construction. Manufacturing, by contrast, has maintained
a stubbornly static share in the economy at around 20 per cent, while that of agriculture – still far
and away the largest employer – has dwindled. Productivity growth in India, unlike virtually all other
regions of the world, has been strongest in services (IMF 2006).

This is not to say that developments in other sectors are unimportant; nor that the profile of India’s
economy will remain static over time. Already, for example, there are signs of an acceleration in the
growth of India’s manufacturing sector. But to date, it has been services that have led the way; and
their sheer size within the economy means they will continue to have a critical role.

This is an unusual growth path. In terms of per capita income India remains a poor country. Yet the
services-dependent profile of its economy is much closer to that which has typically been associated
with middle-income developing countries. In general, development of the services sector occurs after
developments in agriculture and manufacturing. In India’s case, the reverse has occurred.

How can the services boom lead to sustainable growth?

For the reformist approach that has led to India’s recent growth to be politically sustainable in the
medium to long term, it must demonstrate benefits to all strata of society. The key imperative for
Indian policy-makers is to improve the situation of a huge and growing, but relatively low skilled, rural
working class. This means creating vast numbers of appropriate jobs. But the main driver of growth
in the economy since 1991 has been a knowledge-intensive sector, which is never likely to become
a mass employer of low-skilled labour. How to resolve the two?

Fieldwork in the course of this study suggested that, in the minds of many participants in the Indian
economy, there is a plausible route by which services-led growth could lead to broader-based
development, and consequently to job creation on the necessary scale. Put simply, this would involve
growth of dynamic services export sectors such as Information Technology–Information Technology
Enabled Services (IT–ITES), and the income that growth brings to the country, providing a major
stimulus to domestic demand and hence catalysing reform and growth in other sectors – including
infrastructure development, construction, manufacturing and retail. It is the consequent growth in
these other sectors, particularly manufacturing, which might be expected to provide the bulk of the
required jobs over time.

Though somewhat speculative, this idea, which is elaborated in Chapter 1, is of interest because it
provides a plausible road map by which current developments might lead to the long-term projections.

P A G E iv
Executive Summary

It also provides a framework for examination of India’s services sector as a whole which highlights the
differing roles that different sub-sectors might play as the economy develops – and hence the differing
types and timeframes for opportunities that are likely to arise for Australian services providers.

The roles of different sub-sectors

Within an overall framework of services-led growth, different services sub-sectors clearly have different
roles to play. These are examined in Chapter 2.

Broadly speaking, the better performing services sub-sectors either have not been subject to significant
amounts of regulation (notably IT–ITES) or have been deregulated and opened up to competition
(most prominently, telecommunications and domestic air travel). Increased inward investment flows
stemming from a relaxation of restrictions on foreign investment and particular inducements such
as Special Economic Zones (SEZs) have helped underpin the performance of some of the faster
growing services sectors.

Knowledge-based industries have been prominent among the fastest growing services. The relative
lack of regulation and modest capital requirements in these industries have enabled them to capitalise
on the advantages of a low-cost, educated workforce, technological advances and widespread
English‑language capabilities. The rapid expansion of the export-oriented IT–ITES sector is much lauded,
but several other key services are also growing strongly, including telecommunications, financial
services, consulting services, private healthcare, and biotechnology services.

High-end services such as IT–ITES have an important role to play in India’s overall development on
two levels. Their expansion has in large part been based on external demand, and has resulted in a
significant increase in export earnings, as well as burgeoning inflows of foreign direct investment, with
most of the multinational ‘majors’ now represented in India. This success has led, and will continue
to lead, to expansion of the IT sector, which should in turn fuel increased domestic demand, as
employment grows, creating requirements for new buildings and infrastructure, as well as the growth
of an increasingly sophisticated and affluent consumer class. India’s world-class knowledge-based
services are also increasingly assuming importance for the inputs they provide for other sectors
of the Indian domestic economy – such as manufacturing, retail, and logistics – thereby improving
productivity in those sectors and further enhancing growth prospects.

As growth continues, other services sectors also have a crucial role to play. A modern economy
demands both an efficient telecommunications infrastructure to facilitate rapid information exchange
and communication between economic units, and a financial sector which is able to provide
sophisticated intermediation between capital providers and capital users so that resources are
allocated efficiently within the economy. It also requires increasing sophistication in areas such as
transport and power infrastructure to prevent disruptions to production and enable goods to be moved
efficiently around the country; and in education and training to ensure that there is sufficient skilled
labour to allow the economy to modernise.

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INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY

Reform measures within these ‘enabling’ sub-sectors vary considerably, although most services
have been, and remain, less regulated by comparison with manufacturing. Significant changes have
occurred in the financial sector, although foreign investment in banking and insurance remains heavily
constrained. Within another sector crucial to the health of the economy – transport infrastructure
– the picture is mixed. Ports have been considerably opened up to competition, but while reform has
begun in respect of railways, and to a greater extent, roads, substantial investment is required in
these sectors to bring them to an acceptable standard. Modernisation of airports is under way, but
it has been fraught with delays and is struggling to keep pace with the major expansion in air travel
that is taking place in India. Power shortages also remain a major constraint on growth – albeit one
which the government is now seeking to address, including through the introduction of mechanisms
designed to promote private and international investment in the sector.

Some business services important to facilitating growth – such as legal and accountancy services
– remain largely protected from foreign competition, as does the retail sector. As reform and growth
continues in other areas, these sectors can also be expected to come under further pressure to
deregulate and modernise. Already shopping malls are springing up all over India in the face of
seemingly insatiable demand. The first hypermarkets and department stores are starting to emerge
– again bringing with them requirements for skills and approaches which to date have been little
required in India, including modern distribution systems and integrated supply chains. While complete
liberalisation of foreign investment rules in these areas is fraught with political difficulty and likely to
be some way off, pressure for change can only be expected to increase as Indians increasingly travel
overseas and experience international standards of service in these areas.

Opportunities for Australian services providers

The range and extent of changes that are foreseeable in the Indian economy as it continues to
develop suggest that, as well as focusing on the obvious growth areas of IT–ITES, Australian services
providers should be looking to a number of other sectors in considering how they might participate
in India’s ongoing growth. Where they might do so is examined in Chapter 3.

In relation to IT–ITES, India’s role in creating and leading a ‘tradability revolution’ in services merits strong
attention from Australian business. The most commonly highlighted aspect of this phenomenon has
been the trend towards business process outsourcing and ‘offshoring’ of services to India. But it is very
much a two-way process. As India’s exports of business services have exploded, so have its imports,
reflecting a fundamental change in the way services are produced and delivered worldwide. And its major
IT companies, such as Infosys, Wipro, Satyam and Tata Consulting Services (to name but a few), are
increasingly expanding overseas, providing jobs for locals in host markets – including Australia.

Essentially, economic activity in this area is mirroring familiar developments in the manufacturing sector.
Production is becoming more fragmented. Specialised activities are taking place in diverse locations,
resulting in a rapid increase in services trade. Australia has very real strengths in this area and is well
placed to participate in emerging services production networks – particularly in high-end services such
as Information and Communications Technology (ICT)-enabled research and analysis.

P A G E vi
Executive Summary

While a key focus of the dozens of Indian IT companies operating in Australia is the provision of IT
solutions to local companies, a number of these companies are also using their Australian subsidiaries
to secure or help take advantage of global market opportunities – leading to high-quality employment
opportunities for Australians. As the trend to deliver services through international networks develops,
cooperation and collaboration between Australian and Indian firms to service third markets could
expand to the benefit of both countries. It will be important for Australian companies to understand
the export opportunities created by complementarities between Indian and Australian services
providers in this area.

While India is home to a number of world class companies, particularly in IT–ITES, Australian
companies also have significant expertise that could augment India’s capabilities or meet India’s
needs. Relevant areas include infrastructure development and related consultancy services;
information technology; telecommunications; financial services; tourism and travel-related services;
film and television; sports and related infrastructure, particularly in the context of New Delhi’s hosting
of the 2010 Commonwealth Games; healthcare services; biotechnology; mining services; retail and
logistics; and legal and accountancy services.

Perhaps the most striking example, however, is that of education and training. A major relationship
already exists in this field, with more than 38 700 Indian student enrolments in Australian educational
institutions for the 11 months to November 2006, principally at tertiary level. This number is still
growing rapidly. Given the skills India’s development is likely to demand, there is ample scope for this
relationship to continue to grow in the medium term – particularly as institutions take the opportunity to
diversify their approaches to provision of education and training, including through the establishment
of operations offshore and distance learning programs.

Expanding bilateral economic ties

The base of bilateral commercial activity on which Australian companies can build has grown rapidly.
Chapter 4 examines this activity.

The bilateral commercial relationship has developed rapidly into one of vitality and energy, with strong
support from governments. Numerous visits to India by senior Australian Ministers – highlighted by
that of Prime Minister Howard in March 2006 – underpin what is now a major trading relationship. At
the official level, Australia and India concluded a Trade and Economic Framework (TEF) in March
2006, which provides a clear structure for the further development of commercial relations.

India ranks twelfth overall as a trading partner of Australia. Total trade surpassed A$10 billion for
the first time in 2005–06. India has been Australia’s second-fastest growing services export market
over the past five years, in large part reflecting the strength of education exports – a direct spin-off
from India’s rapid growth. Despite high levels of publicity for the relocation of corporate functions to
India by some major companies, the balance of bilateral services trade is firmly in Australia’s favour.
While Australian direct investment in India’s services sector is presently at modest levels, it is set to
increase with some recent investment decisions and conclusion of contracts. Indian companies have
made substantial investments in Australia’s services sector, most notably in IT.

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INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY

India’s business environment

A credible story can be told that would see the pattern of knowledge-intensive service-driven
development which has been embarked upon by India feeding into the robust growth trajectory
projected by Goldman Sachs and others. That said, the jury will remain out for some time on whether
the benign scenario of ongoing growth – and particularly increased employment and welfare across
the Indian economy – will come to pass. It is clear that many other less optimistic scenarios are
also possible. Work by the World Economic Forum in collaboration with the Confederation of Indian
Industry, for example, produced three possible scenarios for the future of the Indian economy, only
one of which leads unequivocally to strong growth and broad-based development – and one of which
leads equally unequivocally in the opposite direction (WEF 2005). Chapter 5, the final chapter of
this report, seeks to identify relevant considerations for Australian companies considering a deeper
involvement in India as a market for services exports.

The key question will be the ability of successive governments to sustain the momentum of reform.
The success of reform in generating growth to date appears to have engendered a critical mass of
political opinion that is in favour, in principle, of ongoing reform. But the devil, as always, is in the
detail. Much can be, and has been, achieved through low-profile, administrative measures. However,
achieving major necessary reforms remains difficult, particularly in flagship areas such as labour
policy, privatisation, and foreign participation, whether through trade or investment. If the necessary
political support is to be achieved, it is important that the benefits of economic growth are seen to
be widely distributed.

Australian companies enjoy a degree of benefit from favourable Indian perceptions of their country,
despite facing fierce competition for India’s attention from larger players such as the United States,
Europe and China. Indians perceive Australia as a safe, relatively reasonably priced and friendly
destination for their children’s education. English is widely spoken. So is cricket, whose capacity to
engender fellow-feeling should not be underestimated. There are some similarities in the legal systems
of the two countries, though these should not be overstated. There are also significant people-to-people
links, through migration and education, which represent a potential asset when it comes to exploiting
trade and investment opportunities. Recent efforts to broaden the base of the business relationships
by federal and state government-led business missions to India have helped raise Australia’s profile
and improve Indian awareness of Australian capabilities and expertise in a number of areas.

While India presents as a potentially attractive market for many Australian businesses, it also poses
significant challenges, especially for smaller Australian companies. Success demands significant
investment of time and effort in understanding the business environment, and the tenacity and
resilience to overcome setbacks or delays. Key challenges include power and transport infrastructure
shortcomings, and barriers and burdens that exist both formally in the regulatory framework and
informally in the way it is administered. Increasing automation of transactions; reduction in bureaucratic
discretion over licences and permits; and the activities of a free, vocal and critical media have improved
transparency for business, but feedback from businesses active in the Indian market continues to
suggest that issues remain. Prerequisites for building a successful business in the Indian market
include thorough research and preparation, careful selection of a business partner or customer, and
the ability to take a long-term view of the market.

P A G E viii
Table of Contents

TABLE OF CONTENTSI

executive summary iii

TABLE OF CONTENTS ix

CHAPTER 1 services and india’s rise 1


Key points 1
Introduction: an emerging giant 2
The importance of services 4
Drivers of services sector growth 7
The way forward 12
Implications 14

CHAPTER 2 THE role of services in development 15


Key points 15
The drivers 17
The contributors 28
The slower reformers 35
Sectors vital to broad-based development 40
Interrelationship of services with manufacturing, agriculture and mining 45

CHAPTER 3 OPPORTUNITIES FOR australian service providers in india 49


Key points 49
Information technology 51
Telecommunications 52
Financial services 53
Infrastructure, construction management and consulting services 54
Education and training services 56
Tourism and travel-related services 59
Film and television 61
Sports and related infrastructure 62
Healthcare services 62
Research 63
Mining services 64
Retail 64
Logistics 65
Professional services 65

CHAPTER 4 the bilateral economic relationship 67


Key points 67
Overview of the relationship 68
Trade in services 70
Services investment 77
A platform for future growth 84

P A G E ix
INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY

CHAPTER 5 INDIA’S BUSINESS ENVIRONMENT: IMPLICATIONS FOR


AUSTRALIAn COMPANIES 87
Key points 87
An improving business environment 89
Advantages for australian companies 100
Remaining hurdles 101
Strategies for success 107

rEFERENCES 109

AUTHORS 125

ECONOMIC ANALYTICAL UNIT 125

Acknowledgments 127

Also by the Economic Analytical Unit 131

PAGE 
Chapter 1

services and india’s riseI

KEY POINTS

• Developments in India’s services sector potentially have worldwide


significance, given

– the rapidly increasing importance of India’s economy, which could be


the third-largest in the world by a significant margin in 2050, measured
at market exchange rates;

– the unusually large role services play in the economy overall by


comparison with other countries at similar stages of development;
and

– changes in patterns of services production worldwide, in which India’s


high-end services providers are playing a major role.

• Services have been a major contributor to India’s strong recent GDP


growth.

– Rapidly increasing two-way trade in information technology and


information technology enabled services (IT–ITES) and other high-end
services sub-sectors has been a critical factor in India’s improved
economic performance.

– Services have helped underpin India’s economic vibrancy through


their linkages with other sectors of the economy.

• If accompanied by further economic reforms, increased demand for


goods and services in the Indian economy resulting from the success
of high-end services has the potential to drive robust growth in the
medium term.

– Implementation of the reforms required to bring this growth about


could engender changes in key services sectors that would open
opportunities for participation by foreign companies.

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INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY

‘[Information Technology (IT) and IT Enabled Services] can do for India what automotives did
for Japan and oil for Saudi Arabia.’
(Noshir Kaka, Principal, McKinsey & Company)

Introduction: an emerging giant

The first-time visitor to one of India’s major cities cannot but be struck by the energy, entrepreneurialism
and optimism that abounds there. If much of the international commentary is to be believed, the
optimism seems well-founded. A chorus of recent long-term projections, citing India’s growing workforce
and the scope for it to increase productivity dramatically through technological ‘catch-up’ with the
West, suggest India could be the world’s fastest growing major economy over the next 50 years,
outstripping even China and other emerging market economies.

Assuming the maintenance of growth-supportive policy settings, ongoing reform, and no major
adverse shocks, Goldman Sachs predicts annual real GDP growth of around six per cent through
to 2040, tapering off slightly after that (Goldman Sachs 2003). Employing similar assumptions,
PricewaterhouseCoopers forecast real average GDP growth of 5.2 per cent per annum in India
through to 2050, compared to 3.9 per cent in China, Brazil and Mexico, and 4.8 per cent in Indonesia
(PricewaterhouseCoopers 2006). The Economist Intelligence Unit projects annual average growth in
India’s real GDP of 5.9 per cent through to 2030 (The Economist 2005b).

If realised, the analyses of Goldman Sachs et al would point to a significant re-alignment of the global
economic order, as emerging economies, led by China and India, come to account for a much larger
share of global economic output. They suggest India’s economy could rival – at market exchange
rates – the size of the largest European countries by 2020 and outstrip Japan by 2032 to become
the world’s third-largest economy after the United States and China (Goldman Sachs 2003). In
purchasing power parity terms, India is already the world’s fourth-largest economy and will become
the third-largest much sooner. Measured at market exchange rates, Goldman Sachs projects that
by 2050 the Indian and Chinese economies will respectively be around 80 and 125 per cent of the
size of the US economy.

These projections build on an impressive growth record since the then Finance Minister (and now
Prime Minister) Manmohan Singh initiated key economic reforms in June 1991, resulting in reduced
public sector participation in the economy, greater openness to international competition, and
significant deregulation. Since those reforms, India’s economic growth has averaged around six per
cent, far ahead of its previous sluggish performance; and over the past three years growth has been
of the order of 7.5 to 8.5 per cent. GDP grew at 9.2 per cent during the third quarter of 2006, and
most commentators estimate that India should be able to sustain growth rates of between 7.0 and
8.5 per cent in the near term (see for example, IMF 2006, The Economist 2006a and ADB 2006).
Clearly, India is doing something right.

PAGE 
Servces and India’s Rise

In one important respect, India’s growth path to date resembles those of other key developing
economies in Asia. That is, rapid growth in an export-oriented sector has been a key stimulus for
growth in the economy as a whole. But China and the ASEAN countries rose to prominence through
the rapid expansion of their export-oriented manufacturing, fuelled by significant foreign investment.
By contrast, services – led by exports of business services from India’s burgeoning information
technology and information technology enabled services (IT–ITES) sectors – have been the chief
source of India’s recent economic success.

The extent to which India’s growth path can be sustained; whether growth generated in what remains
one relatively small sector of the economy will translate into reform and growth in other sectors; and
in particular whether it can adequately address India’s need to provide jobs for huge numbers of
its unemployed and underemployed rural citizens, will have important implications not just for India
itself, but also for the world economy.

This report examines the contribution of India’s services sector to the unfolding story of India’s
economic development. It describes the role that headline growth sectors such as IT–ITES and
telecommunications would play in catalysing reform and growth in other areas of the services sector
and the Indian economy more broadly if this path to development is successfully pursued.

The report concludes that successful pursuit of India’s current growth path could open a wide range
of opportunities for Australian services providers. Both sustained growth, and the reform and change
within India which would need to accompany it, would create demand for new skills and capabilities
within the Indian economy. Australian enterprises would be well placed to provide many of these
capabilities, either through direct service provision or through education and training. It is important
that Australian companies are aware of the potential for these opportunities to arise, so that they are
able to respond strategically when they do.

It is equally important that Australian companies remain aware of the caveats that surround
this optimistic scenario. India has profited significantly from the reformist approach of its recent
governments. The current leadership is likewise reformist in orientation, but the tasks – both practical
and political – which confront it in maintaining the momentum of reform remain huge. This report has
deliberately focused on the implications of India pursuing its current growth trajectory successfully.
But, as numerous studies make clear, this is by no means the only possibility. In considering the
potential for opportunities to arise in India, Australian companies need also to be fully cognisant of
the hurdles that remain to be overcome.

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INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY

THE IMPORTANCE OF SERVICES


The strength and importance of India’s services sector distinguish it from Asia’s other developing
countries (Figure 1.1). Typically, service industries develop on a large scale after agriculture and
manufacturing have reached a certain stage of development. Generally, as development proceeds,
agriculture’s share in national output contracts and a parallel expansion of industry takes place,
initially centred on labour-intensive production. The share of both industry and services in GDP tends
to increase as per capita incomes rise and the economy progresses from low to lower-middle income
status. As the economy moves to upper-middle income levels, services’ share tends to grow more
rapidly, while industry’s share plateaus or declines.

Figure 1.1
India’s ‘X’ factor: a dominant and growing services sector
Services as a proportion of GDP (five year averages) and 2004 per capita GDP in
selected Asian economies

India’s services sector


is larger and growing
faster than that of
economies with higher
70 per capita GDP 1985–89 16000
1990–94
60 1995–99 14000
2000–04
2004 per capita GDP 12000
50
Per cent of GDP

Current USD
10000
40
8000
30
6000
20
4000

10 2000

0 0
Vietnam India Indonesia China Thailand Malaysia Republic of
Korea

Notes: Services to GDP data are at constant 1990 prices in US dollars. 2004 services to GDP data for Thailand and Malaysia are not
available. Pre 1999–2000 services to GDP data for India are 1993–94 price data, which have been melded to available 1999–2000
price data.
Sources: United Nations Statistics Division 2006 for services to GDP data; Indian CSO 2006 for 1999–2000 to 2004–05 services to GDP
data on India; RBI 2005b, Table 3 for pre-1999–2000 services to GDP data on India. IMF World Economic Outlook Database
2006 for 2004 per capita GDP data.


In this report construction is included as part of the services sector. This is consistent with the WTO General Agreement on
Trade in Services (GATS), which includes construction and related engineering services as one of 12 major services sectors. The
other major sectors are business services, communication services, distribution services, educational services, environmental
services, financial services, health related and social services, tourism and travel related services, recreational, cultural and
sporting services, transport services and other services not included elsewhere.

PAGE 
Servces and India’s Rise

India’s manufacturing sector is biased towards capital-intensive production. It has remained largely
static at around 20 per cent of the economy and, while its growth is accelerating, has not thus far
benefited appreciably from strong growth in exports due to the trend to integrated international
production systems (see Chapter 2). In this respect, India appears more typical of a middle-income
developing economy than a low-income economy.

The upward trend in services’ share of Indian GDP has accelerated since the major economic reforms

initiated in 1991. In 1970–71, it stood at just 39 per cent. By 1990–91, it was 48 per cent. By 2005–06,
services’ share of GDP had risen to 60.7 per cent (Figure 1.2).

Figure 1.2
Services sector gaining ground
Sector shares in GDP (at factor cost and 1999–2000 prices), in per cent,
1990–91 to 2005–06

100

80
Per cent of GDP

60

40

20

0
1990–91

2000–01
1993–94

1997–98

2003–04
1991–92

1992–93

1994–95

1995–96

1996–97

1998–99

1999–00

2001–02

2004–05

2005–06
2002–03

Services Industry Agriculture

Notes: Pre 1999–2000 data are 1993–94 price data, which have been melded to available 1999–2000 price data.
Sources: PIB 2006 for 2005–06 data; Indian CSO 2006 for 1999–2000 to 2004–05 data; RBI 2005b, Table 3 for pre-1999–2000 data.

Over the period 1991–92 to 2005–06, the services sector grew at a trend rate of 7.9 per cent, compared
with just 2.6 per cent for agriculture, 6.1 per cent for industry and 6.1 per cent for the economy overall.
It contributed 70 per cent of overall GDP growth over the period. Between 1980–2004, productivity
grew most rapidly in services, in contrast to the general pattern observed in other countries where
productivity growth was stronger in manufacturing and agriculture (IMF 2006).


Throughout the report, Indian fiscal year data are for the April – March fiscal year.

PAGE 
INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY

Growth in services likewise exceeded overall growth in the economy over 2002–03 to 2005–06,
the first four years of the tenth Five Year Plan (2002–07). The sector recorded a robust 9.1 per cent
average growth, while total GDP grew at 7.0 per cent, somewhat short of the eight per cent target
set in the Plan. Services may be even more important and growing somewhat faster than the official
data would suggest (Box 1.1).

BOX 1.1: measurement of services in the national accounts

Services contributed 59.7 per cent of GDP in 2004–05 according to GDP data at 1999–2000
prices – compared with 57.6 per cent based on the earlier 1993–94 price data. Weightings
used to calculate 1999–2000 price estimates may not reflect activity weightings that would be
more appropriate today, given the fast-changing nature of some services sectors. Moreover
the official data do not capture all economic activity equally well. GDP estimates for the
‘unorganised’ segments (as defined in Box 2.6) of manufacturing and services, as well as for
some segments of private organised services sectors, are compiled through indirect methods,
using indicators to extrapolate benchmark GDP estimates in a base year (Indian CSO 2006).
Under-reporting of incomes may also take place in some sectors.

Growth is not, however, uniform across India’s services sector. Certain services stand out in terms of
their role in driving economic growth. Building on India’s large pool of engineering talent and its rapidly
expanding telecommunications sector, IT–ITES have in recent years been the key catalyst of growth.
Their success has come largely through rapid expansion of exports tapping into burgeoning world-wide
demand, as investment and rapid advancements in telecommunications infrastructure and information
technology enable an increasing array of activities to be performed remotely. Faced with relatively low
levels of regulation, IT–ITES and other fast-growing high-end services such as telecommunications
have now reached a size where they are significant contributors to GDP growth.

Growth and improved efficiencies in other key areas, such as financial services, transportation and
transport infrastructure, are vital to facilitating expansion of other sectors of the economy. This could
in turn help ensure that development is more broadly based across both regions and socio-economic
groups – and therefore sustainable. Deregulation and foreign investment in such facilitating services
drive improved performance within those sectors and bring significant competitiveness benefits to
the wider economy given their importance as inputs to other sectors. While reform is proceeding in
these areas, much remains to be done. And other sectors which potentially have a critical role to play
in improving overall productivity have lagged far behind growth in the economy as a whole.

PAGE 
Servces and India’s Rise

Drivers of services sector growth

‘The aphorism “In a desert one should find camels not hippopotamuses” is a good guide
to analyzing the pattern of economic growth. If rain is scarce, then one should find animals
adapted to a scarcity of water, not those reliant on water. In an economic environment where,
say, transport infrastructure is scarce, one should find “infrastructure camels” – those industries
and firms that are thriving should be less than usually reliant on infrastructure.’

(World Bank 2006a)

Strong growth in foreign demand; deregulation, liberalisation of foreign investment and greater private
sector participation since 1991; increased industry outsourcing; and high income elasticity of demand
for services have been among the key factors driving high growth in India’s services sector (Gordon
and Gupta 2004). These factors are examined further below. However some other important influences
should be noted, consistent with the comment from the World Bank cited above.

Services tend to be less dependent on large-scale investments, and so less subject to


investment‑related regulatory hurdles (Indian Planning Commission 2002a). Compared with the
manufacturing sector, gross product in services sectors (outside of community, social and personal
services) is more concentrated in the largely unregulated ‘unorganised’ sector (as defined in Box 2.6).
Transport infrastructure shortcomings also tend to have a lesser bearing on most services sectors.
The IT–ITES sector in particular has benefited from a supportive policy approach. A large, relatively
low cost, and well-educated workforce, which contains more English-speakers than the United States
and Britain combined (Chapter 5), has enabled India to capitalise on burgeoning export opportunities
in high‑end services.

Booming services trade


India’s services trade has grown at a phenomenal rate in recent times reflecting strong growth in
foreign demand, particularly for IT–ITES. Exports grew at a trend annual growth rate of 20 per cent
over the ten years to 2004–05. In 2005–06 they were valued at US$60.6 billion, up over 40 per cent
on their 2004–05 value (RBI 2006a). Around 85 per cent of the growth in services exports in 2005–06
was attributable to growth in commercial services excluding transportation and travel (RBI 2006a).

Services imports have demonstrated a similar pattern of strong growth, reflecting the two-way nature
of trade opportunities generated by growth in the commercial services sector. Between 2003–04
and 2005–06, total services imports more than doubled to US$38.3 billion (RBI 2006a). Imports of
commercial services excluding transportation and travel accounted for some 60 per cent of the total
growth in services imports in 2005–06 (RBI 2006a).

Technological developments have been the key enabler of the explosion in commercial services trade.
Specifically, investment and rapid technological advancements in telecommunications and information
technology are driving reductions to the cost of digitising, transmitting and processing information,
thereby enabling an ever increasing number of services to be undertaken remotely by specialist

PAGE 
INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY

providers. In particular, the dotcom bust of 2000, which left a global network of broadband on the
market from failed telecommunications companies that was subsequently snapped up for a fraction
of its cost, drastically reduced the cost of broadband communications (Friedman 2005). India, with its
large cohort of engineering graduates and the widespread English language skills of its population,
has been a particular beneficiary of this services tradability revolution (Box 1.2).

BOX 1.2: Rethinking the haircut – India and the Services


tradability revolution

Traditionally, economists have tended to think of services either as ‘tradable’ or ‘non-tradable’.


The haircut, which requires the deliverer of the service (the hairdresser) to be physically located
next to the recipient, has often been regarded as the archetypal ‘non-tradable’ service.

But companies are re-examining their approach to service delivery as advances in information
technology, and in telecommunications have enabled packages of digitised information to be
moved around the globe almost instantaneously. Fundamental changes are occurring in the
way service activities are undertaken and delivered worldwide.

In Bangalore, for example, there is a hairdressing shop where the appointment commences

with the customer sitting while her head is photographed from many different angles. The
digitised images are then processed so as to produce an accurate representation of the
customer’s scalp, without hair, which is transmitted to a designer in a remote location. The
designer produces and transmits back to the shop a range of suggested hairstyles, from which
the customer can then choose.

By ‘unbundling’ the hairdressing service in this way, the hairdressing shop is able both to
increase its efficiency and provide a better service. The customer potentially has access to a
top international designer and a range of possible new hairstyle choices; and the hairdresser
and designer can focus on their respective specialised skills, maximising the value added by
each. All of a sudden, the haircut – or part of it – has become a tradable service.

This rather elaborate approach to hairdressing may never become widespread. But it is
indicative of the entrepreneurialism being applied in India to exploiting its competitive advantage
in IT Enabled Services. As the graph on the left of the next page shows, the overall outcome
has been a dramatic increase in India’s exports of commercial services excluding transportation
and travel. But as the graph on the right demonstrates, India’s commercial services imports
have experienced similar meteoric growth, as the ‘tradability revolution’ results in rapidly
increasing trade in services.


Based on discussions in May 2006 with Professor S. Sadagopan, Director, International Institute of Information Technology,
Bangalore.

PAGE 
Servces and India’s Rise

BOX 1.2 (Continued)

Booming two-way trade in commercial services


India’s services trade (US$ billion)

70
45
Exports Imports
60 40

35
50
30

US$ billion
US$ billion

40
25

30 20

15
20
10
10
5

0 0
1996–97

2000–01

1996–97

2000–01
1995–96

1995–96
1997–98

1998–99

1999–00

2001–02

2002–03

2003–04

2005–06

1997–98

1998–99

1999–00

2001–02

2002–03

2003–04

2005–06
2004–05

2004–05
Commercial services excluding travel Commercial services excluding travel
and transportation and transportation
Total services Total services

Note: 2005–06 data are provisional.


Sources: RBI 2006a for 1999–2000 to 2005–06 data; RBI 2005b, Table 146 for pre 1999–2000 data.

Foreign Investment and deregulation


Liberalisation of foreign direct investment (FDI) regimes worldwide has enabled service providers to
establish a commercial presence in host countries, which can be critical for the delivery of services
(UNCTAD 2004). Reflecting the strong international demand for services in which India enjoys a
comparative advantage, FDI in India’s services has grown strongly. The stock of FDI in India’s services
sector grew at a compound annual rate of 36 per cent between 1992–93 and 2001–02, compared
with 20 per cent in other sectors (World Bank 2004). Close to one-half of total FDI inflows between

2002–03 and 2005–06 were directed to services (RBI 2005d, 2006b). Business and computer services

and the finance and insurance sectors have been the main targets (Figure 1.4). Not surprisingly
these are sectors that either have not been subject to significant amounts of regulation or have been
deregulated and opened to competition since 1991.


The official data may underestimate the level of foreign investment in services, owing to the difficulties of measuring investment
in the sector.

According to data from the Indian Department of Industrial Policy and Promotion (DIPP), the telecommunications sector has
also attracted significant inflows of FDI.

PAGE 
INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY

Figure 1.3
Growing services FDI is concentrated in a few key sectors
Industry breakdown of FDI inflows in Indian services, 2002–03 to 2005–06

900
Computer services
Finance, insurance, real estate
800 and business services
Construction
700 Transport
Health and medical services
600 Trade, hotels and restaurants
Other services
500
US$ million

400

300

200

100

0
2002–03 2003–04 2004–05 2005–06

Sources: RBI 2005d, Table 1.71; RBI 2006b, Table 1.76.

The fast growing Indian services market offers considerable potential for foreign investors, although
continuing restrictions on foreign equity holdings in some sectors and other constraints and
impediments to business have a restraining effect.

Increased industry outsourcing of services


Indian industry has increasingly sought to contract out an array of services previously produced in

house (Gordon and Gupta 2004) , such as software development, design and testing, back-office
functions and post-sales service. Industry’s increased reliance on services inputs in turn appears to
be having a marked effect on increasing manufacturing output. Services inputs contributed around
25 per cent of total output growth in India’s organised manufacturing sector in the 1990s, up from
just one per cent in the 1980s (Banga and Goldar 2004). The trade reforms of the 1990s were a
significant factor behind manufacturing industries’ greater reliance on services inputs, as firms
appeared increasingly to look to services inputs to meet intensifying competition precipitated by the
reforms (Banga and Goldar 2004).

Increased private consumption of services


High levels of domestic consumption are fuelling growth in both the services sector and the
broader Indian economy (Das 2006). Private consumption expenditure accounts for 64 per cent
of India’s GDP – more than in Europe (58 per cent), Japan (55 per cent) and China (42 per cent)


Gordon and Gupta (2004) find empirical evidence of industry’s increased resource to contract out services over the 1980s and
early 1990s.

P A G E 10
Servces and India’s Rise

(The Economist 2006b). Services’ share in private final consumption expenditure almost tripled
to 29 per cent over the 50 years to 2000–01 (Hansda 2001). Services were prominent among the
segments of private consumption expenditure that grew at annual rates of above 15 per cent over the
decade to 2003 (Ernst & Young 2005a). The segments recording strong growth included hotels and
restaurants, medical care and health services, transport, communication, and education. Consumption
expenditure on movies and theatres and vacations each increased by around 30 per cent in 2003
(KSA Technopak Consumer Outlook 2004, cited in IBEF 2005c). Growing affluence and a rapidly
increasing middle class (Box 1.3) have helped power growth over more recent years.

BOX 1.3: An increasingly affluent middle class

India has a large and growing consumer class. India’s National Council of Applied Economic
Research (NCAER) estimates that in 2001–02 there were some 53 million households (comprising
around 280 million people) with annual incomes of Rs90 000 (US$1900) or more. There were
almost 11 million households with incomes of Rs200 000–1million (US$4200–21 000). Bearing
in mind the relatively low cost of many goods and services in developing countries and rising
per capita incomes, the number of households able to afford an increasing range and quality of
services is clearly growing rapidly. By 2009–10, NCAER estimates the number of households
with annual incomes of Rs90 000 or more will have increased to 108 million – double the
number in 2001–02 and treble that in 1995–96 – while the number of households with incomes
of Rs200 000–500 000 could exceed 28 million.

India’s growing middle class

Classification of households by income class (Rs ’000 pa)

250
Number of households (millions)

200

150

100

50

0
1995–96 2001–02 2005–06 * 2009–10 *

Deprived (<90) Aspirers (90–200) Strivers (200–1000) Well-off (1000–10 000)

Source: NCAER. * Projection

P A G E 11
INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY

The way forward

Bullish forecasts for long-term economic growth in India vis-à-vis all other major economies are
principally premised on projections of its labour force growing beyond 2050 (unlike China’s, Brazil’s
or Russia’s), and its capacity to increase productivity dramatically through technological ‘catch-up
with the West from a lower base level than China and other large developing economies (Goldman
Sachs 2003, PricewaterhouseCoopers 2006).

But the key question for India is whether the services-led growth that has, to date, mainly been
driven by very rapid expansion of what remains a relatively small part of the economy – particularly
in employment terms – can feed into broader economic development, sufficient to raise the living
standards of all Indians, and not just a relatively small, educated elite.

It is arguable that rapid expansion in knowledge-intensive services exports could continue to be a


catalyst for India’s economic growth. India’s increasingly outward orientation is facilitating a more
efficient allocation of resources according to the country’s comparative advantage in the production
of knowledge-intensive services. This specialisation, to serve a global market, can provide greater
opportunities for economies of scale, and therefore higher returns. Exporting is an efficient means
of introducing new technologies and gaining exposure to leading-edge production and marketing
techniques, both to India’s services exporters and to the broader economy (ADB 2005). Growth in
services exports encourages savings and capital accumulation; generates the foreign exchange
needed to procure capital goods, oil and other resources; and, by increasing the supply potential of
the economy, raises India’s capacity to import.

Perhaps most importantly in the context of India’s services-driven development model, export-led
growth facilitates an expansion of aggregate demand (ADB 2005). The income generated by India’s
knowledge-intensive services feeds into increased domestic demand in two ways (conceptualised in
Figure 1.4). First, the companies generating international revenue drive a rapid expansion of demand
for production inputs and facilities (including physical infrastructure and services such as education
and training). Second, there are income multiplier effects. The rising incomes and expectations of
those working in the boom industries helps fuel consumer demand.

If sustained, the growth of these high-end services should create pressure for expanded output from
the industries required to facilitate ongoing expansion at the next level, such as telecommunications,
financial services, education services, and more traditional services such as transport and construction,
while rising consumer demand is likely to drive growth in retail trade, hotels and restaurants and
other tourism-related services, as well as manufacturing and agriculture. Pressure for expanded
output in those sectors would intensify further if India’s relatively capital-intensive manufacturing
sector – which has begun to record growth rates in the vicinity of ten per cent – continues to perform
strongly, particularly given that manufacturing is widely considered to have a substantial multiplier
effect on job creation in services.

P A G E 12
Servces and India’s Rise

Pressure for expanded output and rising consumer demand, in turn, could create pressure for increased
capabilities and productivity growth in the sectors outlined above. At that point reform, investment
and modernisation could occur, or constraints on the ongoing expansion of the fast-growing sectors
might emerge. Recent scenario work by the World Economic Forum and the Confederation of Indian
Industry (WEF 2005) emphasises the risks for broader growth in the medium to longer term if reforms
do not proceed.

If reform and modernisation do occur, a further feedback to the IT–ITES sector could well develop as
reforming sectors draw on India’s expertise in IT–ITES to make their own operations more productive
– for example, implementing modern logistics systems or computerised manufacturing systems or
outsourcing basic business processes. Over time this should make growth in the Indian economy
less dependent on external demand, and therefore less vulnerable to slowdown in industrial country
markets.

Some of these processes are already evident. IT, financial services and telecommunication services are
already vital inputs to the manufacturing sector. Manufacturing’s competitiveness is being enhanced by
the increasing tendency to contract out a range of services (see Chapter 2). Fast-growing services are
also providing increasing business for other sectors. Knowledge-intensive services support innovation,
productivity growth and technological improvements in other sectors. Moreover, it is apparent that the
IT–ITES sector – and in particular its principal representative organisation, the National Association of
Software and Service Companies (NASSCOM) – is an active and empowered advocate for ongoing
reform in the Indian economy.

Figure 1.4

How services could lead to broad-based development


International demand
for IT–ITES and other
high-end services

New products Export growth

Investment in Increased
increased capacity revenue

Higher salaries
in IT sector

Demand for construction, Increased domestic demand for IT–ITES


infrastructure, and and other high-end services
human resources
Higher personal
consumption

Productivity-enhancing reforms

Pressure to Pressure on retail,


improve delivery of manufacturing,
infrastructure, human agriculture, etc to
resource development increase output

P A G E 13
INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY

The services tradability revolution; the increasing sophistication, technology-driven nature and scale
of a growing range of Indian services; and strong and growing inter-sectoral linkages, point to the
possibility of India’s services-led development being a viable alternative to the path followed by other
rapidly developing Asian economies. The robustness of productivity growth in India’s services sector

through the 1990s of around 5.6 per cent per annum was in some senses reminiscent of China’s
experience in manufacturing over the 1984–93 period, relative to overall productivity growth in the
respective economies (UNCTAD 2005b). At the same time it is clear that manufacturing also has
an important role to play in broadening the base of growth and absorbing India’s labour force (see
Chapter 2), a fact of which Indian policy-makers are fully cognisant.

Implications

The above characterisation of the broad role services might play in the development of the Indian
economy would give rise to a number of implications:

• For India’s current development path to be sustainable, it will be important for other sectors to
provide an environment in which the ongoing growth of high-end services can be maintained.
– This will necessitate expansion in sectors (such as construction, telecommunications, transport
and power infrastructure, financial services, professional services and education and training)
that supply inputs for IT–ITES and other leading-edge services.
– A significant ongoing commitment to regulatory reform and market opening in these sectors
– including reform of foreign investment regulations – will in turn be required to ensure that
constraints on growth do not emerge.
– If the reform effort falters, longer-term economic growth prospects could be placed at risk.
However the dynamics of the system mean there are likely to be strong positive pressures in
favour of reform.
• Reform to date in different services sub-sectors has been variable, so that change in some of
these is likely to be rapid, with economic growth continuing to generate pressure for productivity
improvements.
– Such change will give rise to large-scale requirements for skills and capabilities that may not
currently be available in sufficient quantities in India.
– There are, therefore, grounds to expect opportunities to arise for foreign services providers.
• Australian companies could benefit from maintaining a strategic understanding of these
developments when considering whether to venture into the Indian market.


Productivity in the services sector is difficult to measure.

P A G E 14
Chapter 2

THE role of services in developmentI

KEY POINTS

• While high-end services are a key driver of economic growth, other


services have a critical role to play.

• Broadly speaking, the services driving economic growth in India have


either not been subject to significant amounts of regulation (notably
IT–ITES) or have been deregulated and opened to competition (most
prominently, telecommunications).

• Growth in high-end services like IT–ITES has the potential to generate


significant spin-offs, including productivity growth in other services and
in agriculture; technological improvements in manufacturing; and the
emergence of a large consumer base with the discretionary spending power
to spur demand and employment growth in key labour-intensive sectors.

• Financial services and transport infrastructure can be expected to


face further pressure to expand capabilities and improve productivity
through reform if these sectors are to play their critical role in facilitating
economic expansion.

• The services sector has a major role to play in absorbing India’s rapidly
growing labour force.

– Retail and wholesale trade and housing and construction in particular


have the potential to employ large numbers of less skilled workers.

• Restrictive labour laws and a raft of other regulations provide a strong


disincentive to small Indian companies growing above a certain size, and
prevent modernisation and inhibit productivity growth in a number of
sectors, including retail, logistics, and legal and accountancy services.

• Improvements in the delivery of education and healthcare services,


particularly in rural areas, are vital for sustainable growth.

• Services sector developments are facilitating modernisation in India’s


relatively capital-intensive manufacturing industries and in agriculture,
and services inputs should enable India to derive maximum benefit from
mineral exploitation once an investment-friendly platform is established
for the mining sector.

P A G E 15
INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY

‘Of the 40 million-plus jobs created since 1965 in the [US] economy, high technology did not
contribute more than 5 or 6 million. High tech thus contributed no more than ‘smokestack’
lost… Where did all the jobs come from? Everywhere and nowhere.’

(Peter Drucker, Innovation and Entrepreneurship)

The description of the possible role of services in driving India’s economic growth in Chapter 1
highlights that services sub-sectors at different stages of deregulation and reform are likely to have
differing roles to play in generating economic growth.

As noted in Chapter 1, IT–ITES and other high-end services are already having a significant positive
impact on growth in the broader Indian economy. Growth in these services has the potential to
drive higher incomes among the growing middle class of consumers. This in turn would generate
demand that could be a catalyst for growth in other more labour-intensive areas of the economy. It
also has the potential to spur reform and productivity improvements in other key services sectors, as
they increasingly draw on high-end services as inputs. Moreover high-end services can provide the
technology to enable Indian manufacturing to move rapidly up the value chain, possibly leapfrogging
similar industries in key competitor countries.

Other services sectors are critical to the health of the Indian economy. Deregulation and improved
efficiencies in financial services, transportation and transport infrastructure are driving improved
performance within these sectors and also facilitating expansion in other areas of the economy.
Developments in these key sectors can help ensure that development is more broadly based, across
regions and socio-economic groups.

Services sectors with high employment potential – including retail and wholesale trade, hotels and
restaurants, and housing and construction – will need to expand significantly in response to increased
demand stemming from growing consumer affluence. Demand for manufactured products is also likely
to increase. For these sectors to meet the increased demand there is likely to be a need for reforms
directed at easing the impact of the dual economy, in which heavy regulation discourages small
companies from growing above a certain size. Such reforms could significantly improve productivity
in the economy.

These relatively labour-intensive services are likely to have a crucial role to play if India is to absorb
its rapidly growing labour force. But as the above quote by Drucker highlights, in a dynamic and
growing economy where entrepreneurialism is flourishing, significant numbers of jobs can emerge,
often in unexpected areas of the economy. Improvements in the delivery of public healthcare and
education services, particularly in rural areas, will be critical to promoting more even – and politically
sustainable – economic development.

In general, India’s more liberalised services have grown faster. Growth rates are also strongly and
positively correlated with levels of FDI in services sub-sectors (World Bank 2004). While economic
liberalisation can lead to adjustment costs, the sectors which have been subject to the greatest
liberalisation have tended to experience higher employment growth than those which have only been

P A G E 16
Role of Services in Development

partially liberalised or remain closed. Continued liberalisation therefore appears to be both critical to
future growth and potentially welfare-enhancing, particularly in those sectors which primarily employ
skilled professionals, such as legal and accountancy services, where policy makers need not be so
concerned over the risk of displacement of large numbers of relatively poor and low-skilled workers
(World Bank 2004). The efficient functioning of some sectors nonetheless demands oversight from
an independent and effective regulator, especially where service providers utilise and/or rely on
public infrastructure – as is usually the case in telecommunications. With the economy currently
growing strongly, the Government is arguably in a good position to be taking some of the harder
reform decisions.

This chapter examines the role of the services sectors critical to the Indian economy’s ongoing
expansion, noting some of the key areas where reform has already taken place, and where further
reform is planned. These sectors are categorised as follows:

• the ‘drivers’ – high-end services such as IT–ITES and telecommunications, which are relatively
lightly regulated or significantly deregulated, and whose growth has already had a significant
impact on the economy’s strong performance;

• ’contributors’ such as financial services and transport infrastructure, where reform has been
happening but more remains to be done;

• the ’slower reformers’ such as retail and legal and accounting services, which remain relatively
closed; and

• ’sectors vital to broad-based development’ – education and healthcare.

The final section of the chapter considers the interrelationship between services sector developments,
and modernisation and job creation in manufacturing, agriculture and mining.

THE DRIVERS

‘The advent of the internet proved to be the most important turning point. New technology
meant that at last India could reap the benefits of its long-term investments in education, and
inadequacies in infrastructure were less of a hindrance.’

Joseph Stiglitz, Making Globalization Work

IT–ITES – the star performer


The rapid expansion of Information Technology–Information Technology Enabled Services (IT–ITES)
has had a significant impact on the broader Indian economy, by generating substantial export
earnings and tax revenue; creating significant numbers of high-quality jobs; and precipitating
productivity-enhancing technology diffusion to other industries and the public sector. Despite facing
some challenges, IT–ITES looks set to remain a key driver of economic development in India, both
as a high-growth and employment-generating sector in its own right, and through its linkages with
other sectors.

P A G E 17
INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY

The dramatic growth in IT–ITES has been driven principally by fast-growing international demand
for Indian IT services and software and by burgeoning business process outsourcing to India. India’s
IT industry took off in the late 1990s, when the global IT industry was unable to meet the exponential
growth in demand for IT services precipitated by Y2K compliance concerns. It has since benefited from
rapid reductions in the cost of digitising, transmitting and processing information (Friedman 2005).
The government’s light-handed approach to regulation in the sector, combined with a supportive
policy environment (Box 2.1), has played a particularly important role in facilitating its growth.
IT–ITES’ expansion has been underpinned by a number of strengths, including India’s large pool
of qualified professionals, its widespread use of English, its rapidly increasing stable of world-class
companies, and cost advantage over other locations.

In addition to being far and away the largest exporter of ITES-business process outsourcing
(ITES‑BPO) services, India is a major exporter of IT services and software. IT services and software
exports accounted for nearly two-thirds of total IT–ITES exports in 2004–05. ITES-BPO exports
accounted for nearly 30 per cent of the total in that year (Box 2.2) and have been growing rapidly,
as companies offshore service functions to affiliated Indian businesses (‘captive’ units) – which
continue to dominate the segment – or outsource services to independent/third party BPO vendors
(NASSCOM 2005a).

The ITES-BPO segment was initially dominated by call centres and the undertaking of ‘back-office’

functions. More recently there has been a shift towards the provision of higher value knowledge and
analytic-based processes as capabilities have improved. India is emerging as a prominent player in a
number of these segments, and is at the same time helping to re-define which services components are
tradable. India is fast gaining strength in legal services (for example, legal research, drafting contracts);
engineering R&D; medical services (for example, diagnostic services, telemedicine); education
and training (for example, tutorial services using Voice over Internet Protocol, curriculum design);
software product development; market research; and data analytics (PricewaterhouseCoopers 2005b).
The Indian operations of multinational enterprises continue to dominate the ITES-BPO segment
(NASSCOM 2005a).


Primarily data entry and processing, administration services and general accounting functions.

P A G E 18
Role of Services in Development

BOX 2.1: the role of policy in promoting the software sector

The Indian software industry took off largely in response to Y2K-driven demand for IT services.
But policy measures introduced by the central government to bolster the position of the
software sector arguably contributed significantly to India’s ability to exploit this opportunity.
These included*:

• A 1984 Computer Policy recognised software as an ‘industry’, making it eligible for an


investment allowance and other incentives. Import duties on software and personal
computers were also lowered. Firms became eligible for concessional import duties on
computers if they exported software.

• In 1986, import of software in any form was permitted and the sector was opened to
foreign investment.

• The Software Technology Parks (STP) scheme was introduced in the early 1990s, modelled
after Silicon Valley in USA. STPs are special zones, akin to Export Processing Zones,
provisioned with appropriate communication and physical infrastructure and designated
for export-oriented activities. Firms in STPs benefit from tax holidays up to 2010 and duty
free equipment imports. FDI with 100 per cent foreign equity is permitted. By July 2004,
there were 40 parks set up under the scheme (WTO 2005). The most famous STPs are
located in Bangalore and Hyderabad. They have prospered and become a highlight of
the ICT landscape in India.

• In 1997, all import duties on software were eliminated and software firms were permitted
to invest overseas.

• A National Task Force, established in 1998, developed an Information Technology Action


Plan containing a large number of recommendations aimed at addressing the inadequacy
of telecommunications and other infrastructure, and the regulatory impediments faced by
the sector. The government accepted the plan’s recommendations.

• In 1998–99, the software sector was included amongst the list of ‘priority sectors’ to which
the banks are subject to directed lending.

State governments have also played a role in promoting the sector. For example, Andhra
Pradesh’s efforts to attract technology investment and promote the use of IT in government
agencies in the second half of the 1990s triggered competition from other states. Some states
have also been more willing to modify labour laws as they apply to the IT sector, notably
through enabling 24/7 working arrangements.

* see Saxenian (2000) for more detail on a number of these measures.

P A G E 19
INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY

BOX 2.2: THE SUCCESS OF INDIA’S IT SECTOR

By any standard, India’s IT sector has enjoyed remarkable success. Revenues of the sector grew
more than five-fold in the space of six years to reach an expected US$28.2 billion in 2004–05

(NASSCOM 2005a). IT services and software is the largest segment (US$16.5 billion),
followed by ITES-BPO (US$5.7 billion) and hardware (US$6 billion). According to NASSCOM,
the sector’s share of GDP grew from just 1.2 per cent to 4.1 per cent, which would place it

ahead of the communications sector. Total IT–ITES revenues (i.e. excluding the hardware
segment) increased by a further 30 per cent in 2005–06 to US$29.5 billion and are expected
to reach US$36–38 billion in 2006–07. IT–ITES’ share of GDP is projected to increase to
4.8 per cent in 2006–07 (NASSCOM 2006b, 2006c). While IT services and software revenues
have been contributing more to growth in total IT–ITES revenues, ITES-BPO revenues
increased ten-fold over the five years to 2004–05.

‘Software services’ (predominantly IT–ITES) exports have grown at a compound annual rate of
around 35 per cent over the past six years. In 2005–06, they were valued at US$23.9 billion,

comprising US$23.4 billion in IT–ITES, and US$0.5 billion in hardware. Large companies
dominate the export profile, with the top ten companies accounting for 60 per cent of total

computer services exports in 2002–03 (RBI 2005c). India’s share in global IT software and
services (including ITES-BPO) spending was 2.3 per cent in 2004–05, and an estimated
2.8 per cent in 2005–06 (Indian Ministry of Finance 2006).


Includes revenues derived by overseas subsidiaries of Indian IT companies.

NASSCOM’s calculation seems inflated, as it would appear to be based on sector revenues, not value added, as a share of
GDP. According to the Indian CSO, which bases its figures for the organised sector on NASSCOM revenue data and a value
added ratio estimated from an analysis of annual reports of a few software companies, the Computer and related activities
sector’s gross value added in 1999–2000 was Rs172 billion (US$4.0 billion), or 0.96 per cent of GDP, as compared with the
communication sector’s 1.6 per cent share of GDP. This includes an estimated Rs25.7 billion of gross value added in the
unorganised sector (Indian CSO 2006). This compares with organised IT–ITES sector (excluding hardware) revenues of Rs251
billion (US$5.8 billion), which is equivalent to 1.4 per cent of GDP for that year.

There has been some contention as to the accuracy of Indian data, which tend to suggest a far higher level of exports than
do counterpart import data, most notably for the United States (see US Government Accountability Office 2005, and WTO
2005). This would appear to reflect the fact that the Indian data include revenues derived from all four modes of supply as
identified by the WTO General Agreement on Trade in Services, not just conventional cross-border supply (Mode 1). The
discrepancy is apparent from a comprehensive survey of computer services companies for the year 2002–03 conducted by
the RBI (RBI 2005c). Conventional cross-border supply (Mode 1) accounted for almost 40 per cent of the US$6.4 billion, while
individuals temporarily abroad to supply a service (Mode 4) accounted for 13 per cent. Almost 50 per cent were derived from
the supply of services by the overseas subsidiaries of Indian companies (Mode 3).

Computer services exports differ from total IT–ITES exports in that they exclude exports of companies engaged exclusively
in business process outsourcing activities.

P A G E 20
Role of Services in Development

BOX 2.2 (Continued)

The IT export boom

IT–ITES export revenues

25

IT services and software exports

20 ITES-BPO exports
Hardware exports
US$ billion

15

10

0
1999–00 2000–01 2001–02 2002–03 2003–04 2004–05 2005–06

Note: The 2005–06 figure for IT services and software exports includes ITES-BPO (split of exports between IT services and
software, and ITES-BPO was not available for 2005–06).
Source: NASSCOM 2005a and 2006b.

Despite being heavily export-oriented, the Indian IT sector is having a significant and growing impact
on the local economy. Revenues from domestic business grew at a 19 per cent compound annual
rate over the five years to 2004–05, with IT services and software accounting for roughly 40 per cent
of revenues and hardware for 50 per cent. While most small Indian businesses cannot at this point
afford IT services, IT is beginning to be used in a major way in manufacturing and in the automotive,
banking and telecommunication sectors, enhancing the competitiveness of these industries. High‑end
services can also provide solutions to issues in other key services sectors, the development of which
will be essential to ongoing economic growth.

IT and online information provision and service delivery has been adopted rapidly by both the
central and state governments. This is leading to streamlined and more efficient government service
delivery and approvals processes, and also adding transparency to procedures and decision making.
The growth in IT–ITES has also had a significant impact on the domestic economy as a result of
technology diffusion.

Relatively speaking, IT–ITES is not a major direct employer within the economy as a whole. In 2004–05,
total direct employment was estimated at just over one million, comprising 697 000 professionals in
the software segment – half of whom are involved in software exports with most of the remainder
being in-house staff – and a further 348 000 in the ITES-BPO segment. Most direct employment is
of skilled workers in larger cities such as Bangalore, Hyderabad and Delhi.

P A G E 21
INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY

The numbers directly employed are nonetheless increasing rapidly. ITES-BPO employment
numbers almost doubled between 2002–03 and 2004–05. Total direct employment in IT–ITES is
projected to increase to 1.3 million in 2005–06 – over a million more in the six years since 1999–2000
(NASSCOM 2006a, 2006b). TCS, Wipro and Infosys collectively are expected to hire some
50 000 engineering graduates in 2006–07 and the rest of the IT sector another 30 000. The ITES‑BPO

sector will probably increase by 120 000–130 000.

The IT industry also generates significant numbers of jobs in other industries through inter-sectoral
linkages, especially in construction, but also in transport and retail. By one estimate, an additional

2½–3 million mainly low-skilled workers are employed indirectly by the IT industry.

Opportunities are emerging for IT sector employment in smaller cities and towns as the supply of skilled
workers in the major IT centres comes under pressure. Furthermore, a number of IT–ITES activities
do not require high skill levels and many can be undertaken remotely. For example, call centre and
accounting-related services can be performed by people with at least some level of education from
their homes or small shops/businesses as a source or supplementary source of income.

The information technology and telecommunications revolution is showing some promise in


assisting India’s rural development, in areas such as distance learning using the Internet; the use
of IT to help agriculture at the grass-roots level; and telemedicine (see section on ‘Services and
agriculture’ below).

A number of the larger IT companies have established trusts and foundations or otherwise lent their
support to community initiatives, including in rural areas. For example, Infosys gives one per cent of
its profits to the ‘Infosys Foundation’, which is focused on helping the socially deprived in education
and healthcare. In healthcare, for example, the Foundation helps government hospitals, while in
education it assists libraries in villages and provides computers to government schools.

The broader economy also benefits from growth in IT–ITES as a result of the tax revenues derived
from the sector.

The outlook for India’s IT–ITES sector remains buoyant. Almost all observers anticipate a continuing
trend over coming years to increased trade in ITES-BPO services, whether by outsourcing to third
parties or by captive units (UNCTAD 2004). To take one example, business process outsourcing
of healthcare services to India has the potential to generate US$4.5 billion in revenues by 2008
(IBEF 2004). Nearly 80 per cent of executives from the world’s largest companies plan to locate
corporate functions overseas over the coming three years (A.T. Kearney 2005). Global IT spending
is forecast to grow at a compound annual growth rate of 7.9 per cent over the period 2004–08, with
the ITES-BPO segment growing at over 11 per cent (NASSCOM 2005a). India’s IT–ITES exports
are projected to grow at an annual average rate of over 25 per cent through to 2010, to reach
US$60 billion (NASSCOM-McKinsey 2005). IT services and software exports are projected to grow


Based on discussions in May 2006 with Professor S. Sadagopan, Director, International Institute of Information Technology,
Bangalore.

Discussions in May 2006 with: Kiran Karnik, President, NASSCOM.

P A G E 22
Role of Services in Development

at 25 per cent a year to reach US$35 billion, while ITES-BPO exports are projected to grow even
more strongly – at 37 per cent – which would take their value to US$60 billion. IT–ITES could be
contributing seven per cent of India’s GDP by then, and creating additional direct employment of
1.6 million over the five years to 2010. NASSCOM-McKinsey (2005) estimate it has the potential to
provide over 6.5 million indirect jobs.

Buoyant predictions for IT–ITES in India are conditional on the industry addressing some critical
issues, notably the potential shortage of IT professionals. While the graduate talent pool for offshore
IT and BPO is estimated at 1.8 million (or 28 per cent of the global total), on current trends there
could be a shortfall of towards half a million suitably qualified workers by 2010 (NASSCOM-McKinsey
2005). India’s pool of young university graduates is estimated at 14 million, 1.5 times the size of
China’s and almost twice that of the United States. 2.5 million graduates are added to the pool every
year. However, despite the very high quality of the top Indian tertiary education institutions, only a
relatively small percentage of graduates are considered suitable for employment in customer contact
positions in multinationals, in large part because many have poor English or strong local accents
(McKinsey 2005a). In response to impending labour shortages in some states, some IT companies are
setting up or expanding their operations elsewhere. In particular, many are beginning to experience
wage pressures and high turnover of engineering professionals. Demand for middle managers is
particularly strong but there is a limited supply of people suitably qualified for these positions. McKinsey
forecast that demand for young engineers could exceed supply as early as 2008, and even earlier in
some regional centres. On the other hand, India has no looming shortage of people suitably qualified
in areas outside of IT such as finance and accounting, call centres, and back-office administration
(McKinsey 2005a). NASSCOM and a number of commentators (for example, Das 2006) highlight
the need for action in the education system (and corporate training) to ensure that India produces
enough quality English-speaking graduates. Reflecting these pressures, the major Indian providers
are heavy investors in education and training.

The increasingly acute shortage of suitably qualified workers for IT–ITES also affects other industries.
India’s IT majors are recruiting engineers at the expense of manufacturing and infrastructure firms.
Skills shortages are driving up wages for highly-skilled workers, and in turn beginning to erode the
cost advantage that has been critical to the success of India’s IT–ITES. While labour costs remain
a fraction of those in developed economies like the United States, wage increases are narrowing
India’s cost advantage over other emerging economies (Accenture 2006).

Telecommunications – a dynamic enabler


Efficient telecommunications infrastructure generates significant spill-over effects in other sectors of
an economy. Modern telecommunications networks facilitate efficient information exchange among
economic units and rapid two-way communication, thereby lowering search and transaction costs,
aiding the coordination of economic activity on a global scale, and enabling the optimal utilisation of
available labour, technology, products and services around the world (Nandi 2002). India’s emergence

P A G E 23
INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY

and ongoing competitive advantage as a global provider of IT–ITES was (and will continue to be)
dependent on the availability of efficient telecommunications infrastructure for electronically transferring
and assessing information (Banerjee and Jha 2004).

India’s telecommunications have undergone extensive deregulation and liberalisation (Box 2.3), in
large part driven by technological developments and the requirements of the IT sector. Deregulation
has helped spur rapid growth and enabled private telecommunications providers to play an increasingly
important role. The communications sector grew at an average annual rate of 24 per cent over the five
years to 2004–05, increasing its share of GDP from 1.9 per cent to 3.5 per cent. The mobile phone
market has grown at extraordinary rates from an initially low base. Over the past five years, the mobile
subscriber base posted 85 per cent growth per annum. Private companies achieved annual growth
rates in their subscriber base of closer to 200 per cent (Indian Investment Commission 2006a). By
December 2005, private sector operators had secured 79 per cent of the mobiles market, while in
the fixed-line market they had captured 15 per cent (Indian Ministry of Finance 2006).

As at November 2005, there were 48 million fixed-line subscribers and 71 million mobile subscribers
(Indian Investment Commission 2006a). Despite the recent rapid growth, tele-density is still relatively
low at around 11 phones per 100 people. Penetration in rural areas is significantly lower still. However,
a number of mobile operators have plans to tap into the rapid growth expected in rural areas, which
is being spurred by the availability of cheap handsets and a wide array of tariff plans.

Internet usage has increased nearly tenfold since 2000 to reach 50.6 million in 2005, a penetration rate
of 4.5 per cent. However the take-up of broadband has been relatively slow. By November 2005, there
were about 750 000 broadband subscribers (Indian Ministry of Finance 2006). The Broadband Policy
announced in October 2004 had set a target of three million broadband subscribers by December
2005 and 20 million by 2010 (Indian Ministry of Finance 2005).

Increased mobile and Internet access could make a strong contribution to addressing regional inequalities
and ensuring more broadly based economic development if it reduces the telecommunications
infrastructure divide between urban and rural areas. Access to telecommunications and information
technology in rural areas can facilitate the provision of basic services such as medical care; enable
better access to financial services and create opportunities for distance learning. Telecommunications
networks also act as an electronic highway, reducing asymmetries of access to market information and
allowing rural businesses and citizens to participate directly in national and global economies. If for
example, Indian farmers can access modern telecommunications and IT to obtain more information
about agricultural prices, other markets and economic opportunities, they are more likely to increase
productivity and boost their livelihoods (see Box 2.8).

P A G E 24
Role of Services in Development

BOX 2.3: GROWTH-FACILITATING DEREGULATION OF THE


TELECOMMUNICATIONS SECTOR

There have been a number of significant milestones in the deregulatory process:

• In 1992, a range of value added services, including cellular phone services and paging
services, was opened to private sector competition.

• The National Telecom Policy 1994 set a number of telecommunications penetration targets
and opened basic telephone services to the private sector with the objective of bringing
about world class telecommunication services and improving the competitiveness of the
Indian economy.

• In 1997, an independent telecommunications regulatory authority was established. Its role


included setting conditions attached to the licensing of private sector operators, which
was previously undertaken by the incumbent Department of Telecommunications.

• In 1999 against the backdrop of revenues falling short of industry expectations and the
convergence of the telecom, information technology and media industries, the New
Telecom Policy was announced. This introduced a number of reforms aimed at creating
a more enabling environment, including in the area of licence fees (Telecom Regulatory
Authority of India 1999). NTP 1999 also foreshadowed the opening of the national long
distance segment from January 2000.

• In October 2000, the Department of Telecommunications’ operational network was


corporatised through the creation of a public company, BSNL.

• In April 2002, international long distance services and Internet telephony were opened
to competition. Concurrently, the government sold a strategic stake in VSNL – which at
the time was the sole operator in the international long distance market – in favour of the
Tata group.

• In 2002 a Universal Service Obligation (USO) Fund mechanism, involving a levy on all
telecom operators, was established to mobilise funding for services in remote and rural
areas.

• In 2005 the foreign equity limit in telecommunications was raised from 49 to 74 per cent
subject to numerous restrictions. Certain conditions apply to ensure the management of
service providers remains in Indian hands. Owing in large part to the Indian Government’s
concerns over security, foreign carriers are not permitted to use overseas networks to link
Indian cities nor to situate control centres outside of India.

P A G E 25
INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY

Other commercial services


The dynamism in India’s IT–ITES and telecommunications sectors is widely recognised. Exports
of other commercial services have also grown rapidly, and look set to make an increasingly strong
contribution to economic growth. Between 2000–01 and 2004–05 exports of other commercial services
(excluding software services) almost quadrupled in value to US$13.8 billion. In 2005–06 exports of
these services increased by 64 per cent to US$22.64 billion, to almost rival software services exports
(RBI 2006a).

Much of the growth in these exports stems from the ‘miscellaneous other commercial services’
sub‑sector, which comprises approximately 20 professional and other services (Figure 2.1)

Figure 2.1
Miscellaneous other commercial services – a strong growth area
Breakdown of exports of ‘Other commercial services’
(i.e. excluding transportation and travel)
Insurance
services
3% Communication
services
11%
Software services
64%
Construction
services
5%

Financial services
3%

Management
Other services
37% 3%

2000–01 — US$10.1b
Other services
11%

Insurance
services Communication
2% services
5%
Software services Construction
51% services
2%
Financial services
4%

Management
services
8%
Other
49%

2005–06 — US$46.2b Other services


28%

Source: RBI 2006a.

P A G E 26
Role of Services in Development

Prominent exports within the miscellaneous other commercial services sub-sector (as detailed in
RBI 2006a) include:

• Architectural, engineering and other technical services exports, which reached US$4.64 billion
in 2005–06, a 227 per cent increase on the previous year.

• Maintenance of offices abroad exports, which grew by 106 per cent to US$1.49 billion in 2005–06.

• Trade related services exports: US$880 million in 2005–06, a 107 per cent increase on 2004–05.

• Research and development services exports: $US519 million in 2005–06, a 135 per cent increase.

• Merchanting services exports: US$504 million in 2005–06, an 81 per cent increase.

• Advertising / trade fair exports: US$435 million in 2005–06, a 169 percent increase.

• Legal services exports: US$390 million in 2005–06, a 52 per cent increase.

• News agency services exports: US$339 million in 2005–06, a 98 per cent increase.

Other smaller but rapidly expanding growth areas include accounting and auditing services exports
(US$138 million in 2005–06, a 393 per cent increase) and operational leasing services exports
(US$393 million in 2005–06, a 145 per cent increase).

So-called ‘medical tourism’ has also been a growth sector. A number of technically advanced private
Indian hospitals, most visibly the Apollo Group, have been drawing in increasing numbers of patients
from Western countries for a range of treatments and operations that can be carried out by highly
skilled medical personnel far more cheaply than in their home countries and/or without the delays
often experienced under their home country national health systems. Some 150 000 foreigners
went to India for treatment in 2004, with numbers increasing by 15 per cent a year. Medical tourism
export revenues are projected to reach US$2.3 billion by 2012 (Confederation of Indian Industry and
McKinsey in Medical Tourism India 2006). Medical tourism is a key area that has been targeted for
expansion by the Indian Government.

Biotechnology is assuming greater significance in the Indian economy, aided by a well-qualified and
low cost workforce. Significant numbers of qualified non-resident Indians are now returning to India to
take advantage of emerging opportunities. The sector, comprising services and biopharmaceuticals, is
growing at annual rates in the order of 40 per cent. Revenues in 2003–04 were around US$700 million,
56 per cent of which derived from exports (IBEF 2005a).

India is the largest producer of films in the world. Film exports have been rising as Indian films gain
popularity overseas. Film studios in Hollywood and elsewhere have also outsourced considerable
work to India.

P A G E 27
INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY

the contributors

While leading-edge services have been in the vanguard of India’s economic rejuvenation, they remain
a relatively small, albeit growing, part of the overall economy. Their direct contribution to employment
is also comparatively low. Banking and transport infrastructure services – which are critical to the
health of the broader economy – will need to modernise further and become more productive if the
growth currently being exhibited in higher-end services is to be replicated throughout the economy.
Several reforms have been introduced in the financial sector, and in roads, ports and air services
– but there is scope for more.

Finance – work in progress


The financial sector has a very important role to play in the modernisation of India’s economy. It
serves as a vehicle for channelling savings to individuals and businesses seeking to borrow funds.
The sector therefore plays a vital role in the investment process, which is a major determinant of
economic growth. There is strong empirical evidence of a positive relationship between liberalisation
and growth in financial sectors (see for example, Francois and Schuknecht 1999 and Mattoo,
Rathindran and Subramanian 2001).

India’s banking and insurance sectors have been significantly opened to private sector competition
since 1993 and 2000 respectively. Private sector mutual funds were also permitted from 1993. Financial
sector reforms and deregulation have triggered strong growth in the sector as financial intermediation
has become increasingly important in the economy. Indian stock markets have also come to greater
prominence. Measured in terms of the number of transactions, the National Stock Exchange is the
third-largest stock exchange in the world after the NASDAQ and the NYSE, while the Bombay Stock
Exchange moved into fifth place in 2003 (Indian Ministry of Finance 2006).

Yet much remains to be done. Indian borrowers pay more for capital and depositors receive a lower
return than they do in comparable economies, due to the sector’s shortcomings in mobilising savings
and allocating capital (Farrell, Lund and Puri 2006). According to one recent estimate published
by McKinsey, addressing these shortcomings through an integrated reform program could raise
India’s growth rate by close to three percentage points, which would, in turn, increase per capita
income by 2014 to more than US$1200 or 30 per cent higher than it would otherwise be (ibid).
While such estimates are necessarily speculative to a degree, it is clear further reform would have
significant dividends.

Banking
The Indian banking system is changing rapidly. Traditionally, it was characterised by poorly-
performing public sector banks employing outdated practices and technology. Beginning in the
early 1990s, the sector has been gradually liberalised (Box 2.4) but foreign investment remains
severely constrained.

P A G E 28
Role of Services in Development

BOX 2.4: GRADUAL LIBERALISATION OF THE BANKING SECTOR

• In January 1993, The Reserve Bank of India issued guidelines under which new private
sector banks could be established. Foreign banks were also permitted more liberal entry
and have been able to take modest equity positions in existing private sector banks.

• Interest rates were deregulated in stages beginning in the early 1990s.

• Banks have been permitted to invest a greater percentage of their assets outside of cash
and government securities and given more freedom in their lending policies. While directed
lending requirements have remained in place, the scope of lending deemed as meeting
these requirements has been widened (Singh 2005).

• Legislative amendments in 1994 enabled public sector banks to raise capital through
public share issues. New guidelines issued in February 2005 provide greater managerial
autonomy and operational flexibility to public sector banks.

• The greater freedoms afforded to the banks have been accompanied by an improvement
in the overall regulatory framework, including a tightening of prudential requirements.

The liberalisation process resulted in the number of private sector scheduled commercial banks
increasing to 61 in March 2005, including 31 foreign banks. Private sector banks had increased their
share of total assets of all scheduled commercial banks to 24.7 per cent by March 2005, with foreign
banks having a 6.6 per cent share (RBI 2005a). By September 2004, the Reserve Bank had granted
operating approval to 25 new foreign banks or bank branches since issuing its 1993 guidelines,

bringing the total number of foreign bank branches to 217 (USTR 2005).

The liberalisation of, and resulting greater competition within, the sector – together with tightened
prudential requirements – has led to improved efficiencies in the banking system. The return on assets
of the banks rose from 0.4 per cent in 1991–92 to 1.2 per cent in 2003–04, while the percentage
of gross non-performing assets to gross advances fell from 14.4 per cent in 1998 to 7.2 per cent
in 2004 (Reddy 2005). Bad loans account for less than two per cent of all loans, compared to 20
per cent in China (Das 2006). Significantly, the lending competences of the public sector banks are
getting better, although there remains considerable scope for improvement in the use of technology.
As a group, the public sector banks reduced their operating expenses as a share of total assets from
2.9 per cent in 1996–97 to 2.3 per cent at the end of 2002–03. Their gross non-performing assets as
a percentage of gross advances declined from 17.8 per cent in 1996–97 to 7.8 per cent in 2003–04
(Chanda 2005).

Some of the public sector banks have responded well to the new environment, performing on a par
with private and foreign banks. However, others continue to perform poorly. New guidelines issued
in February 2005 (Box 2.4) may bring about some further improvements.


Under the WTO Financial Services Agreement concluded in December 1997, India committed to permitting 12 new foreign
bank branches a year.

P A G E 29
INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY

The efficiency of financial intermediation continues to be adversely affected by directed lending, with
public and domestic private banks required to extend 40 per cent of their credit to priority sectors,

notably agriculture and small-scale industries.

Foreign investment policy remains a severe constraint. The previous National Democratic Alliance
(NDA) government was moving in early 2004 to automatically allow foreign equity in private banks
from all sources of up to 74 per cent, but the election intervened. The current United Progressive
Alliance (UPA) government released a ‘roadmap’ for the entry of foreign banks in February 2005
(RBI 2005e). In the first phase, through to March 2009, foreign banks are allowed to establish a wholly-
owned subsidiary or convert their existing branches to wholly-owned subsidiaries. RBI guidelines
of July 2004 remain in effect. These limit the shareholding and control by a single entity or group of
related entities in any private sector bank to ten per cent, with the exception of banks that have been
identified for restructuring. Foreign investment from all sources of up to 74 per cent will be considered
in these banks. Investment of up to 20 per cent is permitted in public sector banks. Foreign banks
were also directed not to acquire any fresh stakes in a private sector bank if such acquisition would
take their holdings above five per cent.

Subject to a review, foreign investment in any private sector bank will, in the second phase beginning
in April 2009, be permitted up to a 74 per cent limit, and the individual shareholding limit removed.
The Indian Government believes that some consolidation of the public sector banks needs to take
place before opening up the sector to foreign competition. But only limited amalgamations and
consolidations have taken place to date. Some mergers have been attempted but have not materialised
because of union concerns over retrenchments and branch closures. If progress on consolidation is
not achieved, the scheduled opening up of the sector to foreign competition could well be delayed
or even stalled.

The penetration of financial services products in rural India is particularly low, with only 42 per cent
of rural households having bank accounts, 21 per cent having access to credit from a formal source
and only one percent relying on a loan from a financial intermediary (IndiaMART 2006). Improved
access to banking products would greatly benefit rural businesses and households, and help to raise
living standards across the rural sector as a whole.

India’s Reserve Bank has urged banks to adopt ‘no frills’ accounts with a view to encouraging greater
availability and uptake of financial services by the rural sector and other parts of the population that
have largely been excluded from the formal financial system. Banks have been advised to allow
limited overdraft facilities in these accounts and provide a General purpose Credit Card (GCC)
facility at their rural and semi-urban branches to allow holders to draw cash from their local branches
(Thorat 2006).


Foreign banks face a lesser directed lending obligation of 32 per cent.

P A G E 30
Role of Services in Development

Some banks are now beginning to introduce innovative technology products that take account of the
higher costs of delivering financial services to rural India, which stem from typically low transaction
sizes along with poor roads, power and telecommunications connectivity. For example, ICICI Bank
has introduced ATMs with integrated power management systems suitable for use in rural areas. Its
Kisan Loan Card enables farmers to withdraw cash and take out cash or crop loans (ICICI Bank 2004).
The bank has also been involved in the establishment of Internet kiosks in rural India, which can
complement the ATMs to provide a powerful medium for farmers to enhance their business interests.
While arguably a step in the right direction, these initiatives remain modest given the magnitude of
the rural service gap in banking.

Some of the larger Indian banks with extensive rural branch networks such as ICICI Bank are
well positioned to service the rural sector as they are able to defray their technology costs across
a large customer base. The recent experience of ICICI and other Indian banks in partnering with
community‑based micro-finance institutions as intermediaries for micro lending has been encouraging
(Thorat 2006, Rediff.com 2006a).

Insurance
India’s insurance sector, like its banking system, has an important role to play in enhancing
financial intermediation, creating liquidity and mobilising savings in the economy. As increasingly
significant institutional investors in India, insurers are playing a more prominent role in channelling
financial resources to investment opportunities and facilitating companies’ access to capital. A well
developed insurance market also promotes economic growth by fostering entrepreneurialism
and innovation, enabling firms to expand and take on the risks associated with pursuing new
business opportunities.

India’s insurance sector has changed significantly over the past few years, having operated as a
state monopoly up until 1999 (Box 2.5). Insurance business transacted by Indian private insurance
companies has increased rapidly, even though insurers continue to be subject to product price controls
and prescriptive guidelines for funds investment (Mulford 2005).

P A G E 31
INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY

BOX 2.5: REFORMS IN THE INSURANCE SECTOR

• The passing of the Insurance Regulatory and Development Authority Act, 1999 enabled
competition from the private sector for the first time. Previously the sector had operated
as a state monopoly – the non-life sector under the General Insurance Corporation and its
four subsidiaries plus the Export Credit Guarantee Corporation, and the life sector under
the Life Insurance Corporation.

• In August 2000, the newly formed Insurance Regulatory and Development Authority invited
applications for registration from private life and non-life insurers.

• Foreign investment was also permitted, subject to a 26 per cent foreign equity limit.

• In November 2000, the General Insurance Corporation became the national re-insurer
and its subsidiaries were formally de-linked in March 2002.

In the life insurance sector, there are currently 14 private insurers plus the government-owned Life
Insurance Corporation. According to the Insurance Regulatory and Development Authority (IRDA), first
year (i.e. new business) premium income of the private insurers for the first nine months of 2005–06
was Rs231 billion (US$5.2 billion), 95 per cent up on that for the corresponding period of the previous
10
year. By comparison, total new business income grew by over 50 per cent. In the space of just
six years, private insurers have secured a 27.8 per cent share in new business.

In the non-life insurance sector, there are currently eight private insurers and six government-owned
insurers. Premium income of the private insurers for the first nine months of 2005–06 was Rs169 billion
(US$3.8 billion), 52 per cent up on that for the corresponding period in 2004–05. By comparison, total
industry premium income grew by 16 per cent. The market share of private insurers consequently
rose from 19.6 per cent over the first nine months of 2004–05 to 26.6 per cent over the corresponding
period of 2005–06. Health insurance has been the fastest growing segment of the non-life sector.

Most of the private insurers have foreign equity partners. The Finance Minister proposed in his
July 2004 Budget Speech that the foreign equity limit be increased from 26 to 49 per cent, but this
change was stymied by political factors.

Transport infrastructure – vital for growth


A modern economy depends upon an efficiently functioning transportation network. Infrastructure
shortcomings are frequently cited as among the chief causes for the failure of India’s manufacturing
sector to make greater headway as tariff barriers have come down. India has made some progress in
recent years in upgrading and modernising its transport infrastructure, including through Public Private
Partnerships (PPPs). But despite the Government’s recognition of deficiencies, much remains to be
done. The rate of infrastructure development is likely to lag behind demand and constrain economic
growth for some years to come.

10
See www.irdaindia.org/.

P A G E 32
Role of Services in Development

Infrastructure has traditionally been the preserve of the public sector. However, in recognition of limited
government finances and the constraints the generally poor state of infrastructure has imposed on
economic growth, the government has moved in recent years to open the sector to partnerships
with private players, including foreign investors. Against the backdrop of PPPs falling short of its
own expectations, the government launched a scheme in July 2005 to fund up to 20 per cent of
infrastructure projects, with budgetary provisions for this purpose to be made on a year‑to‑year
basis (Indian Department of Economic Affairs 2005). This ‘Viability Gap Funding’ is available on
a first‑come, first-served basis, for projects in transport infrastructure and power, as well as other
physical infrastructure in urban areas such as water supply and sewerage. To be eligible for funding,
projects should provide a service against payment of a predetermined tariff or user charge. Many
projects are arranged on a build-operate-transfer (BOT) basis.

Roads
The private sector has been permitted to participate in national highway projects since 1995, when
the National Highways Act was amended. The top priority for the current Five Year Plan period is the
completion of the National Highway Development Project (Phase I and II), comprising the so-called
‘Golden Quadrilateral’ connecting Delhi, Mumbai, Chennai and Kolkata, and the North-South and
East-West corridors. The Project involves the four/six-laning of 14 000 km of the existing road network,
as well as port connectivity (Indian Planning Commission 2002a). The Project was launched in 1999
11
at an estimated cost of US$12.3 billion. NHDP (Phase III), involving the upgrading and 4-laning
of 10 000 km of selected high-density corridors of National Highways, was launched in 2005 at an
12
estimated cost of US$12.5 billion (2005 prices). The Golden Quadrilateral is running two years behind
schedule, but was nearing completion at the time of publication. The government is still aiming to meet
its original target of 2007 for the completion of the North-South and East-West corridors.

Railways
Recent improvements in service provision and financial performance on the part of Indian Railways
after what the Government has characterised as years of financial trouble and neglect (Singh 2006),
have fostered cautious optimism that India will be able to grapple with the task of rectifying massive
under-investment in railways and modernising its ailing network.

Since the current UPA Government came to power, Indian Railways has derived efficiency gains
through better utilisation of its existing pool of resources. The load capacity (axle load) permitted
for previously under-loaded rolling stock has been raised on select routes and wagon turnaround
times have been improved across the network (Indian Institute of Management in Rediff.com 2006b).
Complex passenger and freight pricing policies have also been simplified. In Indian Railways’ 2006–07
budget for example, freight rates for petroleum products were cut by eight per cent and the number
of commodity groups reduced from 80 to 28 (having been lowered from 4000 to 80 in the previous
budget) (The Hindu Business Line 2006a).

11
1999 prices
12
See National Highways Authority of India, www.nhai.org/.

P A G E 33
INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY

Construction of a dedicated high axle-load freight corridor with computerised control on the western
and eastern routes was proposed in the 2006–07 budget. In October 2006, work commenced on the
Western corridor linking the Jawaharlal Nehru Port Trust and other ports in western India to industries
in northern and central India (Singh 2006). Such infrastructure development should go some way to
enabling India’s rail network to cope with anticipated growth in freight.

Notwithstanding these developments, an enormous amount of investment will be required to modernise


India’s rail network. In response to calls for PPPs to bridge the infrastructure and technology gaps,
Indian Railways have reportedly asked for clarification from the Department of Industrial Policy and
Promotion on foreign company involvement in the rail sector (Asia Times Online 2006). Rail has largely
been the preserve of the public sector to date, although railway container licences were privatised in
April 2006. In addition, despite some pricing reforms, rail freight continues to be hampered by excessive
charges, in large part because of cross-subsidisation of suburban and lower-class passenger fares
(The Hindu Business Line 2006a).

Ports
Major reforms have been introduced to the ports over recent years. Private-sector, including foreign-
investor, participation in port development has increased markedly. As of 2005, 13 private-sector
port projects with a capacity addition of around 47.4 million tons per annum – or over ten per cent of
existing cargo throughput at major ports – and involving an investment of Rs26 billion (US$600 million)
had been completed (Indian Department of Shipping 2005). Significant investment has also been
directed to ‘minor ports’ (a state responsibility) in some states.

Several state-owned ports have leased out terminals to private operators, particularly for container
handling. The government has also moved to allow joint ventures between major ports and foreign
ports and between major ports and minor ports (Ernst & Young 2005a).

Plans are afoot to corporatise India’s 12 major ports, which handle some 75 per cent of the country’s
port traffic (Indian Planning Commission 2002a). However progress has been slow.

Airports and air services


Recognising that private sector involvement is required in order to ensure adequate funding for the
modernisation of India’s major airports, the Government decided to lease India’s four principal airports
– in Delhi, Mumbai, Chennai, and Kolkata – to private sector operators, with a view to upgrading
them to international standards. Foreign companies were invited to form consortiums to bid for the
restructuring and operating of the Delhi and Mumbai airports, with the winners forming joint ventures
with the Airports Authority of India. Arrangements for new international airports at Bangalore and
Hyderabad are also proceeding, with private sector participation.

Domestic air services were liberalised in 1994. Private carriers have since been permitted to operate
scheduled services in India, subject to the fulfilment of certain criteria. Emulating the emergence of
‘no-frills’ carriers in the United States and Europe, several new low-cost airlines have commenced
operations in India since August 2003 to capitalise on increased demand for air travel from the

P A G E 34
Role of Services in Development

rapidly-expanding middle class. The number of domestic passengers is expected to grow from around
20 million a year in 2005 to 50 million a year in five years (The Economist 2006d). Today several private
airlines compete to provide regular domestic air services, alongside the government-owned Indian
Airlines. Currently, the biggest private airlines are Jet Airways, Sahara and Air Deccan. The limit on
FDI in domestic airlines has been raised to 49 per cent, although the Government decided not to allow
direct or indirect participation of foreign airlines. The Government has also allowed private airlines to
fly on some international routes. The privatisation of Indian Airlines and Air India was initiated a few
years ago, but both sales fell through due to the withdrawal of the qualified bidders late during the
final stages of the process. The current UPA government still plans to divest equity in the airlines.

the slowER reformers

Reforms in finance and transport infrastructure are building a platform for job creation and productivity
improvements in the broader economy. However growth in these sectors and high-end services
alone will not generate the 200 million new jobs needed to absorb existing unemployed and
under‑employed workers and the 160–170 million new workforce entrants expected by 2020 (Indian
Planning Commission 2002b).

Some analysts question the capacity of services to absorb labour in a major way (for example, Jha
2005). The services sector’s share of employment is significantly less than its share in economy-wide
GDP. In 1999–2000, approximately 30 per cent of India’s 337 million-strong workforce was employed
in services. Given its dominant contribution to domestic output, the sector will have to play a major
role in absorbing large numbers of low-skilled workers. There are grounds to believe it is well-placed
to do so. Services have been the main source of employment growth in the economy since the 1991
reforms. Economy-wide employment growth over the six years to 1999–2000 was virtually entirely
13
due to job creation in the services sector (Indian Ministry of Finance 2003, Table 10.9). There is
a high income elasticity of demand for services. Demand for services inputs by the manufacturing
sector is also growing (see section on ‘Services and manufacturing’ below).

Prominent amongst the services sectors with high employment potential are retail and wholesale
trade, and housing and construction. Yet these sectors, along with legal and accountancy services,
remain highly protected, and therefore tend to be less competitive compared to those that have been
liberalised. Logistics also remains subject to significant hindrances. Moreover, the vast majority of
workers in these industries are in the relatively labour-intensive ‘unorganised’ sector, which mainly
comprises family businesses and other small employers (Box 2.6). The marked difference in the labour
intensity of production between the unorganised and ‘organised’ sectors underscores the dualistic
nature of the Indian economy. While small Indian companies in the unorganised sector benefit from
being subject to minimal regulation, they are discouraged from growing above a certain size by the
heavy regulation, particularly in relation to labour, to which they would become subject. This dual
economy prevents modernisation, inhibits productivity growth and impedes job creation in retail and
wholesale trade, logistics, legal and accountancy services and housing and construction.

13
Excluding community, social and personal services.

P A G E 35
INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY

BOX 2.6: EMPLOYMENT AND OUTPUT IN THE ‘ORGANISED’ AND ‘unorganised’


sectorS

India’s National Accounts Statistics divide the economy into ‘organised’ and ‘unorganised’
sectors. The organised sector consists of the public sector, manufacturing units registered
14
under the Factories Act 1948 and other private corporate sector entities. The unorganised
sector comprises units whose activity is not regulated by law, and/or those which do not
maintain regular accounts. It includes private and limited companies and unincorporated
enterprises, as well as enterprises run by co-operative societies and trusts.

The organised sector is a major force in the Indian economy, yet is not a major source of
employment. The organised sector employed 28 million – or a mere eight per cent – of
India’s 337 million-strong workforce in 1999–2000. However it contributed 41 per cent of
aggregate net domestic product in the same year. Services (excluding community, social &
personal services) are not a major employer within the organised sector, but are a significant
contributor to overall GDP. They accounted for just 11 per cent of employment in the private
organised sector and 29 per cent of employment in the public sector in March 2003 (Indian
Ministry of Finance 2006, Appendix Tables 3.1–3.3). While accounting for just 1.9 per cent of
aggregate economy-wide employment in 1999–2000, these services contributed over 16 per
cent of aggregate economy-wide net domestic product. When community, social and personal
services are added in, services’ net domestic product in the organised sector exceeded that
in the unorganised sector.

Services are far more prominent as employers in the unorganised sector. In 1999–2000,
services employed 64 million workers, representing 19 per cent of aggregate economy-wide
employment (Indian Ministry of Finance 2003 and 2006). Over one-half of this employment
was in trade, hotels & restaurants.

14
Manufacturing establishments employing 10 or more workers on a regular basis using power plus those not using power and
employing 20 or more workers.

P A G E 36
Role of Services in Development

BOX 2.6 (Continued)

The organised sector is a major force in services


Share of organised and unorganised gross product for selected services,
1999–2000, current prices

90
Unorganised sector Organised sector
Share in gross product (per cent)

80

70

60

50

40

30

20

10

0
Construction Retail trade, hotels Transport, storage Finance, insurance, Community, social
and restaurants and communications real estate and and personal services
business services

Source: Indian Planning Commission 2002c, Table 24.

Retail trade
Retail trade occurs almost exclusively in the unorganised sector, and is dominated by small,
family‑owned shops often surviving on unpaid labour. India has the highest density of retail outlets in
the world – more than 15 million compared to 900 000 in the United States (Mukherjee and Patel 2006).
The retail industry is the largest provider of jobs after agriculture, accounting for six to seven per cent
of employment and approximately ten per cent of GDP (The Economist 2006b).

Organised retailing accounts for only 2–3 per cent of the total and is concentrated in large cities,
with an estimated 86 per cent occurring in the six biggest cities. Large-scale organised retailing
has been held back by poor transport infrastructure, difficulties faced in acquiring tracts of land
and rules and regulations at all levels of government. In most states, for example, the Agricultural
Produce Marketing Committee Act prevents farmers from selling produce directly to retailers (The
Economist 2006b). In 2003, a new shop needed on average 15 licences from 11 government bodies.
Securing the licences took six months on average and cost up to 500 000 rupees (2003 study quoted
in The Economist 2006b).

In any event, change is coming to the retail sector. Some retail chains are now appearing on the
scene and large shopping centres are springing up. Some 40 shopping malls had been opened in
India by the end of 2005 – up from fewer than half a dozen a year earlier – with 300 expected by
2007 (IMAGES-KSA Technopak 2005). The organised retail sector is growing at 18–20 per cent
a year (The Economist 2006b), and is beginning to employ significant numbers of low-skilled

P A G E 37
INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY

workers. Oil, petrochemicals and textiles giant, Reliance Industries is, for example, reported to
be investing US$2.2 billion in 1500–1800 supermarkets and hypermarkets and 60 supply centres
over the next two years, which will provide employment for some 400 000 – 500 000 people (The
Economist 2006b). More recently, Tata Group announced the launch of a retail venture, Infiniti Retail
Limited, with 100 stores to be established by March 2010, selling over 6000 consumer electronics
and durables products (Tata Group 2006). Apart from benefiting the consumer through lower prices
and improvements in the quality of perishable products, organised retailing can benefit agricultural
producers and manufacturers by reducing the need for intermediaries and introducing improved
practices and technologies throughout the value chain.

The Government moved to open up the sector in a very limited way in early 2006 by permitting FDI
of up to 51 per cent in retail trade of ‘single brand’ products, subject to prior approval. ‘Multi-product’
single brands – such as supermarkets’ own branded goods – also appear to be allowed to invest
under this regime (The Economist 2006b). A number of global retailers are positioning themselves
for an anticipated relaxation of foreign investment policy.

Going on the experience of other developing countries, allowing foreign investment would bring greater
competition, best international practice, and increased opportunities for export of Indian products
through foreign retailer outlets. Foreign investment would also be likely to spur growth and create
employment in labour-intensive industries such as food processing. Food processing in India adds
just seven per cent to the value of agricultural output compared to more than 40 per cent in China and
60 per cent in Thailand (Indian Ministry of Commerce and Industry cited in The Economist 2006b).

Logistics
Modern retailing is underpinned by efficient distribution systems and integrated supply chains.
Handicaps faced by logistics providers have retarded the development of an efficient distribution
system in India, and contributed to major losses of perishable goods during transportation. Transport
delays and inadequate cold storage mean that between 35 and 40 per cent of fruit and vegetables
grown in India rots where it is harvested or in transit (The Economist 2006b). Poor transportation
infrastructure and the regulatory disincentives to small operators growing above a certain size have
been key contributory factors to this situation, and toll booths and interstate check-point procedures
have also hindered the smooth flow of interstate traffic. The Economist (2006a) details a typical
2150 km journey between India’s two most populous cities, Kolkata and Mumbai, for freight carriers,
who must negotiate restrictions on travel times for heavy vehicles, traffic jams, limited opening hours
on interstate borders and numerous toll booths. The journey takes around 8 days at an average speed
of 11 km per hour with around 32 hours spent waiting at toll booths and checkpoints.

Legal and accountancy services


Professional services, particularly legal and accounting services, play a vital role in supporting and
facilitating business and encouraging foreign investment. Both legal and accountancy services are
subject to significant domestic regulation, notably limitations on size of firm, as well as barriers to
foreign entry.

P A G E 38
Role of Services in Development

India has the world’s second-largest legal profession. Its more than 900 000 lawyers are regulated
by the Bar Council of India, which is constituted under the Advocates Act 1961. Foreign lawyers and
law firms have no avenues to establish any commercial presence in India. FDI is not permitted in the
sector, which precludes international law firms from establishing offices. Similarly, Indian advocates
are only permitted to enter into profit sharing arrangements with other Indian advocates. While the
Advocates Act contains a reciprocity provision, which would permit legal practice in India by citizens
of a country where Indian legal qualifications are recognised, in reality India’s legal services market
remains closed and foreign lawyers are not permitted to practice, nor to provide advisory services on
foreign law. Multi-jurisdictional legal advice is part of the essential infrastructure required to provide a
sound base to encourage and increase foreign direct investment and international trade.

India’s accountancy services sector is highly fragmented because firms are only allowed to operate
as partnerships or as sole proprietorships (under self regulation), and no more than 20 professionals
are permitted in any one firm (under the Partnership Act). There are fewer than 400 firms with 5 or
more partners. The Institute of Chartered Accountants of India regulates the profession. To date it
has not recognised any foreign qualifications. Only graduates of an Indian university can qualify as
accountants in India. Foreign accounting firms can practice in India if their home country provides
reciprocity to Indian firms. However, foreign accountants may not be equity partners in an Indian
accounting firm. Internationally recognised names may not be used, unless they are comprised of
the names of proprietors or partners or the name is already used in India. Internationally-based
accounting firms are only permitted to operate as consultants.

These barriers to foreign entry preclude exposure to competition from best-practice legal and
accounting firms, in turn driving up transaction costs for other sectors.

Dwelling construction
The construction services sector is highly fragmented, in part due to the Urban Land (Ceiling and
Regulation) Act, which effectively prevents people from buying up large tracts of land to construct
houses (World Bank 2004). If reforms precipitate large-scale construction, the sector has the potential
to create employment opportunities for significant numbers of low-skilled workers.

P A G E 39
INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY

sectors vital to broad-based development

The growth which has resulted from the economic reforms of the 1990s appears to have contributed
to improvements in living standards. The proportion of people living below the poverty line has,
according to official estimates, declined significantly, from 36 per cent in 1993–94 to 26 per cent in
15 16
1999–2000 to 22 per cent in 2004–2005.

Economic reforms have not, however, led to equal distribution of growth, either between the rural
and urban areas or between states. Coefficients of variation in poverty rates across the states have
increased since the mid-1990s and the regional variation in economic growth rates has remained high
despite the reforms (Jha 2005). In the case of the services sector, growth has mainly been in urban
areas – in particular in the larger cities – and has occurred in some states more than others.

Improvements in the delivery of education and public healthcare services, particularly in rural areas,
are critical if more broadly based development is to ensue, with the fruits of reform flowing through to all
sections of society. Addressing deficiencies in the delivery of education and public healthcare services
could also be important in ensuring India’s growth model remains politically sustainable. Moreover,
expanded education and healthcare services will create high-quality employment opportunities,
particularly in rural areas.

The poor state of public finances (Box 2.7) has constrained the provision of education and healthcare
services and inhibited infrastructure development. The Government recognises that the growth
dividend of reform can provide it with more resources to address social issues and ensure at least
a minimum level of services for all sections of the community. If the states and the centre succeed
in moving towards the elimination of their revenue deficits by 2009–10 – including through better
expenditure management – this should place them in a better position to devote more resources to
education and health. At the same time, commentators suggest that many states need to consider
reforms to simplify the business environment; adopt a more investor-friendly approach; and improve
the quality of governance so as to ensure better delivery of education, healthcare and other public
services (World Bank 2003 2006b, Das 2006).

15
28.6 of the population was living below the poverty line in 1999–2000 if the data set is adjusted to ensure comparability with
the 1993–94 estimates (World Bank 2003).
16
Official poverty estimates for India are based on regular surveys of consumer expenditure carried out by the National Sample
Survey (NSS) Organisation. The official poverty line is set with reference to minimum daily calorie requirements. The official
numbers have been the subject of intense debate, both for excluding broader measures of nutrition and due to methodological
changes over time. Changes to the NSS methodology in the 1999–2000 survey in particular called into question its comparability
with previous estimates. Despite the continuing controversy, Thirlwell (2006) points out that the figures, combined with supporting
evidence from national accounts estimates of consumption, data on wage rates, and other surveys, do suggest that India has
experienced a continued fall in poverty since the 1991 reform push.

P A G E 40
Role of Services in Development

BOX 2.7: The state of india’s Public finances

Large revenue deficits at the centre and in the states over the years have resulted in under-
investment by India’s public sector in health, education, power and transport infrastructure.

The central government has gradually wound back its overall fiscal deficit from its 1986–87
peak of 8.5 per cent, but at the expense of a sharp contraction in capital outlays. Capital
expenditures have fallen from seven per cent of GDP in 1986–87 to an estimated two per cent
for 2005–06. Conversely, the ‘revenue deficits’ (current revenues – current expenditures gap)
of the states only became a significant problem from the late 1980s.

Revenue and fiscal deficits of the centre and states


gross fiscal deficit – centre
9 gross fiscal deficit – states
revenue deficit – centre
8 revenue deficit – states
7
Per cent of GDP

6
5
4
3
2
1
0
1987–88

1988–89

1989–90

1990–91

1991–92

1992–93

1993–94

1994–95

1995–96

1996–97

1997–98

1998–99

1999–00

2000–01

2001–02

2002–03

2003–04

2004–05

2005–06

2006–07
1986–87

Source: RBI 2005b and 2006–07 Budget estimates.

The state of Indian government finances reflects a high debt servicing burden, and deficiencies
in the tax system and public expenditure management. Central government tax receipts were
expected to amount to just 10.48 per cent of GDP in 2005–06. State government tax receipts
have been relatively healthy, amounting to an estimated 8.99 per cent of GDP in 2005–06.
Interest payments consume over one quarter of total central government expenditures. The
debt service burden has eased in recent years as interest rates have come down, but remains
vulnerable should rates pick-up again.

The Government has sought to address the country’s public finances through the enactment
of the Fiscal Responsibility and Budget Management Act in August 2003, under which the
central government’s revenue deficit was targeted for elimination by March 2008. The date
for the achievement of these targets has since slipped to 2009–10. To ensure that the states
get their finances in order, the Government has made debt relief conditional on their enacting
similar fiscal responsibility legislation (Indian Ministry of Finance 2005).

P A G E 41
INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY

BOX 2.7 (Continued)

The revenue deficits and overall fiscal deficits of both the centre and the states have
been tracking downwards in recent years. The combined fiscal deficit (excluding losses of
financial public sector enterprises) in 2005–06 amounted to 7.45 per cent of GDP. Further
fiscal consolidation is under way, with the Government projecting in its 2006 Budget that the
centre’s revenue deficit and fiscal deficit will fall in 2006–07 to 2.1 per cent and 3.8 per cent
of GDP respectively.

The Government’s strategy to meet the fiscal targets focuses on increasing revenues
by broadening the tax base and removing distortions in the tax regime, together with
complementary measures to improve expenditure outcomes. The strong economy is also
assisting in improving the tax take.

Source: RBI 2006c

Education services
While India has expanded its education system over recent years, many shortcomings still need to
be addressed to lessen the constraints it imposes on the growth potential of the Indian economy.

The number of out-of-school children in the 6–14 year age group fell from 42 million at the beginning
of the Tenth Five Year Plan period to 8.1 million in September 2004 – although the target of achieving
universality of elementary education by 2003 has not been met. Notably also, the statistics do not
take into account high drop-out rates (Khan and Roy 2003). The Tenth Five Year Plan also set
the objective of all children completing five years of schooling by 2007 and eight years by 2010.
This will also experience some slippage. Improvements in enrolment rates are leading to major
improvements in literacy rates – 65 per cent in 2001 and an anticipated 75 per cent by 2007, up
from just 18 per cent in 1951. The UPA Government is also committed to ensuring the educational
needs of disadvantaged groups are better addressed. The two per cent ‘Education Cess’ levied on
taxes since 2004 is greatly assisting the financing of much higher levels of basic education (Indian
Planning Commission 2005).

In the higher education sector, enrolments grew at around five per cent annually over the two decades
17
to 2002–03, from 3.3 million in 1983–84 to 9.2 million. In 2000–01, 1.9 million students were
enrolled in tertiary-level technical subjects (science, engineering, mathematics and computing)
(UNCTAD 2005a). The gross enrolment rate in higher education (18–23 year age group) is around
seven per cent, which is considerably higher than the average across developing countries, but lower
than the average across Asia and significantly lower than in OECD countries (Kapu and Mehta 2004).
However, the sector is growing rapidly. Under the Plan, an enrolment rate of ten per cent is targeted
18
for 2007. By 2004–05, there were 229 state/central universities and 95 ‘deemed universities’, up

17
University Grants Commission data, available at www.ugc.ac.in.
18
Deemed universities are largely free of government regulations and more entrepreneurial than government-run universities.

P A G E 42
Role of Services in Development

from 133 and 27 respectively in March 2002. The number of colleges increased by almost one-third
to 16 000 over the same period (Indian Planning Commission 2005).

Despite some improvements, the education system still has many weaknesses. While there have
been significant increases in elementary school teacher numbers during the current Plan period,
primary school teacher-pupil ratios in 2002 were 1:42, compared with around 1:20 for the upper-middle
income reference level that India aspires to (Indian Planning Commission 2002b). Around one out
of four teachers in government primary schools were absent during three spot checks, while one out
of two teachers present were not actually teaching (Chaudhury, Hammer, Kremer, Muralidharan and
Rogers 2005). Concerned over the quality of schooling, much anecdotal evidence suggests parents,
even in slums and villages, have increasingly been taking their children out of government schools
and placing them into private schools. Such is the importance accorded to education, 16 per cent of
Indian children from small villages are now enrolled in private primary schools, which typically charge
US$1–3 a month (Das 2006).

India’s universities and technical colleges are also of variable quality, and on the whole the quality
of university education has fallen (Indian Planning Commission 2002a). At one end of the spectrum,
the seven campuses of the Indian Institute of Technology (IITs) and the six campuses of the Indian
Institute of Management (IIMs) are well resourced and internationally renowned. On the other end,
many colleges and universities do not deliver education to rigorous quality standards and many of
India’s approximately 500 engineering colleges need to be upgraded (Indian Planning Commission
2002b). In addition, only a small fraction of the college-age population is able to be accommodated.
Getting into the best institutions is exceedingly difficult. For example, in 2005 only two per cent of
those taking the rigorous admission tests were accepted into the IITs. This compares with a ten per
19
cent acceptance rate by Harvard.

The Indian government acknowledges the need for private sector investment in higher education,
including from reputable foreign universities (Indian Planning Commission 2002b). Otherwise, those
unable to get into the prestigious institutions will often look to overseas study if it is within their means.
The extremely capable students who are not accepted into the IITs and IIMs will often look for an
education outside India (The Economist 2005a).

While the private sector is playing an increasing role in the university sector, regulation currently limits
the scope for private providers. A number of private universities have been set up by large industrialists
and others. Another model is provided by the International Institute of Information Technology in
Bangalore. Although funded by government and the information technology industry, the government
does not exercise control over it. Its revenues derive from student fees, industry and government.
The number of colleges providing professional education with private management structures has
grown rapidly since the early 1990s, especially engineering, medicine and business schools. The
freedoms of these private colleges have however been curtailed as they are subject to the same raft of
regulations as state colleges. Moreover, while students may be enrolled in publicly-funded colleges and

19
www.iitbombay.org, ‘What’s New, September 2005.

P A G E 43
INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY

universities, they are increasingly turning to private sector providers of vocational training (Kapu and
Mehta 2004). The number of private schools has also grown rapidly in recent years.

FDI in the education sector with up to 100 per cent equity is permitted under the ‘automatic route’,
that is without requiring government approval. However, qualifications issued by these institutions are
not recognised by the Indian Government. The government is reportedly in the process of finalising
legislation, based on the recommendations of the CNR Rao committee report, which will regulate
foreign university involvement in the sector (The Economic Times Online 2006). Constraints foreign
providers will face include the need to adopt fee structures laid down by the University Grants
Commission. They will also have to go through a two-phase approval process, with their ability to set
up ongoing operations dependent upon their performance in an initial trial period. A range of controls
also apply in technical education. Foreign providers need to have an Indian partner and obtain approval
to operate from the All-India Council for Technical Education (AICTE).

India’s pool of qualified scientists and engineers is large by international standards. However the
rapidity of growth in knowledge-based industries such as information technology, consulting services
and biotechnology, means it will need to turn out increasing numbers of high quality graduates in
these disciplines. Apart from efforts to ensure that all its institutions are up to an acceptable standard,
there is also a need to define curricula that better reflect the needs of the labour market. Industry will
need in parallel to invest considerably more in research and development, in addition to the strong
commitment to training being demonstrated by the IT–ITES majors.

Healthcare services
A clear duality has arisen in India’s healthcare systems. Public spending on healthcare is increasingly
constrained by public finances. Private healthcare now provides the bulk of the country’s healthcare
services, primarily through independent practitioners and increasingly through well-equipped private
hospitals. With the encouragement of government, a number of private hospitals are now also exporting
their services – in the form of a range of treatments and operations – to foreigners. While the better-
off in India can afford private care, the majority of the population has to make do with a public health
infrastructure that is under-equipped, under-financed and suffers from a shortage of doctors and
nurses. There are for example just 1.5 hospital beds per 1000 people, which compares poorly with
countries such as China, Brazil and Thailand which have an average of 4.3 beds per 1000 people
(The Hindu Business Line 2005). Improvements measured in terms of public health indicators
have been uneven both between urban and rural areas and among states. Public expenditure on
healthcare presently amounts to just 1.0 per cent of GDP, which is very low compared with many
other developing countries. State allocations to health have been declining over the past decade,
and in 2003–04 were just 4.1 per cent of total state government expenditures and 0.75 per cent of
GDP (Indian Planning Commission 2005).

The 2002 National Health Policy put forward the objective of increasing public expenditure on
healthcare to 2.0 per cent of GDP by 2010 (Indian Ministry of Health & Family Welfare 2002). To

P A G E 44
Role of Services in Development

achieve this, it envisaged state sector health spending increasing to eight per cent of state budgets
by 2010 with the share of central grants to constitute at least 25 per cent of total health spending.

The Report of the Committee on India Vision 2020 also pointed to the need to lift public expenditure
on healthcare dramatically, and recommended that it be increased to the upper-middle income country
reference level of 3.4 per cent of GDP by 2020 (Indian Planning Commission 2002b).

The current UPA Government sees an urgent need to put substantially more resources into the
public healthcare system and, in its National Common Minimum Programme, has undertaken to
raise expenditure to at least 2–3 per cent of GDP over the five years to 2009 and introduce a national
scheme for health insurance for poor families (National Advisory Council 2004). Meeting these targets
will require a major mobilisation of financial and manpower resources.

The National Rural Guarantee Scheme and National Rural Health Mission are aimed at raising living
standards and health standards in rural areas. The National Rural Guarantee Scheme, launched by
the Government in 2005, is an ambitious program aimed at reducing rural poverty. It is targeted at the
rural unemployed and guarantees 100 days of work on infrastructure projects each year to one member
from each of India’s 60 million rural households. The first phase of the program will be focused on the
country’s poorest and least developed districts. The National Rural Health Mission (2005–12) aims
to tackle the poor health infrastructure in rural areas. It forms an important part of the Government’s
20
strategy to raise public spending on health from 0.9 per cent to 2–3 per cent of GDP.

INTERRELATIONSHIP OF SERVICES WITH MANUFACTURING,


AGRICULTURE AND MINING

Services sector developments are facilitating modernisation in India’s relatively capital-intensive


manufacturing sector and in agriculture. Job creation in manufacturing, particularly in labour-intensive
industries such as textiles, could play a key role in absorbing India’s growing labour force, lifting
millions of rural Indians out of poverty. Moreover, once an investment-friendly policy platform is
established for the minerals sector, mining services and technology should enable India to derive
maximum benefits from exploration, which itself can bring economic development to remote and
underdeveloped regions.

Services and manufacturing


While the share of manufacturing in India’s GDP remained largely static throughout the 1990s at
around 20 per cent, it has recently posted growth rates in the order of ten per cent. The sector’s
competitiveness is being enhanced by the tendency to contract out an increasing array of service
functions, which has been made possible by the services tradability revolution. Functions previously
undertaken ‘in‑house’ by manufacturers – such as software development, design and testing,
back‑office tasks and post‑sales service – are now being outsourced to world-leading Indian service

20
See Ministry of Health & Family Welfare website, http://mohfw.nic.in/

P A G E 45
INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY

providers. In this way knowledge‑intensive Indian services are supporting innovation in India’s
manufacturing sector. Additionally, increased services sector incomes provide a stimulus to consumer
demand for manufactures.

The global trend towards a ‘service approach’ to manufacturing production, with an increasing
emphasis on design and customisation, is making India more attractive to international investors.
India’s strengths in software and its engineering capabilities place it in a prime position to exploit this
shift, as does the experience in a service-based approach to customers gained from its prominence
as a business process outsourcing destination. Companies such as ABB and Sigma Electric are
already exploiting these capabilities (Financial Times 2006).

An industrial transformation towards advanced manufactures is now under way in India.


PC, whitegoods and telecommunications manufacturers such as Dell, Nokia and Motorola have
recently established advanced plants. The success of these facilities depends upon a variety of
professional service inputs, and can therefore be expected to stimulate demand and employment
growth in niche service sectors.

Many commentators (e.g. Goswami 2005, Das 2006) have pointed to manufacturing’s low share of
India’s GDP compared to that of other developing countries in Asia and the need for it to expand
more rapidly to absorb a fast-growing labour force. Concerns have been raised that India’s emerging
strengths in high-tech, high-skill manufacturing may not generate large numbers of jobs (see for
example, Das 2006). Indian manufacturing, at least in the formal sector, tends to be biased towards
capital-intensive production and predominantly requires skilled labour. Technology-intensive
engineering goods, for example, account for 21 per cent of India’s merchandise exports, while
chemicals (including pharmaceuticals) account for an additional 14 per cent (Thirlwell 2006).

In contrast India remains relatively unrepresented in many labour-intensive manufacturing sectors,


despite boasting healthy productivity growth and much lower wages than its competitors. In 2002 Indian
workers in the manufacturing sector earned about US$23.80 per month, compared to US$110.80
in China (Thirlwell 2006). India may be able to exploit its competitive advantage in labour costs to
significantly expand labour-intensive manufacturing but to do so would need to be able to address
transport infrastructure bottlenecks, improve the business environment (including complex labour
regulations) (Kochhar, Kumar, Rajan, Subramanian and Tokatlidis 2006) and improve basic education in
rural areas to equip potential workers with elementary literacy and other necessary skills. The take-off
of labour-intensive manufacturing in India is also impeded by a limited supply of skilled and managerial
labour, which is in high demand in export-oriented services sectors and therefore increasingly costly
(Kochkar et al 2006). Nonetheless, it would create employment opportunities for large numbers of
low-skilled workers. Industries such as textiles have much potential. The Confederation of Indian
Textile Industry, for example, forecasts that the textiles industry could increase its exports from the
current level of US$17 billion to US$40 billion by 2010 and provide 12 million additional jobs.

A stronger manufacturing sector can in turn generate employment opportunities in services, and could
provide a means for rural Indians to move out of subsistence agriculture. A recent Confederation
of Indian Industry–Boston Consulting Group report highlights the fact that the manufacturing sector
provides a conduit for agricultural labour looking to enter more value-added industries and also has

P A G E 46
Role of Services in Development

a substantial multiplier effect in creating jobs in the services sector. Several global studies have
estimated that every job created in manufacturing can lead to the creation of 2–3 jobs in services
(IBEF 2006a).

Services and agriculture


Production in the agriculture, forestry and fishing sector remains labour-intensive. The sector accounted
for 57 per cent of employment in 1999–2000 but contributed only 25.3 per cent of total output. Its
share of GDP has since declined steadily to 19.9 per cent. Over the post-reform period, 1991–92 to
2005–06, agriculture, forestry and fishing grew at a trend rate of just 2.6 per cent. The creation of large
numbers of low-skilled jobs in services sectors like retail and wholesale trade, hotels and restaurants,
and housing and construction – as well as in labour-intensive manufacturing – could absorb surplus
labour from agriculture, and thereby increase that sector’s productivity.

Growth in organised retailing could also benefit farmers by reducing the need for intermediaries while
the modernisation of logistics could reduce losses stemming from the spoiling of agricultural produce
during transportation (see ‘The slower reformers’ above). Meanwhile, high-end service provision,
notably in relation to IT and telecommunications, is being directed towards raising the competitiveness
of India’s fragmented agricultural sector (Box 2.8).

BOX 2.8: the ‘E-CHOUPAL’ InitiATIVE – FACILITATING RURAL DEVELOPMENT

The ‘e-Choupal’ initiative was launched in 2000 by ITC, one of India’s largest companies
with a diversified presence in many products and sectors and a large exporter of agricultural
products. The initiative aims to raise the competitiveness of India’s fragmented agricultural
sector by empowering Indian farmers through the uptake of the Internet at the village level.
Today, e-Choupal services reach out to more than 3.5 million farmers growing a range of
crops in over 36 000 villages through nearly 6000 village ‘Internet kiosks’ across nine states.
E-Choupal is aimed at a more efficient supply chain. Farmers are able to gain ready access
to information in their local language on such things as the weather, market prices and
modern farm practices. They are also able to make more informed decisions on the purchase
of farm inputs and on the sale of their produce. The development means that farmers can
look to collective purchases of inputs and sell their produce without the need to go through
intermediaries and multiple handling.

Source: ITC website, www.itcportal.com.

Services and mining


India has large known reserves of bauxite, iron ore and coal and, given its geology, may also possess
large deposits of other minerals such as gold, copper, lead, zinc and diamonds (Federation of Indian
Mineral Industries 2006). Yet only a small fraction of the area conducive to mineral deposits has been
explored, owing in part to prevailing policies. While progressive reforms beginning with the enactment

P A G E 47
INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY

of the 1993 National Mineral Policy have paved the way for private and foreign investor participation
(Federation of Indian Mineral Industries 2006), investment in exploration and mine development has
been inhibited by a number of factors. There is currently no guarantee that exploration leases will be
converted to mining leases. Establishing a mining project in India requires multiple approvals from
different layers of government (The Hindu Business Line 2006b). In addition, captive mining policies
grant power, iron, steel, and cement producers access to coal and iron ore at extraction cost rather
than market value (The Times of India 2006), often leading to small--scale operations and sub--optimal
development of resources.

A high-level committee under the chairmanship of former Deputy Director General of the WTO,
Professor Anwarul Hoda was established in September 2005 to recommend policy changes to
attract more foreign and domestic investment in mineral exploration. The Hoda Committee’s findings,
published in June 2006, are anticipated to form the basis of a new mining policy. The Committee’s
key recommendations include the establishment of a maximum 5000 square-kilometre area in which
prospecting can take place; the introduction of 3-year, 100 sq km ‘Large Area Prospecting Licenses’
within this area; the institution of an ‘open skies’ policy under which reconnaissance permits would
be granted to more than one applicant for the same area; and the removal of all qualitative and
quantitative restrictions on iron ore exports.

If India’s central and mineral-rich state governments can agree on a liberal, investment-friendly and
internationally competitive policy regime with clearer and more transparent regulation, large scale
private (including foreign) investment in the mining sector is likely to take place. As mineral deposits
generally occur in remote areas with poor infrastructure (Indian Ministry of Mines 1993), exploration
and mining can be harnessed to contribute to economic development in India’s more remote and
underdeveloped regions, in addition to contributing to its overall prosperity.

The application of advanced mining services and technology for exploration, software and systems,
safety, environmental management, communications and training should enable India to derive
maximum benefits from mineral exploration. Leading-edge expertise in mining services and technology
is readily available from companies in countries such as Australia.

P A G E 48
Chapter 3

OPPORTUNITIES FOR australian service providers in indiaI

KEY POINTS

• India’s services-driven development model is creating substantial


openings for business.

– Additional opportunities are likely to emerge over time as the


momentum for reform fosters liberalisation and deregulation in
protected sectors.

• Key areas of current and emerging demand in India, in which Australian


companies have significant expertise, include:

– information technology

– telecommunication services

– financial services

– infrastructure, construction management and consulting services

– education and training

– tourism and travel-related services

– film and television

– sports and related infrastructure

– healthcare services

– research, including biotechnology

– mining services

– retail

– logistics, and

– professional services.

P A G E 49
INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY

‘No big international company can be without an India strategy’

(The Economist 2006c)

Opportunity knocks where change occurs. As the previous chapters highlight, India’s economy is
currently in a phase of significant growth, largely induced by the expansion of the IT and other leading-
edge services sectors. But the pattern of growth posited in Chapter 1, wherein the rapid development
of one sector of the economy catalyses reform and expansion of others, suggests that it is prudent
for Australian services providers to look beyond the immediately obvious for longer-term possibilities;
and to differentiate between the different types of market opportunities that will arise depending on
the current state of reform initiatives and growth in each sector.

There is no doubt that India’s current boom sectors offer opportunities for Australian participation.
Australia is itself an attractive international business process outsourcing destination (Greene 2006,
A.T. Kearney 2005) because of its experienced, English-speaking and educated workforce and
stable business environment (A.T. Kearney 2005). While this implies a certain degree of competition,
it also suggests scope for collaboration taking into account each country’s particular strengths,
including in selling services to third country markets. To a significant extent, this is starting to occur.
As disaggregation of services provision occurs through the development of international production
networks, bilateral activity can be expected to intensify, to the benefit of both countries.

While these are important trends, the potential for major expansion in bilateral services trade is
arguably in the sectors which are only now starting to take off in India. As noted in Chapters 1 and
2, broad-based economic development in India implies the ongoing reform and modernisation of a
number of crucial facilitating sectors – including telecommunications, finance, infrastructure, retail,
logistics, construction and transport, as well as the application of services to manufacturing, agricultural
production and distribution, and mining. Given the scale – and particularly the potential scale – of
India’s economy, the size of this task is enormous. Reform and modernisation imply the need, on
a huge scale, for capabilities and skills which to date may not have been extensively required or
available in India. Whether in finding these capabilities or in building indigenous capacity, India will
face a strong need to enlist the participation of external providers.

Australian service providers are well positioned to capitalise on emerging market opportunities in
India. Education is already a major services export for Australia, as are professional services, and
this can only be expected to increase (see Chapter 4). But Australia also has significant expertise
in many other areas where India will be seeking to augment its capabilities. This chapter examines
some of those areas, highlighting the opportunities that could be expected to arise if India continues
along its current growth trajectory.

P A G E 50
Opportunities for Australian Services Providers in India

Information technology

India’s information technology (IT) sector is attracting increasing attention from foreign investors.
India’s Minister of Communications and Information Technology, Dayanidhi Maran, has said that
planned foreign investment in telecommunications and information technology is expected to double
to US$22 billion in 2006 (The Economic Times Online 2005). Many of the major global information
technology manufacturers and service providers – including Microsoft, Intel Corporation and Cisco
Systems – along with smaller Australian companies (see Chapter 4) are stepping up their presence
in India. While ‘offshoring’ to affiliated Indian businesses (‘captive’ units) has been growing strongly,
many multinationals are setting up development centres in India and also targeting the fast-growing
domestic IT services market.

The Information technology-information technology enabled services (IT–ITES) industry is projected to


grow at an annual rate of over 25 per cent to US$148 billion by 2012 (Indian Investment Commission
2006a). In a similar vein, a NASSCOM-McKinsey report in 2005 predicted that on the back of the
strong growth in offshoring, the country’s IT and business process outsourcing industry would account
for seven per cent of India’s GDP by 2010, and about 17 per cent of GDP growth and 44 per cent of
export growth over five years to 2010. IT–ITES exports are projected to grow at 25 per cent a year to
reach US$60 billion by 2010 (NASSCOM-McKinsey 2005). Minister Maran has said this projection
may be too conservative (The Economic Times Online 2005).

Indian IT companies are becoming formidable multinationals in their own right. They are building up
global networks of facilities to service clients better in-country and thereby compete more effectively
with the IBMs and Accentures of the world (NASSCOM 2005b).

As of October 2006, 26 first and second tier Indian IT companies had established a presence in
Australia. In addition to providing IT solutions to local businesses, these companies are using their
Australian subsidiaries to secure or help take advantage of global market opportunities, in turn
generating high-quality employment for Australians in engineering, business management and
consulting, stimulating collaboration in research and development, and creating export opportunities
(see Chapter 4). The Australian operations of TCS, Satyam, Infosys and Birlasoft, for example, have
generated significant employment and collaborative research opportunities in software engineering
and telecommunications, while an R&D and distribution agreement between the CSIRO and Infosys
has paved the way for the commercialisation and export of leading-edge Australian intellectual
property. As the trend to deliver services through international networks intensifies, more and more
opportunities for collaboration between Australian and Indian firms to take up joint development work
and service third markets are likely to emerge.

In many respects, Indian IT companies are world class, implying that opportunities for Australian
companies will come in the form of cooperation and collaboration, enabling each partner to specialise in
its strengths and augment its capabilities in other areas. One prospective area for such collaboration is
knowledge process analytics – an area into which Indian companies are increasingly seeking to move,
and where Australia has established strengths. This is of particular relevance to the financial services

P A G E 51
INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY

sector. Australia can avail itself of its highly-skilled financial services workforce, sophisticated financial
markets, and cost advantages over competing destinations. India also has application solutions gaps
in mining, media and banking – areas where Australian companies have evident strengths. Australian
IT people are also recognised for their business orientation and problem solving strengths, which
can complement Indian technical expertise. Indian companies can look to developing the requisite
capabilities themselves but often it will make sense for them to adapt offerings from overseas. There
may also be opportunities for Australian businesses to win market share in overseas markets by
partnering with Indian outsourcing companies (ACS 2005, Invest Australia 2006).

Austrade has identified a range of opportunities for Australian companies in IT, including software
products for industries such as health, transportation, insurance, finance and entertainment;
consultancy and other services for India’s burgeoning ITES sector; network and Internet security
consultancy and products; e‑governance; and joint research and development projects for emerging
technologies and solutions around established technologies (Austrade 2006b). Given Australian
capabilities in distance education, tele-health and remote monitoring, there is scope for Australian
business to become involved in education and health initiatives which can help raise living standards
in India’s rural sector.

A visit in October 2005 by a high-level industry delegation to India led by the Australian Minister
for Communications, Information Technology and the Arts, Senator Helen Coonan, resulted in a
memorandum of understanding (MOU) being signed to promote further cooperation in developing
information and communications technology industries and strengthening business linkages
(Coonan  2005b).

Telecommunications

Foreign investors are taking an increasing interest in India’s fast-growing telecommunications sector,
principally the mobile phone market. Total FDI approvals in the sector up to September 2005 amounted
to Rs416 billion (US$9.6 billion) (Indian Ministry of Finance 2006). In October 2005, Vodafone secured
a ten per cent stake in Bharti Tele-Ventures Ltd for approximately Rs67 billion (US$1.5 billion), which
at the time was the largest ever single foreign investment in India (Bharti Enterprises 2005b). Singtel
and investment house Warburg Pincus were already partners with Bharti. Two other mobile phone
operators also have foreign partners. Hutchison Essar is a joint venture between the Essar Group
and Hong Kong-based Hutchison Whampoa. AT&T is a joint venture partner in IDEA Cellular. Cisco
Systems, a leader in networking for the Internet, is also reported to be ramping up its involvement in
India, in part on the back of an assessment that deregulation is exposing local businesses to increased
competition, forcing them to invest in communications and other technology (The Mercury 2005).

With revenues of US$17.8 billion in 2004–05, India is now the fifth-largest telecommunications
services market in the world. The market, and in particular the mobile market, is expected to continue
to grow at break-neck speed in coming years. The telephone subscriber base is projected to grow at
30–40 per cent a year to reach 250 million by 2009–10 (Indian Investment Commission 2006a).

P A G E 52
Opportunities for Australian Services Providers in India

While growing rapidly, the Indian telecommunications market, particularly in relation to mobile
phones, is extremely competitive. Rising incomes and cheaper services are one side of the equation.
Peak telecom tariffs have fallen dramatically over the past decade, aided by stiff competition in the
marketplace. Domestic long distance rates presently vary between Rs1.2 (US2.7 cents) and Rs2.4
(US5.5 cents) a minute, while mobile rates are around US2–3 cents a minute. Further dramatic falls
are expected in the near term, especially in long distance call rates (Indian Ministry of Finance 2006,
IBEF 2005b). On the other side of the equation, mobile carriers are now expanding their networks
into untapped rural areas where more than two-thirds of the population lives (The Economic Times
Online 2005).

AT&T Global Network Services India, a joint venture 74 per cent-owned by AT&T, became the first
foreign telecom operator in India to secure national long distance and international long distance
(NLD/ILD) licences, following keen interest from numerous foreign carriers (Digital Media Asia 2006).
An ILD enables foreign carriers to provide international connectivity to network facilities which they
operate in other countries. A number of guidelines that impede the provision of international voice
and data telecommunications services were introduced in 2005 when the foreign equity limit in
telecommunications was raised from 49 to 74 per cent (see Box 2.3). Other international carriers
remain interested in applying for NLD/ILD licences, pending the outcome of an Indian Government
review of the guidelines, which is expected in early 2007.

Financial services

Banking
The banking sector is expected to grow strongly in coming years, reflecting buoyant conditions
and the increasingly important role played by banking intermediation in a liberalising economy. The
penetration of financial products, for example bank accounts, credit cards, and mortgages, is currently
quite low by comparison with that in other developing countries. The market potential in rural India is
particularly significant (see Chapter 2). One projection is for total banking assets to double by 2010
to US$915 billion, representing a compound annual growth rate of 15 per cent (Indian Investment
Commission 2006a). At the same time, the opportunities that arise in the rural sector in particular may
be difficult for foreign companies to access, involving, as they do, the potential for large numbers of
very small transactions.

While public sector banks still dominate Indian banking, the opening of the sector since the early 1990s
has enabled the generally more efficient foreign and privately-owned banks to secure an increasing
share of the market – currently around 25 per cent.

Three foreign banks – Standard Chartered Bank, Citibank and HSBC – accounted for 64 per cent
of the assets of all foreign banks in March 2005 (RBI 2005a). All three are expanding their presence
in India (Sify 2005). HSBC, whose activities in India are focused on outsourcing operations,
invested US$150 million in India through the first 11 months of 2005. India’s largest foreign bank,

P A G E 53
INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY

Standard Chartered, which has been operating in the Indian market for 150 years, invested around
US$120 million over the same period. The bank reportedly plans to continue expanding its operations
by opening 10–12 branches every year and focusing on the fast-growing retail segment (Sify 2005).
Citigroup, whose activities are focused on retail and corporate banking, is currently expanding its
research and equity businesses. Deutsche Bank is also restarting its retail banking operations in India.
All major Australian banks are represented in India and are actively appraising market opportunities
(see Chapter 4).

Foreign banks have been prevented from holding a stake of more than five per cent in domestic private
sector banks but a number of them, including some Australian banks, are positioning themselves for
the opening of the sector to greater foreign ownership, slated for March 2009.

Insurance
The opening of the life and non-life insurance sectors to foreign investment in 2000 spurred
considerable activity by foreign investors. ICICI Prudential and Birla Sun Life have each generated

more premiums on new business in India than in any other markets in Asia (IBEF 2006c). India’s
imports of insurance services doubled to US722 million in 2004–05. Given the importance of insurance
availability to encouraging risk-taking business ventures, demand for such services can only be
expected to increase as India continues to grow.

With India’s large population, increasing discretionary incomes and a growing awareness of insurance
products, continued strong growth in the life- and non-life sectors is widely expected in coming years.
Life insurance premium income (first year plus renewal income) was running at around 2.6 per cent
of GDP in 2003–04, which is low compared with more mature markets. Independent research and
advisory firm, Financial Insights projects India’s life insurance sector will continue to expand at around
20 per cent a year over the medium term (Financial Insights 2005).

AXA Asia Pacific and Aon have each established joint ventures in the insurance sector (see Chapter 4),
and QBE Insurance is reported to be eyeing opportunities in India (Canberra Times 2005).

Infrastructure, CONSTRUCTION MANAGEMENT AND


CONSULTING SERVICES

India is according the highest priority to bringing its transport infrastructure to a standard which will
support the rapid growth of the Indian economy. All sectors – road, rail, ports, and aviation – are in
need of massive upgrades and modernisation. Prime Minister Singh indicated in October 2006 that the
country needed investment in infrastructure to the tune of US$320 billion over the coming 5–10 years.
In transport as well as water, sewerage and tourism projects, the government is enlisting private sector
involvement in a major way through Public Private Partnerships. Aside from supplementing scarce
government finances, foreign investment is bringing management, engineering and design skills.


Most private insurance companies are joint ventures between Indian and foreign partners.

P A G E 54
Opportunities for Australian Services Providers in India

Roads
At least US$50–60 billion investment is required over the coming five years to improve road
infrastructure (Indian Investment Commission 2006a). Private sector investment is being sought,
under build-operate-transfer (BOT) arrangements, to assist with the implementation of the National
Highways Development Project. Several incentives are available to encourage private sector, including
foreign investor, participation. These include up to 100 per cent foreign equity; subsidies of up to
40 per cent of project cost to make projects viable; 100 per cent tax exemption in any consecutive
ten years out of 20 after project commissioning, and the right to retain tolls (Indian Department of
Road Transport and Highways 2006). A number of foreign players, including SMEC (Box 4.1), have
already secured contracts associated with the construction and upgrading of sections of the national

highways network.

Airports and air services


The government is considering private investment in a further 25 city airports, in addition to leasing
out India’s four major international airports at Delhi, Mumbai, Chennai and Kolkata to private operators
and building new international airports in Bangalore and Hyderabad with private sector participation
(see Chapter 2). Altogether, over US$15 billion is expected to be invested in airport development
over the coming five years (Indian Investment Commission 2006a).

These projects are likely to generate flow-on opportunities in aviation transport services such as
baggage handling, air traffic control, fire services and navigational technologies. Australia’s capabilities
are recognised as world class in many of these areas. Airservices Australia has already had some
success (see Chapter 4), and a number of other Australian companies are also interested in securing
business in the air transport sector.

Several new, low-cost airlines have commenced operations in the past few years in response to
rapidly growing demand from India’s burgeoning middle class (see Chapter 2). Yet India has limited
skilled resources in a number of aviation services required by these and established airlines, who
are streamlining cost structures. The aviation industry is consequently seeking outside assistance for
a range of services, such as international standards compliance, manual design and management,
compliance documentation, training, aviation security, ground handling and safety systems
development. Melbourne consultancy, Aviation Compliance Solutions, has already begun assisting
India’s aviation industry in this regard (see Chapter 4).

Ports
The National Maritime Development Programme, announced in December 2005, envisages investment
of Rs558 billion (US$12.7 billion) on ports sector projects through to 2011–12. Private sector investment
in constructing, managing and operating berths and terminals is expected to account for two-thirds
of overall investment in the Programme (Indian Press Information Bureau 2005a).


See www.nhai.org.

P A G E 55
INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY

Many multinationals and domestic players have been involved in new port development; they have
also taken over and are operating existing port facilities. P&O Ports, for example, operates Mumbai’s
new port, Nhava Sheva, the new deep water container port at Mundra, and the Chennai Container
Terminal. Private sector participation has generally been in the form of a build-operate-transfer (BOT)
model, with assets reverting to the port after the concession period. Up to 100 per cent foreign equity
under the automatic route is permitted in projects involving construction and maintenance of ports
and harbours. Ten-year tax holidays also apply.

Environmental infrastructure and services


India also recognises the need to improve its environmental infrastructure, in areas such as waste
treatment and water purification, but has only limited funding and management capacity. It is also
yet to develop comprehensive R&D, design and technology capabilities in environmental services.
Since the 1990s, municipalities have encouraged private participation in infrastructure environmental
services, and foreign investment and joint ventures with foreign partners have been increasing
(Sawhney and Chanda 2004; Box 3.1).

BOX 3.1: Sinclair Knight Merz

Australian engineering consulting firm, Sinclair Knight Merz, was the managing contractor for
the Bangalore Water Supply and Environmental Sanitation Master Plan Project. The project
aimed to improve local capacity for the delivery of water supply, sewerage and environmental
sanitation services to Bangalore. Particular emphasis was placed on assisting the urban poor
and other vulnerable groups.

Sinclair Knight Merz has also been engaged to carry out the civil, structural, mechanical and
electrical engineering, and project management for the development of a large temple in the
state of West Bengal.
Sourced from www.skmconsulting.com, accessed May 2006

Education and training services

Human resource development, at all levels, is arguably the largest challenge that confronts India
on its path to development. As noted in Chapter 2, the best of India’s educational institutions have
incredibly competitive entry requirements and excellent tuition by world standards. India’s major IT
companies are investing very significantly in their own training efforts, in many cases establishing their
own learning institutions. Despite this, and the relatively large number of graduates produced, skills
shortages in the IT–ITES sector are still looming. Development of other sectors will necessitate still
further development of the indigenous skills base. Assuming development proceeds according to plan,
there is enough potential to keep both domestic and foreign providers busy for a very long time.

P A G E 56
Opportunities for Australian Services Providers in India

Australia has been a popular, and rapidly growing, destination for Indian tertiary students, particularly
those wishing to undertake postgraduate engineering and business management degrees. But
potential exists for this pattern to change, both as competition heats up among Indian companies
to recruit and provide in-house training to graduate engineers; and as demand grows for labour in
other sectors where potential salaries do not provide the incentive to justify the expense of travelling
overseas to undertake a degree. It seems increasingly likely that the major training opportunities will
require foreign tertiary education and training providers to look at delivering their services on the
ground in India.

No foreign universities have established campuses in India as yet, although a number are positioning
for entry. A handful of foreign institutions have been involved in establishing non-university higher
education campuses in India. They include the UK-based Wigan & Leigh which has set up a number
of business-oriented campuses across India; the Western International University of the United States,
which established the Modi Apollo International Institute in collaboration with the K.K. Modi Group;
and the Kellogg School of Management, The Wharton School and the London Business School which

have an association with the Indian School of Business.

A recent study found that at least 131 Indian higher education institutions have collaborative
arrangements with foreign institutions, predominantly in the vocational area, notably business and
hotel management programs. The majority of collaborations have involved ‘twinning’ arrangements,
whereby part of the program is undertaken in each country. With foreign degrees offered in India
(in‑country delivery) not recognised in India, the demand for such courses would appear to reflect the
enthusiasm among Indian students for foreign degrees (Boston College 2005). A number of foreign
universities, including the University of Southern Queensland and the University of South Australia,
also provide distance education courses (see Chapter 4).

While most attention has been paid to the higher education sector, the number of collaborative
arrangements in school education has been increasing. There are estimated to be more than
200 schools in which foreign schools and Indian partners collaborate on program delivery
(oneworld.net 2006).

Overseas study
Middle class interest in study abroad is growing. Study abroad is becoming more accessible with the
increasing availability of credit. The number of Indians studying in Australia has consequently grown
rapidly in recent years (see Chapter 4). Growth prospects are particularly strong, given the trend
toward international student mobility. One forecast is for the demand for international higher education
(encompassing overseas study, offshore campuses and distance education) to grow from 1.8 million
students in 2000 to 7.2 million by 2025, with China and India generating over half the global demand
(Böhm, et al. 2002). Australia’s share of global demand is forecast to increase from three per cent in
2000 to eight per cent (one million students) in 2025, 56 per cent of which is expected to be for onshore

 See www.wiganindia.org, www.wiuindia.com and www.isb.edu.

P A G E 57
INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY

higher education in Australia. Some 800 000 students from India are projected to seek overseas study
by 2025, with 80 000 wanting to study in Australia (IDP Education Australia 2005a).

The increasing numbers of international students enrolled in Australian institutions is helping to


facilitate the recognition of Australian qualifications overseas. The Bar Council of India, for example,
now recognises undergraduate law degrees from a number of Australian universities.

Commercial links
Building on the many and varied educational linkages between Australia and India (see Chapter 4),
Australian educational institutions have been actively appraising the Indian market. Australian
universities are exploring opportunities for twinning with Indian universities as well as the establishment
of a direct market presence (Downer 2005).

By 2025 offshore campuses and distance education programs are forecast to account for 44 per cent
of the total global demand for Australian higher education (Böhm et al 2002). There will be potential
opportunities for Australian institutions to be involved in the establishment of campuses in India
– once there is clarity in the regulatory approach governing the presence of foreign higher education
providers. Henry Ledlie, IDP Education Australia’s India country director, has noted that while
Australian institutions may not be able to take 80 000 Indian students [as projected by Böhm et al],
‘there is certainly room for another Monash in India or a Curtin in India’ (IDP Education Australia
2005b). However, Australian educational institutions need to have something unique to offer before
contemplating the establishment of campuses in India.

Australian education providers have also shown considerable interest in pursuing partnerships in
vocational and technical education (VTE). While growing from a relatively small base, the number of
Indian VTE students studying in Australia – principally hospitality and business courses – has increased
by some 140 per cent over the past year. Compared with university education, VTE courses can be
provided more readily in India.

In the trades, there is a relative lack of formal training and skills are typically passed from father to
son. Accreditation standards are also lacking in many fields. In the case of nursing, while India has
a large number of nursing colleges, many nurses have aspirations to work overseas. There may
therefore be opportunities for Australian educational institutions to get involved in joint ventures
delivering education programs to Australian and international standards.

TAFE Global, Australia and Tata Consultancy Services (TCS) concluded a deed of understanding
in 2004 for the introduction of a skills training strategy aimed at the Tata group, the broader Indian
workforce and internationally. Cooperation is envisaged in automotive, healthcare, white goods, and
English language in the workplace. The parties agreed to explore delivering four projects to transfer
the know-how and training quality standards, products and services of TAFE Global to the Indian
training environment through TCS (TCS 2004). The agreement has not yet translated into commercial
contracts, but TAFE Global has concluded memoranda of understanding with two other Indian parties
for the provision of vocational training services.

P A G E 58
Opportunities for Australian Services Providers in India

Tourism and travel-related services

Indian outbound tourism is expected to grow very strongly in the coming years. The World Tourism
Organization forecast in 2002 that the number of outbound Indian travellers will reach 50 million by
2020 (Asia Times Online 2002). This represents an annual compound growth rate of over 12 per cent
on the 4.6 million tourist numbers recorded in 2001, and in fact the number of outbound tourists
has been growing at rates not too far short of this over recent years. International departures have
grown from 2.2 million in 1992 to 4.6 million in 2001 (8.5 per cent compound annual growth), to an
estimated 6.2 million in 2004 (10.5 per cent compound annual growth over 2001) (RBI 2002). These
growth rates compare with World Tourism Organization forecasts of 4.1 per cent growth in worldwide
international tourist arrival numbers through to 2020. Clearly, India is one of the fastest growing
sources of tourists in the world.

In 2001, an estimated 25 million people, or 2.5 per cent of the Indian population could afford
international travel (Department of Industry, Tourism and Resources 2005). Apart from India’s growing
middle class, other factors have been facilitating the recent strong growth in Indian outbound tourism,
notably the relaxation of foreign exchange transactions. Under the Foreign Exchange Management
Act 1999 (FEMA), people travelling abroad as tourists or as students are entitled to obtain foreign
exchange from authorised dealers up to a limit of US$10 000 per person in any one calendar year
(double the previous limit). A limit of US$100 000 applies for persons travelling abroad for employment
or emigration purposes. Changing mindsets, particularly among the younger, aspiring segments of
the population, have also stimulated interest in travel abroad. In addition, credit cards and personal
loans are increasingly popular. The deregulation of the aviation market has led to a plethora of new
airlines and air services, which has helped accommodate growth in the tourism market.

Travel agencies and tour operators have proactively promoted foreign travel, while foreign tourism
boards and international airlines have also been actively undertaking promotional activities.
An increasing number of agents are starting to promote Australia as a destination (Tourism
Australia 2005). Competition is tough however, especially among the larger travel agencies. While
margins may be tight, foreign players consider it worthwhile to invest in the Indian market given its
anticipated future growth.

Tourism Australia (2006) expects Australian providers to gain further market share in Indian outbound
tourism over the coming decade, with average annual growth in arrivals from India of 15.6 per cent
through to 2015, when visitor numbers are expected to top 290 000. Looking ahead to 2025, visitor
numbers from India are predicted to grow to around 550 000, which would make India Australia’s
seventh-largest source of visitors with a share of 4.2 per cent. Currently the share is a little over one
per cent (Department of Industry, Tourism and Resources 2005).

The Indian domestic tourism sector is performing well below its potential, in large part reflecting a poorly
developed tourism infrastructure. India’s share in world tourist arrivals is low – just 0.44 per cent in
2004 – although tourist numbers have recently been increasing quite rapidly (Indian Press Information
Bureau 2005b). Its travel and tourism economy gross product is expected to grow at an average annual
inflation-adjusted rate of 6.9 per cent over the ten years to 2015, the 11th fastest of all countries.

P A G E 59
INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY

Expenditure by international visitors on goods and services, adjusted for inflation, is projected to grow
at 9.0 per cent, the 6th highest across all countries (World Travel & Tourism Council 2005). India
will need to address a number of issues if such growth is to be realised, including air seat capacity,
airport and other transport infrastructure, and availability of high standard hotel accommodation. An
estimated 100 000 hotel rooms will need to be added over the coming five years (Indian Investment
Commission 2006a).

A number of foreign providers have entered the Indian travel-related services sector in recent years,
both to service the Indian tourist market as well as to capture some of the growing business in
Indian outbound tourism. FDI in travel-related services with up to 100 per cent equity is permitted
automatically. In addition to the opportunities the growth of Indian tourism brings for Australian travel
agencies and tour operators, Australian service providers have developed substantial expertise in
the provision of tourism-related advice, planning and management services.

The signing of an MOU in 2004 and a new Air Services Agreement in 2006 significantly increased the
access of the two countries’ airlines to each other’s market, so providing a platform for expansion of
two-way trade and investment in the tourism sector (Box 3.2).

BOX 3.2: qantas re-enters the indian market

After a two-and-a-half year hiatus, Qantas resumed air services to India in September 2004
with three services a week to Mumbai.

The new services coincided with the signing of an MOU and a new Air Services Agreement.
In 2004, access for the airlines of both countries increased from 2100 seats each way each
week to 4500 seats between Australia’s four main gateway ports of Sydney, Melbourne,
Brisbane and Perth and four major ports in India: New Delhi, Mumbai, Kolkata and Chennai.
Capacity had increased to 6500 seats per week by October 2006, and Australian and Indian
carriers had gained access to two additional ports in India and Australia respectively. The
introduction of multiple designation (‘open skies’) has allowed an unlimited number of airlines
to operate between the two countries. More liberal code-sharing arrangements were agreed
which will provide airlines greater flexibility in serving the market. Open freight arrangements
with unlimited capacity and open routes were also agreed.

Qantas currently offers three non-stop flights per week from Mumbai to Sydney, and offers
connections from New Delhi, Bangalore, Hyderabad, Chennai and Ahmedabad. Although
traffic is growing strongly, India is continuing to prove a difficult market for Qantas in the face of
strong competition from hub carriers such as Singapore Airlines and Malaysian Airlines, which
serve multiple cities in India and are able to offer connections with their Australian services at
their hubs. In a bid to build a strong and viable presence in the market, Qantas entered into a
codeshare arrangement with Jet Airways in August 2006 to significantly increase the frequency
of flights between multiple points in Australia and Mumbai and New Delhi via Singapore.
Sources: Anderson 2004; discussions with David Hawes, Group General Manager Government and International Relations,
Qantas; Qantas India website (http://www.qantas.com.au/regions/dyn/in/home, accessed December 2006)

P A G E 60
Opportunities for Australian Services Providers in India

Film and television

The audio-visual and related services sector has been reformed considerably. It was largely under
public ownership prior to the 1990s, with the exception of film production, distribution and exhibition.
The government’s monopoly on the import of foreign films was removed in 1992 and a range of
qualitative restrictions on film imports were removed in 2002 (Mukherjee 2002). The film, television
and radio sectors are all open to foreign investment and a number of foreign investors have entered
the market (IBEF 2006b).

India’s entertainment industry is projected to grow at a compound annual growth rate of 21 per cent
to reach Rs617 billion (US$13.6 billion) in 2010, up from Rs201 billion (US$4.4 billion) in 2004
(PricewaterhouseCoopers 2005a). The film and television sectors are expected to grow at
18 and 24 per cent a year respectively, to reach Rs153 billion (US$3.4 billion) and Rs427 billion
(US$9.4 billion). Factors leading to buoyant growth include increasing numbers of pay TV homes
and multiplexes, evolving efficiencies in distribution, advancements in and better use of technology,
industry corporatisation and consolidation, and reductions in entertainment tax in some states from
their previous high levels (PricewaterhouseCoopers 2005a, Ernst & Young 2004). Entertainment
taxes varied between 14 and 167 per cent in 2002 (Mukherjee 2002).

The cable industry forecasts the number of households with television to rise from 79 million in 2002
to 134 million in 2010. The number of cable and satellite households is expected to reach 94 million
by 2010, up from just 35 million in 2002, making India one of the largest cable markets in the world
(Zee Television 2003).

Indian film producers are focusing more on state-of-the-art technologies in cinematographic


equipment, post-production, and exhibition. Modern multiplex and digital cinemas are also springing
up everywhere, partly spurred by the five year tax exemption on 50 per cent of profits from building,

owning and operating multiplex cinemas constructed between April 2002 and March 2005. Likewise,
in the television and cable industry, broadcasters are investing in the latest technology and additional
services. These developments and liberalisation are spurring foreign investment (Austrade 2006c).

The international audience for Indian films is growing, as is the interest of Indian film-goers in foreign
films and influences. This is encouraging producers to co-produce with overseas filmmakers and to
include exotic locales in their films, television serials and commercials. Australia remains a popular
destination for Indian productions and awareness of Australia among Indian filmmakers is only likely
to increase now that Australia Network, Australia’s television service in the Asia Pacific region, is
available in India (see Chapter 4). Demand for Australian film post-production services is also likely
to grow.

 See Income Tax Act, 1961, Section 80-IB (available at www.taxmann.net).

P A G E 61
INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY

Sports and related infrastructure

A number of Australian companies are positioning themselves to win business in connection with
the Delhi 2010 Commonwealth Games. The Delhi Games will be India’s largest sporting event since
the 1982 Asian Games. India will be seeking collaboration from countries with experience in hosting
major games events. India has also signalled its wish to host the 2016 Olympic Games.

Australian companies have competencies in design, architecture, engineering, environmental


management, as well as games operations and management and related services. Many Australian
companies have, on the back of their involvement in the 2000 Sydney Olympics and 2006 Melbourne
Commonwealth Games, built up particular strengths in contracting in the context of complex major
sporting events.

An Australia–India Council-sponsored sports- and related-infrastructure forum took place in India in


November 2005, with 18 Australian companies participating. The Victorian Government has since led
a building, infrastructure and related services mission to India, with the Delhi Games being a major
focus. The Victorian and New South Wales governments in 2006 jointly established an Australian
International Sporting Events Secretariat to promote the expertise developed by both states from
hosting the Sydney Olympics and Melbourne Commonwealth Games (Brumby 2006).

Healthcare services

The healthcare services sector appears poised for buoyant growth, particularly in the increasingly
prominent private sector. Healthcare sector revenues are projected to increase from around
US$30 billion in 2004–05 to US$60 billion by 2010, representing growth of 15 per cent a year (Indian
Investment Commission 2006a). By one estimate, the public healthcare system will be able to
meet just one tenth of the demand for additional hospital beds over the coming three or four years.
Moreover, the Indian Healthcare Federation estimates that domestic investors will be in a position to
meet only about one-half of the required investment in the sector over the next 8–10 years, pointing
to significant opportunities for foreign investors (IBEF 2004).

Changing demographics, increasing disposable incomes and changing lifestyles are driving the
burgeoning demand for healthcare. The percentage of the population 55 and above will increase to
12 per cent by 2010. The percentage of the working age population will also grow over the coming
years. Increasing per capita incomes and a larger number of two-income families are spurring demand
for health services among the middle- and higher-income groups. The share of health in private final
consumption expenditure increased from 3.5 to 5.3 per cent over the 1993–04 to 2001–02 period.
As more and more Indians adopt Western lifestyles, the incidence of diabetes and cardio-vascular
diseases is increasing. With a greater awareness of health issues and greater financial means, Indian
consumers are increasingly seeking out preventive healthcare services. Health insurance cover is
beginning to take off (IBEF 2004).

P A G E 62
Opportunities for Australian Services Providers in India

The number of private sector companies owning and managing hospitals has grown rapidly in recent
years. A number of hospitals and other healthcare operators have formed alliances with foreign
companies with a view to tapping their capabilities and expertise in the provision of healthcare services.
Australian companies have capabilities in a range of healthcare service areas where India has a need
for expertise, as demonstrated by Aus Health International and AWS Clinical Waste’s successes in
the Indian market (see Chapter 4). Capabilities that are in particular demand include health insurance,
new hospital and diagnostic centre projects, as well as training and consulting services.

RESEARCH

There is strong scope for partnering and collaboration in numerous research fields, notably in
biotechnology but also in areas such as nanotechnology and bioinformatics.

Measured in terms of numbers of biotechnology companies, India had the 11th largest biotechnology
sector in the world in 2005, with around 100 companies (Ernst & Young 2005b); Australia was
ranked 5th. India’s biotechnology industry has the potential to generate US$5 billion in goods and
services revenues by 2010, up from US$700 million in 2003–04. Clinical development services
revenues could exceed US$1.5 billion; bio-services or outsourced research services could reach
US$1 billion; and agricultural and industrial biotechnology could account for US$500 million. Each
year, India turns out nearly half a million graduates with degrees and diplomas in biotechnology,
bio‑informatics and the biological sciences (Indian Department of Biotechnology 2005).

Anticipating the Indian biotechnology market to reach half the size of the US biotechnology market
within the space of 20 years, Australian biotechnology industry body, AusBiotech signed an MOU with
India’s peak biotechnology industry body, the Indian Association of Biotechnology Led Enterprises
(ABLE), in October 2004 (AusBiotech 2004). The MOU aims to strengthen ties and develop further
biotechnology partnering and collaborative opportunities. AusBiotech notes the complementarities
that exist. India has made some significant investments in biotechnology, has a large skills base and
offers development and market potential across several biotechnology sectors. For its part, Australian
industry has a track record in innovation.

Nanotechnology and bioinformatics are two areas at the interface of biotechnology and information
technology where both countries have strengths. An Indo–Australian Conference on Nanoscience and
Nanotechnology was held in Bangalore in March 2006. There has also been a proposal to establish
an Australia-India Nanotechnology Centre at the University of New South Wales (UNSW 2005).

Prime Minister Howard announced a new A$25 million bilateral research and fellowships program and
a new MOU on biotechnology was signed during his visit to India in March 2006, further enhancing
scope for multi-disciplinary research and technology cooperation between the two countries. The new
MOU will complement existing agreements between Australia and India in science and technology
and education and training signed in 2003.

P A G E 63
INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY

Mining services

Australian exports of mining technology services globally were expected to reach A$1.24 billion in
2004–05. Over 60 per cent of the world’s mining software is written in Australia (Minerals Council
2005). The Indian mining industry is becoming more aware of Australian capabilities in mining
technology and other services areas, with Xstrata, Ludowici, Mincorp and JK Tech already operating
successfully in India (see Chapter 4).

Opportunities exist to supply mining technology and services for exploration, software and systems,
safety, environmental management, communications and training. India is looking for state-of-the-art
technological and management expertise, which can improve productivity through good planning and
design of mines, cost reduction, and optimisation of smelting and refining operations and by-product
recoveries (Austrade 2006d).

For the present, regulatory regimes are largely precluding foreign mining company investment
in mine development in India, but mining policy is currently under review. When the restraints on
FDI are removed, Australian mining service companies can be expected to follow the miners in a
major way.

retail

Retail consultancy Technopak predicts that India’s retail sector will increase in size from US$300 billion
in 2006 to US$427 billion by 2010 and US$637 billion by 2015. At least 2.5 million additional jobs
are likely to be created in retail by 2010. Organised retailing in India is growing particularly strongly
and is projected to reach US$60–75 billion by 2011–12. The retail supply chain alone is expected to
benefit from investments amounting to around US$22 billion (Technopak 2006).

Australian retailers have developed significant expertise in the modern retailing systems and practices
that will be required by Indian companies scrambling to establish organised retailing ventures. The
growth in the organised retail sector could provide additional opportunities for Australian retailers if foreign
investment laws are further relaxed. Woolworths concluded a deal to provide Tata Group’s recently
announced Infiniti retail venture with technical support and strategic sourcing facilities from its global
network. While Woolworths has no equity stake in Infiniti, the detail will reportedly be revisited if the
Indian Government loosens restrictions on FDI in the retail sector (The Hindu Business Line 2006c).

Technopak (2006) estimates an additional 600–700 million square feet of retail space will be required
by 2011. Based on current projections of mall construction there will be a shortfall of 400–500 million
square feet. An estimated US$10–15 billion will be needed to make good this shortfall, with additional
investment of US$8–10 billion required in retail fit-outs and related equipment. Australian project
developers, architectural firms and engineering consultancies – many of whom are already involved
in India – are well placed to participate in the planning, design and construction of this additional
retail space.

P A G E 64
Opportunities for Australian Services Providers in India

Logistics

The rapid growth in organised retailing is rapidly changing the logistics landscape. India’s fragmented
logistics sector offers opportunities for more efficient Australian operators with sophisticated capabilities
in supply chain management, refrigerated containers and cold storage to enter the market. Linfox
recently commenced operations in India and is working with potential customers to solve their supply
chain issues (Linfox 2006). Toll Holdings aims to become the pre-eminent integrated logistics provider
in the Asian region. Its recent acquisition of a 60 per cent shareholding in Singapore’s SembCorp
Logistics, with its transportation and warehousing network stretching across 15 countries including
India, is a key element of its strategy (Toll Holdings 2006).

PROFESSIONAL SERVICES

The Australian Government is working with Australian business to open opportunities in professional
services in India, including legal and accountancy services. The growth of the Indian economy has
fostered demand for qualified and suitably experienced international lawyers and accountants to
service the needs of foreign investors in India and Indian multinationals and Indian exporters of
capital, goods and services. There is also demand in India for internationally qualified lawyers and
accountants to support Indian companies acquiring assets abroad, especially in the resource and
information technology sectors. While India’s legal and accounting professions are resistant to reform
and market opening, there is growing acceptance within the Indian Government of the benefits of
greater foreign participation. Any liberalisation is likely to be gradual.

In WTO services trade negotiations, Australia is seeking a commitment from India on legal services
covering advisory services in foreign law, which would enable Australian lawyers to enter into voluntary
forms of commercial association with Indian lawyers and law firms, and employ or be employed by
Indian lawyers. Australia is also pushing for commitments on commercial presence to enable Australian
accountants to establish offices in India and provide a full range of accountancy services. Gradual
opening of these professional services markets in this way would encourage foreign investment,
better enable Indian companies to take advantage of international business opportunities, and expose
Indian legal and accounting firms to international best practice.

P A G E 65
P A G E 66
Chapter 4

the bilateral economic relationshipI

KEY POINTS

• Australian business is beginning to capitalise on India’s economic


emergence.

– Growth in India’s services sector has fuelled a growth in demand by


India for Australian services, particularly in education.

– Australia currently runs a significant surplus in services trade with


India.

• India has been Australia’s second-fastest growing services export market


over the past five years.

– India is now the second-largest source country for international


student enrolments.

– Visitor numbers from India have grown rapidly over recent years.

• Australian companies are also taking advantage of emerging export


opportunities in engineering, infrastructure design, healthcare and
mining services.

• While presently at modest levels, the level of Australian direct investment


in India is set to increase with some recent investment decisions and
conclusion of contracts.

• Dozens of Indian information technology companies have a significant


and growing presence in Australia, which is generating employment,
collaborative initiatives and export opportunities for Australian
companies.

• The Trade and Economic Framework Agreement signed in March 2006


provides an important basis for the facilitation and future development
of the bilateral trade and economic relationship.

– A number of state governments have also identified India as a strategic


market.

– Business associations and chambers of commerce, notably the


Australia India Business Council (AIBC), play an important role in
showcasing business opportunities in India.

P A G E 67
INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY

‘Australian companies have undoubtedly discovered India. But it is highly likely that the growth
is only just beginning’
(AFR 2006a)

overview of the relationship

Australian services providers looking to capitalise on the opportunities highlighted in Chapter 3 have
an increasingly solid base of commercial activity upon which to build. India’s importance to Australia
as a trade and economic partner has grown enormously over recent years. In 2005–06 India was
Australia’s 11th largest overall trading partner – up from 18th in 2000–01. Total trade was worth
A$10.4 billion. Total Australian exports to India exceeded A$8.8 billion.

India is Australia’s fastest-growing major merchandise export market, with exports growing at a trend
rate of over 31 per cent over the past five years. Merchandise exports were valued at A$7.4 billion
in 2005–06, making India Australia’s seventh-largest export market with 4.9 per cent of total exports.
Together coal and gold accounted for 83 per cent of the total growth in exports over the 2000–01 to
2005–06 period and 72 per cent of total merchandise exports in 2005–06. Increased coal sales have
reflected increased demand for resources to fuel India’s fast-growing economy. Changes in Indian
regulations governing gold imports have precipitated strong demand for Australian non-monetary gold,
driven by increased jewellery production in India. As India’s economy adjusts to greater openness to
trade in both industrial products and services, diversification of the bilateral commercial relationship
can be expected.

Bilateral services trade, though somewhat smaller, is growing rapidly. In 2005–06, Australia’s services
exports to India were valued at A$1.4 billion. With a 23.2 per cent trend growth rate over the past
five years, India has been Australia’s fastest-growing services export market after China. Exports
increased by 36 per cent in 2005–06, pushing India up into ninth place as a services export market
for Australia. Imports of services from India were valued at A$348 million in 2005–06, making India
Australia’s 21st largest source of services imports.

According to Australian statistics, the stock of Australian FDI in India across all sectors was A$47 million

at the end of 2005 (ABS 2005b). The Indian data shows cumulative FDI inflows , excluding re-invested
earnings, of US$160 million from Australia between August 1991 and April 2006 (Indian Department
of Industrial Policy and Promotion 2006). Estimates based on foreign investment approvals are
substantially higher still. According to the Federation of Indian Chambers of Commerce and Industry, for
example, Australia is India’s eighth-largest overseas investor with over $1 billion approved for around
140 joint ventures. While estimates of Australian investment in India vary substantially depending on
the methodology applied, it is clear that Australian companies have been actively pursuing investment
opportunities, with SMEC International (Box 4.1), ANZ Bank (technology operations in Bangalore)
and Orica (explosives business) among the highest profile investors. The level of investment is set
to increase, with a number of investments in the services sector as well as manufacturing sector
investments being undertaken by Bluescope Steel and Mayne Pharma.


Data from the ABS and Department of Industrial Policy and Promotion statistics on foreign direct investment are not directly
comparable. Cumulative foreign direct investment inflows is a very rough proxy for the stock of investment, as it does not take
into account market valuation and exchange rate movements.

P A G E 68
The Bilateral Economic Relationship

BOX4.1: smec international

The Australian consulting firm SMEC International has particular strengths in the application
of IT to natural resource management. Over the past 15 years, it has undertaken a number
of major infrastructure projects in India involving highways, irrigation and water resource
management. It has ten project offices in India and over 600 staff in country under its
100 per cent owned local subsidiary, SMEC India. SMEC is also drawing increasingly on its
staff in India for projects elsewhere in Asia. SMEC’s recent and current projects include:

• a A$5 million contract for preparation of a Decision Support System to guide future water
allocation and investment decisions across the Gangetic Plains of Uttar Pradesh. The
project involves the application of software to map and model water allocation generally,
including the irrigation system, groundwater, crops, wetlands and socio-economic
indicators;

• a A$3 million World Bank-funded consulting contract to prepare an institutional strengthening


and reform roadmap for the massive Uttar Pradesh Irrigation Department (UPID) with close
to 100 000 staff. The project aims to achieve structural, policy and capability reforms to
enable the Department to deal with emerging water sector management challenges in
India’s most populous state and one of its poorest;

• a contract with the Public Works Department of the state government of Kerala for capacity-
building and modernisation initiatives, aimed at achieving sustainable improvement in the
efficiency and effectiveness of transport infrastructure management in Kerala;

• a contract with the Public Works Department of the state government of Karnataka for
the provision of project management and construction supervision services in connection
with a major upgrading program for 1000 km of state highways; and

• an MOU with the Power Trading Corporation of India Limited, the Indian government
agency responsible for the co-ordination of the electricity market and the purchase of
energy from private suppliers. This opens the way for the sale of electricity from the West
Seti hydropower plant that SMEC International is proposing to develop in the Far Western
Region of Nepal.

SMEC has also been actively involved as a supervising consultant for stretches of road being
constructed and upgraded as part of the National Highways Development Project, including
the World Bank- and Asian Development Bank-funded stretches of road in Bihar, Jharkhand,
Rajasthan, Orissa and Haryana.

With many years experience in India and the countries of the region, SMEC has built an
appreciation of local needs and what would be an ‘appropriate solution’, taking account of the
situation on the ground, local technical skills and the social and political context. SMEC also
places emphasis on capacity building by involving client personnel in their development work.

Source: www.smec.com.au and discussions with Pankaj Patel, General Manager Environment & Planning, SMEC.

P A G E 69
INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY


Separate statistical data on the level of Indian direct investment in Australia are not available. It is
concentrated in the IT (see sub-section on ‘Indian direct investment in Australia’ below) and resource
sectors (construction of an ammonia plant by the Oswal Group for approximately A$630 million and
copper mines acquired by Birla and Serlite in Queensland, Western Australia and Tasmania). Invest
Australia estimates Indian investment in Australia to be worth around A$1 billion, which would make
Australia the ninth-most important destination for Indian FDI.

Trade in services

Australia’s services exports to India


Australia’s A$1.4 billion-plus services exports to India are dominated by education (described in the
statistics as ‘education-related travel services’) which accounted for 70 per cent of total services exports
in 2005–06. Other personal and business travel amounted to A$181 million in 2005–06 while the
remaining commercial services exports were valued at A$249 million (Figure 4.1).

Figure 4.1
Education the lion’s share of services exports

Breakdown of exports of services to India, 2005–06 (A$ million)

Government services, 4 Business, 71

Other commercial
services, 189 Personal – education-related, 985


Transportation, 56

Personal – other, 110


Travel, 1166

Source: ABS 2006a.


Total Indian investment in Australia at the end of 2005, including portfolio and other investment, was estimated by the ABS to
be A$258 million (ABS 2005b).

P A G E 70
The Bilateral Economic Relationship

Education services

Education exports in 2005–06 were valued at A$985 million; more than double their value in 2003–04 .
India became the second-largest market (after China) for the export of education services in 2005
(Figure 4.2), up from eighth position in 2002. Between 2003 and 2005, Indian student enrolments
almost doubled to around 28 000, far outpacing the growth of other major markets. For the 11 months
to November 2006, there were more than 38 700 Indian student enrolments in Australian educational
institutions. Australia is the second-most popular destination for Indians enrolled in higher education
institutions overseas, after the United States.

India, China and the Republic of Korea have been the major sources of growth in the higher education
sector as well as in the vocational and technical education sector.

Figure 4.2
India: a large and growing source of students
Australia’s top ten markets for international student enrolments for the
2005 calendar year, and growth on previous year

120 40
Enrolments 2005 calendar year 35
100 Growth on previous year

Growth on 2004 (per cent)


30
Enrolments (’000s)

25
80
20
15
60
10
5
40
0
20 -5
-10
0 -15
Malaysia
Hong Kong
Republic

Singapore
Indonesia
of Korea

Thailand

United States
Japan
China

Other
India

Source: AEI 2006b.


Note: Overseas students undertaking short English language courses not requiring a student visa are excluded from the statistics.


The student fees component was estimated at A$230 million in 2004, ranking India third behind China and Malaysia.

P A G E 71
INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY

In 2005, 80 per cent of all Indians studying in Australia were enrolled in higher education institutions
(AEI 2006a). Indian students accounted for almost 14 per cent of all international student enrolments in
Australian higher education in 2005, but just 8.0 per cent of international student enrolments at all levels
of education. Popular fields of higher education include business administration and management,
information technology and engineering. Biotechnology, communication studies, and art and design
are becoming increasingly popular. India is the top-ranked source of overseas postgraduate students
in Australia, as well as the largest source of computing, science and engineering students.

The majority of the remaining Indian students undertaking studies in Australian educational institutions
are enrolled in vocational and technical education (VTE). VTE student enrolments have increased
rapidly, up from around 1400 in 2003 to around 3900 in 2005, mainly in hospitality, services and transport.
The number of Indian students undertaking English language courses in Australia has also grown
strongly, with student enrolments increasing from less than 100 in 2002 to around 1300 in 2005.

Rapid growth in education exports has been facilitated by the forging of institutional links between
Australian education providers and their Indian counterparts. An agreement was concluded in 1999
between the Australian Vice-Chancellors’ Committee and the Association of Indian Universities to
cooperate in a number of areas. A growing number of universities in the two countries have since been
establishing their own agreements or memoranda of understanding in particular fields (Box 4.2).

A number of foreign institutions have established credit transfer / ‘twinning’ arrangements with Indian
counterparts. Several Australian universities also provide courses online via distance education over
the Internet. The University of Southern Queensland offers online MBA studies to students in India.
The University of South Australia similarly offers an online master’s degree in Information Technology
(Techbizindia.com 2005). The University of Wollongong has an MOU with Wipro, a leading Indian
information technology company, to provide strategic direction for a partnership in the area of
information technology services (The Hindu Business Line 2004).

A visit to India in February 2006 by Australia’s ‘Group of Eight’ universities was aimed at raising the
profile of Australian education and research and building linkages.

Linkages are also being forged outside the higher education sector. Melbourne-based franchise
company Kangaroo Kids recently opened seven new high schools in Mumbai in addition to its
35 pre‑schools already operating in 12 cities across India (Austrade 2005). The Australian School,
which offers students the opportunity to obtain the Western Australian Certificate of Education, also
recently opened in New Delhi (123India.com 2004).

P A G E 72
The Bilateral Economic Relationship

BOX 4.2: EXAMPLES OF AUSTRALIAN university linkages with


indian counterparts

In 2001, the Department of Computer Science and Computer Engineering at La Trobe


University signed a twinning agreement with CMTES Informatics, a private provider of
computer training courses in India, to deliver the first part of its Master of Information Technology
course in Hyderabad (La Trobe University 2002).

Monash University, in collaboration with BHP Billiton, is establishing a joint institution


for scientific research with the Indian Institute of Technology Mumbai (IIT Mumbai). The
University of New South Wales (UNSW) has entered a partnership with IIT Mumbai to
develop collaborative research programs in computer science (Howard 2006a). UNSW has
MOUs with Jawaharlal Nehru University and the University of Pune, focused on collaboration in
research, student and staff exchanges and education projects (DFAT 2005). It has established
offices in New Delhi and Mumbai.

The University of Queensland concluded a research collaboration agreement with Manipal


Academy of Higher Education, one of India’s top medical schools, in 2004. It also negotiated
a PhD student exchange program with Jawaharlal Nehru University in 2003 (University of
Queensland 2004).

An agreement between Southbank Institute of TAFE and the Institute of Hotel Management
Bangalore, and another between the Queensland University of Technology and the Indian
Institute of Information Technology in Bangalore, were signed during Premier Beattie’s 2004
visit to India (Queensland Department of Premier and Cabinet 2004). The Queensland
University of Technology also signed an MOU with the Madras Institute of Technology during
Prime Minister Howard’s March 2006 visit to India (Howard 2006b). Queensland University of
Technology’s School of Mechanical, Manufacturing and Medical Engineering also has an MOU
with the Vellore Institute of Technology in the state of Tamil Nadu (Queensland Department
of Premier and Cabinet 2004).

In 2004, the University of Sydney established five Visiting Research Fellowships, designed
to establish and encourage research links with leading Indian researchers (University of
Sydney 2004).

The University of Melbourne has developed a variety of linkages with leading Indian academic
institutions, including through an MOU with the Indian Institute of Science, Bangalore focused
on biotechnology and through research collaboration on topics such as grid technology
research, Indian economic policy, and prevention and control of HIV/AIDS. The University

plans to open a liaison office in Bangalore in early 2007.


Based on correspondence in December 2006 with Professor Frank P Larkins, Deputy Vice Chancellor (International), the
University of Melbourne.

P A G E 73
INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY

Tourism
India was Australia’s 14th-largest inbound tourist market in 2005–06, with 79 000 short-term visitor
arrivals, up 33 per cent on the 59 000 recorded in 2004–05 (ABS 2006b). The average annual growth
in visitor numbers over the decade to December 2005 was 13.2 per cent. Annual growth in short-
term visitor arrivals from India outstripped the overall average from all countries over the decade and
rebounded particularly strongly since the worldwide decline in tourism precipitated by September 11
(Figure 4.3). Strong growth in Indian visitor numbers looks set to continue. During the ten months to
October 2006 around 69 000 short-term visitors from India arrived in Australia, a 25 per cent increase
on the 53 000 that visited in the corresponding period of 2005 (ABS 2006b).

Figure 4.3
Rapid growth in visitor numbers from India

Annual growth in short-term visitor arrivals from India and from all countries

30
India World
25

20
Per cent

15

10

0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
-5

-10

Source: ABS 2005a.

Short-term visitors from India contributed A$280 million to the Australian economy in 2005, an increase

of 54 per cent on the previous year . The long average stay, at 46 nights, reflects the fact that many
Indians come to Australia to visit friends and relatives (13 000 in 2005, out of 68 000 total visitors).
Visiting friends and relatives, including those studying in Australia, would also be a motivating factor
for many of those stating they came to Australia for a holiday (27 000) (Tourism Australia 2006).

Despite gaining market share in Indian outbound tourism over recent years, Australia’s share remains
low, at a little over 1.0 per cent. During a September 2005 visit to India by the Australian Minister for
Small Business and Tourism, Fran Bailey, Australia and India agreed on an Action Plan to assist in
fast-tracking tourism growth between the two countries. Key elements of the Plan included research
and training cooperation in ecotourism, the sharing of expertise and the holding of a Tourism Business


Measured in terms of Total Inbound Economic Value (TIEV).

P A G E 74
The Bilateral Economic Relationship

Forum during the Melbourne Commonwealth Games in March 2006 (Bailey 2005). During the forum,
Minister Bailey and India’s Minister for Tourism and Culture, Ambika Soni, agreed to pursue opportunities in
ecotourism, food tourism, enhancement of heritage sites and investment in infrastructure (Bailey 2006).
The Australian Government has also moved to adopt a strategic approach to the sustainable growth
of the Indian tourism market with the launching of an ‘Emerging Markets’ strategy, which forecasts
the number of annual visitors from India to reach 550 000 by 2025, and the economic value of Indian
inbound tourism to increase by 890 per cent to A$2 billion by 2025. (Department of Industry, Tourism
and Resources 2005). The Department of Immigration and Multicultural Affairs introduced an electronic
visa application facility for short stay visitor visas to the India market on 21 August 2006. This allows
‘Aussie Specialist’ agents in India to submit an electronic visa application (via the internet) for their
clients, thus reducing application delivery and processing times.

Other Commercial Services


Australian companies are beginning to take advantage of emerging services export opportunities in
India, outside of the education and tourism sectors. Other commercial services exports from Australia to
India (including transportation) grew by 46 per cent between 2004–05 and 2005–06 from A$171 million
to A$249 million, and have more than trebled since 2002–03 (ABS 2006a).

Numerous Australian engineering consultancies and infrastructure design companies are involved in
the upgrading and modernisation of India’s transport infrastructure (Box 4.3 contains examples). The
increasing importance accorded to infrastructure development by the central and state governments
alike is generating flow-on opportunities for Australian service providers. In the air transport sector for
example, Airservices Australia is providing safety management systems and air traffic management
training at Delhi and Mumbai international airports for the Airports Authority of India (Airservices
Australia 2005). Aviation Compliance Solutions reportedly secured contracts, including with Air India,
to provide aviation compliance and safety services to the fast-growing Indian market (AFR 2006b).

Australian design and software capabilities are also being recognised in India. Ford Australia designed
and engineered a new Fiesta specifically for the Indian market, which was launched in the fourth quarter
of 2005 (Ford 2005). Australian software company, Securities Markets Automated Research Training
and Surveillance (SMARTS), supplied its stock market monitoring solution to the Indian national
securities regulator, Securities and Exchange Board of India (SEBI) (Invest Australia 2005b).

P A G E 75
INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY

BOX 4.3: EXAMPLES OF AUSTRALIAN COMPANY INVOLVEMENT IN INDIA’S


INFRASTRUCTURE SECTOR

Australian companies are actively participating in the modernisation of India’s infrastructure.


From the State of Queensland alone, companies that have won infrastructure-related business
include:

• Engineering consultancy Cullen Grummitt and Roe, which secured a number of projects
in India associated with port sector development. It is doing the design work for the
extension of a wharf in Mundra Port, Western India while its Indian partner, Simplex
Concrete Piles, is undertaking the construction work. It has also designed port terminal
facilities at Chennai, Kandla, Tuticorin and the Nhava Sheva Port and Jawaharlal Nehru
Port in Mumbai. CGR established an office in Mumbai in 2005.

• Civil, structural and environmental engineers and planners, Burchill Partners of the Gold
Coast, who have been responsible for the planning and infrastructure design of the city
at Amby Valley, a residential project near Mumbai being constructed by Sahara India.

• Infrastructure design company Maunsell (part of the AECOM Group), which supplied
design and safety systems for the Delhi metro system.

• Union Switch and Signal Asia Pacific, which installed state-of-the-art safety control systems
for India’s Southern Railway and South Eastern Railway, valued at several million dollars.
Union Switch and Signal Asia Pacific has market responsibility in the Asia Pacific Region
for the Ansaldo Signal NV group.

Source: Queensland Department of Premier and Cabinet 2004.

Australian companies have been involved in projects aimed at strengthening India’s health system.
Aus Health International secured a project focused on improving the institutional framework for policy
development in the state health system, as well as strengthening management and implementation
capacity, performance improvement and technical supervision. The company was also involved in
planning aspects for a 300-bed speciality hospital with corporate governance and contemporary

management practice. AWS Clinical Waste recently won a World Bank contract for the design and
installation of clinical waste treatment plants in 22 district hospitals in West Bengal (Queensland
Department of Premier and Cabinet 2004). The 2006 Australian Exporter of the Year, ResMed, exports
medical products to India that are used to treat sleep-disordered breathing and other respiratory
disorders (ResMed 2006).

In the past four years Australia has gained in popularity amongst Indian filmmakers as a film location,
reflecting both the growing international audience for Indian films and a growing interest among
Indian film-goers in foreign films and influences. Since 1998, over 40 Indian films have been shot in


See www.ahi.com.au.

P A G E 76
The Bilateral Economic Relationship

Australia (Austrade 2006c). Salaam Namaste, released in September 2005, was the first Indian movie
entirely shot in Australia (The Australian 2005a). It was the highest-grossing Indian film overseas
in 2005 and did well in the Indian urban market. Australian film post-production services have also
been in demand.

Industry links arising from strong growth in exports of mineral products to India are helping to foster an
awareness of Australian capabilities in the mining industry more broadly. Australian mining software and
technology services are much sought after by Indian industry. Xstrata’s Australian-based technology
business has helped India’s Sterlite Industries to build an ISASMELT furnace, which is now operational.
It has also supplied Sterlite with its IsaProcess copper refining technology. Some smaller Australian
companies, notably from Western Australia and Queensland, have also established a foothold in areas
such as mining software and mining systems development. For example, Queensland mining services
firm JK Tech has recently supplied mineral processing technologies to Hindustan Zinc (Queensland
Department of Premier and Cabinet 2004).

India’s services exports to Australia


According to official statistics, personal non-education-related travel to India is by far Australia’s most
significant services import from India (A$195 million in 2005–06). While short-term departures to India
have not grown as fast as the number of visitors from India over the past decade, they have grown
more rapidly in recent years – at a robust average of 37 per cent over the three years to 2005–06
(ABS 2006b, 2005a, 2004b).

The Australian Bureau of Statistics (ABS) estimates imports of computer and information services and
other business services from India to be worth A$75 million in 2005–06 (A$35 million in 2002–03). The
Indian data on exports to Australia of computer services (excluding exports of companies engaged
exclusively in business process outsourcing activities) is higher, perhaps owing to the fact that it
includes revenues derived by the Australian subsidiaries of Indian companies (see Section on ‘Indian

direct investment in Australia’ below). The RBI estimates computer services exports to Australia at
Rs4.48 billion (A$164 million) for the 12 months to March 2003 (RBI 2005c).

services investment

Australian direct investment in India


The level of Australian investment in India’s services sector is set to increase with some recent
investment decisions and conclusion of contracts. Several Australian companies have established
an on-the-ground presence in India to capitalise on emerging market opportunities, particularly in
medical services (Box 4.4 below), construction, infrastructure, mining services, telecommunications,
banking and insurance.


ABS data on exports are collected to standards set out in the fifth edition of the IMF Balance of Payments Manual (BPM5)
which incorporates Mode 1 (conventional cross-border supply), Mode 2 (consumption abroad) and Mode 4 (movement of natural
persons) (excluding salaries and wages). RBI data on computer services exports incorporate Mode 3 transactions (trade by
foreign affiliates), which are not recognised as exports under BPM5.

P A G E 77
INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY

BOX 4.4: IBA health

IBA Health develops advanced information systems for clinicians and hospitals around the
world. Their software solutions link clinical, administrative and departmental systems across
the whole spectrum of health services. In Australia, more than 180 private and public hospitals
use IBA Health solutions for administration and business support. IBA Health has operations
in South East Asia, South Africa and the Middle East, and most recently in India.

IBA Health acquired the Bangalore-based Indian company, Medicom Solutions, in late 2005.
The acquisition gave them a quick entry into the fast-growing Indian market and access to
Medicom’s R&D capability. IBA Health’s intention is to consolidate all its development work in
Bangalore and to develop the business there into a centre of excellence servicing its growing
international business.

IBA Health’s main focus in the Indian market will be private hospitals. The private hospital
sector is becoming increasingly important as incomes rise and as increased availability and
affordability of insurance has increasingly made private healthcare more affordable.

IBA Health chose to develop an in-house operation in India rather than outsource their IT needs
because of the greater scope this afforded for managing the development work undertaken.
The operation requires managers from head office to be present on the ground so as to
ensure their software is configurable and flexible enough for selling into other markets, not
just India.

In gaining the necessary approvals to invest in India, IBA Health found that that the Indian
authorities recognised that the approvals process is an important issue for foreign investors,
and consequently were making efforts to streamline procedures. Visa applications were also
processed without delay. More broadly, IBA Health’s experience has been that Australians
– both corporates and individuals – are very welcome in India.

While Bangalore is beset with infrastructure difficulties, the infrastructure in Bangalore’s


Electronic City is relatively good. IBA Health has nonetheless installed a power back-up.
The company also recognises the clustering advantages of operating an IT development
centre from Bangalore’s Electronic City. In addition, there are free trade zone-type benefits
from operating in Electronic City and more administrative transparency compared with other
parts of India.
Source: www.ibatech.com and discussions with Dr Brian Cohen, Chief Technology Officer, Asia, IBA Health.

Australian project development companies have begun to make significant investments in India.
Clough Limited announced in January 2005 the signing of a US$131 million (A$170 million) contract
with BG Exploration and Production India Limited to develop three new platforms and associated
pipelines in the shallow-water Panna oil field and the South Tapti gas field located north-west of
Mumbai (Clough 2005). Clough is also currently undertaking work for the major G1-GS15 Deepwater
Development located off the East Coast of India for India’s Oil and Natural Gas Corporation (ONGC).
The scope of work includes the design, procurement and installation of a new onshore gas plant, an

P A G E 78
The Bilateral Economic Relationship

additional shallow water wellhead platform, and a five-well sub-sea development involving trunklines

and control system tied back to new and existing facilities . In 2006, Hydro Tasmania Consulting and
Australian renewable energy development business, Roaring 40s, established offices in India to capitalise
on consulting opportunities in the renewable energy sector (Hydro Tasmania 2006) Leighton is also
investing in India with a view to ramping up its involvement in project development (Box 4.5).

BOX 4.5: Leighton’s increasing involvement in india

Leighton is one of Asia’s leading contractors and project developers. It has significantly
ramped up its involvement in India over the past couple of years, and sees significant scope
for future growth. India’s strong economic growth is driving increased demand for energy. It
is also driving a need for improved infrastructure and at the same time is providing a greater
capacity to fund infrastructure improvements. Leighton focused its attention initially on oil
and gas infrastructure but also sees opportunities in transport infrastructure, coal mining and
industrial building projects.

Leighton is part of a consortium that won a contract to modernise the signalling and
telecommunications systems on the rail link between Ghaziabad and Kanpur. Leighton will be
providing and installing communication systems along the railway line and in the locomotives
using the line. Also in joint venture, Leighton won the contract to install new marine terminal
facilities near Jamnagar, India for Reliance Ports & Terminals Limited, which is part of Reliance
Group, one of India’s largest conglomerates.

Leighton has also looked for business opportunities with major multinationals operating in India.
It completed Nokia’s new mobile phone manufacturing plant near Chennai (Leighton 2005a).
It has also won contracts to design and construct manufacturing centres for Motorola and ,
Flextronics and Salcomp.

The Leighton Group is well positioned to meet growing demand for contract mining and
associated mine infrastructure in India, which is being fuelled by strong domestic growth and
accompanying requirements for power generation and steel production. Leighton subsidiary
Thiess currently has staff on the ground in Kolkata and Delhi and has recruited Indian graduates
who are being trained in Indonesia and Australia to work in this emerging market.

Coal India is currently responsible for around 90 per cent of India’s annual coal production.
Indian coal mining productivity should benefit from the management and technological expertise
in mine operation and coal preparation of contract miners. Thiess was the first foreign company
to submit a major coal mining tender to work for Coal India’s subsidiary Eastern Coalfields
Limited for their Rajmahal Open Cut Expansion Project in the state of Jharkhand. Although this
bid was unsuccessful, Thiess is reportedly planning to bid for another contract worth several
billion dollars in early 2007 to supply coal to several major power stations in India.
Sources: The Australian 2006, Leighton 2005a, 2005b, 2006a and 2006b, and discussions with Leighton.


www.clough.com.au, accessed April 2006.

P A G E 79
INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY

Reflecting the growing demand for mining services, Ludowici opened an office in Chennai in 2006
to undertake design work for mining projects. Mincorp, a Queensland company providing complete
solutions for coal washeries, opened an office in Bhubaneswar, Orissa, in 2004. Leighton subsidiary
Thiess and the Surpac Minex Group are also pursuing opportunities (Box 4.5 and Box 4.6).

BOX 4.6: surpac minex group

The Surpac Minex Group produces leading-edge software for mine planning, mining,
engineering, geology, exploration and mineral resource modelling. The company was formed
as a result of a merger between Perth-based Surpac Software International and Australian
mining software company ECSI (Minex) in October 2002.

Initially, Surpac serviced India remotely from Australia and the United Kingdom. It then moved
to employ local agents. In 2001, after successfully doing business in India for over 10 years,
Surpac decided to establish its own office. The company’s presence in India has continued
to grow, and today there are a number of divisions in the office including Research and
Development, Quality assurance, IT Support, and Sales and Support.
Sourced from www.surpac.com.

While Telstra currently does not have a carrier licence in India, it has three offices – in Bangalore,
Mumbai and New Delhi – which manage supply of international telecommunications services to the
Indian sites of its corporate clients, as well as sales to Indian customers of Telstra services outside
India. Telstra has established direct supply arrangements with Indian carriers, such as Videsh
Sanchar Nigam Ltd (VSNL) and Bharti, so as to provide a one-stop shop for all telecommunications
services for its corporate clients based in India (Telstra 2006). Telstra is also a sales agent for its
Hong Kong-headquartered joint venture operation, Reach, which has an Internet service provider
licence in India.

All major Australian banks are now represented in India, either directly or through third-party
relationships, although none currently has a branch licence. ANZ has had a lengthy involvement
in India, initially through its Grindlays businesses, which included the largest foreign bank branch

network in the country. ANZ disposed of its Grindlays operation to Standard Chartered in 2000 , but
retained its investment banking arm. It currently operates as a merchant bank, ANZ Capital Private
Limited, in Mumbai. It also has a significant information technology operation in Bangalore, which was
established in 1988. The ANZ Trade Centre in Bangalore now employs 1300 IT officers and provides
a range of customised services aimed at forging and expanding trade and investment relationships
10
between Australian and New Zealand companies and Indian businesses.


The sale stemmed from ANZ’s intention, signalled in May 1999, to simplify its international business and focus it on the Asia
Pacific (ANZ 2000). The ANZ’s preferred approach today is to enter partnerships with local banks, as it has done in Indonesia,
Cambodia, the Philippines and Vietnam.
10
See www.anztradecentre.com.

P A G E 80
The Bilateral Economic Relationship

The Commonwealth Bank received approval in June 2005 to establish a representative office in
Bangalore. The office will lead the Bank’s evaluation of opportunities in India (Commonwealth Bank
2005). National Australia Bank received approval to open a representative office in Mumbai in
August 2006. Westpac has a third-party relationship with Standard Chartered Bank (SCB) in India.
Under the relationship, SCB supports Westpac customers in India and Westpac supports Indian
customers in Australia. At the time of writing Westpac was reviewing its options for establishing a
presence in India.

BOX 4.7: macquarie bank

Macquarie Bank established a securities business in Mumbai in July 2005, marking an


expansion of Macquarie’s presence into all key Asian markets. It acquired ING’s Asian cash
equities business in July 2004 giving it a footprint in 10 Asian countries. It currently employs
over 850 staff in Asia and has one of the largest equities sales and research teams dedicated
to Asia (Macquarie Bank 2005). The focus of its Indian business is on stockbroking, equity
research, investment advisory services and corporate finance. Macquarie sees particular
opportunities in India’s infrastructure sector, and also property, telecommunications and
media – all sectors in which it has competitive strengths. Macquarie Bank had teamed up
with Aeroports de Paris to bid for the restructure and modernisation of the Mumbai and Delhi
11
airports, but its bids were unsuccessful. It is reportedly keen to be involved in the privatisation
of other airports in India (SMH 2006).

In 2005, AXA Asia Pacific established a joint venture in the insurance sector (Box 4.8), which is
expected to invest approximately Rs5 billion (A$150 million) over the first three to four years of
operations (Bharti Enterprises 2005a). In the same year, AMP decided to sell its 26 per cent stake in
its joint venture business, AMP Sanmar, to Reliance Life Insurance as part of a re-orientation towards
its core wealth management businesses in Australia and New Zealand. In Asia, it would henceforth be
focused on asset management through AMP Capital Investors. India remains an important market for
AMP Capital Investors, with a presence that includes two infrastructure funds and other investments
(AMP 2005a, 2005b).

11
Macquarie Bank has an exposure in Airports Company of South Africa, which was part of the winning bid for the Mumbai
airport redevelopment. Macquarie Bank’s MacAir has a 28 per cent stake in Aeroporti di Roma, which has a 20 per cent stake
in the South African company (SMH 2004).

P A G E 81
INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY

BOX 4.8: axa asia pacific

AXA Asia Pacific signed an agreement in August 2005 with Bharti Enterprises, a business
conglomerate with interests in telecom, agribusiness and infrastructure projects, to establish a
joint venture company to undertake life insurance business in India. AXA Asia Pacific acquired
a 26 per cent equity stake in the joint venture, the maximum currently permitted under Indian
regulations. AXA Asia Pacific brings to the partnership its global life insurance and asset
management expertise, while Bharti brings its strong local market knowledge, reputation and
presence. Bharti Televentures has a retail presence in 4500 towns and over 20 million mobile
customers, which the joint venture will be seeking to leverage. The joint venture commenced
operations on 22 August 2006 with the opening of its first office in Hyderabad. It plans to roll
out over 30 branches by the end of 2007.
Sources: Bharti Enterprises 2006, AXA Group 2005, and discussions with AXA Asia Pacific Holdings.

Australian franchises, Gloria Jeans and Cookie Man, have also established operations in India. Other
Australian companies are reported to be considering investment opportunities, notably in banking,
and in minerals prospecting and exploration.

Indian direct investment in Australia


As of October 2006, 26 first and second-tier Indian information technology companies had established
a significant presence in Australia to provide IT solutions to local businesses and secure global
market opportunities.

Tata Consultancy Services set up a Global Delivery Centre in Melbourne in 2002, which provides
12
software solutions and consulting services to clients in Australia, New Zealand and the Asia Pacific.
TCS also has a SAP Centre of Excellence in Melbourne (TCS 2005b). TCS launched a credit risk
model banking solution for the Indian market in association with JYI Risk Management Services of
Melbourne in 2002 (TCS 2002). Having initially partnered with Sydney-based Financial Network
Services to deliver a banking platform to the Central Bank of India for the automation of bank branches
(Financial Network Services 2005), TCS acquired the business in October 2005 for US$26 million
(TCS 2005a). TCS plans to develop its Financial Network Services business into a global centre
of excellence for the banking industry (TCS 2006). In November 2006, TCS acquired Australian
consultancy firm TCS Management (formerly Total Communications Solutions) for A$1.7 million and
performance payments of A$15 million over five years. The acquisition of TCSM, which specialises
in strategy conversion, program alignment, portfolio balancing and navigation services, is intended
to complement TCS’s global capabilities in consulting, IT services and BPO. It should enable TCS
to improve services to its growing Australian client base, which includes BHP, Woolworths, ANZ,
St George Bank, Alcoa and Rio Tinto (Business Standard 2006).

12
See www.tcs.com

P A G E 82
The Bilateral Economic Relationship

Satyam’s Melbourne operations house its largest global development centre outside India, and serves
as a major technological development and software support centre for the company’s Asia Pacific
operations (Satyam 2004). Satyam has entered into an alliance with Victoria University which will
enable up to ten VU students to undertake a software development internship with it each year. On
successful completion of the training, the students will be allocated to projects in Melbourne or in
one of Satyam’s other 46 locations around the world. Satyam will also employ up to 20 of Victoria
University’s graduating software engineers each year (Satyam 2005) and provide 20 University of
13
Melbourne software engineering students with internships annually. Birlasoft, part of the CK Birla
14
Group, also offers IT services worldwide from development centres in India and Australia.

Infosys entered the Australian market in 2004 with the acquisition of Melbourne company Expert
Information Services for A$31 million (The Australian 2005b). Infosys is structured into globally
15
integrated business units for different parts of its business. Gartner Research’s vice-president,
Partha Iyengar, has observed that Infosys’ long-term strategic intent is to use Australian resources
for its global requirements (The Australian 2004). Accordingly, Infosys is forging partnerships with
Australian technology developers (Invest Australia 2005a). For example, it concluded an agreement
with the Smart Internet Technology Cooperative Research Centre for joint efforts in research and
development. The partnership will result in opportunities for Smart Internet’s growth through the
leveraging of Infosys’ global network and knowledge base. The collaboration involves the investment
of $A800 000 in Australian research and development over four years (Infosys 2004).

The partnerships are in turn stimulating export opportunities for Australia. The CSIRO recently signed
a cooperation agreement with Infosys, which encompasses research and development cooperation
for information engineering, as well as the commercialisation of CSIRO’s technology. This will enable
the CSIRO to market its Australian-developed intellectual property through Infosys’ strong global
distribution network (Coonan 2005a). The Australian Information Industry Association (AIIA) and its
counterpart, the National Association of Software and Service Companies (NASSCOM), have also
forged a cooperative working relationship in order to further enhance business-to-business links
between Australian and Indian information and communications technology companies, and thereby
generate additional bilateral trade and investment opportunities.

Indian companies are increasingly investing in Australia outside the information and communications
technology sector. The Taj Hotels Resorts and Palaces, part of the Tata Group, acquired a 100‑room
hotel, situated at The Wharf at Woolloomooloo in Sydney, in December 2005 for A$36 million
(Taj Hotels 2005). The State Bank of India has a branch office in Sydney. Additional Indian
investment in the banking and finance sectors can be expected as trade and investment linkages
develop further.

13
Based on correspondence in December 2006 with Professor Frank P Larkins, Deputy Vice Chancellor (International), the
University of Melbourne. Satyam signed an MOU with the University of Melbourne in September 2006.
14
See www.birlasoft.com
15
Discussions with K. Dinesh, co-founder and Member of the Board of Infosys.

P A G E 83
INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY

A platform for future growth

A key factor in the heightened interest of Australian business in the Indian market, which is being
reflected in increased trade and investment linkages between the two countries, has been the push
from the Australian and state governments, supported by the Australia India Business Council. The
Australian Government has recently directed increasing attention to the Indian market. A Trade and
Economic Framework Agreement was signed between Australia and India during Prime Minister
Howard’s visit to India in March 2006. The Agreement will provide an important basis for the facilitation
and future development of the trade and economic relationship, and will encourage closer strategic
cooperation in many of the key economic sectors. Specific services sectors identified for cooperation
include infrastructure development and financing; information and communications technology;
education; tourism; film and entertainment; sporting event infrastructure, management, technology
and medicine; and biotechnology.

The Australian Government is also encouraging the development of productive, cooperative links
between Australian and Indian businesses, industry bodies and research institutions in specific services
sectors. For example, Prime Minister Howard announced a new A$25 million bilateral research
and fellowships program during his visit to India in March 2006. The stated aim of this initiative is
to generate stronger links between Australian and Indian scientists and their research institutions;
strengthen the overall bilateral relationships to the benefit of both nations; and highlight within India
the high quality of Australian education, science and training services.

Links have also been fostered through memoranda of understanding, reciprocal trade missions, the
promotion and facilitation of joint ventures and partnerships, trade and investment and, more broadly,
through promoting the respective strengths of the two economies. For example, during his March
2006 visit, Prime Minister Howard witnessed the signing of Memoranda of Understanding on Defence
Cooperation, Customs and Biotechnology, a bilateral Air Services Agreement, and the Scientific
Collaboration Fund. Australia’s television service in the Asia Pacific region, Australia Network, has
been broadcasting local Australian content into India since September 2005, generating increased
awareness of Australia in the Indian market. Australia Network is available in approximately five million
homes in India, and the number is growing rapidly.

Overarching coordination of the Australian Government presence in India is carried out by the High
Commission in New Delhi, supported by the Consulate-General in Mumbai. Prime Minister Howard
announced the establishment of a Consulate-General in Chennai during his March 2006 visit.
Australian Government representatives from Austrade and Invest Australia are on the ground in India
to assist Australian exporters capitalise on business opportunities and facilitate Indian investment in
Australia. Austrade has offices in New Delhi (within the Australian High Commission), Mumbai (within
the Australian Consulate-General), Bangalore, Kolkata, Chennai and Hyderabad. Invest Australia
has offices in New Delhi (within the Australian High Commission), and Mumbai (within the Australian
Consulate-General).

P A G E 84
The Bilateral Economic Relationship

A number of state governments have also identified India as a strategic market. For example, Victoria
has launched an ‘Opening Doors to Export’ plan which focuses on the promotion of exports in three
emerging markets identified as key growth markets for Victorian exporters – North Asia, India and
the Middle East – and has appointed a Special Trade Envoy to India (Business Victoria 2004). There
have been several state-government-led business missions to India over the past two or three years,
most with a strong focus on services sectors. A number of Memoranda of understanding have been
signed during these visits. Western Australia has a Trade Office in Mumbai; Queensland has a Trade
and Investment Office in Bangalore; Victoria recently opened a Business Office in Bangalore; while
South Australia appointed a commercial representative in Chennai.

Business associations and chambers of commerce in both Australia and India play an important role
in facilitating bilateral trade and investment. The Australia India Business Council (AIBC) is a national
bilateral chamber of commerce committed to building stronger business links between Australia and
India for the benefit of both countries. It maintains close links to the federal and state governments
and showcases business opportunities in India to the Australian business community through an
active program of events nationally.

P A G E 85
P A G E 86
Chapter 5

INDIA’S BUSINESS ENVIRONMENT:


IMPLICATIONS FOR AUSTRALIAn COMPANIES

KEY POINTS

• India’s improved economic performance has been accompanied by


a dramatic increase in its external trade and by its implementing of
policies to attract foreign investment, although there is scope for further
liberalisation in these areas.

– India’s rapidly increasing middle class and growing consumer


affluence is already a draw-card for foreign investors and exporters,
and a likely source of future opportunities for service providers.

– The need for economic reform is now more broadly accepted in India
and while further reforms may be gradual, once implemented they
are likely to be durable given the need to build consensus among
decision-makers in a democratic environment.

• Australian companies can benefit from favourable perceptions of their


country in India and significant people-to-people links in seeking to
capitalise on business opportunities.

• Nonetheless, hurdles in improving the business environment remain, and


it will be important for Australian companies wishing to exploit business
opportunities in India to be aware of these.

– Power and transport infrastructure shortcomings are a major concern,


although these tend to act as less of a brake on services than on
manufacturing.

– Many regulations remain onerous, despite significant attention over


recent years to addressing regulatory barriers and burdens.

– Corruption remains a concern for business operating in India, although


such behaviour is being curtailed by increased competition, deregulation
and e‑governance, improved accountability mechanisms and an
increasingly activist media and NGO community.

• While India presents as a potentially attractive market for many Australian


businesses, they need to invest time and effort in understanding the
business environment and its challenges.

– Prerequisites for building a successful business in the Indian market


include detailed research and targeted preparation, careful selection
of a business partner or customer, the ability to take a long-term view
and the capacity to ride out rough patches.

P A G E 87
INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY

‘India’s economy will continue to have the capacity to surprise optimists negatively, and to
surprise pessimists positively.’
(Financial analyst)

India is successfully managing its transition to a more open economy, spurred by the reforms initiated
by the then Finance Minister Manmohan Singh in 1991. The reforms have resulted in reduced public
sector participation in the economy, greater openness to international competition and significant
deregulation. India’s increasingly dynamic and competitive private sector now accounts for nearly

80 per cent of GDP (RBI 2005b). Both exports and imports, particularly of services, are growing
strongly. The workforce is becoming increasingly skilled and the economy is being driven more and
more by knowledge-based industries, notably IT–ITES. Incomes per capita are increasing, consumer
tastes are changing and the aspirations of the younger population are rising. Foreign exporters
and investors recognise India’s emergence and want to do business with India. If growth in India’s
knowledge-intensive services flows through into broader sustainable economic development, their
eyes will be focused on India for a long time to come. Recent figures showing a rapid increase in
manufacturing output suggests that such developments may indeed be starting to occur.

Optimism is a fine thing – and of itself is contributing to the sense of energy and success which is
currently driving India forward. But some caveats are also required. The rosy growth scenario sketched
out in preceding chapters is by no means the only one. A study by the World Economic Forum and
Confederation of Indian Industry (WEF 2005) presents three scenarios for India to 2025. The most
pessimistic of these scenarios, which is premised on the government failing to instigate appropriate
reforms and a difficult global environment, would see India slipping back towards the lower growth
rates of earlier decades.

India’s government remains of a reformist mindset. But the task it faces is enormous. While reforms
to date have been impressive, there remain some major hurdles in India’s business environment
that will need to be overcome for sustainable growth to take place in the broader Indian economy.
Australian companies wishing to exploit the opportunities India presents will do well to be aware of
these. Chief among them are continuing power and transport infrastructure constraints, significant
amounts of regulation in many sectors, and the need to adapt to challenging business practices.

Australian companies enjoy some advantages over others in capitalising on business opportunities
in India. But a recurring theme in the authors’ conversations with companies already operating
successfully in India was the need for Australian entrants to the market to calibrate their expectations
carefully. Australian businesses need to invest time and effort in understanding the business
environment in India and its challenges; to be willing to do the hard yards required to adapt; to accept
that establishing a business presence will be time-consuming and possibly frustrating; and to take a
long-term strategic view of their prospects, if they are to be successful.


2004–05 figures at factor cost.

P A G E 88
India’s Business Environment: Implications for Australian Companies

AN IMPROVING BUSINESS ENVIRONMENT

Reform efforts and prospects


‘Because of its need to build a consensus for reform, in the longer term India’s rise may prove
even more durable than that of China.’
(AFR 2005)

The far-reaching economic reforms outlined in particular by the Indian Government’s July 1991
Statement on Industrial Policy aimed to foster a more vibrant economy, with far higher growth rates
than those realised over the first three decades of India’s post-independence period. In addition to
deregulation at the sectoral level (see Chapter 2), the reforms have included significant liberalisation
of industrial policy, public sector enterprises, foreign exchange controls, interest rates, competition
policy and taxation (Box 5.1), as well as tariffs and foreign investment (see section on ‘Increased
openness to trade and foreign investment’ below). However commentators such as the World Bank
continue to point to the need for further reforms if recent growth rates are to be sustained and the
growth driven by knowledge-intensive services is to be replicated in other, more regulated areas of
the economy.

The need for ongoing reforms is now more broadly accepted in India. A strongly performing economy,
increasing consumer affluence, a buoyant external sector and record foreign exchange holdings
have given rise to confidence that policy makers will continue down the path of reform. The success
enjoyed by reforming sectors has led to pressure for reforms to reap improved efficiencies in other
industries they depend upon.

Owing to the success of deregulation and liberalisation policies of the past decade-and-a-half, both
central and state governments have come to recognise the need for a thriving private sector. For its
part, the Planning Commission’s policies are now focused on facilitating private sector development.
Following the devolution of many economic powers from the centre, state governments are now
competing to attract foreign and domestic investment, which is in turn helping to drive improvements
in policy, infrastructure and the overall business environment. Accordingly, by 2004–05, the public

sector’s share of GDP was just 23.6 per cent. Further reinforcing the point, IT–ITES’s success is widely
attributed to the government’s light-handed approach to regulation in that sector (see Chapter 2). The
rapid growth of IT–ITES and other knowledge-based sectors shows clearly that Indian companies
can thrive in the face of international competition.


Indian CSO 2006, Statement 18. Includes public services in quasi-government bodies. By comparison, the public sector share
in Australia’s GDP was 22.0 per cent in the December quarter 2005.

P A G E 89
INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY

BOX 5.1: India’s MAJOR economic reforms SINCE 1991

• Industrial policy was significantly liberalised in 1991 and reform has continued in the
subsequent period. Compulsory industrial licensing for new undertakings or expansions
was abolished in 1991 for all but 18 industries. The number of industries exclusively
reserved for the public sector was reduced to eight. Today, six industries remain subject to
compulsory licensing (mainly on account of environmental, safety and strategic grounds),
while the only industries exclusively reserved for the public sector are atomic energy and
railway transport. The number of manufacturing industries reserved for the small-scale
sector has been reduced over time, but remains in excess of 50.

• Some public sector enterprises have been partially privatised, although outcomes to date
have been modest and privatisation remains controversial. Numerous public enterprises
have been corporatised while others have been given greater managerial autonomy and
operational flexibility.

• Foreign exchange controls have been gradually relaxed since the early 1990s. A
market-determined exchange rate system and full convertibility on the current account
were in place by the early 1990s. Regulatory emphasis in relation to foreign exchange
shifted significantly from control over use to management with the passing of the Foreign
Exchange Management Act (FEMA) in 1999. The rupee is today almost fully convertible
on the capital account for non-residents.

• An administered interest rates regime was progressively replaced by a system of market-


determined interest rates during the 1990s.

• The Competition Act 2002 replaced the Monopolies and Restrictive trade Practices Act
1969, which heavily circumscribed the operations of monopolies. The new Act aims to
curb anti-competitive behaviour and abuse of dominant market positions; and regulates
mergers and acquisitions. The Competition Commission of India, a new regulatory body
with a scrutiny and enforcement role, has been established. Independent regulators have
also been created in a number of sectors.

• Taxation reform has focused on broadening the indirect tax base and removing distortions.
A central services tax was introduced in 1994, and has been increased on two occasions
to stand now at ten per cent. Additional services have been progressively brought into the
tax net. Central excise duties on manufactured goods have been replaced by CENVAT, a
16 per cent tax on value added up to the manufacturing stage. A uniform state level VAT
on goods, applying up to the retail stage, was introduced in April 2005, replacing state
sales taxes. The standard tax rate is 12.5 per cent, although some goods attract a four
or a one per cent tax. The tax replaced state-level sales taxes, entry taxes, purchase
taxes and turnover taxes. The four per cent central sales tax levied on interstate sales
of goods is also set to be phased out. In the 2006–07 Budget, the Finance Minister laid
down a target date of April 2010 for the adoption of a national level goods and services
tax, shared between the centre and the states. This will require a merging of CENVAT
and state level VAT in some fashion.

P A G E 90
India’s Business Environment: Implications for Australian Companies

Only the pace of reforms is open to question. Economic reforms since the current United Progressive
Alliance (UPA) government came to power in May 2004 have been more measured than under the
previous National Democratic Alliance (NDA) government led by the Bharatiya Janata Party. During
the election campaign, the Congress Party, the main party within the governing coalition, said it would
pursue economic reforms with a ‘human face’. The ‘National Common Minimum Programme’, a pact
agreed between the UPA government and the Communist and other parties it relies upon to maintain a
majority in India’s lower house of parliament, reflects this stance (National Advisory Council 2004).

In general, reforms are more likely to be held up by political opposition when they are dependent on
legislative change rather than administrative decisions and notifications. Notwithstanding the progress
being made by the Government in achieving reforms on the administrative front, some progress on
flagship reforms such as labour laws and privatisation will be important to convince investors that
the process is retaining momentum.

Reforms in democratic India tend to be take place gradually because of the need to build consensus
for reform among governing coalitions. In the longer term however, India’s democratic processes
should underpin the durability of the reforms, provided reformers can point to improved performance
and benefits for the majority of the Indian population.

Increased openness to trade and foreign investment


India’s improved economic performance has been accompanied by a dramatic increase in its outward
orientation. Trade as a proportion of GDP has increased from 16 per cent in 1990–91 to 40 per cent
in 2004–05. Average applied tariffs have declined significantly from prohibitive rates since the early
1990s (Box 5.2), although they still remain higher than in many developing countries.

BOX 5.2: indian tariffs

Prior to the 1990s reforms, most Indian imports were subject to licensing restrictions and high
tariffs. India’s average tariff on non-agricultural products was reduced from 73 per cent in

1992–93 to 36 per cent in 1997–98 to 31 per cent in 2001–02. Maximum tariffs have been
subject to cuts in more recent years. The tariff on most non-agricultural goods was lowered
in January 2004 from 25 to 20 per cent; and the four per cent ‘Special Additional Duty’, which
had been levied on virtually all imports since the 1998–99 budget, was abolished (although it
was reinstated in 2006). The peak rate of customs duty on non-agricultural imports was further
reduced in the 2006–07 Budget from 15 to 12.5 per cent. Lower input costs resulting from the
tariff cuts have significantly enhanced the competitiveness of Indian industry.


Sourced from successive WTO Trade Policy Reviews of India.

P A G E 91
INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY

In addition to tariff reductions, which effectively act as an incentive to export by making production
for domestic consumption relatively less attractive, the Indian Government has instituted a number
of trade measures to encourage exports, with particular focus on the services sector (Box 5.3).

BOX 5.3: Policy measures to support exports

• Numerous Special Economic Zones (SEZs) for both manufacturing and service provision
have been established since April 2000, while eight Export Processing Zones have been
converted into SEZs. The SEZs offer superior infrastructure facilities and tax concessions
with a view to stimulating foreign investment and exports.

• Under the ‘Star Export Houses’ scheme, both merchandise and services exports can
apply for status as Star Export Houses and consequently be eligible for a number
of privileges including fast-track clearance procedures for both exports and imports.
Exporters are categorised according to the value of their exports. Star Export Houses
achieving rapid growth in their exports are entitled to duty credits under the newly
introduced Target Plus scheme.

• The ‘Served from India’ scheme, a revamped version of the earlier duty free export credit
scheme for services, involves duty credit entitlements for service providers depending on
their level of foreign exchange earnings.

• The Export Promotion Capital Goods scheme, accessible by all exporters including
exporters of services, has been made more flexible. Under the scheme, the import of
capital goods at a five per cent rate of duty is allowed, subject to fulfilling an obligation to
export the equivalent of eight times the duty saved over a period of eight years.

• ‘Export Oriented Units’ (EOUs) – units established anywhere which export all their
production – have been extended benefits additional to duty free imports, including
exemption from service tax. EOUs selling some of their output within the ‘domestic tariff
area’ also enjoy some concessions, subject to certain conditions. Units in free trade zones,
export processing zones, electronics hardware/software technology parks, and bio-tech
parks enjoy similar privileges.

• Duty exemption schemes are available, enabling the duty free import of inputs required
for export production.
Source: Directorate General of Foreign Trade 2004

P A G E 92
India’s Business Environment: Implications for Australian Companies

Foreign direct investment (FDI) has an important role to play in India’s development. Both the central
and state governments have assumed a more welcoming stance towards FDI, and this, as well as
increasingly positive sentiment on the part of foreign investors, has resulted in healthier foreign
investment inflows (Figure 5.1). The US$7.2 billion inflow in 2005–06 is in the vicinity of the US$8
billion a year inflow judged necessary to underpin the eight per cent GDP growth rate envisaged for
the Tenth Five Year Plan period (Indian Planning Commission 2002d).

Figure 5.1
FDI picking up
India’s direct investment inflows, 1991–92 to 2005–06 (US$ billion)

7 Total, including re-invested earnings and other capital


Equity
6

5
US$ billion

0
1991–92

1992–93

1993–94

1994–95

1995–96

1996–97

1997–98

1998–99

1999–00

2000–01

2001–02

2002–03

2003–04

2004–05

2005–06
Note: FDI data have recently been brought into line with international statistical standards by incorporating reinvested earnings and inter-
company debt transactions components. For the years prior to 2000–01, data are only available for the equity component.
Source: DIPP 2006.

In recent years, India has relaxed restrictions on FDI, with higher equity caps and investment
approvals granted automatically (the ‘automatic route’) for most services sectors, although limits on
foreign equity holdings continue to act as a restraint on investors’ operations (see Figure 5.2 and
Table 5.1). India has also streamlined its procedures, set target timeframes and introduced greater
transparency for the consideration of FDI proposals by the Foreign Investment Promotion Board
(FIPB), the body charged with considering FDI in activities not covered by the automatic route (DIPP
2005a). A Foreign Investment Implementation Authority was established in 1999 to facilitate quick
implementation of FDI approvals required by investors to get a project up and running. The Authority
is assisted by ‘Fast-track Committees’ which include state government agencies concerned with the
implementation of projects.

P A G E 93
INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY

Notwithstanding these central Government policy initiatives, the investment climate in India tends to
vary from state to state. Significant differences can exist on such measures as cost and complexity of
regulations and approvals processes; the attitude of state government officials in facilitating business;
state government incentives; and the availability of trained manpower.

Figure 5.2
Evolution of FDI policy in India
The progressive liberalisation of FDI policy, 1991–2005

2001–05 More sectors opened. Equity caps raised in many other sectors. Procedures simplified.

2000 Up to 100 per cent under Automatic Route in most sectors, except a small
negative list.

1997 Up to 74/51/50 per cent in 112 sectors under the Automatic Route;
100 per cent in some sectors.

1991 FDI up to 51 per cent allowed under the Automatic route in


35 Priority sectors.

Pre 1991 Allowed selectively up to 40 per cent.

FDI policy liberalisation

Source: DIPP 2005b

Foreign investors and local players – most notably in areas such as information technology,
pharmaceuticals, and film – also benefit from India’s legislative provisions for the protection of
intellectual property (Box 5.4), although some improvements are still possible on the enforcement
front. Increasingly, Indian companies – particularly in areas such as software development and
biotechnology – are themselves driving reform in this area pushing for greater protection of intellectual
property rights to protect their own innovations.

P A G E 94
India’s Business Environment: Implications for Australian Companies

BOX 5.4: Intellectual property rights

India has implemented a number of major improvements in its intellectual property rights regime
in order to meet its obligations under the 1994 WTO Trade-Related Aspects of Intellectual
Property Rights (TRIPS) Agreement. As a developing country, it had a transition period of five
years to implement the Agreement, beginning in January 1995. It also had a further five years to
extend its product patent protection to areas of technology not already protected. It undertook
to meet its patent obligations by a January 2005 deadline, in three phases (Deloitte 2005). The
outcome has been three amendments to the Patents Act, 1970. The Patents (Amendment)
Act, 1999 introduced a transitional facility in the fields of pharmaceuticals and agriculture
chemicals and a system of exclusive marketing rights (previously only process patents were
granted). It included a number of substantive and procedural changes bringing Indian patent law
more into line with international norms. Changes introduced under the Patents (Amendment)
Act 2002 included increasing the term of patents to 20 years from date of filing and extended
patent protection to drugs, foods and chemicals. India acceded to the Paris Convention on
Intellectual Property in 1998.

The Copyright (Amendment) Act 1994 provided protection to all original literary, dramatic,
musical and artistic works, cinematography, films and sound recordings, and also brought
satellite broadcasting, computer software and digital technology under copyright protection.
The Copyright (Amendment) Act 1999 effected changes to make the law fully compatible
with the provisions of the TRIPS Agreement. India is a party to the Berne Convention for the
Protection of Literary and Artistic Works. The Trademarks Act 1999 served to provide better
protection of trademarks for goods and services.

While the investment environment still has shortcomings, A.T. Kearney’s 2005 FDI Confidence Index,
which is based on a survey of executives from the world’s largest companies, ranked India the second-
most attractive FDI destination in the world, up from third place in 2004. India’s attractiveness to foreign
investors is expected to increase, provided further reforms are initiated and infrastructure, logistics
and regulatory barriers addressed (A.T. Kearney 2005). Table 5.1 details the services sectors which
are open to investment by foreign players.

P A G E 95
INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY

Ta b l e 5 . 1
Most sectors now open to FDI
Current foreign direct investment guidelines for services sectors

Foreign Approval
Sector Comments
equity limits mechanism

Infrastructure Includes hotels, resorts, hospitals,


educational institutions, and greenfield
Townships, building, 100% Automatic
airport projects. FDI not permitted in housing
infrastructure and
and real estate.
construction projects
FIPB approval required for more than 74%
equity in airport development.
Tax holidays for development or operation
and maintenance of most infrastructure
projects.
‘Viability Gap Funding’ available for Public
Private Partnership (PPP) infrastructure
projects.

Trading
Retail trading activity Not permitted* *51% FDI permitted in single brand product
retailing and in bulk imports with bonded
warehouses subject to FIPB approval.
Cash and carry 100% Automatic 100% FDI permitted in export sector trading
wholesale trading and wholesale cash and carry under the
automatic route.

Transport
Domestic airlines 49% Automatic Direct or indirect participation of foreign
airlines not permitted.

Road and maritime 100% Automatic


transport services
Railways Not permitted

Telecommunications Includes basic, cellular, unified access


services, national/international long distance,
Telecom services 74%* Automatic
V-Sat, public mobile radio trunked services,
approval up
global mobile personal communications
to 49%
services and other VAS.
74% limit relates to foreign investment from
all sources, including institutional investors.
Certain conditions apply to ensure
management of service providers remains
in Indian hands.
*The Indian Government has frozen the
74% level until the FDI rules are consistent
with the licence guidelines. A resolution is
expected in early 2007.

P A G E 96
India’s Business Environment: Implications for Australian Companies

Foreign Approval
Sector Comments
equity limits mechanism

Finance and 74% limit relates to foreign investment from


insurance all sources, including institutional investors.
Private banks 74%* Automatic *This ‘liberalisation’ occurred just prior
approval up to the 2004 elections and implementing
to 5% guidelines are yet to be issued by the RBI.
The incoming UPA government postponed
the opening of the sector to 2009. A 10%
shareholding limit in private sector banks
applies in the meantime, except those
identified for restructuring.

Insurance 26% Automatic 26% limit relates to foreign investment from


all sources, including institutional investors.
While approval is automatic, a license is
required to operate.

Non-bank financial 100% Automatic Includes merchant banking, underwriting,


companies portfolio management services, investment
advisory services, financial consultancy,
stock broking, asset management, venture
capital, leasing and finance.

Selected other
sectors
Computer-related 100% Automatic
services, advertising
and films, R&D
services, construction
and related
engineering services,
Pollution control and
management services,
architectural services,
health-related and
social services,
travel‑related services

Note: More liberal arrangements apply for non-resident Indian investments.


Source: DIPP 2005a, and DIPP Press Notes.

P A G E 97
INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY

Recognising that a local presence is often necessary to facilitate the export of services abroad
(Indian Department of Commerce 2002), the Indian Government has relaxed restrictions on outward
investment. Increased FDI outflows have followed. FDI abroad in non-financial services sectors over
the years 2002–03 to 2005–06 amounted to more than US$1.7 billion, led by India’s information
technology companies which are increasingly adopting a global approach to service delivery
(RBI 2005d, 2006b).

India’s rapidly growing knowledge-intensive services exports have encouraged the Government
to play a more active role in multilateral, regional and bilateral trade negotiations on services and
services-related outward investment. Given both the significance of services exports to its economy
and its increasing prominence as an overseas investor, a liberalising outcome to the WTO services

negotiations would clearly be of benefit to India (Box 5.5).

BOX 5.5 INDIA’s INCREASINGLY ACTIVE ROLE IN TRADE NEGOTIATIONS


COVERING SERVICES

In the Uruguay Round formally concluded in 1994, India committed to allowing foreign equity
participation in a limited number of sectors, but otherwise made very limited commitments on
services, both in terms of quality and sectoral coverage. India is a key player in the current
WTO Doha Round as a leading Member of the ‘G20’ (developing country agricultural exporters).
While it has adopted a generally conservative position on agricultural market access, it has
become much more ambitious in the services negotiations. India’s initial offer on services
related only to sectors in which it had already made commitments under the Uruguay Round.
However its revised August 2005 offer covered just over half of the 160 sectors and sub-
sectors in the WTO services classification list, including higher education and environmental
services in which it had not previously made commitments. While Australia has acknowledged
the improvements in sectoral coverage and depth of commitments in India’s revised offer,
a number of Australia’s requests remain unmet, including those related to FDI restrictions;
limitations in insurance and banking; better access for foreign lawyers; and a more open
regime on telecoms, energy and professional services. India has made no commitments on
mining and energy-related services, areas of key interest to Australia.

India has submitted requests to its trading partners in a number of services sectors, aiming
at more liberal commitments in respect of cross-border supply (Mode 1) and of temporary
entry by business people (Mode 4). Access conditions for the cross-border supply of services
are critical for exports of IT–ITES and other business services. Similarly, in order to facilitate
the temporary movement of Indian professionals in computer-related, hospital and audio
visual services sectors, India is pushing for WTO commitments to facilitate the movement
of contractual services suppliers and independent professionals, including clear prescription


The WTO General Agreement on Trade in Services distinguishes between four modes of supply: By virtue of Mode 2:
Consumption abroad, services delivered in India to foreign visitors are counted as exports. Similarly services delivered abroad
through the commercial presence of an Indian enterprise are considered exports under Mode 3: Commercial presence.

P A G E 98
India’s Business Environment: Implications for Australian Companies

BOX 5.5 (Continued)

of duration of stay and the removal of labour market and economic needs tests. It is also
a strong proponent of developing broad disciplines on the domestic regulation of services
covering qualification requirements and procedures, licensing and technical standards.
India is particularly interested in recognition of professional qualifications in sectors such as
computer-related services, hospital services, and architectural services (Indian Department
of Commerce 2002, Indian Ministry of Finance 2006).

Given the potential of India’s conventional and medical tourism industries, as well as its

existing and prospective overseas investment interests in sectors such as ICT, it appears to
be in its interests to push more actively for better Mode 2 (consumption abroad) and Mode 3
(commercial presence) access from its trading partners. The Report of the Steering Group on
FDI has advocated automatic approval for up to 100 per cent foreign equity for most sectors
of the economy, although only limited further relaxation has occurred to date under the current
National Congress-led UPA government (Indian Planning Commission 2002d).

India made its first substantive commitments on services and investment in a Comprehensive
Economic Cooperation Agreement with Singapore, which was signed in June 2005. Under
this agreement, India agreed to allow three major Singapore banks to establish wholly-owned
subsidiaries in its territory, with Singapore making a similar commitment in respect of three
Indian banks. Both countries agreed to ease visa restrictions governing the temporary entry of
business visitors, service suppliers, intra-corporate transferees as well as professionals from
a wide range of occupations. Mutual recognition arrangements for education, experience and
licensing requirements are to be negotiated, initially in the areas of accounting and auditing,
architecture, doctors, dental and nursing. Both countries have undertaken to encourage
close cooperation between their educational institutions and agreed to mutual recognition of
degrees for university admission purposes.

India is pursuing trade agreements covering services and investment with ASEAN, the
Gulf Cooperation Council, Japan, the Republic of Korea, the EU, Thailand, the South Asian
Association for Regional Cooperation member states (through the Framework Agreement on
the South Asia Free Trade Area) and its Bay of Bengal partners (through the Bay of Bengal
Initiative for Multi-Sector Technical and Economic Cooperation). Despite the benefits which
would accrue to India from liberalisation of services trade, it has typically finalised negotiations
on goods prior to services and investment.


Indian investments in Australia are detailed in Chapter 4.

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Rising consumerism and a growing middle class

India’s rapidly increasing middle class and growing consumer affluence are already a draw-card for
foreign investors and exporters. Australian service providers should be aware of these demographic
changes and the opportunities that likely to emerge from them.

The Indian consumer population is characterised by dynamic change and increasing confidence.
With greater media exposure and a population increasingly travelling abroad, Western trends, tastes
and brands are in growing demand, particularly among the younger age group which tends to have
higher aspirations. Around 47 per cent of India’s one billion plus population is under 20 years of age,
including almost 160 million in their teens. By 2015, the under-20 age group will grow to 55 per cent
of the population (Business Standard 2005). Double-income families are becoming increasingly
common as more and more women enter the workforce, providing a spur to consumer spending.
Indian consumers are now more readily able to access finance in order to purchase goods and
services. By December 2004, the number of credit cards issued by banks and outstanding had grown
to 43 million, up from 27 million just one year earlier (Gopinath 2005). Other forms of consumer credit
are also growing rapidly.

ADVANTAGES FOR AUSTRALIAN COMPANIES

Australian companies enjoy a degree of benefit from favourable perceptions of their country in India,
despite having to compete fiercely for attention with larger players such as the United States, Europe
and China. Indians perceive Australia as a friendly, safe and reasonably-priced destination for their
children’s education.

English is widely spoken in business. A 1997 ‘India Today’ survey suggested that about one-third of
the Indian population has the ability to carry on a conversation in English. That is, there are more

English speakers in India than in the United States and Britain combined. Both countries have a
particular affinity for cricket, and the importance of its capacity to engender fellow-feeling should not
be underestimated. The Indian law of contract is based on the common law principles of contract,
although similarities in the legal systems of the two countries should not be overstated.

There are also significant people-to-people links, through migration and education, which represent
a potential asset when it comes to exploiting trade and investment opportunities (Box 5.6). The
entrepreneurial spirit common to both countries is also a plus.

Recent efforts to broaden the base of business relationships by federal and state government-led
business missions to India have helped raise Australia’s profile and improve Indian awareness of
Australian capabilities and expertise in a number of areas.


See www.abc.net.au/newsradio/txt/s1363471.htm.

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India’s Business Environment: Implications for Australian Companies

BOX 5.6: CAPITALISING ON PERSONAL LINKS – INDIANS IN AUSTRALIA

In 2001, there were around 95 000 people living in Australia who were born in India (DIMIA
2003). Altogether, there were over 156 000 people of Indian ancestry (ABS 2004). India is
Australia’s second-largest source of skilled migration, accounting for 13 per cent of visas
granted in 2004–05 (DIMIA 2006).

Indian-born immigrants have among the highest levels of educational training and qualifications
of any group in Australia. An exceptionally high number of Indian-born immigrants hold post-
secondary qualifications and many are employed in professional, technical and other white-
collar occupations. In recent years, a significant number of Indian students who undertook
higher education in Australia in fields of study with high labour market demand have opted
for permanent migration.

This skilled diaspora represents a potential asset for both countries when it comes to exploiting
trade and investment opportunities in the fast growing and increasingly open Indian economy.
Non-resident Indians have additional freedoms in some areas of FDI in India compared with
other foreigners. The passing of India’s Citizenship (Amendment) Bill 2003, which permits
citizens of Indian origin from Australia and 15 other countries to hold dual citizenship, may
also open further investment opportunities for non-resident Indians as citizens. A number of
Australian companies have been engaging non-resident Indians to manage or advise on their
Indian interests (JSCFADT 1998).

REMAINING HURDLES

‘Significant constraints to the country’s growth potential, including fiscal fragility, infrastructure
bottlenecks, the continued burden of excessive regulation and bureaucracy, shortcomings in
the financial and agricultural sectors, and the pressures associated with growing inter- and
intra-regional inequality, will all need to be overcome.’
(Thirlwell 2004)


India’s investment climate has improved enormously over recent years. Nevertheless, a range of
impediments to investment remain.

A survey of the Australian business community in India undertaken by the Australian High Commission
in New Delhi in early 2005 revealed a number of concerns. Some companies had experiences of
customers not adhering to contracts. Companies also noted differences between states in their
receptiveness to foreign investment, as well as business incentives and taxation treatment. Where
FDI equity limits apply, it can be difficult for companies to convince their shareholders of the value of
a minority investment. Moreover growth prospects can be constrained by the size and resources of


Investors in India can avail themselves of a wide range of investment advisory services. A number of the large consultancy
and accountancy houses also publish information on the investment climate, for example PricewaterhouseCoopers’ Destination
India: A Brief Overview of Tax and Regulatory Framework, available at www.pwc.com.

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the Indian joint venture partner. The regulatory framework in a number of industries, notably mining,
was cumbersome and lacked transparency. Business licences, particularly in emerging industries,
could be difficult to obtain.

A recent report by the Indian Investment Commission points out that sustaining growth rates of over
eight per cent a year would require a significant increase in investment levels in the economy, and
highlights a number impediments to investment. These include: entry barriers in several sectors,
an uneven playing field in sectors dominated by public sector undertakings, inflexible labour laws,
bureaucratic delays and discretion, and divergence on investment policy between the central
and state governments (Indian Investment Commission 2006b). The report identified a series of
recommendations aimed at establishing a more open, stable and consistent investment regime, and
advocates the promotion of Special Economic Zones (SEZs) for key sectors.

Perhaps the greatest immediate impediment to business lies in power and transport infrastructure
shortcomings. Power shortages and transport infrastructure bottlenecks have a bearing on most
economic activity, although more so in manufacturing than services. But even in the information
technology sector, the state of infrastructure in India is seen as a major issue by multinationals
locating functions there (McKinsey 2005a). In addition, while significant attention has been devoted to
addressing regulatory barriers and burdens over recent years, many regulations remain onerous.

Infrastructure
The poor state of India’s infrastructure has acted as a major, if not the major, constraint to growth
and is cause for some consternation amongst foreign investors. A key finding arising from interviews
of companies conducted on behalf of KPMG International in May 2005 was that India might fail to
attract more foreign investment if it does not make more rapid improvements to its infrastructure
(KPMG 2005).

Despite a significant allocation of resources to major infrastructure projects, it will be a challenge


to meet existing and future demand. To some extent, the problems faced are a reflection of India’s
economic success in recent years. Infrastructure development is happening but is not keeping pace
with ever-shifting and ever-increasing requirements.

The government’s finances are already stretched. The states, too, find it difficult to mobilise sizeable
resources for development expenditure. Efforts to reduce the fiscal deficits at both the centre and
the states are, however, starting to meet with some success, which should provide scope to direct
more public spending into infrastructure works.

The National Common Minimum Programme attaches the highest priority to the development of
physical infrastructure. It contains an undertaking to enhance public investment in infrastructure and
at the same time bolster private sector involvement through the Public Private Partnerships scheme.
However, the Rs15 billion (US$340 million) provision in 2005–06 for Viability Gap Funding under the
scheme is very modest given the infrastructure investment expenditures required.

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India’s Business Environment: Implications for Australian Companies

Contributing to the difficulties faced, many public infrastructure projects have not been completed
in a timely manner, reflecting poor scheduling and prioritisation, and inadequate management and
oversight (Indian Planning Commission 2002a). The number of delayed public sector projects increased
in 2003–04 and cost overruns were substantial (RBI 2005d, Table 2.10).

Power sector
The power sector is beset with problems. Up to 40 per cent of electricity generated is believed to be
lost in transmission (Fortune 2005). The average Indian business faces 17 power outages a month,
and over 60 per cent run their own generators (Accenture, 2006). Electricity theft, below-cost pricing
and the provision of free power to some rural areas has resulted in under-investment in the sector,
and consequently unreliable supply and high prices for paying customers.

Generation capacity has grown rapidly, but has failed to keep pace with demand, resulting in continuing
energy shortages and outages during peak periods. In the Ninth Five Year Plan period (1997–2002),
barely half of the additional capacity planned was actually developed (Indian Planning Commission
2002a). The poor and deteriorating financial position of state electricity boards, stemming from tariffs
insufficient to cover costs because of cross-subsidisation, has acted to discourage private sector
investment in power generation. In the current Plan period (2002–07), the government’s expectations
of generation capacity addition by the private sector are much reduced, but look to significant extra
capacity coming from the public sector. The government’s Viability Gap Funding and the passing
of the Electricity Act, 2003, could lead to increased capacity down the track. But continuing power
shortages can be expected for some time to come.

The 2005 National Electricity Policy establishes guidelines for accelerated development of the
power sector and sets the objective of fully meeting the demand for power by 2012. An estimated
Rs9000 billion (over US$200 billion at 2002–03 prices) needs to be invested to achieve this objective.
Recognising the immense funding required, the policy emphasises the need for Public Private
Partnerships.

The Government recently adopted a model for fast tracking mega-power projects. Projects are
parked in ‘shell’ companies with all necessary clearances in place. These ‘shell’ companies are then
auctioned through competitive bidding to Indian and foreign investors, with the main criterion being
the price at which power will be supplied.

Transport infrastructure
Capacity shortages on the main road and rail links are a major constraint to growth. Problems are
compounded by inadequate maintenance of roads, rail track and rolling stock. While there have been
major investments in port infrastructure in recent years, port operations are inefficient by international
standards.

The road network remains inadequate, despite some major investments in recent years, notably
the ‘Golden Quadrilateral’ and the North-South and East-West corridors. Only 20 per cent of paved

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INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY

roads are thought to be in good condition. In 2002, the government estimated that Rs1650 billion
(US$34 billion) was required in order to address deficiencies in the national highway network (Ministry
of Finance 2005). This represents a huge challenge, even with funding from multilateral development
agencies, and an increasing reliance on Public Private Partnerships and foreign investment.

Efficiency gains have been realised in railways in recent years, but enormous levels of investment in
infrastructure and technological upgrading appear to be required for the sector to meet anticipated
demand for freight traffic. Labour productivity is low and there is overcharging on freight traffic in
order to subsidise passenger transport (The Hindu Business Line 2006a). Significant reforms appear
to be required if the sector is to take some of the load off roads.

Major investments in ports in recent years, some through Public Private Partnerships, are resulting in
significant additions to capacity. With port capacity no longer acting as a constraint, the government aims
to improve productivity, including through bringing ship turnaround times more into line with international
standards (Ministry of Finance 2005). Increased private sector participation, including through FDI,
should help raise efficiency levels. The corporatisation of major ports is a pressing priority.

Regulation
India has taken major steps since 1991 in lessening regulation and economic controls, notably in
industrial licensing, quantitative restrictions on imports, price controls, and areas of the economy
reserved for the public sector or subject to foreign investment restrictions. It has also moved to
streamline administrative procedures and commit to timelines for administrative processing and
decisions in some areas, including the foreign investment approvals process.

Nevertheless, the economy, including the services sector, continues to be heavily regulated and
controlled. Complex administrative procedures remain in some areas, and administrators continue
to have wide discretionary powers. For example, in a recent World Bank survey 61 per cent of firms
reported that government regulations occupied ten per cent or more of senior management time
(World Bank 2005). The government itself recognises that ‘business still has to deal with an inefficient

and sometimes still slow-moving bureaucracy’. In addition, some regulatory functions are performed
at both the centre and state levels, leading to duplication of effort and additional expense for the
businesses affected.

India ranks relatively poorly in terms of a number of indicators of the ease of doing business
(Table 5.2). In 2006, it was ranked 116th by the World Bank in terms of an overall measure of
ease of doing business.


http://finmin.nic.in/foreign_investment/fii/, accessed February 2006.

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India’s Business Environment: Implications for Australian Companies

Ta b l e 5 . 2
Doing business in India
Measures of the ease of doing business in selected Asian economies

  Starting a business Hiring and firing Enforcing contracts

Ease of
doing Difficulty Difficulty
business Procedures Duration of hiring of firing Procedures Time
Country (ranking) (number) (days) (index) (index) (number) (days)

China 91 13 48 11 40 25 241
India 116 11 71 56 90 40 425
Indonesia 115 12 151 61 70 34 570
Korea, Rep of 27 12 22 44 30 29 75
Malaysia 21 9 30 0 10 31 300
Philippines 113 11 48 56 40 25 360
Singapore 2 6 6 0 0 23 69
Taiwan, China 35 8 48 78 30 28 210
Thailand 20 8 33 33 0 26 390
Vietnam 99 11 50 44 70 37 343
Australia 5 2 2 0 10 11 157

Source: World Bank 2006b.

Labour law and regulations are very complex, varying from state to state. Firms become subject to a
number of regulations depending on their size. Small businesses in the unorganised sector tend to
be less regulated, while larger businesses may be subject to a raft of regulations.

The difficulty experienced under the Industrial Disputes Act by firms with 100 workers or more in
shedding labour is often cited by business as a factor inhibiting investment and was recognised as
such in the Report of the Steering Group on FDI (Indian Planning Commission 2002d). In practice, it
seems that many firms are able to find their way around this constraint, although often at significant cost.
While the UPA Government has signalled the need to effect reforms in this area, political opposition
has made it extremely unlikely that it will be able to push ahead in the short term. While the Industrial
Disputes Act only covers the industrial sector and so has no direct bearing on services companies, it
impacts on India’s overall economic performance and foreign investor perceptions of India.

Many large – and not so large – companies have turned more to contract labour in recent years,
although the hiring of contract labour is also heavily regulated under the Contract Labour (Regulation
and Abolition) Act for establishments employing 20 or more people. Moreover, interpretation of the law
is unclear. Some states have moved to rationalise and update their laws in this area. For example,
Andhra Pradesh has amended its law to facilitate the employment of workers to undertake temporary
and non-core activities.

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Business practices
The Indian business environment can be challenging, particularly for Australian companies seeking
to enter sectors still subject to significant amounts of regulation.

Corruption in India remains a pervasive concern, although there has been some progress in curbing it.
India continued to perform relatively poorly in Transparency International’s 2005 Corruption Perceptions

Index (CPI), despite marginal improvement since 2001 (Transparency International 2005). In 2005,
India was ranked 88th of 159 countries, marginally behind China (78) but ahead of Vietnam (107),
the Philippines (117) and Indonesia (137). According to the World Bank (2006c), multiple, overlapping
anti-corruption agencies and lengthy legal processes have made it difficult to secure convictions. A
lack of legitimate funding sources for election campaigns has created incentives to extract rents from
administrative functions to fund campaign expenses or repay contributors (World Bank 2006c).

Progress in tackling corruption is evident in a number of areas. Corruption and rent-seeking are
increasingly being curtailed as regulations and controls are gradually reduced and more sectors opened
to competition. Deregulation reduces the number of areas in which officials can exercise discretion,
and therefore limits the scope for corrupt practices. The increased adoption of e-governance to simplify
transactions and promote transparency in service delivery also appears to have curbed corruption
by keeping transactions between business and decision-makers at arms’ length, particularly when
accompanied by the political will and strong administrative leadership needed to counter resistance
from officials. The computerisation of land records in Karnataka and Maharashtra, for example,
contributed significantly to reducing corruption levels, as measured by perception surveys (World
Bank 2006c).

Accountability mechanisms of central and state governments have also been enhanced, yet
considerable scope for improvement remains. The Central Vigilance Commission (CVC) – which
is charged with tackling corruption among senior civil servants and state-owned enterprises – was
given a stronger mandate in 1998 following a decision by an activist Supreme Court. Previously an
advisory body to the government of the day, the CVC became an independent statutory body with
the power to supervise the functioning of India’s two key investigating agencies, the Central Bureau
of Investigation and the Enforcement Directorate. The CVC has since sought to limit the scope for
corruption by encouraging public sector banks to computerise operations; banning post-tender
negotiations with any party in procurement processes other than the lowest bidder and; publishing
on its website a list of public servants who have been found guilty of corrupt practices or are facing
prosecution. In 2004, the CVC was given authority to receive complaints from whistleblowers, and
protect their identity (World Bank 2006c).

State governments have deployed Lok Ayukta (ombudsmen) to address high-level political corruption.
The Karnataka Lok Ayukta in particular has been successful in using its power of office and media


India’s Corruption Perceptions Index (CPI) score increased from 2.7 out of 10 in 2001 to 2.9 in 2005. However this may not
simply reflect improved perceptions of India’s performance on corruption. Year-to-year changes in a country’s score on the
CPI can also result from changing samples and methodologies (Lambsdorff 2005).

P A G E 106
India’s Business Environment: Implications for Australian Companies

scrutiny to pressure corrupt officials and make corruption in service delivery a potent public issue
(World Bank 2006c). An increasingly active media and civil society have played a critical role in
exposing several high profile corruption cases and galvanising political support for reforms that
minimise rent-seeking opportunities (World Bank 2006c, Box 13 for examples).

While increased competition, deregulation and e-governance, improved accountability mechanisms,


and a more activist media and NGO community are likely to limit the scope for corruption and rent-
seeking in the future, businesses contemplating the Indian market nonetheless need to be aware of
their potential impact on their operations.

STRATegies for success

There are some prerequisites for building a successful business in the Indian market, as in any
overseas market, such as thorough research and preparation, careful selection of a business partner
or customer and the ability to take a long-term view. But approaches and ingredients for success in
India are many and varied (see for example Austrade 2006a). Companies generally need to have
substantial resources at their disposal in the start-up phase as success often requires a substantial
initial investment of time and capital.

For many businesses entering the Indian market, it may be prudent to focus on just one region or
city in India as there can be substantial differences between states in per capita incomes, economic
development and the business environment. Moreover connecting transport infrastructure is often
deficient. Broadly speaking, the southern and western parts of India are wealthier and have been
growing more strongly than others.

Research by McKinsey (2005b) suggests that the most successful multinationals in India are those
that have developed their strategy from the ground up, rather than just tailoring the strategy they
have adopted in other markets. The prices of local competitors may mean that products that sell well
in other markets will not sell in India. Consistent with the need to tailor products, supply chains and
distribution systems to local markets, there can be strong advantages in placing an Indian in charge of
local operations. If the preference is to have an expatriate in the position, there could be advantages
in combining longer postings with a competent local as second in charge (McKinsey 2005b).

There is considerable merit in having full control of an operation where policy allows. Of 25 major
joint ventures established by foreign multinationals from 1993 to 2003, only three have remained
in business (McKinsey 2005b). Most foundered because the local partner was not in a position to
invest sufficient resources to enlarge the business as quickly as the multinational had hoped. In the
event of a dispute, joint venturers are also hamstrung to a degree by the time consuming nature of
dispute resolution through the Indian legal system, compounded by the fact that foreign ventures
cannot utilise in-house lawyers.

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INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY

Nevertheless, joint ventures can have their advantages, including the local knowledge and experience
that the foreign partner can readily tap into. Parties entering into joint ventures should have congruent
goals and similar ethics and values, and uncomplicated related-party transactions (Todorchevski 2005).
Franchising and licensing is another option foreign companies may wish to consider for getting their
brands into India.

Rapid growth and change in India’s services sector is creating substantial openings for Australian
business. Australian services providers are well positioned to capitalise on emerging market
opportunities in India. But, as with any moves into a new country with a different business culture,
success for the newcomer may not be immediate and will depend largely on identifying and cementing
the right business relationships from the start and being prepared to stay the course.

P A G E 108
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Economic Analytical Unit

AUTHORSI

This report was co-authored by Robert Walters and Tim Stapleton under the guidance and direction
of Richard Andrews, Executive Director of the Economic Analytical Unit in the Department of Foreign
Affairs and Trade (DFAT).
Robert Walters was a Director in the Economic Analytical Unit until mid-2006. Previously he directed
sections in the DFAT’s Office of Trade Negotiations, Trade and Economic Analysis Branch, Europe
Branch, and North Asia Division. He was Counsellor at the Australian High Commission in London
between 1990 and 1994. He spent the early part of his career with the Australian Bureau of Statistics.
He has a Master of Economics from the Australian National University and a Bachelor of Economics
(Honours) from the University of Tasmania. He has written a number of trade-related analytical
publications. Robert is now with the Commonwealth Grants Commission.
Tim Stapleton joined the Economic Analytical Unit in mid-2006, having previously been a policy
officer in DFAT’s East Asia Branch. Prior to this he worked in business development and financial
management roles for a software development company and taught at the University of New South
Wales. He has published on trade policy in the Bulletin of Indonesian Economic Studies. He holds a
Bachelor of Commerce and a Bachelor of Arts from the University of New South Wales.

ECONOMIC ANALYTICAL UNITI

The Economic Analytical Unit is part of the Department of Foreign Affairs and Trade and is responsible
for publishing reports analysing major trade and economic issues of relevance to Australia.

The Economic Analytical Unit has produced 43 major reports since its establishment in 1990. Electronic
copies of previous reports and information on how to purchase reports are on the Unit’s website.

Contact details: Executive Director


Economic Analytical Unit Richard Andrews
Department of Foreign Affairs and Trade Directors
RG Casey Building Evanor Palac-McMiken
John McEwen Crescent Bruce Donald
Barton ACT 0221 Joanne Frederiksen
Australia Christopher Lang
Telephone: +61 2 6261 2237 David Morgan
Facsimile: +61 2 6261 3493 Deputy Directors
Email: economic.analytical@dfat.gov.au Gita Nandan
Internet site: www.dfat.gov.au/eau Angela Carey
Research Analyst
Tim Stapleton
Office Manager
Andrew Flowers

P A G E 125
P A G E 126
Acknowledgments

AcknowledgmentsI

Nicholas Coppel, as former Executive Director of the EAU, was closely involved in oversighting
the initial stages of preparation of the report. The Unit’s Office Manager, Andrew Flowers provided
administrative support.

Within the Department of Foreign Affairs and Trade, we would like to thank: Deputy Secretary David
J Ritchie; Justin Brown, First Assistant Secretary, Trade Development Division; Deborah Stokes,
First Assistant Secretary, South and West Asia, Middle East and Africa Division; Ric Wells, Head
China Free Trade Taskforce and Acting First Assistant Secretary, Trade Development Division; John
Griffin, Assistant Secretary, South and West Asia Branch; Nic Brown, Assistant Secretary, Trade and
Economic Analysis Branch; Brendan Pearson, Assistant Secretary, Services and Intellectual Property
Branch; Ron Wickes, Director, Trade Analysis Section; Tony Urbanski, Director, International Economic
and Finance Section; John Fisher, Director, Peter Howarth and Phillip Stonehouse, former Directors,
Kristina Hickey, former Executive Officer, Steven Yates, Graduate Trainee, India and South Asia
Section; Frank Bingham, Acting Director, Sue Begley, Manager – Client Services and John Weeden,
Manager – Publications, Market Information and Analysis Section; Edward Sulikowski, Director, Kerrie
Burmeister, Legal Specialist and Roy Clogstoun, Executive Officer, Services Trade and Negotiations
Section; and Rachel Small, Indigenous Graduate, Internet and International Broadcasting Section.

The Australian High Commission in New Delhi, the Austrade-managed Australian Consulate-General
in Mumbai and Austrade’s office in Bangalore organised the Economic Analytical Unit visits to those
cities and provided assistance in producing this report. In New Delhi, we thank the High Commissioner,
John McCarthy, David Holly, Deputy High Commissioner, Luke Davies, First Secretary – Political,
Megan Jones, Second Secretary – Political/Economic and Jibby Thomas; Michael Moignard, Senior
Trade Commissioner, Tony Burchill, Trade Commissioner, and Sabina Jain, Business Development
Manager, Austrade; John Webb, Education Counsellor; and David Ingham, Agriculture Counsellor. In
Mumbai, we thank Ajit Mangrulkar, Acting Post Manager; Mahesh Rathod, Senior Investment Manager;
Rohit Manchanda, Business Development Manager, and Joyce Pereira, Consular Officer, Australian
Consulate-General. In Bangalore, we thank Chaitanya Patil, Business Development Manager.

Also within Austrade, we thank, Pat Stortz, Manager, International Liaison Unit, and Ranjit Singh, Project
Manager, South East Asia, South Asia and the Pacific, Government Industry and Policy Group.

Other Australian Government agencies provided helpful information: within AusAID, Stephen Howes,
Principal Economic Advisor, and Dr Chakriya Bowman, Economic Analysis & Trade Policy, and Dong
Zhang, Senior Analyst, Asia Economic Section; within Invest Australia, Sandra Fox, Senior Manager,
international Operations; Anthony Donnellan, Investment Manager, South Asia & Middle East; and
Jarrod Mander, Investment Manager – India; within Treasury, Nathan Dal Bon, Manager, and Hassan
Noura, India Desk Officer, Asia Policy Unit; within the Department of industry, Tourism and Resources,
Jeff Riethmuller, former Manager, International Tourism and Bridgette Hargreave, Acting Assistant

P A G E 127
INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY

Director, International Tourism Team; within Australian Education International, Quentin Stevenson-
Perks, Onshore Counsellor, Market Development Branch; within the Department of Communications,
Information Technology and the Arts, Lindsay Barton, General Manager ICT Development Branch;
within the Attorney-General’s Department, John Tucker, Special Advisor, International Legal Services
Advisory Council.

State Governments in Australia also provided helpful information and suggestions. From Victoria, we
thank Darren Gribble, Victorian Special Trade Envoy – India and Chairman Australia-India Council;
George Di Scala, Manager Export Development – Middle East and South Asia, Office of International
Business and Export, and Mark Lobo, Manager, International Investment, Invest Victoria, Department
of Innovation, Industry and Regional Development. Within the NSW Department of State and Regional
Development, we thank Ellen Lintjens, Senior Manager, Trade Services; Vince Smith, Senior Manager,
Trade Services; Sally Williams, Senior Manager, Trade Services; Eric Winton, Senior Manager, Post
Olympics; and Raji Bhatia, Manager Trade Services. In Western Australia, we thank Ashish Puri,
Manager Market Development for Middle East and India, International Market Development Division,
Department of Industry & Resources. In Queensland, we thank Gayle O’Brien, Director of Business
Development (South Asia), Department of Premier & Cabinet (now with the Queensland Government
Trade and Investment Office, Bangalore). In South Australia, we thank Donna-Marie Griffiths, Trade
Manager, India and Europe, Department of Trade and Economic Development.

In addition, we thank Neville Roach AO, National Chairman, Australia-India Business Council; Professor
Raghbendra Jha, Executive Director, Australia South Asia Research Centre, Research School of
Pacific and Asian Studies, Australian National University; Mark Thirlwell, Program Director, International
Economy, Lowy Institute; Professor Marika Vicziany, Director, The National Centre for South Asian
Studies, Monash Asia Institute; Professor Frank P Larkins, Deputy Vice Chancellor (International),
University of Melbourne; David Hawes, Head of Government and International Relations, Qantas;
Victoria Somlyay, Head of Government and Regulatory Affairs and Monica Murray, Manager,
Government and Regulatory Affairs, Westpac; Dr Pankaj Patel, General Manager Environment &
Planning, SMEC; Gavin Winbanks, Director International Relations, Macquarie Bank; Edward Mandla,
past President, Australian Computer Society; Fiona McAlister, Policy Advisor, International Affairs,
Australian Information Industry Association; Danny Kotlowitz, Lawyer, Regulatory & Competition Legal
Group, Telstra; Geoff Coates, Executive General Manager – Business Development, International
Financial Services, Commonwealth Bank; Paul Mason, Head of Strategy, International Partnerships,
ANZ; Anna Lavelle, Chief Executive Officer, Ausbiotech; and Henry Ledlie, Director – India, IDP
Education Australia Ltd.

In Delhi, we thank: G. Srivastava, Director, Confederation of Indian Industry; Dr Sharat Kumar, Director,
Development Policy Division, and Majundar, Planning Commission; S P Joshi, Representative – India,
International growth Specialists, Australian business Ltd; Kiran Karnik, President, NASSCOM; Ashok
Juneja, Corporate Director, Network technology & Projects, Bharti Tele-Ventures; Dr Rangarajan,
Chairman, Prime Minister’s Advisory Council; Dr Rashmi Banga, Economist, UNCTAD; P.K. Dash, Joint
Secretary, Ministry of Commerce & Industry; Dr Bhide, Senior Research Counsellor, and Devendra

P A G E 128
Acknowledgments

Kumar Pant, Fellow, National Council of Applied Economic Research; Raghvan Srinivasan, Consulting
Editor, Business Standard; Anjan Roy, Advisor, FICCI; Ashish Narain, Economist, World Bank; Ajay
Sahai, Director General, Federation of Indian Export Organisations; and Dr Arpita Mukherjee, Senior
Fellow, Indian Council for Research on International Economic Relations.

In Bangalore, we thank: Dr Brian Cohen, Chief Technology Officer, Asia, IBAHealth; Prof S. Sadagopan,
Director, International Institute of Information Technology, Bangalore; K. Dinesh, Co-founder and
Member of the Board, Infosys; Murali Krishnan, President – Group Finance, Biocon Ltd; Wayne Lewis,
Commissioner to India, State Government of Victoria; and Radhika Choudary, Executive Director,
and Dr Anand Kumar, Hon Director, Association of Biotechnology Led Enterprises.

In Mumbai, we thank: Phil Michell, Director and Country Head – India, ANZ Capital Private Ltd;
Manfred Bertram, Managing Director, ANZ - OTSS India; Sarosh Irani, Director, Macquarie Securities
(India) Pvt. Ltd.; D. P. Rath, Director, R. K. Patnaik, Adviser, L. Lakshmanan, Assistant Adviser, Sanjay
Hansda, Assistant Adviser, and Raj Rajesh Kumar, Research Officer, Department of Economic
Analysis & Policy, Reserve Bank of India; Pankaj Baliga, Vice President, TATA Consultancy Services;
Pankaj Baliga, Vice President, TATA Consultancy Services; Kalpana Morparia, Joint Managing
Director, ICICI Bank; Sundeep Bhandari, Regional Head, Global Markets – South Asia, and Shuchita
Mehta, Economist, Global Markets, Standard Chartered Bank; Dr Archana Mahale, Deputy Director,
Bombay Chamber of Commerce & Industry; and Dr Ajit Ranade, Group Chief Economist, Additya
Birla Management Corporation.

P A G E 129
P A G E 130
EAU Publications

Also by the Economic Analytical UnitI

ASEAN: Building an Economic Community


Published July 2006 (ISBN 1 920959 89 0), 103 pages

Unlocking China’s Services Sector


Published February 2006 (ISBN 1 920959 47 5), 113 pages

Education Without Borders: International Trade in Education


Published September 2005 (ISBN 1 920959 51 3), 69 pages

More Than Oil: Economic Developments in Bahrain, Kuwait, Oman, Qatar, and the United
Arab Emirates
Published September 2005 (ISBN 1 920959 46 7), 95 pages

Australia and the United States: Trade and the Multinationals in a New Era
Published June 2005 (ISBN 1 920959 36 X), 85 pages

Malaysia: An Economy Transformed


Published February 2005 (ISBN 1 920959 25 4), 119 pages

Papua New Guinea: The Road Ahead


Published November 2004 (ISBN 1 920959 23 8), 172 pages

Solomon Islands: Rebuilding an Island Economy


Published July 2004 (ISBN 1 920959 08 4), 139 pages

South-South Trade: Winning from Liberalisation


Published June 2004 (ISBN 1-920959-07-6), 42 pages

Economic Aspects of Combating Terrorism in the Transport Sector


Published May 2004 (ISBN 1 920959 00 9), 52 pages

African Renewal: Business Opportunities in South Africa, Botswana, Uganda, Mozambique


and Kenya
Published November 2003 (ISBN 0 646 42822 5), 135 pages

China’s Industrial Rise: East Asia’s Challenge


Published October 2003 (ISBN 0 9750627 4 3), 75 pages

Globalisation: Keeping the Gains


Published May 2003 (ISBN 0 646 42270 7), 103 pages

Connecting With Asia’s Tech Future: ICT Export Opportunities


Published November 2002 (ISBN 0 642 50244 7), 191 pages

China Embraces the World Market


Published November 2002 (ISBN 0 642 50227 7), 200 pages

P A G E 131
INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY

Changing Corporate Asia: What Business Needs to Know (2 parts)


Published March 2002 (ISBN 0 642 48780 4/0 642 48781 2/0 642 48779 0), 87 and 230 pages

India: New Economy, Old Economy


Published December 2001 (ISBN 0 642 56583), 172 pages

Investing in Latin American Growth: Unlocking Opportunities in Brazil, Mexico, Argentina


and Chile
Published August 2001 (ISBN 0 642 51879 3), 294 pages

Indonesia: Facing the Challenge


Published December 2000 (ISBN 0 642 70501 1), 205 pages

Accessing Middle East Growth: Business Opportunities in the Arabian Peninsula and Iran
Published September 2000 (ISBN 0 642 47659 4), 160 pages

Transforming Thailand: Choices for the New Millennium


Published June 2000 (ISBN 0 642 70469 4), 216 pages

Asia’s Financial Markets: Capitalising on Reform


Published November 1999 (ISBN 0 642 56561 9), 376 pages

Korea Rebuilds: From Crisis to Opportunity


Published May 1999 (ISBN 0 642 47624 1), 272 pages

Asia’s Infrastructure in the Crisis: Harnessing Private Enterprise


Published December 1998 (ISBN 0 642 50149 1), 250 pages

The Philippines: Beyond the Crisis


Published May 1998 (ISBN 0 642 30521 8), 328 pages

The New ASEANs - Vietnam, Burma, Cambodia and Laos


Published June 1997 (ISBN 0642 27148 8), 380 pages

A New Japan? Change in Asia’s Megamarket


Published June 1997 (ISBN 0 642 27131 3), 512 pages

China Embraces the Market: Achievements, Constraints and Opportunities


Published April 1997 (ISBN 0 642 26952 1), 448 pages

Asia’s Global Powers: China-Japan Relations in the 21st Century


Published April 1996 (ISBN 0 642 24525 8), 158 pages

Pacific Russia: Risks and Rewards


Published April 1996 (ISBN 0 642 24521 5), 119 pages

Iron and Steel in China and Australia


Published November 1995 (ISBN 0 642 24404 9), 110 pages

P A G E 132
EAU Publications

Growth Triangles of South East Asia


Published November 1995 (ISBN 0 642 23571 6), 136 pages, only available online

Overseas Chinese Business Networks in Asia


Published August 1995 (ISBN 0 642 22960 0), 372 pages

Subsistence to Supermarket: Food and Agricultural Transformation in South-East Asia


Published August 1994 (ISBN 0 644 35093 8), 390 pages

Expanding Horizons: Australia and Indonesia into the 21st Century


Published June 1994 (ISBN 0 644 33514 9), 364 pages

India’s Economy at the Midnight Hour: Australia’s India Strategy


Published April 1994 (ISBN 0 644 33328 6), 260 pages

ASEAN Free Trade Area: Trading Bloc or Building Block?


Published April 1994 (ISBN 0 644 33325 1), 180 pages

Changing Tack: Australian Investment in South-East Asia


Published March 1994 (ISBN 0 644 33075 9), 110 pages

Australia’s Business Challenge: South-East Asia in the 1990s


Published December 1992 (ISBN 0 644 25852 7), 380 pages

Southern China in Transition


Published December 1992 (ISBN 0 644 25814 4), 150 pages

Grain in China
Published December 1992 (ISBN 0 644 25813 6), 150 pages

Korea to the Year 2000: Implications for Australia


Published November 1992 (ISBN 0 644 27819 5), 150 pages

Australia and North-East Asia in the 1990s: Accelerating Change


Published February 1992 (ISBN 0 644 24376 7), 318 pages

The EAU’s website, www.dfat.gov.au/eau, provides access to recent reports, full publication
catalogues and details of briefing papers, as well as executive summaries and tables of contents
of earlier reports.

Hard copies of the reports can also be ordered through www.dfat.gov.au/eau.

P A G E 133
Optimism abounds in India. Entrepreneurial spirit was
unleashed by wide-ranging liberalising reforms that
commenced in 1991. The Indian economy has shifted to a
much faster growth trajectory, led by the dynamism of its

INDIA’S SERVICES SECTOR: Unlocking Opportunity


services sector – particularly high-end, knowledge-intensive
services exports. Studies by a number of prominent analytical
organisations are now projecting that India could outperform
all of the world’s major economies over the next fifty years. By
2050, it could be the third largest economy in the world by a
significant margin. Such developments would profoundly shift
the world’s centre of economic gravity.

This report does not seek either to substantiate or to disprove


these rosy projections. Instead we ask: How might it happen?
Is there a plausible path from today’s India to the projected
giant economy of 2050? What opportunities might successful
pursuit of that path generate for Australian services
providers? And finally, what factors need to be taken into
account along the way as Australian companies consider
whether they should be seeking to participate directly in
India’s growth?

The report looks beyond headline services such as


information technology and IT enabled services to examine
emerging export and investment opportunities in education,
telecommunications, financial services, infrastructure,
construction management, tourism, film, healthcare, sports
and related infrastructure, biotechnology, mining, retail,
logistics and professional services. And it highlights the
successes of some of the Australian services providers
behind Australia’s increasingly dynamic services trade
relationship with India.

www.dfat.gov.au/eau
DFAT

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