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Summer Project Work “Emerging SME Sectors in India and their future prospects At
WBUT Registration No: 091360710078 OF 2009-2010 WBUT Roll No: 09136009106
ARMY INSTITUTE OF MANAGEMENT KOLKATA
This project was undertaken at Bank of Baroda, SME Loan Factory, Kolkata from July 01, 2010 to August 31, 2010 as an Assignment for Summer Internship Project in management for partial fulfillment of the PGDM Program at Army Institute of Management, Kolkata
Date: Aug,31st 2010
ACKNOWLEDGEMENT I would like to express my gratitude to Mr. Victor Vincent, General Manager, HRD, Bank of Baroda, Kolkata, for giving me the permission to carry out my Summer Internship at Bank of Baroda, SME Loan Factory, Kolkata. My sincerest gratitude also goes to Mr. Swapan Chandra, Chief Manager, SME Loan Factory, Kolkata, who took proactive steps granting requisite organizational facilities, He was extremely kind and patient and his guidance and encouragement was of immense help throughout my project. I would like to thank Mr. Subir Sanyal, Senior Manager Credit, SME Loan Factory, Kolkata who as my Project Guide has always encouraged me to do new things, to critically analyze the cases and gave his inputs as and when it was necessary. My gratitude goes to Prof. Moushmi Bhattacharya, Army Institute of Management, Kolkata, who as my Faculty Guide has always motivated us to put our best foot forward by setting high standards. I thank him for guiding us at every step of the project and motivating us to do in-depth analysis. My special thanks also go to the following individuals at SME Loan Factory, Kolkata. Their cooperation has helped me immensely and made the experience of the internship program at Bank of Baroda, SME Loan Factory an enriching one. Mr. Arun Khandelwal, Manager Credit Mr. Pankaj Biswas, Manager Credit Mr. Jayanto Samadar, Manager Credit Mr. Sunil Kumar Saha, Manager Credit Mr. Ujjwal Roy, Manager Credit Ms. Snehi More, Officer Credit Last but not the least; I would like to thank all my family members for their care, encouragement and support.
TABLE OF CONTENTS CHAPTERS SECTION- 0 SECTION- 1.0 1.1 1.2 TOPICS Title Authorisation Acknowledgement Industry Overview Banking Industry Indian Banking: A Paradigm Shift PAGE NO. 1 2 3 7 7 10
5 1.0 3.3 4.5 SECTION5.0 2.2 4.8 SECTION4.2 7.6 1.0 6.6 3.1 4.1 2.7 3.1 3.4 2.4 6.2 3.0 Food & Agro Based Industries Executive Summary Methodology Data Collection & Analysis Findings Conclusion & Recommendations Chemicals Executive Summary Methodology Data Collection & Analysis Findings Conclusion & Recommendations Textiles Executive Summary Methodology Data Collection & Analysis Findings Conclusion & Recommendations Automotive Components Executive Summary Methodology Data Collection & Analysis Findings SECTION -3.8 SECTION.1 5. SME Policy Objectives Scope of Policy Small & Medium Enterprise Sector.2 2.5 SECTION7.5 Types of Reform Measures for the Banking Sector Limitations of the Study 13 16 20 21 22 22 23 23 24 24 24 24 Impacts of Reforms upon the Banking Industry Small And Medium Enterprises (SMEs) In India Role of Small and Medium Enterprises (SMEs) Financing the SMEs Company Background Bank’s Mission Statement Brief History Products And Services Bank’s Logo Business & Financial Performance.3 2.3 1.3 7.3 3.0 4 .4 1.4 5. Bank’s approach towards SME Establishment of SME Loan Factory Targets for Priority Sector / SME Sector Lending Guidelines for Takeover of Advance Accounts SME Products 4.4 4.5 3.1.4 25 25 26 26 27 27 28 28 30 31 32 32 33 42 48 51 52 53 54 64 68 70 71 71 72 77 83 86 87 87 88 91 5.3 5.4 3.1 7.0 7.2 6.2.1 6.2 5.7 1.5 SECTION6.3 6.
4 8.3 8.5 Conclusion & Recommendations Pharmaceuticals SME Model Procedure of Processing Data Collection & Analysis Findings Conclusion & Recommendations 99 102 103 103 104 110 114 5 .8.2 8.5 SECTION.0 8.1 8.7.
Modern banking in India can be dated as far back as in 1786 with the establishment of General Bank of India (Kalita.1 Banking Industry A Banking sector performs three essential functions in an economy: the operation of the payment system. Rajan and Zingales. In 1935. In the early nineteenth century three Presidency Banks were established in Bengal. the Reserve Bank of India was established under the 6 . By allocating capital to the highest value use while limiting the risks and the costs involved the banking sector can exert a positive influence on the overall economy and thus is of broad macroeconomic consequence (Roland.1. Jaffe and Levonian.0) INDUSTRY OVERVIEW 1. 2001. 2008). Commercial banking has been one of the oldest businesses in India and the earliest reference of commercial banking in India can be traced in the writings of Manu. 2006. 1998). the mobilization of savings and the allocation of savings to the investment projects. Bombay and Madras and in 1921 they were merged in to newly form Imperial Bank of India.
The Indian Government when nationalizing all the larger Indian banks in 1969 argued that banking was “inspired by a larger social purpose” and must “sub serve national priorities and objectives such as rapid growth in agriculture. There are essentially two views that justify Government’s ownership of financial markets.Reserve Bank of India Act as the central bank of India (Chakrabarti. This raised the proportion of scheduled bank branches in government control from 31% to about 84%(Kalita. in some countries. were privatized further raising the proportion of government controlled bank branches to about 90%(Chakrabarti. 50 crores. The optimistic or „developmental‟ view is that of Alexander Gerschenkron who emphasized on the necessity of financial development for economic growth (La Porta et.Gerschenkron argued that privately owned commercial banks had been crucial for channelising savings into industry in the second half of the 19th century in industrialized nations such as Germany. However. were nationalized in 1969. most arguments for nationalizing banks are based on the premise that profit maximizing lenders do not necessarily deliver credit where the social returns are the highest.In 1980. 1955. the Reserve Bank of India was nationalized in 1949 and given wide powers in the area of bank supervision through the Banking Companies Act (later renamed Banking Regulations Act). In keeping with the increasingly socialistic leanings of the Indian government. each with deposits exceeding Rs.al. most conspicuously 7 . 2004.. After independence. 2008 ) . 2005).al. 14 major private banks. Dobson 2006). al. 2002. 2005). While there are those who have emphasized the political importance of public control over banking. independent India inherited a rather weak banking and financial system marked by a multitude of small and unstable private banks whose failures frequently robbed their middle-class depositors of their life’s savings. 2005). The Imperial Bank of India was converted in to State Bank of India under the State Bank of India Act. small industry and exports” (Banerjee et. The nationalization of the Imperial bank through the formation of the State Bank of India and the subsequent acquisition of the state owned banks in eight princely states by the State Bank of India in 1959 made the government the dominant player in the banking industry. six more private banks each with deposits exceeding Rs 200 crores. Das et. In spite of all these developments.
2002). 2002). which accounted for about 90% of all commercial banking.For good reason. 8 .. They were the „smoking gun threatening the very stability of the Indian Banks‟ (Bidani. The poor performance of the public sector banks. al. 2002. therefore. economic institutions were not sufficiently developed for private banks to play this crucial development role. 2009). efficiency and profitability (Kalita.al. India chose a „gradualistic‟ approach to the reform over a „big-bang‟ approach (Bhinde. and most importantly. The continuous escalation in Non-Performing Assets (NPAs) in the portfolio of banks posed a significant threat to the very stability of the financial system. Prasad and Ghosh. accountability and prudential norms in the operations of the banking system led also to a rising burden of non-performing assets (Ghosh and Prasad. equally important was the need for proper credit appraisal. Banking reforms.no bank could have successfully engaged in long term credit policies in an economy where fraudulent banking practices had almost elevated to the rank of a general business practice…” (La Porta et. According to Gerschenkron “. 2007). 2002). Banking in India has grown at a rapid pace with the number of commercial banks increasing from 89 in 1969 to 284 in 1995 (RBI Banking Statistics. The lack of recognition of the importance of transparency. As in other areas of economic policy-making.Russia. former chairman of the Punjab National Bank (nationalized in 1969) describes the rationale for nationalization as follows: The two significant aspects of nationalization were rapid branch expansion and channeling of credit according to Plan priorities (Mohan. While expansion of credit was desirable to help the economy grow.. Prakash Tandon. was rapidly becoming an area of concern. As pointed out by Bhide et. 2008)... the emphasis on government control began to weaken and even reverse in the mid-80s and liberalization set in firmly in the early 90‟s. 2002). such gradualism was due to the fact that reforms were not introduced in face of a prolonged economic crisis. gradualism was a result of India’s democracy and highly pluralistic polity in which reforms could be undertaken only if based on popular consensus. became an integral part of the liberalization agenda which provided the necessary platform for the banking sector to operate on the basis of operational flexibility and functional autonomy enhancing productivity.
2 Indian Banking: A Paradigm Shift The decade gone by witnessed a series of financial reforms. The aim of the former was to bring about “operational flexibility” and “functional autonomy” so as to enhance “efficiency. 2003). rising staff level and high unit cost of administering loan to the priority sector. Interest rates. 2008). were liberalized in the 90‟s and directed lending through the use of instruments of the Statutory Liquidity Ratio which was reduced (Chakrabarti. previously fixed by the Reserve Bank of India. IRDP lending. 9 . 2003). loan festival. According to the committee the operational expenditure of the public sector banks had tremendously increased due to rise in number of branches. poor supervision.. etc.1. the sound banking system had been disturbed by the system of directed credit operation in the form of subsidized credit flow in the under banked and priority areas. inefficient and financially unsound…‟ The first Narasimham Committee set the stage for financial and bank reforms in India. The Narasimham Committee had acknowledged the success of public sector banks in respect of branch expansion. with many of them still in the process of implementation. Research studies have time and again proved that financial liberalization had a positive effect on bank performance (Koeva. But during the post nationalization period.unprofitable. productivity and profitability”. three of them – the Narasimham committee I (1992) and II (1998) and the Verma committee – have aimed at major changes in the banking system.. While several committees have looked into the ailments of commercial banking in India. The latter focused on bringing about structural changes so as to strengthen the foundations of the banking system to make it more stable (Chakrabarti. priority sector lending and removal of regional disparities in banking. the banking sector suffered serious erosion in its efficiency and productivity (Dhar. 2008). Joshi and Little (1996) had characterized the Indian banking sector as „. The 1990s saw India implementing Macroeconomic Adjustment Program of which the financial sector reform is a major component (Narayana. 2000). Moreover. deposit mobilization in household sector. The ground for reform was the several distortions which had crept into the financial system rendering it unable to meet the challenges of a competitive environment.The basic principle guiding financial sector reform was that the financial system has a crucial role to play in the mobilization of savings and their allocation to the most productive uses. The financial reform process is often thought of as comprising two stages – the first phase guided broadly by the Narasimham Committee I report while the second is based on the Narasimham Committee II recommendations.
4. The govt. the tiny industrial sector. Narasimham committee report II observed that Central Bank’s role should be separated from being monetary authority to that of regulator of the banking sector. small business operators and weaker sections. 1. The govt. 2. The Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) should be progressively brought down from 1991-92. 1. of India (Kalita. 2008). The directed credit program should be re-examined and the priority sector should be redefined to comprise small and marginal farmers. 6. Narasimham. share of public sector banks should be disinvested to a certain percentage like in case of any other PSU. 7. 10 . 8.The major recommendations made by the Narasimham I committee report are listed below (Kalita. 2008). Banking industry should follow BIS/Basel norms for capital adequacy within three years. should tighten the prudential norms for the commercial banks. The committee submitted its report on 23rd April 1998 to the Finance Minister of Govt. 2008). 3. In order to initiate the second generation of financial sector reforms a committee on Banking Sector Reforms (BIS) was formed in 1998 under the chairmanship of M. 5. The major recommendations of the second Narasimham II report were mentioned below (Kalita. The committee favoured the merger of strong public sector banks and closure of some weaker banks if their rehabilitation was not possible. The ban on setting new banks in private sector should be lifted and the licensing policy in the branch expansion must be abolished. The govt. has to be more liberal in the expansion of foreign bank branches and also foreign operations of Indian banks should be rationalized. Interest rates should be deregulated to suit the market conditions.
2. The report envisaged flow of capital to meet higher and unspecified levels of capital adequacy and reduction of targeted credit. 4. 11 . The report emphasized the need of enhancement of capital adequacy norms from the present level of 8 percent but did not specify the amount to which it should be raised. The Banking Sector Reform Committee further suggested that existence of a healthy competition between public sector banks and private sector banks was essential. the committee provided the idea of setting up an asset reconstruction fund to tackle the problem of huge non-performing assets (NPAs) of banks under public sector. 3. Expressing concern over rising non-performing assets. 5.
because the government does not have to compete with the private sector. .However. 2002). repressive policies such as artificially low real interest rates. The argument is essentially that the government can ensure a better economic outcome by for example channeling savings to strategic projects that would otherwise not receive funding or by creating a branch infrastructure in rural areas that would not be build by profit-maximizing private banks. La Porta.. how to manage the transition to this coordination mechanism (Kaminsky and Schmukler. increase financial development and eventually lead to higher economic growth (Demetriades and Luintel.Without big banks. the questions arise under which coordination mechanism – state or market – it best performs its functions.. directed credit programs and excessive statutory pre-emption that are imposed on banks have negative effects on both the volume and the productivity of investments. which in turn has a growth enhancing effect (Denizer. p.Currently. The attraction of such political control of banks is greatest in economies with underdeveloped financial systems and poorly protected property rights. who return the favour in the form of votes and political contributions. The proponents of financial liberalization take an opposite stance.. 311. the political motives behind the provision of services and the benefits of privatization The active involvement of government thus ensures a better functioning of the banking sector. Denizer. there are opposing views concerning the most preferable coordination mechanism. socialism would be impossible. The „big banks‟ are the state apparatus which we need to bring about socialism and which we take ready made from capitalism…” (La Porta et. 2002). Governments acquire control of enterprises and banks in order to provide employment. In their view. subsidies and other benefits to supporters. a majority of the empirical studies support the financial liberalization hypothesis supporting 12 . The view of state ownership is buttressed by considerable evidence documenting the inefficiency of government enterprises. 1998.1. According to the development and political view of state involvement in banking. 1998). 1997. Desai and Gueorguiev. Lopez de Silanes and Schleifer. al. 2002). Desai and Gueorguiev. and. if necessary.3 Types of Reform Measures for the Banking Sector Since the general importance of a banking sector for an economy is widely accepted. a government is through either direct ownership of banks or restrictions on the operations of banks better suited than market forces alone to ensure that the banking sector performs its functions. In the words of Lenin „. Removing these repressionist policies and giving more importance to market forces will. in the view of the proponents of financial liberalization.
Measures enhancing role of market forces Reduction in pre-emption through reserve requirement. foreign banks and joint venture banks. Competition Enhancing Measures Allowing operational autonomy and reduction of public ownership in public sector banks by raising capital from equity market up to 49 percent of paid up capital. 2008. Watchel. Introduction of auction-based repos and reverse repos for short term liquidity management. 2006. special emphasis was placed on building up the risk management capabilities of Indian banks while measures were initiated to ensure flexibility. Some of the measures undertaken in this regard are as follows (Kalita. market determined pricing for govt. 2006. Singh. 1993. disbanding of administered interest rates and enhanced transparency and disclosure norms to facilitate market discipline. Roadmap for foreign banks and guidelines for mergers and amalgamation of private sector banks with other banks and NBFCs. 2006). the level of competition was gradually increased within the banking system while simultaneously introducing international best practices in prudential regulation supervision tailored to Indian requirements (Kalita. Secondly. The banking sector reforms started in the early 1990s essentially followed a two pronged approach. 13 . Transparent norms for entry of Indian private sector banks. first. Roland. 2001). securities. facilitation of improved payments and settlement mechanism. Instructions and guidelines on ownership and governance in private sector banks. Mohan. In particular. active steps were initiated to improve the institutional arrangements like legal and technological frameworks (Mohan.the fact that financial liberalization is essential for economic growth (King and Levine. The banks are allowed to diversify product portfolio and business activities. operational autonomy and competition in the banking sector. 2008). Permission for foreign investment in the financial sector through foreign direct investment (FDI) as well as portfolio investment. 2005).
2000. India went a step further and stipulated CRAR at nine per cent as against the international norm of eight per cent from March 31. Following the Basel Accord of 1988. risk concentration. broadly in line with the 1996 amendment to Basel norms. Measures to strengthen risk management though recognition of different component of risk. Furthermore. In fact. guidelines for ownership and governance. accounting. provisioning and exposure. Significant advancement in dematerialization and markets for securitized assets are being developed. Introduction of capital charge for market risk. etc. Accordingly. securitization and debt restructuring mechanism norms. the capital to risk-weighted assets ratio (CRAR). which took into account the element of risk involved in both balance sheet as well as off-balance sheet business. Introduction and roadmap for implementation of Basel II. as a part of banking sector reforms. higher graded provisioning for NPAs. India also prescribed the capital charge for market risk in June 2004. Prudential measures Introduction of international best practices norms on capital to risk weighted asset ratio (CRAR) requirement. 14 . assignment of risk weights to various asset classes. India adopted the Basel norms in a phased manner. emerged as a well recognized and universally accepted measure of soundness of the banking system. norms of connected lending. income recognition.
Seven new private banks entered the market between 1994 and 2000. which effectively shielded the incumbents from competition (Roland. better risk management practices and greater portfolio diversification (RBI Report on Trend and Progress of banking in India). In addition.1. the study confirms a presence of convergence phenomenon in the Indian public sector banking industry. the detailed prescriptions of the RBI concerning for example the setting of interest rates left the banks with limited degrees of freedom to differentiate themselves in the marketplace. 2006.Through the lowering of entry barriers. Before the start of the 1991 reforms. specialized skills. over 20 foreign banks started operations in India since 1994. the inefficient PSBs have been noted to be catching up with the efficient ones. Per capita Deposit (Rs. Further. Population per Office („000) 4. In sum.4 Impacts of Reforms upon the Banking Industry The Indian banking industry had made sufficient progress during the reforms period. Kumar and Gulati (2008) have examined the issue of convergence of efficiency levels among Indian public sector banks (PSBs) during the post-reforms period spanning from 1992/1993 to 2005/2006. Joshi and Little.1: Progress of Scheduled Commercial Banks in India Pre and Post-Reforms Progress of Scheduled Commercial Banks in India Indicators 1. Their empirical results indicate that the majority of PSBs have observed an ascent in technical efficiency during the post-reforms years. there was little effective competition in the Indian banking system for two reasons. the new private sector banks and the foreign banks had a combined share of almost 20% of total assets Deregulating entry requirements and setting up new bank operations has benefited the Indian banking system from improved technology. 1997) . That is. India had strict entry restrictions for new banks. competition has significantly increased since the beginning of the 1990s. of SCBs 2.No. the banks with low level of efficiency at the beginning of the period are growing more rapidly than the highly efficient banks. No. First. Second. of bank offices Of which Rural and Semi-urban 3. By March 2004.) June 1980 154 34594 23227 16 738 March 1991 272 60570 46550 14 2368 March 2000 298 67868 47693 15 8542 March 2005 288 68355 47485 16 16091 15 . Table 1.
Deposit (% to national income) 457 36 1434 48. One of the major factors that affected the banks‟ profitability was the high pre-emptions in the form of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio which had reached at the historically high levels of 63. The above diagnosis of the maladies of banking led the Committee to recommend- 16 . interest rates were a tool of cross-subsidization between different sectors of the economy. 2006). The Narasimham Committee having commended the Indian Banking system for its impressive quantitative achievements during the two decades since nationalisation in 1969 noted the decline in productivity and efficiency of the system and the related erosion of profitability (Narayana.) 6. the interest rate structure had grown increasingly complex with both lending and deposit rates set by the RBI.5% in early 1990s.5. Concessional interest rate on directed investment and credit. Per capita Credit (Rs.1 4555 53. RBI. In the Committee's view the major elements leading to low productivity and profitability were Constraints on operational flexibility owing to directed investment in terms of SLR together with cash reserve ratios and directed credit programs. 2005. The deregulation of interest rates was a major component of the banking sector reforms that aimed at promoting financial savings and growth of the organized financial system (Singh. impinged on the allocated efficiency of resources (Report on Currency and Finance. 2000). 2006-2008). Decline in portfolio quality owing to political and administrative interference in credit decision making. Deregulation of interest rates implied that banks were able to fix the interest rates on deposits and loans depending upon the overall liquidity position and their risk perceptions (for lending rates). To achieve this objective. Roland. Expansion of branch network into rural and semi-urban areas turning many offices into primarily deposit centres without adequate credit business and income. The administered structure of interest rates did not allow banks to charge the interest rates depending upon the credit worthiness of the borrower and thus.5 10440 68.3 Interest rate deregulation Prior to the reforms.
CRR be turned into an instrument of monetary policy. The motive behind the liberalization of interest rates in the banking system was to allow the banks more flexibility and encourage competition. Under the directed credit policy commercial banks are required to provide 40% of their commercial loans to the priority sectors which include agriculture. small transport operators. Use fiscal instruments rather than the credit system to help the weaker sections. The Indian banks are now adopting a completely market driven interest rate structure which was in earlier a govt. The Narasimham committee had recommended reduction of the directed credit to 10% from 40%. artisans. However. and review the concessional interest rate. Dismantle the administered interest rate structure and allow interest rates "to perform their main function of allocating scarce loan-able funds to alternative use”. 2002). etc. The prime lending rate of each bank is now synchronized with the bank rate. (Kalita. The most important and far reaching impact of banking liberalization in India has been the deregulation of the interest rate (Kalita. Within the aggregate ceiling there are various sub-ceilings for agriculture and also for loans to poverty related target groups. The policy of 40% of loans to the priority sectors has not been abolished by the govt. the definition of the priority sector activities has been broadened with the new inclusion and reclassifications. SLR requirements be related to prudential requirements and be brought down to 25% of net demand and time liabilities. Directed credit program be phased out in the long run. redefine priority sector in the short run.2008). 2008). The interest rate deregulation has resulted in the integration of the lending rates across spectrum. The Committee on Banking Reforms has suggested inclusion 17 . driven interest rate structure. The borrowing rates to be brought closer to market rates. small-scale industry. The committee had also suggested narrowing down the definition of priority sector to focus on small farmers and low income target groups. Directed credit Policies: Directed credit policies have been an important part of India’s financial sector reforms. The bank rate was revived by the RBI to serve as the reference rate for the banking sector. Banks can charge rates according to their cost of funds and to reflect the creditworthiness of different borrowers. Banks can vary nominal rates offered on deposits in line with changes in inflation to maintain real returns (Ahluwalia.
they failed to achieve the various sub-targets for agriculture. 18 . 2008). it inevitably leads to increased mergers and acquisitions activity. 10 new banks were set up by 1998. advances to weaker sections. However.51% in 1992-93 to 2. 1). In the context towards deregulation. norms for the entry of Private players were announced.95 per cent in 1997-98 (RBI Report on Currency and Finance 2006-08. since in 2003 the share of credit of private sector banks going to the priority sector had surpassed that of public sector banks [In 2002-03. Annual Report. 42. Besides. etc. that the impact on competition remained muted was evident from the limited number of mergers (four).of activities related to food processing. RBI). 22 foreign banks were also set up.The current arrangement shows how the banking sector reforms have provided operational flexibility to the banks even while meeting social objectives. 2008). Significant variation was also observed in the performance of different banks within the public sector banks with regard to the achievement of sub-targets (RBI. The issue of priority sector lending. Vol.This will increase the list of activities under the priority sector credit and also improve the quality of the portfolio. 2004-05). an important concern against privatization. it was decided in 1992 to give greater freedom to banks in opening up branches. Normally when competition intensifies. as a group. In January 199. Keeping this view several measures were initiated to instil competitiveness in the banking sector where the lack of threat to the entry of new players had led to inefficiency in the banking sector. which increased during this phase from 2. Following liberalization of entry of new private sector banks. At present if a bank fails to fulfill the target for priority sector lending. The lack of enough competition was also reflected in the net interest margins (NIM) of banks.4% of the total bank credit was given by Private Sector Banks to priority sector] (Source: Trend and Progress of Banking in India. The priority sector lending norms have been fulfilled by a good margin by both public and private sector banks at present.5% of the total credit of PSUs was given to the priority sector whereas 44. is no longer that crucial. While public sector banks. achieved the overall priority sector targets 40%. The number of foreign bank branches increased from 140 at end-March 1993 to 186 at end-March 1998. dairying and poultry in the priority sector list (Kalita. it can invest the shortfall amount in RBI securities dealing with flow of funds towards agriculture and smallscale industries but it still desirable that banks adhere to the priority sector lending target (RBI. tiny sector within the SSI sector. One of the major objectives of the reform was to bring in greater efficiency in the Indian Banking sector by permitting entry of private sector banks and increased operational flexibility of the banks.
an SSI unit should neither be a subsidiary of any other industrial unit nor can it be owned or controlled by any other industrial unit. 3. the definition of “Small Scale Sector” was revisited. appliances and electrical machinery. SMEs have to play a prominent role. synthetic products. SME sector also has a large number of service industries. and hence the growth of the overall economy.6 Role of Small and Medium Enterprises (SMEs) SMEs have been playing a pivotal role in country’s overall economic growth. furniture and fixtures. apparatus. However. given that their labour intensiveness generates employment. SME is the biggest provider of employment next only to Agriculture. and have achieved steady progress over the last couple of years. printing publishing and allied industries. The SMEs constitute 95% of total industrial units and constitute 40% of total industrial output. Small and Medium Enterprises Development Act of 2006.3. In India. MSMED Act was operationalised with effect from 2nd October 2006. both Government and RBI credit policy placed emphasis on manufacturing units from the Small Scale Sector. The SME 19 . 100 million is considered as a medium unit. Banks were interalia advised to formulate comprehensive and more liberal policies than the existing policies in respect of loans to SME Sector. wool. In addition. industry and academicians. hemp & jute products. tobacco and tobacco products. machinery. Keeping in view the same and the global practices. ‘small and medium enterprises’ (SME) is a generic term used to describe small scale industrial (SSI) units and medium-scale industrial units. beverage. The SME sector produces a wide range of industrial products such as food products. Subsequently. jute. it was decided to broaden the concept of SSI Sector by inclusion of services within its ambit as also including the “Medium Enterprises” in a composite sector of “Small & Medium Enterprises”. cotton textiles.5 Small And Medium Enterprises (SMEs) In India The small and medium enterprises segment has been a topic of intense deliberation among banks. which defines an “enterprise” instead of an “industry” to give recognition to service sector and also defines a “medium enterprise” to facilitate technology upgradation and graduation. paper & paper products. financial institutions. machines. silk. In India. From the perspective of industrial development in India. As per the Micro. in order to make the size of the unit and the technology employed by firms to be globally competitive. wood & wood products. Formerly. any industrial unit with a total investment in its fixed assets or leased assets or hire-purchase asset upto Rs10 million is considered as a SSI unit and investment up to Rs.
SMEs now are experiencing a new model of functioning in the value chain. at the same time they have realized their drawback in terms of inadequate availability of managerial and financial resources. i. With globalisation. personnel training and inability to innovate on a faster pace. given the abundant supply of labour in these countries. However. access to technology. suppliers or distributors at a different level. The restructuring of production at the international level through increased outsourcing is having significant effects on small and medium entrepreneurs in a positive as well as negative manner. SME-tax friendly environment. creating ebusiness models and diversification to meet the increasing competition. wherein capital is scarce. exchanges of best practices to name a few. such as. They also lead to an equitable distribution of income due to the nature of business.e. SME policy initiatives at the national and state level are aimed at strengthening the role of SMEs at the base as well as at the higher level. access to markets. Globalisation. Some of the changes that SMEs are focusing on include acquiring quality certifications. address the issues and challenges and reap the benefits of the global market. finance. Moreover. The enactment of the Micro. The combined effect of market liberalisation and deregulation has forced the SME segment to change their business strategies for survival and growth. economic liberalisation and the WTO regime would undoubtedly open up a unique opportunity for the largest business community. SMEs through effective involvement in international trade by streamlining certain factors. The past few years has seen the role of the SME segment evolve from a traditional manufacturer in the domestic market to that of an international partner. SMEs in countries such as India help in efficient allocation of resources by implementing labour intensive production processes. Demand in terms of new niche products and services are providing more opportunities for SMEs that are in a better position to take advantage of their flexible nature of operations. all forms of production of goods and services are getting increasingly fragmented across countries and enterprises. With large players adopting different models of business that include involvement of the traditional partners. 2006 was a landmark initiative taken by the Government of India to enable the SMEs’ competitive strength. access to skills. 20 .segment also plays a major role in developing countries such as India in an effort to alleviate poverty and propel sustainable growth. increasing use of ICT. Small and Medium Enterprises Development (MSMED) Act. lack of working capital. development of necessary infrastructure.
Mauritius-based Horizon advisors launched Ambit Pragma Fund I.000 million. Lately this segment has been witnessing winds of change in the new sources of capital. continued with its dereservation policy by removing 79 items from the list of 114 items reserved specifically for SSI (small scale industries) manufacturing.50 million without collateral. Also the government has put in place the Credit Guarantee Scheme to encourage banks to lend up to Rs 0. it plays a dual role since the output produced by SMEs is not only about final consumption but also a source of capital goods in the form of inputs to heavy industries. Small and Medium Enterprises (MSME). MSME Cluster Development Scheme and ISO 9000 Reimbursement Scheme to help SMEs for procuring timely funds. an India dedicated PE fund. Though SMEs are being touted as the priority sector within the economy. the Ministry of Micro. the biggest challenge before the SMEs today is to have access to non debt based and non-traditional financial products such as external commercial borrowings. In 2007. In Jan 2008. The Soros Economic Development Fund (SEDF). 21 . Only 35 items remain in the reserved category from the total 836 selected in 1994 denoting the declining monopoly of the SSI segment on the reserved products.org announced a Small to Medium Enterprise Investment Company with an initial corpus of $17 million for providing capital to SMEs in underserved markets.in the form of private equity (PE) and foreign direct investments (FDI). In fact. factoring etc. the government has set up various schemes in place such as the Credit Linked Capital Subsidy Scheme. Omidyar Network and Google. primarily in the industrial space with revenues between Rs 200 – 1. they continue to face problems pertaining to finance. There has also been a recent budget announcement of setting up of a Risk Capital Fund. 3.The SME sector has also registered a consistently higher growth rate than the overall manufacturing sector. they have a very traditional way of lending to this segment against collateral and SMEs end up being under financed. Evidently. private equity. with a corpus of $100 million for providing equity capital and professional management advice to SMEs.7 Financing the SMEs In Feb 2008. Mauritius-based Frontline Strategy launched a $200 million India Industrial Growth Fund (IIGF) for investment in SMEs targeting companies. When it comes to banks. However.
Investments in the SME sector are not only by PE funds but this sector is also attracting FDI. In this respect the government has removed the 24 per cent cap on FDI in the SME sector. Foreign entities are also keen on promoting trade and cooperation between SMEs of different countries. Genesis Initiative, an UK-based organization consisting of entrepreneurs, policy makers and SMEs, is trying to forge mutual cooperation between SMEs in India and UK for in terms of JVs and partnerships in sectors such as textiles, IT, infrastructure etc.
CHAPTER 2 : COMPANY BACKGROUND Bank of Baroda (BoB) is the 3rd largest bank in India, after State Bank of India and Punjab National Bank and ahead of ICICI Bank. BoB has total assets in excess of Rs. 2.27 lakh crores, or Rs. 2,274 billion, a network of over 3000 branches and offices, and about 1100+ ATMs. It offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialised subsidiaries and affiliates in the areas of investment banking, credit cards and asset management.  2.1 Bank’s Mission Statement
2.2 Brief History Bank of Baroda was incorporated in 1908 by Maharaj Sayajirao Gaekwad III. It launched its first branch in 1910 in Ahmedabad. In 1953, its first branches in Kampala and Mombasa became operational. Its overseas branch in Nairobi was opened in 1954. 2.3 Products And Services Bank of Baroda provides it banking products and services in several categories like personal, international, business, treasury, corporate and rural. In personal banking section Bank of Baroda offers products like deposits, debit cards, Gen-Next, personal banking services, loans, lockers and credit cards.
In business banking sector, Bank of Baroda offers products and services such as deposits, business banking services, loans and advances and lockers. In corporate banking section, Bank of Baroda offers products and services like wholesale banking, loans and advances, deposits and corporate banking services.
2.4 Bank’s Logo Bank’s new logo is a unique representation of a universal symbol. It comprises dual ‘B’ letterforms that hold the rays of the rising sun. They call this the Baroda Sun. The sun is an excellent representation of what our bank stands for. It is the single most powerful source of light and energy – its far reaching rays dispel darkness to illuminate everything they touch. At Bank of Baroda, it seek to be the source that will help all our stakeholders realise their goals. To our customers, we seek to be a one-stop, reliable partner who will help them address different financial needs. To our employees, we offer rewarding careers and to our investors and business partners, maximum return on their investment.
2.5 Business & Financial Performance The Bank has reported a healthy growth in its business and profits with improvement in all key parameters during FY10.  As stated earlier, its Global Business touched a new milestone of Rs 4,16,080 crore in FY10 reflecting a growth of 24.0% (y-o-y). Both its domestic deposits and advances increased at the above-industry pace of 22.4% and 21.3%, respectively. The Bank recorded a growth of 44.0% in SME credit, 27.0% in farm credit and 24.0% in retail credit reflecting a well-diversified growth achievement. Total assets of the Bank’s overseas operations increased from Rs 51,165 crore to Rs 68,375 crore registering a growth of 33.6% during the year under review. The Bank’s Net Profit at Rs 3,058.33 crore for FY10 reflected a robust year-on-year growth of 37.3%. As the Bank’s primary objective has been to grow with quality, the Bank focused on containing the impaired assets to the minimum possible level. While the Gross NPA in domestic operations stood at 1.64% at end-March 2010, the same for Overseas Operations was at 0.47%. In spite of growing slippages for Indian banking industry during FY10, our Bank succeeded in restricting its global Gross NPA level to 1.36% and Net NPA level to 0.34% by end-March, FY10.
CHAPTER 3 : SME POLICY
3.1 Objectives The SME Loan Policy is framed with the following objectives: To improve flow of credit to SME Sector. To formulate norms of lending to SME sector, to ensure availability of adequate and timely credit to the sector. To provide guidelines to the branches to dispense credit to SME Sector. To devise an organizational structure at all levels for handling SME credit portfolio in a more focused manner. To comply with terms of Policy package announced by Hon’ble Union Finance Minister on 10.08.2005 and further guidelines received from Reserve Bank of India from time to time for improving flow of credit to SME Sector. 3.2 Scope of Policy This Policy will form a part of Bank’s Domestic Loan Policy and will cover following:
25/.crore to Rs.1000/.crores and new infrastructure and real estate projects. Bank has therefore for internal purposes given focused attention to finance all Commercial enterprises i.500/. where the project cost is upto Rs. Composition of SME Sector Broad guidelines on lending to SME Sector SME Loan Factory Model Credit Rating and Pricing Policy Identifying Thrust Industries Discretionary lending powers Training needs Reporting and Monitoring System 3. Small and Medium Enterprises – as per regulatory definition irrespective geographical location.lacs Above Rs. semiurban. 150/. 50/.lacs and upto Rs. 25/. 50/.3 Small & Medium Enterprises Sector The SME segment is broadly classified as under in MSMED ACT. enterprises which may be outside the purview of regulatory definition of SME but having turnover upto Rs 150. All other entities with their annual sales turnover of Rs.500/. metro areas.lacs and up to Rs. 1/.10/. i.500/. 2006 : Particulars Investment in Plant & Machineries in case of Manufacturing Enterprises * Upto Rs.lacs Micro Enterprises Small Enterprises Medium Enterprises * original cost excluding land and building and the items specified by the Ministry of Small Scale Industries ** original cost excluding land & Building and Furniture.e. 25 .lacs and upto Rs. urban.lacs Above Rs.e.crores by treating them as part of SME segment. rural.lacs Above Rs.lacs Investment in Equipment in case of Service Sector Enterprises * Upto Rs.crores.10/. SMEs which are Associate/sister concerns of Wholesale Banking customers.lacs and upto Rs.00 crores and new infrastructure and real estate projects where the project cost is upto Rs.200/.lacs Above Rs. Fittings and other items not directly related to the service rendered or as may be notified under MSMED Act.4 Bank’s Approach Towards SME Sector SMEs are growth engines for development of Economy.200/. 2006 3. SME Banking business will thus include the following across the bank: Micro.
It is a revolutionary step taken by Bank of Baroda amongst the Nationalised Banks. 26 . The model works on assembly line principles with simplified processes using latest technology and inhouse skilled men power to deliver focused services to SME customers. SME LOAN FACTORY : To grab vast business opportunities available and with an aim to extend focused attention to Industries & Service Sector. Its important feature is working of the SME Loan Factory on assembly line principles with simplified processes. We have two nodes to take care of the marketing /sales(SALES HUB) and credit processing sanction(CREDIT HUB). This model titled SME Loan factory has separate Hub for Centralized Processing of SME proposals. Clubs. Instead of appointing DSAs(Direct Selling Agents).5 Establishment Of SME Loan Factories Business Model which operates on assembly line principle is adopted by the bank for hassle free and faster dispensing of credit to SME segment. 3. The team members reach out to different market segments. The hub’s main role is ensuring speedy appraisal & sanctioning of proposals pertaining to SME sector in a time bound program. under a single umbrella of the SME Loan Factory. Bank of Baroda has come out with an unique model in the form of SME LOAN FACTORY exclusively for SMEs. such units. However. It envisages setting up of Centralized Processing Hub to ensure speedy appraisal and sanctioning of proposal of SME Sector within a time bound schedule. Attractive features of the model are as under : Team of officers having expertise in the area of credit with positive approach is selected. Trusts. etc. 34 SME Loan Factories have been operationalized across the country. which are outside the purview of regulatory definition will not form part of Priority Sector lending. As of March. A team of Relationship Officers/Relationship Managers have been stationed at different key places spread over the micro segment of the city who will reach out to SME customers. Financing under various Government schemes launched for MSME Sector. 2009. bank has appointed officers from existing dedicated team only.
Various authorities have been authorized to permit deviations in respect of accounts. Deviation allowed Various authorities have been authorized to permit deviations in respect of accounts.3.7 Guidelines for Takeover of Advance Accounts: There are two types of compliances: Non-Financial norms to be complied in case of takeover of SME accounts as per regulatory guidelines or SME as per expanded coverage: Sr. which are not covered under BOBRAM Credit Rating System. Norms Profit-making (i.2 lacs 20% to Micro (manufacturing) enterprises with investment in plant and machinery above Rs. There should not have been any reschedulement /restructuring in the account during last two years.10 lacs.e. may be considered under permitted deviation as per extant guidelines issued from time to time. Accounts.2 lacs and upto Rs. Accounts be rated as per the new credit rating model (BOBRAM) subject to ‘minimum’ BOB 6. All other existing norms. d. f. Accounts with existing lenders should be under the category of “Standard Assets”. a. c.5 lacs and upto Rs.N o. However in order to ensure that credit is available to all segments of the Small Enterprises sector. b. 3. Banks are advised to fix their own target in order to achieve a minimum 20% YOY growth in credit to SME as per statutory guidelines so as to double flow of credit to SME sector by the year 2009-10. 27 .6 Targets for Priority Sector / SME Sector Lending As regards lending to SME Sector.5 lacs and Micro(service) enterprises having investment in equipment upto Rs. There is no sub-target fixed for lending to small enterprises sector.25 lacs and Micro(service) enterprises having investment in equipment above Rs. net profit before tax) concerns only as per last audited Balance Sheet. banks are advised to ensure that 60% of the total advances to small enterprises sector should go to Micro Enterprises as under: 40% to Micro (manufacturing) enterprises with investment in plant and machinery upto Rs. Satisfactory report from the existing bank/FI and/or satisfactory conduct of account as per latest statement of accounts. e. guidelines as applicable to borrowal accounts are to be scrupulously followed.
28 . Minimum 1. Various authorities have been authorized to permit deviations in respect of accounts.5:1 Minimum 1.5:1 Minimum 1.17 & above Maximum 4:1 2 Medium Enterpris es under manufacturing sector and service Sector as per regulatory guidelines Minimum 1.25 Maximum 4...20 & above Maximum 3:1 3 Units outside the purview of regulatory definition but covered under SME Sector as Per expanded definition.75 with a condition that in any one year it should not be below 1.75 with a condition that in any one year it should not be below 1. been authorized in respect of been authorized in respect of Maximum 4. Various authorities have to permit deviations accounts.25 Various authorities have been authorized to permit deviations in respect of accounts..75 with a condition that in any one year it should not be below 1.33 & above Maximum 3:1 Authority who can allow Deviation Proposed Various authorities have to permit deviations accounts.Financial norms in case of takeover of SME accounts as per regulatory guidelines or SME accounts as per expanded coverage: Ratio Norms 1 Micro & Small Industries under manufacturing sector and service Sector as per regulatory guidelines Current Ratio Debt Equity Ratio (TTL / TNW) Total outside liability/ TNW Average DSCR for Term Loan Minimum 1.25 Maximum 4.5:1 Minimum 1.
whichever is Baroda Overdraft against Land & Building is a unique product for financing working capital requirements.crores. Hospitals including Pathological Laboratories. upto a maximum limit of Rs. renovation of existing Nursing Homes/Hospitals.8 SME Products The following products are launched for SME sector across the country: Baroda SME Gold Card providing additional 10% facility over the assessed MPBF for meeting emergent business requirements. or. This scheme is also implemented at select branches of the bank. Baroda SME Loan Pack providing single line of credit for meeting SME borrowers’ working capital as well as long term requirements within the overall limit approved by the bank as per the eligibility.lacs with 10% margin. 5/. audited Balance Sheet. or Rs. urban and metro. Scheme for financing existing SME customers/Current Account holders for purchase of new vehicles upto a limit of Rs.5/. Baroda Vidyasthali Loan providing finance to Educational Institutional upto a limit of Rs.3.crores on liberalized terms.crores. 4 times of borrower’s tangible net worth as per last lower.crores depending on the location. on liberalized terms. 2/. rural and semi-urban. depending on the location. 29 . purchase of medical diagnostic equipments as also office equipments etc. 2/. 50/. This scheme is implemented at select branches of the Bank depending on the business potential. i. long term margin requirements of SME borrowers against the security of unencumbered land and building belonging to the unit. and to meet working capital requirement upto a maximum limit of Rs. Baroda Arogyadham Loan for providing finance for setting up new Nursing Homes.e. promoters of the unit. viz.
) FOOD & AGRO BASED INDUSTRIES 30 .4.
followed by 8% each from Ahmedabad and Pune). 17% partnership firms. 7% each in bakery and milk & milk products. Of the 262 companies profiled. 71% companies have a single manufacturing facility while 27% operate with 2 or more plants. while 35% are engaged in manufacturing as well as trading. enabling them to become globally competitive. The food processing industry is expected to continue its high-growth trajectory in the near future. 10% each in non-alcoholic beverages and packaged/convenience food. 82 from the South (20% each from Chennai and Hyderabad) and 68 companies from the North (50% registered in Delhi. Emerging Food Processing SMEs of India will provide the right platform for SMEs. 3% in alcoholic beverages and 9% in the others sub-segment. In terms of IT penetration. 4% each in meat & poultry and marine products. 4. 5% in sugar & confectionary. so as to facilitate their interface with potential global partners and buyers.4. around 33% are into grain processing & spices. The list consists of 89 companies from West India (49% registered in Mumbai-Navi Mumbai region.000 mn. The regional representation of companies in the report suitably reflects the geographical concentration of the Indian food processing industry. 8% in fruits & vegetables. 13% are proprietary firms. Around 79% of the companies began operations during the 1980s and 1990s. There are 53 companies having presence in more than one industry sub-segment.2) METHODOLOGY 31 . 43% private limited companies and the rest 27% are public limited companies. The report has profiled 262 companies with a turnover of less than Rs 1. Some of the insights revealed include the following: In terms of ownership patterns. while 18% of the companies are relatively new and have begun operations post-2000. The profiled companies are from 17 states and 2 union territories. Of the balance 209 companies profiled. These regions are the major industrial clusters of food processing SMEs in the country.1) EXECUTIVE SUMMARY Emerging Food Processing SMEs of India attempts to provide a platform to the Food Processing SMEs. Of these. and SMEs are expected to play a critical role. 83% are small-scale firms and 17% are medium scale. As many as 65% of profiled companies are engaged solely in manufacturing. followed by 21% from Rajasthan). 42% companies have a website. as many as 245 companies provided us sufficient data points to enable a statistical analysis.
changing lifestyles and relaxation in policies has given a considerable push to the industry’s growth. Small and Medium Enterprises Development Act of 2006.3) DATA COLLECTION AND ANALYSIS Overview The food processing industry in India is a sunrise sector that has gained prominence in recent years. the analysis has formulated a correlation between investment and turnover to arrive at a benchmark of Rs 1. Other considerations included financial growth performance over the past two years.The Micro. nonalcoholic beverages. The companies that qualified on the basis of turnover were further screened through another set of parameters to arrive at a truly representative list of emerging SMEs. The report has excluded subsidiaries of large Indian business houses. alcoholic beverages and grain processing. Every effort was made to ensure that the report covers food processors located across the length and breadth of the country. A thrust to the food processing sector implies significant development of the agriculture sector and ensures value addition to it. Availability of raw materials. The report also includes diversified companies operating in the food processing and allied segments and having business interests in other industries. from fruits & vegetables to meat & poultry. Emerging Food Processing SMEs of India focuses on processors of food and food products across the value chain. 2006 defines SMEs as entities that have an investment of above Rs 10 mn and below Rs 100 mn in plant and machinery for firms engaged in production of goods. ensure remunerative prices to farmers and at the same time create favourable demand for Indian agricultural products in the world market. competitive dynamics and the future outlook for the segment. bakery. packaged/convenience food. The SME Insights section presents analytical findings drawn from the primary information collated by leading consulting firms across the world. This sector is among the few that serves as a vital link between the agriculture and industrial segments of the economy.000 mn turnover for the SMEs. milk & milk products. 32 . multinational companies and subsidiaries of multinational companies. thus honouring the true Indian entrepreneurial spirit that the SMEs represent. marine products. Trading companies have been excluded. 4. Strengthening this link is of critical importance to improve the value of agricultural produce. which came into effect from October 2. we identified a large universe of auto component manufacturers. Considering the challenges entailed in tapping financial information from a highly fragmented sector. The sections titled Industry Report and SME Insights are special analyses on the food processing industry which looks at current trends. Companies with negative net worth and those declared financially sick by the Board for Industrial & Financial Reconstruction (BIFR) were eliminated. growth prospects and production efficiencies. Based upon the Annual Survey of Industries (ASI) and National Sample Survey Organization (NSSO) And Centre for monitoring Indian economy and Capitaline database.
600 bn). The average annual growth of the food processing industry has been around 8% between FY01-FY08. The food processing industry in India has a share of 1. The Ministry of Food Processing Industries. considering the still nascent levels of processing at present. marine products. beer & alcoholic beverages. weaning food and extruded food products (including other ready-to-eat foods) • Beer. including non-alcoholic beer • Alcoholic drinks from non-molasses base • Aerated water and soft drinks • Specialised packaging for food processing industries.The Indian food processing industry holds tremendous potential to grow. An extensive and highly fragmented industry. 21% in meat and 6% in poultry products. the industry holds tremendous opportunities for large investments. Considering the wide-ranging and large raw material base that the country offers. milk and milk products. Ministry of Food Processing Industries The Ministry was set up in 1998 and the industry segments that come under its purview are: • Fruit & Vegetable processing (including freezing and dehydration) • Grain Processing • Processing of Fish (including canning and freezing) • Processing and refrigeration of certain agricultural products. 30% in Thailand. these levels are significantly low . 33 . malt extract. meat and poultry. third largest producer of foodgrains and fish and has the largest livestock population. and as part of total manufacturing accounts for 9%. protein isolate. packaged/convenience food and packaged drinks. breakfast foods. India’s share in world trade in respect of processed food is about 1. GoI.5% in the total GDP of the country.6%.. Value addition to agriculture produce in India is just 20%. second largest producer of fruits & vegetables (150 mn tonnes).a.processing of agriculture produce is around 40% in China. poultry and eggs. while the value-added processed food market is around 40%. the food processing sector largely comprises of the following sub-segments: fruits & vegetables. wastage is estimated to be valued at around US$ 13 bn (Rs 580 bn). The segments that have driven the growth are the beverages and meat & meat products and processed fish sectors. Processing of fruits and vegetables is a low 2%. has estimated the size of the Indian food market at US$ 191 bn (Rs 8. the highest producer of milk in the world at 90 mn tonnes p. with an arable land of 184 mn hectares is. grain processing. The processed food market is projected to be over US$ 100 bn. Though India’s agricultural production base is reasonably strong. along with a consumer base of over one billion people. around 35% in milk. By international comparison. India. This segment accounts for more than 70% of the output in volume terms and 50% in value terms. meals (edible). dairy products. meat and meat products • Industries related to bread. biscuits. 70% in Brazil. wastage of agricultural produce is sizeable. oilseeds. 78% in the Philippines and 80% in Malaysia. A large number of players in this industry are small sized companies. of which the primarily processed food market accounts for 60%. high protein food. confectionery. and are largely concentrated in the unorganised segment.
Annual Report 2007-08.However. squashes. Food Processing Units in Organised Sector (numbers) Source: Ministry of Food Processing Industries. though the organized sector is comparatively small. The processing of fruits and vegetables is estimated to be around 2.1 mn tonnes in January 1993 to 2 mn tonnes in 2000 and further to 2. fruit based ready-to-serve beverages. canned fruits and vegetables.2 mn tonnes in 2008.2% of the total production in the country. jams. chutneys and dehydrated vegetables. Some recent products introduced 34 . The prominent processed items in this segment are fruit pulps and juices. Industry Sub-Segments Fruits & Vegetables The installed capacity of fruits and vegetables processing industry has increased from 1. it is growing at a much faster pace. pickles.
Consumption of value added fruits and vegetables is low compared to the primary processed foods. but also a market for agriculture produce. fiscal incentives and tax concessions will also give impetus to the sector. A significant thrust can be given to this sector by strengthening linkages between farmers and processors. As of 2008-09 total milk production in the country was over 100 mn tonnes with a per capita availability of 229 gms/day. The domestic industry is yet to change its preference in favour of processed foods. most of which are milch cows and milch buffaloes. canned mushroom and mushroom products. accelerate technology transfer and capital inflow into the agriculture sector. dried fruits and vegetables and fruit juice concentrates. pickles. The Government of India’s National Agriculture Policy envisages the participation of the private sector through contract farming and land leasing arrangements which not only assures supply of raw material for processing units. vegetables and grain processing industry.in this segment include vegetable curries in retortable pouches. and a large number of units are in the cottage / household and small scale sector. and units engaged in these segments are export oriented. India’s dairy industry is considered as one of the most successful development programmes in the post-Independence era. The industry has been recording an annual growth of 4% during the period 1993-2007. Contract farming in wheat practiced in Madhya Pradesh by Hindustan Lever Ltd and by Pepsi Foods Ltd in Punjab for tomatoes. which changed the farming landscape and promoted the cultivation of processable variety of farm produce. or sold as fresh. foodgrains. as well as. (with the organized dairy industry accounting for 13% of the milk produced) while the rest of the milk is either consumed at farm level. having small capacities of up to 250 tonnes/annum. which is almost 3 times the average growth rate of the dairy industry in the world. Milk processing in India is around 35%. The inclination towards processed foods is mostly visible in urban centers. The five-year 100% tax exemption announced by the Government in FY05 was one such incentive for upcoming fruits and vegetable processing units. and fresh fruits and vegetables. farmers and processing companies has brought about inefficiencies in the supply chain and encouraged the involvement of middlemen. Over the years. Milk is processed and marketed by 170 Milk Producers’ Cooperative Unions. Since 2000. The weak linkage between farmers and markets. spices and oilseeds are some successful examples of contract farming in India. which federate into 15 State Cooperative Milk Marketing Federations. The fruits and vegetable processing industry is highly decentralized. non-pasteurized milk through unorganised channels. processed mushrooms and curried vegetables. Apart from such initiatives. accounting for 50% of the buffaloes and 20% of the world’s cattle population. dehydrated and frozen fruits and vegetable products. the industry has seen significant growth in ready-to-serve beverages. several 35 . fruit juices and pulps. Dairy Cooperatives account for the major share of processed liquid milk marketed in the India. Milk and Milk Products India has one of the highest livestock population in the world. Such innovative practices will power the fruits.
brands have been created by cooperatives like Amul (GCMMF), Vijaya (AP), Verka (Punjab), Saras (Rajasthan). Nandini (Karnataka), Milma (Kerala) and Gokul (Kolhapur). The milk surplus states in India are Uttar Pradesh, Punjab, Haryana, Rajasthan, Gujarat, Maharashtra, Andhra Pradesh, Karnataka and Tamil Nadu. The manufacturing of milk products is concentrated in these milk surplus States. As per data released by the Ministry of Food Processing Industries, exports of dairy products have been growing at the rate of 25% p.a. in quantity terms and 28% in value terms since 2001. Significant investment opportunities exist for the manufacturing of valueadded milk products like milk powder, packaged milk, butter, ghee, cheese and ready-todrink milk products. Meat & Poultry Since 1995, production of meat & meat products has been steadily growing at a rate of 4% p.a.. Currently, the processing level of buffalo meat is estimated at 21%, poultry 6% and marine products 8%. Only about 1% of the total meat is converted into value added products like sausages, ham, bacon, kababs, meat balls, etc. Production of meat is governed under local by-laws as slaughtering is a state subject. Processing of meat is licensed under the Meat Food Products Order, 1973. In 2003 India had a livestock population of 470 mn that included 205 mn cattle and 90 mn buffaloes. The country produces about 450 mn broilers and 30 billion eggs annually. Cattle, buffaloes, sheep and goat, pigs and poultry are the types of animals which are generally used for production of meat. Slaughter rate for cattle as a whole is 20%, for buffaloes it is 41%, pigs 99%, sheep 30% and 40% for goats. The country has 3,600 slaughter houses, 9 modern abattoirs and 171 meat processing units licensed under the meat products order. The poultry industry is among the faster growing sectors rising at a rate of 8% per year. Vertical integration of poultry production and marketing has lowered costs of production, marketing margins and consumer prices of poultry meat. There are eight integrated poultry processing units in the country, which hold a significant share in the industry. Marine Products India is the third largest fish producer in the world and ranks second in inland fish production. India’s vast potential for fishes, from both inland and marine resources, is supplemented by the 8,000 km coastline, 3 mn hectares of reservoirs, 1.4 mn hectares of brackish water, 50,600 sq km of continental shelf area and 2.2 mn sq km of exclusive economic zone. Processing of marine produce into canned and frozen forms is carried out almost entirely for the export market. Infrastructure facilities for processing of marine products include 372 freezing units with a daily processing capacity of 10,320 tonnes and 504 frozen storage facilities with a capacity of 138,229.10 tonnes. Apart from these, there are 11 surimi units, 473 pre-processing centres and 236 other storages. Processed fish products for export include conventional block frozen products, individual quick frozen products (IQF), minced fish products like fish sausage, cakes, cutlets, pastes, surimi, texturised products and dry fish etc.
Exports of marine products have been erratic and on a declining trend which can be owed to the adverse market conditions prevailing in the EU and US markets. The anti-dumping procedure initiated by the US Government has affected India’s shrimp exports to the US. Grain Processing Grain processing includes milling of rice, wheat and pulses. As of 1999-00, there were over 91,000 rice hullers and 2,60,000 small flour mills engaged in primary milling. Also, there are about 43,000 modernised rice mills/huller-cum-shellers. Around 820 large flour mills in the country convert about 10.5 mn tonnes of wheat into wheat products. Also there are 10,000 pulse mills milling about 75% of pulse production of 14 mn tonnes in the country. Primary milling of grains is the most important activity in the grain processing segment of the industry. However, primary milling adds little to shelf life, wastage control and value addition. Around 65% of rice production is milled, mostly in modern rice mills. However, the sheller-cum-huller mills operating give low recovery. Wheat is processed for flour, refined wheat flour, semolina and grits. Apart from the 820 large flour mills, there are over 3 lakh small units operating in this segment in the unorganised sector. Dal milling is the third largest in the grain processing industry, and has approximately 11,000 mechanised mills in the organised segment. Oilseed processing is another major segment, an activity largely concentrated in the cottage industry. According to estimates, there are approximately 2.5 lakh ghanis and kolus (animal operated oil expellers), 50,000 mechanical oil expellers, 15,500 oil mills, 725 solvent extraction plants, 300 oil refineries and over 175 hydrogenated vegetable oil plants. Indian rice, especially Basmati rice, has gained international recognition, and is a premium export product. Branded grains as well as grain processing is now gaining popularity. Beer & Alcoholic Beverages India is the third largest market for alcoholic beverages in the world, and the domestic market is largely dominated by United Breweries, Mohan Meakins and Radico Khaitan. The demand for beer and spirits is estimated to be around 373 mn cases per year. There are 12 joint venture companies having a licensed capacity of 33,919 kilo-litres p.a. for production of grain based alcoholic beverages. Around 56 units are manufacturing beer under license from the Government of India. The two segments in the liquor segment, country liquor and Indian Made Foreign Liquor, both cater to different sections of society. The former is consumed in r ural areas and by low-income groups, while the latter is consumed by the middle and high income groups. There are approximately 23,000 licensed liquor outlets in India, with another 10,000 outlets in the form of bars and restaurants. Regulations in this sector differ state-wise. In Tamil Nadu, Kerala and Andhra Pradesh, the distribution is controlled by the state government, and any change XVIII in the ruling party has a direct impact on the availability of alcohol. In Uttar Pradesh, liquor distribution licenses were earlier based on bidding, and the highest bidder was given the license. This has not changed to the lottery allotment system. Gujarat Government has banned the sale and distribution of liquor in the state. The wine industry in India has come into prominence lately and has been receiving support from the Government as well. The market for this industry has been estimated to be
growing at around 25% annually. Maharashtra has emerged as an important state for the manufacture of wines. There are more than 35 wineries in Maharashtra, and around 1,500 acres of grapes are under cultivation for wine production in the state. The Maharashtra Government has declared wine-making business as small-scale industry and has also offered excise concessions. Consumer Foods This segment includes packaged foods, aerated soft drinks, packaged drinking water and alcoholic beverages. Packaged / Convenience Foods Consumer food industry mainly consists of ready-to-eat and ready-to-cook products, chips, salted snacks, pasta products, cocoa based products, bakery products, biscuits, soft drinks, etc. There are around 60,000 bakeries, 20,000 traditional food units and several pasta food units. The bakery industry is among the few processed food segments whose production has been increasing steadily in the country in the last couple of years. Bakery products include bread, biscuits, pastries, cakes, buns, rusk etc. This activity is mostly concentrated in the unorganized sector. Bread and biscuits constitute the largest segment of consumer foods with an annual production is around 4.00 mn tonnes. Bread manufacturing is reserved for the small scale sector. Out of the total production of bread, 40% is produced in the organized sector and the remaining 60% in the unorganised sector. Similarly, in the production of biscuits, share of unorganized sector is about 80%. Cocoa Products There are 20 units engaged in the manufacture of cocoa products like chocolates, drinking chocolate, cocoa butter substitutes, cocoa based malted milk foods with an annual production of approximately 34,000 tonnes. Soft drinks This segment is the 3rd largest in the packaged foods industry, after packed tea and packed biscuits. The aerated soft drinks industry in India comprises over 100 plants and provides direct and indirect employment to over 125,000 employees. It has attracted one of the highest foreign direct investments in the country. Its position is strengthened by strong forward and backward linkages with glass, plastic, refrigeration, sugar and the transportation industry. Penetration levels of aerated soft drinks in India are quite low compared to other developing and developed markets, which is indicative of the potential the segment holds for further growth. Constraints & Drivers of Growth Growing urbanization, increasing disposable income, emergence of organised food retail, changing lifestyles and food consumption patterns are the key factors driving growth for
etc Lack of adequate quality control and testing infrastructure Inefficient supply chain and involvement of middlemen High inventory carrying cost High taxation High packaging cost Affordability and cultural preference of fresh food Highest priority has been accorded by the Government for the development of infrastructure. the growth rates for fruits. However. Some of the key constraints identified by the industry include: • • • • • • • Lack of suitable infrastructure in terms of cold storage. packaging centres. These are post-liberalisation trends that have given an impetus to the sector. This shift in turn implies that there is also a need to diversify the food production base to match the changing consumption preferences. etc In terms of policy support.processed foods in India. Going by this pattern. organic and diet foods. vegetables. So far. except for alcoholic beverages Declared as priority sector for lending in 1999 100% FDI on automatic route Excise duty waived on fruits & vegetables processing from 2000 – 01 Income tax holiday for fruits & vegetables processing from 2004 – 05 Customs duty reduced on freezer van from 20% to 10% from 2005 – 06 Implementation of Fruit Products Order Implementation of Meat Food Products Order Enactment of FSS Bill 2005 Food Safety & Standards Bill. Earlier. followed by milk & milk products. the share of cereal products was the highest. 2005 39 . meat and dairy products have been higher than cereals and pulses. vegetables. snack foods and convenience foods and further on the demand would shift towards functional. the ministry of food processing has taken the following initiatives: • • • • • • • • • • • Formulation of the National Food Processing Policy Complete de-licensing. Consumption patterns in India have been undergoing a visible shift. edible oil and meat products. The Government has already taken several initiatives on this front which include developing of food parks. in recent years. warehousing. packaging centres. integrated cold chain facilities. food testing and analysis laboratories. There is a shift from carbohydrate staples to animal sources and sugar. 22 food parks have come into operation which provide common facilities like cold storage. irradiation facilities and value added centres. The initiative to develop food parks was taken primarily in order to assist the small and medium enterprises which are unable to invest in capital intensive activities. modernised abattoirs. there will be increasing demand for prepared meals. This shift in consumption follows the pattern observed in developed countries in the evolution of the global food demand. in future.
facilitating a sustained growth of the sector and also improve global competitiveness. Nearly 30 per cent of FDI in the food processing sector comes from EU countries such as Netherlands. Cadbury. Godrej-Pilsbury.Apart from these initiatives. Maharashtra was among the front-runners to receive the highest share of FDI in food processing during the last five years. At the same time. The dairy and consumer industrise received FDI worth Rs 2. Germany. The emerging new growth phase of the sector is just in its initial stages with the potential for India to emerge as a leading food supplier to the world. The highest investment in a single year was in 2001-02 amounting to Rs 10 bn.7 bn each as foreign investment. SWOT Analysis of Food–Processing Industry Strengths • • • • Abundant availability of raw material Priority sector status for agro-processing given by the central Government Vast network of manufacturing facilities all over the country Vast domestic market Weaknesses 40 . This level of competition has increased innovations. the Centre has requested state Governments to undertake the following reforms: • • • • Amendment to the APMC Act Lowering of VAT rates Declaring the industry as seasonal Integrate the promotional structure Investments The total inflow of foreign direct investment in the food processing sector has been around Rs 55 bn between 1991 to November 2008. Major Food Processing Companies in India The entry of multinational companies has increased competition in the food processing industry. Manjini Comaco are some of the successful ventures from EU countries. Nutricia International. FDI witnessed an inflow of over Rs 24 bn of foreign investment. Perfetti. During the last five years. these companies are facing tough competition from strong Indian brands. Italy and France.
the requirement being that at least 80% of the information sought has been provided. Seasonality of raw material Opportunities • • • • • • Large crop and material base offering a vast potential for agro processing activities Setting of SEZ/AEZ and food parks for providing added incentive to develop greenfield projects Rising income levels and changing consumption patterns Favourable demographic profile and changing lifestyles Integration of development in contemporary technologies such as electronics. bio-technology etc. there has been a deficit of authentic information on this segment and has limited the estimation of value contributed by it to India’s economy.4) FINDINGS SME Insight The attention that small and medium enterprises are lately commanding from banks. a sample of 245 companies was considered. we attempt to add value through insights that have emerged from our study. We have attempted to chart their operational structure.5%. marketing. etc. Some key characteristics of the sample of 245 companies are: • Ownership pattern of companies include: proprietary firms 13. Inadequately developed linkages between R&D labs and industry. industry and academicians. As a result. For this quantitative exercise. has encouraged this study on the SME segment. material science.5%. The SMEs were relatively over-shadowed for long by other economic concerns. Through this primary research undertaken by the leading consulting firms. business practices.• • • • • • Low availability of adequate infrastructural facilities Lack of adequate quality control & testing methods as per international standards Inefficient supply chain due to a large number of intermediaries High requirement of working capital. institutions. efficiency parameters. preferences. private limited companies 43% and public limited companies 27% 41 . offer vast scope for rapid improvement and progress Opening of global markets Threats • • • • Affordability and cultural preferences of fresh food High inventory carrying cost High taxation High packaging cost 4. partnership firms 16. This study aims to draw a profile of how small and medium companies in the food processing space function.
flavours.5% companies are located in the West. 27. 31% in the South. guar gum etc. • In terms of IT penetration. 8% in non-alcoholic beverages which includes soft drinks. fruit juices. 5% into sugar & confectionary. around 77% of the companies in the sample are small scale enterprises on the basis of investments in plant and machinery. (Refer Fig 01) • The representation from the various sub-segments of the industry is as follows: 34% in grain processing & spices segment. 4% in meat & poultry. The rest are relatively new having begun operations post-2000 • 71% of companies have a single manufacturing facility while 27% operate with 2 or more plants.5% in the North and 8% in the East • Reflecting the low capital intensive nature of the industry. only 4% were present prior to 1980s. The West and South have maximum representation. (Refer Fig 02) • Around 65% of the companies are solely into manufacturing. except a few in Himachal Pradesh and Jammu & Kashmir • The geographical spread of the sample companies mirrors the concentration of food processing companies in the country. tea. 7% each in milk & milk products and fruits & vegetable processing. The ‘others’ category include manufacturers of food colours. Around 33. The rest are medium enterprises.• The sample covers over 98% of the food processing clusters. coffee. water. 42% of the companies have a website. additives. 3% each into alcoholic beverages and marine products and 9% in the others segment (Refer Fig. 6% into bakery. etc.5% of the companies in the sample began operations between 1980 and 2000. 42 . seeds. while 35% are engaged in manufacturing as well as trading • Around 78. 14% into packaged / convenience food. 2).
Another 33% were earning over Rs 100 mn but less than Rs 500 mn.Turnover Over 50% of the companies in the sample have a turnover of less than Rs 100 mn. followed by proprietary firms. The northern and southern region showed a higher proportion of companies falling in the Rs 500 mn and above turnover bracket. the public limited and private limited companies dominated with a share of 60% and 33% respectively.000 mn. 43 . and most of them were private limited companies. In terms of the regional spread of these companies. a large number of small firms were concentrated in the West. Of the remaining 17% of the companies which were in the turnover bracket of Rs 500 mn and Rs 1.
The companies in the South were prominently private limited companies. similar to that observed among textile SMEs. 04) 44 . The companies in the Western region were again predominantly private limited companies. (Refer Fig.Figure 03 Top Ownership Structure The North-based companies once again showed a preference for proprietary form of ownership.
the enterprises having turnover between Rs 250-500 mn showed higher average capacity utilisation of an average 88%. Brand consciousness among companies was widespread irrespective of their size. Capacity Utilisation The companies in the study were operating at an average capacity utilisation of 78%. the North-based companies reflected higher capacity utilisation and were on an average operating at 82% of installed capacity. 69% of the companies in the turnover bracket of Rs 500-1. Of the exporting companies. 38% were operating in the Grain Processing & Spices segment followed by companies in Fruits & Vegetable Processing segment. Of the total exporting firms. Segment-wise. Correspondingly. followed by marine product manufacturers. which on an average exported 93% of their produce. It was found that among the small scale companies with turnover less that Rs 100 mn.000 mn had developed brands for their products. The grain processing and packaged/convenience foods segments were the most prominent among the brand owning companies. it was found that companies exclusively into meat & poultry exported over 96% of their output. with many of them exporting directly to foreign clients. Average capacity utilisation across segments 45 . fruits & vegetables and meat & poultry segments. The average capacity utilization among exporting companies was relatively higher (80%) compared with those selling only in the domestic market. Regionally.Branding Around 65% of the companies in the sample had branded products. Of these companies operating at 90% and above capacity. were exporting their products and 36% were exporting more than 90% of their produce. In terms of the various sub-segments in the food processing industry and their exports. Approximately 44% of the companies were operating at 90% and above of installed capacity. or 47% of the sample. Exports Around 114 companies. In terms of ownership. 62% of the companies had branded products. the pre-dominant exporters were companies in the grain processing and the fruits & vegetables segments having a share of 29% and 15% respectively. 23 companies were 100% exporters mainly in the grain processing. On the basis of size. public limited companies constituted a significant 36% of those operating at more then 90% capacity. 61% have branded products and almost 55% have quality certifications.
the grain processing companies showed highest dynamism with 65% of the companies in this segment having divulged future growth plans. In terms of future plans. 61% have envisaged strategies for future growth. while 16% companies looking for newer markets belonged to non-alcoholic beverages segment 46 . diversification to new marketing initiatives and venturing into newer markets. The plans range from capacity expansion. of the companies having capacity expansion plans. modernisation. Bakeries accounted for 13% of the companies having plans for diversifying their product segment. A substantial 29% of the companies have diversification plans into related or un-related fields.Table 2 Top Future Plans Of the total 245 companies in the sample. Segment-wise. Out of the total companies with future plans for growth. 45% of the companies have plans for expanding their capacity in order to meet the growing demand. 33% were from the grain processing segment followed by packaged/convenience foods (15%).
A large number of these companies were from the northern and southern belt. Nearly 52% of the companies in the sample responded to the query on hindrances to growth. demographic factors.Figure 05 Hindrances to growth Infrastructure and lack of institutional support were cited as the key hindrances to growth by the SMEs. Experience of large developed agricultural economies has proven that the integration of production and processing stages are a universal feature of efficient food marketing systems in the advanced stages of economic development. over 80% of the responses alluded to lack of institutional support as an impediment. However. Of these. Policies are now promoting the participation of private investors that would promote efficiency in food processing and agriculture marketing systems. The Westbased companies were largely concerned with marketing issues. Reforms had more or less bypassed the agriculture sector till recently.5) CONCLUSION AND RECOMMENDATIONS FUTURE PROSPECTS The decade-and-a-half of Indian economic reforms have now reached a stage where it is bringing about changes in the the agriculture and food processing sectors. Driving growth in the food processing sector holds the key to imparting changes in the labour intensive agriculture sector in India. in terms 47 . changing lifestyles and consumer demand for greater variety has increased pressures on the food processing sector to provide products at competitive prices. Infrastructure as a barrier was cited by 37% of the companies. Top 4. Inefficient marketing systems are already being targeted. These are just the initial stages of development and further efficiencies in the agriculture sector.
In this backdrop. The products that would see remarkable growth include pickles. Realising this vision entails an investment of US$ 24 bn over the decade of 2004-2015. creating facilities for primary grading/sorting. progress has been pre-eminent in the grain processing sector with the extensive branding of processed end-products like wheat flour and processed rice. Organised food retailing is likely to play an important role in increasing the consumption of processed food items. contract farming and supply chain management. organised retail. marketing interventions and regulations. Aditya Birla Group. infrastructure development. Indian corporates who have already ventured into this segment include ITC. GoI. and are backward integrating their operations. In other words. It also aids better understanding of consumer preferences as it is a vital link between the processors and consumers. has projected the organised food retail industry to grow by 30% for the next five years. Policy reforms in the food processing sector are already in their advanced phase. This would require improving infrastructure for warehouses. Though current sales of processed foods through retail outlets are hardly 1% of total food sales. canned and frozen fruits and vegetables. several companies have already made foray into this segment. HLL and Cargill. it is estimated to grow at an annual rate of 40% in the near future. cold storage. This strategy addresses issues of taxation. 48 . The Vision 2017 strategy released in 2007-08 envisages: • Trebling the size of the processed food sector to close to US$ 400 bn by 2015 • Increasing level of processing of perishables from 6% to 20% • Value addition to increase from 20% to 35% • Increase share in global food trade from 1. fruit pulps.of improving productivity and investments. and have prompted several corporates to invest in the sector. the Government of India is already in the midst of a vision. strengthening of institutions and issues of food safety and regulations. where too significant progress has taken place in terms of branding and marketing of products. Bharti. The retail format reduces the number of intermediaries and transaction costs. Key players in this segment include Venky’s India and Godrej. will be a source of power for the food processing sector in turn. the two sectors share a symbiotic relationship and changes to either will impact the other. Among the key categories that constitute the organised retail market. strategy and action plan for the food processing sector. and will continue to witness significant changes in the next few years. The fruits and vegetables segment is still localised in its operations. Among the food processing segments.5% to 3% • Increase the share of value added products in food consumption from the current 16% to 50%. For the agriculture sector. The Ministry of Food Processing. and largely unbranded. improving access to price and market information to farmers. A few prominent companies XXIX investing in this segment include ITC. the food and beverages segment make up a high 29%. Acquiring global competitiveness implies building-in efficiencies into the agricultural production and processing systems. Subhiksha and Future Group. the state Governments will have to play a critical role in raising yields and improving quality of agricultural produce. This is among the faster growing segments in the industry. However. access roads. The other growing segment is poultry and meat. Reliance.
but also the promise it holds in driving growth of a certain section of society that has remained marginalised for a long time. investments in infrastructure and a shift towards centralised distribution centres from the traditional wholesale markets. More than just demand and supply dynamics.Studies on the impact of organised food retailing on the supply chain have shown that it helps in consolidation among farmers towards meeting consumer requirements. 49 . The food processing industry in India has taken off substantially and will continue to grow rapidly considering the untapped potential in the sector. stakeholders in the food processing sector of India have a social responsibility to fulfil. similar to the developed nations. The growth in this segment not only indicates the changing development patterns of the country.
5.) CHEMICALS 50 .
a large 55% of the companies responded that fund availability was moderate. around 60% of companies in these segments were exporting their products.1) EXECUTIVE SUMMARY The Emerging Chemical SMEs of India attempts to provide a platform to the chemical SMEs. 9% in the South and 4% in the East. and on an average. so as to facilitate their interface with potential global partners and buyers to tap ever increasing export opportunities by leveraging high quality Indian technical expertise. while private limited companies were prominently high in the Rs 100 – 500 mn turnover bracket.000 mn. The report has profiled 384 companies with a turnover of less than Rs 1. On the strengths of low cost manpower. Of the 384 companies profiled. a large and growing domestic market. • The average capacity utilisation of the sample companies was around 85%.5. as many as 271 companies were used for a statistical analysis. inorganic and dyestuff — were most optimistic on future growth. The region is entirely represented by two states – Gujarat (58% of total West) and Maharashtra (42% of total West). • On the query of availability of funds. companies are featured from 75 cities. Emerging Chemical SMEs of India will provide the right platform for SMEs. prospects for the Indian chemicals sector are bright. with Ahmedabad at 30% and Mumbai at 25% share topping the chart. • It was observed that public sector companies had a dominant presence in the Rs 500 – 1000 mn bracket. 51 . The geographical spread of the industry mirrors the concentration of chemical companies in the country with the West region dominating with a 76% share. Location-wise. strong forward and backward linkages and a conducive policy environment. The report covers SMEs based in 10 chemical clusters across the country. Around 11% companies are located in the North. with 45% of the companies operating at over 90% of their capacity. enabling them to become globally competitive. Another 35% felt that it was easy to acquire funds. and a large number of such companies were located in the West and South of the country. Some of the insights revealed include: • Three segments — organic.
the Government of India has defined SMEs as entities that have an investment of above Rs 10 mn and below Rs 100 mn in plant and machinery. growth prospects and production efficiencies. thus honouring the true Indian entrepreneurial spirit that the SMEs represent. The definition of small and medium enterprises (SMEs) in the Indian context has remained contentious until recently. 52 . The report has excluded subsidiaries of large Indian business houses.5. The report includes diversified companies operating in the chemical space and having business interests in other industries. Emerging Chemical SMEs of India focuses on manufacturers of chemicals and allied products.000 mn turnover for auto component SMEs. The companies that qualified on the basis of turnover were further screened through another set of parameters to arrive at a truly representative list of emerging SMEs. Other considerations included financial growth performance over the past two years. As per the Micro. The SME Insights section presents analytical findings drawn from the primary information collated by the various research conducted by the leading consulting firms. competitive dynamics and the future outlook for the segment. trading companies have been excluded. Based upon the Survey Organization (NSSO) And database. multinational companies and subsidiaries of multinational companies. touches upon auto component of the country. Considering the challenges entailed in tapping financial information from a highly fragmented sector. we identified a large The sections titled Industry Report and SME Insights are special analyses on the auto component industry which look at current trends. Small and Medium Enterprises Development Act of 2006.2)METHODOLOGY. Companies with negative net worth and those declared financially sick by the Board for Industrial & Financial Reconstruction (BIFR) were eliminated. the analysis has formulated a correlation between investment and turnover to arrive at a cutoff Rs 1. Every effort was made to ensure that the report manufacturers located across the length and breadth Annual Survey of Industries (ASI) and National Sample Centre for monitoring Indian economy and Capitaline universe of auto component manufacturers.
synthetic rubber. and provides the building block for many downstream industries. The chemical industry is among the most diversified industrial sectors. paints.000 commercial products. The sector covers over 70.6% to the total output in the manufacturing sector. GoI. fertilisers and detergents. Introduction The Indian chemical industry is among the established traditional sectors of the country. including basic chemicals and its products. plastics. gases. dyes. polyester. A robust chemical industry is a harbinger of significant economic and strategic benefits to the nation. 53 . dyestuffs. at different levels across the industry supply chain. the domestic chemical industry contributes about 17. The sector has a share of 3% to the country’s total GDP. is a critical input for industrial and agricultural development. The industry includes a wide variety of products. petrochemicals. 13-14% to total exports and 8-9% of total imports into the country.5. paper. such as finished drugs. playing an integral role in the country’s economic development. paints. pharmaceuticals. from basic chemicals to research-driven specialised products. The fundamental nature and diversity of the industry is best understood from the fact that the industry itself is the largest consumer of its products. forming part of the basic goods industry. Its contribution to the revenue kitty of the Government is around 18-20%. fertilisers. accounting for around 33% of total consumption. pesticides. The industry has a weight of 14% in the Index of Industrial Production (Base year 1993-94 = 100).3) DATA COLLECTION AND ANALYSIS. This sector. etc. giving an indication of the importance the sector holds in the country’s industrial growth.Gol As stated in the Annual Report of 2005-06 of the Department of Chemicals & Petrochemicals. Sources: Department of Chemicals & Petrochemicals.
pesticides and fungicides. Sources: Department of Chemicals & Petrochemicals. biocides. high volume. Organic chemicals cover over half of all known chemical compounds. This classification is based on the product categorisation as provided by the Department of Chemicals & Petrochemicals. which is slightly over 1% of the global production. cutting fluids. Inorganic chemicals comprise of alkalis. for the chemical industry. GoI. Industry structure The chemical industry can be broadly classified into two segments – organic and inorganic chemicals. etc. etc. chemicals may be divided into basic. corrosion inhibitors. drugs. agrochemicals. Specialty and fine chemicals are low volume. low margin products.. It is estimated that nearly 70% of fine chemicals produced in India are used by the pharmaceutical and agrochemical industries. additives.300 bn). dyes & dyestuffs. India stands 12th in terms of production. The basic chemicals industry forms the largest part of the chemical industry and is characterised by capital intensive.The domestic industry’s turnover is estimated to have crossed US$ 30 bn (Rs 1. dyes. which can be further divided into alkalis. and excludes drugs & pharmaceuticals and petrochemicals. specialty and fine chemicals. lubricants. high margin in nature. Based on a more functional classification. pigments. In world ranking. antioxidants. organic and inorganic chemicals. and includes petrochemicals. Regional concentration of the basic chemicals industry 54 . cosmetics. Gol This report largely focuses on basic chemicals. dyes and dyestuffs. Specialty chemicals include adhesives.
MP and Punjab.Sources: Department of Chemicals & Petrochemicals. while consumption has been rising at 5% per annum. which contributes 9%. TN.25% and 37.Gol Though the chemical industry is spread across the country. The other major producing states include UP. Industry Sub-segments The annual production of basic chemicals between FY02-FY06 has been growing at 7% per year.6% respectively. in value terms have been for organic chemicals followed by dyes & dyestuffs. logistics costs for the industry have tended to become a significant position of total costs. Due to the regional concentration of chemical companies in certain pockets. implying that India has been a net exporter of chemicals. Gujarat alone is estimated to contribute around 53% to the total production in the country. State-wise Capacity & Production of Major Chemicals(‘000 MT) 55 . on the largest imports. especially inorganic chemicals. As per the Department of Chemicals. in the case of heavy chemicals segment. followed by Maharashtra. Imports and exports have also been rising at 7. fuel availability is a determining factor. while the largest export item in value terms is also organic chemicals and chlor-alkali chemicals. On the other hand. there is relatively a high concentration along the west-coast. largely due to the proximity to raw materials and ports. and hence there is a concentration of these companies around power plants.
forming the basic building block for the chemical processing industry. paper & boards. viscose. is a volume driven. End-users of this segment include aluminium. pharmaceuticals. to a large extent. to name a few. Chlor alkali companies are largely concentrated along the west coast due to the availability of salts. newsprint. The scale of margins for alkalis. Being a capital intensive sector. water treatment. Caustic soda. a key raw material. energy costs form a key determinant of the profitability of the industry. the largest segment of basic chemicals produced in India. textiles and pharmaceuticals. depends upon the levels of industrial activity in sectors such as metals. soaps & detergents. dyes.Gol Chlor Alkali Chlor alkalis. soda ash and chlorine are products of this industry. low margins industry and accounted for around 72% of the total production in FY06. the sector is largely dominated by big players.Sources: Department of Chemicals & Petrochemicals. pesticides industries. textiles. 56 . glass. Hence.
with production in FY06 touching an estimated 5. thus having tremendous potential for exports. the sector has been a net exporter. Department of Chemicals & Petrochemicals. GoI Organic Chemicals 57 . Technology has played a key role in this segment in adopting better production techniques. Performance of Chlor Alkali Chemicals(‘000 MT) Note: @ = Production + Imports Exports Source: Annual Report 2005 – 2006. This is one of the few industries where supply exceeds demand.Sources: Department of Chemicals & Petrochemicals. while imports are rising at close to 6% per year. Exports of chlor alkali have been growing at 52% annually since 2001. Around 60% of mercury-based caustic-chlorine plants in the country have shifted from mercury cell technology to membrane cell technology that has been recommended as a viable production alternative. Since FY03.Gol The Chlor alkali segment has been witnessing a robust 6% growth in production since FY02.5 mn tonnes.
citric acid. due to price competitiveness. both in terms of value and volume. This segment accounts for 20% of total chemical production in the country. these manufacturers have exhibited the competence to produce chemicals of high quality standards. carbon black. although dropped by 6% to 561 thousand tonnes in volume in FY05. Between FY02-FY05. phenol. During FY05. most of which are knowledge driven. As a result. The domestic market forms a large part of the consumer base for the XVI industry. with a 66% jump in value terms to Rs 5. calcium carbide.Organic chemicals form the second largest segment of the chemical industry. while between FY02-FY05 production grew at an impressive 7%. sodium chlorate. products like methanol are mainly imported into India. most of which are used in drugs. pesticides. methanol. production of organic chemicals is estimated to have increased by 2% to 1. exports of organic chemicals rose by 36% in volume terms to 63 thousand tonnes. and is dominated by medium and small players. saw a rise of 26% in value to Rs 12.7 bn. This segment too is concentrated in Western India. etc are part of this segment. with specialised focus in particular product segment. exports grew by 55% while imports went up by 6% annually in quantity terms.Gol During FY06. This rise in exports can be attributed to the significant value-addition to the Indian product list. This sluggish rate of growth has been persisting since FY05. Inorganic Chemicals This segment comprises of products such as aluminum fluoride. This segment produces a large number of products and combinations thereof. especially in the drugs and pharmaceutical segments.5 mn tonnes. Sources: Department of Chemicals & Petrochemicals. This segment has the largest number of products classified under it. Imports. titanium dioxide and red phosphorous. nitrobenzene. However. Being largely a technology driven segment. potassium chlorate. etc. formaldehyde. 58 . Acetic acid. Exports of organic chemicals have been impressive. R&D forms a considerable part of the manufacturer’s costs.3 bn during this period. etc.
GoI Pesticides 59 . though the value of imports has been high. having recorded an average annual growth rate of around 11% between FY02-FY05. There are large variations among products in the segment owing to the required skills and technology used. Exports of inorganic chemicals too have been rising by over 50% annually since FY02. Department of Chemicals & Petrochemicals.End-users of these chemicals include manufacturers of soaps & detergents. Performance of Inorganic Chemicals (’000 MT) Source: Annual Report 2005 – 2006. The inorganic chemicals sector is the fastest growing sub-segment. implying the highvalue imports by domestic players. Sources: Department of Chemicals & Petrochemicals. glass. fertilisers and alkalis. Imports have been erratic and on the decline in volume terms. and the value addition to the products. this segment accounted for 7% of total chemical production in India. In 2005.Gol Inorganic chemicals are manufactured by using naturally occurring minerals. During FY06 production is estimated to have risen by 7% to 544 thousand tonnes. and therefore availability of raw materials is the key determinant for the development of the industry.
Indian players have also shown competence in select product segments. However. Use and production of pesticides is directly related to the crop situation. According to estimates. Cash crop producers are the major consumers of pesticides. India is the second largest manufacturer of agrochemicals in the world with 165 pesticides registered in the country. and indirectly to monsoons. South Africa.180 mn. Bangladesh. which typically consumes the highest proportion of pesticides. Some key export destinations for India include US. a weedicide. This segment is also a knowledge driven segment and R&D plays an important role. During FY05. It has witnessed consolidation over a period of time and the presence of MNCs has been expanding through increased acquisitions of local players. which has played an almost revolutionary role in the Indian agricultural sector. including about 10 multinational companies.Pesticides are one of the most important constituent of the agro-chemicals sub-segment. India is also a dominant producer of Isoproturon. distribution and marketing of agrochemicals. exports of pesticides grew by 9% to 22. During FY06. and more than 500 pesticide formulators spread all over the country. unit realization remained under pressure and fell by 9% thus leading to a decline in the export value by 1. Nonetheless. exports have been one of the growth enablers for this sector. However. France. production of pesticides dropped by 12% to 82. Sources: Department of Chemicals & Petrochemicals. Although most of the exports have been undertaken by MNCs through their established distribution channels across the globe. with more than 60 technical grade pesticides being manufactured indigenously by 125 producers consisting of large and medium scale enterprises. Belgium. a large number of small and medium players are associated with the production. Spain. which also helps to hedge the risk of weather conditions.Gol India has one of the most dynamic generic pesticide manufacturing base.000 tonnes. UK. accounting for nearly 25% of the world’s production. Netherlands. India 60 .000 tonnes mainly due to lower intake of pesticides in the cotton crop. Malaysia and Singapore.6% to Rs 5.
exports of dyes and dyestuff witnessed a fall of 7% during FY05 to 112.000 tonnes in volume and a drop of 6% in value to Rs 2. ink. India today accounts for 6% of total world production of dyes. leather. Performance of Pesticides(’000 MT) Source: Annual Report 2005 – 2006. including paints. Performance of Dyes & Dyestuffs (’000 MT) 61 . Africa. In contrast. companies have yet to obtain relevant product registrations to enable direct sales. etc.27 bn. From being an importer and distributor during the 1950s. During FY06. GoI India has lately emerged as a global base for generic agrochemicals. the dyes and dyestuff industry has come a long way. Department of Chemicals & Petrochemicals. plastics. The reason for this is that apart from lack of necessary sales and distribution infrastructure. As per data available from the Department of Chemicals & Petrochemicals. EU. textiles. their performance is critically linked with that of their end-users’ performance.000 tonnes in volume and by 20% to Rs 3. Dyes and Dyestuff Dyes and dyestuff finds application in a range of industries. being intermediate suppliers. production of dyes grew by 4% to 30.56 bn in value during this period. imports went up by 21% to 15. accounting for nearly 80% of total demand. etc. The textile industry is the largest consumer for this segment.meets most of the domestic requirement of pesticides and imports are limited to only few innovative products.000 tonnes. sales of a significant proportion which are to traders and not to end-users. However. A large number of manufacturers in this segment are small and medium scale players. and Indian dyes are exported to the East Asia.
Department of Chemicals and Petrochemicals. which. India is being looked upon as a preferred destination for outsourcing and contract manufacturing. inter-alia. In fact. This has led to higher utilisation of capacity and revenue generation for the participants. This has led to many new products being introduced in the market. which requires sustained investment in R&D. (c) Focus on R&D Specialty and fine chemicals are essentially a knowledge-based industry. In fact. During the past few years. (d) Outsourcing and contract manufacturing On the strength of low-cost production and world-class technology. large domestic market. Considering the vastness of this sector. a strong economic growth is an important factor for sustaining demand for the chemical industry. strong forward and backward linkages and conducive policy environment.Source: Annual Report 2005 – 2006. Some key strengths of the sector that can drive growth for the industry include low cost manpower. Higher consolidation and capacity building has driven growth. thus boosting demand. This makes integration of processes easier. giving a hint to the potential growth for the industry. (b) Integration along the value chain The industry participates in different stages of the value chain by producing intermediates and finished goods. growing competition in select chemical segments has forced the industry to scale up production. some of the common growth drivers that could be identified for the sector include: (a) Macroeconomic factors Being largely an intermediate product. the chemical industry has witnessed a rise in R&D and technology up-gradation. the per capita consumption of most of the finished products under this sector is far below the world average. 62 . GoI Key Strengths & Drivers The chemical industry forms the backbone of the Indian manufacturing base. requires backward or forward integration in some cases.
(a) Power costs Chemicals.4) FINDINGS SME Insights The small and medium enterprises. especially heavy chemicals. it still lags behind international standards. we have considered a sample of 271 companies. 5. Volatility in power supply and prices of crude oil has been impacting the margins of the chemical companies. Some key characteristics of the sample of 271 companies are: 63 . where technological changes are rapid and needs continuous up-gradation and innovation. are power intensive sectors. business practices. and at the same time the domestic market is already reaching a mature level where demand potential for chemical end-products is on the rise. In these changing circumstances. preferences. which form the backbone of India’s manufacturing sector. marketing. rail and ports are other detrimental factors. which have provided over 85% of the information sought. (c) Infrastructure Poor infrastructure. we present here some insights that have emerged from our study. and sustained supply of power is imperative. (b) Technology Although India has shown remarkable improvement in technological innovation. like roads. (d) Dumping Growing international competition and low customs duty on some of the chemicals have led the dumping of certain chemicals in domestic industry. there has been a deficit of authentic information on this segment that has limited the estimation of value contributed by it to India’s economy. This study aims to draw a profile of how small and medium companies operating in the chemical space function. However. For this exercise. institutions. we have attempted to chart their operational structure. industry and academicians. Through this primary research undertaken by the leading consulting firms. have been the focus of banks. Chemical sectors are one.The Indian chemical industry today is emerging from a protected environment into highly competitive global market. most of the cases related to anti-dumping duty in India relates to chemical sector. Regional concentration of the chemical industry requires better infrastructure and logistics to reach across the country. etc. efficiency parameters. Notably. the industry faces some key challenges.
Another 42% began operations during the 1990s. the small companies in this sample of chemical companies did not show any particular ownership pattern.4% companies are located in the North. close to 72%. Chemical sub-segments 64 . while another 16% had a turnover of between Rs 100 – 250 mn.5% of the total sample. around 39% of the companies have a website. • Close to 77% of the companies in the sample operate in a single segment. • The total sample is from 15 states. while private limited companies were prominently high in the Rs 100 – 500 mn turnover bracket. had a turnover of up to Rs 100 mn. • In terms of IT penetration.5% in the East. 8.5% in the South and 5. • Around 89% of the companies in the sample are small scale enterprises with investments less than Rs 50 mn in plant and machinery. partnership firms 25%. private limited companies 34% and public limited companies 11%. partnership and private firms. Around 11. organic companies at 37% and inorganic 28%. Unlike other SME-dominated segments. and were equally represented by proprietary. It was observed that public limited companies had a dominant presence in the Rs 500 – 1000 mn bracket. The next largest segment is Dyes and Dyestuff accounting for 22%. while only 9% began operations post-2000. the highest coming from the Western region. • Depicting the long-established nature of the industry. around 49% of the companies in the sample were established prior to 1990. The companies in the West are entirely from Gujarat and Maharashtra and account for 74. The Organic and Inorganic manufacturers constitute 65% of the sample.• Ownership pattern of companies include: proprietary firms 30%.2% each. Turnover A large number of companies. Representation of Alkali and Pesticide companies is 1. The rest are medium sized enterprises.
partnership firms having a share of 22 and public limited companies 12%. Among these brand conscious companies. In terms of chemical sub-segments. 7% of the companies were totally export oriented. accounting for 87%. Nearly 68% of these companies were exporting their products. and nearly 43% of the exporting companies have quality certifications. On an average. The organic. a significant 66% were exporting more than 50% of their products. Around 63 companies were operating in more than one segment. with 27% of them exporting more than 50% of their total production. followed by dyes. inorganic and dyes & dyestuff companies dominate the sample. inorganic chemicals. alkalis and pesticides.Though alkalis forms the largest segment of the basic chemicals industry in terms of production. around 60% of the companies in these segments were exporting their products. Around 39% of the companies were exporting over 50% of their produce. Among these companies operating in multiple segments. Among the dyes & dyestuff manufacturers that were exporting their products. 65 . a large number of dyes & dyestuff manufacturing companies were also manufacturing organic chemicals. Of these exporting firms. inorganic and dyestuff — are the key growth drivers of the basic chemicals industry. private limited were 29% while proprietary firms accounted for 24%. Branding Around 38% or 102 companies in the sample sold their products under a brand name. partnership companies accounted for 31%. Nearly 41% of the companies exporting were private firms. Exports Nearly 61% or 165 companies in the sample were exporting their products. with over 50% of these companies manufacturing organic as well as inorganic chemicals. The three segments — organic. the major exporters were organic chemical manufacturers. followed by proprietary firms at 25%. their representation in the sample was very small.
Another 35% felt that it was easy to acquire funds while 5% of the companies expressed difficulty in acquiring funds. another 9% in the North.Funding Banking preference of companies was largely rooted with the public sector banks with 72% of the companies banking with PSUs. while 12% with private sector and another 3% each with cooperatives and MNCs. Availability 66 . and 4% each from East and South. a large 55% of the companies responded that fund availability was moderate. Hindrances in Business In terms of concerns expressed by the companies for business growth. lack of institutional support was highlighted by maximum number of companies. The other major concerns were related to marketing and infrastructure. Nearly 70% of such companies were located to the West. On the query of availability of funds. The remaining 10% were dependent on internal resources to meet their working capital requirements.
the industry also faces considerable challenges in a changing environment. 5. Nevertheless. societal demand for improved environmental performance and the need for increased profitability and productivity. this segment. ensures a sustained demand for chemicals in future. R&D spending as well as building up of a skill base. and will continue to be an adjunct to the chemical industry. Going forward. FUTURE PROSPECTS. which illustrates the maturing technical and chemical synthesis skills of Indian players. especially exports is set to witness high growth in the near term. driven by agriculture. resources. • Low production costs in terms of labour. considering the central role it plays in the growth of the manufacturing and agriculture sector of the country. like textiles.of facilities for quality checks and hindrances in having an assured market was also brought forth by the companies. Big-push from the Pharmaceutical sector The pharmaceutical sector is a significant growth driver for the chemical industry. such as increased globalisation of markets. Some of the end-user industries are also growing rapidly and are emerging as outsourcing hubs for the global market. The current growth pattern of the country. Moreover. in terms of pre-empting the cyclical nature of operations. pharmaceuticals. 67 . following the future trend and opportunities in the field of CRAMS. Also. This trend is likely to gain momentum in the backdrop of recently announced government policies related to R&D in the Union Budget for FY08. Indian pharmaceutical players have shown impressive progress on filing new chemicals entities with foreign regulatory agencies. These measures will help the sector to augment R&D capabilities.5) CONCLUSIONS AND RECOMMENDATIONS. India’s global competitiveness in the chemical industry has grown and will continue to grow in the medium term for the following reasons: • High demand growth in the domestic and global market • Localisation of end-user industries. the proposed exemption of customs duty on coking coal would also provide respite to the fuel intensive sectors. etc These factors have led to increasing investments. the dumping of chemicals and increased inflow of chemical products (mostly basic) under a reduced customs regime will hinder the growth in certain sub-segments. technology may play a significant role in empowering the chemical industry to meet future challenges. Prospects for the Indian chemical industry are bright. Growth in the pharmaceutical sector in turn implies impressive growth for the organic chemicals segment. However. The Union Budget FY08 offers incentives for R&D by way of extending the weighted deduction at the rate of 150% of the expenses on R&D for the next five years and duty exemption for imports of specified machinery used for R&D purpose. industry and services.
the strength of domestic pesticide players lies in their regional presence and understanding local needs. whether organized or unorganized. However. Although. few big domestic players have shown their competitive skills in the domestic and international market by pushing their superior products. the growing presence of MNCs will impact the small and medium players. it will simultaneously open up opportunities in terms of contract manufacturing and research. which will help them to stay and grow in the market. process integration and acquisition. 68 . domestic players may give stiff competition to MNCs MNCs have expanded their presence in the country by introducing innovative products.Pesticides segment may witness further consolidation. In fact. however. Dyes and dyestuff have good prospects based on economic growth Impressive performance of the-end user segments in the dyes and pigment sector is set to give a boost to a large number of players associated with the industry.
6.0) TEXTILES 69 .
the analysis has formulated a correlation between investment and turnover to arrive at a cutoff Rs 1. Small and Medium Enterprises Development Act of 2006.2) METHODOLOGY The definition of small and medium enterprises (SMEs) in the Indian context has remained contentious until recently. Around 16% of the profiled companies are into spinning. in terms of IT penetration. enabling them to become globally competitive. Of these. No response was received from companies in the North-eastern states. the Government of India has defined SMEs as entities that have an investment of above Rs 10 mn and below Rs 100 mn in plant and machinery. and SMEs are expected to play a critical role. 16% of the companies are relatively new and have begun operations post-2000. The regional representation of companies in the report suitably reflects the geographical concentration of the Indian textile and clothing industry. while 37% are engaged in manufacturing as well as trading. There are 62 companies that have integrated operations and function in more than one sub-segment. The profiled companies are from 18 states and 2 union territories. partnership firms 31%. 20% in the clothing segment and 15% are into made-ups. Some of the insights revealed include: in terms of ownership pattern. 70 . the major industrial pockets of textile manufacturers in the country. Considering the challenges entailed in tapping financial information from a highly fragmented sector. 6. around 63% of the companies are only into manufacturing.1) EXECUTIVE SUMMARY Emerging Textile SMEs of India attempts to provide a platform to the Textile SMEs. Emerging Textile SMEs of India will provide the right platform for SMEs. The textile and clothing industry is expected to continue its high-growth period in the near future. private limited companies 27% and public limited companies 18%. The list consists of 232 companies from the North (31% registered in Delhi-Noida region. The report has profiled 621 companies with a turnover of less than Rs 1. 88% are smallscale firms and 12% are medium scale. followed by 19% from Panipat) 144 from the West (80% registered in Mumbai region. 42% of the companies have a website. followed by 10% each from Ahmedabad and Surat) and 226 from the South (23% from Tirupur. followed by 15% from Coimbatore). Of the 621 companies profiled. 11% into weaving. so as to facilitate their interface with potential global partners and buyers.6. as many as 350 companies provided us sufficient data points to enable a statistical analysis. proprietary firms are 24%. around 70% of the companies in the sample began operations during the 1980s and 1990s. 73% of companies have a single manufacturing facility while 27% operate with 2 or more plants.000 mn turnover for auto component SMEs.000 mn. As per the Micro.
for its livelihood. The companies that qualified on the basis of turnover were further screened through another set of parameters to arrive at a truly representative list of emerging SMEs. Based upon the Survey Organization (NSSO) And database. Its importance is underlined by the fact that it accounts for around 4% of Gross Domestic Product. 18% of employment in the industrial sector. 9% of excise collections.Emerging Textile SMEs of India focuses on manufacturers of textile products across the value chain. The SME Insights section presents analytical findings drawn from the primary information collated by the various research conducted by the leading consulting firms. and 16% of the country’s total exports earnings. The sector employs nearly 35 million people and after agriculture. good export potential and low import content are some of the salient features of the Indian textile industry. competitive dynamics and the future outlook for the segment. The report also includes diversified companies operating in the textiles and readymade garments space and having business interests in other industries. Companies with negative net worth and those declared financially sick by the Board for Industrial & Financial Reconstruction (BIFR) were eliminated. India vis-à-vis Global Textiles The global textile and clothing industry is estimated to be worth about US$ 4. a vast pool of skilled and unskilled personnel. 6. cheap labour. enjoying considerable demand in the domestic as well as global markets. The report has excluded subsidiaries of large Indian business houses. from yarns. multinational companies and subsidiaries of multinational companies. it has been estimated that one of every six households in the country depends on this sector. A strong raw material production base. Trading companies have been excluded. The US market 71 .395 bn and currently global trade in textiles and clothing stands at around US$ 360 bn. robust. With direct linkages to the rural economy and the agriculture sector. investment and employment. thus honouring the true Indian entrepreneurial spirit that the SMEs represent. is the second-highest employer in the country. well-established industry. growth prospects and production efficiencies. fibres to processing and finished goods. touches upon auto component of the country. either directly or indirectly. Every effort was made to ensure that the report manufacturers located across the length and breadth Annual Survey of Industries (ASI) and National Sample Centre for monitoring Indian economy and Capitaline universe of auto component manufacturers. Other considerations included financial growth performance over the past two years. 14% of industrial production.3) DATA ANALYSIS AND COLLECTION Overview The Indian textile industry is one the largest and oldest sectors in the country and among the most important in the economy in terms of output. This is a traditional. we identified a large The sections titled Industry Report and SME Insights are special analyses on the auto component industry which look at current trends.
cotton fabrics accounted for 46% of the total fabric produced in 2007-08. At the same time. weaving. The unorganised sector forms the bulk of the industry. The cellulosic fibre/yarn industry is under the administrative control of the Ministry of Textiles. it is a highly fragmented sector. In 1995-96. estimated to be growing at 5% per year. after China. and accounts for 23% of the world’s spindle capacity • Around 6% of global rotor capacity is in India • The country has the highest loom capacity. It is well-established that India possesses a natural advantage in terms of raw material availability. with a share of 61% in world loomage. and in combination with the EU nations. accounts for 64% of clothing consumption. The fibre and yarn-specific configuration of the textile industry includes almost all types of textile fibres. though other types of fabric have gained share in recent years. the Indian textile industry is ranked second. non-integrated spinning. while man-made fibres held a share of 41%. extending from fibre to fabric to garments. nylon. jute. The industry structure is fully vertically integrated across the value chain. India’s presence in the international market is significant in the areas of fabrics and yarn. finishing. the share of cotton and manmade fabric was 60% and 27% respectively. made-ups and a variety of garments. The Indian textile industry is valued at US$ 40 bn with exports totalling US$ 19 bn in 20072008. including handlooms. India is the largest producer of jute. and comprises small-scale. the second-largest producer of silk. viscose. comprising handlooms. acrylic and polypropylene (PP) as well as multiple blends of such fibres and filament yarns such as partially oriented yarn (POY). the third-largest producer of cotton and cellulosic fibre/yarn and fifth-largest producer of synthetic fibres/yarn. silk and wool. wool and silk fabrics.72% of global textile and clothing exports.is the largest. At the global level. 72 . man-made yarn and fabrics. synthetic / man-made fibres such as polyester. • India is the largest exporter of yarn in the international market and has a share of 25% in world cotton yarn exports • India accounts for 12% of the world’s production of textile fibres and yarn • In terms of spindleage. while the non-cellulosic industry is under the administrative control of the Ministry of Chemicals and Fertilisers. The type of yarn used is dictated by the end product being manufactured. encompassing natural fibres such as cotton. India’s Textile Industry Structure Cotton textiles continue to form the predominant base of the Indian textile industry. The Man-made textile industry comprises fibre and filament yarn manufacturing units of cellulosic and non-cellulosic origin. The export basket includes a wide range of items including cotton yarn and fabrics. This represents a clear shift in consumer preferences towards man-made fabric. More recently. and apparel-making enterprises. India’s textile exports account for just 4. Quota constraints and shortcomings in producing value-added fabrics and garments and the absence of contemporary design facilities are some of the challenges that have impacted textile exports from India.
recording growths of 2.7% respectively.9% and 2. hosiery and knitting. showing a robust growth of 4. Man-made yarn has driven much of this. The production of handloom fabrics had gone up to 4700 mn sq mtrs in 2007.1 million spindles and 395. overall cloth production in the country has been growing at 3. According to the Ministry of Textiles. khadi and carpet manufacturing units. weak marketing links.00 to 4. The competitiveness of composite mills has declined in comparison to the powerlooms in the decentralised segment.923 mn powerlooms in the country distributed over 430.000 knitting units registered as producers or exporters and most of these units were registered as small-scale units. representing an annual growth of around 4%. overall stagnation in demand and competition from the powerloom and mill sectors. The sector accounts for 13% of the total cloth produced in the country. both grey as well as processed.4% and 0. Cloth production in the mill sector has fallen from 1.powerlooms. while the non-cellulosic industry is under the administrative control of the Ministry of Chemicals and Fertilisers. Being the largest manufacturer of fabric in the country.000 rotors. since 2000. and also readymade garments.815 mn people. with growth driven largely by the powerloom sector. XV productivity. low The Man-made textile industry comprises fibre and filament yarn manufacturing units of cellulosic and non-cellulosic origin. Knitting and hosiery units account for around 17% of fabric production in the country.3% in the last five years. Nonetheless. India had about 6. the powerloom sector produces a wide variety of cloth. 218 were composite mills which accounted for just 3% of total fabric production. unorganised production systems. there are 1.6% respectively. silk and handspun yarn. declining at a rate of 2% per annum. Trends in Production Yarn and fabric production has been growing annually at 1. with 97% of fabric production happening in the unorganised segment. with an installed capacity of 34. The cellulosic fibre/yarn industry is under the administrative control of the Ministry of Textiles. from 500 mn sq mtrs in the 1950s. The sector accounts for 63% of the total cloth production in the country and provides employment to 4. albeit less impressively. Of these.5% per annum since 2000. Yarn production has increased from 3. As a result. 73 .400 mn kg in 2007-08.493 million sq mtrs in 2007-08. there were 1779 cotton/man-made fibre textile mills in the organised sector. As in January 2008. weaving and processing activities are carried out under a single roof.714 million sq mtrs in 1999-2000 to a projected 1. According to data available for the year 2000.940 mn kg in 1999. the number of sick units in the organised segment has also been growing rapidly. Policy restrictions relating to labour laws and the fiscal advantages enjoyed by the handloom and powerloom sectors have been identified as two of the major constraints responsible for the declining scenario of the mill sector. not including wool. Spun yarn production and the cotton yarn sector have also grown. The handloom sector is the second-highest employer in the country after agriculture.000 units. The organised mill sector consists of spinning mills involved only in spinning activities and composite mills where spinning. The sector is weighed down by several problems such as obsolete technology.
etc. which were worth US$ 3. including handicraft carpets. This segment has benefited significantly with the termination of the Multi-Fibre Arrangement (MFA) in Jan 08.5% and blended fabric at 0. recording a 22% growth year-on-year. Fabric production touched a peak 47000 million sq mtrs in 2007-08. Analysis of trade figures by the US Census Bureau shows that post-MFA. In 2003-04 and 2007-08.5 bn. In 2007-08.constitute over 2/3rd of total textiles exports (excluding readymade garments).which include yarn. post the termination of the MFA. Apparel Parks. touching US$ 7. GoI XVI were worth US$ 4. Between 19992000 and 2002-03.5 bn. The slowdown began since 2003-04 and have been on the decline since.Source: Ministry of Textiles. According to the Ministry of Textiles. Exports to the US have further increased since 2005. the growth in RMG exports was 8. Overall. man-made textiles exports were growing at around 30% per annum. total cotton textile exports Source: Ministry of Textiles.Under the TUFS scheme. Trade Scenario According to the provisional DGCI&S data. wool and silk. imports from India into the US have been nearly 27% higher than in the corresponding period in 2007-08. Readymade garments (RMG) is the largest export segment. GoI Fabric production has been growing at 2. followed by cotton fabric at 1. Investments Investments in the textiles sector can be assessed on the basis of three factors: • Plan schemes such as the Technology Upgradation Funds Scheme (TUFS). Technology Mission on Cotton. There are around 26 Apparel Parks in eight states in India. in 2007-08. GoI Source: Ministry of Textiles.3%. have recorded a growth in exports during 2007-08 .1% respectively. independent powerloom sector. implying a growth of 27% over the exports in 2007-08. Major export destinations for India’s textile and apparel products are the US and EU. this segment accounts for 26% of total textile exports. production recorded a robust 9% growth compared to the corresponding period in the previous year. Exports of cotton textiles -. fabric and made-ups -. with a total estimated investment of Rs 134 bn 74 . Except for man-made textiles. Growth in the 100% non-cotton segment touched 5%. total RMG exports grew by 29%. -.9% annually between 2000 and 2008. a total of Rs 916 bn has been disbursed for technology upgradation. which together accounted for over 75% of demand.5% in 2007-08.the first year since the phasing out of the quota system in the global market. accounting for a considerable 45% of total textile exports. driven primarily by the smallscale.75 bn. all segments in the textile industry.5% and 4.5 billion. Man-made textiles exports have witnessed a decline of 2. The jump in 2007-08 exports has been largely due to the elimination of quotas. and in Nov 08. textile exports during fiscal 2007-08 stood at around US$17.
29% of total FDI inflows in the country. while only 25% is expected in processing and garment units. The year 2000 was also marked by initiatives of setting up apparel parks. which account for 1.• Industrial Entrepreneurship Memorandums implemented from 1992 to Aug 08. Though significant investments are being made in the textiles segment. The removal of the SSI reservation for woven apparel in 2000 and knitted apparel in 2008 were significant decisions in promoting setting up of large-scale firms.67 bn in investment is expected by 2008. the bulk of them are in the spinning and weaving segments. policies were drawn to provide employment with a clear focus on promoting the small-scale industry. The new Textile Policy of 2000 set the ball rolling for policy reforms in the textile sector. Source: Ministry of Textiles Government Initiatives The Government’s role in the textile industry has become more reformist in nature. more than two-thirds is expected in the spinning and weaving segments. 2002 and 2003 saw a gradual 75 . Of this. The scenario changed after 1995. modernisation of outdated technology etc. A cumulative total of US$ 6. with policies being designed to encourage investments in installing modern weaving machinery as well as gradually eliminating the pro-decentralised sector policy focus. dealing with removal of raw material price distortions. Initially. cluster approach for powerlooms. pragmatic exit of idle mills. amounting to Rs 263 bn • Foreign Direct Investments inflows worth US$ 910 mn have been received by the textile industry between Aug 91 and May 08. Government schemes such as Apparel Parks for Exports (APE) and the Textile Centres Infrastructure Development Scheme (TCIDS) now provide incentives for establishing manufacturing units in apparel export zones.
16% into garmenting. partnership firms 31%. 8% into printing and 2% in ginning (Figure 02) 76 . etc. we have attempted to chart their operational structure. mirroring the low capital intensive nature of the industry (Figure 01) • In terms of the textiles industry sub-segments. 6. except from those based in Orissa and Madhya Pradesh • On the basis of investments in plant and machinery. marketing.35 bn allocation with 10% capital subsidies for the textile processing sector • Initiation of cluster development for handloom sector • Availability of health insurance package to 0. a sample of 350 companies was considered. The Textile Vision 2015 was born as a result of interaction between the government and the industry which has around 12% annual growth in the textile industry from US$ 36 billion now to US$ 85 billion by 2010. yarns. proprietary firms are 24%. efficiency parameters. from 20% to 10% on textile machinery and from 24% to 16% in excise duty for polyester oriented yarn/polyester yarn • Reduction in corporate tax rate from 35% to 30% with 10% surcharge • Reduction in depreciation rate on plant and machinery from 25% to 15% • Inclusion of polyster texturisers under the optimal CENVAT rate of 8% To meet the challenges of the post-MFA setup.02 mn initially • Reduction in customs duty from 20% to 15% for fibres. 12% each into spinning and dyeing. the Government of India initiated a reforms process which aimed at promoting large capital investments. intermediates. For this quantitative exercise. fabrics and garments. Some key characteristics of the sample of 350 companies are: • In terms of ownership pattern. 11% each into knitting and made-ups. The Union Budget of 2005-2006 announced competitive progressive policies. Additionally. 33% in the South. etc.2 mn weavers from 0. pruning cumbersome procedures associated with the tax regime. whose salient features included: • A major boost to the 1999-established Technology Upgradation Fund Scheme for its longevity through a Rs 4. preferences. The North and South have maximum representation. 18% of the companies are into weaving. around 92% of the companies are small scale enterprises. 26% in the West and 4% in the East • The sample of 350 companies has representation from all textiles clusters across the country. the requirement being that at least 80-90% of the information sought has been provided. business practices. Vision 2015 also proposes the creation of an additional 15 million jobs through this initiative.4) FINDINGS SME Insights This study aims to draw a profile of how small and medium companies in the textiles space function. private limited companies 27% and public limited companies 18% • The geographical concentration of the sample companies reflects the concentration of textile manufacturers in the country. Around 37% companies are located in the North.reduction in excise duties for most types of fabrics while 2004 offered the CENVAT system on an optional basis.
16% each in man-made and silk. 13% in blended and 10% use wool • Around 63% of the companies are only into manufacturing. 77 . the public limited and private limited companies dominated with a share of 52% and 26% respectively. Of the remaining companies in the bracket of Rs 500 mn and Rs 1.000 mn. while 37% are engaged in manufacturing as well as trading • Around 70% of the companies in the sample began operations during the 1980s and 1990s. 42% of the companies have a website. with investments of less than Rs 20 mn. 43% companies are into cotton and cotton based products.• Similarly on the basis of raw materials used. Turnover The dominance of small-scale enterprises was largely reflected in the sample. Another significant 35% were earning over Rs 100 mn but less than Rs 500 mn. Around 16% of the companies are relatively new which have begun operations post-2000 • 73% of companies have a single manufacturing facility while 27% operate with 2 or more plants • In terms of IT penetration. Over 55% of the companies have an annual turnover of less than Rs 100 mn.
Exports Around 234 companies. (Figure 03) Ownership Structure Though no distinct ownership structure was evident. The northern region had a high share of small companies. the southern region showed a higher proportion of companies falling in the Rs 250 mn and above turnover bracket. 114 companies were 100% exporters with many of them exporting directly to foreign clients. indicating they are part of the global value chain. (Figure 04) Comparing ownership structure with the turnover of companies revealed that proprietary firms were concentrated in the Rs 100 mn and below turnover bracket. The western region had a reasonably proportionate share of companies in the various revenue brackets.In terms of the regional spread of these companies. Of the exporting companies. The private and public enterprises were mostly in the Rs 500 mn and above turnover range. In terms of market access. Another 20% of the companies export only through trading houses. 27% of the companies directly export 100% of their output to foreign clients. these companies were exporting 78 . but north-based companies showed a preference for proprietary form of ownership while south-based companies were prominently for partnership. only 35% have shown to have any kind of quality certifications. On an average. with over 70% of the companies necessarily exporting to these countries. or 67% of the sample. The remaining sell partly through trading houses and direct sales. The average capacity utilization among exporting companies was relatively higher compared with those selling only in the domestic market. Another 53% of the 234 companies export 90% of their total output. Of these. were exporting their products. The major export destinations were the US and Europe. The companies from the Western region were predominantly private limited companies.
which on an average exported 82% of their produce. The pre-dominant exporters were garment and fabric manufacturers having a share of 39% each.endorsing the industry view that the bigger companies are able to fulfill more orders. the South-based companies reflected higher capacity utilization and were on an average operating at 86%. 79 . (Figure 06) On the basis of size. the medium scale enterprises having turnover between Rs 500-1000 mn showed higher average capacity utilisation of an average 91% . followed by garment firms. partnership companies constituted a significant 32% of those operating at more then 90% capacity. In terms of ownership.at least 71% of their produce. Regionally. on an average. from yarn making to garmenting. 2% of the companies were operating across the value chain. (Figure 05) In terms of the various sub-segments in the textile industry and their exports. respectively. over 90% of their output. The other major segment was home furnishings. Among these. Companies in this sample. it was found that companies exclusively into made-ups exported. that were exclusively into weaving and garmenting held a share of 23% and 18%. Capacity Utilisation Approximately 59% of the companies were operating at 80% and above of their installed capacity.
9 7.8 9.7 1. On an average.6 25.4 25. the players were expecting an average growth rate of 32% for the next two years.4 33.3 58. representing 59% of the yarn manufacturers. (Figure 07) Fabrics 31. The other sub-segments that are expecting to do well are manufacturers of fabric and made-ups. In terms of the finished goods. Yarn manufacturers were concentrated mostly in the South. (Table 01) (as % of total companies) Region North South East West Growth The companies in the sample were largely optimistic on growth prospects over the next two years.4 Garment 42. the garment firms being the most hopeful and expecting a 40% increase in sales.1 19.2 80 .7 Home Furnishing 66. Industrial textile manufacturers were more in number from the Western region. representation of garment and home furnishings manufacturers in the sample was largely from the North. with a share of 34% and 31% respectively. Fabric manufacturers had a strong presence in the South and North India.6 1.1 13.Figure 06 Top Regional Products Of the companies engaged in the manufacture of home furnishing products. 67% were located in North India.4 27.3 Yarn 14.1 22.
Of these. The Western region showed higher growth compared with the other regions. the average growth for all companies in the sample was an average 28%. 37% of the companies were private limited companies. Another interesting factor is that nearly 73% of those benefiting from this Fund were small scale enterprises with investments in the range of Rs 10-50 mn. Figure 07 Technology Upgradation Fund (TUF) The number of companies that have availed of the TUF facility given by the government comprise 24% of the sample size. Figure 08 Top 81 .In the last two years. In terms of ownership. 53% are into yarn and fabric manufacturing.
These companies were mostly from the North. over 50% of these companies being small scale enterprises with turnover less than Rs 100 mn. 29% of them perceive lack of infrastructure as the biggest hindrance to growth. This concern was mostly highlighted by the south-based companies. There were 4% companies which utilized internal resources to meet their finances.5) CONCLUSION AND RECOMMENDATIONS FUTURE PROSPECTS Expectations are high. 75% met their funding requirements from nationalised banks. but capitalising on the new emerging opportunities will be a challenge for textile companies. The garmenting and weaving segments mainly showed labour as their principal concern.5% share. Some prerequisites to be included in the globally competing textile industry are: • Imbibing global best practices 82 . Most respondents felt that availability of funds for future plans and working capital requirements was moderately difficult. prospects are bright. (Figure 09) Hindrances to growth Of the companies in the sample. 6. Almost 28% of the companies raised concerns regarding labor issues and an equal proportion highlighted lack of institutional support as their priority concern. South and East. however with only a 13.Funding Funding Of the companies in the sample. Cooperative banks and MNCs were least preferred. Private Banks were next in preference for these companies.
especially in the readymade garments and home furnishings segment. They have clear preferences for companies with integrated design. Strategic Initiatives Business integration -.have prompted several companies to move up the value chain into the finished products segment. keep up with delivery schedules and meet their growing demand. Readymade garment exports were worth US$ 9 bn in FY08 and will cross US$ 20 bn by the end of 2015. where they can avail of duty concessions and reduce export lead-time. Raymonds has set up a unit in Bangladesh to avail of the zero duty access to the EU. Domestic acquisitions are on the rise.from buying cloth to readymade garments -. 18% in China. and Ambattur Clothing taking over Celebrity Fashions. This trend is seen primarily among the large domestic players. The readymade garment segment will be the principal driver of growth even in the domestic industry. Most of the large textile companies have opted for an inorganic growth strategy to scale up operations. are now keen to enter the readymade garments space. which launched its readymade garments range in Nov 06. Several companies that are engaged in fabric manufacturing. while acquiring foreign assets is yet to gain traction. assuming a conservative growth of 15% per annum. The changing preferences of Indian consumers -. Global retailers prefer large-sized companies that can scale up capacities consistently. The Indian textiles industry has established its supremacy in cotton based products. 20% in Thailand.especially forward integration -. these countries have a wider base of exports and have done very well in the market for large volumes of uniform products. Zodiac and Ambattur Clothing have set up facilities in the Gulf region to cut down on export delivery schedules to the European and US markets. 83 .• • • • Adopting rapidly changing technologies and efficient processes Innovation Networking and better supply chain management Ability to link up to global value chains.by the larger textile companies has been prominent among Indian companies. A recent entrant is Siyaram. 28% in South Korea and 36% in Taiwan. An interesting commonality in countries with successful garment exports is that they have a much lower level of sub-contracting than India. These two segments will be the key drivers of growth for Indian textiles. following suit with other majors like Century Textiles and Raymonds. A study during the 1990s found that apparel firms Future Outlook XXXIII in India subcontracted 74% of their output. Consequently. process and manufacturing facilities. According to estimates. investments in textiles are expected to touch US$ 31 bn by 2010. as compared to only 11% in Hong Kong. Another growing phenomenon observed among Indian textile companies is the setting up of manufacturing facilities in strategic regions outside India. Some recent domestic acquisitions that have been executed in 2006 include KSL & Industries’ acquisition of Deccan Cooperative. Acquisition is the most logical step towards integrating operations and building the value chain. who are trying to achieve sizable scales in order to win orders from the large retailers in the US and EU.
Implications for SMEs The new business dynamics have varying undertones across the value chain. This will be the phase in which Indian textile companies will come under tremendous pricing pressures and tighter product delivery schedules. 84 . lengthMessages in this topic (1) y delivery times. reforms in labour laws and significant policy support will be essential.For readymade garment SMEs.000. delays in customs clearance and high transportation and input costs. It will thus be essential for SMEs to align with these firms. Spinning mills that account for 95% of the yarn and fibre production. Post 2008. This will be the most thriving segment in the industry and SMEs will play a key role. while the more efficient and dynamic ones aligning with manufacturers or buyers. The segment that is likely to be hit is weaving.The exports market will remain favourable for India till 2008. will move up the value chain into weaving. For fabric manufacturers in the unorganised segment. the Government will have to play a key role. Nevertheless. On the basis of these strengths. This will erode the viability of the hitherto protected powerloom and handloom operators numbering over 400. who have remained insulated from competitive forces so far. India will become a major outsourcing hub for foreign manufacturers and retailers.with composite mills and large integrated firms being their preferred partners. that can ensure a market for their products and new orders. sizable supply of fabric. this will mean inefficient units losing out eventually. To tackle these factors. India’s key assets include a large and low-cost labour force. home furnishings and made-ups will continue to grow. The fragmented industry structure has in the past been beneficial in generating employment. A possible remedy could be for these weavers to align with bigger players or integrate operations that would ensure off-take of their products. but will be difficult to sustain in a globally competitive environment. when quota restrictions on China end. Weaknesses of the Indian textile industry include fragmentation of the industry. rising demand and preference for ready-to-wear outfits in the domestic market will sustain a large number of units in this sector. Infrastructure development. the value-added segments of readymade garments. competition will become tougher. The SMEs in the powerloom and handloom sector will face significant churn in the future. sufficiency in raw material and spinning capacities.
7.) AUTOMOBILE COMPONENT INDUSTRY 85 .0.
70 companies are not members of any industry associations or trade bodies. the production process lends itself to operations that can be divided and tiered. and have a turnover range of Rs 50 mn to Rs 535 mn. The Auto Component sector has tremendous potential to encourage entrepreneurship.7.000 mn.2) METHODOLOGY. and was therefore selected for profiling in the first report of the series. 86 . Further. The auto component industry is expected to continue its high-growth period for at least another decade. Of these. with strong potential for global impact. We have covered companies from 17 states and 3 union territories. The list consists of 152 companies from the north.1) EXECUTIVE SUMMARY. and promises a wide range of opportunities for SMEs.000 mn. The sector has emerged among the fastest growing industries in the Indian economy. The rest of the companies are medium scale and have a maximum turnover of Rs 1. An interesting aspect of this industry segment. enabling them to become globally competitive. considering the diverse nature of the industry. The number of small and medium firms profiled is in the proportion of 43:57. Emerging Auto Component SMEs of India profiles 370 companies with a turnover of less than Rs 1. 128 from the west and 78 from the south. the major industrial clusters of auto component manufacturers in the country. is that public sector banks are their principal lenders. as revealed by our research. The regional representation of companies in the report suitably reflects the concentration of the Indian auto component industry. and SMEs will play a pivotal role in this critical growth phase. with few dependent on private sector banks. Emerging Auto Component SMEs of India will provide the right platform to SMEs. Of the 370 companies profiled. 160 companies are small-scale firms with investments of less than Rs 50 mn in plant and machinery. The sector is projected to grow at a rate of 15-20% over the next decade. thus tapping a range of companies that have remained unrecognised. 7.
The global auto components industry is estimated at US$1. competitive dynamics and the future outlook for the segment. The report includes diversified companies operating in the auto component space and having business interests in other industries. Dun & Bradstreet India (D&B India) has formulated a correlation between investment and turnover to arrive at a cut-off Rs 1. The Indian auto component sector has been growing at 20% per annum since 2000 and is projected to maintain the high-growth phase of 15-20% till 2015. 7.3) DATA COLLECTION & ANALYSIS. multinational companies and subsidiaries of multinational companies.000 mn turnover for auto component SMEs. Every effort was made to ensure that the report manufacturers located across the length and breadth Annual Survey of Industries (ASI) and National Sample Centre for monitoring Indian economy and Capitaline universe of auto component manufacturers.The definition of small and medium enterprises (SMEs) in the Indian context has remained contentious until recently. Driven by global competition and the recent shift in focus of global automobile manufacturers. The SME Insights section presents analytical findings drawn from the primary information collated by the various research conducted by the leading consulting firms. Overview of Auto Component Industry. Based upon the Survey Organization (NSSO) And database. The companies that qualified on the basis of turnover were further screened through another set of parameters to arrive at a truly representative list of emerging SMEs. The value in sourcing 87 . Small and Medium Enterprises Development Act of 2006. Emerging Auto Component SMEs of India focuses on manufacturers of auto components. Considering the challenges entailed in tapping financial information from a highly fragmented sector. touches upon auto component of the country. business rules are changing and liberalisation has had sweeping ramifications for the industry. The Indian auto component industry has been navigating through a period of rapid changes with great élan. the Government of India has defined SMEs as entities that have an investment of above Rs 10 mn and below Rs 100 mn in plant and machinery. As per the Micro. The Indian auto component industry is one of the few sectors in the economy that has a distinct global competitive advantage in terms of cost and quality. growth prospects and production efficiencies. The report has excluded subsidiaries of large Indian business houses. thus honouring the true Indian entrepreneurial spirit that the SMEs represent. Other considerations included financial growth performance over the past two years. Companies with negative net worth and those declared financially sick by the Board for Industrial & Financial Reconstruction (BIFR) were eliminated.2 trillion. we identified a large The sections titled Industry Report and SME Insights are special analyses on the auto component industry which look at current trends. trading companies have been excluded.
technically skilled manpower and quality assurance. Amtek Auto. Wheels India. Government of India. These companies are in the process of making a mark on the global arena. Several large Indian auto component manufacturers are already gearing to this new reality and are in the process of substantially investing in capacity expansion. Estimates by the Department of Heavy Industries. a number of players are also involved in job work and contract manufacturing. This in turn effectively acted as a catalyst to the local development of the component industry. The firms in this segment operate in low technology products and cater to Tier I and Tier II suppliers and also serve the replacement market Around 4% of the companies operating in the auto component segment cater to 80% of the demand emanating from OEMs. India’s processengineering skills. The Indian auto component industry is extensive and highly fragmented. applied to re-designing of production processes. Bharat Forge. published by Dun & Bradstreet in 2008.000 firms exist in the unorganised sector that operates in a tier-format. Rico Auto and Subros. and some have already acquired assets abroad. Sundaram Fasteners. listed 26 auto component manufacturers as top companies in India with a total turnover of US$ 3 bn. The India’s Top 500 Companies. Industry Structure The total turnover of the Indian auto component industry is estimated at US$10 bn in 2008. indicate there are over 400 large firms who are part of the organised sector and cater largely to the Original Equipment Manufacturers (OEMs). The industry has the resources to manufacture the entire range of auto products required for vehicle manufacturing. Within the unorganised segment. Today. Innovation and cost pruning hold the key to meeting the global challenge of rising demand from developed countries and competition from other emerging economies. establishing partnerships in India and abroad. new products. apart from supplying in the aftermarket. Motherson Sumi. Some leading manufacturers of auto components in India include Motor Industries Company of India. acquiring companies overseas and setting up greenfield ventures. India has become the outsourcing hub for several global automobile manufacturers. The entry of global manufacturers into India during the 1990s enabled induction of new technologies. R&D facilities and design capabilities. improved quality and better efficiencies in operations.000 components. An average cost reduction of nearly 25-30% has attracted several global automobile manufacturers to set base since 1991. approximately 20. 88 . have enabled reduction in manufacturing costs of components. raw material availability. Another 10.auto components from India includes low labour cost.
with each broad product segment having a different market structure and technology. North and South of India. the auto component industry was solely dependent on the domestic automobile industry todrive the demand for ancillary products. whilst the entry of Maruti during the 1980s created the base in the North. has negated any possible concentration of the market in a few hands.5 bn at present. A large part of the spurious or grey market companies are in the unorganised sector. This growth in exports if sustained for another five years will see India’s auto components exports will touch US$ 8 bn by 2015 from the US$ 3. At the same time. Exports of auto components have been strong growing at 24% per annum since 2000. Till the 1990s. However. The market is so large and diverse that a large number of players can be absorbed to accommodate buyer needs. An interesting insight provided by a study conducted by the National Council of Applied Economic Research revealed that the market segments for auto components included OEMs constituting 33%.Source: ACMA The range of products manufactured. The key to competing in this industry is through specialisation by product-type. a bright outlook for the domestic 89 . Mahindra & Mahindra and TVS in the 1950s and 1960s laid the foundation for auto component manufacturers in the West and South. This composition of the market however is undergoing radical changes with global outsourcing gaining momentum. exports has emerged as a significant driver of growth. and integrating operations across the related area of specialisation. In recent times. The regional base of auto component manufacturers is mostly concentrated in the West. local components having 25% with the balance 42% comprising of spurious market including re-conditioned parts. The set up of Tata Motors. and the demand emanating from global OEMs and Tier I manufacturers has opened new opportunities for the auto component industry in India. Industry Growth Production of auto ancillaries was estimated at US$13 bn in 2007-08 and has been growing at a robust 20% per annum since 2000. Bajaj. there are a select few large companies that have integrated their operations across the value chain.This regional concentration of auto component manufacturers has been dictated by the emergence of automobile manufacturers in these regions.
This is a healthy trend. financial institutions. Investments in the sector have been growing at 14% per year. 332 were considered for the purpose of this quantitative exercise. indicative of rising domestic demand. Outsourcing is fast catching up with domestic OEMs as well. with most Indian OEMs today sourcing nearly 70-80% of their component requirements from vendors. industry and academicians. India has tremendous potential to emerge as a supply base. investments touched US$ 5 bn. having less than Rs 1. Share of exports in total production has risen from 10% in 1997 to 20% in 2008. Of the responses received. the auto component industry has recorded an investment level of Rs 18 bn and has attracted US$ 530 mn in terms of foreign direct investment. This is a sizeable target considering the meagre amount of FDI currently coming into the industry. given the fast rising income levels with a rapidly growing middle and high income consumers.4) FINDINGS SME Insights. especially in the last three years.4% to 3-4%.000 mn turnover and other parameters. and have grown significantly since then. Some key characteristics of this sample include: 90 . Of the profiled 370 companies. The small and medium enterprises segment has been a topic of intense deliberation among banks. The ratio of OEM to aftermarket has changed from 35:65 in the 1990s to 75:25 in 2008. they have gone up to US$800 mn in FY08. there has been a sharp rise in imports of auto components as well. the paucity of authentic information on this segment has limited the estimation of value contributed by this integral constituent of India’s economy. These companies were contacted through various means. Investments Since 2000. The Investment Commission has set a target of attracting foreign investment worth US$ 5 bn for the next five years to increase India’s share in the global auto components market from the present 0. While exports have been booming. The changing perception of global auto makers is however fast altering this scenario. With less than 1% share in the global market. From an import of US$ 250 mn in FY03. In 2007-08. The research began with the leading consulting firms reports association member directories and trade listings. and have been profiled in the report. 7. Several global giants like Ford and Toyota have already set up base in India to source auto components. 370 companies met the criteria set by D&B India.automobile industry also offers significant growth potential. The composition of exports in terms of the proportion of OEM and aftermarket has also undergone a sweeping change since the past decade. This database was further short-listed based on the criteria of being only manufacturing companies. However.
Around 7% of the companies are relatively new which have begun operations post-2000 Around 61% of companies have single manufacturing facility while 22% operates 2 plants. Key observations and findings are covered below. with maximum representation coming from the North and West. private limited companies 58% and public limited companies 22% The firms included are to a degree replicating the concentration of auto component manufacturers across the country.• • • • • • Ownership pattern of these 332 companies include proprietary firms 8%.000 mn.3% in the East.5% in the North and 8. around 41% of the companies have an income up to Rs 100 mn. of which 58% are in the private sector while 35% are public limited companies. partnership firms 12%. Around 90% of the auto component manufacturers in the East are small enterprises with a turnover less than Rs 250 mn. Only 13% of the companies were in the turnover bracket of Rs 500 mn to Rs 1. Turnover The proportion of companies in the sample with a turnover above Rs 500 mn is high in the Southern and Western parts of the country. Around 40% companies are located in the North. 18% in the South and 4% in the East Around 43% of the companies are small scale. Overall. Around 15% of the companies from the South and 17% of those in the West fall in this bracket as compared to 8. 91 . and 57% are medium scale on the basis of their investments in plant and machinery Of the 332 companies. 254 or 77% of the companies are having a website and 309 companies have an email facility Over 60% of the companies in the sample began operations during the 1980s and 1990s. 37% in the West.
Around 30% of the companies are supplying to both OEMs and the replacement market. In terms of ownership. West and South based companies are supplying to all segments of the market. while the East based companies are largely supplying to the OEMs. Regionally. private sector companies are the largest suppliers to OEMs and Tier I firms followed by public limited companies. The North and West based companies are the largest players in the replacement market. 92 .Top Demand Around 57% of the companies are supplying to OEMs and Tier I suppliers. About 77% of total proprietary firms and 55% of partnership firms in the sample are supplying to only OEMs and Tier I companies. the North.
Proprietary and partnership firms constituted just 2%. 93 . Ownership-wise. Around 56% of these standalone companies are supplying to OEMs.Top Nature of Operations Regardless of type of ownership. 60% of private and public sector firms. East and South are standalone companies while over 33% of the companies in the West are ancillary units. over 70% of partnership firms. The private sector companies constitute a large portion of these certified companies. Region-wise. Assessing in terms of ownership of these companies. The regional distribution of these exporting companies show a high concentration in the North and West accounting for 46% and 35% respectively. around 60% of the companies in the sample are operating on standalone basis. Nearly 90% of the exporting companies in the sample have quality certifications. accounting for 59%. Around 21% of the companies export more than 50% of their produce. Top Exports Almost 67% of the companies in the sample are exporting their products. over 50% of companies in the North. and 55% of proprietary firms are operating on a standalone basis. while the remaining are either into contract manufacturing or are ancillary units. followed by public limited companies (25%). the private sector companies were most dominant among the exporting firms. accounting for 56%. The major export destinations are Americas and EU. with over 60% of the companies exporting to these countries. partnership firms (10%) and proprietary firms (7%). 7% of the companies are totally export oriented.
13% manufacture suspension and braking parts and 14% manufacture drive transmission & steering parts. Around 31% of these companies are drawing up plans for undertaking innovative marketing initiatives.Product Brands In this sample. Among these brand conscious companies. around 16% of the companies manufactures engine parts. Only 35% of the companies sell their products under a brand name. 17% manufacture body & chassis parts. Over 55% of the companies with brands have indicated exploring new markets both in India and abroad. Branding among proprietary and partnership firms is low at 5% and 9% respectively. Top 94 . the private limited companies dominate holding a share of 61% followed by public limited companies with 25%.
either with domestic or international companies. A noteworthy factor noticed from the sample was that the smaller the company the higher their capacity utilisation. These companies were mostly concentrated in the Northern and Western parts of the country. They exhibit an average capacity utilization of 77%. The private limited companies constituted 55% of all companies with above 90% capacity utilisation. while nearly 90% of the companies indicated having tie-ups with foreign companies in some form or the other. while 13% have strategic alliances. Around 19% of the companies have a capacity utilisation of over 90%. This was followed by the North with utilisation rate of 74%. Capacity Utilisation The companies were found to be operating on an average at about 75% of their capacity. Partnership firms showed higher capacity utilisation while public limited companies were the lowest. the South-based companies showed higher capacity utilisation compared to the other regions. with the average capacity utilisation ranging around 77-78% for higher investments. with investments less than Rs 10 mn. 57% have collaborated for technical purposes. The rest have marketing. Of the total companies in this basket. The small companies. production and financial tie-ups.Collaborations Only 11% of the companies in the sample have entered into joint ventures or collaborations. ranging from financial. Some of these companies have multiple collaborations. 95 . strategic to marketing arrangements and technical tie-ups. operated at 81% capacity. The purpose for the collaboration varied. On an average.
Around 22% of the companies are expecting the industry to grow at a rate of 10-20%. The companies indicating future plans for diversification. modernisation and marketing accounted for 68% of the total sample.Top Growth The companies have exhibited growth of an average rate of 35% over the last two years. Modernisation plans were indicated by around 45% of the companies. Private sector companies showed the most robust growth followed by the public sector. Furthermore these companies are confident of maintaining the momentum over the next two years. while 14% were planning marketing initiatives. capacity expansion. a large number (66%) are planning capacity expansion. The North-based companies conveyed a higher growth followed by companies in the Western region. Nearly 66% of the companies preferred banking with public sector banks (PSBs) or 96 . A little over 55% of the companies intend to extend their reach by making forays into new markets. while 30% of the respondents are expecting the domestic auto component industry to continue growing at 20% and above for another two years. Top Funding The most preferred source of funding among companies in the sample was the public sector banks. Of these.
Top Hindrances in Business Infrastructure and lack of institutional assistance were cited as the key hindrances to growth for these SMEs. In terms of availability of funds. with a turnover of less than Rs 300 mn. Only 35% of the companies gave a response to this query.nationalised banks for their fund requirements. some 7% of companies in the sample have claimed difficulty in acquiring funds. This issue largely emanated from Maharashtra. There were approximately 4% companies that have funded their business through internal resources. Around 35% of the companies complained of marketing issues. MNC banks were funding only 1% of the companies. Around 56% of the companies that have responded complained of lack of infrastructure with close to 50% of the companies with issues pertaining to infrastructure from the Northern belt. These are primarily North and West based. followed by private banks and cooperative banks. West Bengal and Haryana. 97 . standalone companies.
since 2000. The Indian automobile industry offers great potential considering the low penetration along with rising income levels and a rapidly growing middle class. For instance. • The entry of global OEMs. especially passenger cars and two wheelers. The factors that will drive growth for the auto component industry are: • The growth expected in the domestic automobile industry will give a fillip to the auto component sector. has given a big boost to the industry. 7. This trend has also enabled Indian companies to gain a competitive 98 . Skoda plans to source parts for its European operations from its Indian base and raise indigenisation level for Indian models to 70%. making India as their manufacturing base. These factors will see a boost in demand for vehicles.Top We hope that the fine points that have emerged from this study are useful for further deliberation. The industry is transforming from being highly domestic-centric. In fact. this is one sector which has made a global mark and has been identified as a sunrise industry. to a force ready to face global competition.5) CONCLUSION AND RECOMMENDATIONS FUTURE PROSPECTS Current trends indicate a smooth run for the auto component industry. These two segments are estimated to grow at between 10-12% for at least the next five years.
the export of India-made models of global OEMs like Hyundai’s Santro Xing and Suzuki’s Alto has given a boost to the industry. Rising exports of Indian-made vehicles like M&M’s Scorpio model. 99 . Before the end of 2010. engineering and technical skills Established quality systems Availability of raw materials Adaptability to new technology • Investments in research and development. • The Government’s initiatives towards opening up channels of finance. This stands out positively in favour of India. Some features are: • • • • • • Cost reduction of 25-30% in production in the domestic market compared to overseas Low labour costs Designing. Further. a few risks exist that the auto component manufacturers may have to confront. the Government’s initiative towards road development will give a boost to demand for vehicles and indirectly auto components. These investments are expected to increase in the near future Though India rides on these inherent strengths. global OEMs expect a commitment of 5-10% reduction in prices every year. Intense competition from counterparts in other emerging economies may add pressure on margins of manufacturers. Extending their reach to global markets is the pre-dominant outlook among the top auto component manufacturers in the country.edge in the global market. Also. The vision to compete globally comes from the inherent strengths the Indian auto component industry possesses. The Indian auto component industry is poised for robust growth till 2015. • • • • A global slowdown can derail the prospects of the industry. • Investments coming in for research and development will keep the industry abreast of the latest technology. Volatility in the prices of metals and other inputs could erode the industry’s cost competitiveness. These factors portend a robust auto ancillary industry in India and the overall expected good growth will provide several opportunities for the emergence of new enterprises. Also. • Export of automobiles has also emerged as a key component of growth. Further. • De-regulation and the Government’s policy initiatives have facilitated growth and focus has now shifted towards attracting foreign direct investments. Bajaj Auto’s Bikes. at least 30 new car models are expected to be launched by foreign OEMs. Entry of global OEMs has transformed the Indian automobile and auto components landscape. There is a perceptive exuberance in the industry and growth estimates indicate a booming industry. Key players are not only willing to invest in R&D but also in mechanical and engineering operations. Tata Motors’ City Rover are indirectly increasing the demand for Indian auto components. the model of cluster-based development prominent in this sector will provide economies of scale. India is being perceived as a major market for cars and two wheelers by global OEMs. coming in from global OEMs. Tier I manufacturers taking up greenfield projects overseas.
The overall trend is encouraging. indicate a doubling of the domestic auto component industry by 2015. which are largely based on traditional management practices.Going by current trends in production and exports of auto components. This growth outlook implies opportunities for the small and medium enterprises. Similarly. to imbibe technology in a big way.5 bn as compared to US$1. Achieved growth in production and exports of auto components is shown in the graphs below. innovation and networking will determine the success of the SMEs in this globally competitive environment. 100 . The SMEs can exploit these opportunities through joint ventures. Knowledge.8 bn in 2015. It would be imperative for these companies. Expansion and diversification will help break into new markets. collaboration and technical tie ups. India’s exports of auto components could grow to US$4. but remaining competitive in this changing scenario will be the toughest challenge. specialisation. The combination of low manufacturing costs along with quality systems would give an edge to companies in terms of pricing and quality. The production of auto components could grow to US$30 bn by 2015.
8.0)PHARMACEUTICAL INDUSTRY 101 .
as many as 225 companies provided us sufficient data points to enable a statistical analysis. Mumbai with 28% and Ahmedabad with 8% of total companies top the charts. 19% in the South and 4% in the East.000 mn. Around 21% companies are located in the North. Some of the insights revealed include: • In terms of ownership pattern. In the western region. As per the Micro. R&D would be the key growth driver and survival strategy for SMEs. Of the 271 companies profiled. 8. Considering the 102 . The report covers SMEs based in 10 pharmaceutical clusters. CRAMs (Contract Research and Manufacturing Services) opportunities would keep the pharmaceutical industry on a high growth trajectory. orientation towards R&D. growing domestic market.8. • Going forward. while Hyderabad with 8% and Delhi with 10% are key hubs in southern and northern regions respectively. This report has profiled 271 companies with a turnover of less than Rs 1. Interestingly. with a reported growth of 22% in the last five years.1)EXECUTIVE SUMMARY Emerging Pharmaceutical SMEs of India attempts to provide a platform to the pharmaceutical SMEs. Small and Medium Enterprises Development Act of 2006. so as to facilitate their interface with potential global partners and buyers to tap ever increasing export opportunities by leveraging high quality Indian technical expertise. enabling them to become globally competitive. Moreover. partnership firms 14%. Gujarat and Maharashtra. 12% of the SMEs considered for this analysis are keenly involved in R&D activities such as clinical trials and contract research. the Government of India has defined SMEs as entities that have an investment of above Rs 10 mn and below Rs 100 mn in plant and machinery.2)METHODOLOGY The definition of small and medium enterprises (SMEs) in the Indian context has remained contentious until recently. Africa etc. private limited companies 52% and public limited companies 25% • Around 50% of companies featured in the report export there products to various overseas destinations including US. will continue to remain the biggest opportunity for pharmaceutical companies. Middle East. The generic opportunities in the overseas market. The geographical spread of the industry mirrors the concentration of pharmaceutical companies in the country with the West region dominating with 56% companies based in three states – Goa. Europe. and SMEs are expected to play a critical role. Emerging Pharmaceutical SMEs of India will provide the right platform for SMEs. proprietary firms are 9%. exports.
Other considerations included financial growth performance over the past two years. driven by rising consumption levels in the country and strong demand from export markets. The ranking in value terms may also be a refl ection of the low prices at which medicines are sold in the country. the domestic industry stands fourth in terms of volume and 13th in value terms. technology base and the wide range of products manufactured. The pharmaceutical industry in India is estimated to be worth about US$ 10 bn. growing at an annual rate of 9%. The SME Insights section presents analytical findings drawn from the primary information collated by the various research conducted by the leading consulting firms. competitive dynamics and the future outlook for the segment. The report includes diversified companies operating in the pharmaceutical and having business interests in other industries.3) DATA COLLECTION AND ANALYSIS.000 mn turnover for auto component SMEs. thus honouring the true Indian entrepreneurial spirit that the SMEs represent.challenges entailed in tapping financial information from a highly fragmented sector. Based upon the Survey Organization (NSSO) And database. growth prospects and production efficiencies. Bulk drugs of all major therapeutic groups. Every effort was made to ensure that the report manufacturers located across the length and breadth Annual Survey of Industries (ASI) and National Sample Centre for monitoring Indian economy and Capitaline universe of auto component manufacturers. trading companies have been excluded. In world rankings. The report has excluded subsidiaries of large Indian business houses. The industry has seen tremendous progress in terms of infrastructure development. we identified a large The sections titled Industry Report and SME Insights are special analyses on the auto component industry which look at current trends. 103 . touches upon auto component of the country. Demand from the exports market has been growing rapidly due to the capability of Indian players to produce costeffective drugs with world class manufacturing facilities. The companies that qualified on the basis of turnover were further screened through another set of parameters to arrive at a truly representative list of emerging SMEs. requiring complicated manufacturing processes are now being produced in India. Companies with negative net worth and those declared financially sick by the Board for Industrial & Financial Reconstruction (BIFR) were eliminated. Dun & Bradstreet India (D&B India) has formulated a correlation between investment and turnover to arrive at a cut-off Rs 1. Pharma companies have developed Good Manufacturing Practices (GMP) compliant facilities for the production of different dosage forms. 8. Emerging Pharmaceuticals SMEs of India focuses on manufacturers of pharmaceuticals. OVERVIEW OF PHARMACEUTICAL INDUSTRY The Indian Pharmaceutical industry has been witnessing phenomenal growth in recent years. multinational companies and subsidiaries of multinational companies.
MCC (South Africa). However. which has now made India TRIPS compliant. with the enactment of The Patent Act. the Indian pharmaceutical industry is estimated to have over 10. WHO. the Indian companies are now exploring new business models such as contract research. several Indian companies have also been getting plant approvals from international regulatory agencies like US FDA.000 manufacturing units. ushering in the Product Patent Regime. as well as contract manufacturing. as given by the Organisation of Pharmaceutical Producers of India. 1970. it poses a challenge to the generics industry as it would no longer be able to freely continue with the production of generics of the new patented molecules without license/payment of royalty to the innovator company. MCA (UK). of which 19% came from MNCs while the remaining 81% was contributed by 104 . Earlier. This has also facilitated the domestic industry to attract contract manufacturing opportunities in the rapidly growing generics market. With the introduction of the product patent beginning 01-Jan-05. Industry Trends A highly fragmented industry. India possesses the highest number of US FDA approved manufacturing facilities outside the USA and currently tops in filing the drug master files (DMF) with the US FDA. As a result. The organized sector accounts for just 5% of the industry with around 300 players. A paradigm shift occurred in the Indian pharmaceutical industry with India becoming a signatory to the WTO order. while a huge 95% is in the unorganized sector.In addition to having GMP. turnover of the organized sector companies aggregated to Rs 302 bn. only process patent was applicable for pharmaceuticals. In calendar year (CY) 2008. A large number of players in the unorganized segment are small and medium enterprises and this segment contributes 35% of the industry’s turnover. TGA (Australia). the Indian market has become an attractive option for the introduction of research-based products. for drug and discovery research & development.
low cost and the advantage of the English language. The chronic therapy segment includes anti-diabetics. faster than the acute therapy segment. Turnover of players in the unorganized segment. India is largely self-sufficient in case of formulations. which accounts for more than one-third of the country’s total bulk drug production.the-art manufacturing facilities. Among the therapeutic segments. is estimated to be around Rs 160 bn. India has pre-dominantly been a generic player and has the potential to gain a global presence for the following key developments: • Multiple branded drug patent expirations in the short term. Bulk drug manufacturing is largely concentrated in Andhra Pradesh. Bulk drugs include the active pharmaceutical ingredients (APIs) which are used for the manufacture of formulations. followed by Gujarat. Factors favouring the industry are a vast resource of technical people. According to estimates. duty free zones have been set up and several manufacturers of bulk drugs have been shifting their facilities to these areas. respectively. the proportion of formulations and bulk drugs is in the order of 75:25. cardiac and neuro-psychiatry formulations. growing at a rate of 10%. stateof. In 2007. the diverse spread has now started getting consolidated and concentrated in certain regions across the country. The Indian bulk drug industry has lately been gaining signifi cant presence in the global market as foreign and multinational companies are looking to sourcing APIs and intermediates from Indian manufacturers. new-generationtechnology-barrier formulations continue to be imported. though difficult to assess. As part of government’s support to increase exports.Indian companies. necessitating affordable medication for the masses • Generic companies in India are recognizing the importance of patent expiries and are making significant incremental investments in research and drug development. Production and Trade 105 . As a result. There are believed to be over 60. The Indian pharmaceutical industry consists of manufacturers of bulk drugs and formulations. though some life saving. More than 85% of the formulations produced in the country are sold in the domestic market. leading to increasing demand for low cost therapies Global healthcare crisis like AIDS in the developing world. in 2007 and 2008 a total of US$ 28 bn and US$ 20 bn. India has a significant share in the global generics market and is ranked third. According to IMS Health.000 formulations manufactured in India in more than 60 therapeutic segments. the anti-infectives top domestic production in volumes. of branded sales were likely to become susceptible to the entry of generic equivalents • Increasing confidence of consumers in generics in the developed markets • A pro-generic sentiment from healthcare authorities driven by the pressure of containing rising healthcare costs • An aging population across the world. this segment has been facing stiff competition which makes the scale of production important to improve profitability. In recent years. the chronic therapy segment accounted for around 26% of the domestic formulation business.
Key Drivers for the Pharmaceutical Industry Growing orientation towards Research and Development (R&D) The introduction of product patent in India has brought some fundamental changes in strategies of Indian pharmaceutical companies. this discouraged multinational companies from launching their new products in India. As a result. particularly regulated markets. Moreover. and greater thrust towards innovation. Though this is the average for the industry. imports were worth Rs 50 bn as against Rs 35 bn in FY05. In FY08. the favourable regulatory environment. Consequently. Exports currently constitute nearly 48% of the industry’s turnover. which recognized only process patent. exports grew by an impressive 21% touching Rs 300 bn.The domestic bulk drug and formulation industry has been able to largely meet the domestic demand for these products. Besides. the rise in consumption being primarily attributed to the rising population. to largely bulk drugs today. MNCs’ market share declined from 70% prior to 1972 to 20% at present. The increasing alliances and tie-ups of Indian companies with global players has further given a boost to Indian exports. which would require higher capital investment in R&D. rise in income levels and increasing health awareness among people. fearing duplication of their new drug discovery through reverse engineering. with focus shifting more towards R&D. On the other hand. gave Indian companies the opportunity to produce products under patent in overseas markets. The nature of imports has undergone a significant change over the years. increased expenditure on R&D and improved technical skills in the fi eld of chemical synthesis has also played an important role. This is to the advantage of the sector and will see a significant thrust in coming years. top-line players have spent in the range of 8-10% during FY08. The introduction of product patent has led the domestic industry towards exploring new avenues of drug development. and have been growing at an average 22% annually since 1994. New product launches by the Indian and multinational companies have also catalyzed market demand. This level of expenditure is however low compared with the spending of 12-16% of turnover on R&D by international leaders. from finished doses imported prior to the 1970s. The growing demand from the domestic market and increased manufacturing activities has led to rising imports during the past few years. Domestic demand has been showing significant growth. companies were in advantageous position to produce drugs through reverse engineering at relatively very low cost that helped the domestic industry to grow faster during the initial stages of development. including the EU and US. Current trends indicate that R&D expenditure of top domestic companies has increased from a mere 2% of total turnover in CY00 to nearly 4% in CY05. 106 . The original Indian patent law. by adopting new processes. In FY08. it also exports to several regions. R&D by Indian pharmaceutical companies is backed by a favourable policy environment and availability of surplus skilled technical workers at low costs.
Expanding presence in regulated market Over the years. Lupin. Currently. Nepal. which is stringent and is also subject to high legal risk. exports constitute 48% of estimated turnover of the industry as compared to nearly 35% during CY02. Majority of the contract manufacturing deals relate to production of active pharmaceutical ingredients (APIs) and intermediates. Exports of pharmaceutical products (finished products as classified under heading 30 of ITC-HS code) to the US grew by an impressive 33% to Rs 23 bn and by a whopping 62% to Rs 35 bn to the EU during FY04-FY06. India has shown better regulatory awareness and superior technical skills. Regulated markets. APIs and intermediates to more than 200 countries across the world. in which India possesses competence. India exports pharmaceutical products. the process of getting approval of new products in regulated market requires strict compliance of quality norms.Leveraging CRAMs opportunities The global pharmaceutical industry is increasingly facing cost pressures on various counts. Nicholas Piramal. This factor is forcing MNCs to outsource part of their R&D and manufacturing activities to low cost destinations like India and China. Shasun Chemicals. India has leveraged this advantage to attract clinical trials process outsourced by the companies involved in innovation. Dishman Pharma. under rising manpower costs and higher regulatory risk. Germany. and the Middle East were the major markets for Indian pharmaceutical exports. are known to give better value and margin to exporters 107 . In fact. Matrix Lab and Aurobindo Pharma are some of the companies which have witnessed impressive growth in revenues from their CRAMs business under various tie-ups with global pharmaceutical majors. Growing exports Exports have been the major growth enabler of the Indian pharmaceutical industry in recent years. Nigeria and India’s neighbouring countries like Sri Lanka. Russia. which has enabled Indian companies to penetrate the high-value markets like the US and EU. though difficult to penetrate due to stringent regulations. Divi’s Lab. the proportion of exports in domestic turnover has been increasing over the years. India is emerging as the global hub for contract research and manufacturing services (CRAMs) due to its low cost advantage and world class quality standards. despite the growing domestic demand. Remarkably. Cadila Healthcare. Most of these markets are not highly regulated and are considered to be low-value markets. The diverse disease profile and abundance of patients in India provides better ground for clinical trials. and R&D productivity of these players has gone down significantly in recent years. The Indian pharma industry possesses world standard manufacturing facilities as per the GMP norms which are approved by various regulatory agencies across the globe. Traditionally.
Indian players are also expanding their geographical reach to high-growth regions such as the CIS and Latin American countries. Key issues facing the Pharmaceutical Industry Some of the issues the domestic industry is facing are as under: Increasing span of price control The draft National Pharmaceuticals Policy. Rise in new product launches In the pharmaceutical industry. The rise in new launches of products has emerged as one of the important factors. the rate of launching new molecules had come down during the process patent era. In fact. the domestic industry has witnessed a fresh spell of new product launches. In fact. New products launched since 2007 accounted for around 12% of the overall market growth. new product launches create new demand. The price control as proposed in the Policy is likely to cover at least 50-60% of the domestic market under price control. After the introduction of product patent in India. to secure the profitability. asking the Department of Fertilisers and Chemicals. currently underway and awaiting approval from the Parliament. The proposed control on prices is set to impact the industry margin significantly. However. with competition getting stiffer in the regulated markets and the consequent pressure on margins. which has driven the growth in recent past. intends to bring 354 drugs under price control. 2006. The new draft policy consists of these 354 drugs that are likely to be under the cost based price control. GoI. These launches have been done by both domestic and international players and some of them are first time launch of new chemical entity (NCE). to identify the essential and life saving drugs that need to continue remaining under price control. these markets are witnessing impressive growth and therefore it provides great opportunity for Indian players. The number of drugs under price control had come down from nearly 400 in the 1970s to 72 in 1995.The increasing presence in high-value markets like the USA and Europe has strongly boosted the overall growth of the Indian pharmaceutical industry. especially those players having only local operations. India has witnessed 108 . firms will have to increase their scale of production. Price erosion in generics Indian generics market is witnessing a margin pressure in most of the product categories due to two main reasons: the proposed price control likely to be imposed by the Government and the stiff competition among domestic players. which is in addition to the 74 bulk drugs already notified under price control. Although considered as low-value markets. This decision was however stalled by the Supreme Court. However. The Department listed 354 items that it purchases for its hospitals called the National List of Essential Medicines (NLEM). and further reduced to 29 in 2002.
have also witnessed erosion in margins in certain therapeutic segments. efficiency parameters. In spite of the rising expenditure in R&D. the requirement being that at least 80-90% of the information sought has been provided. Moreover. The erosion in prices is to the extent of 90% in some cases. Indian players. which is the world’s largest pharmaceutical market. Consolidation is inevitable and is expected to bring in economies of scale and provide access to newer geographies to regional players. Low R&D productivity Despite the increasing expenditure on R&D. preferences. It is. Very few discoveries reach the final stages of approvals. in fact. which have been operating in these markets. Some other developed countries like the UK and Germany have also witnessed the same scenario. The Government has estimated that by year 2015. A similar trend was observed during 2006. we have considered all the 225 companies. the industry has the potential to achieve a size of US$ 40 bn 8. at average 4% as compared to the global practice of spending 12-16% of sales on R&D. which restricts margins of the smaller players. Some key characteristics of the sample of 225 companies are: 109 . acquisitions by the Indian pharmaceutical companies were the highest. where misses are more than hits. Europe has emerged as the most preferred destination for acquisitions by Indian companies. a hit-and-miss situation in the field of discovery and developments of new chemical entity (NCEs). the expansion of capacities by certain leading players has also fuelled competition in certain product categories.4) FINDINGS. is also experiencing a sharp reduction in prices of generic drugs due to stiff competition. etc. The changing global pharmaceutical industry has transformed prospects of Indian pharmaceutical companies. the introduction of new molecules by Indian players has been limited. with 20 buyouts abroad. the level of investment in R&D is still low. The US. which include Dr Reddy’s buyout of Germany’s Betapharm and Ranbaxy’s purchase of Romania’s Terapia.a fast rise in the number of players over a period of time. business practices. The fall in prices of generic drugs are not limited to India only. According to reports. margin erosion in Europe is much less compared to the US when a drug or formulation becomes generic. we have attempted to chart their operational structure. In 2005. The leading pharma companies in India have been actively extending the frontiers of scientific knowledge and going global through mergers and acquisitions. marketing. the claim for patent gets stuck in legal battles. SME INSIGHTS This study aims to draw a profile of how small and medium companies in the pharmaceuticals space function. and in most of the cases. For this quantitative exercise. The European generics market has emerged as a major attraction for acquisitions by Indian companies.
• Bulk drug manufacturers constitute 8% of the sample. The rest are medium enterprises. Companies manufacturing allopathic formulations account for 74%. Proprietary and partnership firms were mostly in the turnover bracket of less than Rs 10 mn. 110 . The 100% export-oriented firms were mostly large companies with turnover above Rs 500 mn. private limited companies 51. • In the sample. Around 21. It has been observed that pharmaceutical companies are largely concentrated along the coastal states. the sample covers companies from 10 out of the 11 pharmaceutical clusters identified. Exports Of the total sample. These companies largely sold their products in the domestic market. around 98% of the companies were necessarily into manufacturing either on their own or on contractual basis.• Ownership pattern of companies include: proprietary firms 9. • 59% of the companies have a single manufacturing facility while the remaining operates with 2 or more plants. Ownership pattern Private and public limited companies largely dominate the sample accounting for 76%. Some key highlights have been presented below.1% of the companies located in this region. The West-based companies were found to be dominating in terms of exports with 61% of those exporting concentrated in this region. but 75% companies were purely manufacturing companies with own facilities. Another 5% companies are solely into intermediaries. R&D operations among companies did not show any connection with ownership patterns. • The representation of companies is highest from the West with 56. • Around 57% of the companies in the sample began operations before 1990 while only 11% are relatively new having begun operations post-2000.5% of the companies were focused on only research & development. The companies engaged in the dual function of manufacturing and R&D were mostly medium sized enterprises.5% of the companies were doing R&D work (clinical tests as well as contract research) along with manufacturing.4% companies are located in the North. and another 10.8% in the South and 3.6%. 18.7% and public limited companies 24. • Apart from Orissa. 13% companies were engaged in manufacturing as well as trading. while 13% are into other forms of medicines like herbal and ayurveda. 48% companies were exporting their products. partnership firms 14%.7% in the East. which includes 2% companies also into intermediaries. • Around 82% of the companies in the sample are small scale enterprises on the basis of investments in plant and machinery. with 60% of these companies located in the western region of the country. Research & Development Companies in the sample that have undertaken only clinical trials were small enterprises with investments of up to Rs 10 crore. The largest number of companies with quality certification was among the private and public limited companies. Companies with investments between Rs 10-50 mn were engaged in manufacturing as well as clinical trails.7%. Companies engaged in contract-based manufacturing were observed largely among private limited companies. Close to 1.
MNCs had a small share in funding of pharmaceutical SMEs in the sample. A massive 84% of the respondents revealed banking with PSUs. A large number of West-based companies were receiving funds from cooperatives. and most of these companies were located in the West. Capacity Utilisation On an average.5% with the North-based companies being way ahead of the rest of the regions. and vitamins therapeutic segments. These companies were operating at an average 82% of their capacity. cardiac. A large number of these companies were operating in the anti-infectives.Region-wise exports classified by share in turnover Nearly 87% of the exporting companies were found to be having quality certifications. 111 . a prerequisite in the pharmaceutical industry. Finance the pharmaceutical SMEs also showed a strong preference for banking with public sector banks. gastrointestinal. There were 43% companies which were operating at more than 90% capacity utilization. the capacity utilisation in the sample was at 75. followed by cooperative banks. Over 90% of these companies divulged future plans of accessing new markets or undertake product diversification.
taxes & duties imposed. with majority emphasising as investment in R&D as a big constraint. The South and West-based companies were the most optimistic. the biggest worry being industry regulation along with price controls.Growth Trends The turnover growth indicated by companies in the sample averaged around 23%. A whopping 94% of the respondents viewed lack of institutional support as a major hindrance. 56% companies who responded to the query agreed that infrastructure inadequacy was a big hindrance. Pertaining to lack of infrastructure. Concentration of companies in the higher turnover bracket was largely from this region and also in terms of exports. To conclude. especially Maharashtra and Gujarat. Most of the respondents were expecting growth to accelerate in the next two years to around 29%. Quite a few of companies expressed apprehensions regarding the threat from spurious and counterfeits available in the market. the western region was found to be the most prominent and dominant region for pharmaceutical companies. Hindrances to Growth Some interesting aspects came to light when companies were asked what they perceived as the major hindrances to the growth of their business. 78% of the companies cited marketing issues and the lack of marketing and distribution networks. 112 .
several small players have started setting up separate clinical research unit. Launches of new molecules by MNCs will accrue contract manufacturing and in-licensing opportunities for Indian players including the small and medium enterprises. SMEs have acquired expertise in formulations & chemical synthesis. India’s population is likely to touch 14. this rise in the generic market size will be to their benefit. This trend is likely to continue in future as well. FUTURE PROSPECTS.11 bn by 2026. For SMEs which are largely engaged in the generics business. The generic industry is estimated to grow by more than 20% annually till 2008 and the total size is estimated to be around US$ 100 bn by 2010. Leveraging the cost-effective production capabilities of Indian manufacturers. Demographic factors like population growth and improving life expectancy is set to drive domestic demand. Demographic factors Population growth coupled with rise in per capita income and increasing health awareness are factors which will continue to drive domestic demand for the pharmaceutical industry. SME players. Some important molecules developed by Indian players have already reached different stages of clinical trials. The Indian pharmaceutical industry is passing through a transformation and industry players are organizing themselves to avail of the immense opportunities that have opened up globally. Manufacturing under contracts gives them a safe position against margin fluctuations. generic drugs make up for 55% of the prescription written. Already. thus giving them the edge in acquiring research contracts from the big players in the domestic.8. have been lagging in investments towards in-house R&D. New product launches After the introduction of product patent laws in India. better scientific skills and favourable regulatory environment. Increasing investments in R&D Given the long gestation period right from the discovery of molecules to the final approval for marketing. multinational companies have shown renewed interest in launching some blockbuster products in India. the current investments made towards R&D will lead to sustainable growth. Doing so categorises them as a research organisation. Growing generics market an opportunity for India Increasing number of products getting off-patent and recognition of generic drugs by some developed countries is set to expand opportunities for India in the generics market. To circumvent this fallback. however. The proportion of population in the agegroup of 15-65 years is likely to constitute 68% of the total population in 2026 as against 61% in 2001.5) CONCLUSION AND RECOMMENDATIONS. several such companies have attracted sizeable contracts for research. 113 . some of which have reached the critical phase-II. The sector is set to report impressive growth in the years to come and outlook for the industry remains strong. as well as international market. the Indian pharmaceutical industry is well-placed to tap these opportunities. According to projections given in the Economic Survey 2005-06. In the US.
achieved during last few years. is likely to continue in the near future.Growing exports market Exports will continue to remain strong and an enabler of growth for the pharmaceutical industry. Price control remains the principal concern The expanding span of control on drug prices in India remains the main concern for the pharmaceutical industry. the volume of sales will determine the profits of the players. To sum up. Contract research business is estimated at US$ 6-10 bn. Indian companies are capable of conducting various clinical trials at relatively lower costs. have been increasing over a period of time. Although India has also started experiencing rising bills on skilled manpower. Nevertheless. it has been seen that the prices of medicines. exports grew by 21% despite the sharp price erosion in key generics markets. the price scenario in markets not under price control will witness a rise in prices due to increasing demand. There has been a spate of tie-ups and acquisitions by companies in the CRAMS segment in India. Exports as a proportion of the industry’s turnover have gone up to 43% in 2008 from 36% in 2002. Despite the growing competition in the global generics market and increased participation among developing countries in the global generics market. Impressive performance of Indian exports. Contract manufacturing business is estimated to touch US $40 bn by 2015 and is likely to grow at 10-12%. Hedge risk by changing the product mix Despite the price control on certain bulk drugs and formulations. CRAMs opportunities will continue to pick up Contract manufacturing and contract research will gain prominence among the Indian pharmaceutical companies. having the largest number of US FDA approved facilities outside the US and low cost manpower with technical expertise. and for SMEs in particular. India aptly suits the changing global scenario. 114 . During FY08. and is growing in the range of 16-18%. the industry is set to grow in the medium to long term on the strength of better R&D capabilities and rise in exports to a high value and high growth market. Indian companies have already proven their ability to compete. Therefore. the product-mix between prescription and OTC drugs or the mix of business between domestic and exports holds the key to profitability for players in general. it is still in a relatively advantageous position on the cost front. The driving factors include the rising manufacturing costs in developed countries and falling prices in the generics segment world over. In the field of R&D. As the price is proposed to be fixed on the basis of manufacturing costs and fixed margins. on an average. Under this situation SMEs may be hit due to the smaller economies of scale. The increase in average price is attributed to the rise in prices of drugs not under control and upward revision in prices of certain controlled drugs owing to rise in input costs. Most of the OTC drugs are out of the ambit of price control and recent trends show an impressive growth in the Over The Counter (OTC) segment. despite the concern over pricing and huge investments in R&D leading to blocking of funds and resulting in short term obstacles.
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