West Bengal University Of Technology

Summer Project Work “Emerging SME Sectors in India and their future prospects At

By
WBUT Registration No: 091360710078 OF 2009-2010 WBUT Roll No: 09136009106

ARMY INSTITUTE OF MANAGEMENT KOLKATA

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AUTHORISATION
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

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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

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0 3.6 1.4 4.1 7.3 2.4 2.1 5.2 5.7 3.2 2.3 3.5 SECTION5.0 4 .2 3.7 1.5 1.1 2.2 6. 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 4.0 7.3 6.2 4.3 5. SME Policy Objectives Scope of Policy Small & Medium Enterprise Sector.6 3.4 6.5 SECTION6.0 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 -3.2 7.1 3.5 SECTION7.3 1.4 3.1 6.5 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.0 2.8 SECTION4.1 4.2.8 SECTION.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 5.0 6.4 1.3 4.3 7.4 5.5 3.

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 .5 SECTION.1 8.4 8.8.0 8.7.2 8.

the Reserve Bank of India was established under the 6 . Rajan and Zingales. In 1935.0) INDUSTRY OVERVIEW 1.1 Banking Industry A Banking sector performs three essential functions in an economy: the operation of the payment system. Modern banking in India can be dated as far back as in 1786 with the establishment of General Bank of India (Kalita. 2001.1. 2006. 1998). the mobilization of savings and the allocation of savings to the investment projects. 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. In the early nineteenth century three Presidency Banks were established in Bengal. 2008). Bombay and Madras and in 1921 they were merged in to newly form Imperial Bank of India. 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. Jaffe and Levonian.

2005). 50 crores. While there are those who have emphasized the political importance of public control over banking.al. 2005). Das et. in some countries. 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). However. 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.. After independence. small industry and exports” (Banerjee et. 1955. 2004.al.In 1980. 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. In spite of all these developments. There are essentially two views that justify Government’s ownership of financial markets. The optimistic or „developmental‟ view is that of Alexander Gerschenkron who emphasized on the necessity of financial development for economic growth (La Porta et. Dobson 2006). This raised the proportion of scheduled bank branches in government control from 31% to about 84%(Kalita. were nationalized in 1969. al. The Imperial Bank of India was converted in to State Bank of India under the State Bank of India Act.Reserve Bank of India Act as the central bank of India (Chakrabarti. were privatized further raising the proportion of government controlled bank branches to about 90%(Chakrabarti. 14 major private banks. 2002. 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.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. In keeping with the increasingly socialistic leanings of the Indian government. most conspicuously 7 . 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. each with deposits exceeding Rs. 2005). 2008 ) . six more private banks each with deposits exceeding Rs 200 crores.

. 2002)..For good reason. 2002). 2009). gradualism was a result of India’s democracy and highly pluralistic polity in which reforms could be undertaken only if based on popular consensus. 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. The poor performance of the public sector banks.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. efficiency and profitability (Kalita. equally important was the need for proper credit appraisal. which accounted for about 90% of all commercial banking. India chose a „gradualistic‟ approach to the reform over a „big-bang‟ approach (Bhinde. was rapidly becoming an area of concern. accountability and prudential norms in the operations of the banking system led also to a rising burden of non-performing assets (Ghosh and Prasad. economic institutions were not sufficiently developed for private banks to play this crucial development role. Prakash Tandon. According to Gerschenkron “. 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. Banking reforms. such gradualism was due to the fact that reforms were not introduced in face of a prolonged economic crisis. al.. 2002). 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.Russia. While expansion of credit was desirable to help the economy grow. They were the „smoking gun threatening the very stability of the Indian Banks‟ (Bidani. 2002. As in other areas of economic policy-making. 2008). and most importantly. 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. Prasad and Ghosh. 2007).al. therefore. The lack of recognition of the importance of transparency.. As pointed out by Bhide et. 8 . 2002). 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.

were liberalized in the 90‟s and directed lending through the use of instruments of the Statutory Liquidity Ratio which was reduced (Chakrabarti. The aim of the former was to bring about “operational flexibility” and “functional autonomy” so as to enhance “efficiency. loan festival.1.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. 9 . Moreover. etc.2 Indian Banking: A Paradigm Shift The decade gone by witnessed a series of financial reforms. But during the post nationalization period. IRDP lending. deposit mobilization in household sector. While several committees have looked into the ailments of commercial banking in India.. Research studies have time and again proved that financial liberalization had a positive effect on bank performance (Koeva. The Narasimham Committee had acknowledged the success of public sector banks in respect of branch expansion. 2003). 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. The 1990s saw India implementing Macroeconomic Adjustment Program of which the financial sector reform is a major component (Narayana. 2000). inefficient and financially unsound…‟ The first Narasimham Committee set the stage for financial and bank reforms in India. 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. poor supervision.unprofitable. with many of them still in the process of implementation. previously fixed by the Reserve Bank of India. Joshi and Little (1996) had characterized the Indian banking sector as „. rising staff level and high unit cost of administering loan to the priority sector. 2008). Interest rates.. the banking sector suffered serious erosion in its efficiency and productivity (Dhar. The latter focused on bringing about structural changes so as to strengthen the foundations of the banking system to make it more stable (Chakrabarti. three of them – the Narasimham committee I (1992) and II (1998) and the Verma committee – have aimed at major changes in the banking system. productivity and profitability”. 2008). priority sector lending and removal of regional disparities in banking. 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. 2003). According to the committee the operational expenditure of the public sector banks had tremendously increased due to rise in number of branches.

8. of India (Kalita. Banking industry should follow BIS/Basel norms for capital adequacy within three years. The directed credit program should be re-examined and the priority sector should be redefined to comprise small and marginal farmers.The major recommendations made by the Narasimham I committee report are listed below (Kalita. 10 . 3. The committee favoured the merger of strong public sector banks and closure of some weaker banks if their rehabilitation was not possible. the tiny industrial sector. should tighten the prudential norms for the commercial banks. The major recommendations of the second Narasimham II report were mentioned below (Kalita. 5. 2008). share of public sector banks should be disinvested to a certain percentage like in case of any other PSU. The committee submitted its report on 23rd April 1998 to the Finance Minister of Govt. 7. 2008). Interest rates should be deregulated to suit the market conditions. 4. The Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) should be progressively brought down from 1991-92. 2008). 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. The govt. 1. has to be more liberal in the expansion of foreign bank branches and also foreign operations of Indian banks should be rationalized. The ban on setting new banks in private sector should be lifted and the licensing policy in the branch expansion must be abolished. 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. 6. 1. The govt. The govt. 2. Narasimham. small business operators and weaker sections.

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. The report envisaged flow of capital to meet higher and unspecified levels of capital adequacy and reduction of targeted credit. The Banking Sector Reform Committee further suggested that existence of a healthy competition between public sector banks and private sector banks was essential.2. 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. 5. 3. Expressing concern over rising non-performing assets. 11 . 4.

. Desai and Gueorguiev. p. which in turn has a growth enhancing effect (Denizer. and. 2002). a majority of the empirical studies support the financial liberalization hypothesis supporting 12 . 1997. 2002). Desai and Gueorguiev. repressive policies such as artificially low real interest rates. In the words of Lenin „. subsidies and other benefits to supporters. 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. how to manage the transition to this coordination mechanism (Kaminsky and Schmukler. Removing these repressionist policies and giving more importance to market forces will. 1998. al. 2002). 311. if necessary.1. because the government does not have to compete with the private sector. According to the development and political view of state involvement in banking. Denizer.However.3 Types of Reform Measures for the Banking Sector Since the general importance of a banking sector for an economy is widely accepted. in the view of the proponents of financial liberalization. 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. The attraction of such political control of banks is greatest in economies with underdeveloped financial systems and poorly protected property rights. increase financial development and eventually lead to higher economic growth (Demetriades and Luintel. 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. Lopez de Silanes and Schleifer. 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..Without big banks. 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. who return the favour in the form of votes and political contributions.. the questions arise under which coordination mechanism – state or market – it best performs its functions.Currently.. La Porta. socialism would be impossible. The view of state ownership is buttressed by considerable evidence documenting the inefficiency of government enterprises. In their view. there are opposing views concerning the most preferable coordination mechanism. 1998). The proponents of financial liberalization take an opposite stance. Governments acquire control of enterprises and banks in order to provide employment.

2001). 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. operational autonomy and competition in the banking sector. 13 .  Permission for foreign investment in the financial sector through foreign direct investment (FDI) as well as portfolio investment. special emphasis was placed on building up the risk management capabilities of Indian banks while measures were initiated to ensure flexibility. The banking sector reforms started in the early 1990s essentially followed a two pronged approach. 2005). 2006. Singh. 2006. first. In particular. facilitation of improved payments and settlement mechanism.  Transparent norms for entry of Indian private sector banks. Mohan. 2008).  Introduction of auction-based repos and reverse repos for short term liquidity management. 1993. 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. Some of the measures undertaken in this regard are as follows (Kalita. disbanding of administered interest rates and enhanced transparency and disclosure norms to facilitate market discipline.  Instructions and guidelines on ownership and governance in private sector banks. Roland. foreign banks and joint venture banks. 2008.   The banks are allowed to diversify product portfolio and business activities.the fact that financial liberalization is essential for economic growth (King and Levine. Secondly. active steps were initiated to improve the institutional arrangements like legal and technological frameworks (Mohan. securities. market determined pricing for govt. Measures enhancing role of market forces  Reduction in pre-emption through reserve requirement. Roadmap for foreign banks and guidelines for mergers and amalgamation of private sector banks with other banks and NBFCs. Watchel. 2006).

risk concentration. Accordingly. 14 . In fact. accounting. Prudential measures  Introduction of international best practices norms on capital to risk weighted asset ratio (CRAR) requirement.  Introduction and roadmap for implementation of Basel II. Following the Basel Accord of 1988. 2000. the capital to risk-weighted assets ratio (CRAR). Furthermore. as a part of banking sector reforms.  Introduction of capital charge for market risk. higher graded provisioning for NPAs. income recognition. assignment of risk weights to various asset classes. emerged as a well recognized and universally accepted measure of soundness of the banking system. broadly in line with the 1996 amendment to Basel norms. etc. India went a step further and stipulated CRAR at nine per cent as against the international norm of eight per cent from March 31. norms of connected lending. India adopted the Basel norms in a phased manner. guidelines for ownership and governance. India also prescribed the capital charge for market risk in June 2004. securitization and debt restructuring mechanism norms. Significant advancement in dematerialization and markets for securitized assets are being developed. provisioning and exposure.  Measures to strengthen risk management though recognition of different component of risk. which took into account the element of risk involved in both balance sheet as well as off-balance sheet business.

of bank offices Of which Rural and Semi-urban 3. the inefficient PSBs have been noted to be catching up with the efficient ones.) 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 . 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. Table 1. First. By March 2004. That is. 2006. specialized skills. 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. 1997) . which effectively shielded the incumbents from competition (Roland. Their empirical results indicate that the majority of PSBs have observed an ascent in technical efficiency during the post-reforms years.Through the lowering of entry barriers.1: Progress of Scheduled Commercial Banks in India Pre and Post-Reforms Progress of Scheduled Commercial Banks in India Indicators 1. of SCBs 2. No. Per capita Deposit (Rs.1.4 Impacts of Reforms upon the Banking Industry The Indian banking industry had made sufficient progress during the reforms period. India had strict entry restrictions for new banks. Joshi and Little. the study confirms a presence of convergence phenomenon in the Indian public sector banking industry.No. over 20 foreign banks started operations in India since 1994. Population per Office („000) 4. In sum. better risk management practices and greater portfolio diversification (RBI Report on Trend and Progress of banking in India). Before the start of the 1991 reforms. 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. competition has significantly increased since the beginning of the 1990s. there was little effective competition in the Indian banking system for two reasons. In addition. Seven new private banks entered the market between 1994 and 2000. the banks with low level of efficiency at the beginning of the period are growing more rapidly than the highly efficient banks. Second. Further.

To achieve this objective. RBI. 2005. Expansion of branch network into rural and semi-urban areas turning many offices into primarily deposit centres without adequate credit business and income.3 Interest rate deregulation Prior to the reforms. Per capita Credit (Rs.  Decline in portfolio quality owing to political and administrative interference in credit decision making. 2006-2008).5 10440 68.1 4555 53. 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. interest rates were a tool of cross-subsidization between different sectors of the economy. 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. 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. 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. 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).5. 2000). Deposit (% to national income) 457 36 1434 48. impinged on the allocated efficiency of resources (Report on Currency and Finance. 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. Roland. The above diagnosis of the maladies of banking led the Committee to recommend- 16 .   Concessional interest rate on directed investment and credit.

CRR be turned into an instrument of monetary policy. Directed credit program be phased out in the long run. SLR requirements be related to prudential requirements and be brought down to 25% of net demand and time liabilities. Directed credit Policies: Directed credit policies have been an important part of India’s financial sector reforms. Use fiscal instruments rather than the credit system to help the weaker sections. etc. small transport operators. 2002). Banks can charge rates according to their cost of funds and to reflect the creditworthiness of different borrowers. Under the directed credit policy commercial banks are required to provide 40% of their commercial loans to the priority sectors which include agriculture. Within the aggregate ceiling there are various sub-ceilings for agriculture and also for loans to poverty related target groups. The Indian banks are now adopting a completely market driven interest rate structure which was in earlier a govt. The prime lending rate of each bank is now synchronized with the bank rate. small-scale industry. The Committee on Banking Reforms has suggested inclusion 17 . The Narasimham committee had recommended reduction of the directed credit to 10% from 40%. The policy of 40% of loans to the priority sectors has not been abolished by the govt. However. The committee had also suggested narrowing down the definition of priority sector to focus on small farmers and low income target groups. The borrowing rates to be brought closer to market rates.    The motive behind the liberalization of interest rates in the banking system was to allow the banks more flexibility and encourage competition. redefine priority sector in the short run.2008). the definition of the priority sector activities has been broadened with the new inclusion and reclassifications. The bank rate was revived by the RBI to serve as the reference rate for the banking sector. 2008). The interest rate deregulation has resulted in the integration of the lending rates across spectrum. and review the concessional interest rate. Banks can vary nominal rates offered on deposits in line with changes in inflation to maintain real returns (Ahluwalia. Dismantle the administered interest rate structure and allow interest rates "to perform their main function of allocating scarce loan-able funds to alternative use”. (Kalita. driven interest rate structure. artisans. The most important and far reaching impact of banking liberalization in India has been the deregulation of the interest rate (Kalita.

they failed to achieve the various sub-targets for agriculture. In the context towards deregulation. 2008). norms for the entry of Private players were announced. The issue of priority sector lending. 22 foreign banks were also set up.4% of the total bank credit was given by Private Sector Banks to priority sector] (Source: Trend and Progress of Banking in India. However. 2004-05). 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. it was decided in 1992 to give greater freedom to banks in opening up branches. is no longer that crucial. While public sector banks. 2008). The lack of enough competition was also reflected in the net interest margins (NIM) of banks. 18 . 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. advances to weaker sections. an important concern against privatization. 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. 10 new banks were set up by 1998. Besides. 1). At present if a bank fails to fulfill the target for priority sector lending. as a group.The current arrangement shows how the banking sector reforms have provided operational flexibility to the banks even while meeting social objectives. 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. The priority sector lending norms have been fulfilled by a good margin by both public and private sector banks at present. tiny sector within the SSI sector. Normally when competition intensifies. In January 199. The number of foreign bank branches increased from 140 at end-March 1993 to 186 at end-March 1998. achieved the overall priority sector targets 40%. Following liberalization of entry of new private sector banks. etc. Annual Report.51% in 1992-93 to 2.This will increase the list of activities under the priority sector credit and also improve the quality of the portfolio.5% of the total credit of PSUs was given to the priority sector whereas 44. it inevitably leads to increased mergers and acquisitions activity. 42. that the impact on competition remained muted was evident from the limited number of mergers (four). 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. Vol. RBI).95 per cent in 1997-98 (RBI Report on Currency and Finance 2006-08. dairying and poultry in the priority sector list (Kalita.of activities related to food processing.

Banks were interalia advised to formulate comprehensive and more liberal policies than the existing policies in respect of loans to SME Sector. 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. In India. Small and Medium Enterprises Development Act of 2006. 100 million is considered as a medium unit. financial institutions. cotton textiles. 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. synthetic products. The SME 19 .3.  In India. 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. in order to make the size of the unit and the technology employed by firms to be globally competitive. As per the Micro. jute. The SMEs constitute 95% of total industrial units and constitute 40% of total industrial output. printing publishing and allied industries. apparatus. SME is the biggest provider of employment next only to Agriculture. SMEs have to play a prominent role. both Government and RBI credit policy placed emphasis on manufacturing units from the Small Scale Sector. In addition. given that their labour intensiveness generates employment. hemp & jute products.5 Small And Medium Enterprises (SMEs) In India The small and medium enterprises segment has been a topic of intense deliberation among banks. wool. and have achieved steady progress over the last couple of years. silk. industry and academicians. 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”. From the perspective of industrial development in India. However. beverage. Formerly. furniture and fixtures. machines.6 Role of Small and Medium Enterprises (SMEs) SMEs have been playing a pivotal role in country’s overall economic growth. MSMED Act was operationalised with effect from 2nd October 2006. the definition of “Small Scale Sector” was revisited. tobacco and tobacco products.  3. Keeping in view the same and the global practices. SME sector also has a large number of service industries. paper & paper products. appliances and electrical machinery.   Subsequently. and hence the growth of the overall economy. machinery. ‘small and medium enterprises’ (SME) is a generic term used to describe small scale industrial (SSI) units and medium-scale industrial units. wood & wood products. The SME sector produces a wide range of industrial products such as food products.

With globalisation. increasing use of ICT. Small and Medium Enterprises Development (MSMED) Act. 20 . SME-tax friendly environment. access to skills. suppliers or distributors at a different level. i. all forms of production of goods and services are getting increasingly fragmented across countries and enterprises. However. With large players adopting different models of business that include involvement of the traditional partners. 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. The combined effect of market liberalisation and deregulation has forced the SME segment to change their business strategies for survival and growth.segment also plays a major role in developing countries such as India in an effort to alleviate poverty and propel sustainable growth. 2006 was a landmark initiative taken by the Government of India to enable the SMEs’ competitive strength. finance. access to technology. The enactment of the Micro. at the same time they have realized their drawback in terms of inadequate availability of managerial and financial resources. 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. given the abundant supply of labour in these countries. economic liberalisation and the WTO regime would undoubtedly open up a unique opportunity for the largest business community. address the issues and challenges and reap the benefits of the global market. 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. They also lead to an equitable distribution of income due to the nature of business. SMEs through effective involvement in international trade by streamlining certain factors. SMEs in countries such as India help in efficient allocation of resources by implementing labour intensive production processes. such as.e. development of necessary infrastructure. wherein capital is scarce. creating ebusiness models and diversification to meet the increasing competition. 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. Moreover. access to markets. lack of working capital. exchanges of best practices to name a few. SMEs now are experiencing a new model of functioning in the value chain. personnel training and inability to innovate on a faster pace. Globalisation. Some of the changes that SMEs are focusing on include acquiring quality certifications.

in the form of private equity (PE) and foreign direct investments (FDI).7 Financing the SMEs In Feb 2008. 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. they continue to face problems pertaining to finance. Lately this segment has been witnessing winds of change in the new sources of capital. MSME Cluster Development Scheme and ISO 9000 Reimbursement Scheme to help SMEs for procuring timely funds. 21 . Though SMEs are being touted as the priority sector within the economy. However. they have a very traditional way of lending to this segment against collateral and SMEs end up being under financed. In fact. continued with its dereservation policy by removing 79 items from the list of 114 items reserved specifically for SSI (small scale industries) manufacturing. Also the government has put in place the Credit Guarantee Scheme to encourage banks to lend up to Rs 0. The Soros Economic Development Fund (SEDF). with a corpus of $100 million for providing equity capital and professional management advice to SMEs. Omidyar Network and Google. In 2007. Mauritius-based Horizon advisors launched Ambit Pragma Fund I. primarily in the industrial space with revenues between Rs 200 – 1. 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. 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. There has also been a recent budget announcement of setting up of a Risk Capital Fund. In Jan 2008. private equity. the Ministry of Micro. factoring etc.50 million without collateral. Small and Medium Enterprises (MSME). the government has set up various schemes in place such as the Credit Linked Capital Subsidy Scheme. Evidently. When it comes to banks. 3. an India dedicated PE fund.The SME sector has also registered a consistently higher growth rate than the overall manufacturing sector.000 million. Mauritius-based Frontline Strategy launched a $200 million India Industrial Growth Fund (IIGF) for investment in SMEs targeting companies.

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. [1] 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.

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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. [2]  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.

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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:

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3 Small & Medium Enterprises Sector The SME segment is broadly classified as under in MSMED ACT. Small and Medium Enterprises – as per regulatory definition irrespective geographical location. 1/.  SMEs which are Associate/sister concerns of Wholesale Banking customers. 50/.10/.500/. 2006 3. 25 . 25/.e.lacs and up to Rs.e.lacs and upto Rs.lacs Above Rs. Bank has therefore for internal purposes given focused attention to finance all Commercial enterprises i.500/.crores.  All other entities with their annual sales turnover of Rs. where the project cost is upto Rs.lacs and 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. SME Banking business will thus include the following across the bank:  Micro.lacs Above Rs.crores by treating them as part of SME segment. rural.4 Bank’s Approach Towards SME Sector SMEs are growth engines for development of Economy.lacs Above Rs.crore to Rs.200/. semiurban.200/.00 crores and new infrastructure and real estate projects where the project cost is upto Rs. i. Fittings and other items not directly related to the service rendered or as may be notified under MSMED Act.lacs Investment in Equipment in case of Service Sector Enterprises * Upto Rs. urban.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.lacs Above Rs. 25/. 2006 : Particulars Investment in Plant & Machineries in case of Manufacturing Enterprises * Upto Rs.1000/. 150/.lacs and upto Rs. enterprises which may be outside the purview of regulatory definition of SME but having turnover upto Rs 150. 50/.10/.500/.crores and new infrastructure and real estate projects. metro areas.

SME LOAN FACTORY : To grab vast business opportunities available and with an aim to extend focused attention to Industries & Service Sector. 2009. etc.  We have two nodes to take care of the marketing /sales(SALES HUB) and credit processing sanction(CREDIT HUB). Instead of appointing DSAs(Direct Selling Agents). Its important feature is working of the SME Loan Factory on assembly line principles with simplified processes. Trusts. bank has appointed officers from existing dedicated team only. Bank of Baroda has come out with an unique model in the form of SME LOAN FACTORY exclusively for SMEs.   The team members reach out to different market segments. 34 SME Loan Factories have been operationalized across the country.  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. under a single umbrella of the SME Loan Factory. Clubs. Attractive features of the model are as under :   Team of officers having expertise in the area of credit with positive approach is selected. It envisages setting up of Centralized Processing Hub to ensure speedy appraisal and sanctioning of proposal of SME Sector within a time bound schedule.  Financing under various Government schemes launched for MSME Sector.  As of March.  The hub’s main role is ensuring speedy appraisal & sanctioning of proposals pertaining to SME sector in a time bound program.  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. However. 26 . such units. 3. which are outside the purview of regulatory definition will not form part of Priority Sector lending.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.  It is a revolutionary step taken by Bank of Baroda amongst the Nationalised Banks. This model titled SME Loan factory has separate Hub for Centralized Processing of SME proposals.

Deviation allowed Various authorities have been authorized to permit deviations in respect of accounts. f. which are not covered under BOBRAM Credit Rating System.e. 27 . net profit before tax) concerns only as per last audited Balance Sheet. Norms Profit-making (i. e. d. guidelines as applicable to borrowal accounts are to be scrupulously followed. There should not have been any reschedulement /restructuring in the account during last two years.25 lacs and Micro(service) enterprises having investment in equipment above Rs. Accounts. b. Various authorities have been authorized to permit deviations in respect of accounts. c.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.N o.2 lacs 20% to Micro (manufacturing) enterprises with investment in plant and machinery above Rs.  3.3.6 Targets for Priority Sector / SME Sector Lending As regards lending to SME Sector. 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.2 lacs and upto Rs. Accounts with existing lenders should be under the category of “Standard Assets”. There is no sub-target fixed for lending to small enterprises sector.10 lacs.5 lacs and Micro(service) enterprises having investment in equipment upto Rs. Accounts be rated as per the new credit rating model (BOBRAM) subject to ‘minimum’ BOB 6. 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. a. All other existing norms.5 lacs and upto Rs. Satisfactory report from the existing bank/FI and/or satisfactory conduct of account as per latest statement of accounts. However in order to ensure that credit is available to all segments of the Small Enterprises sector. may be considered under permitted deviation as per extant guidelines issued from time to time.

5:1 Minimum 1.75 with a condition that in any one year it should not be below 1.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.. Various authorities have to permit deviations accounts.25 Maximum 4. been authorized in respect of been authorized in respect of Maximum 4. 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..25 Maximum 4.17 & above Maximum 4:1 2 Medium Enterpris es under manufacturing sector and service Sector as per regulatory guidelines Minimum 1.20 & above Maximum 3:1 3 Units outside the purview of regulatory definition but covered under SME Sector as Per expanded definition. 28 .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.5:1 Minimum 1.5:1 Minimum 1.. Minimum 1.

promoters of the unit. 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. whichever is  Baroda Overdraft against Land & Building is a unique product for financing working capital requirements. i.crores.5/. 2/.  Scheme for financing existing SME customers/Current Account holders for purchase of new vehicles upto a limit of Rs.  Baroda Arogyadham Loan for providing finance for setting up new Nursing Homes. viz. upto a maximum limit of Rs.crores. 29 . 5/.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. 50/. depending on the location. urban and metro. rural and semi-urban. audited Balance Sheet. 4 times of borrower’s tangible net worth as per last lower. on liberalized terms. purchase of medical diagnostic equipments as also office equipments etc.crores on liberalized terms.3.e. renovation of existing Nursing Homes/Hospitals. 2/. Hospitals including Pathological Laboratories. or. or Rs. and to meet working capital requirement upto a maximum limit of Rs.  Baroda Vidyasthali Loan providing finance to Educational Institutional upto a limit of Rs. This scheme is also implemented at select branches of the bank.lacs with 10% margin.crores depending on the location. This scheme is implemented at select branches of the Bank depending on the business potential. long term margin requirements of SME borrowers against the security of unencumbered land and building belonging to the unit.

) FOOD & AGRO BASED INDUSTRIES 30 .4.

10% each in non-alcoholic beverages and packaged/convenience food.1) EXECUTIVE SUMMARY Emerging Food Processing SMEs of India attempts to provide a platform to the Food Processing SMEs. Of the 262 companies profiled. 8% in fruits & vegetables. Emerging Food Processing SMEs of India will provide the right platform for SMEs. enabling them to become globally competitive. 3% in alcoholic beverages and 9% in the others sub-segment.4. 71% companies have a single manufacturing facility while 27% operate with 2 or more plants. The profiled companies are from 17 states and 2 union territories. followed by 21% from Rajasthan). and SMEs are expected to play a critical role. Some of the insights revealed include the following: In terms of ownership patterns. The regional representation of companies in the report suitably reflects the geographical concentration of the Indian food processing industry. 83% are small-scale firms and 17% are medium scale. 4% each in meat & poultry and marine products. as many as 245 companies provided us sufficient data points to enable a statistical analysis. 7% each in bakery and milk & milk products. 13% are proprietary firms. As many as 65% of profiled companies are engaged solely in manufacturing. 42% companies have a website.000 mn. while 18% of the companies are relatively new and have begun operations post-2000. The report has profiled 262 companies with a turnover of less than Rs 1. 43% private limited companies and the rest 27% are public limited companies. 17% partnership firms. followed by 8% each from Ahmedabad and Pune). 5% in sugar & confectionary. Of the balance 209 companies profiled.2) METHODOLOGY 31 . 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. In terms of IT penetration. around 33% are into grain processing & spices. 4. These regions are the major industrial clusters of food processing SMEs in the country. while 35% are engaged in manufacturing as well as trading. The food processing industry is expected to continue its high-growth trajectory in the near future. The list consists of 89 companies from West India (49% registered in Mumbai-Navi Mumbai region. Of these. 82 from the South (20% each from Chennai and Hyderabad) and 68 companies from the North (50% registered in Delhi. so as to facilitate their interface with potential global partners and buyers.

from fruits & vegetables to meat & poultry. Every effort was made to ensure that the report covers food processors located across the length and breadth of the country. changing lifestyles and relaxation in policies has given a considerable push to the industry’s growth. the analysis has formulated a correlation between investment and turnover to arrive at a benchmark of Rs 1. growth prospects and production efficiencies. Other considerations included financial growth performance over the past two years. This sector is among the few that serves as a vital link between the agriculture and industrial segments of the economy. competitive dynamics and the future outlook for the segment. The sections titled Industry Report and SME Insights are special analyses on the food processing industry which looks at current trends. 4. Based upon the Annual Survey of Industries (ASI) and National Sample Survey Organization (NSSO) And Centre for monitoring Indian economy and Capitaline database. ensure remunerative prices to farmers and at the same time create favourable demand for Indian agricultural products in the world market. 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. marine products. Availability of raw materials. which came into effect from October 2. Strengthening this link is of critical importance to improve the value of agricultural produce. The report has excluded subsidiaries of large Indian business houses. bakery. Considering the challenges entailed in tapping financial information from a highly fragmented sector. multinational companies and subsidiaries of multinational companies. The report also includes diversified companies operating in the food processing and allied segments and having business interests in other industries. 32 . A thrust to the food processing sector implies significant development of the agriculture sector and ensures value addition to it. we identified a large universe of auto component manufacturers.The Micro. alcoholic beverages and grain processing. The SME Insights section presents analytical findings drawn from the primary information collated by leading consulting firms across the world. Trading companies have been excluded. 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 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. milk & milk products. thus honouring the true Indian entrepreneurial spirit that the SMEs represent. Emerging Food Processing SMEs of India focuses on processors of food and food products across the value chain. nonalcoholic beverages.000 mn turnover for the SMEs. packaged/convenience food. Companies with negative net worth and those declared financially sick by the Board for Industrial & Financial Reconstruction (BIFR) were eliminated.

dairy products. protein isolate. Value addition to agriculture produce in India is just 20%. oilseeds. second largest producer of fruits & vegetables (150 mn tonnes). This segment accounts for more than 70% of the output in volume terms and 50% in value terms. breakfast foods. high protein food. considering the still nascent levels of processing at present.600 bn). Considering the wide-ranging and large raw material base that the country offers. The Ministry of Food Processing Industries. marine products. The food processing industry in India has a share of 1. The segments that have driven the growth are the beverages and meat & meat products and processed fish sectors. wastage is estimated to be valued at around US$ 13 bn (Rs 580 bn). including non-alcoholic beer • Alcoholic drinks from non-molasses base • Aerated water and soft drinks • Specialised packaging for food processing industries. beer & alcoholic beverages. the highest producer of milk in the world at 90 mn tonnes p. India. 78% in the Philippines and 80% in Malaysia. 21% in meat and 6% in poultry products. meals (edible). with an arable land of 184 mn hectares is. around 35% in milk. milk and milk products. wastage of agricultural produce is sizeable.5% in the total GDP of the country. and as part of total manufacturing accounts for 9%. GoI. packaged/convenience food and packaged drinks. and are largely concentrated in the unorganised segment. weaning food and extruded food products (including other ready-to-eat foods) • Beer. grain processing.The Indian food processing industry holds tremendous potential to grow. these levels are significantly low . meat and meat products • Industries related to bread. poultry and eggs. India’s share in world trade in respect of processed food is about 1. By international comparison. Though India’s agricultural production base is reasonably strong. has estimated the size of the Indian food market at US$ 191 bn (Rs 8. 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. third largest producer of foodgrains and fish and has the largest livestock population. The processed food market is projected to be over US$ 100 bn. The average annual growth of the food processing industry has been around 8% between FY01-FY08. of which the primarily processed food market accounts for 60%. along with a consumer base of over one billion people. 30% in Thailand. A large number of players in this industry are small sized companies. 33 . while the value-added processed food market is around 40%.processing of agriculture produce is around 40% in China. biscuits. the industry holds tremendous opportunities for large investments. Processing of fruits and vegetables is a low 2%.a. malt extract.. meat and poultry. the food processing sector largely comprises of the following sub-segments: fruits & vegetables. confectionery.6%. An extensive and highly fragmented industry. 70% in Brazil.

The prominent processed items in this segment are fruit pulps and juices. Food Processing Units in Organised Sector (numbers) Source: Ministry of Food Processing Industries. canned fruits and vegetables. Some recent products introduced 34 . 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. pickles. it is growing at a much faster pace. fruit based ready-to-serve beverages.However. Annual Report 2007-08. though the organized sector is comparatively small.2 mn tonnes in 2008.2% of the total production in the country. Industry Sub-Segments Fruits & Vegetables The installed capacity of fruits and vegetables processing industry has increased from 1. squashes. jams. chutneys and dehydrated vegetables.

Apart from such initiatives. India’s dairy industry is considered as one of the most successful development programmes in the post-Independence era.in this segment include vegetable curries in retortable pouches. Milk is processed and marketed by 170 Milk Producers’ Cooperative Unions. foodgrains. spices and oilseeds are some successful examples of contract farming in India. The industry has been recording an annual growth of 4% during the period 1993-2007. Such innovative practices will power the fruits. A significant thrust can be given to this sector by strengthening linkages between farmers and processors. vegetables and grain processing industry. which federate into 15 State Cooperative Milk Marketing Federations. The inclination towards processed foods is mostly visible in urban centers. The weak linkage between farmers and markets. The domestic industry is yet to change its preference in favour of processed foods. non-pasteurized milk through unorganised channels. Since 2000. (with the organized dairy industry accounting for 13% of the milk produced) while the rest of the milk is either consumed at farm level. dehydrated and frozen fruits and vegetable products. farmers and processing companies has brought about inefficiencies in the supply chain and encouraged the involvement of middlemen. and fresh fruits and vegetables. which changed the farming landscape and promoted the cultivation of processable variety of farm produce. Milk and Milk Products India has one of the highest livestock population in the world. fruit juices and pulps. Consumption of value added fruits and vegetables is low compared to the primary processed foods. or sold as fresh. Over the years. most of which are milch cows and milch buffaloes. Dairy Cooperatives account for the major share of processed liquid milk marketed in the India. dried fruits and vegetables and fruit juice concentrates. accounting for 50% of the buffaloes and 20% of the world’s cattle population. as well as. processed mushrooms and curried vegetables. Contract farming in wheat practiced in Madhya Pradesh by Hindustan Lever Ltd and by Pepsi Foods Ltd in Punjab for tomatoes. but also a market for agriculture produce. having small capacities of up to 250 tonnes/annum. The fruits and vegetable processing industry is highly decentralized. and a large number of units are in the cottage / household and small scale sector. the industry has seen significant growth in ready-to-serve beverages. Milk processing in India is around 35%. 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. canned mushroom and mushroom products. which is almost 3 times the average growth rate of the dairy industry in the world. pickles. several 35 . and units engaged in these segments are export oriented. As of 2008-09 total milk production in the country was over 100 mn tonnes with a per capita availability of 229 gms/day. fiscal incentives and tax concessions will also give impetus to the sector. accelerate technology transfer and capital inflow into the agriculture sector. The five-year 100% tax exemption announced by the Government in FY05 was one such incentive for upcoming fruits and vegetable processing units.

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.

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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

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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

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So far. there will be increasing demand for prepared meals. vegetables. This shift in turn implies that there is also a need to diversify the food production base to match the changing consumption preferences. warehousing. 22 food parks have come into operation which provide common facilities like cold storage. packaging centres. However. the growth rates for fruits. the share of cereal products was the highest. integrated cold chain facilities. Earlier. followed by milk & milk products. These are post-liberalisation trends that have given an impetus to the sector. snack foods and convenience foods and further on the demand would shift towards functional. modernised abattoirs. This shift in consumption follows the pattern observed in developed countries in the evolution of the global food demand. Some of the key constraints identified by the industry include: • • • • • • • Lack of suitable infrastructure in terms of cold storage. 2005 39 . food testing and analysis laboratories.processed foods in India. 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. in future. meat and dairy products have been higher than cereals and pulses. organic and diet foods. 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. Consumption patterns in India have been undergoing a visible shift. packaging centres. irradiation facilities and value added centres. edible oil and meat products. 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. vegetables. Going by this pattern. etc In terms of policy support. the ministry of food processing has taken the following initiatives: • • • • • • • • • • • Formulation of the National Food Processing Policy Complete de-licensing. in recent years. The Government has already taken several initiatives on this front which include developing of food parks. There is a shift from carbohydrate staples to animal sources and sugar.

FDI witnessed an inflow of over Rs 24 bn of foreign investment. facilitating a sustained growth of the sector and also improve global competitiveness. 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. these companies are facing tough competition from strong Indian brands. Maharashtra was among the front-runners to receive the highest share of FDI in food processing during the last five years.7 bn each as foreign investment. Nearly 30 per cent of FDI in the food processing sector comes from EU countries such as Netherlands.Apart from these initiatives. Perfetti. This level of competition has increased innovations. Italy and France. The highest investment in a single year was in 2001-02 amounting to Rs 10 bn. Nutricia International. Germany. At the same time. 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 . Major Food Processing Companies in India The entry of multinational companies has increased competition in the food processing industry. The dairy and consumer industrise received FDI worth Rs 2. Manjini Comaco are some of the successful ventures from EU countries. 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. During the last five years. Cadbury. Godrej-Pilsbury.

5%. marketing. private limited companies 43% and public limited companies 27% 41 . etc. partnership firms 16. 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. efficiency parameters. business practices. we attempt to add value through insights that have emerged from our study. preferences. Some key characteristics of the sample of 245 companies are: • Ownership pattern of companies include: proprietary firms 13.• • • • • • 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. a sample of 245 companies was considered. has encouraged this study on the SME segment. For this quantitative exercise. industry and academicians. The SMEs were relatively over-shadowed for long by other economic concerns. Inadequately developed linkages between R&D labs and industry. the requirement being that at least 80% of the information sought has been provided. We have attempted to chart their operational structure. material science.4) FINDINGS SME Insight The attention that small and medium enterprises are lately commanding from banks. 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. Through this primary research undertaken by the leading consulting firms. bio-technology etc. This study aims to draw a profile of how small and medium companies in the food processing space function. institutions.5%. As a result. 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.

• The sample covers over 98% of the food processing clusters. • In terms of IT penetration. The ‘others’ category include manufacturers of food colours. 31% in the South. 3% each into alcoholic beverages and marine products and 9% in the others segment (Refer Fig. (Refer Fig 01) • The representation from the various sub-segments of the industry is as follows: 34% in grain processing & spices segment. fruit juices. (Refer Fig 02) • Around 65% of the companies are solely into manufacturing. 4% in meat & poultry. Around 33. coffee. The rest are medium enterprises. 27.5% companies are located in the West. 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. while 35% are engaged in manufacturing as well as trading • Around 78. around 77% of the companies in the sample are small scale enterprises on the basis of investments in plant and machinery. 7% each in milk & milk products and fruits & vegetable processing. seeds. additives. 6% into bakery.5% in the North and 8% in the East • Reflecting the low capital intensive nature of the industry. flavours. only 4% were present prior to 1980s. 14% into packaged / convenience food. water. 42 . 2). 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. 8% in non-alcoholic beverages which includes soft drinks. etc. 5% into sugar & confectionary.5% of the companies in the sample began operations between 1980 and 2000. The West and South have maximum representation. 42% of the companies have a website. guar gum etc. tea.

a large number of small firms were concentrated in the West.Turnover Over 50% of the companies in the sample have a turnover of less than Rs 100 mn. 43 . Of the remaining 17% of the companies which were in the turnover bracket of Rs 500 mn and Rs 1. Another 33% were earning over Rs 100 mn but less than Rs 500 mn. followed by proprietary firms. and most of them were private limited companies. 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. In terms of the regional spread of these companies.

04) 44 .Figure 03 Top Ownership Structure The North-based companies once again showed a preference for proprietary form of ownership. The companies in the South were prominently private limited companies. The companies in the Western region were again predominantly private limited companies. similar to that observed among textile SMEs. (Refer Fig.

In terms of ownership. the North-based companies reflected higher capacity utilisation and were on an average operating at 82% of installed capacity.Branding Around 65% of the companies in the sample had branded products. Of the exporting companies. Approximately 44% of the companies were operating at 90% and above of installed capacity. followed by marine product manufacturers. it was found that companies exclusively into meat & poultry exported over 96% of their output. or 47% of the sample. with many of them exporting directly to foreign clients. Of the total exporting firms. The average capacity utilization among exporting companies was relatively higher (80%) compared with those selling only in the domestic market. were exporting their products and 36% were exporting more than 90% of their produce. 38% were operating in the Grain Processing & Spices segment followed by companies in Fruits & Vegetable Processing segment. 62% of the companies had branded products. The grain processing and packaged/convenience foods segments were the most prominent among the brand owning companies. Segment-wise. Exports Around 114 companies. the enterprises having turnover between Rs 250-500 mn showed higher average capacity utilisation of an average 88%. public limited companies constituted a significant 36% of those operating at more then 90% capacity. Capacity Utilisation The companies in the study were operating at an average capacity utilisation of 78%. Of these companies operating at 90% and above capacity. Brand consciousness among companies was widespread irrespective of their size. 61% have branded products and almost 55% have quality certifications. 69% of the companies in the turnover bracket of Rs 500-1. In terms of the various sub-segments in the food processing industry and their exports. On the basis of size. which on an average exported 93% of their produce. fruits & vegetables and meat & poultry segments. It was found that among the small scale companies with turnover less that Rs 100 mn. Regionally. Average capacity utilisation across segments 45 .000 mn had developed brands for their 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. Correspondingly.

the grain processing companies showed highest dynamism with 65% of the companies in this segment having divulged future growth plans. diversification to new marketing initiatives and venturing into newer markets. Out of the total companies with future plans for growth. while 16% companies looking for newer markets belonged to non-alcoholic beverages segment 46 . 45% of the companies have plans for expanding their capacity in order to meet the growing demand. 61% have envisaged strategies for future growth. A substantial 29% of the companies have diversification plans into related or un-related fields. of the companies having capacity expansion plans. The plans range from capacity expansion. modernisation. 33% were from the grain processing segment followed by packaged/convenience foods (15%). Segment-wise. In terms of future plans. Bakeries accounted for 13% of the companies having plans for diversifying their product segment.Table 2 Top Future Plans Of the total 245 companies in the sample.

Reforms had more or less bypassed the agriculture sector till recently. 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. Infrastructure as a barrier was cited by 37% of the companies. demographic factors. in terms 47 .Figure 05 Hindrances to growth Infrastructure and lack of institutional support were cited as the key hindrances to growth by the SMEs. Top 4. A large number of these companies were from the northern and southern belt. The Westbased companies were largely concerned with marketing issues. These are just the initial stages of development and further efficiencies in the agriculture sector. over 80% of the responses alluded to lack of institutional support as an impediment. changing lifestyles and consumer demand for greater variety has increased pressures on the food processing sector to provide products at competitive prices.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. Inefficient marketing systems are already being targeted. Nearly 52% of the companies in the sample responded to the query on hindrances to growth. However. Driving growth in the food processing sector holds the key to imparting changes in the labour intensive agriculture sector in India. Policies are now promoting the participation of private investors that would promote efficiency in food processing and agriculture marketing systems. Of these.

It also aids better understanding of consumer preferences as it is a vital link between the processors and consumers. GoI. will be a source of power for the food processing sector in turn. Reliance. Acquiring global competitiveness implies building-in efficiencies into the agricultural production and processing systems. strengthening of institutions and issues of food safety and regulations. Key players in this segment include Venky’s India and Godrej. The fruits and vegetables segment is still localised in its operations. Aditya Birla Group. This is among the faster growing segments in the industry. 48 . where too significant progress has taken place in terms of branding and marketing of products.of improving productivity and investments. and will continue to witness significant changes in the next few years. Among the food processing segments. A few prominent companies XXIX investing in this segment include ITC. 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. the food and beverages segment make up a high 29%. infrastructure development. contract farming and supply chain management. and have prompted several corporates to invest in the sector. cold storage. Though current sales of processed foods through retail outlets are hardly 1% of total food sales. Policy reforms in the food processing sector are already in their advanced phase. The Ministry of Food Processing. the two sectors share a symbiotic relationship and changes to either will impact the other. improving access to price and market information to farmers. Subhiksha and Future Group. the state Governments will have to play a critical role in raising yields and improving quality of agricultural produce. canned and frozen fruits and vegetables. it is estimated to grow at an annual rate of 40% in the near future. In other words. marketing interventions and regulations. Indian corporates who have already ventured into this segment include ITC. For the agriculture sector. and largely unbranded. access roads. several companies have already made foray into this segment. strategy and action plan for the food processing sector. Among the key categories that constitute the organised retail market. creating facilities for primary grading/sorting. The retail format reduces the number of intermediaries and transaction costs. and are backward integrating their operations. This strategy addresses issues of taxation. Bharti. the Government of India is already in the midst of a vision. Realising this vision entails an investment of US$ 24 bn over the decade of 2004-2015. progress has been pre-eminent in the grain processing sector with the extensive branding of processed end-products like wheat flour and processed rice.5% to 3% • Increase the share of value added products in food consumption from the current 16% to 50%. HLL and Cargill. has projected the organised food retail industry to grow by 30% for the next five years. The other growing segment is poultry and meat. organised retail. fruit pulps. The products that would see remarkable growth include pickles. Organised food retailing is likely to play an important role in increasing the consumption of processed food items. However. This would require improving infrastructure for warehouses. In this backdrop.

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. The food processing industry in India has taken off substantially and will continue to grow rapidly considering the untapped potential in the sector. similar to the developed nations. 49 . stakeholders in the food processing sector of India have a social responsibility to fulfil. investments in infrastructure and a shift towards centralised distribution centres from the traditional wholesale markets. but also the promise it holds in driving growth of a certain section of society that has remained marginalised for a long time. The growth in this segment not only indicates the changing development patterns of the country.

5.) CHEMICALS 50 .

1) EXECUTIVE SUMMARY The Emerging Chemical SMEs of India attempts to provide a platform to the chemical SMEs. inorganic and dyestuff — were most optimistic on future growth. as many as 271 companies were used for a statistical analysis. a large and growing domestic market. 51 . • It was observed that public sector companies had a dominant presence in the Rs 500 – 1000 mn bracket. Another 35% felt that it was easy to acquire funds. 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. around 60% of companies in these segments were exporting their products.000 mn. The report has profiled 384 companies with a turnover of less than Rs 1. Some of the insights revealed include: • Three segments — organic. companies are featured from 75 cities. with 45% of the companies operating at over 90% of their capacity. with Ahmedabad at 30% and Mumbai at 25% share topping the chart. The region is entirely represented by two states – Gujarat (58% of total West) and Maharashtra (42% of total West). Of the 384 companies profiled. Emerging Chemical SMEs of India will provide the right platform for SMEs. The report covers SMEs based in 10 chemical clusters across the country. On the strengths of low cost manpower. and a large number of such companies were located in the West and South of the country. The geographical spread of the industry mirrors the concentration of chemical companies in the country with the West region dominating with a 76% share. enabling them to become globally competitive. Around 11% companies are located in the North. a large 55% of the companies responded that fund availability was moderate. • The average capacity utilisation of the sample companies was around 85%. while private limited companies were prominently high in the Rs 100 – 500 mn turnover bracket. Location-wise. 9% in the South and 4% in the East. strong forward and backward linkages and a conducive policy environment. and on an average.5. • On the query of availability of funds. prospects for the Indian chemicals sector are bright.

The definition of small and medium enterprises (SMEs) in the Indian context has remained contentious until recently.000 mn turnover for auto component SMEs.5. 52 . The SME Insights section presents analytical findings drawn from the primary information collated by the various research conducted by the leading consulting firms. Based upon the Survey Organization (NSSO) And database. Emerging Chemical SMEs of India focuses on manufacturers of chemicals and allied products. competitive dynamics and the future outlook for the segment. Considering the challenges entailed in tapping financial information from a highly fragmented sector. As per the Micro. 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. Small and Medium Enterprises Development Act of 2006. 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.2)METHODOLOGY. multinational companies and subsidiaries of multinational companies. The report includes diversified companies operating in the chemical space and having business interests in other industries. 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. touches upon auto component of the country. the analysis has formulated a correlation between investment and turnover to arrive at a cutoff Rs 1. The report has excluded subsidiaries of large Indian business houses. growth prospects and production efficiencies. Companies with negative net worth and those declared financially sick by the Board for Industrial & Financial Reconstruction (BIFR) were eliminated. thus honouring the true Indian entrepreneurial spirit that the SMEs represent. trading companies have been excluded. 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. Other considerations included financial growth performance over the past two years.

53 . The sector has a share of 3% to the country’s total GDP. The industry includes a wide variety of products. such as finished drugs. the domestic chemical industry contributes about 17. giving an indication of the importance the sector holds in the country’s industrial growth. gases. The sector covers over 70. The industry has a weight of 14% in the Index of Industrial Production (Base year 1993-94 = 100). This sector. 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. dyestuffs. fertilisers and detergents. paints. pharmaceuticals.6% to the total output in the manufacturing sector. including basic chemicals and its products. Introduction The Indian chemical industry is among the established traditional sectors of the country.Gol As stated in the Annual Report of 2005-06 of the Department of Chemicals & Petrochemicals. plastics.5. dyes. petrochemicals. Its contribution to the revenue kitty of the Government is around 18-20%.3) DATA COLLECTION AND ANALYSIS. etc. polyester. paints. fertilisers. Sources: Department of Chemicals & Petrochemicals. forming part of the basic goods industry. The chemical industry is among the most diversified industrial sectors. pesticides. 13-14% to total exports and 8-9% of total imports into the country. A robust chemical industry is a harbinger of significant economic and strategic benefits to the nation. playing an integral role in the country’s economic development. from basic chemicals to research-driven specialised products.000 commercial products. accounting for around 33% of total consumption. paper. and provides the building block for many downstream industries. GoI. is a critical input for industrial and agricultural development. at different levels across the industry supply chain. synthetic rubber.

dyes. agrochemicals. low margin products. etc. Based on a more functional classification. Organic chemicals cover over half of all known chemical compounds. antioxidants. biocides. Inorganic chemicals comprise of alkalis. pigments. corrosion inhibitors. drugs. additives. Specialty and fine chemicals are low volume.. Industry structure The chemical industry can be broadly classified into two segments – organic and inorganic chemicals. etc. Regional concentration of the basic chemicals industry 54 . for the chemical industry. dyes and dyestuffs. high volume. cosmetics. Gol This report largely focuses on basic chemicals. pesticides and fungicides.300 bn). dyes & dyestuffs. The basic chemicals industry forms the largest part of the chemical industry and is characterised by capital intensive. organic and inorganic chemicals. GoI. which is slightly over 1% of the global production. In world ranking. which can be further divided into alkalis. high margin in nature. and includes petrochemicals. specialty and fine chemicals. cutting fluids. and excludes drugs & pharmaceuticals and petrochemicals. India stands 12th in terms of production. This classification is based on the product categorisation as provided by the Department of Chemicals & Petrochemicals. lubricants. Specialty chemicals include adhesives.The domestic industry’s turnover is estimated to have crossed US$ 30 bn (Rs 1. Sources: Department of Chemicals & Petrochemicals. It is estimated that nearly 70% of fine chemicals produced in India are used by the pharmaceutical and agrochemical industries. chemicals may be divided into basic.

in the case of heavy chemicals segment. in value terms have been for organic chemicals followed by dyes & dyestuffs. fuel availability is a determining factor. and hence there is a concentration of these companies around power plants. Imports and exports have also been rising at 7. Industry Sub-segments The annual production of basic chemicals between FY02-FY06 has been growing at 7% per year.Sources: Department of Chemicals & Petrochemicals. TN. Due to the regional concentration of chemical companies in certain pockets. implying that India has been a net exporter of chemicals. while the largest export item in value terms is also organic chemicals and chlor-alkali chemicals. The other major producing states include UP. on the largest imports. As per the Department of Chemicals. especially inorganic chemicals. largely due to the proximity to raw materials and ports. State-wise Capacity & Production of Major Chemicals(‘000 MT) 55 . which contributes 9%.25% and 37. followed by Maharashtra. while consumption has been rising at 5% per annum. On the other hand.Gol Though the chemical industry is spread across the country. logistics costs for the industry have tended to become a significant position of total costs. MP and Punjab. there is relatively a high concentration along the west-coast.6% respectively. Gujarat alone is estimated to contribute around 53% to the total production in the country.

Hence. Caustic soda. 56 . glass. dyes. newsprint. pesticides industries. soda ash and chlorine are products of this industry. soaps & detergents. energy costs form a key determinant of the profitability of the industry. viscose. textiles and pharmaceuticals. water treatment. is a volume driven.Gol Chlor Alkali Chlor alkalis. paper & boards.Sources: Department of Chemicals & Petrochemicals. low margins industry and accounted for around 72% of the total production in FY06. the largest segment of basic chemicals produced in India. Chlor alkali companies are largely concentrated along the west coast due to the availability of salts. to a large extent. pharmaceuticals. to name a few. a key raw material. The scale of margins for alkalis. depends upon the levels of industrial activity in sectors such as metals. forming the basic building block for the chemical processing industry. Being a capital intensive sector. the sector is largely dominated by big players. End-users of this segment include aluminium. textiles.

with production in FY06 touching an estimated 5. 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. This is one of the few industries where supply exceeds demand. Department of Chemicals & Petrochemicals. Performance of Chlor Alkali Chemicals(‘000 MT) Note: @ = Production + Imports Exports Source: Annual Report 2005 – 2006.Gol The Chlor alkali segment has been witnessing a robust 6% growth in production since FY02. while imports are rising at close to 6% per year.Sources: Department of Chemicals & Petrochemicals. thus having tremendous potential for exports. GoI Organic Chemicals 57 . the sector has been a net exporter. Exports of chlor alkali have been growing at 52% annually since 2001.5 mn tonnes. Technology has played a key role in this segment in adopting better production techniques. Since FY03.

5 mn tonnes. while between FY02-FY05 production grew at an impressive 7%. Acetic acid. with a 66% jump in value terms to Rs 5. As a result. This rise in exports can be attributed to the significant value-addition to the Indian product list. especially in the drugs and pharmaceutical segments.7 bn. titanium dioxide and red phosphorous. calcium carbide.Gol During FY06. and is dominated by medium and small players. Being largely a technology driven segment. Exports of organic chemicals have been impressive. R&D forms a considerable part of the manufacturer’s costs. both in terms of value and volume. with specialised focus in particular product segment. 58 . However. Inorganic Chemicals This segment comprises of products such as aluminum fluoride. sodium chlorate. exports grew by 55% while imports went up by 6% annually in quantity terms. 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. products like methanol are mainly imported into India. production of organic chemicals is estimated to have increased by 2% to 1. most of which are knowledge driven. exports of organic chemicals rose by 36% in volume terms to 63 thousand tonnes. etc. pesticides. most of which are used in drugs. due to price competitiveness. The domestic market forms a large part of the consumer base for the XVI industry. formaldehyde. etc. saw a rise of 26% in value to Rs 12. This segment too is concentrated in Western India. nitrobenzene. During FY05. carbon black.3 bn during this period. methanol. This segment produces a large number of products and combinations thereof. This segment has the largest number of products classified under it. Between FY02-FY05. Sources: Department of Chemicals & Petrochemicals. although dropped by 6% to 561 thousand tonnes in volume in FY05. citric acid.Organic chemicals form the second largest segment of the chemical industry. Imports. etc are part of this segment. potassium chlorate. phenol. This sluggish rate of growth has been persisting since FY05.

this segment accounted for 7% of total chemical production in India. Department of Chemicals & Petrochemicals. Sources: Department of Chemicals & Petrochemicals.End-users of these chemicals include manufacturers of soaps & detergents. In 2005. implying the highvalue imports by domestic players. fertilisers and alkalis. The inorganic chemicals sector is the fastest growing sub-segment. GoI Pesticides 59 . and the value addition to the products. Performance of Inorganic Chemicals (’000 MT) Source: Annual Report 2005 – 2006. and therefore availability of raw materials is the key determinant for the development of the industry. Exports of inorganic chemicals too have been rising by over 50% annually since FY02. Imports have been erratic and on the decline in volume terms. glass.Gol Inorganic chemicals are manufactured by using naturally occurring minerals. During FY06 production is estimated to have risen by 7% to 544 thousand tonnes. 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.

which also helps to hedge the risk of weather conditions. Malaysia and Singapore. UK. India is the second largest manufacturer of agrochemicals in the world with 165 pesticides registered in the country. a weedicide. Although most of the exports have been undertaken by MNCs through their established distribution channels across the globe. a large number of small and medium players are associated with the production. which has played an almost revolutionary role in the Indian agricultural sector. accounting for nearly 25% of the world’s production. This segment is also a knowledge driven segment and R&D plays an important role. According to estimates. Some key export destinations for India include US. with more than 60 technical grade pesticides being manufactured indigenously by 125 producers consisting of large and medium scale enterprises. exports have been one of the growth enablers for this sector. and indirectly to monsoons. South Africa. including about 10 multinational companies. Netherlands.000 tonnes. However. Nonetheless. which typically consumes the highest proportion of pesticides.Pesticides are one of the most important constituent of the agro-chemicals sub-segment.6% to Rs 5. Use and production of pesticides is directly related to the crop situation. Spain. exports of pesticides grew by 9% to 22. Indian players have also shown competence in select product segments. India is also a dominant producer of Isoproturon. Cash crop producers are the major consumers of pesticides. However. and more than 500 pesticide formulators spread all over the country. production of pesticides dropped by 12% to 82. Sources: Department of Chemicals & Petrochemicals. Bangladesh. It has witnessed consolidation over a period of time and the presence of MNCs has been expanding through increased acquisitions of local players. Belgium.180 mn. France. unit realization remained under pressure and fell by 9% thus leading to a decline in the export value by 1. distribution and marketing of agrochemicals. During FY06.Gol India has one of the most dynamic generic pesticide manufacturing base. During FY05. India 60 .000 tonnes mainly due to lower intake of pesticides in the cotton crop.

including paints. Performance of Pesticides(’000 MT) Source: Annual Report 2005 – 2006. sales of a significant proportion which are to traders and not to end-users. India today accounts for 6% of total world production of dyes. ink. imports went up by 21% to 15. textiles. During FY06.meets most of the domestic requirement of pesticides and imports are limited to only few innovative products. The reason for this is that apart from lack of necessary sales and distribution infrastructure. GoI India has lately emerged as a global base for generic agrochemicals. As per data available from the Department of Chemicals & Petrochemicals.56 bn in value during this period. leather. the dyes and dyestuff industry has come a long way. their performance is critically linked with that of their end-users’ performance. EU. In contrast. Department of Chemicals & Petrochemicals. Performance of Dyes & Dyestuffs (’000 MT) 61 . However. etc. From being an importer and distributor during the 1950s.000 tonnes. The textile industry is the largest consumer for this segment. exports of dyes and dyestuff witnessed a fall of 7% during FY05 to 112. being intermediate suppliers. Dyes and Dyestuff Dyes and dyestuff finds application in a range of industries.000 tonnes in volume and a drop of 6% in value to Rs 2. A large number of manufacturers in this segment are small and medium scale players. companies have yet to obtain relevant product registrations to enable direct sales.000 tonnes in volume and by 20% to Rs 3. Africa. accounting for nearly 80% of total demand. plastics. etc.27 bn. and Indian dyes are exported to the East Asia. production of dyes grew by 4% to 30.

(b) Integration along the value chain The industry participates in different stages of the value chain by producing intermediates and finished goods. (d) Outsourcing and contract manufacturing On the strength of low-cost production and world-class technology. strong forward and backward linkages and conducive policy environment. 62 . In fact. This has led to higher utilisation of capacity and revenue generation for the participants. growing competition in select chemical segments has forced the industry to scale up production. a strong economic growth is an important factor for sustaining demand for the chemical industry. the per capita consumption of most of the finished products under this sector is far below the world average. In fact. which. This makes integration of processes easier. (c) Focus on R&D Specialty and fine chemicals are essentially a knowledge-based industry. During the past few years.Source: Annual Report 2005 – 2006. This has led to many new products being introduced in the market. large domestic market. Some key strengths of the sector that can drive growth for the industry include low cost manpower. Considering the vastness of this sector. inter-alia. GoI Key Strengths & Drivers The chemical industry forms the backbone of the Indian manufacturing base. thus boosting demand. India is being looked upon as a preferred destination for outsourcing and contract manufacturing. giving a hint to the potential growth for the industry. which requires sustained investment in R&D. some of the common growth drivers that could be identified for the sector include: (a) Macroeconomic factors Being largely an intermediate product. Higher consolidation and capacity building has driven growth. Department of Chemicals and Petrochemicals. the chemical industry has witnessed a rise in R&D and technology up-gradation. requires backward or forward integration in some cases.

the industry faces some key challenges. industry and academicians. like roads.4) FINDINGS SME Insights The small and medium enterprises. rail and ports are other detrimental factors. However. marketing. have been the focus of banks. (d) Dumping Growing international competition and low customs duty on some of the chemicals have led the dumping of certain chemicals in domestic industry. For this exercise. etc. 5.The Indian chemical industry today is emerging from a protected environment into highly competitive global market. especially heavy chemicals. which have provided over 85% of the information sought. preferences. Notably. 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. it still lags behind international standards. This study aims to draw a profile of how small and medium companies operating in the chemical space function. most of the cases related to anti-dumping duty in India relates to chemical sector. (a) Power costs Chemicals. (c) Infrastructure Poor infrastructure. Some key characteristics of the sample of 271 companies are: 63 . which form the backbone of India’s manufacturing sector. where technological changes are rapid and needs continuous up-gradation and innovation. 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. we present here some insights that have emerged from our study. Volatility in power supply and prices of crude oil has been impacting the margins of the chemical companies. are power intensive sectors. we have considered a sample of 271 companies. (b) Technology Although India has shown remarkable improvement in technological innovation. institutions. Through this primary research undertaken by the leading consulting firms. we have attempted to chart their operational structure. efficiency parameters. Chemical sectors are one. Regional concentration of the chemical industry requires better infrastructure and logistics to reach across the country. and sustained supply of power is imperative. In these changing circumstances. business practices.

Turnover A large number of companies. around 49% of the companies in the sample were established prior to 1990. private limited companies 34% and public limited companies 11%.5% in the East. • Depicting the long-established nature of the industry. had a turnover of up to Rs 100 mn. partnership firms 25%. 8.4% companies are located in the North. It was observed that public limited companies had a dominant presence in the Rs 500 – 1000 mn bracket. • The total sample is from 15 states. • Around 89% of the companies in the sample are small scale enterprises with investments less than Rs 50 mn in plant and machinery. while private limited companies were prominently high in the Rs 100 – 500 mn turnover bracket. The rest are medium sized enterprises. • In terms of IT penetration.2% each.5% of the total sample. while only 9% began operations post-2000. close to 72%. while another 16% had a turnover of between Rs 100 – 250 mn. the small companies in this sample of chemical companies did not show any particular ownership pattern. organic companies at 37% and inorganic 28%. Representation of Alkali and Pesticide companies is 1. Another 42% began operations during the 1990s. around 39% of the companies have a website. • Close to 77% of the companies in the sample operate in a single segment. Chemical sub-segments 64 . partnership and private firms. The Organic and Inorganic manufacturers constitute 65% of the sample.5% in the South and 5. Unlike other SME-dominated segments. Around 11. The next largest segment is Dyes and Dyestuff accounting for 22%.• Ownership pattern of companies include: proprietary firms 30%. and were equally represented by proprietary. The companies in the West are entirely from Gujarat and Maharashtra and account for 74. the highest coming from the Western region.

Among the dyes & dyestuff manufacturers that were exporting their products. partnership companies accounted for 31%. inorganic and dyes & dyestuff companies dominate the sample. Nearly 68% of these companies were exporting their products. Exports Nearly 61% or 165 companies in the sample were exporting their products. The organic.Though alkalis forms the largest segment of the basic chemicals industry in terms of production. The three segments — organic. Of these exporting firms. 65 . private limited were 29% while proprietary firms accounted for 24%. the major exporters were organic chemical manufacturers. accounting for 87%. Branding Around 38% or 102 companies in the sample sold their products under a brand name. In terms of chemical sub-segments. with over 50% of these companies manufacturing organic as well as inorganic chemicals. followed by dyes. followed by proprietary firms at 25%. Around 63 companies were operating in more than one segment. On an average. inorganic and dyestuff — are the key growth drivers of the basic chemicals industry. 7% of the companies were totally export oriented. alkalis and pesticides. Around 39% of the companies were exporting over 50% of their produce. around 60% of the companies in these segments were exporting their products. Among these brand conscious companies. Nearly 41% of the companies exporting were private firms. and nearly 43% of the exporting companies have quality certifications. their representation in the sample was very small. a significant 66% were exporting more than 50% of their products. Among these companies operating in multiple segments. a large number of dyes & dyestuff manufacturing companies were also manufacturing organic chemicals. partnership firms having a share of 22 and public limited companies 12%. with 27% of them exporting more than 50% of their total production. inorganic chemicals.

while 12% with private sector and another 3% each with cooperatives and MNCs. another 9% in the North. Hindrances in Business In terms of concerns expressed by the companies for business growth. Nearly 70% of such companies were located to the West. On the query of availability of funds. Availability 66 . lack of institutional support was highlighted by maximum number of companies.Funding Banking preference of companies was largely rooted with the public sector banks with 72% of the companies banking with PSUs. and 4% each from East and South. Another 35% felt that it was easy to acquire funds while 5% of the companies expressed difficulty in acquiring funds. The remaining 10% were dependent on internal resources to meet their working capital requirements. The other major concerns were related to marketing and infrastructure. a large 55% of the companies responded that fund availability was moderate.

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. • Low production costs in terms of labour. in terms of pre-empting the cyclical nature of operations. this segment. 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. Growth in the pharmaceutical sector in turn implies impressive growth for the organic chemicals segment. These measures will help the sector to augment R&D capabilities. such as increased globalisation of markets. like textiles.of facilities for quality checks and hindrances in having an assured market was also brought forth by the companies. Some of the end-user industries are also growing rapidly and are emerging as outsourcing hubs for the global market. societal demand for improved environmental performance and the need for increased profitability and productivity. Also. 67 . pharmaceuticals. industry and services. ensures a sustained demand for chemicals in future. R&D spending as well as building up of a skill base. which illustrates the maturing technical and chemical synthesis skills of Indian players. Moreover. Nevertheless.5) CONCLUSIONS AND RECOMMENDATIONS. FUTURE PROSPECTS. following the future trend and opportunities in the field of CRAMS. driven by agriculture. 5. etc These factors have led to increasing investments. Big-push from the Pharmaceutical sector The pharmaceutical sector is a significant growth driver for the chemical industry. 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. 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. and will continue to be an adjunct to the chemical industry. Indian pharmaceutical players have shown impressive progress on filing new chemicals entities with foreign regulatory agencies. Going forward. However. especially exports is set to witness high growth in the near term. The current growth pattern of the country. technology may play a significant role in empowering the chemical industry to meet future challenges. the proposed exemption of customs duty on coking coal would also provide respite to the fuel intensive sectors. considering the central role it plays in the growth of the manufacturing and agriculture sector of the country. Prospects for the Indian chemical industry are bright. resources. the industry also faces considerable challenges in a changing environment.

In fact. which will help them to stay and grow in the market. 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. 68 . the growing presence of MNCs will impact the small and medium players.Pesticides segment may witness further consolidation. however. it will simultaneously open up opportunities in terms of contract manufacturing and research. the strength of domestic pesticide players lies in their regional presence and understanding local needs. domestic players may give stiff competition to MNCs MNCs have expanded their presence in the country by introducing innovative products. Although. However. process integration and acquisition. few big domestic players have shown their competitive skills in the domestic and international market by pushing their superior products. whether organized or unorganized.

0) TEXTILES 69 .6.

The regional representation of companies in the report suitably reflects the geographical concentration of the Indian textile and clothing industry. Small and Medium Enterprises Development Act of 2006. Around 16% of the profiled companies are into spinning. The report has profiled 621 companies with a turnover of less than Rs 1.000 mn turnover for auto component SMEs. around 63% of the companies are only into manufacturing. private limited companies 27% and public limited companies 18%.1) EXECUTIVE SUMMARY Emerging Textile SMEs of India attempts to provide a platform to the Textile SMEs. 16% of the companies are relatively new and have begun operations post-2000. as many as 350 companies provided us sufficient data points to enable a statistical analysis. 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. Considering the challenges entailed in tapping financial information from a highly fragmented sector.2) METHODOLOGY The definition of small and medium enterprises (SMEs) in the Indian context has remained contentious until recently. followed by 19% from Panipat) 144 from the West (80% registered in Mumbai region.000 mn. the major industrial pockets of textile manufacturers in the country. 73% of companies have a single manufacturing facility while 27% operate with 2 or more plants. Emerging Textile SMEs of India will provide the right platform for SMEs.6. partnership firms 31%. in terms of IT penetration. 20% in the clothing segment and 15% are into made-ups. Of the 621 companies profiled. and SMEs are expected to play a critical role. proprietary firms are 24%. followed by 15% from Coimbatore). followed by 10% each from Ahmedabad and Surat) and 226 from the South (23% from Tirupur. 42% of the companies have a website. 11% into weaving. the analysis has formulated a correlation between investment and turnover to arrive at a cutoff Rs 1. The profiled companies are from 18 states and 2 union territories. so as to facilitate their interface with potential global partners and buyers. No response was received from companies in the North-eastern states. while 37% are engaged in manufacturing as well as trading. 70 . 88% are smallscale firms and 12% are medium scale. As per the Micro. Some of the insights revealed include: in terms of ownership pattern. 6. Of these. enabling them to become globally competitive. around 70% of the companies in the sample began operations during the 1980s and 1990s. The list consists of 232 companies from the North (31% registered in Delhi-Noida region. There are 62 companies that have integrated operations and function in more than one sub-segment. The textile and clothing industry is expected to continue its high-growth period in the near future.

enjoying considerable demand in the domestic as well as global markets. touches upon auto component of the country. for its livelihood. investment and employment. fibres to processing and finished goods. Based upon the Survey Organization (NSSO) And database. a vast pool of skilled and unskilled personnel.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. 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 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. Trading companies have been excluded. 18% of employment in the industrial sector. This is a traditional. The US market 71 . Companies with negative net worth and those declared financially sick by the Board for Industrial & Financial Reconstruction (BIFR) were eliminated. 6. The report has excluded subsidiaries of large Indian business houses.395 bn and currently global trade in textiles and clothing stands at around US$ 360 bn. is the second-highest employer in the country. India vis-à-vis Global Textiles The global textile and clothing industry is estimated to be worth about US$ 4. The SME Insights section presents analytical findings drawn from the primary information collated by the various research conducted by the leading consulting firms. Its importance is underlined by the fact that it accounts for around 4% of Gross Domestic Product. from yarns. A strong raw material production base.Emerging Textile SMEs of India focuses on manufacturers of textile products across the value chain. and 16% of the country’s total exports earnings. The report also includes diversified companies operating in the textiles and readymade garments space and having business interests in other industries. thus honouring the true Indian entrepreneurial spirit that the SMEs represent. 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. well-established industry. With direct linkages to the rural economy and the agriculture sector. competitive dynamics and the future outlook for the segment. 14% of industrial production. multinational companies and subsidiaries of multinational companies. The sector employs nearly 35 million people and after agriculture. it has been estimated that one of every six households in the country depends on this sector. robust. Other considerations included financial growth performance over the past two years. 9% of excise collections. cheap labour. growth prospects and production efficiencies. good export potential and low import content are some of the salient features of the Indian textile industry. either directly or indirectly.

finishing. made-ups and a variety of garments. 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. The Indian textile industry is valued at US$ 40 bn with exports totalling US$ 19 bn in 20072008. silk and wool. accounts for 64% of clothing consumption. At the same time. acrylic and polypropylene (PP) as well as multiple blends of such fibres and filament yarns such as partially oriented yarn (POY). The industry structure is fully vertically integrated across the value chain. The type of yarn used is dictated by the end product being manufactured. It is well-established that India possesses a natural advantage in terms of raw material availability.is the largest. the share of cotton and manmade fabric was 60% and 27% respectively. This represents a clear shift in consumer preferences towards man-made fabric. • 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. and in combination with the EU nations. non-integrated spinning. nylon. while the non-cellulosic industry is under the administrative control of the Ministry of Chemicals and Fertilisers. India’s Textile Industry Structure Cotton textiles continue to form the predominant base of the Indian textile industry. The fibre and yarn-specific configuration of the textile industry includes almost all types of textile fibres. The cellulosic fibre/yarn industry is under the administrative control of the Ministry of Textiles. In 1995-96. estimated to be growing at 5% per year. comprising handlooms. encompassing natural fibres such as cotton. and comprises small-scale. after China. India is the largest producer of jute. synthetic / man-made fibres such as polyester. with a share of 61% in world loomage. though other types of fabric have gained share in recent years. the third-largest producer of cotton and cellulosic fibre/yarn and fifth-largest producer of synthetic fibres/yarn. it is a highly fragmented sector. weaving. extending from fibre to fabric to garments. the second-largest producer of silk. India’s presence in the international market is significant in the areas of fabrics and yarn. 72 . More recently. The export basket includes a wide range of items including cotton yarn and fabrics. jute.72% of global textile and clothing exports. The unorganised sector forms the bulk of the industry. cotton fabrics accounted for 46% of the total fabric produced in 2007-08. man-made yarn and fabrics. including handlooms. the Indian textile industry is ranked second. wool and silk fabrics. while man-made fibres held a share of 41%. India’s textile exports account for just 4. and apparel-making enterprises. At the global level. 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. The Man-made textile industry comprises fibre and filament yarn manufacturing units of cellulosic and non-cellulosic origin. viscose.

weak marketing links. 73 .7% respectively. with an installed capacity of 34. weaving and processing activities are carried out under a single roof. The sector accounts for 63% of the total cloth production in the country and provides employment to 4.815 mn people. The organised mill sector consists of spinning mills involved only in spinning activities and composite mills where spinning.940 mn kg in 1999. Nonetheless. The handloom sector is the second-highest employer in the country after agriculture. Being the largest manufacturer of fabric in the country.6% respectively. the powerloom sector produces a wide variety of cloth. silk and handspun yarn. while the non-cellulosic industry is under the administrative control of the Ministry of Chemicals and Fertilisers. recording growths of 2.00 to 4.714 million sq mtrs in 1999-2000 to a projected 1. Man-made yarn has driven much of this.000 rotors. unorganised production systems. The cellulosic fibre/yarn industry is under the administrative control of the Ministry of Textiles. there were 1779 cotton/man-made fibre textile mills in the organised sector. albeit less impressively.3% in the last five years. Knitting and hosiery units account for around 17% of fabric production in the country. 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. khadi and carpet manufacturing units. and also readymade garments. there are 1. since 2000. overall stagnation in demand and competition from the powerloom and mill sectors. showing a robust growth of 4. 218 were composite mills which accounted for just 3% of total fabric production. declining at a rate of 2% per annum. hosiery and knitting. Yarn production has increased from 3. overall cloth production in the country has been growing at 3. Trends in Production Yarn and fabric production has been growing annually at 1.4% and 0. with growth driven largely by the powerloom sector. the number of sick units in the organised segment has also been growing rapidly. from 500 mn sq mtrs in the 1950s. representing an annual growth of around 4%.powerlooms. As in January 2008. The competitiveness of composite mills has declined in comparison to the powerlooms in the decentralised segment.400 mn kg in 2007-08. The sector accounts for 13% of the total cloth produced in the country. Spun yarn production and the cotton yarn sector have also grown. Of these. India had about 6.493 million sq mtrs in 2007-08.000 knitting units registered as producers or exporters and most of these units were registered as small-scale units. not including wool. As a result. with 97% of fabric production happening in the unorganised segment.9% and 2. According to the Ministry of Textiles. The sector is weighed down by several problems such as obsolete technology.000 units. XV productivity.1 million spindles and 395. both grey as well as processed. The production of handloom fabrics had gone up to 4700 mn sq mtrs in 2007.923 mn powerlooms in the country distributed over 430. low The Man-made textile industry comprises fibre and filament yarn manufacturing units of cellulosic and non-cellulosic origin. According to data available for the year 2000.5% per annum since 2000. Cloth production in the mill sector has fallen from 1.

The slowdown began since 2003-04 and have been on the decline since. which together accounted for over 75% of demand. fabric and made-ups -. In 2007-08. GoI XVI were worth US$ 4. post the termination of the MFA. all segments in the textile industry. GoI Source: Ministry of Textiles. Exports of cotton textiles -. Growth in the 100% non-cotton segment touched 5%.5% in 2007-08.constitute over 2/3rd of total textiles exports (excluding readymade garments). Between 19992000 and 2002-03. Exports to the US have further increased since 2005.5 bn. and in Nov 08. total cotton textile exports Source: Ministry of Textiles. a total of Rs 916 bn has been disbursed for technology upgradation. In 2003-04 and 2007-08. Technology Mission on Cotton. The jump in 2007-08 exports has been largely due to the elimination of quotas.5 billion. including handicraft carpets. Man-made textiles exports have witnessed a decline of 2. Major export destinations for India’s textile and apparel products are the US and EU. followed by cotton fabric at 1.75 bn. which were worth US$ 3.which include yarn.Under the TUFS scheme. -. the growth in RMG exports was 8. recording a 22% growth year-on-year. This segment has benefited significantly with the termination of the Multi-Fibre Arrangement (MFA) in Jan 08. production recorded a robust 9% growth compared to the corresponding period in the previous year. GoI Fabric production has been growing at 2. According to the Ministry of Textiles. Overall. textile exports during fiscal 2007-08 stood at around US$17. Trade Scenario According to the provisional DGCI&S data. independent powerloom sector. Investments Investments in the textiles sector can be assessed on the basis of three factors: • Plan schemes such as the Technology Upgradation Funds Scheme (TUFS). driven primarily by the smallscale. in 2007-08. Analysis of trade figures by the US Census Bureau shows that post-MFA.9% annually between 2000 and 2008. etc. with a total estimated investment of Rs 134 bn 74 . imports from India into the US have been nearly 27% higher than in the corresponding period in 2007-08.Source: Ministry of Textiles.5% and blended fabric at 0.5 bn. Except for man-made textiles.3%. man-made textiles exports were growing at around 30% per annum.5% and 4.the first year since the phasing out of the quota system in the global market.1% respectively. There are around 26 Apparel Parks in eight states in India. wool and silk. this segment accounts for 26% of total textile exports. total RMG exports grew by 29%. accounting for a considerable 45% of total textile exports. implying a growth of 27% over the exports in 2007-08. Readymade garments (RMG) is the largest export segment. have recorded a growth in exports during 2007-08 . Apparel Parks. touching US$ 7. Fabric production touched a peak 47000 million sq mtrs in 2007-08.

The scenario changed after 1995.67 bn in investment is expected by 2008.29% of total FDI inflows in the country.• Industrial Entrepreneurship Memorandums implemented from 1992 to Aug 08. policies were drawn to provide employment with a clear focus on promoting the small-scale industry. The year 2000 was also marked by initiatives of setting up apparel parks. dealing with removal of raw material price distortions. pragmatic exit of idle mills. 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. 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. 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. Though significant investments are being made in the textiles segment. The new Textile Policy of 2000 set the ball rolling for policy reforms in the textile sector. while only 25% is expected in processing and garment units. 2002 and 2003 saw a gradual 75 . Source: Ministry of Textiles Government Initiatives The Government’s role in the textile industry has become more reformist in nature. cluster approach for powerlooms. which account for 1. the bulk of them are in the spinning and weaving segments. more than two-thirds is expected in the spinning and weaving segments. Of this. modernisation of outdated technology etc. 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. Initially.

33% in the South.4) FINDINGS SME Insights This study aims to draw a profile of how small and medium companies in the textiles space function. partnership firms 31%. The North and South have maximum representation. except from those based in Orissa and Madhya Pradesh • On the basis of investments in plant and machinery.2 mn weavers from 0.reduction in excise duties for most types of fabrics while 2004 offered the CENVAT system on an optional basis. the Government of India initiated a reforms process which aimed at promoting large capital investments. yarns. mirroring the low capital intensive nature of the industry (Figure 01) • In terms of the textiles industry sub-segments. business practices. preferences. The Union Budget of 2005-2006 announced competitive progressive policies. Around 37% companies are located in the North. we have attempted to chart their operational structure.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. Vision 2015 also proposes the creation of an additional 15 million jobs through this initiative. etc. 16% into garmenting. marketing. 26% in the West and 4% in the East • The sample of 350 companies has representation from all textiles clusters across the country.02 mn initially • Reduction in customs duty from 20% to 15% for fibres. 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. whose salient features included: • A major boost to the 1999-established Technology Upgradation Fund Scheme for its longevity through a Rs 4. 18% of the companies are into weaving. proprietary firms are 24%. 8% into printing and 2% in ginning (Figure 02) 76 . 11% each into knitting and made-ups. 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. Additionally. 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. For this quantitative exercise. fabrics and garments. a sample of 350 companies was considered. pruning cumbersome procedures associated with the tax regime. intermediates. efficiency parameters. etc. 6. 12% each into spinning and dyeing. around 92% of the companies are small scale enterprises. the requirement being that at least 80-90% of the information sought has been provided. Some key characteristics of the sample of 350 companies are: • In terms of ownership pattern.

77 . Over 55% of the companies have an annual turnover of less than Rs 100 mn. Of the remaining companies in the bracket of Rs 500 mn and Rs 1.000 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. with investments of less than Rs 20 mn. 43% companies are into cotton and cotton based products. Another significant 35% were earning over Rs 100 mn but less than Rs 500 mn. Turnover The dominance of small-scale enterprises was largely reflected in the sample. 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. the public limited and private limited companies dominated with a share of 52% and 26% respectively. 16% each in man-made and silk. 42% of the companies have a website.• Similarly on the basis of raw materials used. 13% in blended and 10% use wool • Around 63% of the companies are only into manufacturing.

the southern region showed a higher proportion of companies falling in the Rs 250 mn and above turnover bracket. In terms of market access. with over 70% of the companies necessarily exporting to these countries. (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. Exports Around 234 companies. were exporting their products. The private and public enterprises were mostly in the Rs 500 mn and above turnover range. 114 companies were 100% exporters with many of them exporting directly 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. indicating they are part of the global value chain.In terms of the regional spread of these companies. The western region had a reasonably proportionate share of companies in the various revenue brackets. The average capacity utilization among exporting companies was relatively higher compared with those selling only in the domestic market. 27% of the companies directly export 100% of their output to foreign clients. The major export destinations were the US and Europe. The northern region had a high share of small companies. The companies from the Western region were predominantly private limited companies. (Figure 03) Ownership Structure Though no distinct ownership structure was evident. Of the exporting companies. Another 20% of the companies export only through trading houses. On an average. only 35% have shown to have any kind of quality certifications. The remaining sell partly through trading houses and direct sales. or 67% of the sample. Of these. Another 53% of the 234 companies export 90% of their total output.

at least 71% of their produce. Regionally. that were exclusively into weaving and garmenting held a share of 23% and 18%.endorsing the industry view that the bigger companies are able to fulfill more orders. which on an average exported 82% of their produce. it was found that companies exclusively into made-ups exported. Companies in this sample. on an average. respectively. 79 . the South-based companies reflected higher capacity utilization and were on an average operating at 86%. over 90% of their output. (Figure 05) In terms of the various sub-segments in the textile industry and their exports. In terms of ownership. from yarn making to garmenting. The pre-dominant exporters were garment and fabric manufacturers having a share of 39% each. 2% of the companies were operating across the value chain. The other major segment was home furnishings. the medium scale enterprises having turnover between Rs 500-1000 mn showed higher average capacity utilisation of an average 91% . followed by garment firms. (Figure 06) On the basis of size. partnership companies constituted a significant 32% of those operating at more then 90% capacity. Capacity Utilisation Approximately 59% of the companies were operating at 80% and above of their installed capacity. Among these.

4 33. Industrial textile manufacturers were more in number from the Western region.7 Home Furnishing 66.7 1. with a share of 34% and 31% respectively. Yarn manufacturers were concentrated mostly in the South.6 25.4 Garment 42.2 80 .4 27. representing 59% of the yarn manufacturers. (Figure 07) Fabrics 31. (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. On an average.6 1.9 7.1 22. the garment firms being the most hopeful and expecting a 40% increase in sales.1 19. The other sub-segments that are expecting to do well are manufacturers of fabric and made-ups. Fabric manufacturers had a strong presence in the South and North India. the players were expecting an average growth rate of 32% for the next two years. representation of garment and home furnishings manufacturers in the sample was largely from the North.4 25. In terms of the finished goods.8 9.Figure 06 Top Regional Products Of the companies engaged in the manufacture of home furnishing products. 67% were located in North India.1 13.3 Yarn 14.3 58.

53% are into yarn and fabric manufacturing. The Western region showed higher growth compared with the other regions. Figure 08 Top 81 . 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. Of these.In the last two years. the average growth for all companies in the sample was an average 28%. In terms of ownership. 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.

Private Banks were next in preference for these companies. Cooperative banks and MNCs were least preferred. prospects are bright. over 50% of these companies being small scale enterprises with turnover less than Rs 100 mn.5% share. however with only a 13. South and East. Some prerequisites to be included in the globally competing textile industry are: • Imbibing global best practices 82 . There were 4% companies which utilized internal resources to meet their finances.5) CONCLUSION AND RECOMMENDATIONS FUTURE PROSPECTS Expectations are high.Funding Funding Of the companies in the sample. but capitalising on the new emerging opportunities will be a challenge for textile companies. These companies were mostly from the North. This concern was mostly highlighted by the south-based companies. Almost 28% of the companies raised concerns regarding labor issues and an equal proportion highlighted lack of institutional support as their priority concern. The garmenting and weaving segments mainly showed labour as their principal concern. 6. 29% of them perceive lack of infrastructure as the biggest hindrance to growth. 75% met their funding requirements from nationalised banks. (Figure 09) Hindrances to growth Of the companies in the sample. Most respondents felt that availability of funds for future plans and working capital requirements was moderately difficult.

by the larger textile companies has been prominent among Indian companies. Readymade garment exports were worth US$ 9 bn in FY08 and will cross US$ 20 bn by the end of 2015. The Indian textiles industry has established its supremacy in cotton based 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. who are trying to achieve sizable scales in order to win orders from the large retailers in the US and EU. keep up with delivery schedules and meet their growing demand.have prompted several companies to move up the value chain into the finished products segment. Consequently. They have clear preferences for companies with integrated design. Several companies that are engaged in fabric manufacturing. and Ambattur Clothing taking over Celebrity Fashions. where they can avail of duty concessions and reduce export lead-time. 20% in Thailand. assuming a conservative growth of 15% per annum. Another growing phenomenon observed among Indian textile companies is the setting up of manufacturing facilities in strategic regions outside India. A recent entrant is Siyaram. 28% in South Korea and 36% in Taiwan. are now keen to enter the readymade garments space. these countries have a wider base of exports and have done very well in the market for large volumes of uniform products. The changing preferences of Indian consumers -.• • • • Adopting rapidly changing technologies and efficient processes Innovation Networking and better supply chain management Ability to link up to global value chains. The readymade garment segment will be the principal driver of growth even in the domestic industry. According to estimates. Raymonds has set up a unit in Bangladesh to avail of the zero duty access to the EU. 18% in China.from buying cloth to readymade garments -. 83 . These two segments will be the key drivers of growth for Indian textiles. as compared to only 11% in Hong Kong. Domestic acquisitions are on the rise. while acquiring foreign assets is yet to gain traction.especially forward integration -. which launched its readymade garments range in Nov 06. process and manufacturing facilities. A study during the 1990s found that apparel firms Future Outlook XXXIII in India subcontracted 74% of their output. Acquisition is the most logical step towards integrating operations and building the value chain. investments in textiles are expected to touch US$ 31 bn by 2010. An interesting commonality in countries with successful garment exports is that they have a much lower level of sub-contracting than India. Global retailers prefer large-sized companies that can scale up capacities consistently. Most of the large textile companies have opted for an inorganic growth strategy to scale up operations. Some recent domestic acquisitions that have been executed in 2006 include KSL & Industries’ acquisition of Deccan Cooperative. following suit with other majors like Century Textiles and Raymonds. especially in the readymade garments and home furnishings segment. This trend is seen primarily among the large domestic players. Strategic Initiatives Business integration -.

Weaknesses of the Indian textile industry include fragmentation of the industry. 84 . but will be difficult to sustain in a globally competitive environment. sizable supply of fabric. The segment that is likely to be hit is weaving. delays in customs clearance and high transportation and input costs.The exports market will remain favourable for India till 2008. This will erode the viability of the hitherto protected powerloom and handloom operators numbering over 400. the Government will have to play a key role. To tackle these factors. India will become a major outsourcing hub for foreign manufacturers and retailers.For readymade garment SMEs. On the basis of these strengths. Infrastructure development. It will thus be essential for SMEs to align with these firms. the value-added segments of readymade garments. A possible remedy could be for these weavers to align with bigger players or integrate operations that would ensure off-take of their products. reforms in labour laws and significant policy support will be essential. sufficiency in raw material and spinning capacities. Nevertheless. that can ensure a market for their products and new orders. India’s key assets include a large and low-cost labour force. This will be the phase in which Indian textile companies will come under tremendous pricing pressures and tighter product delivery schedules. The fragmented industry structure has in the past been beneficial in generating employment. who have remained insulated from competitive forces so far. will move up the value chain into weaving.with composite mills and large integrated firms being their preferred partners. Implications for SMEs The new business dynamics have varying undertones across the value chain. The SMEs in the powerloom and handloom sector will face significant churn in the future. Spinning mills that account for 95% of the yarn and fibre production. Post 2008. this will mean inefficient units losing out eventually. This will be the most thriving segment in the industry and SMEs will play a key role. rising demand and preference for ready-to-wear outfits in the domestic market will sustain a large number of units in this sector.000. lengthMessages in this topic (1) y delivery times. home furnishings and made-ups will continue to grow. competition will become tougher. For fabric manufacturers in the unorganised segment. while the more efficient and dynamic ones aligning with manufacturers or buyers. when quota restrictions on China end.

0.) AUTOMOBILE COMPONENT INDUSTRY 85 .7.

128 from the west and 78 from the south. with strong potential for global impact. 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.000 mn. 86 . the production process lends itself to operations that can be divided and tiered.000 mn. Further. and SMEs will play a pivotal role in this critical growth phase. is that public sector banks are their principal lenders. considering the diverse nature of the industry. and have a turnover range of Rs 50 mn to Rs 535 mn. Emerging Auto Component SMEs of India will provide the right platform to SMEs. The list consists of 152 companies from the north. as revealed by our research. The auto component industry is expected to continue its high-growth period for at least another decade. 160 companies are small-scale firms with investments of less than Rs 50 mn in plant and machinery. enabling them to become globally competitive.2) METHODOLOGY. The sector has emerged among the fastest growing industries in the Indian economy. The Auto Component sector has tremendous potential to encourage entrepreneurship. The rest of the companies are medium scale and have a maximum turnover of Rs 1. The regional representation of companies in the report suitably reflects the concentration of the Indian auto component industry. We have covered companies from 17 states and 3 union territories. Of the 370 companies profiled. The number of small and medium firms profiled is in the proportion of 43:57. and promises a wide range of opportunities for SMEs. with few dependent on private sector banks.1) EXECUTIVE SUMMARY. and was therefore selected for profiling in the first report of the series. An interesting aspect of this industry segment.7. the major industrial clusters of auto component manufacturers in the country. 7. 70 companies are not members of any industry associations or trade bodies. Emerging Auto Component SMEs of India profiles 370 companies with a turnover of less than Rs 1. Of these.

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.000 mn turnover for auto component SMEs. multinational companies and subsidiaries of multinational companies.2 trillion. Dun & Bradstreet India (D&B India) has formulated a correlation between investment and turnover to arrive at a cut-off Rs 1. Companies with negative net worth and those declared financially sick by the Board for Industrial & Financial Reconstruction (BIFR) were eliminated. Other considerations included financial growth performance over the past two years. touches upon auto component of the country. As per the Micro. Overview of Auto Component Industry. Emerging Auto Component SMEs of India focuses on manufacturers of auto components. 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. 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. thus honouring the true Indian entrepreneurial spirit that the SMEs represent. The SME Insights section presents analytical findings drawn from the primary information collated by the various research conducted by the leading consulting firms. Considering the challenges entailed in tapping financial information from a highly fragmented sector. business rules are changing and liberalisation has had sweeping ramifications for the industry. The value in sourcing 87 . competitive dynamics and the future outlook for the segment. 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.3) DATA COLLECTION & ANALYSIS. trading companies have been excluded. The global auto components industry is estimated at US$1. 7. Based upon the Survey Organization (NSSO) And database. The report includes diversified companies operating in the auto component space and having business interests in other industries.The definition of small and medium enterprises (SMEs) in the Indian context has remained contentious until recently. The report has excluded subsidiaries of large Indian business houses. Small and Medium Enterprises Development Act of 2006. 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. Driven by global competition and the recent shift in focus of global automobile manufacturers. The Indian auto component industry has been navigating through a period of rapid changes with great élan. growth prospects and production efficiencies. 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.

Several large Indian auto component manufacturers are already gearing to this new reality and are in the process of substantially investing in capacity expansion.000 components. The entry of global manufacturers into India during the 1990s enabled induction of new technologies. India has become the outsourcing hub for several global automobile manufacturers. apart from supplying in the aftermarket. Bharat Forge. raw material availability. indicate there are over 400 large firms who are part of the organised sector and cater largely to the Original Equipment Manufacturers (OEMs). This in turn effectively acted as a catalyst to the local development of the component industry. new products. published by Dun & Bradstreet in 2008. India’s processengineering skills. Rico Auto and Subros. Today. approximately 20. These companies are in the process of making a mark on the global arena. 88 .auto components from India includes low labour cost. improved quality and better efficiencies in operations. Some leading manufacturers of auto components in India include Motor Industries Company of India. and some have already acquired assets abroad. 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. acquiring companies overseas and setting up greenfield ventures. Another 10. a number of players are also involved in job work and contract manufacturing. establishing partnerships in India and abroad. Within the unorganised segment.000 firms exist in the unorganised sector that operates in a tier-format. An average cost reduction of nearly 25-30% has attracted several global automobile manufacturers to set base since 1991. Government of India. Estimates by the Department of Heavy Industries. The Indian auto component industry is extensive and highly fragmented. listed 26 auto component manufacturers as top companies in India with a total turnover of US$ 3 bn. Industry Structure The total turnover of the Indian auto component industry is estimated at US$10 bn in 2008. Wheels India. technically skilled manpower and quality assurance. Sundaram Fasteners. Amtek Auto. have enabled reduction in manufacturing costs of components. applied to re-designing of production processes. Innovation and cost pruning hold the key to meeting the global challenge of rising demand from developed countries and competition from other emerging economies. Motherson Sumi. The India’s Top 500 Companies. The industry has the resources to manufacture the entire range of auto products required for vehicle manufacturing. R&D facilities and design capabilities.

Mahindra & Mahindra and TVS in the 1950s and 1960s laid the foundation for auto component manufacturers in the West and South.Source: ACMA The range of products manufactured. Industry Growth Production of auto ancillaries was estimated at US$13 bn in 2007-08 and has been growing at a robust 20% per annum since 2000. and integrating operations across the related area of specialisation. The market is so large and diverse that a large number of players can be absorbed to accommodate buyer needs. The regional base of auto component manufacturers is mostly concentrated in the West. In recent times. has negated any possible concentration of the market in a few hands. The set up of Tata Motors. and the demand emanating from global OEMs and Tier I manufacturers has opened new opportunities for the auto component industry in India. A large part of the spurious or grey market companies are in the unorganised sector. the auto component industry was solely dependent on the domestic automobile industry todrive the demand for ancillary products. local components having 25% with the balance 42% comprising of spurious market including re-conditioned parts. there are a select few large companies that have integrated their operations across the value chain. At the same time. with each broad product segment having a different market structure and technology. This growth in exports if sustained for another five years will see India’s auto components exports will touch US$ 8 bn by 2015 from the US$ 3. a bright outlook for the domestic 89 . This composition of the market however is undergoing radical changes with global outsourcing gaining momentum. Bajaj. However. 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%. North and South of India. Till the 1990s. exports has emerged as a significant driver of growth.5 bn at present. whilst the entry of Maruti during the 1980s created the base in the North. The key to competing in this industry is through specialisation by product-type. Exports of auto components have been strong growing at 24% per annum since 2000.This regional concentration of auto component manufacturers has been dictated by the emergence of automobile manufacturers in these regions.

From an import of US$ 250 mn in FY03. With less than 1% share in the global market. 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. Share of exports in total production has risen from 10% in 1997 to 20% in 2008. However. Some key characteristics of this sample include: 90 . In 2007-08. and have grown significantly since then. 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. Several global giants like Ford and Toyota have already set up base in India to source auto components. 7. Investments Since 2000. The composition of exports in terms of the proportion of OEM and aftermarket has also undergone a sweeping change since the past decade. having less than Rs 1. given the fast rising income levels with a rapidly growing middle and high income consumers. The small and medium enterprises segment has been a topic of intense deliberation among banks. financial institutions. The research began with the leading consulting firms reports association member directories and trade listings. 370 companies met the criteria set by D&B India. Of the responses received. While exports have been booming. there has been a sharp rise in imports of auto components as well. especially in the last three years. The changing perception of global auto makers is however fast altering this scenario. Of the profiled 370 companies.4) FINDINGS SME Insights. the paucity of authentic information on this segment has limited the estimation of value contributed by this integral constituent of India’s economy. The ratio of OEM to aftermarket has changed from 35:65 in the 1990s to 75:25 in 2008. This is a healthy trend. Outsourcing is fast catching up with domestic OEMs as well. and have been profiled in the report.000 mn turnover and other parameters. This database was further short-listed based on the criteria of being only manufacturing companies.automobile industry also offers significant growth potential. India has tremendous potential to emerge as a supply base. 332 were considered for the purpose of this quantitative exercise. These companies were contacted through various means.4% to 3-4%. with most Indian OEMs today sourcing nearly 70-80% of their component requirements from vendors. indicative of rising domestic demand. industry and academicians. This is a sizeable target considering the meagre amount of FDI currently coming into the industry. they have gone up to US$800 mn in FY08. Investments in the sector have been growing at 14% per year. investments touched US$ 5 bn.

Overall. Around 40% companies are located in the North. 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. partnership firms 12%.5% in the North and 8.3% in the East. 91 . Only 13% of the companies were in the turnover bracket of Rs 500 mn to Rs 1. 37% in the West.000 mn. Around 15% of the companies from the South and 17% of those in the West fall in this bracket as compared to 8. around 41% of the companies have an income up to Rs 100 mn. Around 90% of the auto component manufacturers in the East are small enterprises with a turnover less than Rs 250 mn.• • • • • • Ownership pattern of these 332 companies include proprietary firms 8%. with maximum representation coming from the North and West. Key observations and findings are covered below. and 57% are medium scale on the basis of their investments in plant and machinery Of the 332 companies. 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. 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. of which 58% are in the private sector while 35% are public limited companies. 18% in the South and 4% in the East Around 43% of the companies are small scale. 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.

About 77% of total proprietary firms and 55% of partnership firms in the sample are supplying to only OEMs and Tier I companies. Regionally. 92 . West and South based companies are supplying to all segments of the market. private sector companies are the largest suppliers to OEMs and Tier I firms followed by public limited companies. In terms of ownership. The North and West based companies are the largest players in the replacement market. the North. Around 30% of the companies are supplying to both OEMs and the replacement market.Top Demand Around 57% of the companies are supplying to OEMs and Tier I suppliers. while the East based companies are largely supplying to the OEMs.

while the remaining are either into contract manufacturing or are ancillary units. Around 21% of the companies export more than 50% of their produce. Nearly 90% of the exporting companies in the sample have quality certifications. the private sector companies were most dominant among the exporting firms. followed by public limited companies (25%). over 50% of companies in the North. Ownership-wise. Region-wise. over 70% of partnership firms.Top Nature of Operations Regardless of type of ownership. partnership firms (10%) and proprietary firms (7%). 93 . 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. accounting for 56%. 7% of the companies are totally export oriented. 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. The private sector companies constitute a large portion of these certified companies. The major export destinations are Americas and EU. Top Exports Almost 67% of the companies in the sample are exporting their products. Around 56% of these standalone companies are supplying to OEMs. and 55% of proprietary firms are operating on a standalone basis. Proprietary and partnership firms constituted just 2%. accounting for 59%. Assessing in terms of ownership of these companies. with over 60% of the companies exporting to these countries.

Branding among proprietary and partnership firms is low at 5% and 9% respectively. 17% manufacture body & chassis parts. the private limited companies dominate holding a share of 61% followed by public limited companies with 25%. 13% manufacture suspension and braking parts and 14% manufacture drive transmission & steering parts.Product Brands In this sample. Top 94 . Around 31% of these companies are drawing up plans for undertaking innovative marketing initiatives. around 16% of the companies manufactures engine parts. Among these brand conscious companies. Only 35% of the companies sell their products under a brand name. Over 55% of the companies with brands have indicated exploring new markets both in India and abroad.

The purpose for the collaboration varied. strategic to marketing arrangements and technical tie-ups. The small companies. operated at 81% capacity. These companies were mostly concentrated in the Northern and Western parts of the country.Collaborations Only 11% of the companies in the sample have entered into joint ventures or collaborations. The rest have marketing. while nearly 90% of the companies indicated having tie-ups with foreign companies in some form or the other. 95 . A noteworthy factor noticed from the sample was that the smaller the company the higher their capacity utilisation. This was followed by the North with utilisation rate of 74%. while 13% have strategic alliances. On an average. ranging from financial. Around 19% of the companies have a capacity utilisation of over 90%. with investments less than Rs 10 mn. with the average capacity utilisation ranging around 77-78% for higher investments. Capacity Utilisation The companies were found to be operating on an average at about 75% of their capacity. Of the total companies in this basket. Some of these companies have multiple collaborations. either with domestic or international companies. 57% have collaborated for technical purposes. the South-based companies showed higher capacity utilisation compared to the other regions. They exhibit an average capacity utilization of 77%. production and financial tie-ups. The private limited companies constituted 55% of all companies with above 90% capacity utilisation. Partnership firms showed higher capacity utilisation while public limited companies were the lowest.

while 14% were planning marketing initiatives. Of these. capacity expansion. A little over 55% of the companies intend to extend their reach by making forays into new markets. modernisation and marketing accounted for 68% of the total sample. The North-based companies conveyed a higher growth followed by companies in the Western region. while 30% of the respondents are expecting the domestic auto component industry to continue growing at 20% and above for another two years. The companies indicating future plans for diversification. Top Funding The most preferred source of funding among companies in the sample was the public sector banks. Nearly 66% of the companies preferred banking with public sector banks (PSBs) or 96 . Private sector companies showed the most robust growth followed by the public sector. Modernisation plans were indicated by around 45% of the companies. Around 22% of the companies are expecting the industry to grow at a rate of 10-20%. a large number (66%) are planning capacity expansion. Furthermore these companies are confident of maintaining the momentum over the next two years.Top Growth The companies have exhibited growth of an average rate of 35% over the last two years.

West Bengal and Haryana. followed by private banks and cooperative banks. In terms of availability of funds. There were approximately 4% companies that have funded their business through internal resources.nationalised banks for their fund requirements. Around 35% of the companies complained of marketing issues. 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. with a turnover of less than Rs 300 mn. some 7% of companies in the sample have claimed difficulty in acquiring funds. Top Hindrances in Business Infrastructure and lack of institutional assistance were cited as the key hindrances to growth for these SMEs. standalone companies. This issue largely emanated from Maharashtra. These are primarily North and West based. 97 . Only 35% of the companies gave a response to this query. MNC banks were funding only 1% of the companies.

In fact. 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. has given a big boost to the industry. • The entry of global OEMs. to a force ready to face global competition. 7.5) CONCLUSION AND RECOMMENDATIONS FUTURE PROSPECTS Current trends indicate a smooth run for the auto component industry. For instance.Top We hope that the fine points that have emerged from this study are useful for further deliberation. The Indian automobile industry offers great potential considering the low penetration along with rising income levels and a rapidly growing middle class. These factors will see a boost in demand for vehicles. this is one sector which has made a global mark and has been identified as a sunrise industry. This trend has also enabled Indian companies to gain a competitive 98 . since 2000. These two segments are estimated to grow at between 10-12% for at least the next five years. 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. The industry is transforming from being highly domestic-centric. especially passenger cars and two wheelers.

Some features are: • • • • • • Cost reduction of 25-30% in production in the domestic market compared to overseas Low labour costs Designing. Entry of global OEMs has transformed the Indian automobile and auto components landscape. engineering and technical skills Established quality systems Availability of raw materials Adaptability to new technology • Investments in research and development. Key players are not only willing to invest in R&D but also in mechanical and engineering operations. Before the end of 2010. Bajaj Auto’s Bikes. These investments are expected to increase in the near future Though India rides on these inherent strengths. at least 30 new car models are expected to be launched by foreign OEMs. Tata Motors’ City Rover are indirectly increasing the demand for Indian auto components. a few risks exist that the auto component manufacturers may have to confront. Volatility in the prices of metals and other inputs could erode the industry’s cost competitiveness. Further. global OEMs expect a commitment of 5-10% reduction in prices every year. Rising exports of Indian-made vehicles like M&M’s Scorpio model. Tier I manufacturers taking up greenfield projects overseas. Also. Further. • The Government’s initiatives towards opening up channels of finance. • Export of automobiles has also emerged as a key component of growth. Also. The Indian auto component industry is poised for robust growth till 2015. The vision to compete globally comes from the inherent strengths the Indian auto component industry possesses. 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. coming in from global OEMs. 99 . There is a perceptive exuberance in the industry and growth estimates indicate a booming industry. Extending their reach to global markets is the pre-dominant outlook among the top auto component manufacturers in the country. • De-regulation and the Government’s policy initiatives have facilitated growth and focus has now shifted towards attracting foreign direct investments. • Investments coming in for research and development will keep the industry abreast of the latest technology.edge in the global market. 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. India is being perceived as a major market for cars and two wheelers by global OEMs. Intense competition from counterparts in other emerging economies may add pressure on margins of manufacturers. • • • • A global slowdown can derail the prospects of the industry. the model of cluster-based development prominent in this sector will provide economies of scale. the Government’s initiative towards road development will give a boost to demand for vehicles and indirectly auto components. This stands out positively in favour of India.

indicate a doubling of the domestic auto component industry by 2015. The combination of low manufacturing costs along with quality systems would give an edge to companies in terms of pricing and quality. Achieved growth in production and exports of auto components is shown in the graphs below. Similarly. but remaining competitive in this changing scenario will be the toughest challenge.8 bn in 2015. Knowledge. 100 . to imbibe technology in a big way. which are largely based on traditional management practices. The production of auto components could grow to US$30 bn by 2015. collaboration and technical tie ups. The SMEs can exploit these opportunities through joint ventures. This growth outlook implies opportunities for the small and medium enterprises. India’s exports of auto components could grow to US$4. It would be imperative for these companies.5 bn as compared to US$1.Going by current trends in production and exports of auto components. Expansion and diversification will help break into new markets. innovation and networking will determine the success of the SMEs in this globally competitive environment. specialisation. The overall trend is encouraging.

0)PHARMACEUTICAL INDUSTRY 101 .8.

Around 21% companies are located in the North.1)EXECUTIVE SUMMARY Emerging Pharmaceutical SMEs of India attempts to provide a platform to the pharmaceutical SMEs. as many as 225 companies provided us sufficient data points to enable a statistical analysis. proprietary firms are 9%. 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. exports. In the western region. The generic opportunities in the overseas market. Small and Medium Enterprises Development Act of 2006. 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. • Going forward. will continue to remain the biggest opportunity for pharmaceutical companies.2)METHODOLOGY The definition of small and medium enterprises (SMEs) in the Indian context has remained contentious until recently. Mumbai with 28% and Ahmedabad with 8% of total companies top the charts. 8. Of the 271 companies profiled. and SMEs are expected to play a critical role.8. Europe. enabling them to become globally competitive. orientation towards R&D. Africa etc. with a reported growth of 22% in the last five years. Gujarat and Maharashtra. This report has profiled 271 companies with a turnover of less than Rs 1.000 mn. Some of the insights revealed include: • In terms of ownership pattern. 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. 12% of the SMEs considered for this analysis are keenly involved in R&D activities such as clinical trials and contract research. Middle East. 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. Emerging Pharmaceutical SMEs of India will provide the right platform for SMEs. CRAMs (Contract Research and Manufacturing Services) opportunities would keep the pharmaceutical industry on a high growth trajectory. Moreover. R&D would be the key growth driver and survival strategy for SMEs. Considering the 102 . while Hyderabad with 8% and Delhi with 10% are key hubs in southern and northern regions respectively. 19% in the South and 4% in the East. partnership firms 14%. The report covers SMEs based in 10 pharmaceutical clusters. growing domestic market. Interestingly.

Bulk drugs of all major therapeutic groups. growth prospects and production efficiencies. trading companies have been excluded. Pharma companies have developed Good Manufacturing Practices (GMP) compliant facilities for the production of different dosage forms. Based upon the Survey Organization (NSSO) And database. 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. Companies with negative net worth and those declared financially sick by the Board for Industrial & Financial Reconstruction (BIFR) were eliminated. OVERVIEW OF PHARMACEUTICAL INDUSTRY The Indian Pharmaceutical industry has been witnessing phenomenal growth in recent years. multinational companies and subsidiaries of multinational companies. growing at an annual rate of 9%. driven by rising consumption levels in the country and strong demand from export markets. The pharmaceutical industry in India is estimated to be worth about US$ 10 bn. The ranking in value terms may also be a refl ection of the low prices at which medicines are sold in the country. technology base and the wide range of products manufactured. 103 . 8.000 mn turnover for auto component SMEs. In world rankings. touches upon auto component of the country. The report includes diversified companies operating in the pharmaceutical and having business interests in other industries. thus honouring the true Indian entrepreneurial spirit that the SMEs represent. Emerging Pharmaceuticals SMEs of India focuses on manufacturers of pharmaceuticals. The SME Insights section presents analytical findings drawn from the primary information collated by the various research conducted by the leading consulting firms. 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. requiring complicated manufacturing processes are now being produced in India. the domestic industry stands fourth in terms of volume and 13th in value terms. 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 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.3) DATA COLLECTION AND ANALYSIS.challenges entailed in tapping financial information from a highly fragmented sector. The report has excluded subsidiaries of large Indian business houses. competitive dynamics and the future outlook for the segment. Dun & Bradstreet India (D&B India) has formulated a correlation between investment and turnover to arrive at a cut-off Rs 1. Other considerations included financial growth performance over the past two years.

1970. With the introduction of the product patent beginning 01-Jan-05. In calendar year (CY) 2008. MCC (South Africa). TGA (Australia). for drug and discovery research & development. As a result. turnover of the organized sector companies aggregated to Rs 302 bn. several Indian companies have also been getting plant approvals from international regulatory agencies like US FDA. as given by the Organisation of Pharmaceutical Producers of India. Earlier. with the enactment of The Patent Act. which has now made India TRIPS compliant. while a huge 95% is in the unorganized sector. 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. WHO.000 manufacturing units. only process patent was applicable for pharmaceuticals. A paradigm shift occurred in the Indian pharmaceutical industry with India becoming a signatory to the WTO order. as well as contract manufacturing.In addition to having GMP. A large number of players in the unorganized segment are small and medium enterprises and this segment contributes 35% of the industry’s turnover. The organized sector accounts for just 5% of the industry with around 300 players. the Indian pharmaceutical industry is estimated to have over 10. However. 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). the Indian market has become an attractive option for the introduction of research-based products. ushering in the Product Patent Regime. This has also facilitated the domestic industry to attract contract manufacturing opportunities in the rapidly growing generics market. Industry Trends A highly fragmented industry. of which 19% came from MNCs while the remaining 81% was contributed by 104 . the Indian companies are now exploring new business models such as contract research.

Turnover of players in the unorganized segment. In recent years. though difficult to assess. More than 85% of the formulations produced in the country are sold in the domestic market. the chronic therapy segment accounted for around 26% of the domestic formulation business. followed by Gujarat. respectively. 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. India has a significant share in the global generics market and is ranked third. In 2007. Bulk drugs include the active pharmaceutical ingredients (APIs) which are used for the manufacture of formulations. new-generationtechnology-barrier formulations continue to be imported. According to IMS Health. Production and Trade 105 . low cost and the advantage of the English language. in 2007 and 2008 a total of US$ 28 bn and US$ 20 bn.000 formulations manufactured in India in more than 60 therapeutic segments. duty free zones have been set up and several manufacturers of bulk drugs have been shifting their facilities to these areas. the proportion of formulations and bulk drugs is in the order of 75:25. According to estimates. though some life saving.the-art manufacturing facilities. As a result. the diverse spread has now started getting consolidated and concentrated in certain regions across the country. faster than the acute therapy segment. the anti-infectives top domestic production in volumes. India is largely self-sufficient in case of formulations. Factors favouring the industry are a vast resource of technical people. 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. leading to increasing demand for low cost therapies Global healthcare crisis like AIDS in the developing world. is estimated to be around Rs 160 bn. stateof. Bulk drug manufacturing is largely concentrated in Andhra Pradesh. Among the therapeutic segments. growing at a rate of 10%. this segment has been facing stiff competition which makes the scale of production important to improve profitability. 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.Indian companies. The chronic therapy segment includes anti-diabetics. There are believed to be over 60. As part of government’s support to increase exports. The Indian pharmaceutical industry consists of manufacturers of bulk drugs and formulations. cardiac and neuro-psychiatry formulations. 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. which accounts for more than one-third of the country’s total bulk drug production.

This is to the advantage of the sector and will see a significant thrust in coming years. with focus shifting more towards R&D. fearing duplication of their new drug discovery through reverse engineering. The original Indian patent law. by adopting new processes. 106 . MNCs’ market share declined from 70% prior to 1972 to 20% at present. Besides. which would require higher capital investment in R&D. this discouraged multinational companies from launching their new products in India. the rise in consumption being primarily attributed to the rising population. 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. The growing demand from the domestic market and increased manufacturing activities has led to rising imports during the past few years. which recognized only process patent. it also exports to several regions. The introduction of product patent has led the domestic industry towards exploring new avenues of drug development.The domestic bulk drug and formulation industry has been able to largely meet the domestic demand for these products. top-line players have spent in the range of 8-10% during FY08. including the EU and US. exports grew by an impressive 21% touching Rs 300 bn. The nature of imports has undergone a significant change over the years. the favourable regulatory environment. rise in income levels and increasing health awareness among people. The increasing alliances and tie-ups of Indian companies with global players has further given a boost to Indian exports. 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. In FY08. from finished doses imported prior to the 1970s. gave Indian companies the opportunity to produce products under patent in overseas markets. particularly regulated markets. Domestic demand has been showing significant growth. In FY08. On the other hand. Moreover. imports were worth Rs 50 bn as against Rs 35 bn in FY05. Though this is the average for the industry. 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. R&D by Indian pharmaceutical companies is backed by a favourable policy environment and availability of surplus skilled technical workers at low costs. Exports currently constitute nearly 48% of the industry’s turnover. Consequently. New product launches by the Indian and multinational companies have also catalyzed market demand. and have been growing at an average 22% annually since 1994. to largely bulk drugs today. and greater thrust towards innovation. increased expenditure on R&D and improved technical skills in the fi eld of chemical synthesis has also played an important role. As a result. This level of expenditure is however low compared with the spending of 12-16% of turnover on R&D by international leaders.

Majority of the contract manufacturing deals relate to production of active pharmaceutical ingredients (APIs) and intermediates. 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. Lupin. Dishman Pharma. Remarkably. Nepal. Currently. Russia. and the Middle East were the major markets for Indian pharmaceutical exports. Traditionally. Divi’s Lab. Cadila Healthcare. Expanding presence in regulated market Over the years. in which India possesses competence. Nigeria and India’s neighbouring countries like Sri Lanka. India has shown better regulatory awareness and superior technical skills. the process of getting approval of new products in regulated market requires strict compliance of quality norms. Shasun Chemicals. which is stringent and is also subject to high legal risk. India exports pharmaceutical products. the proportion of exports in domestic turnover has been increasing over the 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. despite the growing domestic demand.Leveraging CRAMs opportunities The global pharmaceutical industry is increasingly facing cost pressures on various counts. 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. This factor is forcing MNCs to outsource part of their R&D and manufacturing activities to low cost destinations like India and China. though difficult to penetrate due to stringent regulations. Regulated markets. 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. Germany. are known to give better value and margin to exporters 107 . India has leveraged this advantage to attract clinical trials process outsourced by the companies involved in innovation. Nicholas Piramal. exports constitute 48% of estimated turnover of the industry as compared to nearly 35% during CY02. In fact. under rising manpower costs and higher regulatory risk. and R&D productivity of these players has gone down significantly in recent years. 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. APIs and intermediates to more than 200 countries across the world. Growing exports Exports have been the major growth enabler of the Indian pharmaceutical industry in recent years. which has enabled Indian companies to penetrate the high-value markets like the US and EU.

to identify the essential and life saving drugs that need to continue remaining under price control. This decision was however stalled by the Supreme Court. 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. The new draft policy consists of these 354 drugs that are likely to be under the cost based price control. Indian players are also expanding their geographical reach to high-growth regions such as the CIS and Latin American countries. especially those players having only local operations. which is in addition to the 74 bulk drugs already notified under price control. New products launched since 2007 accounted for around 12% of the overall market growth. In fact. asking the Department of Fertilisers and Chemicals. The Department listed 354 items that it purchases for its hospitals called the National List of Essential Medicines (NLEM). which has driven the growth in recent past. intends to bring 354 drugs under price control. firms will have to increase their scale of production. GoI. these markets are witnessing impressive growth and therefore it provides great opportunity for Indian players. Although considered as low-value markets. The proposed control on prices is set to impact the industry margin significantly. In fact.The increasing presence in high-value markets like the USA and Europe has strongly boosted the overall growth of the Indian pharmaceutical industry. However. The price control as proposed in the Policy is likely to cover at least 50-60% of the domestic market under price control. new product launches create new demand. 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. These launches have been done by both domestic and international players and some of them are first time launch of new chemical entity (NCE). 2006. with competition getting stiffer in the regulated markets and the consequent pressure on margins. currently underway and awaiting approval from the Parliament. After the introduction of product patent in India. 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. and further reduced to 29 in 2002. the domestic industry has witnessed a fresh spell of new product launches. Rise in new product launches In the pharmaceutical industry. to secure the profitability. However. The number of drugs under price control had come down from nearly 400 in the 1970s to 72 in 1995. India has witnessed 108 .

which have been operating in these markets. The US. margin erosion in Europe is much less compared to the US when a drug or formulation becomes generic. the expansion of capacities by certain leading players has also fuelled competition in certain product categories. Indian players. marketing. in fact. According to reports. the industry has the potential to achieve a size of US$ 40 bn 8. preferences. Very few discoveries reach the final stages of approvals. etc. The Government has estimated that by year 2015. have also witnessed erosion in margins in certain therapeutic segments. we have attempted to chart their operational structure. the level of investment in R&D is still low. Europe has emerged as the most preferred destination for acquisitions by Indian companies. which is the world’s largest pharmaceutical market. It is. Some other developed countries like the UK and Germany have also witnessed the same scenario. business practices. The leading pharma companies in India have been actively extending the frontiers of scientific knowledge and going global through mergers and acquisitions. at average 4% as compared to the global practice of spending 12-16% of sales on R&D. with 20 buyouts abroad. the requirement being that at least 80-90% of the information sought has been provided. which restricts margins of the smaller players. For this quantitative exercise. we have considered all the 225 companies. Consolidation is inevitable and is expected to bring in economies of scale and provide access to newer geographies to regional players. where misses are more than hits. is also experiencing a sharp reduction in prices of generic drugs due to stiff competition. Some key characteristics of the sample of 225 companies are: 109 . Moreover. the claim for patent gets stuck in legal battles. the introduction of new molecules by Indian players has been limited. and in most of the cases. efficiency parameters.a fast rise in the number of players over a period of time. A similar trend was observed during 2006. In spite of the rising expenditure in R&D. Low R&D productivity Despite the increasing expenditure on R&D. which include Dr Reddy’s buyout of Germany’s Betapharm and Ranbaxy’s purchase of Romania’s Terapia. In 2005. a hit-and-miss situation in the field of discovery and developments of new chemical entity (NCEs). The changing global pharmaceutical industry has transformed prospects of Indian pharmaceutical companies. The European generics market has emerged as a major attraction for acquisitions by Indian companies. The fall in prices of generic drugs are not limited to India only. The erosion in prices is to the extent of 90% in some cases.4) FINDINGS. acquisitions by the Indian pharmaceutical companies were the highest. SME INSIGHTS This study aims to draw a profile of how small and medium companies in the pharmaceuticals space function.

• Around 82% of the companies in the sample are small scale enterprises on the basis of investments in plant and machinery. the sample covers companies from 10 out of the 11 pharmaceutical clusters identified. private limited companies 51. It has been observed that pharmaceutical companies are largely concentrated along the coastal states.6%. 48% companies were exporting their products. • Bulk drug manufacturers constitute 8% of the sample. 13% companies were engaged in manufacturing as well as trading. Research & Development Companies in the sample that have undertaken only clinical trials were small enterprises with investments of up to Rs 10 crore. and another 10. Exports Of the total sample. • In the sample.5% of the companies were doing R&D work (clinical tests as well as contract research) along with manufacturing. • 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-2000.8% in the South and 3. which includes 2% companies also into intermediaries. Proprietary and partnership firms were mostly in the turnover bracket of less than Rs 10 mn. The companies engaged in the dual function of manufacturing and R&D were mostly medium sized enterprises. Close to 1. R&D operations among companies did not show any connection with ownership patterns. The West-based companies were found to be dominating in terms of exports with 61% of those exporting concentrated in this region. Companies engaged in contract-based manufacturing were observed largely among private limited companies. Companies with investments between Rs 10-50 mn were engaged in manufacturing as well as clinical trails. but 75% companies were purely manufacturing companies with own facilities. Some key highlights have been presented below. 110 .1% of the companies located in this region.• Ownership pattern of companies include: proprietary firms 9. The 100% export-oriented firms were mostly large companies with turnover above Rs 500 mn. These companies largely sold their products in the domestic market.7%. with 60% of these companies located in the western region of the country. Another 5% companies are solely into intermediaries.7% in the East. Companies manufacturing allopathic formulations account for 74%. 18. partnership firms 14%. around 98% of the companies were necessarily into manufacturing either on their own or on contractual basis.4% companies are located in the North. • 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%. The rest are medium enterprises.5% of the companies were focused on only research & development. while 13% are into other forms of medicines like herbal and ayurveda. • Apart from Orissa.7% and public limited companies 24. The largest number of companies with quality certification was among the private and public limited companies. Around 21.

cardiac. A massive 84% of the respondents revealed banking with PSUs. Capacity Utilisation On an average. the capacity utilisation in the sample was at 75. and vitamins therapeutic segments. a prerequisite in the pharmaceutical industry. gastrointestinal. A large number of these companies were operating in the anti-infectives.5% with the North-based companies being way ahead of the rest of the regions. and most of these companies were located in the West. A large number of West-based companies were receiving funds from cooperatives. Finance the pharmaceutical SMEs also showed a strong preference for banking with public sector banks. followed by cooperative banks. MNCs had a small share in funding of pharmaceutical SMEs in the sample. Over 90% of these companies divulged future plans of accessing new markets or undertake product diversification. 111 . These companies were operating at an average 82% of their capacity.Region-wise exports classified by share in turnover Nearly 87% of the exporting companies were found to be having quality certifications. There were 43% companies which were operating at more than 90% capacity utilization.

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. A whopping 94% of the respondents viewed lack of institutional support as a major hindrance.Growth Trends The turnover growth indicated by companies in the sample averaged around 23%. Concentration of companies in the higher turnover bracket was largely from this region and also in terms of exports. Pertaining to lack of infrastructure. the western region was found to be the most prominent and dominant region for pharmaceutical companies. To conclude. 112 . 78% of the companies cited marketing issues and the lack of marketing and distribution networks. taxes & duties imposed. especially Maharashtra and Gujarat. The South and West-based companies were the most optimistic. Most of the respondents were expecting growth to accelerate in the next two years to around 29%. the biggest worry being industry regulation along with price controls. Quite a few of companies expressed apprehensions regarding the threat from spurious and counterfeits available in the market. 56% companies who responded to the query agreed that infrastructure inadequacy was a big hindrance. with majority emphasising as investment in R&D as a big constraint.

have been lagging in investments towards in-house R&D. Already. thus giving them the edge in acquiring research contracts from the big players in the domestic.5) CONCLUSION AND RECOMMENDATIONS. 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. According to projections given in the Economic Survey 2005-06. 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. the Indian pharmaceutical industry is well-placed to tap these opportunities. 113 . 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. this rise in the generic market size will be to their benefit. 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. To circumvent this fallback. generic drugs make up for 55% of the prescription written. 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. New product launches After the introduction of product patent laws in India. Increasing investments in R&D Given the long gestation period right from the discovery of molecules to the final approval for marketing. Leveraging the cost-effective production capabilities of Indian manufacturers. India’s population is likely to touch 14. several such companies have attracted sizeable contracts for research. some of which have reached the critical phase-II. In the US. Launches of new molecules by MNCs will accrue contract manufacturing and in-licensing opportunities for Indian players including the small and medium enterprises. several small players have started setting up separate clinical research unit. FUTURE PROSPECTS. however.8. Demographic factors like population growth and improving life expectancy is set to drive domestic demand. This trend is likely to continue in future as well. Manufacturing under contracts gives them a safe position against margin fluctuations. Some important molecules developed by Indian players have already reached different stages of clinical trials. For SMEs which are largely engaged in the generics business.11 bn by 2026. SME players. 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. 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. SMEs have acquired expertise in formulations & chemical synthesis. better scientific skills and favourable regulatory environment.

achieved during last few years. India aptly suits the changing global scenario. Although India has also started experiencing rising bills on skilled manpower. In the field of R&D. 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. Price control remains the principal concern The expanding span of control on drug prices in India remains the main concern for the pharmaceutical industry. having the largest number of US FDA approved facilities outside the US and low cost manpower with technical expertise. Under this situation SMEs may be hit due to the smaller economies of scale. Indian companies are capable of conducting various clinical trials at relatively lower costs. During FY08. and is growing in the range of 16-18%. To sum up.Growing exports market Exports will continue to remain strong and an enabler of growth for the pharmaceutical industry. There has been a spate of tie-ups and acquisitions by companies in the CRAMS segment in India. despite the concern over pricing and huge investments in R&D leading to blocking of funds and resulting in short term obstacles. it has been seen that the prices of medicines. is likely to continue in the near future. Nevertheless. and for SMEs in particular. 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. have been increasing over a period of time. The driving factors include the rising manufacturing costs in developed countries and falling prices in the generics segment world over. 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. As the price is proposed to be fixed on the basis of manufacturing costs and fixed margins. the price scenario in markets not under price control will witness a rise in prices due to increasing demand. Contract research business is estimated at US$ 6-10 bn. 114 . Exports as a proportion of the industry’s turnover have gone up to 43% in 2008 from 36% in 2002. exports grew by 21% despite the sharp price erosion in key generics markets. Contract manufacturing business is estimated to touch US $40 bn by 2015 and is likely to grow at 10-12%. Despite the growing competition in the global generics market and increased participation among developing countries in the global generics market. it is still in a relatively advantageous position on the cost front. Hedge risk by changing the product mix Despite the price control on certain bulk drugs and formulations. Impressive performance of Indian exports. 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. CRAMs opportunities will continue to pick up Contract manufacturing and contract research will gain prominence among the Indian pharmaceutical companies. Indian companies have already proven their ability to compete. Therefore. on an average. the volume of sales will determine the profits of the players.

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