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

1

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

2

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

3

1 4.1.3 1.4 5.0 2.1 3.4 1.2 3.4 4.2.1 6.1 5.5 SECTION5.8 SECTION4.4 2.0 7.3 5.4 6.2 2.3 6.0 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 4.0 6.1 2.8 SECTION.7 1.5 Types of Reform Measures for the Banking Sector Limitations of the Study 13 16 20 21 22 22 23 23 24 24 24 24 Impacts of Reforms upon the Banking Industry Small And Medium Enterprises (SMEs) In India Role of Small and Medium Enterprises (SMEs) Financing the SMEs Company Background Bank’s Mission Statement Brief History Products And Services Bank’s Logo Business & Financial Performance.3 7.0 4 . SME Policy Objectives Scope of Policy Small & Medium Enterprise Sector. 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 4.5 3.6 1.3 2.2 5.0 3.5 SECTION6.3 3.5 1.5 SECTION7.4 3.7 3.3 4.1 7.4 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 5.2 6.6 3.2 7.

8.5 SECTION.7.5 Conclusion & Recommendations Pharmaceuticals SME Model Procedure of Processing Data Collection & Analysis Findings Conclusion & Recommendations 99 102 103 103 104 110 114 5 .3 8.0 8.2 8.4 8.1 8.

In 1935. 2001. the Reserve Bank of India was established under the 6 . By allocating capital to the highest value use while limiting the risks and the costs involved the banking sector can exert a positive influence on the overall economy and thus is of broad macroeconomic consequence (Roland.0) INDUSTRY OVERVIEW 1. Jaffe and Levonian. Modern banking in India can be dated as far back as in 1786 with the establishment of General Bank of India (Kalita. 2008). Bombay and Madras and in 1921 they were merged in to newly form Imperial Bank of India. In the early nineteenth century three Presidency Banks were established in Bengal.1. 1998).1 Banking Industry A Banking sector performs three essential functions in an economy: the operation of the payment system. 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. Rajan and Zingales. the mobilization of savings and the allocation of savings to the investment projects. 2006.

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

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. As pointed out by Bhide et. 2002).For good reason. 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. 2002). 2002. 2002). accountability and prudential norms in the operations of the banking system led also to a rising burden of non-performing assets (Ghosh and Prasad. Banking in India has grown at a rapid pace with the number of commercial banks increasing from 89 in 1969 to 284 in 1995 (RBI Banking Statistics. The lack of recognition of the importance of transparency. 2009). Prakash Tandon... According to Gerschenkron “. 8 . 2002). 2007). While expansion of credit was desirable to help the economy grow. and most importantly. was rapidly becoming an area of concern. efficiency and profitability (Kalita. 2008). which accounted for about 90% of all commercial banking. gradualism was a result of India’s democracy and highly pluralistic polity in which reforms could be undertaken only if based on popular consensus. such gradualism was due to the fact that reforms were not introduced in face of a prolonged economic crisis.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. As in other areas of economic policy-making. Banking reforms.. equally important was the need for proper credit appraisal. Prasad and Ghosh. 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. The poor performance of the public sector banks.Russia. therefore.. economic institutions were not sufficiently developed for private banks to play this crucial development role. They were the „smoking gun threatening the very stability of the Indian Banks‟ (Bidani.al. India chose a „gradualistic‟ approach to the reform over a „big-bang‟ approach (Bhinde. 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. al.

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

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

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

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

active steps were initiated to improve the institutional arrangements like legal and technological frameworks (Mohan. Measures enhancing role of market forces  Reduction in pre-emption through reserve requirement. Watchel. 2008. 2001). foreign banks and joint venture banks. 1993. Singh. operational autonomy and competition in the banking sector. 2006). 2005). special emphasis was placed on building up the risk management capabilities of Indian banks while measures were initiated to ensure flexibility. Some of the measures undertaken in this regard are as follows (Kalita. Competition Enhancing Measures  Allowing operational autonomy and reduction of public ownership in public sector banks by raising capital from equity market up to 49 percent of paid up capital. 2008). 2006. Secondly. Roland.the fact that financial liberalization is essential for economic growth (King and Levine. first. market determined pricing for govt.  Introduction of auction-based repos and reverse repos for short term liquidity management. 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. Mohan.  Transparent norms for entry of Indian private sector banks. The banking sector reforms started in the early 1990s essentially followed a two pronged approach. 2006. disbanding of administered interest rates and enhanced transparency and disclosure norms to facilitate market discipline. Roadmap for foreign banks and guidelines for mergers and amalgamation of private sector banks with other banks and NBFCs. In particular.  Permission for foreign investment in the financial sector through foreign direct investment (FDI) as well as portfolio investment.  Instructions and guidelines on ownership and governance in private sector banks. securities.   The banks are allowed to diversify product portfolio and business activities. 13 . facilitation of improved payments and settlement mechanism.

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

) 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 . Second. First. In sum. the inefficient PSBs have been noted to be catching up with the efficient ones.No. Table 1. of SCBs 2. India had strict entry restrictions for new banks. Joshi and Little. No. the study confirms a presence of convergence phenomenon in the Indian public sector banking industry. of bank offices Of which Rural and Semi-urban 3.1: Progress of Scheduled Commercial Banks in India Pre and Post-Reforms Progress of Scheduled Commercial Banks in India Indicators 1.4 Impacts of Reforms upon the Banking Industry The Indian banking industry had made sufficient progress during the reforms period. Population per Office („000) 4. 1997) . better risk management practices and greater portfolio diversification (RBI Report on Trend and Progress of banking in India). there was little effective competition in the Indian banking system for two reasons. 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. Their empirical results indicate that the majority of PSBs have observed an ascent in technical efficiency during the post-reforms years. Seven new private banks entered the market between 1994 and 2000.Through the lowering of entry barriers. By March 2004. competition has significantly increased since the beginning of the 1990s.1. That is. over 20 foreign banks started operations in India since 1994. 2006. which effectively shielded the incumbents from competition (Roland. 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. Per capita Deposit (Rs. 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. Further. the banks with low level of efficiency at the beginning of the period are growing more rapidly than the highly efficient banks. In addition. Before the start of the 1991 reforms.

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. 2000). interest rates were a tool of cross-subsidization between different sectors of the economy. 2005. 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). Per capita Credit (Rs. 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.   Concessional interest rate on directed investment and credit. Expansion of branch network into rural and semi-urban areas turning many offices into primarily deposit centres without adequate credit business and income.1 4555 53. Deposit (% to national income) 457 36 1434 48. Roland.  Decline in portfolio quality owing to political and administrative interference in credit decision making. RBI. One of the major factors that affected the banks‟ profitability was the high pre-emptions in the form of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio which had reached at the historically high levels of 63. The 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. 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).) 6. To achieve this objective. impinged on the allocated efficiency of resources (Report on Currency and Finance.5 10440 68. the interest rate structure had grown increasingly complex with both lending and deposit rates set by the RBI. 2006-2008).3 Interest rate deregulation Prior to the reforms.5% in early 1990s.5. The above diagnosis of the maladies of banking led the Committee to recommend- 16 .

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

Vol. tiny sector within the SSI sector. At present if a bank fails to fulfill the target for priority sector lending. which increased during this phase from 2. 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.5% of the total credit of PSUs was given to the priority sector whereas 44. 1).of activities related to food processing. norms for the entry of Private players were announced. they failed to achieve the various sub-targets for agriculture. it inevitably leads to increased mergers and acquisitions activity. 2008). 18 . While public sector banks. In January 199. In the context towards deregulation. as a group. Besides. 2008). The issue of priority sector lending. dairying and poultry in the priority sector list (Kalita. 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. Annual Report. Normally when competition intensifies. 10 new banks were set up by 1998. Significant variation was also observed in the performance of different banks within the public sector banks with regard to the achievement of sub-targets (RBI. The priority sector lending norms have been fulfilled by a good margin by both public and private sector banks at present.The current arrangement shows how the banking sector reforms have provided operational flexibility to the banks even while meeting social objectives.95 per cent in 1997-98 (RBI Report on Currency and Finance 2006-08. The lack of enough competition was also reflected in the net interest margins (NIM) of banks. an important concern against privatization. since in 2003 the share of credit of private sector banks going to the priority sector had surpassed that of public sector banks [In 2002-03.4% of the total bank credit was given by Private Sector Banks to priority sector] (Source: Trend and Progress of Banking in India. 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. 22 foreign banks were also set up. it was decided in 1992 to give greater freedom to banks in opening up branches. RBI). 42. that the impact on competition remained muted was evident from the limited number of mergers (four). achieved the overall priority sector targets 40%. 2004-05).This will increase the list of activities under the priority sector credit and also improve the quality of the portfolio. Following liberalization of entry of new private sector banks. is no longer that crucial. advances to weaker sections. However.51% in 1992-93 to 2. The number of foreign bank branches increased from 140 at end-March 1993 to 186 at end-March 1998. etc.

Small and Medium Enterprises Development Act of 2006.6 Role of Small and Medium Enterprises (SMEs) SMEs have been playing a pivotal role in country’s overall economic growth. machines. and hence the growth of the overall economy.   Subsequently. wood & wood products. beverage. tobacco and tobacco products. appliances and electrical machinery. machinery. 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. 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. 100 million is considered as a medium unit. financial institutions. printing publishing and allied industries. furniture and fixtures.5 Small And Medium Enterprises (SMEs) In India The small and medium enterprises segment has been a topic of intense deliberation among banks. Banks were interalia advised to formulate comprehensive and more liberal policies than the existing policies in respect of loans to SME Sector. In India. silk. MSMED Act was operationalised with effect from 2nd October 2006.  In India. From the perspective of industrial development in India. However. 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”. industry and academicians. SME is the biggest provider of employment next only to Agriculture. cotton textiles. The SME 19 . Formerly. In addition. hemp & jute products. and have achieved steady progress over the last couple of years. in order to make the size of the unit and the technology employed by firms to be globally competitive. paper & paper products. given that their labour intensiveness generates employment. wool.  3. Keeping in view the same and the global practices. 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.3. The SMEs constitute 95% of total industrial units and constitute 40% of total industrial output. As per the Micro. SMEs have to play a prominent role. synthetic products. SME sector also has a large number of service industries. apparatus. the definition of “Small Scale Sector” was revisited. both Government and RBI credit policy placed emphasis on manufacturing units from the Small Scale Sector. jute. The SME sector produces a wide range of industrial products such as food products. ‘small and medium enterprises’ (SME) is a generic term used to describe small scale industrial (SSI) units and medium-scale industrial units.

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

Mauritius-based Frontline Strategy launched a $200 million India Industrial Growth Fund (IIGF) for investment in SMEs targeting companies. Small and Medium Enterprises (MSME). There has also been a recent budget announcement of setting up of a Risk Capital Fund. with a corpus of $100 million for providing equity capital and professional management advice to SMEs. Evidently. they continue to face problems pertaining to finance. Mauritius-based Horizon advisors launched Ambit Pragma Fund I. factoring etc.50 million without collateral. However. In Jan 2008. continued with its dereservation policy by removing 79 items from the list of 114 items reserved specifically for SSI (small scale industries) manufacturing. In 2007. MSME Cluster Development Scheme and ISO 9000 Reimbursement Scheme to help SMEs for procuring timely funds.The SME sector has also registered a consistently higher growth rate than the overall manufacturing sector. they have a very traditional way of lending to this segment against collateral and SMEs end up being under financed. primarily in the industrial space with revenues between Rs 200 – 1. When it comes to banks. the Ministry of Micro. an India dedicated PE fund. Though SMEs are being touted as the priority sector within the economy.org announced a Small to Medium Enterprise Investment Company with an initial corpus of $17 million for providing capital to SMEs in underserved markets. In fact.in the form of private equity (PE) and foreign direct investments (FDI). the government has set up various schemes in place such as the Credit Linked Capital Subsidy Scheme. Omidyar Network and Google. 21 . 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. Also the government has put in place the Credit Guarantee Scheme to encourage banks to lend up to Rs 0. it plays a dual role since the output produced by SMEs is not only about final consumption but also a source of capital goods in the form of inputs to heavy industries.000 million. The Soros Economic Development Fund (SEDF). 3. Lately this segment has been witnessing winds of change in the new sources of capital. 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. private equity.7 Financing the SMEs In Feb 2008.

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.

22

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.

23

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:

24

10/.500/. enterprises which may be outside the purview of regulatory definition of SME but having turnover upto Rs 150.3 Small & Medium Enterprises Sector The SME segment is broadly classified as under in MSMED ACT. 50/.lacs and upto Rs.1000/.  All other entities with their annual sales turnover of Rs.lacs Above Rs.500/.e. semiurban.lacs Investment in Equipment in case of Service Sector Enterprises * Upto Rs.500/.10/. 2006 : Particulars Investment in Plant & Machineries in case of Manufacturing Enterprises * Upto Rs.lacs Above Rs. Small and Medium Enterprises – as per regulatory definition irrespective geographical location. i.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. 25/.crores. urban.        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 3.200/.lacs Above Rs.4 Bank’s Approach Towards SME Sector SMEs are growth engines for development of Economy. SME Banking business will thus include the following across the bank:  Micro.200/.crore to Rs. where the project cost is upto Rs.lacs and upto Rs.crores and new infrastructure and real estate projects.  SMEs which are Associate/sister concerns of Wholesale Banking customers.lacs Above Rs.crores by treating them as part of SME segment. Fittings and other items not directly related to the service rendered or as may be notified under MSMED Act.00 crores and new infrastructure and real estate projects where the project cost is upto Rs. 50/.e. 25/. 150/. 2006 3.lacs and upto Rs. Bank has therefore for internal purposes given focused attention to finance all Commercial enterprises i.lacs and up to Rs. metro areas. 1/. rural. 25 .

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

which are not covered under BOBRAM Credit Rating System. f. Accounts. Accounts with existing lenders should be under the category of “Standard Assets”. a.5 lacs and upto Rs.3.2 lacs 20% to Micro (manufacturing) enterprises with investment in plant and machinery above Rs.6 Targets for Priority Sector / SME Sector Lending As regards lending to SME Sector. There should not have been any reschedulement /restructuring in the account during last two years.5 lacs and Micro(service) enterprises having investment in equipment upto Rs.  3. b.e. Satisfactory report from the existing bank/FI and/or satisfactory conduct of account as per latest statement of accounts. Norms Profit-making (i. may be considered under permitted deviation as per extant guidelines issued from time to time.10 lacs. e. However in order to ensure that credit is available to all segments of the Small Enterprises sector.25 lacs and Micro(service) enterprises having investment in equipment above Rs. There is no sub-target fixed for lending to small enterprises sector. Deviation allowed Various authorities have been authorized to permit deviations in respect of accounts.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. Various authorities have been authorized to permit deviations in respect of accounts. 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.N o. net profit before tax) concerns only as per last audited Balance Sheet. 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. guidelines as applicable to borrowal accounts are to be scrupulously followed. d. Accounts be rated as per the new credit rating model (BOBRAM) subject to ‘minimum’ BOB 6. 27 . All other existing norms.2 lacs and upto Rs. c.

. 28 .5:1 Minimum 1.17 & above Maximum 4:1 2 Medium Enterpris es under manufacturing sector and service Sector as per regulatory guidelines Minimum 1..75 with a condition that in any one year it should not be below 1.20 & above Maximum 3:1 3 Units outside the purview of regulatory definition but covered under SME Sector as Per expanded definition.5:1 Minimum 1.5:1 Minimum 1.. been authorized in respect of been authorized in respect of Maximum 4.25 Maximum 4.25 Maximum 4.33 & above Maximum 3:1 Authority who can allow Deviation Proposed Various authorities have to permit deviations accounts. Various authorities have to permit deviations accounts.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. Minimum 1.75 with a condition that in any one year it should not be below 1. Various authorities have been authorized to permit deviations in respect of accounts.25 Various authorities have been authorized to permit deviations in respect of accounts.

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

) FOOD & AGRO BASED INDUSTRIES 30 .4.

Around 79% of the companies began operations during the 1980s and 1990s. while 35% are engaged in manufacturing as well as trading. 8% in fruits & vegetables. 43% private limited companies and the rest 27% are public limited companies. 4% each in meat & poultry and marine products. 10% each in non-alcoholic beverages and packaged/convenience food. 83% are small-scale firms and 17% are medium scale. The regional representation of companies in the report suitably reflects the geographical concentration of the Indian food processing industry. In terms of IT penetration. The food processing industry is expected to continue its high-growth trajectory in the near future. 4. Of the balance 209 companies profiled. around 33% are into grain processing & spices. as many as 245 companies provided us sufficient data points to enable a statistical analysis.4. followed by 21% from Rajasthan). These regions are the major industrial clusters of food processing SMEs in the country.000 mn. 7% each in bakery and milk & milk products. There are 53 companies having presence in more than one industry sub-segment. 5% in sugar & confectionary. Some of the insights revealed include the following: In terms of ownership patterns. followed by 8% each from Ahmedabad and Pune).2) METHODOLOGY 31 . and SMEs are expected to play a critical role. 42% companies have a website. Of the 262 companies profiled. Emerging Food Processing SMEs of India will provide the right platform for SMEs. The profiled companies are from 17 states and 2 union territories. 13% are proprietary firms. 71% companies have a single manufacturing facility while 27% operate with 2 or more plants.1) EXECUTIVE SUMMARY Emerging Food Processing SMEs of India attempts to provide a platform to the Food Processing SMEs. while 18% of the companies are relatively new and have begun operations post-2000. enabling them to become globally competitive. 3% in alcoholic beverages and 9% in the others sub-segment. As many as 65% of profiled companies are engaged solely in manufacturing. The report has profiled 262 companies with a turnover of less than Rs 1. so as to facilitate their interface with potential global partners and buyers. 82 from the South (20% each from Chennai and Hyderabad) and 68 companies from the North (50% registered in Delhi. Of these. 17% partnership firms. The list consists of 89 companies from West India (49% registered in Mumbai-Navi Mumbai region.

3) DATA COLLECTION AND ANALYSIS Overview The food processing industry in India is a sunrise sector that has gained prominence in recent years.000 mn turnover for the SMEs. marine products. This sector is among the few that serves as a vital link between the agriculture and industrial segments of the economy. multinational companies and subsidiaries of multinational companies. A thrust to the food processing sector implies significant development of the agriculture sector and ensures value addition to it. Strengthening this link is of critical importance to improve the value of agricultural produce. growth prospects and production efficiencies. The report also includes diversified companies operating in the food processing and allied segments and having business interests in other industries. Availability of raw materials. 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. nonalcoholic beverages. packaged/convenience food. Trading companies have been excluded. from fruits & vegetables to meat & poultry. the analysis has formulated a correlation between investment and turnover to arrive at a benchmark of Rs 1. 4. 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. thus honouring the true Indian entrepreneurial spirit that the SMEs represent. Based upon the Annual Survey of Industries (ASI) and National Sample Survey Organization (NSSO) And Centre for monitoring Indian economy and Capitaline database. Considering the challenges entailed in tapping financial information from a highly fragmented sector. 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. ensure remunerative prices to farmers and at the same time create favourable demand for Indian agricultural products in the world market. we identified a large universe of auto component manufacturers. The SME Insights section presents analytical findings drawn from the primary information collated by leading consulting firms across the world. bakery. which came into effect from October 2. changing lifestyles and relaxation in policies has given a considerable push to the industry’s growth. Small and Medium Enterprises Development Act of 2006. Emerging Food Processing SMEs of India focuses on processors of food and food products across the value chain. competitive dynamics and the future outlook for the segment. Every effort was made to ensure that the report covers food processors located across the length and breadth of the country. alcoholic beverages and grain processing.The Micro. The sections titled Industry Report and SME Insights are special analyses on the food processing industry which looks at current trends. The report has excluded subsidiaries of large Indian business houses. 32 .

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

The prominent processed items in this segment are fruit pulps and juices. chutneys and dehydrated vegetables.2 mn tonnes in 2008.1 mn tonnes in January 1993 to 2 mn tonnes in 2000 and further to 2. it is growing at a much faster pace. Annual Report 2007-08. squashes. canned fruits and vegetables. though the organized sector is comparatively small.2% of the total production in the country. Some recent products introduced 34 .However. fruit based ready-to-serve beverages. Industry Sub-Segments Fruits & Vegetables The installed capacity of fruits and vegetables processing industry has increased from 1. jams. The processing of fruits and vegetables is estimated to be around 2. pickles. Food Processing Units in Organised Sector (numbers) Source: Ministry of Food Processing Industries.

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

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.

36

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

37

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

38

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

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

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

The rest are relatively new having begun operations post-2000 • 71% of companies have a single manufacturing facility while 27% operate with 2 or more plants.5% of the companies in the sample began operations between 1980 and 2000. additives. 8% in non-alcoholic beverages which includes soft drinks.5% in the North and 8% in the East • Reflecting the low capital intensive nature of the industry. 5% into sugar & confectionary. 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. (Refer Fig 01) • The representation from the various sub-segments of the industry is as follows: 34% in grain processing & spices segment. 31% in the South. 4% in meat & poultry. • In terms of IT penetration. etc. 42 . tea. Around 33. The ‘others’ category include manufacturers of food colours. only 4% were present prior to 1980s. The West and South have maximum representation. flavours. 27. 42% of the companies have a website. while 35% are engaged in manufacturing as well as trading • Around 78. (Refer Fig 02) • Around 65% of the companies are solely into manufacturing. 7% each in milk & milk products and fruits & vegetable processing. 2). The rest are medium enterprises. fruit juices. 6% into bakery.5% companies are located in the West. 3% each into alcoholic beverages and marine products and 9% in the others segment (Refer Fig.• The sample covers over 98% of the food processing clusters. coffee. guar gum etc. around 77% of the companies in the sample are small scale enterprises on the basis of investments in plant and machinery. seeds. 14% into packaged / convenience food. water.

The northern and southern region showed a higher proportion of companies falling in the Rs 500 mn and above turnover bracket. followed by proprietary firms. a large number of small firms were concentrated in the West. In terms of the regional spread of these companies. 43 .000 mn. Another 33% were earning over Rs 100 mn but less than Rs 500 mn. Of the remaining 17% of the companies which were in the turnover bracket of Rs 500 mn and Rs 1. the public limited and private limited companies dominated with a share of 60% and 33% respectively. and most of them were private limited companies.Turnover Over 50% of the companies in the sample have a turnover of less than Rs 100 mn.

(Refer Fig.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. similar to that observed among textile SMEs. The companies in the Western region were again predominantly private limited companies. 04) 44 .

followed by marine product manufacturers. which on an average exported 93% of their produce. On the basis of size. it was found that companies exclusively into meat & poultry exported over 96% of their output. 62% of the companies had branded products. were exporting their products and 36% were exporting more than 90% of their produce. In terms of ownership. The grain processing and packaged/convenience foods segments were the most prominent among the brand owning companies. the North-based companies reflected higher capacity utilisation and were on an average operating at 82% of installed capacity. the pre-dominant exporters were companies in the grain processing and the fruits & vegetables segments having a share of 29% and 15% respectively. 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%. 38% were operating in the Grain Processing & Spices segment followed by companies in Fruits & Vegetable Processing segment. In terms of the various sub-segments in the food processing industry and their exports. Average capacity utilisation across segments 45 . or 47% of the sample. Of these companies operating at 90% and above capacity. Regionally. fruits & vegetables and meat & poultry segments. 69% of the companies in the turnover bracket of Rs 500-1. Approximately 44% of the companies were operating at 90% and above of installed capacity. The average capacity utilization among exporting companies was relatively higher (80%) compared with those selling only in the domestic market. with many of them exporting directly to foreign clients. Brand consciousness among companies was widespread irrespective of their size. Segment-wise. Of the total exporting firms. 23 companies were 100% exporters mainly in the grain processing. Correspondingly. Of the exporting companies.000 mn had developed brands for their products. 61% have branded products and almost 55% have quality certifications. It was found that among the small scale companies with turnover less that Rs 100 mn.Branding Around 65% of the companies in the sample had branded products. the enterprises having turnover between Rs 250-500 mn showed higher average capacity utilisation of an average 88%. Exports Around 114 companies.

Out of the total companies with future plans for growth. In terms of future plans. of the companies having capacity expansion plans. 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. modernisation. 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. 61% have envisaged strategies for future growth. Segment-wise. 33% were from the grain processing segment followed by packaged/convenience foods (15%). A substantial 29% of the companies have diversification plans into related or un-related fields. The plans range from capacity expansion.Table 2 Top Future Plans Of the total 245 companies in the sample. Bakeries accounted for 13% of the companies having plans for diversifying their product segment.

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

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

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

5.) CHEMICALS 50 .

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

000 mn turnover for auto component SMEs. As per the Micro. Companies with negative net worth and those declared financially sick by the Board for Industrial & Financial Reconstruction (BIFR) were eliminated. The report includes diversified companies operating in the chemical space and having business interests in other industries. competitive dynamics and the future outlook for the segment. we identified a large The sections titled Industry Report and SME Insights are special analyses on the auto component industry which look at current trends. Small and Medium Enterprises Development Act of 2006. touches upon auto component of the country. 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. Based upon the Survey Organization (NSSO) And database. Emerging Chemical SMEs of India focuses on manufacturers of chemicals and allied products. The SME Insights section presents analytical findings drawn from the primary information collated by the various research conducted by the leading consulting firms. The definition of small and medium enterprises (SMEs) in the Indian context has remained contentious until recently. Considering the challenges entailed in tapping financial information from a highly fragmented sector. trading companies have been excluded. multinational companies and subsidiaries of multinational companies. the analysis has formulated a correlation between investment and turnover to arrive at a cutoff Rs 1.2)METHODOLOGY. 52 .5. growth prospects and production efficiencies. Every effort was made to ensure that the report manufacturers located across the length and breadth Annual Survey of Industries (ASI) and National Sample Centre for monitoring Indian economy and Capitaline universe of auto component manufacturers. Other considerations included financial growth performance over the past two years. The companies that qualified on the basis of turnover were further screened through another set of parameters to arrive at a truly representative list of emerging SMEs. The report has excluded subsidiaries of large Indian business houses. thus honouring the true Indian entrepreneurial spirit that the SMEs represent.

Its contribution to the revenue kitty of the Government is around 18-20%. giving an indication of the importance the sector holds in the country’s industrial growth.5. dyes. from basic chemicals to research-driven specialised products. including basic chemicals and its products. The fundamental nature and diversity of the industry is best understood from the fact that the industry itself is the largest consumer of its products. petrochemicals. plastics. and provides the building block for many downstream industries. dyestuffs. paints.Gol As stated in the Annual Report of 2005-06 of the Department of Chemicals & Petrochemicals.000 commercial products. paints. polyester. This sector. The industry includes a wide variety of products. 13-14% to total exports and 8-9% of total imports into the country. etc. at different levels across the industry supply chain. such as finished drugs. fertilisers.6% to the total output in the manufacturing sector. The chemical industry is among the most diversified industrial sectors. pesticides. is a critical input for industrial and agricultural development. GoI. Introduction The Indian chemical industry is among the established traditional sectors of the country. The sector covers over 70. forming part of the basic goods industry. playing an integral role in the country’s economic development. pharmaceuticals. the domestic chemical industry contributes about 17.3) DATA COLLECTION AND ANALYSIS. fertilisers and detergents. 53 . paper. accounting for around 33% of total consumption. Sources: Department of Chemicals & Petrochemicals. synthetic rubber. A robust chemical industry is a harbinger of significant economic and strategic benefits to the nation. gases. The industry has a weight of 14% in the Index of Industrial Production (Base year 1993-94 = 100). The sector has a share of 3% to the country’s total GDP.

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

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

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

Exports of chlor alkali have been growing at 52% annually since 2001. Performance of Chlor Alkali Chemicals(‘000 MT) Note: @ = Production + Imports Exports Source: Annual Report 2005 – 2006. GoI Organic Chemicals 57 .5 mn tonnes. Department of Chemicals & Petrochemicals. This is one of the few industries where supply exceeds demand.Gol The Chlor alkali segment has been witnessing a robust 6% growth in production since FY02. the sector has been a net exporter. 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.Sources: Department of Chemicals & Petrochemicals. thus having tremendous potential for exports. while imports are rising at close to 6% per year. Since FY03. Technology has played a key role in this segment in adopting better production techniques. with production in FY06 touching an estimated 5.

Gol During FY06. most of which are knowledge driven. exports grew by 55% while imports went up by 6% annually in quantity terms. products like methanol are mainly imported into India. etc. production of organic chemicals is estimated to have increased by 2% to 1. and is dominated by medium and small players. 58 . exports of organic chemicals rose by 36% in volume terms to 63 thousand tonnes. Imports. The domestic market forms a large part of the consumer base for the XVI industry. calcium carbide. especially in the drugs and pharmaceutical segments. Being largely a technology driven segment. However. with specialised focus in particular product segment. Sources: Department of Chemicals & Petrochemicals. This segment too is concentrated in Western India. methanol. carbon black. Between FY02-FY05. Inorganic Chemicals This segment comprises of products such as aluminum fluoride. potassium chlorate. Exports of organic chemicals have been impressive. As a result. Acetic acid. saw a rise of 26% in value to Rs 12. sodium chlorate. titanium dioxide and red phosphorous.3 bn during this period.Organic chemicals form the second largest segment of the chemical industry.7 bn. while between FY02-FY05 production grew at an impressive 7%. R&D forms a considerable part of the manufacturer’s costs. both in terms of value and volume. This segment produces a large number of products and combinations thereof. This sluggish rate of growth has been persisting since FY05. This segment accounts for 20% of total chemical production in the country. pesticides. formaldehyde. although dropped by 6% to 561 thousand tonnes in volume in FY05. these manufacturers have exhibited the competence to produce chemicals of high quality standards. with a 66% jump in value terms to Rs 5. This segment has the largest number of products classified under it. most of which are used in drugs. This rise in exports can be attributed to the significant value-addition to the Indian product list. etc are part of this segment. etc. nitrobenzene. citric acid.5 mn tonnes. During FY05. phenol. due to price competitiveness.

Imports have been erratic and on the decline in volume terms.End-users of these chemicals include manufacturers of soaps & detergents. There are large variations among products in the segment owing to the required skills and technology used. having recorded an average annual growth rate of around 11% between FY02-FY05. Department of Chemicals & Petrochemicals. During FY06 production is estimated to have risen by 7% to 544 thousand tonnes. Exports of inorganic chemicals too have been rising by over 50% annually since FY02. and therefore availability of raw materials is the key determinant for the development of the industry. implying the highvalue imports by domestic players. fertilisers and alkalis. The inorganic chemicals sector is the fastest growing sub-segment. Performance of Inorganic Chemicals (’000 MT) Source: Annual Report 2005 – 2006.Gol Inorganic chemicals are manufactured by using naturally occurring minerals. Sources: Department of Chemicals & Petrochemicals. though the value of imports has been high. this segment accounted for 7% of total chemical production in India. and the value addition to the products. GoI Pesticides 59 . glass. In 2005.

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

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

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

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

• Depicting the long-established nature of the industry. the highest coming from the Western region. The next largest segment is Dyes and Dyestuff accounting for 22%. and were equally represented by proprietary. around 39% of the companies have a website. while only 9% began operations post-2000. • In terms of IT penetration. Turnover A large number of companies. Chemical sub-segments 64 .5% of the total sample.2% each. • Around 89% of the companies in the sample are small scale enterprises with investments less than Rs 50 mn in plant and machinery. Unlike other SME-dominated segments. 8. The rest are medium sized enterprises.5% in the South and 5. while private limited companies were prominently high in the Rs 100 – 500 mn turnover bracket. partnership firms 25%. partnership and private firms. the small companies in this sample of chemical companies did not show any particular ownership pattern. had a turnover of up to Rs 100 mn. Around 11. • The total sample is from 15 states.• Ownership pattern of companies include: proprietary firms 30%. It was observed that public limited companies had a dominant presence in the Rs 500 – 1000 mn bracket. while another 16% had a turnover of between Rs 100 – 250 mn. organic companies at 37% and inorganic 28%. Another 42% began operations during the 1990s.4% companies are located in the North. Representation of Alkali and Pesticide companies is 1. • Close to 77% of the companies in the sample operate in a single segment. The Organic and Inorganic manufacturers constitute 65% of the sample. around 49% of the companies in the sample were established prior to 1990. private limited companies 34% and public limited companies 11%. close to 72%.5% in the East. The companies in the West are entirely from Gujarat and Maharashtra and account for 74.

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

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

FUTURE PROSPECTS. and will continue to be an adjunct to the chemical industry. Big-push from the Pharmaceutical sector The pharmaceutical sector is a significant growth driver for the chemical industry. 67 . the proposed exemption of customs duty on coking coal would also provide respite to the fuel intensive sectors. R&D spending as well as building up of a skill base. Indian pharmaceutical players have shown impressive progress on filing new chemicals entities with foreign regulatory agencies. However. pharmaceuticals. Some of the end-user industries are also growing rapidly and are emerging as outsourcing hubs for the global market. Growth in the pharmaceutical sector in turn implies impressive growth for the organic chemicals segment. ensures a sustained demand for chemicals in future. 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. industry and services. 5. etc These factors have led to increasing investments. driven by agriculture. Also. This trend is likely to gain momentum in the backdrop of recently announced government policies related to R&D in the Union Budget for FY08. which illustrates the maturing technical and chemical synthesis skills of Indian players. Going forward. like textiles. the industry also faces considerable challenges in a changing environment. in terms of pre-empting the cyclical nature of operations. 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. Nevertheless. this segment. These measures will help the sector to augment R&D capabilities. resources. • Low production costs in terms of labour. following the future trend and opportunities in the field of CRAMS. The current growth pattern of the country. societal demand for improved environmental performance and the need for increased profitability and productivity. 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. considering the central role it plays in the growth of the manufacturing and agriculture sector of the country. such as increased globalisation of markets. Prospects for the Indian chemical industry are bright.of facilities for quality checks and hindrances in having an assured market was also brought forth by the companies. technology may play a significant role in empowering the chemical industry to meet future challenges.5) CONCLUSIONS AND RECOMMENDATIONS. especially exports is set to witness high growth in the near term. Moreover.

which will help them to stay and grow in the market. whether organized or unorganized. 68 . Although. the strength of domestic pesticide players lies in their regional presence and understanding local needs. the growing presence of MNCs will impact the small and medium players.Pesticides segment may witness further consolidation. it will simultaneously open up opportunities in terms of contract manufacturing and research. however. domestic players may give stiff competition to MNCs MNCs have expanded their presence in the country by introducing innovative products. In fact. process integration and acquisition. few big domestic players have shown their competitive skills in the domestic and international market by pushing their superior products. However. Dyes and dyestuff have good prospects based on economic growth Impressive performance of the-end user segments in the dyes and pigment sector is set to give a boost to a large number of players associated with the industry.

0) TEXTILES 69 .6.

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

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

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

According to data available for the year 2000. weaving and processing activities are carried out under a single roof.4% and 0. According to the Ministry of Textiles.923 mn powerlooms in the country distributed over 430. Cloth production in the mill sector has fallen from 1. showing a robust growth of 4.1 million spindles and 395.815 mn people.000 units. declining at a rate of 2% per annum. while the non-cellulosic industry is under the administrative control of the Ministry of Chemicals and Fertilisers.000 knitting units registered as producers or exporters and most of these units were registered as small-scale units. with an installed capacity of 34. hosiery and knitting.940 mn kg in 1999. Of these. the powerloom sector produces a wide variety of cloth. unorganised production systems. As in January 2008.714 million sq mtrs in 1999-2000 to a projected 1.powerlooms. The competitiveness of composite mills has declined in comparison to the powerlooms in the decentralised segment.400 mn kg in 2007-08. silk and handspun yarn. and also readymade garments. the number of sick units in the organised segment has also been growing rapidly.000 rotors. 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. Knitting and hosiery units account for around 17% of fabric production in the country.7% respectively. The organised mill sector consists of spinning mills involved only in spinning activities and composite mills where spinning. low The Man-made textile industry comprises fibre and filament yarn manufacturing units of cellulosic and non-cellulosic origin. overall stagnation in demand and competition from the powerloom and mill sectors. albeit less impressively. Spun yarn production and the cotton yarn sector have also grown. The production of handloom fabrics had gone up to 4700 mn sq mtrs in 2007. since 2000. both grey as well as processed. not including wool. recording growths of 2.3% in the last five years. The sector is weighed down by several problems such as obsolete technology.00 to 4. from 500 mn sq mtrs in the 1950s. weak marketing links.5% per annum since 2000. representing an annual growth of around 4%. As a result.9% and 2. 73 . The sector accounts for 63% of the total cloth production in the country and provides employment to 4. Trends in Production Yarn and fabric production has been growing annually at 1. with 97% of fabric production happening in the unorganised segment. khadi and carpet manufacturing units.493 million sq mtrs in 2007-08. there were 1779 cotton/man-made fibre textile mills in the organised sector. India had about 6. The cellulosic fibre/yarn industry is under the administrative control of the Ministry of Textiles. Nonetheless. Being the largest manufacturer of fabric in the country. The sector accounts for 13% of the total cloth produced in the country. 218 were composite mills which accounted for just 3% of total fabric production. The handloom sector is the second-highest employer in the country after agriculture.6% respectively. with growth driven largely by the powerloom sector. there are 1. Man-made yarn has driven much of this. XV productivity. Yarn production has increased from 3. overall cloth production in the country has been growing at 3.

The jump in 2007-08 exports has been largely due to the elimination of quotas. total RMG exports grew by 29%. Overall.1% respectively.Source: Ministry of Textiles.5 billion.9% annually between 2000 and 2008.5 bn. touching US$ 7. which together accounted for over 75% of demand.5% in 2007-08. There are around 26 Apparel Parks in eight states in India. Man-made textiles exports have witnessed a decline of 2. which were worth US$ 3. Readymade garments (RMG) is the largest export segment.constitute over 2/3rd of total textiles exports (excluding readymade garments). followed by cotton fabric at 1. all segments in the textile industry. Analysis of trade figures by the US Census Bureau shows that post-MFA. This segment has benefited significantly with the termination of the Multi-Fibre Arrangement (MFA) in Jan 08. recording a 22% growth year-on-year. GoI Source: Ministry of Textiles. Technology Mission on Cotton. driven primarily by the smallscale. Exports of cotton textiles -. Trade Scenario According to the provisional DGCI&S data. independent powerloom sector.5% and blended fabric at 0. the growth in RMG exports was 8. this segment accounts for 26% of total textile exports. Apparel Parks. textile exports during fiscal 2007-08 stood at around US$17. man-made textiles exports were growing at around 30% per annum. Major export destinations for India’s textile and apparel products are the US and EU.the first year since the phasing out of the quota system in the global market. In 2003-04 and 2007-08. Fabric production touched a peak 47000 million sq mtrs in 2007-08. including handicraft carpets. etc.Under the TUFS scheme. total cotton textile exports Source: Ministry of Textiles. GoI XVI were worth US$ 4. post the termination of the MFA. In 2007-08. and in Nov 08. -. production recorded a robust 9% growth compared to the corresponding period in the previous year. implying a growth of 27% over the exports in 2007-08. Exports to the US have further increased since 2005. GoI Fabric production has been growing at 2. accounting for a considerable 45% of total textile exports. Except for man-made textiles. fabric and made-ups -. a total of Rs 916 bn has been disbursed for technology upgradation. Growth in the 100% non-cotton segment touched 5%. 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).5 bn. imports from India into the US have been nearly 27% higher than in the corresponding period in 2007-08.3%. wool and silk. have recorded a growth in exports during 2007-08 . The slowdown began since 2003-04 and have been on the decline since.5% and 4.75 bn. with a total estimated investment of Rs 134 bn 74 .which include yarn. Between 19992000 and 2002-03. in 2007-08. According to the Ministry of Textiles.

pragmatic exit of idle mills. policies were drawn to provide employment with a clear focus on promoting the small-scale industry. A cumulative total of US$ 6. Source: Ministry of Textiles Government Initiatives The Government’s role in the textile industry has become more reformist in nature. while only 25% is expected in processing and garment units.29% of total FDI inflows in the country. which account for 1.• Industrial Entrepreneurship Memorandums implemented from 1992 to Aug 08. Initially. 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. Of this. The new Textile Policy of 2000 set the ball rolling for policy reforms in the textile sector. modernisation of outdated technology etc.67 bn in investment is expected by 2008. dealing with removal of raw material price distortions. The year 2000 was also marked by initiatives of setting up apparel parks. 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. 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 scenario changed after 1995. cluster approach for powerlooms. Though significant investments are being made in the textiles segment. more than two-thirds is expected in the spinning and weaving segments. the bulk of them are in the spinning and weaving segments. with policies being designed to encourage investments in installing modern weaving machinery as well as gradually eliminating the pro-decentralised sector policy focus. 2002 and 2003 saw a gradual 75 .

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

16% each in man-made and silk.• Similarly on the basis of raw materials used. with investments of less than Rs 20 mn. 77 . Another significant 35% were earning over Rs 100 mn but less than Rs 500 mn. 43% companies are into cotton and cotton based products. Turnover The dominance of small-scale enterprises was largely reflected in the sample. Around 16% of the companies are relatively new which have begun operations post-2000 • 73% of companies have a single manufacturing facility while 27% operate with 2 or more plants • In terms of IT penetration. Over 55% of the companies have an annual turnover of less than Rs 100 mn.000 mn. 42% of the companies have a website. 13% in blended and 10% use wool • Around 63% of the companies are only into manufacturing. Of the remaining companies in the bracket of Rs 500 mn and Rs 1. 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.

Of these. only 35% have shown to have any kind of quality certifications. or 67% of the sample. The average capacity utilization among exporting companies was relatively higher compared with those selling only in the domestic market. Another 53% of the 234 companies export 90% of their total output. On an average. but north-based companies showed a preference for proprietary form of ownership while south-based companies were prominently for partnership. 27% of the companies directly export 100% of their output to foreign clients. 114 companies were 100% exporters with many of them exporting directly to foreign clients. were exporting their products. (Figure 03) Ownership Structure Though no distinct ownership structure was evident. The northern region had a high share of small companies. Another 20% of the companies export only through trading houses. The private and public enterprises were mostly in the Rs 500 mn and above turnover range. The major export destinations were the US and Europe. the southern region showed a higher proportion of companies falling in the Rs 250 mn and above turnover bracket. Exports Around 234 companies. The western region had a reasonably proportionate share of companies in the various revenue brackets. (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. In terms of market access. indicating they are part of the global value chain. with over 70% of the companies necessarily exporting to these countries. these companies were exporting 78 .In terms of the regional spread of these companies. Of the exporting companies. The companies from the Western region were predominantly private limited companies. The remaining sell partly through trading houses and direct sales.

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

4 27. the players were expecting an average growth rate of 32% for the next two years. 67% were located in North India.4 25. representation of garment and home furnishings manufacturers in the sample was largely from the North. representing 59% of the yarn manufacturers.6 25.1 19. On an average.4 33.1 13. (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.3 Yarn 14. In terms of the finished goods. the garment firms being the most hopeful and expecting a 40% increase in sales.7 1. with a share of 34% and 31% respectively.1 22. The other sub-segments that are expecting to do well are manufacturers of fabric and made-ups.8 9.9 7.Figure 06 Top Regional Products Of the companies engaged in the manufacture of home furnishing products.4 Garment 42. (Figure 07) Fabrics 31. Industrial textile manufacturers were more in number from the Western region.3 58.6 1.2 80 . Fabric manufacturers had a strong presence in the South and North India. Yarn manufacturers were concentrated mostly in the South.7 Home Furnishing 66.

the average growth for all companies in the sample was an average 28%. 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. 53% are into yarn and fabric manufacturing.In the last two years. In terms of ownership. 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. Of these. The Western region showed higher growth compared with the other regions. 37% of the companies were private limited companies.

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

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

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

0.) AUTOMOBILE COMPONENT INDUSTRY 85 .7.

and promises a wide range of opportunities for SMEs. 70 companies are not members of any industry associations or trade bodies. and have a turnover range of Rs 50 mn to Rs 535 mn. We have covered companies from 17 states and 3 union territories. and SMEs will play a pivotal role in this critical growth phase.1) EXECUTIVE SUMMARY. 7. thus tapping a range of companies that have remained unrecognised. Emerging Auto Component SMEs of India profiles 370 companies with a turnover of less than Rs 1. The auto component industry is expected to continue its high-growth period for at least another decade. The sector has emerged among the fastest growing industries in the Indian economy. and was therefore selected for profiling in the first report of the series. 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. 128 from the west and 78 from the south. 86 . The Auto Component sector has tremendous potential to encourage entrepreneurship.000 mn. considering the diverse nature of the industry. Of these. 160 companies are small-scale firms with investments of less than Rs 50 mn in plant and machinery. The sector is projected to grow at a rate of 15-20% over the next decade. the major industrial clusters of auto component manufacturers in the country. Emerging Auto Component SMEs of India will provide the right platform to SMEs. is that public sector banks are their principal lenders.2) METHODOLOGY. the production process lends itself to operations that can be divided and tiered. The list consists of 152 companies from the north.000 mn. Further. with strong potential for global impact. enabling them to become globally competitive. The number of small and medium firms profiled is in the proportion of 43:57. An interesting aspect of this industry segment. as revealed by our research. with few dependent on private sector banks.7. Of the 370 companies profiled.

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

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

However. The market is so large and diverse that a large number of players can be absorbed to accommodate buyer needs. local components having 25% with the balance 42% comprising of spurious market including re-conditioned parts. exports has emerged as a significant driver of growth. This composition of the market however is undergoing radical changes with global outsourcing gaining momentum.5 bn at present. Bajaj. North and South of India. In recent times. and integrating operations across the related area of specialisation. 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. Exports of auto components have been strong growing at 24% per annum since 2000. The regional base of auto component manufacturers is mostly concentrated in the West. The key to competing in this industry is through specialisation by product-type. 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. 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%. Till the 1990s. The set up of Tata Motors. has negated any possible concentration of the market in a few hands.Source: ACMA The range of products manufactured. there are a select few large companies that have integrated their operations across the value chain. and the demand emanating from global OEMs and Tier I manufacturers has opened new opportunities for the auto component industry in India. Mahindra & Mahindra and TVS in the 1950s and 1960s laid the foundation for auto component manufacturers in the West and South. At the same time. a bright outlook for the domestic 89 .This regional concentration of auto component manufacturers has been dictated by the emergence of automobile manufacturers in these regions. 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. whilst the entry of Maruti during the 1980s created the base in the North.

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. Investments in the sector have been growing at 14% per year. Some key characteristics of this sample include: 90 . This is a sizeable target considering the meagre amount of FDI currently coming into the industry. India has tremendous potential to emerge as a supply base. The composition of exports in terms of the proportion of OEM and aftermarket has also undergone a sweeping change since the past decade.4% to 3-4%. The small and medium enterprises segment has been a topic of intense deliberation among banks. Of the profiled 370 companies. the paucity of authentic information on this segment has limited the estimation of value contributed by this integral constituent of India’s economy. 332 were considered for the purpose of this quantitative exercise. financial institutions. Outsourcing is fast catching up with domestic OEMs as well. there has been a sharp rise in imports of auto components as well. industry and academicians. These companies were contacted through various means. 7. However. Several global giants like Ford and Toyota have already set up base in India to source auto components.4) FINDINGS SME Insights. The ratio of OEM to aftermarket has changed from 35:65 in the 1990s to 75:25 in 2008. and have grown significantly since then. This database was further short-listed based on the criteria of being only manufacturing companies. and have been profiled in the report. especially in the last three years. Of the responses received. with most Indian OEMs today sourcing nearly 70-80% of their component requirements from vendors. This is a healthy trend. The changing perception of global auto makers is however fast altering this scenario. With less than 1% share in the global market. From an import of US$ 250 mn in FY03. they have gone up to US$800 mn in FY08. having less than Rs 1.000 mn turnover and other parameters. Investments Since 2000. given the fast rising income levels with a rapidly growing middle and high income consumers. In 2007-08. While exports have been booming. Share of exports in total production has risen from 10% in 1997 to 20% in 2008. investments touched US$ 5 bn. 370 companies met the criteria set by D&B India. indicative of rising domestic demand. 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.automobile industry also offers significant growth potential. The research began with the leading consulting firms reports association member directories and trade listings.

Around 15% of the companies from the South and 17% of those in the West fall in this bracket as compared to 8. 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. of which 58% are in the private sector while 35% are public limited companies.3% in the East. around 41% of the companies have an income up to Rs 100 mn. Turnover The proportion of companies in the sample with a turnover above Rs 500 mn is high in the Southern and Western parts of the country. Around 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. Only 13% of the companies were in the turnover bracket of Rs 500 mn to Rs 1.5% in the North and 8. 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.• • • • • • Ownership pattern of these 332 companies include proprietary firms 8%. 18% in the South and 4% in the East Around 43% of the companies are small scale. 91 . with maximum representation coming from the North and West. partnership firms 12%. 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. Around 90% of the auto component manufacturers in the East are small enterprises with a turnover less than Rs 250 mn. 37% in the West.000 mn.

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

Top Nature of Operations Regardless of type of ownership. East and South are standalone companies while over 33% of the companies in the West are ancillary units. The private sector companies constitute a large portion of these certified companies. over 70% of partnership firms. Around 56% of these standalone companies are supplying to OEMs. accounting for 59%. Ownership-wise. the private sector companies were most dominant among the exporting firms. 7% of the companies are totally export oriented. Region-wise. Nearly 90% of the exporting companies in the sample have quality certifications. 93 . Around 21% of the companies export more than 50% of their produce. 60% of private and public sector firms. Assessing in terms of ownership of these companies. The regional distribution of these exporting companies show a high concentration in the North and West accounting for 46% and 35% respectively. and 55% of proprietary firms are operating on a standalone basis. partnership firms (10%) and proprietary firms (7%). over 50% of companies in the North. accounting for 56%. Proprietary and partnership firms constituted just 2%. The major export destinations are Americas and EU. around 60% of the companies in the sample are operating on standalone basis. while the remaining are either into contract manufacturing or are ancillary units. Top Exports Almost 67% of the companies in the sample are exporting their products. followed by public limited companies (25%). with over 60% of the companies exporting to these countries.

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

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

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. capacity expansion. Around 22% of the companies are expecting the industry to grow at a rate of 10-20%. while 14% were planning marketing initiatives. 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. Private sector companies showed the most robust growth followed by the public sector. The companies indicating future plans for diversification. Modernisation plans were indicated by around 45% of the companies. a large number (66%) are planning capacity expansion. Furthermore these companies are confident of maintaining the momentum over the next two years. Of these.Top Growth The companies have exhibited growth of an average rate of 35% over the last two years. 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 .

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

5) CONCLUSION AND RECOMMENDATIONS FUTURE PROSPECTS Current trends indicate a smooth run for the auto component industry. This trend has also enabled Indian companies to gain a competitive 98 . The Indian automobile industry offers great potential considering the low penetration along with rising income levels and a rapidly growing middle class. For instance. to a force ready to face global competition. 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. 7.Top We hope that the fine points that have emerged from this study are useful for further deliberation. These two segments are estimated to grow at between 10-12% for at least the next five years. • The entry of global OEMs. since 2000. especially passenger cars and two wheelers. In fact. Skoda plans to source parts for its European operations from its Indian base and raise indigenisation level for Indian models to 70%. These factors will see a boost in demand for vehicles. The industry is transforming from being highly domestic-centric. has given a big boost to the industry. making India as their manufacturing base. this is one sector which has made a global mark and has been identified as a sunrise industry.

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

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

8.0)PHARMACEUTICAL INDUSTRY 101 .

The generic opportunities in the overseas market. Africa etc.2)METHODOLOGY The definition of small and medium enterprises (SMEs) in the Indian context has remained contentious until recently. 12% of the SMEs considered for this analysis are keenly involved in R&D activities such as clinical trials and contract research.8. R&D would be the key growth driver and survival strategy for SMEs. Emerging Pharmaceutical SMEs of India will provide the right platform for SMEs. enabling them to become globally competitive.000 mn. Mumbai with 28% and Ahmedabad with 8% of total companies top the charts. proprietary firms are 9%. CRAMs (Contract Research and Manufacturing Services) opportunities would keep the pharmaceutical industry on a high growth trajectory. 8. The report covers SMEs based in 10 pharmaceutical clusters. • Going forward. Middle East. exports. while Hyderabad with 8% and Delhi with 10% are key hubs in southern and northern regions respectively. Small and Medium Enterprises Development Act of 2006. growing domestic market. This report has profiled 271 companies with a turnover of less than Rs 1.1)EXECUTIVE SUMMARY Emerging Pharmaceutical SMEs of India attempts to provide a platform to the pharmaceutical SMEs. In the western region. partnership firms 14%. 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. Europe. Considering the 102 . orientation towards R&D. 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. 19% in the South and 4% in the East. Around 21% companies are located in the North. will continue to remain the biggest opportunity for pharmaceutical companies. Moreover. as many as 225 companies provided us sufficient data points to enable a statistical analysis. Of the 271 companies profiled. 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. Interestingly. Gujarat and Maharashtra. As per the Micro. Some of the insights revealed include: • In terms of ownership pattern. with a reported growth of 22% in the last five years. and SMEs are expected to play a critical role. 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.

the domestic industry stands fourth in terms of volume and 13th in value terms. 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 ranking in value terms may also be a refl ection of the low prices at which medicines are sold in the country. growth prospects and production efficiencies. competitive dynamics and the future outlook for the segment. technology base and the wide range of products manufactured. 8. trading companies have been excluded. Other considerations included financial growth performance over the past two years. The SME Insights section presents analytical findings drawn from the primary information collated by the various research conducted by the leading consulting firms. growing at an annual rate of 9%.3) DATA COLLECTION AND ANALYSIS. Bulk drugs of all major therapeutic groups. Emerging Pharmaceuticals SMEs of India focuses on manufacturers of pharmaceuticals. OVERVIEW OF PHARMACEUTICAL INDUSTRY The Indian Pharmaceutical industry has been witnessing phenomenal growth in recent years.000 mn turnover for auto component SMEs. multinational companies and subsidiaries of multinational companies. The industry has seen tremendous progress in terms of infrastructure development. Pharma companies have developed Good Manufacturing Practices (GMP) compliant facilities for the production of different dosage forms. The report includes diversified companies operating in the pharmaceutical and having business interests in other industries. The pharmaceutical industry in India is estimated to be worth about US$ 10 bn. thus honouring the true Indian entrepreneurial spirit that the SMEs represent. Companies with negative net worth and those declared financially sick by the Board for Industrial & Financial Reconstruction (BIFR) were eliminated. 103 . Dun & Bradstreet India (D&B India) has formulated a correlation between investment and turnover to arrive at a cut-off Rs 1. The report has excluded subsidiaries of large Indian business houses. driven by rising consumption levels in the country and strong demand from export markets.challenges entailed in tapping financial information from a highly fragmented sector. 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. In world rankings. Based upon the Survey Organization (NSSO) And database. requiring complicated manufacturing processes are now being produced in India. 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. touches upon auto component of the country. Demand from the exports market has been growing rapidly due to the capability of Indian players to produce costeffective drugs with world class manufacturing facilities.

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

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

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

under rising manpower costs and higher regulatory risk. Remarkably. APIs and intermediates to more than 200 countries across the world. Nigeria and India’s neighbouring countries like Sri Lanka. in which India possesses competence. India has leveraged this advantage to attract clinical trials process outsourced by the companies involved in innovation. The Indian pharma industry possesses world standard manufacturing facilities as per the GMP norms which are approved by various regulatory agencies across the globe. Divi’s Lab. 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. Dishman Pharma. Cadila Healthcare. India exports pharmaceutical products. 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. This factor is forcing MNCs to outsource part of their R&D and manufacturing activities to low cost destinations like India and China. Expanding presence in regulated market Over the years. though difficult to penetrate due to stringent regulations. Majority of the contract manufacturing deals relate to production of active pharmaceutical ingredients (APIs) and intermediates. Lupin. despite the growing domestic demand. Russia. and R&D productivity of these players has gone down significantly in recent years. In fact. which is stringent and is also subject to high legal risk. Currently. Nepal. are known to give better value and margin to exporters 107 . exports constitute 48% of estimated turnover of the industry as compared to nearly 35% during CY02. India has shown better regulatory awareness and superior technical skills. the proportion of exports in domestic turnover has been increasing over the years.Leveraging CRAMs opportunities The global pharmaceutical industry is increasingly facing cost pressures on various counts. Germany. the process of getting approval of new products in regulated market requires strict compliance of quality norms. Traditionally. 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. Regulated markets. Nicholas Piramal. The diverse disease profile and abundance of patients in India provides better ground for clinical trials. Most of these markets are not highly regulated and are considered to be low-value markets. and the Middle East were the major markets for Indian pharmaceutical exports. which has enabled Indian companies to penetrate the high-value markets like the US and EU. Growing exports Exports have been the major growth enabler of the Indian pharmaceutical industry in recent years. Shasun Chemicals.

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

Low R&D productivity Despite the increasing expenditure on R&D. Europe has emerged as the most preferred destination for acquisitions by Indian companies. have also witnessed erosion in margins in certain therapeutic segments. The fall in prices of generic drugs are not limited to India only. marketing. In 2005. SME INSIGHTS This study aims to draw a profile of how small and medium companies in the pharmaceuticals space function. and in most of the cases. we have considered all the 225 companies. According to reports. Indian players. a hit-and-miss situation in the field of discovery and developments of new chemical entity (NCEs). The US. with 20 buyouts abroad. The leading pharma companies in India have been actively extending the frontiers of scientific knowledge and going global through mergers and acquisitions. Very few discoveries reach the final stages of approvals. which restricts margins of the smaller players. the requirement being that at least 80-90% of the information sought has been provided. which have been operating in these markets. Moreover. The European generics market has emerged as a major attraction for acquisitions by Indian companies. In spite of the rising expenditure in R&D. The erosion in prices is to the extent of 90% in some cases. Some other developed countries like the UK and Germany have also witnessed the same scenario. The changing global pharmaceutical industry has transformed prospects of Indian pharmaceutical companies. is also experiencing a sharp reduction in prices of generic drugs due to stiff competition. the industry has the potential to achieve a size of US$ 40 bn 8.4) FINDINGS. where misses are more than hits. efficiency parameters. Consolidation is inevitable and is expected to bring in economies of scale and provide access to newer geographies to regional players. which include Dr Reddy’s buyout of Germany’s Betapharm and Ranbaxy’s purchase of Romania’s Terapia. which is the world’s largest pharmaceutical market. the expansion of capacities by certain leading players has also fuelled competition in certain product categories. acquisitions by the Indian pharmaceutical companies were the highest. in fact. etc. A similar trend was observed during 2006. margin erosion in Europe is much less compared to the US when a drug or formulation becomes generic. business practices. preferences. For this quantitative exercise. It is. at average 4% as compared to the global practice of spending 12-16% of sales on R&D. we have attempted to chart their operational structure.a fast rise in the number of players over a period of time. The Government has estimated that by year 2015. the introduction of new molecules by Indian players has been limited. Some key characteristics of the sample of 225 companies are: 109 . the claim for patent gets stuck in legal battles. the level of investment in R&D is still low.

with 60% of these companies located in the western region of the country. 48% companies were exporting their products. • Around 82% of the companies in the sample are small scale enterprises on the basis of investments in plant and machinery.7%. Proprietary and partnership firms were mostly in the turnover bracket of less than Rs 10 mn. The largest number of companies with quality certification was among the private and public limited companies. but 75% companies were purely manufacturing companies with own facilities.5% of the companies were doing R&D work (clinical tests as well as contract research) along with manufacturing. Some key highlights have been presented below. • Around 57% of the companies in the sample began operations before 1990 while only 11% are relatively new having begun operations post-2000.6%.7% and public limited companies 24. Ownership pattern Private and public limited companies largely dominate the sample accounting for 76%. • Apart from Orissa. 13% companies were engaged in manufacturing as well as trading. Companies engaged in contract-based manufacturing were observed largely among private limited companies.7% in the East. The companies engaged in the dual function of manufacturing and R&D were mostly medium sized enterprises. Close to 1. Another 5% companies are solely into intermediaries. Research & Development Companies in the sample that have undertaken only clinical trials were small enterprises with investments of up to Rs 10 crore. the sample covers companies from 10 out of the 11 pharmaceutical clusters identified.8% in the South and 3. Exports Of the total sample. These companies largely sold their products in the domestic market.1% of the companies located in this region. and another 10. The West-based companies were found to be dominating in terms of exports with 61% of those exporting concentrated in this region. The rest are medium enterprises.• Ownership pattern of companies include: proprietary firms 9. which includes 2% companies also into intermediaries. The 100% export-oriented firms were mostly large companies with turnover above Rs 500 mn. private limited companies 51. while 13% are into other forms of medicines like herbal and ayurveda. • In the sample. Companies with investments between Rs 10-50 mn were engaged in manufacturing as well as clinical trails. 18. • 59% of the companies have a single manufacturing facility while the remaining operates with 2 or more plants. Companies manufacturing allopathic formulations account for 74%. It has been observed that pharmaceutical companies are largely concentrated along the coastal states. 110 .4% companies are located in the North. Around 21.5% of the companies were focused on only research & development. • The representation of companies is highest from the West with 56. R&D operations among companies did not show any connection with ownership patterns. around 98% of the companies were necessarily into manufacturing either on their own or on contractual basis. • Bulk drug manufacturers constitute 8% of the sample. partnership firms 14%.

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

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

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

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

115 .

Sign up to vote on this title
UsefulNot useful