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A Report on

Analysis of Macro Business Environments,


Business Opportunities-Threats,
and
Strengths-Weaknesses
Of
IT, Pharmaceutical, and Textile Industry
in India

Submitted to
Mr. Saroj Misra,
Faculty, Business Development in South Asia,
South Asian Institute of Management

Submitted by
Ajay Shrestha [#1301]
Dipika Silwal [#1306]
Minesh Rajbhandari [#1311]
Richa Rungta [#1311]
Sudhir Dhungel [#1327]
Swakiya Shrestha [#1330]

Fifth Term, SAIM


Date: May 24, 2010
Analysis of Macro Business Environment and SWOT Analysis of Key Industries in India

Executive Summary

This report was commissioned to analyze the critical environments of business in India,
identify the present opportunities and threats, and identify the industries which have a
huge potential considering the South Asia as an entire market.

This report provides an analysis of key environments of business in India which is one of
the fastest growing economies in the world. Those key environments include political,
economic, socio-cultural, technological and ecological environment. Analysis of these
influential environments has been used to identify business opportunities and threats in
the country along with the three industries which have been performing well. Selection of
industries has been done on the basis of its current performance, its viability with respect
to environmental analysis and its potential to contribute more to the Indian economy
through its comparative advantage in South Asia.

Environmental analysis starts with the analysis of political environment where the
Legislature, the Executive, the Judiciary, the States, Election Commission, Political
Influence in Business and Indian Corporate Governance practices has been analyzed.
Analysis of economic environment include the analysis of business ideology being
influenced by political ideology, GDP trends, per capita Income and Consumption,
Market Size, Growth Rate, Foreign Direct Investment (FDI) and reasons for FDI
attraction in India. It also analyzes the economy with respect to the models of command
and market economy. Demography, Caste System, Women Empowerment and
Consumption Pattern are important analysis that forms the socio-cultural environment
analysis. While analyzing the technological environment, transportation and
communication sector have been considered. India as an emerging market for value-
added services and telecom equipment manufacturing has been studied in the process.
Finally, environmental analysis has been concluded with the analysis of ecological
environment (Geography, Rural Environment, Biological & Agricultural Diversity and
Domestic Resources).

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Analysis of Macro Business Environment and SWOT Analysis of Key Industries in India

With the help of environmental analysis, business opportunities and threats have been
identified. Also, on the basis of current performance of the industry and future prospects,
following three industries have been selected and analyzed with respect to industry
strengths and weaknesses.

i. Pharmaceutical Industry
ii. Information Technology Industry
iii. Textile Industry

After independence, development of pharmaceutical industry was one of the top agenda
of government along with steel and manufacturing industry. Today the Indian
pharmaceutical industry is the front-runner science-based industries in the country.

Measured by the age of many industries, the computer or information technology (IT)
software industry in India is still in its infancy. Yet, its growth and development has
caught the attention of the world market so much so that India is now being identified as
the major powerhouse for incremental development of computer software.

The textile industry holds significant status in India. Though the industry was
predominantly unorganized industry even a few years back, but the scenario started
changing after the economic liberalization of Indian economy in 1991. The opening up of
economy gave the much-needed thrust to the Indian textile industry, which has now
successfully become one of the largest in the world.

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Analysis of Macro Business Environment and SWOT Analysis of Key Industries in India

Table of Contents

EXECUTIVE SUMMARY.............................................................................................................................I
1. OVERVIEW OF INDIAN ECONOMY...................................................................................................1
2. POLITICAL ENVIRONMENT................................................................................................................2
2.1 GOVERNMENT OF INDIA...............................................................................................................................2
2.1.1 The Legislature..............................................................................................................................2
2.1.2 The Executive.................................................................................................................................3
2.1.3 The Judiciary.................................................................................................................................4
2.1.4 The States.......................................................................................................................................4
2.1.5 Election Commission.....................................................................................................................4
2.2 POLITICAL PARTIES IN INDIA........................................................................................................................5
2.3 NON-STATE PLAYERS: MAOISTS..................................................................................................................5
2.4 POLITICAL INFLUENCE IN BUSINESS...............................................................................................................6
2.5 CORPORATE GOVERNANCE IN INDIA..............................................................................................................8
2.5.1 Pre-liberalization...........................................................................................................................8
2.5.2 Post-liberalization ........................................................................................................................9
2.6 DICTATORSHIP VS. DEMOCRACY.................................................................................................................11
2.6.1 Pre-Independence........................................................................................................................11
2.6.2 Post-Independence.......................................................................................................................12
3. ECONOMIC ENVIRONMENT..............................................................................................................13
3.1 ECONOMIC IMPACT OF THE BRITISH RULE IN INDIA........................................................................................13
3.2 POLITICS AND ECONOMY (POST-INDEPENDENCE INDIA)..................................................................................15
3.2.1 Jawaharlal Nehru (August 15, 1947 - May 27, 1964).................................................................15
3.2.2 Lal Bahadur Shastri (June 9, 1964 - January 11, 1966).............................................................16
3.2.3 Indira Gandhi (January 24, 1966 - March 24, 1977)..................................................................16
3.2.4 Rajiv Gandhi (October 31, 1984 - December 1, 1989)...............................................................17
3.2.5 P.V Narasimha Rao (June 1991 – May 1996).............................................................................17
3.3 GDP Growth Rates under various governments............................................................................18
3.4 KEY ECONOMIC INDICATORS......................................................................................................................19
3.4.1 Gross Domestic Product..............................................................................................................19
3.4.2 PER CAPITA INCOME AND CONSUMPTION..................................................................................................19
3.4.3 Market Size..................................................................................................................................20
3.4.4 Growth Rate.................................................................................................................................22
3.4.5 Foreign Direct Investment...........................................................................................................23
3.5 CONTROL ECONOMY VS. MARKET ECONOMY...............................................................................................24
3.5.1 Pre-liberalization (Phase of control economy)...........................................................................24
3.5.2 Post-liberalization (Move towards market economy)..................................................................25
4. SOCIO-CULTURAL ENVIRONMENT................................................................................................27
4.2 DEMOGRAPHY OF INEQUALITY....................................................................................................................27
4.2.1 Old Age Dependency Ratio with Gini Coefficient.......................................................................27
4.2.2 Relationship between percentage of public sector employees and inequality.............................28
4.2.3 Relationship between urbanization and inequality......................................................................28
4.2.4 Relationship of Corruption and Inequality..................................................................................29
4.3 POPULATION............................................................................................................................................29
4.3.1 Rural and Urban Population ......................................................................................................30
4.4 RELIGION................................................................................................................................................30
4.5 LANGUAGE..............................................................................................................................................30
4.6 LITERACY RATE.......................................................................................................................................30
4.7 CASTE SYSTEM........................................................................................................................................31
4.8 WOMEN EMPOWERMENT...........................................................................................................................32

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4.9 CONSUMPTION PATTERN............................................................................................................................33


5. TECHNOLOGICAL ENVIRONMENT................................................................................................37
5.1 TRANSPORTATION SECTOR.........................................................................................................................37
5.1.1 Railways.......................................................................................................................................38
5.1.2 Roads...........................................................................................................................................38
5.1.3 Ports.............................................................................................................................................38
5.1.4 Aviation........................................................................................................................................38
5.2 COMMUNICATION......................................................................................................................................39
5.3 POWER....................................................................................................................................................39
5.4 R&D IN INDIAN INDUSTRY.......................................................................................................................41
6. ECOLOGICAL ENVIRONMENT.........................................................................................................42
6.1 POLLUTION..............................................................................................................................................43
6.2 UNCONTROLLED POPULATION GROWTH.......................................................................................................43
6.3 ENVIRONMENTAL ISSUES............................................................................................................................44
6.4 EFFECT OF GLOBAL WARMING...................................................................................................................45
6.5 INDUSTRIAL POLLUTION AND THE ENVIRONMENT............................................................................................45
6.6 INITIATIVES BY THE GOVERNMENT..............................................................................................................46
7. OPPORTUNITIES AND THREATS IN INDIA...................................................................................47
7.1 OPPORTUNITIES........................................................................................................................................47
7.1.1 Political Environment..................................................................................................................47
7.1.2 Economic Environment................................................................................................................48
7.1.3 Social Environment......................................................................................................................49
7.1.4 Technological Environment.........................................................................................................49
7.1.5 Ecological Environment..............................................................................................................49
7.2 THREATS.................................................................................................................................................50
7.2.1 Political Environment..................................................................................................................50
7.2.2 Economic Environment................................................................................................................50
7.2.3 Social Environment......................................................................................................................52
7.2.4 Technological Environment.........................................................................................................52
7.2.5 Ecological Environment..............................................................................................................53
8. INFORMATION TECHNOLOGY INDUSTRY...................................................................................54
8.1 WHY INFORMATION TECHNOLOGY INDUSTRY?..............................................................................................54
8.2 STRENGTHS..............................................................................................................................................55
8.3 WEAKNESSES...........................................................................................................................................55
8.4 COMPARATIVE ADVANTAGES......................................................................................................................57
8.5 GROWTH TREND OF SOFTWARE INDUSTRY...................................................................................................58
9. PHARMACEUTICAL INDUSTRY.......................................................................................................60
9.1 WHY PHARMACEUTICAL INDUSTRY?...........................................................................................................60
9.2 STRENGTHS..............................................................................................................................................61
9.3 WEAKNESSES...........................................................................................................................................62
9.4 COMPARATIVE ADVANTAGE.......................................................................................................................64
9.5 GROWTH TREND OF PHARMACEUTICAL INDUSTRY.........................................................................................65
10. TEXTILE INDUSTRY...........................................................................................................................67
10.1 WHY TEXTILE INDUSTRY?.......................................................................................................................67
10.2 STRENGTHS............................................................................................................................................68
10.3 WEAKNESSES.........................................................................................................................................68
10.4 GROWTH TREND OF TEXTILE INDUSTRY....................................................................................................70
10.5 FDI INFLOWS TO TEXTILES INDUSTRY AND GOVERNMENT INITIATIVE............................................................71
REFERENCES.............................................................................................................................................72

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List of Tables

TABLE 1: IMPACT OF EMERGENCY BY INDIRA GANDHI ON ECONOMY..............................16


TABLE 2: ECONOMY DURING RAJIV GANDHI’S TIME.................................................................17
TABLE 3: GROWTH OF TOTAL GDP AT FACTOR COST AND CONTRIBUTION OF
SECTORS......................................................................................................................................................19
TABLE 4: OLD AGE DEPENDENCY RATIO (1961-1991)...................................................................27
TABLE 5: EMPLOYMENTS IN ORGANIZED SECTOR: PRIVATE AND PUBLIC.......................28
TABLE 6: PERCENTAGE OF URBAN POPULATION AND GINI....................................................28
TABLE 7: POPULATION GROWTH TREND IN INDIA, 1901-1991..................................................29
TABLE 8: PROGRESS OF LITERACY RATE IN INDIA (1901 - 2001)..............................................31
TABLE 9: MAN-DAY LOST DUE TO LOCK-OUTS.............................................................................51
TABLE 10: VALUE OF PRODUCTION OF BULK DRUGS AND FORMULATION (IRS. IN
CRORE).........................................................................................................................................................65
TABLE 11: EXPORT TREND IN TEXTILE PRODUCTS.....................................................................70

List of Figures

FIGURE 1: DICTATORSHIP VS. DEMOCRACY CONTINUUM.......................................................12


FIGURE 2: GDP GROWTH RATES UNDER VARIOUS GOVERNMENTS.....................................18
FIGURE 3: GROWTH IN PER CAPITA GDP AND CONSUMPTION...............................................20
FIGURE 4: COMPOSITION OF GDP BY INDUSTRIES......................................................................21
FIGURE 5: GDP GROWTH IN DIFFERENT YEARS...........................................................................22
FIGURE 6: GROWTH RATE OF TOTAL GDP (INDIA VS. SOUTH ASIA).....................................22
FIGURE 7: SECTOR-WISE FDI FLOW..................................................................................................23
FIGURE 8: SECTORS ATTRACTING HIGHEST FDI FLOWS (IRS. IN CRORES).......................23
FIGURE 9: CONTROL ECONOMY VS. MARKET ECONOMY CONTINUUM..............................26
FIGURE 10: CONSUMPTION PATTERN...............................................................................................34
FIGURE 11: RURAL VS. URBAN MONTHLY PER CAPITA EXPENDITURE...............................35

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Analysis of Macro Business Environment and SWOT Analysis of Key Industries in India

1. Overview of Indian Economy

India is developing into an open-market economy, yet traces of its past autarkic policies
remain. Economic liberalization, including reduced controls on foreign trade and
investment, began in the early 1990s and has served to accelerate the country’s growth,
which has averaged more than 7% per year since 1997. India’s diverse economy
encompasses traditional village farming, modern agriculture, handicrafts, a wide range of
modern industries, and a multitude of services. Slightly more than half of the work force
is in agriculture, but services are the major source of economic growth, accounting for
more than half of India’s output, with only one-third of its labor force.

India has capitalized on its large educated English-speaking population to become a


major exporter of information technology services and software workers. An industrial
slowdown early in 2008, followed by the global financial crisis, led annual GDP growth
to slow to 6.5% in 2009, still second highest growth in the world among major
economies. Domestic demand, driven by purchases of consumer durables and
automobiles, has re-emerged as a key driver of growth, as exports have fallen since the
global crisis started. India’s fiscal deficit increased substantially in 2008 due to fuel and
fertilizer subsidies, a debt waiver program for farmers, a job guarantee program for rural
workers, and stimulus expenditures.

The government abandoned its deficit target and allowed the deficit to reach 6.8% of
GDP in FY10. Nevertheless, as shares of GDP, both government spending and taxation
are among the lowest in the world. The government has expressed a commitment to fiscal
stimulus in FY10, and to deficit reduction the following two years. It has increased the
pace of privatization of government-owned companies, partly to offset the deficit. India’s
long term challenges include widespread poverty, inadequate physical and social
infrastructure, limited employment opportunities, and insufficient access to basic and
higher education. Over the long-term, a growing population and changing demographics
will exacerbate social, economic, and environmental problems but possibilities of strong
business growth remains.

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2. Political Environment

Inspired by Mahatma Gandhi and his Satyagraha, a unique non-violent campaign, India
threw off the yoke of British rule on August 15, 1947. Free India’s first Prime Minister,
Pandit Jawaharlal Nehru, described the moment as a “tryst with destiny”.

In less than three years of attaining freedom, India had framed a Constitution and
declared itself a Republic on January 26, 1950. The Constitution was given shape by
some of the finest minds of the country who ensured the trinity of justice, liberty and
equality, for the citizens of India. The Constitution was made flexible enough to adjust to
the demands of social and economic changes within a democratic framework. Adopting
the path of democracy, the country held its first general elections in 1952. Elections to the
Lower House of Parliament, Lok Sabha, have been held regularly every five years.

India is a Union of 28 States and seven centrally administered Union Territories. The
country attained freedom on 15 August 1947. The Constitution of the Republic came into
effect on 26 January 1950. The Constitution provides for single and uniform citizenship
for the whole nation and confers the right to vote on every person who is a citizen of
India and 18 years of age or older.

2.1 Government of India

2.1.1 The Legislature

India has a parliamentary form of government based on universal adult franchise. The
executive authority is responsible to the elected representatives of the people in the
Parliament for all its decisions and actions. Sovereignty rests ultimately with the people.
The Parliament is bi-cameral:

2.1.1.1 Rajya Sabha (Council of States)

The Council of States consists of not more than 250 members, of whom 12 are nominated
by the President of India and the rest elected. It is not subject to dissolution, one-third of

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its members retiring at the end of every second year. The elections to the Council are
indirect. The allotted quota of representatives of each State is elected by the members of
the Legislative Assembly of that State, in accordance with the system of proportional
representation by means of a single transferable vote. The nominated members are
persons with special knowledge or practical experience in literature, science, art and
social service. The Rajya Sabha is presided over by the Vice- President of India.

2.1.1.2 Lok Sabha (House of the People)

The House of the People consists of 545 members. Of these, 530 are directly elected from
the 25 States and 13 from the seven Union Territories. Two members are nominated by
the President to represent the Anglo-Indian community.

Unless dissolved sooner, the term of the House is five years from the date appointed for
its first meeting. The Lok Sabha elects its own presiding officer, the Speaker.

2.1.2 The Executive

The President of India is the Head of the State and the Commander-in-Chief of the
Armed Forces. He is elected by an electoral college composed of members of both the
Houses of Parliament (Rajya Sabha and Lok Sabha) and the legislatures of the nations
constituent States. The President holds office for five years and can be re-elected.

The President does not normally exercise any constitutional powers on his own initiative.
These are exercised by the Council of Ministers, headed by the Prime Minister, which is
responsible to the elected Parliament.

The Vice-President is elected jointly by the members of both the Houses of Parliament.
The person enjoying majority support in the Lok Sabha is appointed Prime Minister by
the President. The President then appoints other ministers on the advice of the Prime
Minister. The Prime Minister can remain in office only as long as he or she enjoys
majority support in the Parliament.

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2.1.3 The Judiciary

The judiciary is independent of the executive. It is the guardian and interpreter of the
Constitution. The Supreme Court is the highest judicial tribunal, positioned at the apex of
a single unified system for the whole country. Each State has its own High Court. A
uniform code of civil and criminal laws applies to the whole country.

2.1.4 The States

The States have their own Legislative Assemblies and in certain case a second Chamber.
All members of the Legislative Assemblies are elected by universal adult franchise. The
Head of the States are called Governors. Appointed by the President, they normally
exercise the same powers in the States as the President does at the Union government
level. As in the Central Government, each State has a Cabinet headed by the Chief
Minister responsible to the elected State Legislature.

2.1.5 Election Commission

The electoral machinery is centralized in an independent statutory body called the


Election Commission. The Commission is responsible for the ‘superintendence, direction
and control’ of the electoral rolls for all elections to Parliament and to the State
Legislatures and also for conducting the elections.

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2.2 Political Parties in India

There are seven parties recognized as national parties.


i. Bahujan Samaj Party
ii. Bharatiya Janata Party
iii. Communist Party of India
iv. Communist Party of India (Marxist)
v. Indian National Congress
vi. Nationalist Congress Party
vii. Rashtriya Janata Dal

2.3 Non-State Players: Maoists

Communist Party of India (Maoist) is a Maoist political party in India which aims to
overthrow the government of India. It was founded on September 21, 2004, through the
merger of the Communist Party of India (Marxist–Leninist) People’s War and the Maoist
Communist Centre of India (MCC). The merger was announced to the public on October
14 the same year. In the merger a provisional central committee was constituted, with the
erstwhile People’s War Group leader Muppala Lakshmana Rao alias Ganapathi as
General Secretary.

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2.4 Political influence in Business

A close relationship between business and government had existed for quite sometime in
India. During the British colonial rule, the interest of British companies was naturally
favored over the interest of Indian business houses). As the movement for freedom from
the British Raj gathered momentum in the1920s and 1930s, close relationships developed
between Indian businesses and leaders of the political movement for India’s
independence.

The pragmatic collaboration between the new Indian government and the business
community to build modern India continued in the immediate aftermath of independence
(1947 to 1960). However, relationship with business houses soured in the 1960s as Indian
government, under the leadership of Prime Minister Jawarharlal Nehru, moved the
country’s economic policies toward socialism. This period, often characterized as the
License Raj, began with the government’s desire to curb big business houses, and to
directly intervene in economic activities through public sector corporations.

Several prominent government commissions followed, such as Monopolies and


Restrictive Trade Practices Act (MRTP) and the Foreign Exchange Regulation Act
(FERA), and the nationalization of the largest private sector banks. These policy changes,
spearheaded by the government of Prime Minister Indira Gandhi, imposed strict
government controls on private sector’s ability to pursue growth opportunities, access
domestic finance, or collaborate with foreign technology or business partners. The FERA
act also required that multinational companies operating in India divest their ownership
so that a majority of the ownership in the Indian operations was held by Indian
shareholders.

In the mid-1980s, under the government of Prime Minister Rajiv Gandhi, a gradual move
towards deregulation began. These reforms relaxed some of the MRTP and import
restrictions, and freed up some of the economy from licensing requirements. Despite
these changes, the Indian economy grew at a fairly modest rate during this entire period,

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culminating in a foreign exchange payment crisis in the early 1990s. This crisis led to a
dramatic deregulation and liberalization of the Indian economy. Under the Congress
Party government of Prime Minister Narasimha Rao, and then subsequently under the
BJP government of Prime Minister Atal Behari Vajpayee, the MRTP and FERA Acts
were repealed, several sectors of the economy including telecom, commercial aviation,
and banking - previously reserved for the public sector - were opened to private sector,
and import duties were dramatically reduced.

As the contours of business-government relations shifted in India during the past half
century, there were complex shifts in relationships between individual business groups
and the government in power. Different groups occupied different positions of favoritism
at different times. There is evidence that these political connections played an important
role in the rise and fall of different business houses. But it is interesting that the groups
that remained dominant throughout did so despite ebbs and flows in their relationship
with the government. Clearly proximity to government was not the only cause of their
success.

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2.5 Corporate Governance in India

Corporate governance deals with the rights and responsibilities of a company’s


management, its board, shareholders and various stakeholders. Corporate governance in a
developing-country setting takes on additional importance. Good corporate governance is
vital because of its role in attracting foreign investment. The extent of foreign investment,
in turn, shapes the prospects for economic growth for many developing countries.

2.5.1 Pre-liberalization

When India attained independence from British rule in 1947, the country was poor, with
an average per-capita annual income under thirty dollars. However, it still possessed
sophisticated laws regarding “listing, trading, and settlements.” It even had four fully
operational stock exchanges. Subsequent laws, such as the 1956 Companies Act, further
solidified the rights of investors.

In the decades following India’s independence from Great Britain, the country turned
away from its capitalist past and embraced socialism. The 1951 Industries Act was a step
in this direction, requiring “that all industrial units obtain licenses from the central
government.” The 1956 Industrial Policy Resolution “stipulated that the public sector
would dominate the economy.” To put this plan into effect, the Indian government
created enormous state-owned enterprises, and India steadily moved toward a culture of
“corruption, nepotism and inefficiency.” As the government took over floundering
private enterprises and rejuvenated them, it essentially “converted private bankruptcy to
high-cost public debt.” One scholar referred to India’s economic history as “the
institutionalization of inefficiency.”

The absence of a corporate-governance framework exacerbated the situation.


Government accountability was minimal, and the few private companies that remained on
India’s business landscape enjoyed free reign with respect to most laws; the government
rarely initiated punitive action, even for nonconformity with basic governance laws.
Boards of directors invariably were staffed by friends or relatives of management, and

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abuses by dominant shareholders and management were commonplace. India’s equity


markets “were not liquid or sophisticated enough” to punish these abuses.

“Takeover threats act as a disciplining mechanism to poorly performing companies”


because as the stock price of poorly governed-firms decreases, the firms become
susceptible to hostile-takeover attempts. Thus, “the fear of a takeover is supposed to
keep the management honest.” However, until recently, hostile takeovers were almost
entirely non-existent in India, and therefore, the poorly governed Indian firms had little to
worry about in terms of following corporate laws once they had raised capital through
their initial public offering. Thus, corporate governance in India was in a dismal
condition by the early 1990s.

2.5.2 Post-liberalization

In 1999, in a defining moment in India’s corporate-governance history, the Indian


Parliament created the Securities and Exchange Board of India (“SEBI”) to “protect the
interests of investors in securities and to promote the development of, and to regulated
the securities market.” In the years leading up to 2000, as Indian enterprises turned to the
stock market for capital, it became important to ensure good corporate governance
industry-wide. Additionally, an excess of scam shocked the Indian business scene, and
corporate governance emerged as a solution to the problem of unscrupulous corporate
behavior.

In 1998, the Confederation of Indian Industry (“CII”), “India’s premier business


association,” unveiled India’s first code of corporate governance. However, since the
Code’s adoption was voluntary, few firms embraced it. Soon after, SEBI appointed the
Birla Committee to fashion a code of corporate governance. In 2000, SEBI accepted the
recommendations of the Birla Committee and introduced Clause 49 into the Listing
Agreement of Stock Exchanges. Clause 49 outlines requirements vis-à-vis corporate
governance in exchange-traded companies. In 2003, SEBI instituted the Murthy
Committee to scrutinize India’s corporate-governance framework further and to make

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additional recommendations to enhance its effectiveness. SEBI has since incorporated the
recommendations of the Murthy Committee, and the latest revisions to Clause 49 became
law on January 1, 2006.

If we analyze the overall political system and governance of India, we can say that the
Indian legal system provides one of the highest levels of investor protection in the world,
the reality is different with slow, over-burdened courts and significant corruption. Much
of the country’s extensive small and medium enterprises (SME) sector displays
relationship-based informal control and governance mechanisms. Even among large
companies, shareholdings remain relatively concentrated with “promoters” and family
business groups continuing to dominate the corporate sector. There is significant
pyramiding and tunneling among Indian business groups and, not withstanding abundant
reporting requirements, evidence of earnings management. This is not surprising:
concentrated ownership and family control are important in countries where enforceable
legal protection of minority property rights is relatively weak. Family controlled
businesses provide an organizational form that reduces transaction costs and asymmetric
information problems under these conditions.

Despite the above corporate governance shortcomings, the Indian economy and its
financial markets have started attaining impressive growth rates in recent years, and
display an exceptionally high level of optimism. The reason is that India is now clearly
and strongly committed to sustaining and rapidly furthering the major economic reforms
and the liberalization started in the early nineties.

Specifically, the Securities and Exchanges Board of India established as a part of these
reforms, has a rigorous regulatory regime to ensure fairness, transparency and good
practice, and the National Stock Exchange of India, also established as part of the
reforms, functions efficiently and transparently to now trade among the highest number
of trades in the world, just behind NASDAQ and NYSE. The traditional Bombay Stock
Exchange has also reformed effectively. Most importantly, the corporate governance
landscape in the country has been changing very fast over the past decade, particularly

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with the enactment of Sarbanes-Oxley type measures in Clause 49 of the listing


agreements, and legal changes to improve the enforceability of creditor’s rights. We are
also seeing the rise of companies like INFOSYS that are free from the influence of a
dominant family or group, and make the individual shareholder their central governance
focus. There is a strong momentum for continuing reforms, and the monumental changes
that have already taken place pave the way for more changes to come. All these positive
developments should arguably help Indian industry ensure that their financial gains reach
their investors fairly and transparently, and enable it to sustain its new-found prosperity
and growth and the political system is India is also stable.

2.6 Dictatorship vs. Democracy

2.6.1 Pre-Independence

During British Raj, India was under British Colonialism. The presence of British in India
dates back to the early 17th century. The East India Company was chartered by Queen
Elizabeth on December 31, 1600 to develop commerce and trade with the East Indies.
The main motive of the English to come to India was to break the monopoly of Dutch in
the spice trade. With time, British Parliament took over the full responsibility for the
governance of India. The governing power was to be exercised by the Secretary of the
state assisted by an Indian council, which only had advisory powers. India was divided
into three presidencies namely Madras, Bengal and the Bombay presidency for
administrative purposes.

Queen Victoria assured that she and her officers would work for the welfare and
upliftment of their subjects. The interest of the British in the governance of India became
obvious. They utilized Indian resources to serve the interests of the British Empire in
costly wars and other parts of the world. The British overthrew many princely states and
formulated laws and policies of their own. Gradually the whole of India came under
British rule. The English introduced railways, telegraph and postal services in India
during the 19th century. This was a step towards establishing themselves permanently in

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India. So we can say that, during British rule, India was under dictatorship and to become
a democratic and independent country Indians revolt against British and finally in 1947,
they became independent country.

2.6.2 Post-Independence

Politics of India take place in a framework of a federal parliamentary multi-party


representative democratic republic modeled after the British Westminster System. India
is the largest democracy in the world. The Prime Minister of India is the head of
government, while the President of India is the formal head of state and holds substantial
reserve powers, placing him or her in approximately the same position as the British
monarch. Executive power is exercised by the government. Federal legislative power is
vested in both the government and the two chambers of the Parliament of India. The
judiciary is independent of the executive and the legislature. According to its constitution,
India is a “sovereign socialist secular democratic republic.” India is the largest state by
population with a democratically-elected government.

But after independence in 1947, there was a period of emergency under the regime of
Indira Gandhi which can be viewed as dictatorship. The state of emergency (1975-1977)
imposed on the country then had suspended political freedoms and given her near
dictatorial powers. Similarly, before liberalization Indian economy was centralized with
lots of government intervention in all the sectors. But with end of emergency period,
dictatorship also ended and today India is democratic market with liberal economy.

Dictatorship Direction Democracy

Figure 1: Dictatorship vs. Democracy Continuum

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3. Economic Environment

Political ideology has had an influence in Indian economy. Political ideology basically
shaped the economic policy and model which impacted market performance.

3.1 Economic impact of the British rule in India

The chief motive of the British to establish political control in India was mainly
economic and commercial. The sole aim of the British government was to establish a
colonial market for the British goods. However the British impact on the economic life of
India was devastating and harmful. Britain used the most complicated methods to exploit
India’s vast rich economic reserves of India. After a control of two hundred years the
British completely shattered the economic set up of India. India in 1947 presented the
picture of an economically underdeveloped nation with hunger, poverty; low national
income etc.

Indian agricultures received maximum care under the east India Company. This was
primarily because the main sources of state income were lands revenue. Moreover it was
the sole aim of the British government was to establish India as agricultural base. Thus
the agricultural produces in India could provide cheap raw materials to industrial
England. The Company tried various experiments to maximize the land revenue by resort
to the method of oppression and repression to the peasants. The system of farming of land
revenue became obsolete. Cornwallis introduced Permanent Settlement or a system of
Land Revenue in Bengal, Bihar and Orissa in the year 1793. Subsequent administrators
introduced the Ryotwari system in the Bombay Presidency and most of the parts of the
Madras Presidency. The Mahalwari system proved extremely devastating in the part of
Uttar Pradesh. The Zamindary system encouraged absentee landlordism. It eventually
created a host of intermediaries between the state and the cultivator. This complicated
system of land revenue created a group of moneylender, who otherwise oppressed the
poor peasants by lending them at high interests. The poor cultivators could not repay

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those high interests and ultimately submitted to those moneylenders. As a result famine
was the regular feature of the time.
Indian industries suffered a maximum under the British domination. The superiority and
extensive sale of the Indian handicraft in Europe was directed to the commercial interests
of the Company. The Whig governments in the early years of the 18th century imposed
heavy duties on Indians textiles imports in Britain. After the Napoleonic wars the Indian
markets were made open to the British for free trades. The same British government now
permitted British machine made goods to be poured in India duty free or at nominal cost
only. The policy of one-way free trade, introduced in India made the Indian handicrafts
losing its market. This caused a great misery to a major section of Indian population.

The impact of British rule created capitalism and bourgeoisie commerce to attain a
thriving prosperity. The capitalist mode of production and bourgeoisie trends in the
commercial transaction destroyed the handicraft industries in the European countries too.
The evil impacts of the industrial revolution in England were suffered in India. The
process of industrial regeneration did not start in India, because of British imperialism.
Hence India was subjected in a continuing economic stagnation.

The imperial rulers were far from planning in the industrial developments in India; rather
they planned to de-industrialize India. Britain’s chief interest was to constitute India as an
agricultural farm for industrialized Britain. Hence the British rulers carried on the policy
of ruralization and peasantization of the Indian Economy. However several cropped up
Indians industries were cropped up from the situation of created by the World War I. The
economic depression of 1930s suffered from economics disability, which was mostly
controlled by the British finance and capital. Due to the development of industries like
iron and steel, heavy industries, metallurgical etc, traditional industries like textile,
cement, jute, paper, sugar, pig iron etc suffered a great deal.

The sole mission of the European in India was the economic exploitation. The burden of
the Europeans was carried on through the economic exploitation in India. The British
rulers created new economic structure belonged to the colonial institutions. The British

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established a colonial economy, colonial society and even colonial ideology. The
institution of landlordism, casteism infested with narrow political consideration,
communalism, regionalism etc were the immediate results of the British economic policy.
Moreover" distorted modernization" created new problems. In 1947, when the British
left, India represented a ruined economy, a sick society and the present danger of the evil
effects of neo-colonialism.

3.2 Politics and Economy (Post-Independence India)

3.2.1 Jawaharlal Nehru (August 15, 1947 - May 27, 1964)

Nehru presided over the introduction of a modified, Indian version of state planning and
control over the economy. Creating the Planning commission of India, Nehru drew up the
first Five-Year Plan in 1951, which charted the government’s investments in industries
and agriculture. Increasing business and income taxes, Nehru envisaged a mixed
economy in which the government would manage strategic industries such as mining,
electricity and heavy industries, serving public interest and a check to private enterprise.
Nehru pursued land redistribution and launched programs to build irrigation canals, dams
and spread the use of fertilizers to increase agricultural production. He also pioneered a
series of community development programs aimed at spreading diverse cottage industries
and increasing efficiency into rural India. While encouraging the construction of large
dams (which Nehru called the “new temples of India”), irrigation works and the
generation of hydroelectricity, Nehru also launched India’s programs to harness nuclear
energy.

For most of Nehru’s term as prime minister, India would continue to face serious food
shortages despite progress and increases in agricultural production. Nehru’s industrial
policies, summarized in the Industrial Policy Resolution of 1956, encouraged the growth
of diverse manufacturing and heavy industries, yet state planning, controls and
regulations began to impair productivity, quality and profitability. Although the Indian
economy enjoyed a steady rate of growth, chronic unemployment amidst widespread
poverty continued to plague the population.

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3.2.2 Lal Bahadur Shastri (June 9, 1964 - January 11, 1966)

In his first broadcast as Prime Minister, on 11 June 1964, Shastri stated:


“There comes a time in the life of every nation when it stands at the cross-roads of
history and must choose which way to go. But for us there need be no difficulty or
hesitation, no looking to right or left. Our way is straight and clear – the building up of a
socialist democracy at home with freedom and prosperity for all, and the maintenance of
world peace and friendship with all nations.”
So, he just continued with the Nehru’s socialist economic policies.

3.2.3 Indira Gandhi (January 24, 1966 - March 24, 1977)

India’s military defeat in the war with China in 1962 undermined the credibility of
Nehru’s foreign policy and ultimately led to Indira Gandhi signing a treaty with the
USSR in 1971 that, according to one analyst, “finally buried the idea of non-alignment.”
This act of Indira Gandhi brought about the influence of socialist forces in the economic
environment.

Table 1: Impact of emergency by Indira Gandhi on economy


Annual Growth Rate (%)
GDP NDP GNP NNP
Year at at at at Per Capita
Factor Factor Factor Factor NNP
Cost Cost Cost Cost
1972-73 10.0 9.7 10.0 9.7 7.2
1973-74 22.6 22.6 22.6 22.7 20.0
1974-75 17.7 16.8 17.9 17.0 14.4
1975-76 6.2 5.5 6.3 5.6 3.1
1976-77 7.5 7.5 7.5 7.5 5.3
1977-78 14.1 14.5 14.2 14.5 12.0

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3.2.4 Rajiv Gandhi (October 31, 1984 - December 1, 1989)

Rajiv Gandhi increased government support for science and technology and associated
industries, and reduced import quotas, taxes and tariffs on technology-based industries,
especially computers, airlines, defense and telecommunications. He introduced measures
significantly reducing the License Raj, allowing businesses and individuals to purchase
capital, consumer goods and import without bureaucratic restrictions. In 1986, he
announced a National Policy on Education to modernize and expand higher education
programs across India. He founded the Jawahar Navodaya Vidyalaya System in 1986
which is a Central government based institution that concentrates on the upliftment of the
rural section of the society providing them free residential education from 6th till 12th
grade. His efforts created MTNL in 1986, and his public call offices, better known as
PCOs, helped spread telephones in rural areas.

Table 2: Economy during Rajiv Gandhi’s Time


Annual Growth Rate
GDP NDP GNP NNP
Year at at at at Per Capita
Factor Factor Factor Factor NNP
Cost Cost Cost Cost
1984-85 12.3 12.0 12.1 11.8 9.4
1985-86 11.7 11.1 11.8 11.1 8.8
1986-87 11.5 11.2 11.4 11.1 8.8
1987-88 13.4 13.3 13.2 13.1 10.6
1988-89 19.3 19.6 18.9 19.1 16.6

3.2.5 P.V Narasimha Rao (June 1991 – May 1996)

P.V Narasimha Rao led one of the most important administrations in India’s modern
history, overseeing a major economic transformation and several incidents affecting
national security. Rao accelerated the dismantling of the Licence Raj. Rao, also called the
“Father of Indian Economic Reforms,” is best remembered for launching India’s free
market reforms that rescued the almost bankrupt nation from economic collapse. He was
also commonly referred to as the Chanakya of modern India for his ability to steer tough

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economic and political legislation through the parliament at a time when he headed a
minority government.

Rao’s major achievement is generally considered to be the liberalization of the Indian


economy. The reforms were adopted to avert impending international default in
1991. The reforms progressed furthest in the areas of opening up to foreign investment,
reforming markets, deregulating domestic business, and reforming the trade regime.
Rao’s government’s goals were reducing the fiscal deficit, privatization of the public
sector, and increasing investment in infrastructure. Trade reforms and changes in the
regulation of foreign direct investment were introduced to open India to foreign trade
while stabilizing external loans. Manmohan Singh, an acclaimed economist and current
prime minister of India, played a central role in implementing these reforms.

3.3 GDP Growth Rates under various governments

Figure 2: GDP Growth Rates under various governments

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3.4 Key Economic Indicators

3.4.1 Gross Domestic Product

The overall growth of GDP at factor cost at constant prices in 2008-09, as per revised
estimates released by the Indian Central Statistical Organization (CSO) (May 29, 2009)
was 6.7 per cent. This is lower than the 7 per cent projection in the Mid-Year Review
2008-09.The growth of GDP at factor cost (at constant 1999-2000 prices) at 6.7 per cent
in 2008-09 nevertheless represents a deceleration from high growth of 9.0 per cent and
9.7 per cent in 2007-08 and 2006-07 respectively.

Table 3: Growth of total GDP at Factor Cost and Contribution of Sectors

(Source: Economic Survey 2008-09)

3.4.2 Per Capita Income and Consumption

The per capita income in 2008-09, measured in terms of gross domestic product at
constant 1999-2000 market prices, was Rs. 31,278. In 2007- 08 this stood at Rs. 29,901.
Per capita consumption in 2008-09 was Rs. 17,344 as against a level of Rs. 17,097 in
2007-08. While there has been an increase in levels of per capita income and
consumption, there has been a perceptible slowdown in their growth rate. The growth in
per capita GDP decelerated from 8.1 per cent in 2006-07 to 4.6 per cent in 2008-09,
while the per capita consumption growth declined from 6.9 per cent in 2007-08 to 1.4 per
cent in 2008-09.

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Figure 3: Growth in per capita GDP and Consumption


(Source: Economic Survey 2008-09)
(Note: The top line is per cap GDP and the bottom line is per cap Consumption)

3.4.3 Market Size

The economy of India is the eleventh largest economy in the world by nominal GDP and
the fourth largest by purchasing power parity (PPP).In the 1990s, following economic
reform from the socialist-inspired economy of post-independence India, the country
began to experience rapid economic growth, as markets opened for international
competition and investment. In the 21st century, India is an emerging economic power
with vast human and natural resources, and a huge knowledge base. Economists predict
that by 2020, India will be among the leading economies of the world.

India’s large service industry accounts for 62.6% of the country’s GDP while the
industrial and agricultural sector contributes 20% and 17.5% respectively. Agriculture is
the predominant occupation in India, accounting for about 52% of employment.
The service sector makes up a further 34% and industrial sector around 14%.The labor
force totals half a billion workers.

Major agricultural products include rice, wheat, oilseed, cotton, jute, tea, sugarcane,
potatoes, cattle, water buffalo, sheep goats, poultry and fish. Major industries include
telecommunications, textiles, chemicals, food processing, steel, transportation equipment,
cement, mining, petroleum, machinery, information technology enabled services
and software.

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India’s per capita income (nominal) is $1,030, while its per capita (PPP) is
US$2,940. Previously a closed economy, India’s trade has grown fast. India currently
accounts for 1.5% of World trade as of 2007 according to the WTO. According to the
World Trade Statistics of the WTO in 2006, India’s total merchandise trade (counting
exports and imports) was valued at $294 billion in 2006 and India’s services trade
inclusive of export and import was $143 billion. Thus, India’s global economic
engagement in 2006 covering both merchandise and services trade was of the order of
$437 billion, up by a record 72% from a level of $253 billion in 2004. India’s trade has
reached a still relatively moderate share 24% of GDP in 2006, up from 6% in 1985.

India has 300 million strong middle-class population and is growing at an annual rate of
5%. This presents a huge opportunity for business.

Figure 4: Composition of GDP by Industries

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3.4.4 Growth Rate

While developed economies are not able to grow at a significant pace, India is able to.

Figure 5: GDP Growth in Different Years

India South Asia


Figure 6: Growth rate of Total GDP (India vs. South Asia)

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3.4.5 Foreign Direct Investment

During 2008-09, the total FDI equity inflows stood at IRs. 1,22,919 crore (US$ 27,309
million) against IRs. 98,664 crore (US$ 24,579 million) during 2007-08 signifying a
growth of 25 per cent in terms of rupee and 11 per cent in terms of US dollar. The
distribution of FDI within the industrial sector between mining, manufacturing, electricity
and construction was as follows.

Figure 7: Sector-wise FDI Flow

Figure 8: Sectors attracting highest FDI Flows (IRs. In Crores)

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3.5 Control Economy vs. Market Economy

India possesses the most complexly mixed economic system in the world, with all three
elements of tradition, market, and command strongly present. India was under social
democratic-based policies from 1947 to 1991. The economy was characterized by
extensive regulation, protectionism, and public ownership, leading to pervasive
corruption and slow growth. Since 1991, continuing economic liberalization has moved
the economy towards a market-based system. A revival of economic reforms and better
economic policy in 2000s accelerated India's economic growth rate. By 2008, India had
established itself as the world's second-fastest growing major economy. However, the
year 2009 saw a significant slowdown in India's official GDP growth rate to 6.1% as well
as the return of a large projected fiscal deficit of 6.8% of GDP which would be among the
highest in the world. In the 1990s, following economic reform from the socialist-inspired
economy of post-independence India, the country began to experience rapid economic
growth, as markets opened for international competition and investment.

3.5.1 Pre-liberalization (Phase of control economy)

When India attained independence from British rule in 1947, the country was poor, with
an average per-capita annual income under thirty dollars. In the decades following India's
independence from Great Britain, the country turned away from its capitalist past and
embraced socialism.

The first concern of its policy makers was to invest and create capacity in heavy
industries such as power, iron and steel, machinery production and chemicals. In other
words, the need of the hour was to develop the capital goods industry that would form the
foundation of industrialization. The private sector was left to cater to the demand for
consumer durables and non-durables. However, the government helped create industrial
competence in two ways. It invested in the creation of a network of public universities
and institutes for advanced research to supply qualified labor to the private sector and
public sector enterprises.

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At the same time, Indian industry grew under severe regulatory constraints in order to
maximize poverty alleviation and access facilitation of essentials to the poor. The Indian
government presided over what was in many respects a ‘closed command economy’ as
distinct from an ‘open market economy’. Many industrial policies were put in place that
discouraged foreign direct investment and permitted the emergence of Indian industry,
while channeling the business vision of Indian firms towards very short run profits with
the least R&D investment.

3.5.2 Post-liberalization (Move towards market economy)

India embraced economic reform and started introducing 10 liberalization policies from
1991. Industrial licenses for expansion of the manufacturing base were abolished.
Government regulation via manufacturing and marketing licenses only served to monitor
the quality and safety of the final products arriving in the market. Price control was eased
in many cases, including drugs. Procedures to obtain foreign technology agreement
(FTA), imports and exports were greatly streamlined and 100 per cent foreign ownership
was permitted in most sectors. Excise duty was slashed on imports, while a value added
tax was added on domestic product. In order to maximize the gains from globalization
and promote its exports, India signed the Uruguay round of GATT, which concluded in
1994, to become a member of the World Trade Organization (WTO). India was thereby
obliged to meet all provisions of the Trade Related Aspects of Intellectual Property
Rights (TRIPs) by 2005 including a return to a uniform product patent regime in all
manufacturing sectors.

Though at the time of initiation, the New Industrial Policy invited a lot of criticism;
production, exports and imports have increased greatly in many sectors. Between 1991
and 1999, the proportion of the population under the poverty line decreased from 37.5 per
cent (using headcount of consumption poverty) to 26.1 per cent when the population
itself was growing at 1.5 per cent and the gross domestic product has grown at 4 percent
or more since 2000. TRIPS have also been viewed with a jaundiced eye by many in India
and other developing countries. Its protagonists claim that it will stimulate foreign direct

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investment, investment in R&D and lower prices through increasing market supply.
Others point out that foreign direct investment is not increasing much because of
infrastructural problems, shortcomings of the Indian business environment and low
market prices needed to ensure accessibility. Indian pharmaceutical and software firms
continue to boost national pride as they venture more into international markets and
establish production and R&D bases in the US and Europe.

Control Direction Market


Economy Economy

Figure 9: Control Economy vs. Market Economy Continuum

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4. Socio-Cultural Environment

Social section enables understanding of customer demographics through income


distribution, rural-urban segmentation and centers of affluence, healthcare and
educational scenario. Changes in social trends can impact on the demand for a firm’s
products and the availability and willingness of individuals to work.

4.2 Demography of Inequality

Scientific study of human population, their size, their structure, their development is
regarded as Demography. According to Van Mayer, sociologist, Demography can be
defined as ‘the numerical analysis of the state and movement of human population
inclusive of census enumeration and registration of vital processes and of whatever
quantitative statistical analysis can be made of the state and movement of population on
the fundamental census and registration data. Census is the process of collecting,
compiling, evaluating analyzing and publishing demographic, social and economic data
pertaining to specific point of time to all persons in a country. This process was first of all
started by British in 1871, since then it is conducted every 10 years. The last census in
India was conducted in 2001.

4.2.1 Old Age Dependency Ratio with Gini Coefficient

Old age dependency ratio is defined as the number of people in the age group 60+ years
per 100 people in the age group 15-59.

Table 4: Old Age Dependency Ratio (1961-1991)


Source: Census India, 1991
Total Rural Urban Gini
Year
Total Males Females Total Males Females Total Males Females Ratio
1961 10.93 10.91 10.94 11.45 11.64 11.24 8.71 8.1 9.5 33.08
1971 11.47 11.39 11.57 12.18 12.33 12.02 8.89 8.2 9.74 31.12
1981 12.04 11.84 12.24 12.99 13.06 12.93 9.24 8.53 10.08 31.82
1991 12.19 12.16 12.23 13.16 13.34 12.97 9.66 9.21 10.19 32.53

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The correlation coefficient between old age dependency ratio and Gini coefficient was
found to be -0.27677. So, as old age dependency ratio increases inequality decreases.

4.2.2 Relationship between percentage of public sector employees and


inequality
Table 5: Employments in Organized Sector: Private and Public
Percentage
Gini Public Private
Year Public
Coefficient Sector Sector
Sector
1991 32.53 190.58 76.76 0.71287499
1999 29.95 194.15 86.98 0.69060577
2002 42.00 187.73 84.32 0.69005697
2004 35.5 181.97 82.46 0.68815944
(Lakh persons)
Source: NSSO survey, 62nd Round
The correlation coefficient between Gini Coefficient and Percentage Public Sector
Employees in Organized Sector came out to be (-0.32966).

4.2.3 Relationship between urbanization and inequality

As employment is moving from agriculture-manufacturing-services sector, there is


increase in urban population. The inequality in the urban population has been found by
most researchers to be more prominent. We compare percentage urban population with
Gini coefficient.

Table 6: Percentage of Urban Population and Gini


Percentage
Gini
Year urban
coefficient
population
1951 35.56 17.29
1961 33.08 10.29
1971 31.12 11.18
1981 31.82 23.34
1991 32.53 25.71
2001 42.00 27.8
Source: Selected Socio-Economic Statistics, 2002
The correlation coefficient was found to be 0.51, which validates the assumption.

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4.2.4 Relationship of Corruption and Inequality

Government aid plays an essential role in poverty alleviation and reduction of inequality.
Corruption in the system does not allow redistribution of wealth and hence may result in
augmentation of inequality. According to India Corruption study (2005) carried out by
Centre of Media Studies, need based services in India are more corrupt than basic
services with Rural Financial Institutes and Tax system found to be the most corrupt
ones. It was also found poverty and the level of corruption faced as directly correlated
with each other.

4.3 Population

India, whose land occupies 2.4% of total area of world, has the second largest nation in
terms of population size. India has population of 1.1 billion, which is 16% of total world
population. With current rate of population growth (2.11% approx.), India will soon
replace China as a most populous nation of the world. According to the Census
conducted in 2001, India had total population of 1,028,610,328 out of which population
of males was 532,156,772 as against 496,453,556 number of females with overall sex
ratio of 933 i.e. 933 females per 1000 males.

Table 7: Population Growth Trend in India, 1901-1991


Population Absolute Change Average Annual
Census Year
(in millions) (in millions) Exponential Growth Rate
1891 236.7
1901 238.4 1.69
1911 252.09 14.7 0.56
1921 251.32 -6.77 -0.03
1931 278.98 27.66 1.04
1941 318.66 36.68 1.33
1951 361.09 42.43 1.25
1961 439.23 78.14 1.96
1971 548.16 108.93 2.2
1981 683.33 135.17 2.22
1991 843.93 160.6 2.11

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4.3.1 Rural and Urban Population

It is said that India lies in villages. Around 70% population of India lives in villages and
is employed in primary sector. But in recent times this ratio of Rural/Urban population is
changing fast. There are many factors of which the most important is migration. Due to
unemployment and lack of facilities in rural set up people are immigrating into the cities
in search of work and better living conditions. This migration has put a lot of strain on
basic infrastructure of cities. The increasing population pressure on cities has resulted in
coming up of slums. According to 2001 Census Delhi alone has slum population of
1,851,231, which is 18.7% of total population of Delhi.

4.4 Religion

India is a secular democracy; almost all the religions of world find representation in this
country. If on one hand majority of its population (approx. 80%) is Hindu, then on the
other it also boasts of having the third largest Muslim population in the world. As per the
last census conducted, out of the total population of 1028,610,328 – 8,275,879 are
Hindus; 138,188 (13%) Muslims; 24,080 (2.34%) Christians; 19,216 (1.8%) Sikhs; 7,955
(0.7%) Buddhist; 4,225(0.4%) Jains; and 6,640 (0.6%) others.

4.5 Language

India is home to approximately 1,652 languages among them 350 are major ones. There
are 22 officially recognized languages. It includes Assamese, Bengali, Bodo, Dogri,
Gujarati, Hindi, Kannad, Kashmiri, Konkani, Maithili, Malayalam, Manipuri, Marathi,
Oriya, Punjabi, Santhali, Sanskrit, Sindhi, Telugu, Tamil, Nepali and Urdu. Hindi is the
most widely spoken language closely followed by English, which is the second official
language of the nation.

4.6 Literacy Rate

Literacy can be defined as the ability to read and write with understanding in any one
language. The percentage of literate people out of the total population of the country is

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known as the literacy rate of that nation. In India literacy rate is 65.38% as per 2001
census. But this rate is not uniform and may vary according to region, religion and
gender. Urban literacy rate is much more than rural, male literacy rate is higher than the
female literacy rate.

Table 8: Progress of Literacy Rate in India (1901 - 2001)


Percent Literate In Population
Census Year Total Male Female
1901 5.53 9.83 0.69
1911 5.92 10.56 1.05
1921 7.16 12.21 1.81
1931 9.5 15.59 2.93
1951 18.33 27.16 8.86
1961 28.3 40.4 15.35
1971 34.45 45.96 21.98
1981 42.57 56.38 29.76
1991 52.21 64.13 39.29
2001 65.38 75.85 54.16

India government spends about 4.1% of GDP (2010, most recent) on education; however,
India still ranks 81st position out of 132 countries surveyed. Although the government
spending has been increased than the previous years, India still lags behind other
countries in terms of spending on education.

4.7 Caste System

India has a hierarchical caste system in the society. Within Indian culture, whether in the
north or the south, Hindu or Muslim, urban or village, virtually all things, people,
and groups of people are ranked according to various essential qualities. If one is attuned
to the theme of hierarchy in India, one can discern it everywhere. Although India is a
political democracy, in daily life there is little advocacy of or adherence to notions of
equality. India’s complex caste system includes 3,000 castes and 25,000 sub-castes, all
traditionally related to occupation and they fall under four broad categories: Brahmin
priests, Kshatriya warriors, Vaisya merchants, and Sudra workers and farmers.

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4.8 Women Empowerment

Women empowerment is the ability of women to exercise full control over one’s actions.
In the past, women were treated as mere house-makers. They were expected to be bound
to the house, while men went out and worked. This division of labor was and is still in a
few parts of the country one of the major reason because of which certain evils took birth
in our society child marriage, female infanticide, women trafficking.

The government has passed many laws so as to empower the women. These rules have
empowered them socially, economically, legally and politically. Not only the government
but various non-governmental organizations have done a lot so as to improve the status of
woman in our society. Child marriages have also been stopped.

A study by the Centre for Economic and Social Studies in Hyderabad found that child
marriage has declined among project participants. Groups have also started campaigns
against the trafficking of women and girl children with the support of police, the revenue
administration and NGOs.

In recent years many steps have been taken so as to increase the participation of women
in the political system. The Women’s reservation policy bill is however a very sad story
as it is repeatedly being scuttled in parliament. Further, there is the Panchayat Raj System
where women have been given representation as a sign of political empowerment. There
are many elected women representatives at the village council level. However their
power is restricted, as the men wield all authority. Their decisions are often over-ruled by
the government machinery.

All this shows that the process of gender equality and women's empowerment still has a
long way to go and may even have become more difficult in the recent years.
Empowerment would become more relevant when women are actually treated as equal to
men. This division of labor that a woman is supposed to do only household chores and
the men are the only one who can earn a living for the family has to be removed.

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Analysis of Macro Business Environment and SWOT Analysis of Key Industries in India

4.9 Consumption Pattern

The liberalization of the economy in 1991 has had a significant impact on the nature of
spending among consumers in India. The portfolio of spending categories for the average
Indian has increased from 1991 to 2007. In 1991, the average Indian spent on 8 product
categories, where as in 2007 the number of categories increased to 17, and included
mobile handsets, gifts, and durables, among others.

Major factors influencing the increase in spending categories include rise in disposable
incomes, increasing number of dual-income nuclear families and changing attitudes
toward consumption. The attitude of people toward shopping has changed from it being a
regular chore to one that provides an enriching experience.

The Indian consumer market is set to undergo a major transformation. By 2025, India is
estimated to climb from its current position as the world’s 12th largest consumer market
to become the world’s 5th largest consumer market. More than 291 million people are
expected to move out of abject poverty to a more sustainable lifestyle and the size of the
middle class is expected to swell by over ten times from its current size of 50 million to
583 million people. Moreover, more than 23 million Indians will get added to the group
of the country’s wealthiest citizens by 2025. This well-being is expected to spread across
the rural areas as well, with annual real rural income growth per household expected to
accelerate from 2.8 percent (since the past 2 decades) to 3.6 percent over the next 2
decades.

As the incomes in India continue to grow on the back of strong overall economic growth,
income dynamics in India are expected to set in. According to MGI, in 2005, the Indian
middle class was still relatively small comprising 5 percent of the population or 13
million households (50 million people). By 2025, the Indian middle class is expected to
reach 41 percent of the population or 128 million households (583 million people). This
would come along with households with real earnings of more than 1,000,000 Indian

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Analysis of Macro Business Environment and SWOT Analysis of Key Industries in India

rupees a year (that is about more than global $21,890 or $117,650 at PPP) comprising
approximately 2 percent of the population but earning almost a quarter of its income.

Aggregate Disposable Aggregate


No. of households (Millions)
Income (USD Billion) Consumption (USD
Billion)
100% 3.6
10.9 78.8 48.1
42.6

80% 67.8 46 669.6


>$10940 932.2
94.9
60%
$4380
313 - $10940
48.1
46
670
276
538
192.4
2

40% 275.7 538.3


367.6 669.6
<$4380 143
20%
356.7 312.9

0%
2005 2025 2005 2025 2005 2025

Figure 10: Consumption Pattern

Rural and urban India is distinct in terms of the extent of average expenditure, with the
urban areas exhibiting a higher cost of living. According to the 2004-05 data from the
National Sample Survey Organization of India, rural India spends Rs. 560 on an average
in terms of monthly per capita expenditure (MPCE). However, urban India spent almost
double the amount at about Rs. 1052 per month per person. The current pattern of
consumer expenditure is depicted in the following chart:

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Analysis of Macro Business Environment and SWOT Analysis of Key Industries in India

Monthly Per Capita Expenditure (Rs.)

1000 81 Misc. consumer goods &


43 taxes
49 Durable goods
108
800 Clothing & footwear
59
69 Medical & education

600 74
Rent
34
19 105
30
Conveyance
52
3 21
400 21
57 Other consumer services

Fuel & light


464
200
323 Food, pan and intoxicants

0
Rural (Rs. 560) Urban (Rs. 1052)

Figure 11: Rural vs. Urban Monthly per Capita Expenditure


Source: National Sample Survey Organisation, India

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Analysis of Macro Business Environment and SWOT Analysis of Key Industries in India

Food products account for a large share of the consumption basket in both urban and
rural areas of India. Fuel and light and rent account for a larger share of urban
expenditure than in rural areas. Rural and urban India is not very different in terms of the
extent of expenditure on clothing and footwear. Urban India, with its higher incomes,
spends more on miscellaneous consumer goods and other consumer services than its rural
counterpart.

However, with increasing income across India, spending pattern is expected to change
across the board. Increasingly the average Indian consumer will be spending more on
discretionary items than on basic necessities. The share of food products is expected to
reduce from about 42% in 2005 to about 25% by 2025. The share of expenditure on
health care, education and recreation and personal products and services is in turn
expected to increase. The retail market in India which was estimated to be worth USD
230 billion in 2005 is projected to reach USD 310 billion in another 3 years.

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Analysis of Macro Business Environment and SWOT Analysis of Key Industries in India

5. Technological Environment

Technological environment in India is favorable to quality improvement, cost reduction,


& introduction to new products in market. It will lead to Industrial development with
global competitiveness. In India, the government has setup large number of R & D
Activities, space research centers etc. for introduction of new technology in different
areas. For a long period of time, technological environment was not favorable for
introduction of updated technology ion manufacturing activities. Funds & Import Policies
were not freely provided for import of updated foreign technology. Foreign collaboration
& joint ventures were also not freely allowed. The scopes given to MNC’s were limited.
Research & development activities were not given encouragement through special
facilities/concessions. This suggests that technological environment was not favorable to
industrial growth till the beginning of economic reforms and globalization by 1980’s.
Now, the technological environment has changed considerably along with liberalization
and globalization of Indian Economy. The need of updated technology in Indian
industries was accepted for cost reduction, quality improvement and raising
competitiveness of Indian goods in domestic & foreign markets. Foreign exchange and
liberal imports are now allowed for the introduction of new technologies in Indian
industries. The expansion of infrastructure facilities in regard to transport,
communication, electricity etc also encourages the application of modern technology to
industries.

5.1 Transportation Sector

India’s transport sector is large and diverse; it caters to the needs of 1.1 billion people. In
2007, the sector contributed about 5.5 percent to the nation’s GDP, with road
transportation contributing the lion’s share. Good physical connectivity in the urban and
rural areas is essential for economic growth. Since the early 1990s, India's growing
economy has witnessed a rise in demand for transport infrastructure and services.

However, the sector has not been able to keep pace with rising demand and is proving to

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Analysis of Macro Business Environment and SWOT Analysis of Key Industries in India

be a drag on the economy. Major improvements in the sector are required to support the
country's continued economic growth and to reduce poverty.

5.1.1 Railways

Indian Railways is one of the largest railways under single management. It carries some
17 million passengers and 2 million tones of freight a day in year 2007 and is one of the
world’s largest employers. The railways play a leading role in carrying passengers and
cargo across India's vast territory. However, most of its major corridors have capacity
constraint requiring capacity enhancement plans.

5.1.2 Roads

Roads are the dominant mode of transportation in India today. They carry almost 90
percent of the country’s passenger traffic and 65 percent of its freight. The density of
India’s highway network – at 0.66 km of highway per square kilometer of land – is
similar to that of the United States (0.65) and much greater than China’s (0.16) or Brazil's
(0.20). However, most highways in India are narrow and congested with poor surface
quality, and 40 percent of India’s villages do not have access to all-weather roads.

5.1.3 Ports

India has 12 major and 187 minor and intermediate ports along its more than 7500 km
long coastline. These ports serve the country’s growing foreign trade in petroleum
products, iron ore, and coal, as well as the increasing movement of containers. Inland
water transportation remains largely undeveloped despite India's 14,000 kilometers of
navigable rivers and canals.

5.1.4 Aviation

- India has 125 airports, including 11 international airports. Indian airports handled 96
million passengers and 1.5 million tones of cargo in year 2006-2007, an increase of
31.4% for passenger and 10.6% for cargo traffic over previous year. The dramatic

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Analysis of Macro Business Environment and SWOT Analysis of Key Industries in India

increase in air traffic for both passengers and cargo in recent years has placed a heavy
strain on the country’s major airports. Passenger traffic is projected to cross 100 million
and cargo to cross 3.3 million tones by year 2010.

5.2 Communication

The Communication Industry in India is one of the rapidly emerging sectors in India and
is estimated to surface as the second biggest international telecom market. As per the
report carried out by Telecom Regulatory Authority of India (TRAI), Indian
communication industry has registered a 3.5% increase in its total telecom subscribers in
December 2009. The sector touched 562.21 million in its total number of subscribers
within a month, against 543.20 million in November 2009.

The growth in communication industry was triggered by an increase in the revenues


generated from both landline and mobile facilities. On December 31, 2009 the sector
earned the revenue of USD 8.56 billion. As per the Business Monitor International report,
the nation is all set to include 8 to 10 million cellular phone subscribers on monthly basis.
At this pace the communication industry is expected to encompass more than half of
India's population i.e. 612 million cellular phone subscribers by mid 2012.

The manufacturing of Cellular phone in India is predicted to expand at an annual rate of


28.3% till the FY 2011 which can be translated as a production of 107 million mobile
handsets by 2010. The production would automatically generate profits and is predicted
to increase at an annual rate of 26.6% till 2011, reaching the target of USD13.7 billion.

5.3 Power

The growth in electricity generation by power utilities during 2008-09 at 2.7 per cent fell
much short of the targeted 9.1 per cent. Despite the sharp decline in hydro and nuclear

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Analysis of Macro Business Environment and SWOT Analysis of Key Industries in India

generation in 2008-09, the growth in total electricity generation was positivedue to the 5
per cent plus growth in thermal generation.

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Analysis of Macro Business Environment and SWOT Analysis of Key Industries in India

5.4 R&D in Indian Industry

Though spending on R&D in relation to the GDP in the case of India has increased over
the years, the difference between the spending in R&D between India and the developed
world remains considerably high. India spends approximately 0.88per cent of its GDP on
research and development. This is low compared to countries like China which spend
1.42 per cent of its GDP on R&D and most developed countries spend more than 2 per
cent of their GDP.

During the period 2005-06, 74.1 per cent of the total R&D expenditure was met from
government sources and rest 25.9 per cent came from the private sector. The Central
Government was the highest contributor to R&D expenditure with a share of 57.5 per
cent; the State Government had a share of 7.7 per cent while the industrial sector
contributed 30.4 per cent, and the higher education sector 4.4 percent. It is pertinent to
note that the industrial sector R&D contribution in developed countries is usually more
than 50 per cent. There are about 3,690 R&D institutions in the country. Under the
Central Government R&D expenditure, 86 per cent was incurred by 12 major scientific
agencies. The share of Defense Research and Development Organization (DRDO)
amongst the 12 major scientific agencies was 34.4 per cent.

During 2005-06, the industrial sector R&D units spent 0.55 per cent of their sales
turnover on R&D. In terms of sector-wise position, the drugs and pharmaceuticals sector
occupied highest position with a share of 37.4 per cent followed by transportation and
defense with 14.7 per cent and6.9 per cent respectively.

The study of human resource sector suggests that nearly 3.91 lakh personals were
employed in the R&D establishments in the country including in-house R&D units of
industries, as on April 1, 2005.Majority (63 per cent) of the total R&D personnel was
employed in institutional sector and higher educational sector. Industrial sector which
comprises both public and private industries deployed 37 percent of the total R&D

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Analysis of Macro Business Environment and SWOT Analysis of Key Industries in India

personnel. Out of this, public sector including joint sector industries employed only 6 per
cent on R&D activities.

6. Ecological Environment

About 76% of India’s population lives in about 5,76,000 villages. In developing countries
like India, the rural sector with high population density and high level of poverty poses a
serious threat to the environment and the impacts of human activities on the Indian
ecology is evident from its degrading environment. Biological diversity in general and
agricultural diversity in particular is being depleted at an unprecedented rate in the past
few decades. Moreover, the growth and economic development are also contributing to
the environmental degradation because of the uncontrolled growth of urbanization and
industrialization, expansion and massive intensification of agriculture, and the destruction
of forests.

One of the primary causes of environmental degradation in a country could be attributed


to rapid growth of population, which adversely affects the natural resources and
environment. The uprising population and the environmental deterioration face the
challenge of sustainable development. The existence or the absence of favorable natural
resources can facilitate or retard the process of socio-economic development. The three
basic demographic factors of births, deaths and migration and immigration produce
changes in population size, composition, distribution and these changes raise a number of
important questions of cause and effect.
Out of India's 3,119 towns and cities, just 209 have partial treatment facilities, and only 8
have full wastewater treatment facilities. 114 cities dump untreated sewage and partially
cremated bodies directly into the Ganges River. Downstream, the untreated water is used
for drinking, bathing, and washing. This situation is typical of many rivers in India as
well as other developing countries.

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Analysis of Macro Business Environment and SWOT Analysis of Key Industries in India

6.1 Pollution

Indian cities are polluted by vehicles and industry emissions. Road dust and vehicles are
contributing up to 33% of air pollution. In cities like Bangalore, around 50% of children
suffer from asthma.One of the biggest causes of air pollution in India is from the
transport system. The major problem areas are in the big cities where there are huge
concentrations of these vehicles.

On the positive side, the government appears to have noticed this massive problem and
the associated health risks for its people and is slowly but surely taking steps. The first of
which was in 2001 when it ruled that its entire public transport system, excluding the
trains, be converted from diesel to compressed gas (CPG). Electric rickshaws are being
designed and will be subsidized by the government but the supposed ban on the cycle
rickshaws in Delhi will require a huge increase on the reliance of other methods of
transport, mainly those with engines.

Another major cause of air pollution is due to cremations in India. In India, 78% of the
population consigns the dead bodies to fire for cremation as a ritual in open air.
Traditionally they have been using butter ghee and a few herbs while the body is
confined to fire. These are required since the wood-fire temperature does not go beyond
300˚C or 600˚F but when the butter ghee is added the temperature obtained is up to
700˚C or 1400˚F, which has been proved now scientifically to be optimum temperature
required for cremation of a human body. Just as the low temperature creates pollution,
higher temperature is also found to create pollution with emissions dangerously harmful
for the environment.

6.2 Uncontrolled Population Growth

It is estimated India’s population will increase to about 1.26 billion by the year 2016. The
projected population indicates that India will be the first most populous country in the
world and China will be ranking second in the year 2050.India having 18% of the world's
population on 2.4% of world's total area has greatly increased the pressure on its natural

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Analysis of Macro Business Environment and SWOT Analysis of Key Industries in India

resources. Water shortages, soil exhaustion and erosion, deforestation, air and water
pollution afflicts many areas. India’s water supply and sanitation issues are related to
many environmental issues.

Population growth and economic development are contributing to many serious


environmental calamities in India. These include heavy pressure on land, land
degradation, forests, habitat destruction and loss of biodiversity. Changing consumption
pattern has led to rising demand for energy. The final outcomes of this are air pollution,
global warming, climate change, water scarcity and water pollution.

6.3 Environmental Issues

Environmental issues in India include various natural hazards, particularly cyclones and
annual monsoon floods, population growth, increasing individual consumption,
industrialization, infrastructural development, poor agricultural practices, and resource
mal-distribution that have led to substantial human transformation of India’s natural
environment. An estimated 60% of cultivated land suffers from soil erosion, water
logging, and salinity. It is also estimated that between 4.7 and 12 billion tons of topsoil
are lost annually from soil erosion. From 1947 to 2002, average annual per capita water
availability declined by almost 70% to 1,822 cubic meters, and overexploitation of
groundwater is problematic in the states of Haryana, Punjab, and Uttar Pradesh. Forest
area covers 18.34% of India’s geographic area (637000 km²). Nearly half of the country’s
forest cover is found in the state of Madhya Pradesh (20.7%) and the seven states of the
northeast (25.7%); the latter is experiencing net forest loss. Forest cover is declining
because of harvesting for fuel wood and the expansion of agricultural land. These trends,
combined with increasing industrial and motor vehicle pollution output, have led to
atmospheric temperature increases, shifting precipitation patterns, and declining intervals
of drought recurrence in many areas.

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Analysis of Macro Business Environment and SWOT Analysis of Key Industries in India

6.4 Effect of Global Warming

The effects of global warming on the Indian subcontinent vary from the submergence of
low-lying islands and coastal lands to the melting of glaciers in the Indian Himalayas,
threatening the volumetric flow rate of many of the most important rivers of India and
South Asia. In India, such effects are projected to impact millions of lives. As a result of
ongoing climate change, the climate of India has become increasingly volatile over the
past several decades; this trend is expected to continue.

Elevated carbon dioxide emissions contributed to the greenhouse effect, causing warmer
weather that lasted long after the atmospheric shroud of dust and aerosols had cleared.
Further climatic changes 20 million years ago, long after India had crashed into the
Laurasian landmass, were severe enough to cause the extinction of many endemic Indian
forms. The formation of the Himalayas resulted in blockage of frigid Central Asian air,
preventing it from reaching India; this made its climate significantly warmer and more
tropical in character than it would otherwise have been.

6.5 Industrial pollution and the environment

Polluting industries have been a significant source of air and water pollution. Out of
2,982 industries identified under the 17 categories of polluting industries, 2,121 units
have so far set up pollution control devices to comply with the standards, 478 units have
been closed and action has been taken against 383 defaulting units. Necessary measures -
both preventive and promotional - have been taken for control of industrial pollution.
These, inter alia, include; notification and enforcement of emission and effluent
standards, setting up of clean technology mechanisms and effluent treatment plants,
establishing waste minimization circles in clusters of small scale industries, regulating
silting of industries, implementing the Charter of Corporate Responsibility for
Environmental Protection (CREP) in highly polluting industries, Eco-mark scheme to
encourage environment-friendly products, progressive emission norms and cleaner fuels
for controlling vehicular pollution, economic instruments to internalize costs of pollution
and fiscal incentives for pollution control equipment.

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Analysis of Macro Business Environment and SWOT Analysis of Key Industries in India

6.6 Initiatives by the Government

Government of India has come up with different laws and rules to control environmental
degradation and make civilization and environment go hand in hand but it has not been
able to strictly enforce them.

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Analysis of Macro Business Environment and SWOT Analysis of Key Industries in India

7. Opportunities and Threats in India

With reference to the analysis of macro business environment identified in the previous
section, we have identified the following opportunities and threats to business in India.
They are discussed under each macro environmental headings.

7.1 Opportunities

7.1.1 Political Environment

• Political ideology of market economy


Indian political parties have realized that socialism or socialist economic policies
have hampered the economic growth in the past. The results of liberalization are
visible with the growth in economy and standard of living. It is unlikely that the
current ideology would change. This gives a great opportunity to private sector
for business growth and expansion.

• Economy becoming top priority


Economy is becoming a top priority of government and the importance of
economic diplomacy has significantly increased in the last few decades. With the
incidents like global financial crises, government of all economies have
emphasized more and India is no exception. This is a positive sign for economy.

• Reducing instability
Indian government is slowly becoming stable. Since its independence in 1947,
political scenario has improved slowly to take the present shape. Political parties
have become more responsible and as a result, governments have become more
stable than in the past. This is a great confidence booster for domestic as well as
foreign investors.

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Analysis of Macro Business Environment and SWOT Analysis of Key Industries in India

7.1.2 Economic Environment

• Growing Market Size


India’s GDP is constantly growing and the growth is likely to continue in
upcoming years. It has become one of the fastest growing economies of the world.
The population size and growing market is a tremendous opportunity for
businesses.

• Growing middle class population


India’s middle class is growing with the growth in economy. GNI per capita is
growing every year signally the increment in purchasing power of people. This
has fueled he demand for various good and services.

• Base for low-cost production


India is increasingly being recognized as a place for low-cost production. China
succeeded with that factor and India is heading in the same direction. Due to the
stiff competition in global arena, the need for cost-reduction has become
significant. The growth in IT sector in India is the result of focus towards cost
reduction.

• FDI
The continuing inflow of foreign direct investment reinforces the positive view
that the Indian market has the capacity to absorb investment and generate a return
based on productive growth. At the same time, a balance needs to be struck
between the immediate priorities for the Indian economy and the long-term
concerns that include environmental and security concerns.

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Analysis of Macro Business Environment and SWOT Analysis of Key Industries in India

7.1.3 Social Environment

• The large diverse group present in the country provides many business
opportunities to cater to one or many groups.
• The country is slowly shifting from the traditional culture to more Western style
of living.
• The large middle-class citizens are diverse from poor to very rich people.
• Government’s initiatives towards providing more education favor most of the
business areas in terms of educated workers and even educated consumers.
• Women empowerment shows the trend of women rising towards managerial and
authorized positions.

7.1.4 Technological Environment

• In India, lifestyle, consumption pattern in changing rapidly and with development


of technology new market is created and this increases opportunities for the
business houses.
• The use of technology and its advancement has increased competitiveness of
Indian goods in both domestic and foreign market which is an opportunity for the
country.
• Large FDI in IT sectors show growth trend for many years.

7.1.5 Ecological Environment

• Different programs like drinking water protection, solid waste management,


vehicle emission monitoring, eco-cities program and many other programs are
launched by government of India as a step to protect environment.

• India’s climatic conditions are extremely favorable for the cotton farming, which
is one of the major raw materials for textile production. This provides great scope
for the development of the Indian textile industry.

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Analysis of Macro Business Environment and SWOT Analysis of Key Industries in India

7.2 Threats

7.2.1 Political Environment

• Political influence in business


India is a combination of states with policies still existing at the local level. This
has distorted uniformity. India is a big country which holds different caste,
religion, cultures and values. This adds more difficulty to uniformity. For
example, we can take the case of shifting of manufacturing plant of TATA’s Nano
car. Such differences can create problems for business in the future too.

• Uncertainty in government policy


Government policies are bound to change and no business can stay isolated from
that. Policies can change due to pressure or for the prevention of problem. For
example, even the government like US government increased the tariff rates in
tires being imported from China. If it had not done that, it would have lost
thousands of jobs in that sector. This decision from US government seriously hit
Chinese exporters. Such situation can also arise in India which is a great threat for
foreign investors.

7.2.2 Economic Environment

• Strikes and Lockouts


During 2008, as per the information available, Tamil Nadu experienced the
maximum instances of strikes and lockouts followed by Kerala, Andhra Pradesh
and Karnataka. Industrial unrest was concentrated mainly in financial
intermediation (excluding insurance and pension), textiles, air transport, and
mining of coal and food products. These incidents pose a threat to economic
environment.

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Analysis of Macro Business Environment and SWOT Analysis of Key Industries in India

Table 9: Man-Day Lost due to Lock-outs

• Foreign completion putting pressure on domestic companies


Opening of the economy has made entry of foreign companies possible and
brought the technology of production skills. This has created more competition
for the domestic industry. This is the result of India’s move towards market
economy and only efficient firm survives. This has created pressure for domestic
industries to be more competitive.

• Shortage of skill in manufacturing


India is seen as a vast pool of talent with great diversity and with a demographic
advantage. However, the industrial sector faces acute shortage of skills. The
swiftness with which this skill deficit is bridged will be critical in determining
whether India can move up the value chain in manufacturing.

• Depleting resources
The growth in many industries is constrained by the acute scarcity/depleting
reserves of important raw materials like coal, irons ore, natural gas and forestry
resources. This is a threat to industry operating on a base of such resources.

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Analysis of Macro Business Environment and SWOT Analysis of Key Industries in India

7.2.3 Social Environment

• Growing conflict over different religion groups such as between Hindu and
Muslim.
• The traditional beliefs still surpass any new ideologies in rural areas.
• Most of the population is in rural areas, which is still under developed.
• Large unequal income distribution leads to wide product categories.

7.2.4 Technological Environment

• Too much of industries and use of technology have led to ecological imbalance
and environmental degradation.
• Technology centered only in major cities such as Mumbai, Delhi, and Bangalore.
• Due to concentration in few cities, these cities are being crowded, leading to
growing urbanization.
• Most parts of India still are deprived of electricity.

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7.2.5 Ecological Environment

• Rapid population increase, dramatic changes in production and consumption


patterns and massive rural-to-urban migration in India have transformed the way
environment and natural resources are used. Ultimately, we are heading towards
the collapse of ecological system which can be greatest hurdle to growth and
civilization in India.

• Environmental degradation is now all pervasive, accelerating and largely


unabated. This is manifested in polluted air, depleted biodiversity, degraded lands,
exhausted aquifers and polluted aquatic and marine ecosystems, as well as
increasing exposure to hazardous and toxic wastes. People’s health and longevity
have suffered, natural resource based livelihood has been compromised, and
ecosystem services and resources that underpin long term economic development
are at risk.

• Development can hardly be sustained when the natural resources of soil, water
and vegetation, the basic economic capital of a country, are depleted recklessly.

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8. Information Technology Industry

As a relatively poor country, India is not normally thought of as a nation that is capable
of building a major presence in a high-technology industry, such as computer software. In
little over a decade, the Indian software industry has astounded its skeptics and emerged
from obscurity into an important force in the global software industry. Measured by the
age of many industries, the computer or information technology (IT) software industry in
India is still in its infancy. Yet, its growth and development has caught the attention of
the world market so much so that India is now being identified as the major powerhouse
for incremental development of computer software. Although India’s domestic software
market is burgeoning fast, the most important factor that has driven this progress is the
growth of the export market. While still a relatively small share of export market, India’s
software export business is mushrooming and export revenue has been growing at an
increasing rate.

8.1 Why Information Technology Industry?

The software services industry provides a lower bound on the relative advantage of
family business groups over independent entrepreneurs in exploiting new opportunities
for a number of reasons:

• The industry is very conducive to starting entry because of low capital


requirements.
• Little government regulation on entry.
• A relatively low level of minimum economic scale to achieve profitability.

Further, the Indian government invested in elite technical institutions, such as the Indian
Institutes of Technology and Indian Institutes of Management, and a large number of
other engineering colleges. These institutions produce abundant talent, a critical input for
the software services industry. Graduates of these institutions, relying on a recognized
education brand, are more willing to work for de novo startups than for incumbent

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business groups. Finally, government policies restricting operations of multinationals


such as IBM leaves plenty of opportunities for domestic entrepreneurs. Given all these
factors, software services is one industry where individual entrepreneurs can compete
effectively with established family business houses of India.

8.2 Strengths

The strengths that lie in the IT industry in India are:


• Availability of large pool of cheap and talented software personnel
• India’s important middle class is highly educated and its top educational
institutions are world class.
• Emphasis on engineering in India and esteemed institutes such as IIT and IIM.
• Presence of the biggest English speaking population after the United States.
• Support from the government in the form of industrial parks, which enjoy various
incentives and tax benefits.
• Liberal import – export policy.
• Strict quality policies adopted by the IT industry in terms of reliability, stability
and maintainability by adhering to the standards laid down by the ISO 9001 or
SEI/CMM (Software Engineering Institute Capability Maturity Model) or both.
• NASSCOM (National Association of Software and Services Companies) acting as
the platform for all IT companies to make representations to the government on
industry problems and integrating the domestic industry with the global industry.

8.3 Weaknesses

The weaknesses that lie in the IT in India are:


• Poor telecommunication infrastructure
India’s telecommunication infrastructure is poor compared even to developing
countries. The reason behind this has been the state monopoly over
telecommunication in India.

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• Lack of cities with good infrastructure for the IT companies to set up offices
Most of the IT companies in India are situated in the cities of Bangalore,
Hyderabad, Pune, Gurgaon, Mumbai and Chennai. However with more and more
companies setting up offices in these cities, the infrastructure in these cities has
begun to get overloaded. Infrastructure within these cities has deteriorated leading
to many problems. Internet and Web infrastructure in most of these cities are not
capable of taking any further load.

Lack of enough electricity remains a big problem even in the metropolitan cities.
Therefore the infrastructure in these cities needs to be developed. However this
process could take a long time considering the delays involved in decision making
and implementing projects in India.

• Potential shortage of skilled human resources


The outsourcing contracts coming to the country is expected to increase
significantly. However country may face shortage of people with the right kind of
talent to execute these contracts. This is a real possibility in the case of high end
software services. The infrastructure and educational facilities in many of the
country’s institutes are abysmal.

Faculty crunch is a problem faced by even the prestigious institutes like the IITs
and the IIMs. The lack of sufficiently qualified professionals may severely restrict
India’s capability to deliver high quality services to the outsourcing contracts
expected to come to India. The shortage of skilled professionals can also push up
the salaries of Indian IT professionals. This may lead to India losing its advantage
in providing low cost outsourcing services.

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8.4 Comparative Advantages

These are the comparative advantages the software industry provides to India in
comparison to the same industry in other countries in the world:

• Cost advantage
The wages commanded by the Indian software professionals is much less
compared to their counterparts in the developed countries. The cost of setting up
and running offices is also less in developing countries compared to the developed
nations.

• Availability of qualified professionals


India has a large talent pool of highly skilled and English speaking professionals.
This factor gives India advantage over other developed nations which are facing a
talent shortage and over other developing countries like China which do not have
a large English speaking population.

• Time zone advantage


India’s geographical position has given it a time zone advantage. Indian engineers
can fix software bugs, upgrade systems, or process data overnight while their
users in Western companies are asleep.

• Proven delivery quality


Over the years Indian software companies have consistently delivered high
quality software products to clients across the world. Most of the major Indian
software services companies have obtained CMM Level 5 ratings, the highest
ratings on the predominant quality scale developed for software at Carnegie-
Mellon University. Out of the nine software development centers in the world
with CMM Level 5, five are in India. This fact underscores the high quality
software development and management practices employed by Indian software

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companies and has led to an increase in the trust shown by various clients around
the globe.

• Rise of Indian software companies up the value chain


India is no longer seen as a destination for outsourcing low cost less critical
services. Indian software majors have started offering high end consulting
services, designing and developing end-to-end software solutions for various
business verticals and providing high quality Research and Development services.
The share of software services exports across these areas is expected to go up in
the future. In recent years India has emerged as a global leader in providing
software services capable of offering low cost high quality services ranging from
high end consulting to low end maintenance services.

8.5 Growth Trend of Software Industry

During the past decade, the Indian


IT industry has been experiencing
a dramatic growth. Between 1991-
92 and 1996-97, sales of Indian
software companies grew at a
compound rate of 53 percent
annually. In 1991-92, the industry
had sales totaling $388 million. By
1996-97 sales were around $1.7
billion. By 1997, there were over
760 software companies in India employing 160,000 software engineers, the third-largest
concentration of such talent in the world. The industry’s total revenues in 2002 stood at
$10.2 billion, and it grew at more than 40% per year during the 1990s. The industry
accounted for $7.7 billion in exports in 2002 while it accounted for $40.4 billion in
exports in 2007, which was a significant portion of the total exports of goods and services
from India in that year.

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9. Pharmaceutical Industry

Pharmaceutical sector is an important industry of any modern day economic power.


Pharmaceutical industry in India has a very humble past. After independence,
development of pharmaceutical industry was one of the top agenda of government along
with steel and manufacturing industry. The market was protected against competition for
a long period of time by giving incentives to small firms, license-raj etc. Today the Indian
pharmaceutical industry is the front-runner science-based industries in the country. Today
the industry boasts of wide ranging capabilities in the complex field of drug manufacture
and technology. India is poised to be one of the fastest growing pharmaceutical markets
in the world. This has led to entry of many major companies in the Indian market and a
huge amount of FDI inflow.

9.1 Why Pharmaceutical Industry?

There are certain favorable factors that underlie the fact that there is growing opportunity
for pharmaceutical industry in India:

• Aging of the world population


With the aging of the world population combined with new diagnoses and new
social diseases, the demand for the medical products on a whole is increasing.
Also, there is a growing attention to health. Moreover, with new therapy
approaches and new delivery systems, Indian industry is bound to grow.

• Migration to the new patent product regime


The migration to the new patent product regime will transform the industry by
bringing with it new innovative drugs. This in turn will increase the profitability
of the Indian MNCs and will force domestic companies to focus more on the
R&D front.

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• Expected growth in the per capita income


The expected growth in the per capita income and opening up of health insurance
sector are the key growth drivers for long-term. This will lead to an expansion of
the healthcare industry of which pharmaceuticals is an integral part.

• Market saturation point is far away


With new diseases being discovered, cure to some diseases still undiscovered and
growing world population signals that the market saturation point is still far away.

• Growing attention for health


Asian people are also becoming more health conscious and use of medicine is
increasing not only to cure problems but also to maintain health. This is
expanding the market size of pharmaceutical industry.

9.2 Strengths

The strengths of pharmaceutical industry are as follows.

• Well-developed industry with a strong manufacturing base


It is a well-developed industry with a strong manufacturing base. The cost of
production of drugs in India is one of the lowest. India can produce drugs at about
40-50% of the cost to the rest of the world, which in some cases may reach up to
as low as 90%.

• Huge untapped market


The high middle class growth has led to fast changing lifestyles in urban as well
as to some extent in the rural centers. This has opened a huge market for lifestyle
drugs, which currently have a low contribution in the Indian pharmaceutical
market.

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• Presence of patent protected drugs ensuring future revenue streams


One more factor adding to the strengths of this industry is the presence of patent
protected drugs that ensure future revenue streams.

• Existence of a large pool of installed capacities


Due to consolidation of acquisition's operations, a large pool of installed
capacities exist. Economies of scale in marketing, production and administration
can be garnered.

• Access to a pool of highly trained scientists


As research forms an integral part of the industry, access to a pool of highly
trained scientists also add to the strengths.

• Liberalization fuelling growth (FDI policy)


Liberalization policies of government are also a great contributing factor since it
has added to the confidence of foreign investors in this industry. The government
of India has allowed foreign direct investment up to 100% through the automatic
route in the drugs and pharmaceuticals industry of the country, on the condition,
that the activity should not fall into the categories that require licensing.

9.3 Weaknesses

The weaknesses of pharmaceutical industry are as follows.

• Lack of product patent preventing new drugs introduction


Lack of product patent prevents new drugs introduction in the country and thereby
suppresses innovation and drug discovery. Also there is lack of experience even
to efficiently exploit the new patent regime.

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• Slow growth in the Indian pharmaceutical market leading to reliance on


exports
Indian pharmaceutical market is one of the least penetrated markets in the world.
Slow growth has made the Indian majors to rely on exports.

• Low entry barriers and highly fragmented market


Although the installed capacities are high, due to very low entry barriers, they are
highly fragmented. There are about 300 large manufacturing units and 18,000
small units across the country. This makes the Indian market extremely
competitive. This has led to price competition, which in turn affects the growth of
the industry in value term.

• High monetary obligations due to the need for acquisitions and mergers
Recently the industry has been exposed to high monetary obligations due to the
need for acquisitions and mergers.

• Low R&D investment and thus greater competition with MNCs


Low investment in R&D and lack of desired resources make it difficult to
compete with the MNCs on a worldwide basis. Few drug discovery systems and
low level of biotechnology add to the problem.

• Low quality drugs tarnishing the industry image on a whole


Due to the fragmented nature of industry and lack of adequate quality control
mechanism, low quality drugs that enter though formal or informal channel is
damaging the quality image of the industry.

• Weak feedback from the industry


There is no strong linkage between the industry and the academia as such, which
could have proved to be a growth driver by providing regular feedback.

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• Industry lacks accurate technology forecasting and strategic future planning


There is a huge shortage of medicines containing psychotropic substances, some
of which are lifesaving.

9.4 Comparative Advantage

These are the factors that give pharmaceutical industry in India comparative advantage
over industries in other countries.

• Competent workforce
India has a pool of personnel with high managerial and technical competence as
also skilled workforce. It has an educated work force and English is commonly
used. Professional services are easily available.

• Cost-effective chemical synthesis


Pharmaceutical’s track record of development, particularly in the area of
improved cost-beneficial chemical synthesis for various drug molecules is
excellent. It provides a wide variety of bulk drugs and exports sophisticated bulk
drugs.

• Legal and financial framework


India has a 53 year old democracy and hence has a solid legal framework and
strong financial markets. There is already an established international industry
and business community.

• Information and Technology


India has a good network of world-class educational institutions and established
strengths in Information Technology.

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9.5 Growth Trend of Pharmaceutical Industry

The Indian pharmaceutical industry has grown from a mere IRs. 1,500 crore turnover in
1980 to over IRs.78,000 crore in 2008 with about 10 per cent of share volume of global
production. High growth has been achieved through the following means the creation of
required infrastructure capacity building in complex manufacturing technologies of active
ingredients and formulations, entering into drug discovery through original and contract
research and manufacturing (CRAM) and clinical trials and product specific strategies of
acquisition and mergers. The domestic sector had a production turnover of IRs. 47,241
crore from about 10,000 small-scale and 300 large and medium manufacturing units in
2008.

Pharmaceutical industry in India ranks 4th in terms of volume globally and 13th in terms of
value. It has 8% share in global sales and 20% to 24% share in production of generic
drugs. The domestic players satisfy almost all of the country’s demand for formulations
and bulk drugs.

Table 10: Value of production of bulk drugs and formulation (IRs. in Crore)

Pharmaceutical exports have grown from IRs.6,256 crore in 1998-99 to IRs. 30,759 crore
in 2008. Exports of pharmaceuticals have been consistently outstripping the value of
corresponding Imports in the period 1996-97 up to 2007-08. Exports registered a growth
rate of 25 per cent in 2007-08 over 2006-07. The sector attracted FDI amounting to
US$1,401.60 million during 2000-01 to September 2008,of which, US$ 125.30 million
occurred during April-September 2008.

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Investments in pharmaceutical sector are now expanding into areas of innovative R&D
focused outsourcing opportunities like clinical trials, data management services,
pharmaceutical informatics, lead discovery and optimization, pharmaco-kinetics and
pharmaco-dynamics and pre-clinical drug discovery in combinatorial chemistry, chiral
chemistry, new drug delivery systems, bio informatics and phyto-medicines. The Indian
pharma industry is taking leaping strides in innovative drug discovery with clinical trials
underway in 34 molecules. Consequently, the Indian drug discovery market has grown
from US$ 470 million in 2005 to US$ 800million in 2007.

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Analysis of Macro Business Environment and SWOT Analysis of Key Industries in India

10. Textile Industry

The textile industry holds significant status in India. Though the industry was
predominantly unorganized industry even a few years back, but the scenario started
changing after the economic liberalization of Indian economy in 1991. The opening up of
economy gave the much-needed thrust to the Indian textile industry, which has now
successfully become one of the largest in the world. Textile industry provides one of the
most fundamental necessities of the people. It is an independent industry, from the basic
requirement of raw materials to the final products, with huge value-addition at every
stage of processing. It provides one of the most basic needs of people and holds
importance for maintaining sustained growth for improving quality of life.

It has a major contribution to the country’s economy. The textile sector also has a direct
link with the rural economy and performance of major fiber crops and crafts such as
cotton, wool, silk, handicrafts and handlooms, which employs millions of farmers and
crafts persons in rural and semi-urban areas. It has been estimated that one out of every
six households in the country depends directly or indirectly on this sector.

10.1 Why Textile Industry?

Apart from providing ample employment opportunities to the middle and lower class of
India, the textile industry has many other opportunities:

• Elimination of quota restriction leads to greater market development.


• Large potential domestic and international market.
• Increased disposable income and purchasing power of Indian customer opens new
market development.
• Market is gradually shifting towards branded readymade garment.
• Indian manufacturers and suppliers are improving design skills, which include
different fabrics according to different markets.
• Greater investment and FDI opportunities available in this segment.

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10.2 Strengths

The strengths of textile industry in India are:

• India enjoys benefit of having plentiful resources of raw materials. It is one of the
largest producers of cotton yarn around the globe, and also there are good
resources of fibers like polyester, silk, and viscose.
• Indian textile industry is an independent and self-reliant industry.
• The country has a huge advantage due to lower wage rates. Because of low labor
rates the manufacturing cost in textile automatically comes down to very
reasonable rates.
• Availability of large varieties of cotton fiber and has a fast growing synthetic fiber
industry.
• India has great advantage in spinning sector and has a presence in all process of
operation and value chain.
• Industry has large and diversified segments that provide wide variety of products.
• The garment industry is very diverse in size, manufacturing facility, type of
apparel produced, quantity and quality of output, cost, requirement for fabric etc.
It comprises suppliers of ready-made garments for both, domestic or export
markets.

10.3 Weaknesses

The weaknesses of textile industry in India are:


• Massive Fragmentation
A major loop-hole in Indian textile industry is its huge fragmentation in industry
structure, which is led by small scale companies. Despite the government policies,
which made this deformation, have been gradually removed now, but their impact
will be seen for some time more. Since most of the companies are small in size,

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the examples of industry leadership are very few, which can be inspirational
model for the rest of the industry.

• Distant Geographic Location


There are some high-level disadvantages for India due to its geographic location.
For the foreign companies, it has a global logistics disadvantage due the shipping
cost is higher and also takes much more time comparing to some other
manufacturing countries like Mexico, Turkey, China etc. The inbound freight
traffic has been also low, which affects cost of shipping - though, movement of
containers are not at reasonable costs.

• Labor Laws
In India, labor laws are still found to be relatively unfavorable to the trades, with
companies having not more than ideal model to follow a ‘hire and fire’ policy.
Even the companies have often broken their business down into small units to
avoid any trouble created by labor unionization.

• Lack of trade membership


India lacks in trade pact memberships, which leads to restricted access to the other
major markets. This issue made others to impose quota and duty, which restricts
on the sourcing quantities from India.

• Industry is highly dependent on cotton textile


The growth of cotton textile has remained negative for last two fiscal years which
poses a threat to overall textile industry. The dependency on cotton is not
favorable.

• Lack of adequate technological development that affect the productivity and


other activities in whole value chain

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10.4 Growth Trend of Textile Industry

Role of textile industry in India GDP has been quite beneficial in the economic life of the
country. The worldwide trade of textiles and clothing has boosted up the GDP of India to
a great extent as this sector has brought in a huge amount of revenue in the country.

In the past one year, there has been a massive upsurge in the textile industry of India. The
industry size has expanded from USD 37 billion in 2004-05 to USD 49 billion in 2006-
07. During this era, the local market witnessed a growth of USD 7 billion, that is, from
USD 23 billion to USD 30 billion. The export market increased from USD 14 billion to
USD 19 billion in the same period.

The role of textile industry in India GDP had been undergoing a moderate increase till the
year 2004 to 2005. But ever since, 2005-06, Indian textiles industry has been witnessing a
robust growth and reached almost USD 17 billion during the same period from USD 14
billion in 2004-05. At present, Indian textile industry holds 3.5 to 4 percent share in the
total textile production across the globe and 3 percent share in the export production of
clothing. The growth in textile production touched USD 22.1 billion during 2007-08.
USA is known to be the largest purchaser of Indian textiles.

Table 11: Export trend in textile products

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10.5 FDI Inflows to Textiles Industry and Government Initiative

• The textiles industry in India is experiencing an increase in the collaboration


between national and international companies International apparel companies
like Hugo Boss, Liz Claiborne, Diesel, Ahlstorm, Kanz, Baird McNutt, etc have
already started their operations in India and these companies are trying to increase
it to a considerable level .
• National and the international companies that are involved in collaborations
include Rajasthan Spinning & Weaving Mills, Armani, Raymond, Levi Strauss,
De Witte Lietaer, Barbara, Jockey, Vardhman Group, Gokaldas, Vincenzo
Zucchi, Arvind brands, Benetton, Esprit, Marzotto, Welspun, etc.
• Foreign Direct Investments (FDI) up to 100% is allowed in this sector through the
automatic route by the Reserve Bank of India.
• In order to provide quality cotton raw materials at reasonable price to the
manufacturers, the Technology Mission on Cotton was launched.
• In order to facilitate the technological advancement in the textile industry, the
Technology Upgradation Fund Scheme (TUFS) was set up.
• The Scheme for Integrated Textile Park (SITP) is set up to provide world standard
infrastructure facilities.
• The reservations for the small scaled units in textiles were abolished.

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