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Indo - US Economic Summit 2007

Building Strong
Partnerships

*connectedthinking
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Table of contents

Education Management 2
Farm to Retail - Overview of India’s retail sector 10
India: A manufacturing destination 25
Infrastructure:
a) Roads 32
b) Civil Aviation & Aerospace 36
c) Port Sector 40
d) Real Estate 45
Healthcare in India 50
Education Management

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Issues in Higher Education & Vocational Education Turning our focus to primary education, India presents
a dismal picture. Article 8 of the Indian Constitution
India is one of the world’s fastest growing economies. mandates universal primary education. Yet, 41 per
Its population has a median age of 25, which means cent of children do not reach class 5 in India. In this
that over 550 million people are 25 years or younger. respect, India fares worse than Gambia (20%), Mali
While this gives India a huge demographic edge, it (18%), Senegal (15%), Tanzania (17%) and Burkina
also puts considerable pressure on its policy makers Faso (25%). Further, the literacy rate in India is lower
to ensure that the young population is given quality than that of many other developing countries. Many
education that will empower the future generations argue that the development of higher education in
to contribute to and participate in the growth of the India has been at the cost of primary education. Higher
country. Is India’s education system geared up for this education is highly subsidized by the Government
massive task? Is it ready to meet the current and future – fees at universities have not been revised for several
challenges? years. At present only 5% of the total cost of operating
a university is generated through fees.
In India, the formal education system consists of 1 to 3
years of preschool, 10 years of school; 2 years of higher Yet there is a woeful lack of quality higher education
secondary school; 3 to 4 years for under-graduate institutions, giving rise to severe competition for
degree followed by Masters, M.Phil and Ph.D degrees. entry. Admission to reputed colleges is extremely
The focus of this paper is on higher education and difficult; one such college in Delhi rejected students
vocational education in India. who scored less than 95% in their school leaving
examination for its bachelors course in economics.
India has one of the largest higher education This level of competition has resulted in increasing
infrastructures in the world with 388 universities / numbers of students seeking higher education overseas
institutions affiliating some 17,000 colleges. Over – US, Australia and UK being the chief destinations.
450,000 teachers teach 10 million students; third It has been estimated that Indian students spend
largest after the US and China. This number is growing approximately USD 4 billion on education overseas
rapidly. Programmes are offered in all major disciplines. every year. In 2004-05, about 80,000 Indian students
Professional education is imparted with English as were studying at US universities comprising roughly
the medium of instruction. Prestigious institutions 14% of the international students there. A considerable
get to pick the very best students. Only 1 out of 200 percentage of this student group ultimately settles
applicants gets admission into the famed Indian down overseas – a migration of talent and resources
Institutes of Technology. The figure of acceptance is that India can do without.
about 1 out of 10 at MIT(USA). Stories of students not
making it to IITs, but securing admission in Ivy League India needs to expand its educational infrastructure
colleges in the U.S. are commonplace. at all levels. Towards this end the Indian Government
needs to seek out partners both within and abroad.
India’s higher education system has been a great asset
– it has not only catered to the manpower needs of I. Regulation of higher education
the economy and helped India become self reliant in
several areas but its doctors, engineers and scientists India is a federal setup with powers to legislate on
have been spectacularly successful in the global arena. certain matters with the Central Government, on others
Clearly the higher education system has done a good with the State Governments and on some matters on
job. But is it good enough for the very rapidly changing the concurrent list which come within the purview of
present and a very demanding future? Perhaps not and both. Education is on the concurrent list. Exclusive
that is the key issue. legislative power has been assigned to the Central
Govt for co-ordination and determination of standards
While there has been a 113% increase in enrolment in institutions of higher education as well as research
in higher education (from 4.95 million in 1990-91 to and scientific and technical institutions while the
10.58 million in 2001-02), the net enrollment ratio in State Governments are responsible for maintenance
2005-06 is still a mere 9.7% While we spend a meagre of standards of higher education. The coordination
0.37% of our GDP on education, developed countries and cooperation between the Union and the States
like Canada spend 1.88% of GDP on higher education is brought about in the field of education through the
alone.

PricewaterhouseCoopers Pvt Ltd. • 3


Central Advisory Board of Education (CABE). • specifying matters in respect of which fees may be
charged and scales of fees
The cornerstone behind all legislations on education is
that education must be a “not for profit” activity. Various The UGC has, accordingly, notified rules and
Supreme Court judgements have reiterated this. regulations governing these issues. Before issuing any
regulation, the UGC must seek the approval of the
The Central Government has established authorities Central Government.
for overseeing and ensuring high standards of higher
education in India which include: B. AICTE

1. The University Grants Commission (UGC) All India Council for Technical Education (AICTE) was
established in 1988 also through an Act of Parliament.
2. All India Council for Technical Education (AICTE) AICTE is vested with the statutory authority for
planning, formulation and maintenance of norms and
3. Specialised Professional Councils, like Medical standards, quality assurance through accreditation,
Council of India (MCI), Bar Council of India (BCI) etc. funding in priority areas, monitoring and evaluation,
maintaining parity of certification and awards and
A. UGC ensuring coordinated and integrated development and
management of technical education in the country.
The UGC was established by the Central Government
through an Act passed by the Parliament in 1956. UGC AICTE’s purview covers programmes in Engineering,
has been vested with two responsibilities: Technology, Architecture, Town Planning, Management,
Pharmacy, Applied Arts and Crafts, Hotel Management
(i) providing funds to institutions of higher education; and Catering Technology etc.
and
For the purpose of facilitating collaboration and
(ii) coordination, determination and maintenance of partnerships between Indian and Foreign Universities /
standards in such institutions. Institutions, the AICTE has, in 2005, issued Regulations
for Entry and Operation of Foreign Universities in India
In carrying out its responsibilities, the UGC serves as imparting technical education.
the link between the Central and the State Governments
and institutions of higher learning. C. Specialised professional councils

Under the provisions of the UGC Act, the right of The Central Government has also set up specialized
conferring or granting degrees is exercisable only by professional councils such as the Bar Council of India,
a university established under an Act passed by the Medical Council of India, Dental Council of India etc.
Centre or a State or by an institution which is declared with a view to regulating professional education in
by the Central Government to be a deemed university law, medicine, dentistry etc. The degrees awarded to
by issuing a notification. The Act also confers powers students admitted by colleges without obtaining the
on the UGC to make rules to provide for, among others: required approval from such bodies are not recognised
for registration to practice the respective professions in
• defining the qualifications required of the teaching India.
staff;
D. State Governments
• defining the minimum standards of instruction for
grant of degree State Governments are responsible for establishment of
State Universities and colleges and provide grants for
• regulating the maintenance of standards and the their development and maintenance.
coordination of work or facilities in universities;

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II. Foreign investment in education sector that it almost appears that they are designed to block
rather than facilitate entry of foreign universities.
A. FDI policy Some provisions are even contradictory in nature. For
example, one of the conditions for entry and operation
The Foreign Direct Investment Policy of India allows reads:
100% FDI in the education sector under the automatic
route as per Press Note 2 of 2000 issued by the “The educational programmes to be conducted in India
Department of Industrial Policy & Promotion, Ministry of by Foreign Universities / Institutions leading to award of
Commerce & Industry. degrees, diplomas, shall have the same nomenclature
as it exists in their parent Country. There shall not be
B. Regulatory framework any distinction in the academic curriculum, mode of
delivery, pattern of examination etc. and such degrees
The UGC has so far not notified any regulatory and diplomas must be fully recognized in their parent
framework in respect of participation in higher Country.”
education by foreign universities. Regulations are under
preparation and are likely to provide for the following:- Another one however reads:

• the prospective foreign education providers be “The Foreign University / Institution shall be bound by
recognized in their home country; the advice of AICTE with regard to admissions, entry
qualifications and the conduct of courses / programmes
• the fees charged by them be controlled by the UGC; in technical education, as may be communicated to
them from time to time.”
• no commercialization of education be allowed;
Clearly, these two stipulations are contradictory. The
• reservations for backward classes. equivalence in the curricula that is mandated in the first
could be lost by the binding “advice” of AICTE given in
On March 1, 2007, the Cabinet approved the Regulation the second stipulation.
of Foreign University Entry and Operation (Maintenance
of Quality and Prevention of Commercialisation) Bill, III. Issues in higher education
2007. Due to political opposition to the entry of foreign
universities, the Bill’s introduction in the Parliament has In a report sent to the Prime Minister in end-November,
been deferred. Media reports indicate that the proposed 2006, the National Knowledge Commission (NKC) notes
legislation gives universities of international repute that there is a “quiet crisis in higher education in India
the freedom to not observe domestic norms such as that runs deep”. It calls for “a systematic overhaul” of
reservations for socially and educationally backward the nation’s universities so that much larger numbers
sections and the dispensation from requirement of of people can be educated without diluting academic
adhering to admission and fee norms. However, their standards.
entry into India may only be with conditions which may
cover minimum investment, usage of surplus for further India needs to increase its number of universities to
development of their educational institutions in India 1,500 by 2015, from 350 now. Such an increase is
etc. necessary to raise the proportion of 18 to 24-year-olds
entering higher-education institutions to at least 15
Unlike the UGC, the AICTE in 2005 has issued percent, up from 7 percent now, which is only half the
regulations for the entry and operations of foreign average for Asia, says the NKC report. The report goes
universities/ institutions imparting technical education on to add that various universities vary considerably in
in India leading to award of diplomas and degrees terms of quality and there is little knowledge creation,
including post graduate and doctoral programmes. little interaction with the economy, society and other
These regulations and the procedures are so complex academic / research institutions.

PricewaterhouseCoopers Pvt Ltd. • 5


The regulatory environment for education in India the Ministry of Labour & Employment. The Directorate
is complex and is often criticized as an hindrance General of Employment & Training (DGE&T), under the
to the growth of the sector. The Economist (2005) Ministry of Labour & Employment, is responsible for
noted ‘whereas most nations in the world are working providing skilled workforce to the industry for shop floor
towards loosening of statutory control over higher level and foreman at supervisory level, both in India and
education, India is moving in the reverse direction’. abroad. The DGE&T’s functions include:
Over-centralisation, lack of institutional autonomy
and accountability and slow responses to change • policy formulation on Vocational Training;
have become the distinguishing features of the higher
education system in India. • laying down standards;

Conclusion • revision of course curricula;

There are two key issues on higher education in India. • granting affiliation;

1. The need to expand the infrastructure to provide • trade testing & certification.
quality education to much larger numbers and
In India, the vocational education programme at
2. The need to recognize that the Government alone will secondary school level was introduced in 1976-77
not be able to do so and it must seek out partners as a state scheme. Due to financial constraints, the
from within and outside India and that partners will programme was introduced initially only in a few States.
come only when they are made to feel welcome. However, these States have felt the need for central
assistance to run the programme. Subsequently, a
These two issues are well debated and well understood. Centrally Sponsored Scheme of Vocationalisation of
India’s policy makers now need to muster the will to do Secondary Education was introduced during 1987-
what is necessary to effect changes. 88 and since then around 6,800 institutions have
introduced the programme at Grade XI and XII level of
IV. Vocational and technical education education.

While India’s population growth rate has declined over The Technical/Vocational Education and Training is
the years, the labour force is still projected to grow by multi-sectoral in nature. Each ministry/department in
close to 2 per cent every year. The National Sample Central as well as State Governments is responsible for
Survey Organisation (NSSO) reports that 12.8 million manpower development in that sector. While some offer
people enter the labour force every year. Over half of regular formal or non-formal courses, others draw from
the labour force is still engaged in rural activities. Over the general pool of educated and trained manpower.
90 percent of the labour force still works in the informal Around 150 vocational courses are offered in these
sector, much of it at low levels of productivity. schools with an intake capacity of around 1 million
students per year.
As per the Constitution, “Vocational and Technical
Training of Labour” is a concurrent subject which The programme covers all major areas like Agriculture,
means that both the Central and State Governments Engineering and Technology, Business and Commerce,
share the responsibility. The Central Government lays Home Science, Health and Paramedical, and
down the policies, standards, norms for affiliation, Humanities, Science and Education. Almost all these
guidelines and conducts trade test and certification. schools are in the public sector, enrolling close to
Implementation of vocational training programme rests 400,000 students in the vocational education scheme
with the respective State Governments. – utilizing just 40 per cent of the available student
capacity in these institutions. These schools offer a
Under the Allocation of Business Rules, “Vocational total of over 100 courses in various areas - agriculture,
training of craftsmen and apprentices” is allocated to

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business and commerce, humanities, engineering and • As against 107 trades that have been notified by the
technology, home science and health and para medical government, the maximum trades that any ITI offered
skills. were just 38. This reflects the inability of the ITIs
to ramp up scale and offer new and more market-
The Vocational Training Programmes (VTP) conducted oriented courses.
are aimed at imparting skills to school leavers at VIII, X
and XII standards. The two major VTP schemes are : • While the situation with regard to physical
infrastructure and availability of power supply
1) Craftsmen Training Scheme (CTS) that are conducted remains comfortable, factors like non-availability
through the Industrial Training Institutes (ITIs). of computerized numerically controlled machines
(CNCs), inadequate supplies of raw material and lack
2) Apprenticeship Training Scheme (ATS) which of focus on staff training and development are key
provides on the job training in real life industry impediments in the strengthening of ITIs in India.
environment.
The Prime Minister has stated that India faces the
There are 5,114 ITIs in the country having a cdapacity challenge of increasing the skilled work force from 5%
of 742,000. The number of Government ITIs is 1,896 at present, which is the lowest in the world, to about
while there are 3,218 private Industrial Training Centres. 50% by 2021 which is the norm in developed countries.
All India Trade Tests are conducted for Craftsmen This requires that the training capacity be increased
Training Scheme under the aegis of National Council by five times. To make working people employable,
of Technical Training (NCVT) which trainees appear adequate infrastructure for skill training and certification
in after completion of the course. Successful trainees and for imparting training needs to be created. To
are awarded the National Trade Certificates, which are sustain a high level of economic growth, it is essential
recognised for employment within the country as well to have a reservoir of skilled and trained manpower.
as overseas. Shortages have already emerged in a number of
sectors. The Government recognises that ITIs must
Performance of ITIs keep pace with the technological demands of modern
industry and the expanding universe of technical
India’s vocational education infrastructure is woefully knowledge. The Prime Minister has noted complaints
inadequate- catering to the training needs of only 2.5 about an imminent shortage of skilled employees
million – 1 million by the DGE&T and 1.5 million by 11 and announced the launch of a National Mission on
other ministries and departments. It is estimated that an Vocational Education so that the skills deficit in the
overwhelming 93 per cent of the workforce, which is in economy is addressed. The Planning Commission has
the unorganised sector, does not have access to formal formed a Task Force on Skill Development which will,
vocational training. inter alia, develop a blueprint for the National Mission.

A survey conducted by the Federation of Indian The Government in recent years has taken steps to
Chamber of Commerce & Industry (FICCI) on the ITIs in upgrade ITIs. The Finance Minister, in his Budget
the country makes the following conclusions: Speech 2004-05, had announced measures for
upgradation of 500 ITIs in the country. Subsequently,
• The quality of the Industrial Training Institutes (ITIs) a scheme for upgradation of 100 Government ITIs with
in the country has been deteriorating in the last domestic funding was approved in March 2005. These
few years, with the industry increasingly reporting 100 ITIs were distributed in 22 States/Union Territory
disconnect between the skills imparted in these Administrations with 75:25 funding pattern to be shared
institutions and the skills demanded in the market. between Central and State Governments respectively.
More than half of the ITIs reported underutilisation
of seats, indicating that the basic industrial trades
offered by these institutes are becoming increasingly
unattractive for their limited scope in terms of
creating job opportunities.

PricewaterhouseCoopers Pvt Ltd. • 7


For the remaining 400 Government run ITIs, the Ministry India. It is also more expensive to organize courses
of Labour and Employment began a dialogue with the in vocational education than in general education.
World Bank for providing financial assistance. The This is because vocational and technical education
World Bank, in June 2007, approved a credit of US $ involve heavier capital costs and maintenance
280 million (Rs. 1,231 crore) towards the central share costs for laboratory, workshop, equipment, etc.
for taking up the ‘Vocational Training Improvement Government expenditure on vocational education
Project’ for upgradation of these 400 ITIs. has been extremely low, as compared to general
secondary education. The Knowledge Commission
The remaining 1,396 government ITIs have been has recommended that given the demand for
proposed to be upgraded into Centers of Excellence skilled manpower in manufacturing and services the
in specific trades and skills under the Public-Private Government should aim to spend at least 10 – 15%,
partnership (PPP). Under the proposed scheme, the of its total public expenditure on education, on
State Government, as the owner of the ITI, continues to vocational education and has suggested 1) enhancing
regulate admission and fees while the new management fees, coupled with student loan schemes, 2) raising
will be given academic and financial “autonomy” and funds through a cess on employers (for instance 2%
the Central Government will provide financial assistance of salaries of all employees, as in Singapore) and 3)
by way of seed money. making it obligatory for companies to finance public
vocational education and training programmes (as in
Industry participation in ITIs is a welcome step that Korea).
has several advantages. It would ensure increased
involvement of the industry resulting in better skills The Planning Commission estimates that every year
delivery & exposure for the candidates. In turn, the 2.2 million students leave school after passing Class X.
Industry would get skilled & trained manpower. The Those who drop out after Class VIII number 19 million.
industry response has been encouraging. Several These young people are the ones for look for vocational
automobile companies have adopted ITIs and training and self-employment avenues. As against this,
introduced relevant training programmes. Industry available formal training capacity of the country is only
chambers like CII and FICCI have also come forward 2.5 million students, thus leaving a huge gap. The ITI
and announced their intent to partner ITIs in various system needs to be revamped to fill this gap.
states.
Educationists and experts have consistently
To maintain the growth rate of the economy, which is recommended that education at secondary and higher
essential to bring people out of poverty, it is imperetive secondary level should be given a vocational bias to
to have a reservoir of technical and skilled manpower. link it with the world of employment. It has also been
A properly planned and effectively implemented recommended that 80-90 percent students completing
vocational education system will enable the Class X should be diverted to the vocational stream,
unemployed youth to take up useful employment and reducing the pressure on the universities and also
contribute to the country’s growth. preparing students for gainful employment.

While scarcity of resources for education is an accepted


fact, it is even more true of vocational education in

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Conclusion India needs to put much more emphasis on Vocational
Education and Training to bring about a transformation
The advantages of vocational education for a country in its manufacturing sector and build entrepreneurship.
like India cannot be overstated. It is estimated that at A major expansion of the vocational education
any given time, 1.5 percent to 2 per cent of Europe’s programme is the need of the hour.
population is under training with VET. The same
percentage of India’s population amounts to at least
20 to 30 million people. In sharp contrast, the actual
number of people receiving VET is very low, at around
2.5 million.

PricewaterhouseCoopers Pvt Ltd. • 9


Farm to Retail –
Overview of India’s
Retail Sector

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Several global studies rank India as the most attractive retail destination PricewaterhouseCoopers estimates that
in the world. PricewaterhouseCoopers estimates that India’s retail sector the Indian retail sector is worth USD350
is worth an estimated USD350 billion. Over 12 million retail outlets (or billion and is growing at 40 percent per
annum. Organised retail penetration is
kirana stores) comprise India’s unorganised market; more than 80 percent currently three percent. Some of the drivers
of kirana stores are operated by small family businesses using household fueling the growth of the retail industry
labour. Organised retail penetration in India is between three to eight include—
percent. Organised retail is growing at a compounded annual growth rate
of between 30 to 40 percent per annum. • Strong GDP

India’s retail sector will witness increased growth due to the following • Rising incomes
factors: • Increased numbers of working women

• Stable GDP growth rates of nine percent are resulting in increased • Demanding middle class
economic prosperity for the country and for consumers.
• Large young population
• India’s 300 million-strong middle class are demanding increased access
Source: PricewaterhouseCoopers, From Sao Paulo to
to good and services.
Shanghai: New Consumer Dynamics—The Impact on
Modern Retailing*
• Changing lifestyle patterns are witnessed in the increase of lifestyle- and
luxury-oriented purchases and a decrease in essential purchases.

• The higher numbers of working women are resulting in an increase


in double income families who want to purchase more consumption-
oriented goods. Also, the higher number of urban professional working
women is driving demand in urban centers.

• India has one of the world’s largest youngest populations where half the
population is under the age of 25 years.

• Increased access to credit is enabling consumers to spend more and


save less. (Retail loans have doubled since 2003.) Who Buys More— Rural or Urban India?

• The top 10 cities account for 11 percent


• Residents in rural and Tier II, III cities are demanding that modern of India’s total consumption and the next
trade move into their localities. The population of rural India is the 20 cities account for 20 percent of India’s
combined populations of the US and the EU and represents 51 percent consumption.
of consumption. In addition, the spread of IT and BPO operations to
Tier II and III cities is raising incomes, improving standards of living and • Of the total households in India that earn
resulting in a desire to acquire more goods and services. more than INR300,000 (USD 6,667) per
annum, a third reside in rural India.

PricewaterhouseCoopers Pvt Ltd. • 11


Some retail real estate issues that impact Emerging trends that are observed in the Indian retail sector include:
the growth of the retail industry include:
• Increase in Private Labels—Private labels enhance the profitability
• High stamp duties on transfer of property,
varying by state.
levels of product categories, increase retailers’ negotiation powers and
create consumer loyalty. Retailers are introducing private labels in all
• Urban Land Ceiling Act and Rent Control categories, including apparel, accessories, footwear and groceries.
Acts have distorted property markets
in cities, leading to exceptionally high • Foray into Retail Agribusiness—India’s most prestigious business houses
property prices. and many global retailers are planning to enter retail agribusiness.
Market entrants plan to invest in the entire value chain, moving goods
• Presence of strong protenancy laws
makes it difficult to evict tenants. This
“from the farm to the fridge at home.” Viewed as India’s next “sunrise
problem is compounded by problems of sector,” retailers use contract farming to access land, manpower and
clear titles to ownership. farming skill without having to purchase land. Multinational companies
also want a share of this food retail market and may enter the market
• Land use conversion is time consuming through cash-and-carry or franchisee models.
and complex.
• Selling to Tier II and III Cities—Indian retailers are planning to extend
• Time consuming legal process for
property disputes.
operations into Tier II and Tier III cities. People living in Tier II and III
cities are typically well-educated and are willing to purchase goods and
• City urban planning projects smaller services. Some of the emerging opportunities in the Indian retail sector
commercial plots and this, along with rigid include:
building and zoning laws, make it difficult
to procure retail space. • Low Penetration of Modern Trade—India’s retail market is largely
dominated by unorganized players, representing a major growth
Source: PricewaterhouseCoopers, From Sao Paulo to
Shanghai: New Consumer Dynamics—The Impact on
opportunity for modern trade. The share of organized retail, currently
Modern Retailing* at three percent, is expected to increase to 10 percent by 2010. For
consumers, modern trade will provide increased access to products and
services. Modern trade will also improve the economy through increased
employment, agriculture and sourcing of products and services from
India.

• Young, Upwardly Mobile Consumers—With the IT/BPO boom in India,


a new and younger generation has access to more disposable income
than their parents. India’s population, with a median age of 24, is the
youngest consumer segment in the world and presents an attractive
and lucrative opportunity for retailers. Young Indian consumers have
easier access to credit and as a result, a “buy now and pay later” culture
is emerging. These consumers are increasingly spending on a variety
of luxury products and lifestyle-oriented services and are unapologetic
about their generous spending habits. Lifestyle-oriented activities include
eating out, watching movies, buying branded apparel, more expensive
personal care items and the latest consumer durables electronics.

12 • PricewaterhouseCoopers Pvt Ltd.


• India As A Sourcing Hub—India is a sourcing location for textiles
and apparel; companies sourced USD2.5 billion worth of goods from
India in 2005 to 2006. Global retailers like Wal-Mart, GAP, JC Penney
and Target are increasing their sourcing volumes from India. These
companies, which accounted for 50 percent of the apparel outsourced
from India in 2005, are now rationalising their vendor bases and limiting
their sourcing to a fewer countries like India and China. International
retail chains are also setting up captive liaison offices in India instead
of depending on third-party buyers. Some of the main challenges
include:

• Inadequate Availability of Skilled Labour—Developed economies,


which have a high penetration of modern retailing formats, employ
between 10 to 11 percent of their workforce in retailing, as compared
to seven percent employed in India today. With new entrants and
existing domestic retailers planning large-scale expansion, there has
been a surge in demand for skilled resources. However, this demand is
not being met by a readily available supply of talent. There is a growing
concern about the paucity of trained retail personnel both at the store
and managerial levels. While there is no manpower shortfall in India,
given its large working population, the gap lies in finding people with
the right hard and soft skill-sets, like customer orientation and selling,
which are critical.

• Retail Real Estate Issues—Availability of quality retail space is a critical


enabler for the anticipated rapid growth of modern retailing in India.
With most Indian cities undergoing rapid urbanization, spiraling costs
of retail space is a key concern among retailers. With the demand from
the commercial properties remaining strong, the cost of real estate
in most top tier cities has been rising in the past two years, thereby
escalating the lease rentals and the time it takes to break-even.

• Absence of Robust Food Supply Chains—India is a fragmented


country with 70 percent of the population residing in rural areas.
The absence of an infrastructure and logistics system means that
reaching consumers and transporting goods is difficult. With growing
urbanization the necessity of roads, highways and public transport
systems are essential. Due to the presence of large local and
multinational companies, India has a fairly organised and developed
non-food manufacturing supply chain. However, the food supply chain
in India is fragmented and unorganised.

PricewaterhouseCoopers Pvt Ltd. • 13


New Trends in Food The Imperative of improving India’s food supply chain
A CII-AC Nielsen Org-Marg report on foods Looking at the figure below, India is at the stage of building supply
and beverages indicates that one of the
biggest opportunities in food is likely to be
chains, improving back-end systems, instituting processes and applying
the quasi-meal. Demand for quasi-meals technologies. These efforts will ensure:
is coming from an increased willingness to
experiment with foods and to break rules, • A smoother transfer of goods from point of origin to point-of-sale
one of the main ones being the importance
of eating a full meal. • Increased operational efficiencies
In addition the rise in the numbers of
working women is likely to be one of the
• A reduction in overall costs
most significant factors in altering the food
landscape in India. Ready-to-eat meals • Improved customer service since goods can be moved rapidly and
and culinary aids that assist with and ease efficiently between factories, warehouses and outlets
the preparation of regional specialties is
emerging. • Better insight into which goods move quickly off shelves and which
remain in stock. Some retailers, in order to address the absence of supply
That said, to be able to move quasi-meals,
ready-to-eat meals and culinary aids to
chain and logistics systems are establishing captive systems comprised
consumers, retailers need to build strong of cargo planes, railway hubs, warehouses, distribution centres, cold
farm-to-fork models. chain storage, etc. Logistical challenges, rapidly changing consumer
tastes, the evolution of retail formats, the high cost and availability of real
Source: CII, PricewaterhouseCoopers analysis estate are characteristics of the Indian retail sector. However, as modern

14 • PricewaterhouseCoopers Pvt Ltd.


trade grows, supply chain efficiency will become essential in offering According to a FICCI report of October
competitively priced products, responding to customers’ changing needs 2004 India is the:
and providing good customer service. Supply chain management involves:
• Second highest fruit and vegetable
supplier management, purchasing, materials management, manufacturing producer in the world (134.5 million tones)
management, warehousing, material handling, transportation, physical with cold storage facilities available only for
distribution and customer service. Establishing an efficient supply chain 10 percent of the produce.
that links farmers and small manufacturers (who have limited infrastructure
or distribution strength) directly with retailers, will maximize value for all • Second highest producer of milk with a
stakeholders. Together with back-end infrastructure, this will minimise cold storage capacity of 70,000 tonne.
wastage (especially for fresh foods and vegetables), will increase farmers’
• Fifth largest producer of eggs. Sixth
realizations, will encourage best practices in crop management and will largest producer of fish with harvesting
improve food safety and hygiene. volumes of 5.2 million tones

The food supply chain can be subdivided into the following sectors:

• Primary—Agriculture, horticulture, fisheries and aquaculture are the


primary producers

• Intermediate—Manufacturers who process the food for ready-to-eat or


cook format together with the packaging companies

• Last stage—Retailers, wholesalers and caterers are in this last stage of


the supply chain.

The success of any retail format largely depends on the efficiency of


its supply chain. India has a fairly organised and developed non-food
manufacturing supply chain, mainly due to the presence of large local
and multinational companies that have built significant experience and
scale by following best practices in their respective fields. Like most other
developing economies, however, India lacks in the last mile distribution
segment. The supply chain in India is fairly unidimensional and there is very
little value-added activity since the distribution remains fragmented and
unorganised. This is primarily due to the geographical and cultural diversity
and complexity of the region and the lack of capital available for investing
in technology and modern retail formats.

PricewaterhouseCoopers’ position paper entitled The Rising Elephant:


Benefits of Modern Trade to Indian Economy* indicates that India is among
the top two producers of milk, fruits and vegetables in the world. Yet, the
organised food retail business in the country is among the least developed
in the world.

• A large portion of fruits and vegetables are lost due to inadequate


postharvest handling, cold storage, processing facilities and convenient
marketing channels.

• Huge quantities of grains are also wasted because of improper handling


and storage, pest infestation and poor logistics management. Existing
intermediaries cause delays and eat up a large portion of the earnings
that essentially belong to the farmer. The result is a chain replete with
inefficiencies.

PricewaterhouseCoopers Pvt Ltd. • 15


International modern trade players such as The current food supply chain situation in India is weak:
Metro significantly invest in their operations
in transitional • There are inadequate cold chain units
economies. In the process of expanding
operations, they make a huge difference • Technologies are not incorporated into supply chains
to the lives of farmers and small-scale
vendors by teaching them new techniques • A regulatory environment that protects middlemen
to improve productivity and providing them
with new market access for their products. • Several levels of the supply chain
Source: PricewaterhouseCoopers,
• Increased wastage levels of between 24 to 40 percent
The Rising Elephant: Benefits of Modern Trade to
Indian Economy* • Several small stakeholders (farmers, wholesalers, food manufacturers,
retailers) who work in silos

• Absence of demand forecasting

One of the arguments in favour of FDI is that it will bring with it the
technologies and expertise required to build robust food supply chains. In
the Indian food chain, from farm to fridge, distribution of most food items
involves multiple intermediaries and wastage during transportation and
storage. While Indian consumers demand fresh products, the cumulative
wastage across the supply chain can vary from 24 to 40 percent. Huge
quantities of fresh fruits and vegetables are lost due to the lack of a cold
chain infrastructure. While inefficiencies increase consumer prices, farmers
suffer from extremely low realisations. To unlock operational efficiencies,
facilitate growth, reduce costs and improve the time it takes food to move
from point of manufacture to point of consumption, robust and scalable
supply chains need to be built. The Government too needs to bring in
appropriate legislative changes to catalyse this transition in the food supply
chain. In advanced countries, retailers, such as Walmart, Tesco, etc have
become the Channel Masters of food supply chain, assuming the process
from the food manufacturers. In India, with no superstores, no economies
of scale, several layers of intermediaries, there is an absence of a channel
master. Channel masters manage the supply demand scenario, coordinate
the supply chain and managing logistical activities.

In India, there are very few large food manufacturers.

• Amul, Ruchi Soya, Nestle, MTR, ITC, Dabur, Britannia, HLL’s food and
beverages section, beverage companies such as Coke and Pepsi are
some of the major players.

16 • PricewaterhouseCoopers Pvt Ltd.


• In poultry Godrej Agrovet, Suguna, Pioneer and Venkateswara “We need a Second Green Revolution.
hatcheries are some of the companies integrating operations end to By 2020, India will require to produce
end from breeding to ready to eat chicken foods. over 340 million tones of food grains
to feed its growing population. An
increase in production would necessitate
Data integration, financial flow management, supply-demand matching, surmounting many impending factors.
collaborative forecasting, information sharing, goods movement Land requirement for afforestation and
synchronization through efficient transport scheduling, are well practiced environment preservation activities would
in high technology industries with immense benefits. Food chain clusters force a situation where the present 170
can be formed with the participation of all stakeholders such as farmers, million hectares arable land would not
seed growers, merchants, transporters, wholesalers, retailers, financial be fully available for agriculture. It might
shrink to 100 million hectares by 2020.
institutions and insurance companies. Information sharing is essential In addition there will be shortage of
for generating the efficiencies. Technologies that are based on the water. The number of farmers available
Internet and mobile communications can be used to enable information for agriculture will reduce to less than 50
and financial transfer between stakeholders. Also, advances in RFID percent.”
technology and barcoding will have an impact on the management and
tracking of food as it moves through the supply chain, especially in --Former President A P J Abdul Kalam.
source identification, monitoring procedures, assessing inventory levels
and stock-outs and providing supply chain visibility.

PricewaterhouseCoopers Pvt Ltd. • 17


The retailing of fresh produce in India is Contract Farming
increasing. Despite a fragmented supply chain,
retailers are aggressively setting up back end While India is currently the second-largest producer of fruits and
systems to move goods from farm-to-fork.
vegetables, its agriculture industry is fragmented in the hands of farmers
As with most emerging economies, food and select agribusiness houses. That said, the amendment of the
accounts for over half the expenditure of an Agricultural Produce Marketing Committee Act in 14 states enables farmers
average family. With increases in disposable to sell produce and crops to buyers that offer the best prices. Additionally,
incomes, people migrate from consuming while a law regarding the integration of food protocols is tabled in
grains to include fruits and vegetables. Fresh Parliament, once passed, it would repeal nine laws and ensure uniformity
produce accounts for 50 percent of the Indian among food standards. One outgrowth of a growing agribusiness industry
shopper’s food and grocery bill compared to
15 percent in the US.
is the use of contract farming to access land, manpower and farming skill.
Of the total cultivable land in India, contract farming consumes seven
million acres. Companies are entering into contract farming to leverage
the cost savings and revenue benefits that are shared among farmers,
companies and customers as depicted below.

The Food and Agriculture Organisation’s report on contract farming


indicates the positive results from a project involving a large FMCG
major and farmers in north India. The FMCG company issued contracts
to approximately 400 farmers to grow select varieties of tomatoes. A
study of the project revealed that production yields and farmers’ incomes
increased as a result of the use of hybrid seeds and the availability of an
assured market. The yields of contract farmers were 64 percent higher
than those not under contract. Typically, farmers do not have access
to finance, equipment, seeds, fertilisers and machinery; under contract
farming, companies provide access to funds and materials to farmers.
Contract farming is likely to also improve food safety since large corporate
companies will be partnering with farmers to teach them best practices in
crop management and food safety. Studies suggest that almost everything
edible contains some bacteria, heavy metals, artificial additives or chemical
residues, which are the result of increasing pollution and the use of
pesticides. Studies confirm this:

• A 1999 study conducted by the All India Co-ordinated Research Project


on Pesticides Residue on vegetables and fruits confirmed that 90 to 100
percent of tested samples from four states and 45 to 80 percent tested
samples from 12 states were contaminated with pesticides.

• Another 2003 research funded by U.K’s Department for International


Development found 72 percent palak samples from Delhi contained
lead and 21 percent contained zinc that exceeded the limits set by the
Prevention of Food Adulteration Act.

Teaching farmers best practices in crop management, organic farming,


use of pesticides will help decrease the hazards associated with fresh
foods and produce. Also proper cold chain facilities which refrigerate foods
adequately, robust transportation networks, etc will also help in maintaining
the freshness of foods and will help to reduce heath risks.

18 • PricewaterhouseCoopers Pvt Ltd.


Cold Chain Storage “Are we using our farms, our farmlands to
full potential? The answer is no. We need
India’s cold chain infrastructure is inadequate and fragmented. The to move the cropping pattern in India from
food grains to crops, which are of high
industry expects the government to provide between 40 to 50 percent of value. India is well-positioned today to
the total investment through viability gap funding. Some estimates suggest feed the world. The vision that we and the
that India produces 140 million tonnes of fruits and vegetables and could Rothschilds have for India is to link Indian
cross the 300 million tonne mark in the next five years; an investment of fields to the world and put the produce, as
about INR18,000 to 20,000 crore in the next five years would be required fresh as it can be, on Western tables in 4-5
to meet about 30 percent of that capacity. Due to a dearth of cold storage days.”
facilities, the seasonal production deteriorates rapidly and has to be sold
-- Sunil Mittal, Chairman and Managing
within weeks. A proper cold chain facility could help meet the demand- Director, Bharti Group
supply gap of various food products including fruits and vegetables. The
cold chain scenario in India is described below:

• Indian supply chain network of six to seven intermediaries between the


primary source (farmers, growers, producers) and the final consumer.

• Food is less than 14 percent of organised retail trade in India, while an


average Indian middle class consumer spends around 50 percent of
his/her income on food and food products. This mismatch is largely due
to infrastructure constraints.

• The shortage of cold storage facilities and refrigerated transport


equipment results in inefficiencies in managing perishable products.
This, in turn, results in increased wastage.

• Since most companies engaged in food processing are in the Small-


Scale Sector (as per Government policy) economies of scale are difficult
to achieve in storage and transportation.

The growth of supermarkets in India also promises to generate greater


sales potential for chilled products such as packaged
meat or fish. Supermarkets enable consumers to Usage Patterns for Transporting Agriculture Produce from
consume fresh produce and products that are stored Production Sources to Marketing Yards
at the correct temperatures and are contained
in wrapped and sealed packaging. Meat or fish Method of Transport Percentage
purchased at a mandi, in contrast, usually must be
prepared and consumed immediately. Consequently, Trucks Ordinary 21
packaging will play an increasingly important role
in cold chain management and the extension of Tractors 18
products’ shelf lives. For example, the need for high-
Tempo Trucks 8
quality plastic packaging for the packing of meats is
related to the development of the delivery systems Bullock Carts 49
to move these packaged products to the retail outlet.
Reefer transportation has been in existence for two Others 4
decades but has now been considered important
with the increase in export of fruits and floriculture Total 100
produce. Initially, reefer transport system was used for
transporting important life-saving drugs, ice-cream, Source: www.nic.gov
frozen food and meat products. Currently grapes and
flowers are being transported from the production location to the exit point
at the seaport or the airport in reefer containers.
PricewaterhouseCoopers Pvt Ltd. • 19
Mode of Transport Adopted for Produce Over Long Distances

Method of Transport Percentage


Unrefrigerated mode, Traditional packing 83
Unrefrigerated mode, Cartons and boxes 10
Refrigerated trucks 4
Freezer trucks (frozen products) 1
Railway 2
Air negligible
Source: www.nic.gov

20 • PricewaterhouseCoopers Pvt Ltd.


Case Examples of season. (For example, Indians “Poised to usher a new paradigm in
eat 80 percent of the apple crop rural areas, the agri-business vision of
Reliance Industries during four months of the year. Reliance Retail is to build infrastructure
for efficiency, value addition, logistics and
Through improved cold chain market access to improve farm incomes,
Reliance Industries signed an MoU and refrigeration infrastructure, create an efficient market place for the
with the government of Punjab in Reliance will be in the unique true price discovery of farm produce,
August 2006. The project, which position of being able to sell drive major initiatives to bring the best
proposes to bring an investment of apples all year long.) The current technology and thereby bring about drastic
INR5,000 crore into Punjab, is an delivery time for most markets is improvements in farm practices.” --
important part of the overall plan three to four days; with Reliance’s Statement issued by Reliance Retail
of the retailers’ plans to establish mega-farm-to-fork model, delivery
hypermarkets, supermarkets, times may be reduced to a day.
specialty stores and agri-retail stores By selling in large volumes and
across India. Reliance Retail plans to reducing delivery times, Reliance
procure several items from the State will ensure better quality and will
including milk, fruits, vegetables and be able to offer competitive prices. sent to West Asia and South East
grains. The retailer plans to utilize the Asia. Mahindra Agribusiness sells
best farm practices and create value Mahindra Group produce to several European retail
for farmers. It also plans to hire and chains, including Carrefour, J
create captive cold chain facilities. The Mahindra Group established Sainsbury, Albert Heijn, etc. The
The Punjab initiative will be spread Mahindra Agribusiness* in division’s main produce is grapes,
across 50 rural business hubs and 2000, with an equity stake from mangoes and pomegranates. It
will have 250 franchises linked to International Finance Corporation. plans to export 5,000 tonnes of
these hubs. Media reports suggest Mahindra Agribusiness integrates pomegranates and grapes, which
that Reliance is offering farmers the agriculture and food chain will fetch INR75 crore over three
new technology and techniques from agri inputs right through to years.
to increase yields and quality. (A agri commodities, utilizes contract
simple example is to explain that farming and agri-retailing. • Mahindra Agribusiness is involved
planting tomatoes farther apart in contract farming across 100,000
results in bigger tomatoes. To move • Mahindra Agribusiness acres in eight states, covering
to a farm-to-fork model, Reliance is establishes agri centres in 30,000 farmers. The company
establishing local receiving centers, various districts under the had set up agri centres in districts
where produce is collected, cleaned Mahindra Krishi Vihar franchisee of the country either under the
and polished. From there, it will model or directly as Mahindra Mahindra Krishi Vihar franchisee
be shipped (typically in fleets of Agribusiness. Its primary focus model or directly as Mahindra
new, cooled trucks) to one of 68 is on crops like basmati, maize, Agribusiness. These centres are
distribution centers nationwide. barley, cotton, lentils, soybeans, one-stop shop for agro service,
According to media reports, Reliance durum, hyola and other oilseeds retailing agro inputs and procuring
will establish distribution points such as sunflower and mustard. produce. To supply fresh
at Special Economic Zones. At produce to the domestic modern
distribution centers, each fruit or • Currently, Mahindra Agribusiness retail formats, the company is
vegetable will be housed in climates exports 95 percent of its conducting a pilot project in
ideal for food preservation and produce to Europe, with the UK Punjab over 100 acres. The
freshness. The cold storage will also being the biggest importer and company is supplying to retailers
enable Reliance to sell produce out the remaining produce being such as Subhiksha, ITC, Namdhari
Fresh, etc.

*The Legal Entity Mahindra Shubhlabh


Services Limited
PricewaterhouseCoopers Pvt Ltd. • 21
“Are we using our farms, our farmlands to Pantaloon Retail India Ltd. (PRIL)
full potential? The answer is no. We need
to move the cropping pattern in India from While fresh food retailers in India implement the farm-to-fork model,
food grains to crops, which are of high
value. India is well-positioned today to
Pantaloon Retail India Ltd (PRIL) is reportedly assessing an alternative
feed the world. The vision that we and the business model involving the mandi middlemen or arhtiyas, as they are
Rothschilds have for India is to link Indian commonly known, in the procurement value chain for its Food Bazaar
fields to the world and put the produce, division. The goal is to ensure buy-in from and involve all stakeholders.
as fresh as it can be, on Western tables in
4-5 days.” -- Sunil Mittal, Chairman and Godrej Agrovet Ltd (GAL)
Managing Director, Bharti Group
GAL is the agricultural business subsidiary of Godrej Industries Ltd
(GIL), which is reported to be signing a Memorandum of Understanding
(MoU) with the Government of Punjab to launch its farm-to-fork project.
Under this project, fresh chickens are procured from farms, dressed in a
processing plant and placed on sale in the markets of Punjab and other
States. The project can supply between 2,000 to 4,000 chickens a day.
The necessary land for a processing plant will be identified in Punjab; two
plants are already in Bangalore and Mumbai. GAL will also expand its retail
outlets from 12 in Punjab and 2 in Haryana to 200 in 5 years.

Ministry of Railways

The Ministry of Railways, Government of India, is preparing a draft policy


for supply chain infrastructure management of agricultural products. It
is reportedly in discussions with retail companies like Cargil, Pantaloon,
Reliance and ITC and will offer its land to the highest bidder for setting up
agri-retail hubs. There would be a total of 16 hubs, with four hubs in each
of the metros. These will be the main hubs and secondary hubs will be
established in cities like Lucknow, Bhopal, Hyderabad and Ahmedabad.
The Indian Railways may also likely provide supply chain logistics support
to retailers. The proposed deal would entail transportation of both
agricultural and non-agriculture produce throughout India.

Bharti Enterprises

Bharti Enterprises entered into a joint venture with Rothschild to form


FieldFresh. FieldFresh invested INR230 crore into contract farming to
purchase 600 acres and supplies produce to Tesco. FieldFresh Foods
(P) Ltd is an equal partnership venture between Bharti Enterprises, one of
India’s leading business groups with interests in telecom, agri business
and insurance and ELRo Holdings India Ltd, an investment company of the
Rothschild family, formed by Sir Evelyn de Rothschild & Lady Lynn Forester
de Rothschild. The company has planned an outlay of USD50 million
in the first phase. These funds are being used to create state-ofthe- art
infrastructure for research and development, climate controlled processing
facilities and cold stores. FieldFresh Foods (P) Ltd was incorporated in
2004 and is engaged in providing premium quality fresh produce to the
markets worldwide.

The company also:

• Promotes world class standards for agricultural practices

• Teaches progressive farming techniques

• Identifies and adopts appropriate technologies

22 • PricewaterhouseCoopers Pvt Ltd.


APMC Act disguised interest, the latter generally exceeding
the statutory limits. The development of farm-to-
The present system of agricultural marketing, regulated fork models will disintermediate the supply chain,
under state Agriculture Produce Marketing Committee bring efficiency in the agricultural marketing process
(APMC) Acts, is aimed at providing an organized and create a common Indian market. Farmers will
marketplace, where farmers can sell produce under become partners in “farm to fork” value chains and
the supervision and administration of local APMCs. will see that their realizations will increase without
The APMC, an autonomous body comprising raising consumers’ prices. To invite investments into
representatives of farmers, traders and other farm-to-fork retail ventures the State and Central
stakeholders, is expected to protect the interests of all governments can—
stakeholders, especially the farmer. That said, today,
the AMPC Act protects the interest of middle men • Waive select duties, fees, cesses registration
and agents at the expense of farmers. The APMC Act charges.
prohibits farmers from selling directly to organised retail
chains. Each day farmers are subjected to changing and • Offer single-window facilities obtain the required
unfair prices that are quoted by agents. This licensed environment, land transfer clearances and other
commission agents and traders deprive farmers of fair- legalities.
market yields. To compound matters, most commission
agents also finance growers’ production and other • Facilitate the provision of water, electricity, roads,
needs. The price ultimately paid by agents to farmers bus stops at locations required by the company.
is then “adjusted” to deduct the loan principal and
• Encourage the use of Agri Export Zones which
attempt to use particular produce/products located
in an area for developing and sourcing the raw
materials, their processing and packaging (and in
some cases for exports).

Prioritising the development of the food processing


industry to encourage commercialisation, value
addition to agricultural produce and tax benefits.

PricewaterhouseCoopers Pvt Ltd. • 23


“The wastage is occurring at various Conclusion
stages of handling after harvesting
due to fragmented farming, provisions In order to encourage the development of farm-to-fork retail models, the
in the Agricultural Produce Marketing
(Development and Regulation) Act, lack of
Government can offer incentives and tax-related benefits to incentivise
adequate postharvest infrastructure such the development and upgradation of the food supply chain. A robust and
as cold chain facilities, transportation, comprehensive farm-to-fork retail model is required in order to:
proper storage facilities, etc.”
• Ensure a smoother transfer of goods from point of origin to point-of-sale
-- India’s Minister of State for Food
Processing • Increase operational efficiencies

• Reduce overall costs

• Improve customer service since goods can be moved rapidly and


efficiently between factories, warehouses and outlets

• Gain insight into which goods move quickly off shelves and which remain
in stock

• Reduce wastage across the agricultural supply chain from the current
levels of 24 to 40 percent

• Improve farmers’ realizations

• Encourage safer crop management practices

• Ensure that India can supply more fruits and vegetables to overseas
markets

24 • PricewaterhouseCoopers Pvt Ltd.


India: A Manufacturing
Destination
Key Opportunities

PricewaterhouseCoopers Pvt Ltd. • 25


Surging Ahead Advantage India

The revival of the manufacturing sector has been Manufacturers across the globe- ABB, Honeywell,
a happy story in the country’s sustained economic Siemens, Cummins, DaimlerChrysler, Piaggio,
growth. With a nearly 80 per cent weightage in the Toyota, Degussa and Rohm & Hass, are setting up
country’s industrial production the manufacturing operations in India. India has all the required skills in
growth rate has doubled in the last 5 years – from 6% process, product, and capital engineering, owing to its
in 2002-03 to a record 12.3% in 2006-07. Within the manufacturing history and quality education system.
sector, industries such as machinery and equipment, India has a vast domestic market and a relatively
food products, basic metals and alloys and chemicals low-cost skills base which can enable it to become a
have emerged as major growth drivers in 2007-08 (up to manufacturing powerhouse within the next 5-10 years.
May).
The current surge in investments into India may be
In April 2007, Shri Kamal Nath, the Minister of attributed to an unprecedented domestic demand
Commerce & Industry, noted that “… apart from the spurred by rising incomes and savings. As India’s
remarkable performance in IT services, India is rapidly middle class is growing, so is its buying power. With all
emerging as a force in manufacturing exports, with the demand drivers in place, more and more MNCs are
capital-intensive products featuring prominently”. And setting up manufacturing capacities/ facilities in India
the best is yet to come. According to the Minister, not only for exports but to meet the growing domestic
“The manufacturing investments are the ‘first mile market. India’s demographics and growing incomes
investments’ in as far as these are likely to be followed have resulted in a middle class whose size is larger than
up by further investments to complete the projects and the entire population of USA.
also for their further expansions”.
It is expected that if the country’s consumer market
The rising investor confidence in India can be continues growing at this rate, India will soon be
attributed to its rise in position from rank 50 to 43 in propelled from the position of 12th to the fifth-largest
the Global Competitive Index, according to The Global consumer market in the world, behind the United
Competitiveness Report 2006-07 released by the World States, Japan, China and Britain, displacing Germany.
Economic Forum in September 2006.
The world’s top five mobile manufacturers -- Nokia,
Although the latest figures on manufacturing growth Motorola, Samsung, Sony Ericsson and LG – have
have not been encouraging, the government is still all set up manufacturing facilities in India. India has
optimistic of a strong growth for the sector for another become the second-largest market for Nokia in volume
year. According to estimates of Index of Industrial terms, displacing the USA. Nokia has gone ahead and
Production released in September ’07, a drop in set up a Special Economic Zone (SEZ) near Chennai as
manufacturing growth to 7.2% was reported in July a developer. Nokia and many of its vendors have also
compared to 14.3% last year. Industry experts attribute set up their manufacturing plants in the SEZ which is
the decline in industrial output to the high base effect, used as a hub wherein the various suppliers of Nokia
a strong rupee and high interest rates. Consumption in either manufacture or store their products and provide
the automotive and consumer durable sectors appears the same to Nokia as and when required.
to have been most impacted.
The incentives provided by SEZs have the potential to
contribute to further growth in India’s manufacturing
activity. SEZs help in bringing together the factors
conducive to excellence in manufacturing and also
offer an attractive package of incentives, including
several fiscal concessions for the developers, thereby
contributing to an increase in the country’s exports and
also attracting FDI.

26 • PricewaterhouseCoopers Pvt Ltd.


Other factors contributing to the India - manufacturing of manufacturing in overall economic growth of a
success story are the following: country and the need for enhancing its productivity,
competitiveness and employment generation, the
• Cost Efficiency: The cost of manufacturing in India government also created the National Manufacturing
has been found to be more competitive (about 30- Competitiveness Council (NMCC), an interdisciplinary
40% lower) than that in the US and Europe. This cost and autonomous body to serve as a policy forum
and quality advantage is helping India emerge as a for credible and coherent policy initiatives in
preferred sourcing hub for multinationals across the manufacturing sector.
world.
India’s Government has also been proactively
• Rich Talent Pool: India has a vast pool of talented involved in policy-making for specific sectors of
engineers and management professionals who are manufacturing to provide additional benefits to the
equipped to take on challenges brought about by manufacturers.
the implementation of new methods and systems
in organizations. India is known for its pool of • Fiscal sops: Government offers several tax-related
highly-skilled engineers who can take on precision- industrial incentives for the manufacturing sector,
based tasks. The output of trained human power including tax holidays, 100% deductible R&D and
at the degree/diploma level has been consistently capital expenses, accelerated depreciation and
increasing since 1985 and touched a figure of exemptions or deferral of state sales taxes. The SEZ
130,000 during the 2000. From a base of 6,800 Acts also provide for substantial fiscal benefits for
knowledge workers in 1985-86, the number increased units operating in SEZ, as well as to the developers
to 522,000 software and services professionals by of SEZs. Other sector specific legislations and
the end of 2001-02 and 814,000 by 2004-05. policies, such as for the infrastructure and IT
sector etc., provides further benefits to the specific
• Labour pool: The labour pool in India is exceptionally industries thereby attempting to create a conducive
rich, with 71 million new entrants set to join the environment for attracting more investments.
working age population by 2010. It takes fewer days
to fill skilled job vacancies in India than in either Defying the traditional view that India is good only for
China or Brazil; remuneration costs are also at the services, the manufacturing sector in India has been
low end. India is marginally costlier than China but is moving up the value chain. While Hyundai is setting up
significantly cheaper than other emerging economies a second car plant in the country, Toyota is exporting
such as Brazil and Mexico. India has a young work transmission systems from a new plant in Bangalore.
force, with the median age being 25 years. The The world’s largest auto parts’ maker, Delphi Corp,
concerns of an aging population can be deferred for a has relocated several product lines to India. So has
much longer time than other countries. Bosch, another auto parts giant. The phenomenon is
not restricted to auto and auto-component firms alone.
• Highest Returns on Investments: India offers Companies like Unilever, Kodak, Whirlpool, Timex
the highest relative return on investment. Higher Watches, Cummins, Tecumseh, GE, ABB and Siemens
returns are a reflection of the higher value-added are already sourcing products from their Indian plants
manufacturing investment that India attracts. India for their global markets. And companies like Nokia and
excels in high value-added manufacturing. As Elcoteq Network Corporation are considering setting up
against China, which is good in high volume and plants in India to meet their global demand for mobile
relatively low technology manufacturing, India has the phones.
upper hand in lower-volume manufacturing, where
technology use is more intensive.

• Liberal policies: Manufacturing of most items falls


under the automatic route of FDI. Some exceptions
are items that require industrial licencing and items
reserved for the small scale sector – this list has been
pruned substantially. Recognizing the importance

PricewaterhouseCoopers Pvt Ltd. • 27


Key Opportunities In an attempt to attract investments into the sector,
in March 2007, the Government announced the
Electronics & Hardware Manufacturing Semiconductor Policy, providing special incentive
packages for the semiconductor and other high tech
Until now the Indian electronics hardware industry industries. The Policy provides for special incentives
has only managed to capture a minuscule share of packages for encouraging setting up of semiconductor
the global electronics hardware market as compared fabrication and other micro- and nanotechnology
to neighbouring Asian countries. India’s electronics manufacturing industries. In brief, the Policy provides
hardware market was worth an estimated USD 12.65 for a part of the capital expenditure during the first
bn in 2005-06 and India’s share in the world production 10 years for manufacturing units to be borne by the
of Electronics and Computer Software/ services was government; no countervailing duty (CVD) on capital
estimated at 2.08 % in the year 2005-06. This sector goods in case of units outside the SEZs. The Policy also
registered a growth of 34.38 % in 2005-06 over the year prescribes minimum investments for semiconductor
2004-05. manufacturing (wafer fabs) plants and for ancillary
plants. However, the regulations are yet to be notified
The Indian Electronics Industry is a burgeoning one – the delay has caused several MNCs to defer their
with the market for electronic products growing rapidly. investment plans.
In June, 2007, India added over 8 million new wireless
phone users, the highest growth rate in the world. The Government is all set to announce its much-
Penetration levels in other high growth products are awaited hardware policy which aims to cut duties and
equally brisk and demand for computer/ IT products, taxes on the industry-manufactured goods almost by
auto electronics and medical electronics is rapidly half, bringing it at par with the ASEAN level of 12-16%.
increasing. This growth rate has attracted several global The policy is also expected to address issues such as
players like Solectron, Flextronics, Jabil, Nokia, Elcoteq infrastructure and skill development besides specifying
and many more to India. Korean electronics giants LG measures to leverage on research and development
and Samsung have also proved their commitment by skills to make India a hardware hub.
establishing large manufacturing facilities and they
now enjoy a significant share in the growing market for The Indian electronic sector faces stiff challenges
products such as Televisions, CD/DVD Players, Audio in the international market as it has to overcome
equipment and other entertainment products. infrastructural constraints leading to high operational
costs. There is also a need for forward and backward
FDI regime integration of hardware and software sectors to take
advantage of India’s burgeoning software sector. India
Foreign investment up to 100 per cent is permitted had been meeting more than half of its electronics
under the automatic route in manufacturing with the hardware requirements through imports. India now
exceptions being Aerospace & defence equipment needs to promote itself as a destination for electronics
manufacturing (which requires an Industrial licence). In and hardware and to promote and develop brand
order to promote exports of Electronics Hardware by ‘INDIA’ as a big potential market and publicise and
entrepreneurs from India, the Government of India has showcase itself as a viable destination. It could also
initiated several schemes such as self certification of participate in International trade fairs specially focusing
all import/export operations of units within the SEZs, on Electronics Hardware or its segments;
statutory services and facilities such as high speed data
connectivity to electronic hardware technology parks. Outsourcing Of Engineering, Design & R&D Services

However, obstacles to India’s growth as a Electronics Usually the models followed for outsourcing in India are:
& Hardware destination remain. There is lack
of awareness at the global level of investment 1) Captive Development Centers set up by companies
opportunities in India. Poor Infrastructure is cited by who want to keep designing and R&D as their core
investors as the main barrier against foreign investment. functions thus creating an in-house team by hiring
Indian engineering talent, such as Microsoft, Intel,
Novell, IBM etc;

28 • PricewaterhouseCoopers Pvt Ltd.


2) Engineering Services divisions of Indian IT players biotech) have access to a large pool of well-trained
who cater to a particular market segment, such as and talented graduates, thus providing a source
Wipro, Infosys and TCS; and of innovative ideas. Indian companies engaged in
knowledge based industries usually invest heavily in
3) Small focused players who only outsource training their employees to maintain and improve their
engineering, design, automation etc. services to a wide skills. In this scenario, growth of these knowledge-
range of clients, such as Neilsoft. based industries seems like a natural progression.

Though the top five growth industries in manufacturing India leads in the growth of outsourcing services in the
in India have been recognised as gems and jewellery, following areas:
cement, steel, pharma, and engineering goods, a
huge potential can also be seen in other fast growing • Information Technology/ IT Offshore Outsourcing
knowledge based industries such as the outsourcing of
Engineering, Design and R&D Services. • Business Process Outsourcing

Over the past few years, the Indian IT and BPO • Engineering Services Outsourcing
Industries have dominated the global IT/ITeS sector.
Since 1990s there has been a considerable growth • Healthcare Services Outsourcing
in the use of outsourcing other services as well. The
main factor driving this trend has to be the competitive • Manufacturing Outsourcing
pressures that companies all over the globe are facing
to create new products and to bring them to the Design in aerospace is also a potential growth area.
market faster or upgrade the existing products to make While big names such as HCL Technologies and Infosys
them more efficient or functional. In such a scenario, Technologies have been working on various systems
it makes sense for companies located in countries like flight management and landing gear etc. for major
where in-house manpower costs are on the higher players such as Boeing, Airbus, Hamilton Sundstrand,
side to outsource the engineering and design functions Boeing etc., aerospace majors like Lockheed Martin,
to outsource vendors to save on manpower costs. Thales, Pratt & Whitney, Bombardier, Rolls Royce have
Outsourcing is also resorted to by companies which all shown keen interest to participate in this segment.
need to shift out non-core functions and to focus their
attention on their core capabilities. To realise the potential of this sector, the government
has been doing its part. It has notified the Designs Act,
Though engineering services outsourcing was a slow 2000 which provides for protection of designs and lays
starter, since sharing product development details down the framework thereof. The government has also
required more trust in vendors and involved intellectual approved the National Design Policy which envisages
property rights issues, improvements in bandwidth setting up of specialized Design Centres or “Innovation
capabilities and engineering collaboration tools have Hubs” for automobile & transportation sector, jewellery,
helped open up the field. leather, etc and promoting ‘Designed In India’ as a
by-word for quality. It also envisages setting up an
Also, considering India’s rich young talent pool and high India Design Council (IDC) on similar lines as other
engineering base, India is emerging as the favoured professional councils such as the Bar Council, Medical
outsourcing destination of the world for engineering Council etc. for performing functions similar to the said
services, design, R&D services etc. As outsourcing councils.
moves up the value chain, knowledge based industries
will soon prove to be drivers of India’s economic Recently the CII has formed a National Committee on
growth. Design which would work closely with the upcoming
IDC & with Department of Industrial Policy and
Thanks to India’s higher education system, which Promotion to address the various issues related to
boasts of several world-class engineering and business development of Design in India and towards creating a
schools, several knowledge-based industries (including Global Brand of ‘Designed in India’

PricewaterhouseCoopers Pvt Ltd. • 29


The NMCC has identified innovation as an important time, the cost of power is high -- about 50% higher
factor for growth in its National Manufacturing Strategy than in China.
paper. As a good beginning to promoting innovation
in the manufacturing sector, the CII recently launched • Transport: The high turnaround time at ports, the
the development of the Indian Innovation Index, in deterioration in rail system and the poor plight
collaboration with the INSEAD, a leading business of roads and highways costs companies dearly.
school of France. The Innovation Index would lead India has very few four-lane highways and the bad
to awareness and would be useful in triggering condition of its roads is affecting the competitiveness
comparisons and inviting questions and ideas for of Indian companies. They need to maintain higher
improvement. inventories, spend more on transportation and face
delays in shipping of their export consignments.
What the future holds:
• Water: The cost of water is 40% higher in India
According to UN ESCAP, India is emerging as a force in than in Thailand. We need to have a plan for
manufacturing exports. Until recently, India’s services manufacturing hubs like Chennai that are facing acute
exports have been a success story. But manufacturing water shortages.
exports have surged, growing 37.3% year-on-year in
US dollar terms between April and September 2006. • Natural gas: India does not have piping networks
Manufactured exports are dominated by capital- in major parts of the country, including key
intensive engineering, chemical and petroleum manufacturing locations like Chennai and Bangalore.
products. The main engineering products iron and steel This is forcing companies to use more expensive
are feeding large global demand, especially from China. alternative fuels, leading to an increase in the cost of
India’s automotive sector is also expanding rapidly. operation.

Growth in manufacturing exports, along with growth in 2. Labour laws. India’s archaic and rigid labour laws
domestic demand, is likely to create 25-30 million new prevent companies from adopting flexible hiring
jobs in manufacturing and add 1 per cent to India’s policies. Only Mexico is considered as restrictive as
annual GDP growth rate. India in this respect. In contrast, labour regulations
in other countries allow greater flexibility in business
Challenges ahead: operations while protecting worker interests. In most
countries, the nature of employment is contract based,
Challenges faced by Indian manufacturing warrant with clear stipulations for employment termination
appropriate responses from both the govt. as well as at the discretion of the employer, provided statutory
the industry for improving the competitiveness of the severance benefits are available and notice period
sector. There are a few areas where both the govt. conditions are met. This allows firms to respond to
and the industry need to put in efforts through a well- business cycles in a flexible manner. Also, in India,
designed Public-Private partnership mode: location tends to determine the quality of labour
relations.
1. Infrastructure: India has the worst infrastructure
amongst the emerging economies. This is affecting the 3. Multiplicity of taxes: Doing business in India is
manufacturing sector’s ability to attract more business. made cumbersome by multiple taxes levied on Indian
Primary issues that needs immediate attention are: manufacturing companies, such as octroi, corporate
tax, entry tax, VAT, customs duty etc. Some of these
• Electricity: Unreliability of power supply is by far the taxes can be set off, others cannot. Though corporate
most significant infrastructural constraint. On an taxation rates have significantly come down in the last
average, a company can expect nearly 17 significant 15 years – the top basic rate fell from 48% to 30% in
power outages per month, against one per month in 2005, they still continue to be on the higher side.
Malaysia and fewer than five in China. At the same

30 • PricewaterhouseCoopers Pvt Ltd.


4. Discrepancies in inter-state regulations: Regulations Conclusion
between states vary and discourage companies
to operate freely across the country. This applies India has a significant competitive advantage in the
especially to industries like liquor and automobile skill-intensive industries. Over the next decade, the
industry. global trend to manufacture and source products
in low-cost countries is likely to gather strength.
Taking advantage of this trend, India’s manufacturing
exports could increase from US$40 billion in 2002
to approximately US$300 billion by 2015, leading
to a share of approximately 3.5 per cent in world
manufacturing trade.

If India is to achieve this quantum jump in


manufacturing exports, several factors need to play
their part. India’s manufacturing industry needs to
adopt a global mindset and carefully select the product
segments. The government needs to play its part by
implementing key reforms in taxation, infrastructure,
SEZs, labour and skill development.

PricewaterhouseCoopers Pvt Ltd. • 31


Infrastructure: Roads

32 • PricewaterhouseCoopers Pvt Ltd.


Road Sector in India safety measures and providing wayside amenities to
cater to the growing demand for road services. In
India has an existing road network of more than 3.3 addition, 100 per cent rural connectivity with all-weather
million km, which is the second largest in the world. roads is a priority objective in national planning. Inter-
This is, though lower than USA which has the largest modal issues like road connectivity with airports,
road network of about 6.3 million km significantly more railways, ports etc. are also priority issues.
than China which has a road network of about 1.4
million km. India has 110 km of road length available Ambitious Programs for Road Sector
per 100 sq. km, far exceeding the corresponding figures
of 68 km per Sq. km and 15 km per Sq. km for USA National Highway Development Programme (NHDP)
and China respectively. Similarly, India has 3,064 km of
roads per million of population which is although lower National Highway Development Programme (NHDP)
than corresponding figure of 22,064 km per million being implemented by National Highway Authority
population for USA, is significantly higher than that of of India (NHAI) has a total of seven phases with an
China at 1,072 km per million population. estimated cost of Rs. 192,100 crores. North-South &
East-West (NSEW) Corridor project, which forms the
In India, the fact that National Highways and State Phase-II of NHDP involves upgradation of existing
Highways together constitute about 6% of the road two-lane highways and four-laning of around 7,300
network and carry about 80% of the total traffic, clearly km of National Highway, connecting Srinagar to
emphasizes the importance of National Highways Kanyakumari (North-South) and Silchar to Porbandar
and State Highways. On the other hand District (East-West). 10,000 km of National Highway is targeted
roads and Village roads together constitute 94% of for 4-laning in NHDP Phase-III. Similarly, 2-laning with
total road network and carry only about 20% of total paved shoulders of 20,000 km of National Highways
traffic. Irrespective of this, their importance cannot be is targeted under NHDP Phase-IV and 6-laning of
underestimated as District Roads and Village Roads are Golden Quadrilateral and some other selected stretches
important from connectivity point of view. covering 6,500 km is targeted under NHDP Phase-
Development of 1,000 km of express ways is also
Road network in India requires major initiatives for targeted under NHDP Phase-VI. Under Phase-VII, NHAI
enhancing its capacity. Only 12% of the National plans to build ring roads to decongest the city traffic.
Highways are four-lane with two-lane and single-lane Also, it plans to build bypasses, over-bridges, flyovers,
being 50% and 38% respectively. State Highways have etc. on the existing corridors to support the growth in
lower capacity, with only 0.7% of total State Highway traffic due to the growth of new habitations along the
length being four-lane and corresponding percentage highways. However, this phase is still in a conceptual
for two-lane and single-lane being 20.3% and 79% stage and the stretches for this phase are yet to be
respectively. identified. NHDP also envisages connecting of all major
ports (Haldia, Paradeep, Vishakapatnam, Chennai &
Government’s Objective for Road Sector Ennore, Tuticorin, Kochi, New Mangalore, Marmugoa,
Jawarharlal Nehru Port Trust and Kandla) to the GQ,
The main objective of Government of India relating through around a 356 km of road network.
to the road sector is balanced development of the
total network. The tasks include widening of roads,
improvement in riding quality and strengthening, road

Road Network in India

Road network Length (km) App. Percentage of total


Length Traffic
National Highway 65,569 2% 40%
State Highway 131,899 4% 40%
Major District Roads 467,763 14% 18%
Other Roads 2,650,000 80% 2%
(Other District Roads and Village Roads)

PricewaterhouseCoopers Pvt Ltd. • 33


Accelerated North East Road Development Programme India’s present highway network to appropriate
(ANERDP) standards will require annual funding of about Rs.7,000
crores, three times the current level of expenditure.
The Government has also initiated a special program From road safety perspective, with 23.9 deaths
with the objective of providing connectivity to remote annually per 10,000 registered vehicles, India suffers
and backward areas in the north-east with the rest of fifteen times the level of traffic deaths experienced
the country as well as with neighboring countries. The in more industrialized countries such as the UK.
programme will be implemented in three phases, with Accidents also have a major impact on the country’s
a target to improve and upgrade 7,639 km of highways economy, costing an estimated Rs 3,000 crore or more
and will require a total investment of Rs.12,100 crores. than 3% of India’s GDP every year. The estimated
annual expenditure on safety measures required for
Pradhan Mantri Gram Sadak Yojana (PMGSY) reducing this accident rate and economic loss comes
out to be about Rs.1–1.5 lakhs per kilometer.
The PMGSY, launched in 2000 and being implemented
by the Ministry of Rural Development, aims at providing Such huge funds requirement cannot be met entirely
road connectivity through all-weather roads to all from the government’s budgetary resources, loans
unconnected inhabitations, having a population of from multilateral agencies and Central Road Fund
more than 1,000 persons, by 2003 and thereafter, to alone and, therefore, an increased level of private
those with a population of more than 500 persons; sector participation in the development, operation and
and to connected habitations (beginning with those maintenance of the road projects has been planned. In
connected by gravel roads) by the end of the Tenth Plan this direction, NHDP Phase III to NHDP Phase VII have
Period (2007). As per the Ministry of Rural Development been planned on (Build-Operate-Transfer) BOT basis.
the expenditure to be incurred for the Rural Road BOT projects are transferred back to the government
Development program is about Rs 60,000 crores till at the end of the pre-determined concession period.
2009-10. The performance with respect to PMGSY During the concession period, the private developer
projects is far from envisaged. Despite being in its fifth recovers his cost and earns a return on investment
year of operation, 41,765 habitations with population through tolls and budgetary support. The NHAI is
of 1,000 and above are yet to be connected and the also beginning to experiment with private sector
connectivity of habitations with population of 500 and participation in road maintenance for completed NHDP
above is also unsatisfactory. stretches. The move could herald the beginning of a
new era in road maintenance.
Huge Requirement of Funds in Near Future
Promoting Involvement of Private Sector
In broad terms, the estimation of the investment
needs for Expressways, National Highways, and State To promote involvement of private sector in road
Highways, comes out to around Rs.30,000 crore, construction and maintenance, Government of India
Rs.192,100 crore and Rs.75,000 crore respectively. has taken some major initiatives. Now 100 per cent
PMGSY requires around another Rs. 60,000 crore. foreign direct investment (FDI) is allowed in road
In the context of Urban Roads, India has 16.1% of sector projects. NHAI/Government of India (GoI) may
developed area occupied by roads which is quite small provide a capital grant up to 40% of the project cost,
when compared to a figure of about 26% for United in order to enhance the viability on a case-to-case
States. Increasing urban population and congestion in basis. Furthermore, Land required for the construction
cities will increase the demand of urban roads, creating and operation of the facilities may be provided by the
fund requirement for construction of new urban roads government, free from encumbrances and Concession
too. period may be allowed up to 30 years depending on
the traffic capacity and the viability of the projects.
Apart from funds required for construction and Model Concession Agreements (MCAs) for BOT toll-
upgradation of roads, huge amounts of funds are also based, annuity-based projects and also for Operations
required for maintenance of existing roads. Maintaining and Maintenance of the already constructed projects

34 • PricewaterhouseCoopers Pvt Ltd.


have been prepared / are under various stages of In the future, the increased level of private sector
finalization. The Government has decided to have investments, together with increase in the projects
dispute resolution in line with the Arbitration and sizes, will put more pressure on the construction
Conciliation Act 1996, based on UNCITRAL provisions. companies to enhance their technical and financial
Apart from these measures, there is 100% tax capacities. In this regard, it would be helpful for
exemption in any consecutive 10 years out of 20 years Indian companies to form Joint Ventures with foreign
after commissioning of the project. Also duty free construction companies. Construction companies will
import of high capacity and modern road construction also require approaching to equity markets to raise
equipment is allowed. In addition, external commercial funds for high value projects. In this context, already a
borrowing norms have been made easier to facilitate few companies have raised funds through the issue of
the process of receiving external funds. equity shares, Global depository Receipts (GDRs) and
Foreign Currency Convertible Bonds (FCCBs).
Several state governments have also taken initiatives
to facilitate private sector’s role in the development of Conclusion
state roads on a BOT basis, by enacting infrastructure
development acts (Andhra Pradesh and Gujarat), Road sector in India is seeing a lot of activity and one
making appropriate amendments to either the Motor can expect this level of activity to carry on in future.
Vehicles Tax Act (Gujarat, Maharashtra, Rajasthan and There are ambitious targets set by Government and
Karnataka) or the Indian Tolls Act (Madhya Pradesh those targets can be met if issues from this sector
and Andhra Pradesh). Many states have also set up are suitably addressed and if role of private sector
State Road Development Corporations (SRDCs) for the is enhanced in road construction, operations and
development and implementation of projects (including maintenance.
the involvement of the private sector).

Policy and Regulatory Support – Roads and Highways


Recent Developments • Performance standards of the • Strong dispute resolution
Highways clearly spelt out. mechanism.
• Committee on Infrastructure has
approved an expanded NHDP • Focus on Road User’s safety • 100% FDI under automatic
for the next seven years (2005- route permitted for all Road
• Users fee charges, revision
2012) largely relying on PPP development projects
thereof and concession to local
• Model Concession Agreement traffic clearly spelt out. • NHAI / GOI may provide capital
for PPPs in national Highways grant up to 40% of project cost
• NHAI responsible for providing
prepared; key features of the to enhance viability on a case to
land free from all encumbrances.
MCA include: case basis
NHAI to bear cost of all related
• Partial guarantee of traffic risk to pre-construction activities. • Concession period allowed up to
the Concessionaire. 30 years
• Force Majeure conditions and
• Concessionaire’s interest relief to the party under such • Duty free import of specified
protected in regard to conditions clearly spelt out. modern high capacity equipment
competing Roads. for Highway construction
• Road Sector declared as an
Industry.
PricewaterhouseCoopers Pvt Ltd. • 35
Infrastructure:
Civil Aviation & Aerospace

36 • PricewaterhouseCoopers Pvt Ltd.


Indian Civil Aviation Sector: Soaring High of India) on preparing a Financing Plan for Airports
(published in July 2006), noted that an investment of
Civil aviation in India has been witnessing phenomenal about USD 10 Billion is projected for the development
growth. As highlighted in the Economic Survey of of airports in India between 2006-07 and 2013-14. Of
India for 2006-07, policy initiatives have had a marked this, about USD 700 Million is projected to be required
impact upon air traffic. India’s booming economy towards capital cost of equipment and instrumentation
and reforms have led to around half a dozen private alone.
airlines starting operations in the past three years.
Over the last 2 years, passenger traffic (international Going forward, the Task Force expected Public
and domestic) has been reported to have grown Private Partnerships (PPPs) to play a key role in the
at over 25% per annum while air cargo traffic has development of Indian Airports and contribute towards
registered a growth at over 10% per annum. a total investment of about USD 7.7 Billion. Already,
a number of Airport projects with private sector
According to the Airports Council International, Asia participation, initiated over the last few years, are now
will witness an annual growth in air traffic of 9% with taking shape.
India likely to be one of the fastest-growing markets
(annual growth of 10.4%) over the next 20 years. Modernisation of Delhi and Mumbai Airports

In this emerging scenario there is an urgent need for With a view to developing world-class airports at Delhi
modern airports in India with larger capacities and and Mumbai, the Government of India invited private
better efficiencies. players to bid for taking over operations, management
and development of these airports. The bidding
Indian Airport Sector process generated considerable interest and witnessed
participation of several international players like Fraport
There are around 450 airports / airstrips in the (owner & operator of Frankfurt Airport), ASA Mexico,
country, of which over 120 airports are managed by Turkish airport operator – TAV, Airports Company South
the Airport Authority of India (AAI). The unprecedented Africa, etc. in association with Indian private players.
growth in air traffic over the recent past has put
tremendous pressure on airports – not only in metro Upon completion of this bidding process, operations
cities like Delhi, Mumbai, Chennai, Bangalore, Kolkata at these airports were handed over to two joint venture
and Hyderabad, but also numerous non-metro cities companies – Delhi International Airport (P) Ltd. (DIAL)
including State capitals and industrial hubs. and Mumbai International Airport (P) Ltd. (MIAL). A
consortium led by M/s GMR Group holds a 74 % stake
India’s growing economy has already led to the in DIAL with the balance share being held by AAI.
opening of air corridors to smaller cities. Many of Similarly, a consortium led by M/s GVK Group holds
these are now connected by direct air routes, making a 74 % stake in MIAL (remaining 26% being held by
them more accessible and leading to growth in AAI). Various agreements / contracts for handing over
business, travel & tourism. the control of the two airports to DIAL and MIAL were
executed in April 2006.
Report of the Task Force, set up by the Committee
on Infrastructure (Planning Commission, Government

PricewaterhouseCoopers Pvt Ltd. • 37


Greenfield Airports at Bangalore and Hyderabad sector involvement will be targeted. It is expected
that an investment of about USD 1.8 Billion would
Simultaneously, green-field airports of international be required for the development of 35 such non-
standards are being constructed at Hyderabad and metro airports.
Bangalore and are expected to become operational
These proposed airport development plans have
by the middle of 2008. Bangalore International Airport
already attracted a host of private companies,
Limited (BIAL) has Siemens Project Ventures, Larsen
including international operators like Changi Airport
and Toubro (L&T) and Unique Zurich Airport as
International (a wholly owned subsidiary of the
equity holders from the private sector, while AAI and
Civil Aviation Authority of Singapore) and a number
Karnataka State Industrial Investment Development
of Indian corporate houses, who are keen on
Corporation are the two public sector shareholders in
participating in these projects. The GVK Consortium
the Company. Similarly, GMR Hyderabad International
(involved with the Mumbai airport modernisation) has
Airport Ltd is a Joint-Venture between GMR Group,
been reported to see potential for low-budget airport
Malaysia Airport Holdings Berhad (MAHB), AAI and the
in non-metro areas possibly clubbing them with what
State Government of Andhra Pradesh.
are being called as ‘Merchant Airports’ where cargo
operations from various textile, pharmaceutical or
The ‘Runway’ Ahead
agriculture hubs could enhance their feasibility.
• Proposed Modernisation of Chennai and Kolkata • Merchant Airports: The Ministry of Civil Aviation
Airports: The Prime Minister’s Committee on has received three separate proposals from the
Infrastructure has given an in-principle approval for private players for setting up of Merchant Airports
the modernisation of Chennai and Kolkata airports, in Durgapur (West Bengal), Jhajjar (Haryana) and
which witnessed average annual growth in passenger Gwalior (Madhya Pradesh). The Gwalior proposal
traffic of about 15.7% and 14.5% respectively over aims at setting up a cargo airport and involves an
2001-02 to 2005-06. During 2005-06, these airports investment of Rs 300 crore while the Durgapur
handled about 6.8 million and 4.4 million passengers proposal envisages a passenger airport being
respectively. developed over 2000 acres of land. The Jhajjar
proposal has come from Reliance Industries
• Development of Non-Metro Airports: Besides
and involves the setting up of an international
the development of the major metro airports, the
cargo airport within Reliance’s Special Economic
Government of India is also focusing on developing
Zone. This interest from private players comes in
airports in non-metro (Tier-II) cities so as to equip
response to a new policy expected to be ready in a
them to handle the phenomenal growth in passenger
couple of months to allow privately-owned airports.
and cargo traffic currently being witnessed. While the
Under this policy the private sector would be able
modalities for the development of these airports are
to identify land and build and operate airports
being worked out (including consideration of various
without government assistance and without being
options like involvement of private players in the
required to pay the government a revenue share.
development of ‘city-side’ (commercial) infrastructure,
public-private joint-ventures for select airports, • Other Greenfield Airports: A number of proposals
inviting private participation in the modernisation of for setting up Greenfield Airports are under active
a ‘cluster’ of airports, etc.), it is certain that private consideration of the Government of India. These

38 • PricewaterhouseCoopers Pvt Ltd.


include Navi Mumbai, Greater Noida and airports Conclusion
like Paykong Airport (Gangtok), Cheithu Airport
(Kohima) and an airport at Itanagar for connectivity There are unique opportunities in the Indian airport
to North-East. Further, in an effort to support sector for potential investors which may extend well
industrial growth, several State Governments like beyond the main metro markets. However, private
Karnataka and Maharashtra are exploring options sector participation in these opportunities would require
for setting up green-field airport projects in other consideration of a number of issues with respect to
Tier-II cities. the legislative & regulatory framework and commercial
aspects so as to enable private players to anticipate
and deal with the complexities and to facilitate effective
project planning.

Projected investment for Indian Airports


(2006-07 to 2013-14)

Figures in USD Billion

0.20
0.38 0.15 0.71

1.17

2.85

3.13

1.43
Delhi & Mumbai Cityside infrastructure for 35
non-metro airports
Kolkata & Chennai
Greenfield airports in North East
7 Greenfield airports (including
Bangalore & Hyderabad) Other aerodrome works

Airside infrastructure for 35 non- Equipment & Infrastructure


metro airports

PricewaterhouseCoopers Pvt Ltd. • 39


Infrastructure: Port Sector

40 • PricewaterhouseCoopers Pvt Ltd.


Current Status The container traffic, in India, has grown at CAGR of
16% over the last 7 years to reach 4.7 Million TEUs at
India, with a coastline of over 7000 Kms has a vibrant the end of FY 2005-06.
ports sector, which includes 12 large Ports managed
by the Central Government ( referred to as Major Ports) Importantly, efficiency of Indian ports continues to
and a very large number of small and large other Ports improve although they are still short of world standards.
( managed by State Governments or run by private Most Major Ports have been consistently improving
sector – 187 In all). The major ports handle bulk of the their turn around times. Ennore Port, India’s only
cargo (75%). corporatized major port has the distinction of the fastest
average turn-around time at 1.19 days. Overall the
The economy has seen a healthy cargo growth of 10% turnaround time was 3.50 days during 2005-06 with an
over the last seven years with cargo volumes (in 2005- average output per ship per day was 9267 tonnes.
06) at over 569 million tonnes.
Enhanced role of Private Sector
Clearly liquid and solid bulk such as Petroleum, Iron
and Coal has been dominating the Indian cargo. The Government has taken a number of initiatives
Containers too account for about 15%. However this in enhancing the role of private sector in ports, as a
proportion is set to grow as the container penetration part of Government policy of increasing private sector
in Indian ports is still below world and Asian standards. participation in all infrastructure areas. For example,

Cargo Profile at Major Ports (Mn Tonne)


(2005-06)

Petroleum & Oil Products Iron Ore

Fertiliser & Raw Materials Coal & Coking Coal

Container Others

(Source - IPA)

PricewaterhouseCoopers Pvt Ltd. • 41


Port Operation Private Operator
Major Ports

Nhava Sheva, JNPT Container Terminal, P & O Ports, Australia


BOT 30 years
JNPT Third Container Terminal Maersk – Concor
Chennai Port Container Terminal P & O Ports, Australia

Visakhapatnam Container Terminal: Visakha Dubai Ports International


& J.M.Baxi

Visakhapatnam BOT – Berth EQ-8 Gammon India & Portia


Mgmt Services
Cochin Container Terminal: BOT Dubai Ports International

Tuticorin Container Terminal Port of Singapore Authority


& SPIC Group
Kolkata Container Terminal Cardinal Logistics
Ennore Port Liquid Cargo Terminal IMC Group – L&T
Ennore Port Iron Ore & Coal Terminals Adani Group

Minor Ports

Hazira, Gujarat Greenfield port BOOT, Royal Dutch/Shell Group,


35 years concession TotalGaz Electricite Holdings,
France

Kulpi, West Bengal Privatization & development, P&O Ports, Australia, WBIDC,
50 yr concession, Mukund-Keventor
SEZ attached.

Gujarat Pipavav Ports Container facilities Maersk India, Port of Singapore


Authority, SeaKing Infrastructure

Mundra, Gujarat Container Terminal P&O Ports, Australia, Adani Group


Vadinar, Gujarat All weather port Essar Group
Jamnagar, Gujarat POL port Reliance

42 • PricewaterhouseCoopers Pvt Ltd.


privatization of specific terminals in Major Ports, dredging contracts to O&M contracts to investment
permission to private parties to set up multi-purpose opportunities in specific berths as well as setting up of
minor ports and permission to set up captive jetties/ Minor Ports. Container berths in particular have also
ports are a few well established steps now. seen a lot of M & A activity recently. In more specific
terms, there are the identified opportunities in each
Private participation in development and operation of of the maritime states, where private sector is being
berths at major ports has achieved a good degree of wooed. For example, Rewas, Dighi and Jaigad ports in
success. New private ports, particularly in Gujarat, have Maharashtra, Simar, Vansi-Borsi, Mithivirdi, Bedi and
established themselves very well. Maroli ports in Gujarat, Alapuzha, Azhikkal, Beypore
and Vizhinjam ports in Kerala, Sandheads and Sagar
Till date, projects worth more than USD 2 billion Island in West Bengal, Cuddalore Port, Nagapattinam
have been approved in the Ports sector and either and Colachel ports in the southern state of Tamil Nadu,
commissioned or at various stages of implementation, Tadri port in Karnataka etc. These are apart from
where private sector is involved. additional terminals in almost all the Major Ports.

The following table gives a broad based view of the


current private sector activities in the Indian Ports
sector.

Ports - a big opportunity now

The Planning Commission has projected an investment


of Rs.870 billion (almost USD 22 billion), in this sector,
during the 11th Five Year Plan period 2007-12. With
increasing emphasis on the enhanced role of private
sector, there are a large number of interesting economic
opportunities for the private sector now - ranging from

Container Traffic Growth

(Source - IPA)

PricewaterhouseCoopers Pvt Ltd. • 43


Pressing Issues that needs to be addressed • Dredging cost is one of the major capital costs
incurred by port companies/trusts. Currently,
Despite improvement in efficiencies and cargo handling the management accounting treatment for such
as well as the healthy trends witnessed in port sector projects is neither clear nor standardized. This
investments and private participation, it is clear that results in skewing the measurement of viability
some critical issues facing the port sector still need to for projects as well as the performance of various
be resolved. These would need to be resolved as soon berths in a port.
as possible in order to prepare the country for a much
• The bulk of traffic in India is handled by Major Ports
needed export thrust:
which come under the Government of India. It is felt
that this is at times impeding development of much
• It has been seen that a number of competing
needed infrastructure since Government approvals
developments, involving huge sums of money, are
can be a lengthy process. Greater autonomy
being promoted in a sub-optimal manner from a
including corporatization could be considered as a
national standpoint. State and Central Government
first step towards privatization.
developing competing projects is one such example.
These should be resolved to avoid duplication of • It is high time that Government relook at the limited
resources. role played by TAMP (Tariff Authority for Major
Ports) in regulating tariffs and came out with a
• Port projects, by their very nature, are long gestation
comprehensive position on regulation of tariffs and
projects – the useful life of a berth or a dredged channel
service standards.
often exceeds 50 years. This would correspondingly
involve huge capital investments and therefore, debt
products with long tenors. Such products are currently
Conclusion
not easily available in the Indian financial markets.
Given the strong GDP growth of over 9% and even
• Port is only one of the components in the logistics
better growth of exports, it is only natural that a
chain. To be effective roads and rail projects need to
corresponding ramping up of ports infrastructure
be envisaged and implemented in conjugation with the
would be required. While the port sector has
port sector development plans in order to optimize the
seen some landmark projects in the past few
transport sector scenario of the country.
years, investment in the sector would have to be
considerably ramped up to accommodate the growing
volume of import-export traffic.

44 • PricewaterhouseCoopers Pvt Ltd.


Infrastructure: Real Estate

PricewaterhouseCoopers Pvt Ltd. • 45


Office Demand Growth Spurred by the IT Industry Tier I and II cities through lower labor and real estate
costs and lower staff attrition but are riskier in terms of
India is the world’s back office, currently commanding much smaller labor pools and somewhat lower-quality
44% of the global market for IT and business process infrastructure. They include Kolkata, Ahmadabad,
outsourcing (BPO) services, according to the National Chandigarh, Indore, Nagpur, Vishakhapatnam and
Association of Software and Service Companies Kochi.
(Nasscom), India’s IT industry association. In 2006,
service and software exports amounted to $17.1 billion Nasscom estimates that the IT and BPO industries
and hardware export another $6.9 billion. Since fiscal will create one million additional jobs in the five major
year 1999-2000, the Indian IT and IT-enabled services hubs (New Delhi, Bangalore, Hyderabad, Chennai and
(ITES) industry has expanded at a compound annual Mumbai) and about 600,000 jobs in other Tier II and
growth rate of 28%. The industry’s contribution to III cities by 2010. This should result in office space
India’s GDP has risen from 1.9% in 1999-2000 to a demand of roughly 21 million m² (226 million square
projected 4.8% in 2005-06. This has led to strong feet), which compares with the total office stock in
demand in the office sector, with most occupier Central London, for example, of 19 million m² (205
demand coming from the growth of IT and ITES, along million square feet). Corresponding to the high demand-
with BPO, as multinationals try to capitalize on the side dynamics, development activity is extensive and is
young, educated and inexpensive work force. mainly focused on secondary locations. The combined
total office stock in the major cities is estimated to
The global demand for Indian outsourcing and stand at about 10 million m² (108 million square feet).
offshoring activities stems from a need to reduce
production costs. Wage levels in the IT sector have Structural Shift in the Retail Sector
been steadily rising since 2000, but they are still low
compared with developed countries. A young IT India ranks as the most attractive retail destination
employee in India still earns about US$8,000 per year, among all emerging markets, according to A.T.
much less than a Western counterpart, who makes Kearney’s Global Retail Development Index. Total sales
about US$50,000-$70,000. Even when the costs of account for more than US$300 billion and are projected
power, telecommunications, office set-up and other to rise between 6% and 10% per year in the medium
infrastructure are included, India retains its cost term, considering India’s projected upward growth
advantage. A Deutsche Bank report, estimating the per trend and favorable demographics.
employee cost per year in several offshore locations,
showed India’s advantageous position, with a cost of The retail sector offers opportunities stemming from
US$5,300. China and Russia trailed at US$7,700 and an ongoing structural change. India’s retail market
US$14,450, respectively. Other factors driving the until recently was very fragmented. The retail scene
growth of the IT-ITES-BPO sector are a large pool of is still characterized primarily by small, family-owned
English-speaking professionals, government policies enterprises and street markets. The largest 10 retailers
actively promoting IT export, good quality control account just for 2% of the total market. One major
systems and the presence of cybersecurity and privacy reason for the underdevelopment of the retail market
laws. was government protection of local retailing from
foreign competition. Only as recently as early 2006 has
The growth in offshoring has led to the classification the government allowed 51% FDI in single-brand retail,
of Indian cities into three tiers in terms of their with Reebok, Nike, Levi Strauss and Benetton opening
attractiveness. Tier I cities provide the largest and most outlets. However, multibrand retail chains like Wal-
qualified labor pool and better infrastructure and real Mart have not yet been allowed entry, although further
estate formats. They include Bangalore, Mumbai and opening of the market is likely in the near future.
the National Capital Region (Delhi and surrounding
satellite towns such as Gurgaon and Noida). Tier II cities India’s accelerated growth potential, the rise of a
provide relatively smaller work force pools but offer growing middle class with high disposable income
similar quality labor at a cost advantage of 15% to 20% and greater contact with the West have all sparked a
over Tier I cities. They include Hyderabad, Chennai and boom in modern shopping centers that are similar to
Pune. Tier III cities provide more cost advantages than Western malls. In recent years, the trend toward larger

46 • PricewaterhouseCoopers Pvt Ltd.


retail formats, such as shopping malls and department growth should rise from 5.9% per year in 1991-2005
stores, has grown, and the major companies likely will to 8.7% per year in 2006-2010. The percentage of
capture up to 10% of total market share within the next households with nominal disposable incomes of more
five years. Developers have started to respond to the than US$3,000 per year should rise from today’s 25%
structural shift. By 2007, India will have about seven to 56% in 2010. Also, India has moved to a lower-
million m² (75 million square feet) of mall space, out of interest-rate environment, with easier availability of
which 57% will be in Delhi and Mumbai, notes a study home mortgages. Prime lending rates fell from 16.5%
by Knight Frank. in May 1996 to 11% in May 2006. Government action
has also helped to raise housing demand via greater tax
Although this could result in pockets of oversupply in incentives. Now, more interest and debt service can be
selected micro-locations, the provision per capita in deducted from income taxes than in the ’90s. Positive
India overall should remain relatively low, at less than 10 demographics, rising income, growing urbanization
m² (107.6 square feet) per 1,000 inhabitants, compared and lower interest rates bode well for demand in the
with the EU15 average of 200 m² (2,153 square feet) per residential sector.
1,000.
India’s homeownership today is estimated at about
Shopping malls are becoming more common, not 30%, compared with roughly 69% in the U.S.
only in Tier I cities, but also in other large cities (those Additionally, the availability of financing choices,
with populations of more than one million). Based including the development of a mortgage market,
on announced development plans, at least 150 new is increasing to meet pent-up demand. Even then,
shopping malls should appear by 2008. Mall developers mortgages currently equal less than 3% of India’s GDP,
are adapting quickly to the preferences of their compared with more than 30% in other South Asian
customers. Some new types of projects are automobile countries.
malls and wedding malls, which are one-stop shopping
destinations. The number of department stores is Industry Trends
growing much faster than overall retail, at an annual
rate of 24%. Supermarkets have garnered a growing With 40 cities of more than one million residents,
share of the food and grocery trade over the past two totaling 128 million people, India offers many potential
decades. investment locations. Despite this, commercial sectors
tend to concentrate in Tier I and II cities due to the
Housing Market on a Steep Growth Path availability of skilled human resources and adequate
infrastructure. Real estate investment focuses on a few
Strong urbanization effects are augmenting the major cities, which follow their own economic and real
growth potential arising from India’s young, expanding estate agenda. The most important investment locations
population. Less than 30% of the population now include Delhi (the political center), Mumbai (the financial
lives in urban areas. But India’s Planning Commission capital) and Bangalore (the major IT hub). Moreover,
forecasts that the urban population will rise by more Chennai and Hyderabad could establish themselves
than 40% by 2020, meaning an increase of about 140 successfully as investment locations. However, as
million over the next 15 years, or nearly 10 million per costs have risen and labor shortages have appeared,
year. cities like Ahmadabad and Chandigarh should compete
successfully due to their lower cost basis, and cities like
Household formation is growing due to population Calcutta and Nagpur likely will take advantage of their
growth and the shift from joint families to nuclear relatively large pool of skilled workers.
families. The average number in each household has
fallen from 5.8 in 1990 to 5.3 in 2005. According to the Many cross-border developers plan to enter the
Tenth Five-Year Plan, a shortage of 22.4 million dwelling residential sector via the emerging trend of integrated
units exists. townships. With land scarce in most major cities,
but large parcels available just outside the city limits,
Additional housing needed each year from 2002 to 2007 developers are moving toward large, integrated
has been estimated at 4.5 million units. Real income developments with commercial, retail, residential and
even medical facilities. Most are joint ventures with

PricewaterhouseCoopers Pvt Ltd. • 47


Indian developers, and some are also in public-private So far, private debt has been the most important source
partnerships, with local governments as minority of financing in this sector. The recent growing demand
stakeholders. for real estate is driving the substantial demand for
construction financing and, according to the Reserve Bank
Developers are also showing interest is Special of India, loans to commercial real estate rose in 2005-06
Economic Zones (SEZ). SEZs are specifically by 84%, to US$2.4 billion.
delineated, duty-free enclaves outside the customs
territory of India. SEZs are approved by the Ministry of Since 2004, venture capital funds have been permitted
Commerce and can be set up by private developers to invest in real estate, allowing domestic and foreign
or by central/state government or jointly by any two or investment managers to operate real estate fund vehicles
more of these. SEZs can be multiproduct or for a single via a private equity route. The first real estate funds are
sector, such as IT, pharmaceuticals or textiles. now up and running, and several are in the planning
stage. Several foreign funds are exploring investment
Businesses operating in SEZs enjoy a corporate tax opportunities, reflecting a strong interest from domestic
holiday on export earnings, indirect tax exemptions and international investors. Roughly US$15 billion have
and liberal exchange controls. Developers also receive been raised on behalf of foreign funds targeting Indian real
many fiscal benefits. The income-tax incentives for a estate.
SEZ developer include a 10-year tax holiday; exemption
from dividend distribution tax; tax-exempt interest on Currently, real estate investment trusts (REITs) are not
long-term financing; tax-exempt long-term capital gains allowed in India, but in June 2006 the Securities and
arising on the transfer of shares in the developer’s Exchange Board of India approved guidelines for real
company; and no minimum alternative tax. The indirect estate mutual funds.
tax incentives include no import duty; no excise duty;
exemption from service tax; and exemption from tax on Challenges faced by the Indian Real Estate Sector
the sale of electricity for self-generated and purchased
power. India is an emerging market. Although country risk is
hard to measure, Euromoney’s rankings of the country’s
Traditionally, India has predominantly been a creditworthiness based on political, economic and capital
developer’s market, whose main source of financing market risk can be used as a proxy. With a rating of
was private debt. International real estate investors 56 out of 100, India falls in the lower end of the range,
have played only a minor role in India, as FDI into real implying higher investment risks. India’s real estate
estate was very restricted and had high threshold market is opaque. Real estate related data is patchy,
requirements. Thus, foreign investment flows were very key time series are nonexistent or too fragmentary to
limited. But India has progressed by introducing reforms allow robust analysis, and no historic reference points
and liberalizing investment policies. In early 2005, exist. Hence, valuations and investment decision-making
the government relaxed FDI norms, and now FDI in in India are challenging tasks. Investors are faced with
“greenfield” real estate developments are automatically typical emerging-market characteristics, most notably low
approved, without a cumbersome permission procedure transparency, lack of suitable investment products and low
from the Foreign Investment Promotion Board, if they liquidity.
fulfill certain conditions. That said, FDI is still somewhat
limited, and barriers to entry for foreigners are still Another major barrier to entry is the fragmented ownership
considerable. For example, foreigner investors cannot structure and absence of clear land titles, restricting
buy existing buildings. organized dealings. Currently, title insurance is unavailable,
although, according to press reports, some Indian financial
We estimate that higher-quality commercial real estate companies are looking into the issues of structuring and
in India totals about US$100 billion, equaling about pricing such a product. Accessing the Indian real estate
0.6% of the global commercial real estate stock. In the market is very difficult due to the lack of investment-grade
long term, India’s real estate share should rise to more properties. This lack is reflected by the 0.3 m² (3.2 square
than 3% of global commercial real estate stock and feet) of office space per capita in major Indian cities, which
more than 12% of the Asian stock due to the structural is 10 times less than in a typical Western European city.
transformation of India’s economy.

48 • PricewaterhouseCoopers Pvt Ltd.


Research by the World Bank suggests that it takes Conclusion
five times longer to register a property in India than
in the U.S. and three times longer than in the UK. Clearly the Indian real estate sector has enormous
Additionally, lease terms in India are rather short. potential. It is a sunrise sector which will be positively
While longer-term leases, up to nine years, can be impacted by major demographic, cultural and industrial
negotiated, the typical commercial lease term is three shifts that are currently ongoing in India. The boom
years, with options to renew for two more terms of in the IT and BPO industries as also the fundamental
three years. changes occurring in the retail sector augur well for
the prospects of the real estate sector. Equally, home
Relative underdevelopment of the capital market ownership growth, through relatively easier financing
in the real estate arena is another drawback. The options, will be another key driver in the significant
primary debt and equity markets are active, but the expansion of the sector. The growth will percolate down
absence of REITs, commercial mortgage-backed from Tier 1 to Tier 2 and other tier cities and this will
securities and other secondary investment vehicles bring forth rapid and significant increase in demand for
are hindering capital flows. Also, domestic institutional quality commercial and residential real estate. However,
investors, such as pension funds and insurance key challenges remain in the form of significant
companies, are prohibited by law from investing structural deficiencies in the market. The relative
directly in real estate, even though they can invest underdevelopment of capital market instruments in
a small portion of their total investments in publicly relation to real estate and the regulatory hurdles posed
listed securities. by the present provisions relating to land and property
ownership are major concerns. Equally, the deficiencies
Regulatory risk is another area of concern. The in the physical infrastructure can crimp the growth
Urban Land Ceiling Act, which imposes a ceiling prospects for the real estate sector. It is therefore true
on the maximum amount of land under individual to suggest that in many ways the real estate is at a
possession, and a high stamp duty, creating a higher cross roads. Should India address these structural
transaction cost, are two such examples. However challenges in a sustained and realistic manner, there
progress is being made in this area, with the central is no reason why the real estate sector cannot grow
government and some of the state governments manifold in the years to come.
liberalizing these restrictions.

Also, RBI regulations concerning the repatriation of


capital somewhat limit exits for cross-border funds.

Another challenge that India needs to meet is the


inadequacy of its physical infrastructure. Even though
India has made significant progress in telecom
infrastructure, at least in the urban areas, much
needs to be done to improve the quality of transport
infrastructure. The quality of Indian roads, railways
and airports leaves much to be desired. Moreover,
each commercial property needs to have its own
back-up generator due to the unreliable supply and
distribution of electricity.

PricewaterhouseCoopers Pvt Ltd. • 49


Healthcare in India

50 • PricewaterhouseCoopers Pvt Ltd.


Healthcare is one of India’s rapidly expanding sectors, to Govt. emphasis on providing better healthcare
in terms of both revenue and employment. During facilities in rural and urban areas and eradicating
the 1990s, Indian healthcare grew at a compound diseases like hepatitis and polio, India is doing
annual rate of 16%. Today the total value of the much better on various healthcare parameters like
sector is more than $34 billion. This translates to $34 infant mortality rate, life expectancy etc. Though
per capita, or roughly 6% of GDP. By 2012, India’s the ailments like poliomyelitis, leprosy and neonatal
healthcare sector is projected to grow to nearly $40 tetanus will be eradicated soon, there has been rise
billion. in infectious and chronic diseases like AIDS. Certain
communicable diseases like dengue fever, viral
The demand side of the Healthcare Industry is being hepatitis, tuberculosis, malaria etc seems to have
constantly fuelled by the ever increasing Indian developed new strains or have become more resistant
population particularly the middle class which is to drugs. Add to this the increase in “lifestyle” or
estimated to touch 62.95% of the total population. “chronic” diseases like hypertension, cancer and
Added to this is the growing number of foreign diabetes.
tourists coming to India for world class medical
services at much lower cost compared to their home In 2005, it was estimated that chronic diseases in
countries. India accounted for almost 53% of all deaths and
44% of disability-adjusted life years (DALYs). It is
On the supply side we have the healthcare estimated that deaths from chronic diseases would
service providers, public and private hospitals, register a sharp increase from 3.78 million in 1990
pharmaceutical companies, medical, surgical and to 7.63 million in 2020 accounting for 66.7% of all
diagnostic equipment manufacturer and suppliers and deaths. In India diabetic nephropathy is expected
insurance companies. to develop in 6.6 million of the 30 million patients
suffering from diabetes. Number of people with
In this document we would be exploring Emerging hypertension is expected to see a quantum leap from
Trends, Medical Tourism and Investment an estimated 118.2 million in 2000 to 213.5 million in
Opportunities in the Indian Healthcare sector. 2025.

Emerging Trends in Healthcare in India Dr. Anbumani Ramadoss, Minister of Health & Family
Welfare, Government of India acknowledges that
The Indian Healthcare Sector is poised for robust the country’s public health advocacy till date has
growth. The healthcare sector has been going through concentrated mainly on infectious diseases. He does
constant change over the last decade and now new mention, however, that the Government is aware that
trends are emerging in this sector. almost 66% of all deaths in 2020 is likely to be from
chronic diseases. The Government has now decided
Growth in Healthcare expenditure and World Class to address the issues related to chronic diseases with
Medical Facilities equal energy and focus and is keen to involve and
work together with the private sector and the civil
The rising Indian middle class, along with its society with a goal to prevent chronic diseases and
increasing purchasing power and willingness to pay save millions of lives.
for quality healthcare, has led to the emergence
of high quality corporate hospitals. To meet the Growth of Private Healthcare Facilities
emerging demand for improved healthcare services,
a number of corporate houses have established their India’s healthcare infrastructure has not kept
chain of hospitals across the country resulting in pace with the economy’s growth. The physical
world class medical facilities in India. infrastructure is woefully inadequate to meet today’s
healthcare demands, much less tomorrow’s. While
Change in Demographics and Disease Profile India has several centers of excellence in healthcare
delivery, these facilities are limited in their ability
One of the most visible trends is the changing
demographics and the disease profiles. Owing

PricewaterhouseCoopers Pvt Ltd. • 51


to drive healthcare standards because of the poor and Shroff Eye Hospital (Mumbai) - have been
condition of the infrastructure in the vast majority of the accredited to the leading healthcare accreditation
country. agency in the United States, Joint Commission
International (JCI).
Of the 15,393 hospitals in India in 2002, roughly two-
• NHS of the UK has indicated that India is a favoured
thirds were public. After years of under-funding, most
destination for surgeries.
public health facilities provide only basic care. The total
healthcare financing by the public sector is dwarfed by • The British Standards Institute has now accredited
private sector spending. Private firms are now thought the Delhi-based Escorts Hospital.
to provide about 60% of all outpatient care in India and
• India’s independent credit rating agency CRISIL
as much as 40% of all in-patient care. It is estimated
has assigned a grade ‘A’ rating to super specialty
that nearly 70% of all hospitals and 40% of hospital
hospitals like Escorts and multi specialty hospitals
beds in the country are in the private sector.
like Apollo.
Slow Acceptance of Health Insurance • Wockhardt Hospital has an exclusive association
with Harvard Medical International, the global arm of
A widespread lack of health insurance compounds the Harvard Medical School, the world’s leading medical
healthcare challenges that India faces. Although some institution.
form of health protection is provided by government
• Max Healthcare, in collaboration with Singapore
and major private employers, the health insurance
General Hospital, is into clinical practice, research
schemes available to the Indian public are generally
and training
basic and inaccessible to most people. Only 11%
of the population has any form of health insurance National Accreditation Board for Hospitals & Healthcare
coverage out of which only 1% of the population was Providers (NABH) is a constituent board of Quality
covered by private health insurance in 2004-05 and Council of India, set up to establish and operate
group insurance accounted for 35% of the total health accreditation programme for healthcare organizations.
insurance business during that period. Although relatively new, the following Hospitals have
already been accredited:
But with the rise of disposable income and a growing
middle class the demand for health insurance is bound • B.M. Birla Heart Research Centre, Kolkata
to go up. To bring more people under the insurance
• MIMS Hospital (MIMS Ltd.), Calicut
coverage, Govt. is partnering with private sector to
provide coverage at low cost. In some cases it has • Kerala Institute of Medical Science,
been successful like Yashaswini Insurance Scheme in Thiruvananthapuram
Karnataka.
• Max Super Speciality Hospital, New Delhi
International and National Accreditation for Hospitals • Max Devki Devi Heart & Vascular Institute, New Delhi
• Moolchand Hospital, New Delhi
Hospitals are going for national and international
accreditation like JCI and NABH. Possible drivers for • Narayana Hrudayalaya, Bangalore
this could be improved efficiency (lower costs) and
Growth of Pharmaceutical Industry
better quality services. In recognition of the quality of
healthcare delivery services in India, a number of Indian
The huge population of India and the increase in
hospitals have received accreditation from international
expenditure on medicines makes India a very lucrative
agencies worldwide. For e.g.:
market for pharmaceutical companies. Further driven
by knowledge skills, growing enterprises, low costs,
• Five hospitals in India -- Indraprastha Apollo Hospital
improved quality and buoyant demand (both domestic
(New Delhi), Apollo Hospital (Chennai), Apollo
and international), the pharmaceutical sector’s value
Hospital (Hyderabad), Wockhardt Hospital (Mumbai)
of output grew more than tenfold from US$ 1.1 billion

52 • PricewaterhouseCoopers Pvt Ltd.


in 1990 to over US$ 12.4 billion during 2005-06. With Healthcare sector. The growing Indian population,
value of exports at over US$ 4.7 billion in 2005-06, India increasing disposable income, increasing medical
is today recognised as one of the leading global players tourism and change in urban lifestyle leading to
in pharmaceuticals. increase in lifestyle disease would sustain the growth.
It is estimated that by 2012 healthcare spending could
Medical Tourism contribute 8% of GDP.

Medical tourism is one of the major external drivers of Key Opportunities Sectors in the Indian Healthcare
growth of the Indian healthcare sector. The emergence Sector are:
of India as a destination for medical tourism leverages
the country’s well educated, English-speaking medical • Hospital Services
staff, state-of-the art private hospitals and diagnostic
• Training and Education in Healthcare Sector
facilities, and relatively low cost to address the spiraling
healthcare costs of the western world. India provides • Wellness Clinics
best-in-class treatment, in some cases at less than
• Medical Tourism
one-tenth the cost incurred in the US. India’s private
hospitals excel in fields such as cardiology, joint • Health Insurance
replacement, orthopedic surgery, gastroenterology,
• Pathology Services
ophthalmology, transplants and urology.
• Pharmaceutical Industry
According to a joint study by the Confederation of
• Tele Medicine
Indian Industry and McKinsey, Indian medical tourism
was estimated at $350 million in 2006 and has the • Medical Devices
potential to grow into a $2 billion industry by 2012. An
estimated 180,000 medical tourists were treated at
Indian facilities in 2004 (up from 10,000 just five years
Hospital Services
earlier), and the number has been growing at 25-30%
annually. India has the potential to attract one million
The Market - India’s physical healthcare infrastructure
medical tourists each year, which could contribute an
is far from being able to meet the current demand. If we
estimated $5 billion to the economy, according to the
consider the huge growth in demand for healthcare that
Confederation of Indian Industries.
India would be facing in near future, we can see a huge
potential investment opportunity for private players.
In addition to receiving traditional medical treatments,
Enormous private capital will be required to enhance
a growing number of western tourists are traveling to
and expand the infrastructure to meet the demand.
India to pursue alternate medicines such as ayurveda,
It is estimated that 450,000 additional hospital beds
which has blossomed in the state of Kerala, in
will be required by 2010 – an investment estimated at
southwestern India. The number of medical tourists
about $25.7 billion. The Govt. is expected to contribute
visiting Kerala was close to 15,000 in 2006 and is
only 15-20%, thus providing enormous opportunity for
expected to reach 100,000 by 2010.
private players.
To encourage the growth of medical tourism, the
The corporate hospital sector of the country is all set to
government is providing a variety of incentives,
take away a significant share of the tertiary healthcare
including lower import duties and higher depreciation
service business from individual private healthcare
rates on medical equipment, as well as expedited visas
providers by 2010. With the advent of private insurance
for overseas patients seeking medical care in India.
and the emergence of India as a medical tourism
destination, there also has been a surge of growth in
Investment Opportunities in Indian Healthcare Sector
so-called “super specialty” hospitals, which have teams
of specialists, sophisticated equipment, links to other
There is tremendous growth potential in the Indian

PricewaterhouseCoopers Pvt Ltd. • 53


medical centers, and the ability to treat a broad range of like diabetes, hypertension and heart diseases. People
ailments. working in the service sector are the ones most likely
to suffer from chronic diseases due to their sedentary
Growth Drivers - Government fiscal constraints are lifestyle, unhealthy working hours and unhealthy food
driving the growth of Public Private Partnerships habits. It is estimated that about 53% of all deaths in
(PPPs) to help meet India’s growing demand for 2005 is attributed to chronic diseases. With no signs
healthcare infrastructure. In addition to participating of abating and Govt. not in a position to tackle this
in infrastructure PPPs, opportunities are emerging for menace, the rate is bound to go up.
foreign companies to create super-specialty hospitals
in collaboration with Indian corporations. For instance, Growth Drivers - Preventing chronic diseases is
Wockhardt Hospitals Group has partnered with possible by tackling their associated risks and the
Harvard Medical International to create a chain of super best place to do so is at the workplace. Corporates
specialty hospitals in India. are increasingly focusing more on the “wellness” of
their employees so as to reduce loss due to illness
Training and Education in Healthcare sector and absenteeism and increase productivity. Wellness
Programs need to be designed and rolled out and
The Market – India has quite a few world class medical regular health and nutrition related consultation have
and nursing colleges. Most of these colleges are to be provided. Companies like Wipro and Infosys
financed by the Govt. Owning to fiscal problems the have already taken the plunge in this direction and
number of Govt. backed hospitals hasn’t increased more and more companies would soon be joining the
significantly over the years. There are 174 recognised initiative. There is a huge opportunity for healthcare
medical colleges, and 68 colleges have been permitted companies to invest in Wellness Clinics and join hands
u/s 10A of the Indian Medical Council Act, 1956 during with corporates to increase the general health of the
the year under review. Approx. 27000 graduates pass employees.
out every year from these colleges. Such graduates
after completing compulsory rotating internship are Medical Tourism
required to be registered with State Medical Council or
the Medical Council of India to practice medicine in the The Market - With lower cost of medical services in
country. India, well trained and highly educated medical service
providers, world class super specialty hospitals and
Growth Drivers - In addition to a deteriorating physical a government policies favoring the growth of medical
infrastructure, India faces a huge shortage of trained tourism, the Medical Tourism business in India is set
medical personnel, including doctors, nurses and to boom in near future. About 180,000 patients arrived
especially paramedics, who may be more willing than in 2004 from across the globe for medical treatment
doctors to live in rural areas where access to care and the market in India estimated at US$ 333 million in
is limited. There is an immediate need for medical 2004, grew by about 25 %.
education and training, which could provide additional
opportunities for private sector providers or public- Growth Drivers - Not only are patients coming from
private partnerships. developed countries like US and UK but India is
currently seeing a surge of patients from countries as
Wellness Clinics well as from South Africa and West Asia.

The Market – Wellness clinics are targeted at chronic Medical Tourism is set to boom in India and private
or lifestyle diseases that are affecting more and more players are all set to cash in on this booming industry.
people across the country. With increase in tobacco
intake, unhealthy diet and excessive energy intake and Health Insurance
physical inactivity, all sections of the society and people
from different age groups including those who are in The Market - Owing to liberalization and a growing
working age are getting affected by chronic diseases middle class with increased spending power, there has

54 • PricewaterhouseCoopers Pvt Ltd.


been an increase in the number of insurance policies inadequate public healthcare provision, India has much
issued in the country. In 2001-02, 7.5 million policies to offer to leading drug makers. Increase in lifestyle
were sold. By 2003-4, the number of policies issued diseases, combined with a growing middle class that
had increased by 37%, to 10.3 million. has more disposable income to spend on treatment,
will provide new opportunities for global pharmaceutical
Growth Drivers - The Insurance Regulatory and firms.
Development Authority (IRDA) eliminated tariffs on
general insurance as of January 1, 2007, and this Not only does India provide a huge market for foreign
move is expected to drive additional growth of private pharmaceutical companies, India has also emerged
insurance products. In the wake of liberalization, health as a major supplier of several bulk drugs. These drugs
insurance is projected to grow to $5.75 billion by 2010, particularly generic and OTC drugs are produced
according to a study by the New Delhi-based PHD at much lower prices compared to formulation
Chamber of Commerce and Industry. producers worldwide. Many multinational generics
companies have been sourcing products from Indian
In another effort to improve the insurance prospects manufacturers for some years. Some also use Indian
for India, the IRDA is focused on standardizing medical contract manufacturers to manufacture the finished
definitions to ensure consistent pricing and products, product. Contract manufacturing, currently estimated
and is providing incentives for stand-alone insurance at $350 million, is expected to reach $1billion by 2010,
companies. according to CRISIL.

In addition, government subsidies and tax incentives for Growth Drivers - Some companies encouraged by
health insurance are expected to increase the number the relaxation of the rules on foreign ownership and
of policy holders and attract key players to the industry. a favorable tax regime have gone beyond contract
manufacturing, setting up their own local manufacturing
Pathology Services facilities. The financial incentive is compelling: Goldman
Sachs estimates that the cost of setting up and running
The Market - The domestic pathology industry has been a new manufacturing facility in India is one-fifth of the
growing over the last 5 years at an estimated CAGR of cost of doing so in the Wes
20% and it currently comprises almost 2.5 per cent of
the overall healthcare delivery market. Pharmaceutical research is also one area that is
expected to achieve tremendous growth in the coming
Presently there are few big names in this market and decade, due to India’s huge and growing population,
this market is largely serviced by small unorganized low per capita drug usage, and increasing incidence of
players and hospitals. With 40,000 independent disease.
pathology laboratories in the country, the industry is
highly competitive and price driven. Tele Medicine

Growth Drivers - Molecular diagnostic and The Market - Only 25% of India’s specialist physicians
pharmacogenomic testing are the future growth drivers reside in semi-urban areas, and a mere 3 % live in
of this industry. Outsourcing of pathology tests by rural areas. As a result, rural areas, with a population
foreign hospital is also becoming a huge opportunity. approaching 700 million, continue to be deprived of
Preventive healthcare and health insurance will further proper healthcare facilities.
drive domestic growth. Big players can enter this
market and set up accredited pathology labs to capture One solution is telemedicine—the remote
a considerable pie of the market. diagnosis, monitoring and treatment of patients via
videoconferencing or the Internet. Telemedicine
Pharmaceutical Industry is a fast-emerging trend in India, supported by
exponential growth in the country’s information
The Market - Despite widespread poverty and and communications technology (ICT) sector, and
plummeting telecom costs.

PricewaterhouseCoopers Pvt Ltd. • 55


Several major private hospitals have adopted Conclusion
telemedicine services, and a number of hospitals have
developed public-private partnerships (PPPs), among Healthcare in India is in rapid and sustained expansion.
them Apollo, AIIMS, Narayana Hridayalaya, Aravind It will contribute significantly to revenues and to
Hospitals and Sankara Nethralaya. employment generation. Key drivers on both the
demand and supply side, which take the form of
Growth Drivers - The early successes of telemedicine demographic and life style changes on the demand
pioneers have led to increased acceptance and side and the significant expansion of healthcare
proliferation of telemedicine. There is a growing infrastructure on the supply side will ensure the
movement within India to establish a health grid growth of this sector for a long time to come. There
that connects medical institutions and practitioners are however significant challenges that need to be
throughout the country. This would allow super addressed. The lack of adequate healthcare insurance
specialists to exchange case studies, compare for a vast number of people is a fundamental problem.
experiences, and hold virtual conferences to discuss Equally, the fact that chronic diseases continue to recur
critical disease patterns and provide treatment. is a matter of concern. Public health is fundamental to
Eventually, telemedicine likely will be practiced in India’s economic growth prospects and an appropriate
the majority of Indian hospitals, initially in a separate public private partnership model, to ensure this,
department, and eventually, integrated into medical could be the relevant answer. The growth in medical
specialties. and healthcare infrastructure needs to be sustained,
consistent and widespread. Inevitably, Government
Medical Devices policy on healthcare will majorly affect the prospects
of growth in the healthcare industry. The entry of
The Market - The rebuilding of India’s healthcare big reputed names in both the manufacturing and
infrastructure, combined with the emergence of medical the services segment of the sector and increased
tourism and telemedicine, will drive strong demand competition will promote quality in all its dimensions.
for medical equipment, such as x-ray machines, CT Regulatory policies need to incentivise such
scanners and electrocardiograph (EKG) machines. competition while ensuring, of course, that healthcare
Leading international companies market most high remains, at a fundamental level, affordable and available
value medical equipment, while only consumables to most people. Healthcare today in India is at a
and disposable equipment are made locally. Many nascent stage and is poised for exponential growth, if
international companies have expanded their operations judiciously managed through an appropriate choice of
in the Indian market in recent years and established regulatory, fiscal and structural reform policy measures.
manufacturing facilities to assemble equipment for the
domestic market and export sales. The competition is
expected to intensify with the entry of more global firms
into the medical equipment marketplace.

Growth Drivers - The government is encouraging the


growth of this market, through policies such as a
reduction in import duties on medical equipment, higher
depreciation on life-saving medical equipment (40%, up
from 25%), and a number of other tax incentives.

Many international companies have expanded their


operations in the Indian market in recent years and
established manufacturing facilities to assemble
equipment for the domestic market and export sales.
The competition is expected to intensify with the
entry of more global firms into the medical equipment
marketplace.

56 • PricewaterhouseCoopers Pvt Ltd.


Contacts

If you would like to discuss issues raised in this report in more detail,
please speak with or write to any one of our experts below:

Jairaj Purandare
[91] (22) 6669 1400
jairaj.purandare@in.pwc.com

Vivek Mehra
[91] (11) 4115 0503
vivek.mehra@in.pwc.com

S Madhavan
[91] (11) 4115 0505
s.madhavan@in.pwc.com

Bharti Gupta Ramola


[91] (124) 462 0503
bharti.gupta.ramola@in.pwc.com

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[91] (124) 462 0501
ashwani.puri@in.pwc.com

Amrit Pandurangi
[91] (124) 462 0517
amrit.pandurangi@in.pwc.com

Rajarshi Sengupta
[91] (33) 2357 3391
rajarshi.sengupta@in.pwc.com

N.V. Sivakumar
[91] (80) 2558 5663
n.v.sivakumar@in.pwc.com

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58 • PricewaterhouseCoopers Pvt Ltd.