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Industrial Environment and Sector Analysis –

Policy assignment
Indian Industrial
NITIE, Mumbai
Sector

Submitted to:
Prof. D.S. Hegde

Submitted By:

Shwetabh Anjan
Roll No – 06

Arun Chaudhary
Roll no - 10

Sanket Baranwal
Roll no - 12

Naresh Dhingra
Roll No – 17

Huzefa Ratawala
Roll no - 60
Introduction:
Industries play a vital role in shaping the economy of a society. All most all the countries of
the world are depended on their industries. An industry is the place that manufactures goods
or provides services and contributes to the economic production of a country.

Indian Industrial Sector – Historical View:

India is a developing nation and the subcontinent has shows her zeal is rising various
industries. Though, India is basically an agrarian nation, yet Indian industries provide
a financial support to the country. Industries can be of various categories; in India four key
industrial economic sectors are identified. The primary sector, largely extract raw material
and they are mining and farming industries. In the secondary sector, refining, construction,
and manufacturing are categorised. The tertiary sector deals with services and distribution of
manufactured goods.
The period from the late 18th and early 19th centuries saw a radical change in the
agriculture, manufacturing, production, and transportation. In India, the concept of
industries was introduced in the country with the coming of the British. The inception
of Indian industries influenced the socioeconomic and cultural conditions in the subcontinent.
Thus the onset of the Industrial Revolution marked a major turning point in Indian society
also. Tea industry in India is said to be the beginning of industrial development of
India. Industries of India can be divided into large scale and small scale.

Large Scale and Small Scale Industries:

Among the Indian industries, Large scale industries are those which involve huge
infrastructure, man power and a have influx of capital assets. The heavy industries of India
include the Iron and steel industry, textile industry, Indian diamond industry, Indian
food industry, automobile manufacturing industry. Petrochemicals in India create a huge
affect on the fiscal planning of the country. Indian economy is greatly dependent on these
large industries for its economic growth, generation of foreign currency as well as for
providing job opportunities. Large scale industries make urbanization desirable in the
society.
However, the small-scale industries are another major contribution to the Gross Domestic
Product (GDP) of India. These Small scale sectors are termed as traditional sectors and are
referred to have huge growth prospect. The primary concern of the small-scale industries is
that capital resources are invested for the development of machineries.

Indian Industry in Present times:

The India Industry scene has made an impressive move on during the last few decades. The
number of industries in India have increased manifold in the last few years. Though the main
occupation has been agriculture for the bulk of the Indian population, it was realized that
India would become a prosperous and a modern state with a good industrial base. Therefore
different programs were formulated and initiated to build up an adequate infrastructure for
rapid industrialization and improve the industry scene in India.
The industry scenario in India saw a rapid increase in the various sectors. But the striking
factor was observed in the IT Industry sector. The Indian software industry has grown at a
massive rate from a mere US $ 150 million in 1991-92 to a staggering US $ 5.7 billion
(including over $4 billion worth of software exports) in 1999-2000. No other Indian industry
has performed this well against the global competition. The IT sector has helped the India
Industry to develop in leaps and bounds.
Today, India exports software and services to nearly 95 countries around the globe. The share
of North America (U.S. & Canada) in India’s software exports is about 61 per cent. In 1999-
2000, more than a third of Fortune 500 companies outsourced their software requirements to
India.

GDP of India: Statistics

The Gross Domestic Product or GDP is the indicator of the performance of an economy.

1) GDP: $1.209 trillion (2008 Estimate)


2) GDP Growth: 6.7% (2009)
3) GDP per capita: $1016

GDP by sector (2008 Estimate):


1) Agriculture: 17.2%
2) Industry: 29.1%
3) Services: 53.7%
Inflation: 7.8% (2008 Estimate)
Labour force: 523.5 million (2008 Estimate)

The contribution of the Industrial Sector in India GDP

The industrial sector is one of the main sectors that contribute to the Indian GDP. The
country ranks fourteenth in the factory output in the world. The industrial sector is made up
of manufacturing, mining and quarrying, and electricity, water supply, and gas sectors. The
industrial sector accounts for around 27.6% of the India GDP and it employs over 17% of the
total workforce in the country. The Growth Rate of the Industrial Sector in India GDP came
to around 5.2% in 2002- 2003. In this year, within the India GDP, the mining and quarrying
sector contributed 4.4%, the electricity, water supply, and gas sector contributed 2.8%, and
the manufacturing sector contributed around 5.7%.
The Growth Rate of the Industry Sector in India GDP came to around 6.6% in 2003- 2004
and in this year, the electricity, water supply, and gas sector contributed 4.8%, the mining and
quarrying sector contributed 5.3%, and the manufacturing sector contributed 7.1% in India
GDP. Industry Growth Rate in India GDP came to 7.4% in 2004- 2005, with the
manufacturing sector contributing 8.1%, the mining and quarrying sector contributing 5.8%,
and the water supply, electricity, and gas sector contributing 4.3% in India GDP.
Industry Growth Rate in India GDP came to 7.6% in 2005- 2006. In this year, the mining and
quarrying sector contributed 0.9%, the manufacturing sector contributed 9.0%, and the water
supply, gas, and electricity sector contributed 4.3%. The Growth Rate of the Industrial Sector
finally came to 9.8% in 2006- 2007. This shows that Industry Growth Rate in India GDP has
been on the rise over the last few years.

The reasons for the rise of Industry Growth Rate in India GDP

The reasons for the increase of Industry Growth Rate in India GDP are that huge amounts of
investments are being made in this sector and this has helped the industries to grow. Further
the reasons for the rise of the Growth Rate of the Industrial Sector in India are that the
consumption of the industrial goods has increased a great deal in the country, which in its
turn has boosted the industrial sector. Also the reasons for the increase of Industry Growth
Rate in India GDP are that the industrial goods are being exported in huge quantities from the
country.
Index to measure Industrial Performance: IIP

Index of Industrial Production (IIP) in simplest terms is an index which details out the growth
of various sectors in an economy. E.g. Indian IIP will focus on sectors like mining,
electricity, Manufacturing & General. Also base year needs to be decided on the basis of
which all the index figures would be arrived at. In case of India the base year has been fixed
at 1993-94 hence the same would be equivalent to 100 Points. Index of Industrial Production
(IIP) is an abstract number, the magnitude of which represents the status of production in the
industrial sector for a given period of time as compared to a reference period of time.

Method to Calculate IIP:

The index is computed using the weighted arithmetic mean of quantity relatives with weights
being allotted to various items in proportion to value added by manufacture in the base year
by using Laspeyre's formula:

I = ∑ (WiRi)/ ∑ Wi.

Where I is the index, Ri is the production relative of the ith item for the month in question
and Wi is the weight allotted to it.

INDEX OF INDUSTRIAL PRODUCTION - SECTORAL


(Base : 1993-94=100)
In the following pages we will provide an in depth analysis of different sectors of Indian
Industries showing their growth trajectories. The sectors which we will cover are as follows:

1) Retail Sector
2) FMCG Sector
3) Power Sector
4) Automobile sector

Sector Analysis 1 -- Indian Retail Sector:

Current Scenario:

Around 70 per cent of the total households in India (188 million) reside in the rural areas,
where mostly traditional retail outlets, commonly called kirana stores exist, with a shop floor
of less than 500 square feet.. These are unorganized, operated by single person and runs on
the basis of consumer familiarity with the owner. However, recently organized retailing has
become more popular in big cities in India and most of the metropolitan cities and other big
cities are flooded by modern organized retail stores. Many semi-urban areas also witnesses
entry of such organized retail outlets.
Till now, entry of foreign retailers was restricted in Indian retail market because of the ban on
Foreign Direct Investment in Indian Retail Sector. But recently, as government has changed
its policy and the cabinet has allowed 51 per cent FDI in single-brand retail, the prospects
of foreign players entering India became high. Entry of new foreign players in Indian retail
sector will further improve the healthy competition among retailers and end benefit would go
to customers.
At present the organized sector (everything other than these small family-owned businesses)
accounts for only 6 to 8 percent of the total market although this is expected to rise by 20 to
25 percent by 2013.

Indian retail market is comprised of three categories. These 3-categories and their choices
are represented in the given figure. Till now a large part of upper class and a small part of
the middle class has been entered into retail shopping. A bulk segment (97%) is still left
as only 6-7% market is captured by organized retail in India.

REASON FOR GROWING RETAIL MARKET IN INDIA


-main reason for growing retail market in India can be outlined as –
 Rising income level in youth segment
 Nuclear family
 Growing literacy
 Growing urbanization
 Increasing media penetration
 More exposure to international brand and products
INDIAN RETAIL GIANTS-
Top 6 Indian retail giants are- Pantaloons, Titan Indus., Shoppers’ stop, Trent, Piramyd
Retail, Provogue.

Indian retail started with Pantaloons in 1997. Founder of this group is Mr. Kishore Biyani,
who extend his group with big bazaar and Food bazaar and make his turnover to 25000 crore
in 2005. Growth of these 6 giants and Indian retail is clear from the table given below. This
data and two new emerging group(Reliance and Wall-Mart) shows the tremendous growth of
Indian retail.

Why to reach BOP market for retail sector -


―The growing Indian rural market, with increasing brand awareness, higher incomes and
greater purchasing power, is marked by a growing desire in the population to better its
lifestyle. The Indian companies have already sensed this change and are on the path to make
it a profitable business.”
The Indian economy is growing at an annual rate of 8 percent. This growth is
considerable when compared to the growth of European countries, which is less than 2
percent on a 10-year average, and the growth of the American economy, which is
approximately 3 percent. Moreover, there has been significant reduction in poverty levels and
increase in quality consciousness among the Indian rural and urban ‘under-served’ in the past
10 years.

From Pyramid to Diamond


The change in the structure of the consumer class as depicted in fig signifies a substantial
opportunity for marketers to capitalize on this fast-growing consumption class.
The rural market has been increasing steadily at a rate greater than the urban market. About
53 percent of FMCG and 59 percent of the consumer goods market reside in the rural sector.
Therefore, rural markets are vital for the growth of most companies.

It’s a Win-win Situation


 Bottom of Pyramid represents one of the biggest potential market opportunities in the
history of
o commerce. Private companies stand to benefit from ‘inclusive capitalism’,
which can be observed through the examples.
 Multinationals stand to benefit from tapping the rapidly-growing rural and urban poor
market in
o more ways than one way, which include:
 The investments in BOP benefit the companies through tax exemptions and relaxation
of stringent government rules.
 Many local innovations can be leveraged across BOP markets, creating a global
opportunity for the former.
 Some innovations from the BOP markets will find applications in the developed
markets.

Sectoral analysis 2--AUTO SECTOR

The automobile industry, one of the core sectors, has undergone metamorphosis with the
advent of new business and manufacturing practices in the light of liberalization and
globalization. The sector seems to be optimistic of posting strong sales in the couple of years
in the view of a reasonable surge in demand. The Indian automobile market is gearing
towards international standards to meet the needs of the global automobile giants and
become a global hub.

Indian automobile industry has grown leaps and bounds since 1898, a time when a car had
touched the Indian streets for the first time. At present it holds a promising tenth position in
the entire world with being # 1 in Two Wheelers and # 4 in commercial vehicles.
Withstanding a growth rate of 18% per annum and an annual production of more than 2
million units, it may not be an exaggeration to say that this industry in the coming years will
soon touch a figure of 10 million units/year The automobile industry in India — the ninth
largest in the world with an annual production of over 2.3 million units in 2008 — is
expected to become one of the major global automotive industries in the coming years.

Segmentvise growth of Auto is given below


The OEM as well as the component industry is highly competitive

The Indian auto industry is highly competitive with a number of global and Indian auto
companies present. The supplier industry is equally competitive with a mix of global and
Indian players

Most automotive players are present in more than one segment


Indian Auto Policy is designed for supporting the growth of the industry

In 2002, the Indian Government formulated an Auto Policy aimed at promoting an integrated,
phased enduring and self-sustained growth of the industry

• Automatic Approval for foreign


equity investment up to 100%

No Minimum Investment Criteri

LOW
ENTRY
BARRIER

Investment Incentives by the Government’s intention on


Local State Governments: Most INVESTMENT CONCERN FOR armonizing the regulatory
INCENTIVE EMISSIONS standards with the rest of world
States Customise incentives for
Large Investments
world• No Minimum
Investment Criteri
EMPHASIS
ON R&D

Weighted Tax Deduction up to


150 % for in-house research and
R&D activities

Sector Analysis 3 -- FMCG SECTOR:

Industry Size:

The Indian FMCG sector is estimated at US$ 25 billion (Rs. 120,000 crore), including
tobacco. It has grown consistently over the last 3-4 years, including the last 12 months of
economic slowdown. Unlike developed markets, which are dominated by a handful of large
players, India’s FMCG sector is fragmented and a substantial part of the market comprises of
unbranded and unpackaged products.

It is a sector with a relatively less discretionary demand and therefore tends to be relative
stable in the long term, though consumers do up or down trade with economic fluctuations.

Growth Projections:

Most FMCG products (non-durables) are daily use products, and therefore, their volume
consumption has been largely unaffected in the current economic slowdown. The sector has
coped well with recent challenges and grew by 15% over the last year.

Significance & Contribution of FMCG Sector:

The FMCG sector in India has played a vital role in the growth and development of the
country, from making efforts to reach out to maximum consumers through distribution of
smaller pack sizes, innovations like single use sachets, to developing innovative products to
cater to regional or local tastes and the needs of niche consumers. There are many significant
contributions – both direct and indirect that the sector has on the Indian economy.

Economic Contribution:

Employment:

The FMCG sector is one of the larger employers in the country. The total salary outlay of the
sector on direct employment is estimated at approximately 6% of turnover, i.e. US$ 1.5
billion (Rs. 7,000 crores).

Fiscal contribution:

On an average therefore, almost 30% (and much more for liquor and tobacco categories) of
the revenue of the sector goes into both direct and indirect taxes. At an estimated size of $25
billion (Rs. 120,000 crores), that would constitute a contribution to the exchequer of
approximately US$ 6.5 billion (Rs. 31,000 crores).

Social Contribution:

It is a sector which helps create employment for people with lower educational qualifications.
Many become small entrepreneurs operating their own Kirana store. Along with this, FMCG
firms have also undertaken some specific projects to integrate with upcountry and rural areas
for both inputs and for distribution as well as to fulfill CSR. Some examples:

ITC echoupal and Choupal Sagar – Choupal Sagar is ITC’s chain of rural retail which sells
both agricultural inputs and daily needs products. ITC’s rural e-network enables farmer
connectivity and provides an easy way for farmers to get better profitability and control
through access to timely information.

HUL’s Shakti Amma network – HUL pioneered a rural entrepreneurship model amongst
women who became HUL distributors and through this status also gained stature in their local
community and now operate as entrepreneurs for other product categories than FMCG
products.

Dabur India-regularly conducts rural and adult education programs and provides training in
rural areas to facilitate employability.
Contribution to Other Sectors:

The FMCG sector has a strong impact on several other sectors of the economy – agriculture;
supply chain; ancillary industry; packaging; media.

Agriculture - Its intake of agricultural output as raw material is estimated to constitute


roughly 9% of total turnover for the sector. That would put its total value to agriculture at
US$ 2.2 billion (Rs. 10,500 crores).

Third Party Logistics - The third-party logistics market for the FMCG sector in India has
been growing at a CAGR of ~12% since 2002, and is estimated to be worth US$ 63
million(Rs. 300 crores). It is anticipated to double by 2011, and be worth over US$ 146
million (Rs. 700 crores) by 2012, a growth of 211% from 2002. India’s infrastructure in
both transportation and warehousing facilities has been lacking which enables the growth of
independent third party logistics (3PL)-players to come up to bridge the gaps.

Ancillary Industries - Ancillary industries like manufacturing and distribution are greatly
boosted by the FMCG sector.

a) Manufacturing --. Almost 9-10% of total sector’s production is outsourced to contract


manufacturing units taking the total size to $ 1.7 – 2 billion (Rs. 8,000 – Rs. 9,500 crores),
approximately.

b) Distribution—i) ITC services 1.1 million outlets at an average frequency of three days
down to villages with a population of 2,000, and has 1,000 wholesale dealers.

ii) Marico reaches 1.6 million outlets, through almost 900 direct distributors, 100+ super
distributors, catering to almost 2,500 small stockists and 4,600 van markets

Summary:

The FMCG sector has a tremendous opportunity for growth in India, with the growing
population, the rising incomes, education and urbanization, the advent of modern retail, and a
consumption-driven society. However, successfully launching and growing market share
around a branded product in India presents tremendous challenges. Many of these challenges
raised have to do with operational inefficiencies – an ambiguous and inconsistent tax
regime, bureaucracy, hazy and outdated legislation as well as infrastructural bottlenecks.
These need to be overcome not only through a concerted effort by the industry but with active
government intervention and promotion to ensure that the sector is able to perform as per its
potential.

Sector Analysis 4 -- POWER SECTOR

Power Sector deals with generation, transmission and distribution of electricity. India is the
6th largest consumer of electricity in the world. The rapidly growing economy is energy
hungry and the deficit between demand and supply is growing. Revenue losses due to power
failure are growing at an alarming rate of 11.9% in last 5 years.

An insight to Indian Power Sector

 The generating capacity has grown manifolds from 1,362MW in 1947 to more than
112,058MW. However, India still has a huge demand supply gap. The Ministry of
Power has set an ambitious goal of adding 100,000MW of capacity by 2012 to bridge
this demand supply gap. This offers a US$90bn opportunity in the next 8 years.
 Indian power sector is plagued by high T&D losses, which is one of the main issues
for the deteriorating state of SEBs. However, stress is now being given on improving
the T&D segment in contrast to the earlier focus on generation. It is estimated that the
T&D sector also requires around US$80bn investments.
 India has a vast supply of green energy resources, and has a significant program for
deploying these resources. The Renewable Energy market in India is pegged at
US$600 million, growing at 15% per annum. The Government’s renewable energy
target by 2030 is 200 gigawatts, estimated to require US$200 billion in capital
investment. Currently, 3.5% of installed capacity is in the renewable sector, producing
3700 MW. Renewable energy is projected to produce 10,000 MW by 2012.

Power Sector Players

Opportunities for private players in the power sector on the rise. The key power sector
players in India can be categorised by the ownership (public and private sector) and presence
in the value chain (Generation, Transmission and/or Distribution). There are more than 20
private utilities/IPPs in the generation sector. Four private players are active in the
distribution sector.
Public Sector G T D
National Hydro Electric Power Corporation (NHPC) P
Nuclear Power Corporation (NPC) P
National Thermal Power Corporation (NTPC) P
Private Sector
Reliance Energy P P
Tata Power P P P
Torrent P P
P = Present, G = Generation, T = Transmission, D = Distribution

Current Situation
The Market Potential to sustain the GDP Growth rate of India @ 8% plus per annum needs
the power sector to grow at 1.8 - 2 times the GDP rate of growth as espoused by economists,
planners and industry experts. This would mean a YOY capacity addition of 18,000 - 20,000
MW to achieve this ambitious plan of moving India to a Developed Economy status, as an
Economic Global Powerhouse.
To achieve this goal, following milestones are critical:-
 Adequate Capacity Growth to Sustain GDP Growth at 8% plus. Reliable & Quality
Power On 24 x 7 basis, at least in Urban & Industrialized areas.
 100% Rural Electrification with Adequate & Qualitative Power for irrigation purpose.
 Increasing the Role of Hydel & Renewable Energy in the Energy Mix.
 Urgent need to develop the alternatives, both in the Fuel & Technology terms.

Some Steps Initiated

 New Electricity Act 2003 is now very much in place, which permits/offers :-
A. 100% FDI in Power sector Concessional Import duty for mega power projects
(1000MW ++)
B. Reduced Import duty of 20% on equipment for Renewable Energy (Wind,
Solar etc.)
C. Direct Sale of Power
 Extensive Program me for New Greenfield projects as well as
Renovation/Modernization of Utilities for accelerated power development
 Private participation in transmission and distribution sector also invited
 For high transparency, all bids and tenders are now accessible on Ministry of Power
website
 Bureau of Energy Efficiency set up to lay down standards for all electrical appliances
for energy conservation
 Energy Audit for manufacturing / processing sector is now mandatory
 Stringent penalties are now imposed for power theft
 Accelerated Power Development Reform Programme (APDRP) being implemented
for reduction of T&D losses through 100% metering, renovation & modernization of
power plants with an incentive scheme

POWER SECTOR: The path ahead

Blue-print for Power Sector Development

 Power for All by 2012 (from the present level of 31 per cent electrification in rural
areas and 45 per cent in urban areas)
 Addition of over 100,000 MW by 2012
 Investment of US$ 90 billion in Transmission and Distribution infrastructure
 Focused strategy for distribution reform, 100 per cent metering and effective
Management Information Systems (MIS) for monitoring at feeder level, privatisation
& corporatisation of distribution and tariff rationalisation by State Electricity
Regulatory Commissions (SERCs)

Key Fiscal benefits for Power Projects

The Power & Energy Infrastructure sector in India is poised for a major take-off. The APDRP
(Accelerated Power Development & Reforms Programme 2002 - 2012) has seen an addition
of around 22,000 MW during last five years. And during the next five years, a capacity
addition of over 78,000 MW has to be setup by 2012.

 Foreign Direct Investment (FDI) – 100 per cent FDI allowed in Generation,
Transmission and Distribution
 Tax holiday – Profit on investments made in power sector during any block of 10
years in the first 15 years is exempt from income tax. In addition, the net interest and
dividend income is exempt from income tax
 Capital import duties – Waived for mega power generation projects (above 1000 MW
for thermal and 500 MW for Hydel). Reduced duties for project imports
 Transmission & Distribution (T&D) equipments and Transmission & Distribution
Fuel – Import duties on T&D equipment reduced to 10 per cent from the earlier 25 per
cent. Customs duties on imported coal reduced from 25 per cent to 15 per cent

Conclusions:

The India Industry scene has made an impressive move on during the last few decades. The
number of industries in India have increased manifold in the last few years. Though the main
occupation has been agriculture for the bulk of the Indian population, it was realized that
India would become a prosperous and a modern state with a good industrial base. Therefore
different programs were formulated and initiated to build up an adequate infrastructure for
rapid industrialization and improve the industry scene in India.
References:

Books:

1) Dutta R, Sundaram K.P.M, Indian Econmy, S Chand Publications

2) Ahuja H.L, Macroeconomics, S Chand Publications

Web Pages:

1) www.ncaer.org/indianeconomyindustry

2) www.ibef.org/sector.aspx

3) www.indianindustry.com

4) www.indianembassy.org/dydemo/industry.htm

5) www.indiaonestop.com/serviceindustry

Reports:

1) Economic Survey of India 2008-2009

2) Indian Budget Highlight 2008-2009