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India Calling

T rade and Investment in India
November 2006
KPMG IN INDIA

Preamble

India is commemorating the fifteenth continuous year of economic reforms. Governments have changed, but the growth focus has not, indicating a broad-based political consensus, which augurs well for the future of continued economic reforms in India. India's long-term growth story is driven by a powerful interplay of favorable demographics, the gradual implementation of reforms, and globalization. India offers a young, vibrant market with almost half of the population less than 25 years of age. These young people work harder, earn more, spend more, and demand more from the market, making India a dynamic and increasingly aspirational society, one that is attracting a fair share of global attention. As companies across the world shift their focus to India, the country's policies and regulations become matters of global interest. In pursuit of our goal to emerge as the business adviser of choice, KPMG in India offers a concise overview of the Indian economy. India Calling is an overview of sectors that contribute significantly to the growth of the Indian economy. This report encapsulates the business environment with respect to each of these sectors, the policies influencing trade, and the growth opportunities of each segment. We hope you will find this information helpful and would appreciate your feedback. Regards, Russell Parera Chief Executive Officer KPMG in India

© 2006 KPMG, an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in India.

Contents

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A Story of Growth and Sustainability Infrastructure - In Pursuit of Fundamental Revisions Real Estate - Of Homes and More Financial Sector - Banking on Reforms Auto and Auto Components - Cruise in Top Gear Knowledge-Based Services
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01 03 10 14 21 27 27 30 33 38 43 43 45 47 51 53 56 66

Indian IT-ITeS -The World’s Back Office Telecommunications - Ringing in New Tones

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Consumer Goods and Retail - The Demographic Dividend Entertainment and Media - Animated by Change Emerging Sectors
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Oil and Gas - Exploring Opportunities Steel and Mining - Braced for Action Transportation - Covering the Distance Healthcare - Rx for Good Health Special Economic Zones - Incentives for Development

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Investing in India - Compounding Returns KPMG in India

© 2006 KPMG, an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in India.

Foreign direct investment (FDI) inflows in April-March 2005-06 were at USD 5. and significant domestic demand have made India a viable partner to global industry. increasing disposable incomes. Some significant dimensions of the dynamic growth in recent years include a new industrial resurgence. The past decade or so have seen fundamental and positive changes in the Indian economy. Japan. the outlook of business and industry. and Sweden are present in India. choice of technology. These positive economic indicators are transforming the corporate landscape and empowering businesses to effectively tackle global headwinds. 1. rapid growth in exports. Switzerland.54 billion. We no longer discuss the future of India: we say 'the future is India'.India Calling 01 A Story of Growth and Sustainability India is the world's largest democracy and the second fastest-growing economy. India's talent pool of skilled professionals. location. the UK. investment. Merger and Acquisition (M&A) deals in January-October 2006 totaled USD 23. import and export. more importantly. All rights reserved. FDI inflows stood at USD 4. government policies.in/ © 2006 KPMG. envisages a significant increase in investment levels in the economy-from approximately 30 percent of Gross Domestic Product (GDP) to about 34 percent of GDP Over the next 5 years. up from USD 16. and progress in fiscal consolidation. and. in the mindset of Indians. as outlined by the Investment Commission Report of February 2006. modest inflation in spite of spiraling global crude prices. over 200 of the Fortune 500 companies from the U. .S. Germany. a Swiss cooperative. investment of over U. and rule of law.S. During April-September 2006. with outbound deals outstripping inbound ones.. France. Printed in India. http://dipp.7 billion. At present. the advantage offered by an English“The world has acknowledged the 'arrival of India'. Netherlands.nic.74 billion1. A favorable foreign investment environment provides these companies freedom of entry and exit. South Korea. dollars (USD) 1. The government is also pursuing reforms and liberalization not out of compulsion but out of conviction and consensus. The Investment Strategy for India.2 billion in the previous year.5 trillion. Canada. this would translate into a cumulative . ” Kamal Nath Union Minister of Commerce and Industry speaking population. increased investment. establishment of some institutional foundations for faster development of physical infrastructure. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International.

a Swiss cooperative. Printed in India. Actis. make India a viable investment proposition. Kohlberg Kravis Roberts. etc. The Hindu Business Line. technical. This document looks at India's attractiveness as an investment destination and unravels the emerging business opportunities in critical sectors. marketing and management services.9 billion across 230 deals.2 A number of the reforms currently awaiting implementation reflect the government's determination to carry the growth impetus forward. . Most global PE firms including Blackstone. The analysis integrates Key private equity deals quantitative information along with news and events in the industry. tax implications. These include full capital convertibility for the rupee. more PE money has entered India than China. Carlyle. a reduction in bureaucratic hurdles. It encompasses policy changes. All rights reserved.. and important announcements. November 7 2006. and legal protection for intellectual property rights. and the opening up of the financial sector. from the government and industry leaders. During the first 10 months of 2006. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. .02 India Calling Key mergers and acquisitions Dollars are also stacking up as private equity (PE) funds discover India. coupled with existing advantages unique to India like well-defined research and development infrastructure. © 2006 KPMG. encouragement for public-private participation. Warburg Pincus. Venture Intelligence India .Roundup Quarterly (July-September 2006). In the last one year. 2. These reforms. proposed infrastructure spend in excess of USD 320 billion during the 11th plan (2007-2012). are active in India. PE investments totaled USD 5.

while light engineering contributes the rest. 2006 India Brand Equity Foundation. Demand growth in the sector is fuelled by expenditure in core segments like power. It employs over four million skilled and semiskilled workers (direct and indirect). especially given that infrastructure has been given high priority in the 11th Five-Year Plan. transmission and distribution). automotive and textiles). January 11. The light engineering industry includes low-tech items like castings. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. 5. railways. airports. It registered a growth of around 15. and infrastructure development.Bolstered by Exports The engineering segment is the largest in the Indian industrial sector. th An Approach to the 11 Five-Year Plan. ports. Merrill Lynch Report. and Infrastructure investments have picked up over the past two years. This has hampered the growth of the manufacturing sector and must be rectified in the next 5-10 years. joint ventures. Indian infrastructure-roads. private sector investments. regional players in the organized sector.India Calling 03 Infrastructure .7 percent in April-December 2005 as compared to 13. 6 The Indian engineering sector is less fragmented at the top as competencies required are high. The deficiency in the infrastructure sector offers growth opportunities. industrial majors (refining. 6. All rights reserved. and power-is not on par with that of competitor countries.In Pursuit of Fundamental Revisions India's infrastructure sector has seen heightened activity following the reforms initiated by the government.4 Engineering . It can be further classified as heavy and light engineering. transport equipment. . February 2006 © 2006 KPMG. 2006. Total infrastructure spend across sectors is estimated to increase from USD 68 billion in FY02-05 to around USD 109 billion over FY06-08. communication. large domestic players. January 2006 CARE Research. and a large number of small players in the unorganized sector.3 Infrastructure inadequacies in rural and urban areas have constrained India's growth as was pointed out in the Mid-Term Appraisal of the 10th Plan. Printed in India. The user industries are power utilities (generation. The engineering sector is made up of multinational companies (MNCs). forgings and fasteners and the highly sophisticated microprocessor-based process control equipment and diagnostic medical instruments. driven by government initiatives and private participation. A CII . 4.KPMG Report 3.5 The heavy engineering industry includes capital goods/machinery and equipment. Planning Commission. and the speed at which projects are implemented.8 percent in the corresponding period of the previous year. a Swiss cooperative. government (public investment) and retail consumers (pumps and motors). Heavy engineering constitutes over 80 percent of the total industry.

garners around 35 percent of its sales from infrastructure activities like engineering. respectively) through the supply of equipment to the power sector.KPMG Report www. A CII .196.equitymaster. The demand from this segment depends largely on GDP growth. Engineering majors like Bharat Heavy Electricals Limited (BHEL) and ABB Limited derive a significant chunk of their revenues (69 percent and 60 percent. hospitals. Larsen & Toubro Limited. and water/effluent treatment projects. Infrastructure is another key area of operation.ciionline. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. All rights reserved. ports.com In India. in turn. Printed in India. 8.8 7 . information technology (IT) parks.04 India Calling Demand drivers for the engineering sector in India Net Sales Order Book Derived Form Influenced Govt Policy Domestic Power Sector Political will to reform SEBs Restructuring Increased Investments (Private & Public) International Balance Sheet Size Industrial & Infrastructure Sector Economic Growth Public Spending Service Offering Capacity Expansion Opening up of the Economy Source: www.com © 2006 KPMG. which. a Swiss cooperative. social and physical projects like housing. expressways.equitymaster. is a function of the infrastructure spending and capacity expansion plans of corporate India.73 million from August 1991-July 2006. with inflows of USD 1.7 The industrial segment contributes to around 30 percent of the total revenues of the engineering sector. bridges. for example. the power sector is the largest contributor to the revenues of engineering companies. The engineering industry continues to attract FDI. design and construction of industrial projects. .com www.

up from 9.9 The 11th Plan has targeted a growth of 12 percent for the manufacturing sector in order to achieve a GDP growth of 8-9 percent.India Calling 05 Foreign investment approval trends from August 1991 to July 2006 Sector Amount Percentage of FDI Inflows of total (USD million) inflows 219.73 3.64 166. Mechanical & engineering Agricultural machinery Machine Tools Boilers and steam plants Earthmoving Prime movers other than electrical TOTAL 74. over the previous year and crossed USD 5.60 1.KPMG Report 9.31 519. ! India has well-developed technical and tertiary education institutions ! Well developed vendor base A CII .34 0. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International.98 8. making the sector the largest contributor to India's total merchandise exports.07 1196. sector grew by 11.27 Source: Ministry of Commerce and Industry India's competitiveness in the engineering industry can be assessed using the following illustration: ! India's comparatively cheaper and skilled workforce can be effectively utilized to setup large low cost production bases for domestic and export markets ! Huge investments from the companies for R&D etc. improve power generation etc.46 0.77 177 . IBEF 2006 . government and retail consumers ! Highly demanding consumers ! Demand linked to the industry growth Source: KPMG. Printed in India.02 In the first quarter of FY06-07 India's exports of engineering goods grew by 20 percent . ports. September 2006 th An Approach to the 11 Five-Year Plan. 10. Cygnus Research. Related and supporting industries ! Consumers inculde power utilities.51 0.38 0. a Swiss cooperative.11 Industrial machinery Misc. industrial major (refining.5 billion. automotive and textiles).8 percent.6 percent in the last fiscal. structure and rivalry ! A large number of domestic as well as multi-national players ! Highly competitive industry Factor conditions Demand conditions Government ! Liberalized overall policy regime ! Import duties on a range of equipment have been reduced ! Heavy Electrical industry has been de-licensed with 100 per cent FDI allowed ! The focus to develop road.23 0.10 Between April and August 2006-07 the . .61 0. All rights reserved. Planning Commission. The Engineering Export Promotion Council (EEPC) is targeting exports of USD 23 billion in the current financial year. Firm strategy.08 30. 2006 © 2006 KPMG.

airports. Planning Commission. Printed in India. Continued emphasis on rural electrification and infrastructure development will encourage upgradation and investment in capital goods. February 2006 th 13. and designing manufacturing systems are increasingly being outsourced to countries like India. has also been proposed. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International.12 Construction . construction. An Approach to the 11 Five-Year Plan.nic) The 11th Plan Draft emphasizes on Public-Private Partnerships (PPPs) as the preferred mode for the construction and operation of highways. CARE Report.14 11. any company deriving profits from the development. Contracts for providing road services for NHDP Phase-III onwards would be awarded only on a Build-Operate-Transfer (BOT) basis. Tax benefits for industrial parks. maintenance. ports. Opportunities The engineering sector stands to benefit significantly from the government's plans to add 1.13 An expanded program for highway development. under Section 80(IA). Trends indicate that urban population will grow at about 3 percent per year over the next few decades. 2006 14. Engineering and design services such as new product design. 2006 12. Under Section 80(IA) of the Income-Tax Act.urbanindia. chemicals.. roads.00.06 India Calling Policy Initiatives The government has de-licensed the heavy electrical industry and allowed 100 percent FDI in the same. and operation of infrastructure projects is eligible for tax exemption for 10 of the first 15 years of operation. About 30 percent of India's population lives in urban areas.. airports. product improvement. Capacity addition and de-bottlenecking in other industries like steel. An Approach to the 11th Five-Year Plan. All rights reserved. a Swiss cooperative. An enhanced allocation of USD 1. refineries. ports.000 MW to the country's electricity generation capacity by 2012. A key driver for increased engineering exports is the shift of global manufacturing bases to low-cost countries like India. Planning Commission. 2006 © 2006 KPMG. traditional construction contracts will be awarded only in specified exceptional cases. It employs over 30 million people (skilled and unskilled) and has been growing at over 10 percent each year over the last five years. is expected to fuel growth in this segment. which will include the National Highway Development Programme (NHDP) III and IV. India has over 3. October 13. (www. in India. and commercial and residential buildings. A CII . 1961. Financial Express. are also likely to create more opportunities in the sector.14 billion to the Technology Upgradation Fund scheme augurs well for textile machinery manufacturers. etc. etc.700 towns and cities.Cemented in Reforms The construction industry covers rural and urban infrastructure. A model concession agreement has been developed to facilitate speedy allocation of contracts.KPMG Report . have been extended to FY09. Rapid urbanization and the subsequent need for basic infrastructure.

dams. This has opened a huge avenue for the private sector. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. a Swiss cooperative. A 10-year tax holiday is available to developers of urban infrastructure projects and to those operating and maintaining water supply.urbanindia. Prior government approval is required for investment in such projects. bridges. Construction services related to infrastructure projects like roads. ports. and Chennai. Kolkata. etc. Enhancing the productivity of urban areas is a national priority since cities hold tremendous potential as engines of economic and social development.nic. etc. Investment opportunities are also available in water management. PPPs are increasingly becoming the preferred mode for the construction and operation of infrastructure services in India. Opportunities The expansion of basic urban infrastructure requires substantial financial resources. at present there exists a resource gap that cannot be met from traditional central and state government grants and loans. while urban rail services are limited to four cities-Mumbai. are either exempted from customs duty or attract a concessional rate of duty. Printed in India. The central and state governments have begun looking at different models (BOT/concessions/management contracts) for private participation in developing. and sanitation projects.. However. Import of specified goods related to infrastructure projects like roads. including housing. commercial buildings. ! Collection efficiency for urban waste ranges from 50 percent to 90 percent. Construction opportunities exist both in government-sponsored projects and Build-Own-Operate (BOO) and BuildOwn-Operate-Transfer (BOOT) projects for roads. hotels. sanitation. sewerage. etc. There is a great need for mass rapid transport systems and light rail systems. and sewage disposal as highlighted by the following facts: ! Only 85 percent of all urban households and 65 percent of urban slum households have access to piped water supply. resorts.India Calling 07 Policy Initiatives The government allows 100 percent FDI in urban infrastructure projects and in the development of integrated townships. do not attract service tax. Only 17 of the 23 metropolitan cities have organized bus services. Delhi. airports. 15.in © 2006 KPMG. the level of service is often poor due to low pressure. supply interruptions. while an average of about 65 percent of collected waste is dumped untreated. which could play a larger role in financing infrastructure in tandem with the public sector. . www. flyovers. airports. etc.15 Housing is another investment area with significant potential. etc. All rights reserved. However.. operating and maintaining urban infrastructure facilities. creating jobs and generating wealth through economies of scale.

.7 0. Competing private sector % 55.582 1.5 12.362 MW to over 1. is the responsibility of state governments and a decisive improvement in this area is a critical challenge.394 41. Annual Report. The 11th Plan Draft stresses on the exploitation of India's hydro potential and nuclear capabilities. 2006 SSKI Report.1 4.988 13.976 3. which was highly regulated with numerous licensing requirements till 2003. This is expected to change market dynamics from a protective environment to a competitive one. central institutions like the National Thermal Power Corporation and State Electricity Boards dominate the power scene in India.839 Fuel Capacity Thermal Coal Gas Oil Hydro Nuclear Renewable Total MW 83. 2006 At present.18 Total installed capacity as on July 31. October 5. in excess of 50 percent in many states.839 % 66.000 km. PGCIL proposes to carry out this extensive activity through joint ventures with private parties.000 MW to the country's present generation capacity by 2012 as will be required during the 10th and 11th Plan periods. Its competitors benefit from uninterrupted power supply at stable voltage and frequency. 18.772 68. 2006 An Approach to the 11th Five-Year Plan.26.231 1. The central transmission utility. The GoI plans to triple existing inter-state T&D capacity by FY12 by establishing a Sector State Central Private Sector Total MW 70.839 MW at a compound annual growth rate (CAGR) of 8 percent.21 The power sector is likely to witness increasing competition. Printed in India. the Power Grid Corporation of India Limited (PGCIL).17 The Government of India (GoI) has launched an ambitious program to add another 1.09 26.0 54. 19.com Angel Report.4 10. and vice versa.9 100. 21. All rights reserved.0 3. Ministry of Power TATA Power Company Ltd. It has proposed the installation of seven ultra mega power projects. 2005 Fitch Ratings. 22 16. Reliance Energy Limited. Planning Commission. which will necessitate an investment of USD 15. ” Dr.0 companies include Tata Power Co Limited. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. June 5. The management of power systems. October 8.191 1. India's installed power capacity has increased from 1. The power sector.08 India Calling Power .20 The government has stepped up the pace of T&D network expansion.0 national grid that will enable the transfer of power from surplus to deficit states.00. each of 4.0 100. has changed after licensing requirements were decreased under the Electricity Act.26. TATA Projects. or 5.19 India has some of the highest Transmission and Distribution (T&D) losses in the world. 2006 Source: Ministry of Power © 2006 KPMG. has been mandated for this task.900 6.214 15.26. in FY06 alone. The Hindu. 20. 2006 www.4 percent. Manmohan Singh at the inaugural address of the Conference on Building Infrastructure: Challenges and Opportunities16 Shortage of power and unreliability of supply are universally recognized as a drag on the pace of India's development. Since independence. 2003. especially distribution.5 32. 17 . with transmission increasing by over 9. a Swiss cooperative. its achievement in FY06 has been significantly higher than targeted. especially in the field of fast-breeder reactors. September 2005. CESC Limited and others.2 billion from FY02-FY10.Spread the Light “We must also open up the power sector to competition as that would not only provide choice to our consumers but also bring efficiency and cost reduction.202 32.equitymaster. 22.000 MW capacity to achieve this goal. Power-generation companies are now free to enter the distribution business.

September 2005 © 2006 KPMG. Source: Ministry of Power 23. is eligible for a tax holiday of 100 percent of the profits of the undertaking for 10 consecutive years out of V . and trade.Plan IX . An undertaking that begins to generate.13 13. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International.Plan VII . 2010. 2003.Plan VIII .Plan VIII .000-20. Printed in India. The GoI recently permitted 100 percent FDI in power trading under the automatic route.000 MW of generation capacity is expected to be added in FY07 alone.57 19.India Calling 09 Investments in the power sector Plan-wise outlay Power Sector against overall (%) Policy Initiatives An FDI of 100 percent is permitted in power generation (except for atomic energy). Plan-wise expenditure The GoI has launched the Rajiv Gandhi Grameen Vidyutikaran Yojana. This would offer the private sector opportunities for capacity addition.24 The creation of a national grid to enable the transfer of power from surplus to deficit states requires a private investment of nine billion dollars. The import of specified goods related to mega power projects is either exempted from customs duty or attracts a concessional rate of duty.Plan V .Plan IX .6 Opportunities GoI's ambitious plan of adding 1. T&D. 2006 25.23 An estimated 18.33 15.79 13. This will create a more vibrant power market and allow potential investors to participate. 18.77 16.49 18. beginning from the year in which the undertaking commences these activities.Plan the first 15 years.33 14.Plan VII .Plan X . subject to compliance with regulations under the Electricity Act. TATA Power Annual Report.04 18.Plan for investment in power generation and T&D. which is the last year of the 10th Plan period.00.2 transmission or distribution lines or by undertaking substantial renovation and modernization of the existing network on or before March 31. . distribute or transmit power by laying new 20. 2006 24. Fitch Ratings. TATA Projects.000 MW power by 2012 will create opportunities X .Plan VI . June 5. a Swiss cooperative. All rights reserved.25 Opportunities are also available for setting up cross-country grids and for trading between surplus and deficit countries. a national rural Power Sector against overall (%) electrification program that proposes electricity for all households in India in the next five years.Plan VI . India Infoline.74 17.

Industry estimates suggest that IT and organized retail alone will require 300 million sq. 27 Commercial real estate continues to be the most favored investment option in India. ITeS and knowledge-process outsourcing have emerged as the main drivers of growth in the commercial real estate sector. over the next five years. decreasing household sizes.28 The real estate market in Tier-II and Tier-III cities is growing rapidly and attracting domestic and foreign investors owing to lower costs (wages and rents). India will need nearly Passage of the SEZ Bill. Favorable socio-economic changes are driving the demand for premium housing in India. Printed in India. 2006 27 Deutsche Bank. is still the most significant part of the overall market. which is about 40 million more than what it was 10 years ago. These are cities with populations of over a million but not completely established as outsourcing and offshoring destinations.000 million by 2010. 10 million new housing units per year. ft. Unleveraged returns from rental income on an investment in commercial property in metros is around 10.Of Homes and More The Indian property sector is witnessing heightened activity as a result of higher real estate prices and a genuine improvement in the underlying demand conditions. companies are increasingly eyeing Tier-III cities. and could be the key growth driver as 48 percent of . Soaring land prices in city centers mean new office space will be mainly in peripheral locations giving rise to new cities with a commercial and residential mix (with some important exceptions like Mumbai's mill land). the cities that are targeted by companies as alternative offshoring destinations and now possess a welltrained pool of labor. 'India The Next IT Offshoring Locations. October 2005 © 2006 KPMG. November 14.3 India's population still lives in semi-permanent/temporary structures. Their absolute cost advantage over Tier-I cities is estimated at between 15 and 30 percent. the financial centre Mumbai. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. The residential segment. and the IT-hub Bangalore. a Swiss cooperative. 26. and Chennai.5 percent every year. Indian cities are divided into three groups: Tier-I comprises the capital Delhi. May 8. ft. Tier III Cities'. The industry was estimated at USD 12 billion last year. But given the rising costs in Tier-II cities in the recent years. By 2030. April 2006. Jones Lang LaSalle. The cost advantage of Tier-II cities over those in Tier-I is estimated to be 15-20 percent. 2006. Financial Times. All rights reserved. and further rationalisation of rates and duties are sending positive signals to foreign investors. there were nearly 200 million households in India. introduction of single-window clearance schemes and the potential introduction of real estate investment trusts. Total housing construction over FY02-05 is estimated at 7 billion sq. rising incomes.10 India Calling Real Estate . The entry of FDI following regulatory changes last year has also brought the sector into the international spotlight. and a housing shortage of 20 million units will necessitate extensive residential construction. According to the last census. Pune. while organized retail and IT/ITeS are emerging as major growth drivers in the commercial real estate sector. The real estate industry is expected to grow at a CAGR of 33 percent to touch USD 50. conducted in 2001. 28.26 Real estate prices in India have gone up by 30-35 percent in the last one year and by 60-70 percent over the last two years. Outlook Money. which has always dominated the industry. Enam. 2006 . Tier-II consists of Hyderabad. . Business Standard. The financing of owner-occupied housing has enormous market potential in this context. Rapid population growth. Another trend is the move towards Tier-III cities. October 24.

an estimated USD 2. a medium-sized Indian real estate company.000 sq. will open up what was until recently one of India's most fragmented and opaque sectors. as compared to bonds/notes and bank deposits. another north India developer. 2006 © 2006 KPMG. Over time. Developers are seeking to raise up to USD 4 billion through domestic and international share offerings by the end of the first quarter of 2007 The capital raisings . Runwal Group. Subsequently. and Emaar tied-up with local players like Puravankara. The Indian property sector has traditionally been under-represented on the stock exchange. It is expected that FDI will change the competitive scenario of the sector and help improve technology and execution.29 There seems to be immense investor appetite for real estate stocks as is evident from the announcement of the country's largest initial public offering (IPO). .. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. All these factors have attracted private equity players and real estate funds from abroad. and favorable changes in the stamp-duty law. reiterating the importance of understanding the local market and environment. several foreign developers including Keppel Land. a Swiss cooperative. . etc. Other offers in the pipeline include the USD 120 million IPO of Sobha Developers and an expected USD 100 million offering by Akruti Nirman. All rights reserved. was oversubscribed 62 times. Financial Times. the USD 220 million IPO of Parasvnath Developers. the Indian real estate market remains largely unorganized and fragmented with a few real estate developers dominating a city/region. the GoI allowed FDI in real estate under the automatic approval route for large projects (at least 25 acres or a minimum built-up area of 50. Ansal. Real estate as an investment opportunity offers high returns on investment similar to those offered by stocks and precious metals. with existing property stocks accounting for a minor percentage of the total market capitalization of nearly USD 700 billion.India Calling 11 Although larger players such as DLF Unitech. November 14. 2006 30. meters). 29. are now diversifying . which offer only moderate returns. Recently. The key driver for the decrease has been a change in buyer profile (larger proportion of salaried employees are buying properties). and MGF respectively. they are the new favorites at the bourses. increasing penetration of housing finance companies (which will not fund the cash component). geographically. In March 2005.5 billion share issue. but it still exists. Now. and several other offerings by blue chips.30 It is difficult to measure the exact size of the sector since a major part of its transaction is cash-based. November 14. by Delhi-based developer DLF and a USD 350-500 million offering from Omaxe.0-2. CapitaLand. this component has shrunk significantly. Printed in India. Financial Times.

Vijaywada Hyderabad Hyderabad Visakhapatnam Hyderabad Bangalore Bangalore Kolkata Source: Knight Frank. ! The minimum area to be developed under each project is 10 hectares in case of the development of serviced housing plots and 50. The investor may. 2006 Policy Initiatives The real estate sector largely comes under the purview of the state or local government. Printed in India. June 22. CLSA Asia . meters in case of a construction project. © 2006 KPMG. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. recreational facilities.Pacific Markets.000 sq. ! The original investment cannot be repatriated before three years from the completion of minimum capitalization. educational institutions. Important conditions include ! Minimum capitalization of USD 10 million for Wholly Owned Subsidiaries (WOS) and USD 5 million for joint ventures. FDI up to 100 percent is permitted in the construction development sector. Taxation Under the automatic route. however. a Swiss cooperative. be permitted to exit earlier with the permission of the Foreign Investment Promotion Board (FIPB). city and regional level infrastructure and townships.12 India Calling FDI in residential housing proposed/under construction projects Investor Lee Kim Tah Holdings Salim Group High Point Rendel Edaw Ltd Kikken Sekkel CESMA International Pvt Ltd Emaar Group IJM Evan Lim & Co Pte Ltd Ho-Hup Construction Company Keppel Land Royal Indian Raj International Corporation Universal Success Enterprise Country Singapore Indonesia UK US Japan Singapore Dubai Malaysia Singapore Malaysia Singapore Canada Indonesia Project Township Township Township Township Township Township Township Township Township Development project Condominium project Integrated township Royal Garden City Housing project Location Chennai Kolkata Jharkhand Jharkhand Jharkhand Hyderabad. which includes housing. commercial premises. and permissible Floor Space Index (FSI) vary across the country. and hence regulations on zoning. The FSI (which determines total construction area as a proportion of total land) changes not only between states but between cities and even between locations in a city. All rights reserved. land acquisition procedures. . Funds would have to be brought in within six months of the commencement of business. resorts. subject to the fulfillment of certain conditions.

capital goods. retail. Printed in India. dams. these will act as catalysts for greater transparency in the market. a Swiss cooperative. leisure accommodation. In the medium term. to make an impact on real estate markets only in the medium term. at best. ft. and residential property. are either exempted from customs duty or attract a concessional rate of duty. a large pool of qualified workers. infrastructure projects like roads. .. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. given the growth scenarios for metros. roughly half of this is for the seven largest cities alone. also enjoy a 100 percent tax holiday if these are developed on a minimum plot of one acre with residential units having a minimum built-up area of 100 or 1.India Calling 13 Qualified housing projects. it requires additional funding and is likely. Under the Jawaharlal Nehru National Urban Renewal Mission it is estimated that an investment of four billion dollars will be needed annually for the development of 63 cities. do not attract service tax. and realize high returns. © 2006 KPMG. airports. airports. Other segments such as hotels. Channeling the process of urbanization into new townships is a plausible step. Construction services related to infrastructure projects like roads. India needs a stronger capital market base for property financing. Strong population growth. ports. etc. The debate on the potential introduction of Real Estate Investment Trusts (REITs) and real estate funds is a step in the right direction. India also offers an early-mover advantage: investors who are among the first to enter the market could establish a presence in the market. However. also leading to enhanced capacity utilization of related industries such as steel. facility management. and increasing domestic and foreign investment are fuelling the demand for office.. Import of specified goods related to mega power projects. Development of urban infrastructure is the key for the coming decades. Opportunities India has enormous potential in all its property investment categories. cement. The opening up of the sector will bring in international investors who have the means to finance new construction projects and the expertise needed for market analysis. Increased activity in the sector can speed up the growth of the economy (and vice versa). The sector has the potential to become a key engine of economic growth because of its high yield on investments and a higher multiplier effect on a large number of other industries. acquire experience in investing and developing projects in India. Certain other conditions also need to be satisfied to avail of this tax holiday. and building construction. and transportation. approved by the concerned local authority. greater integration with the world economy. etc. All rights reserved. and second homes also offer sizeable potential.500 sq.

productivity. 2008. This has 90 85 80 75 70 1997 2001 2002 1996 1998 1999 2000 2003 2004 also resulted in accelerated economic growth. comprising 28 public sector. foreign banks operating in India and Indian banks with presence outside India will have to start implementing Basel II from March 31. small and medium enterprises. in order to conform to the best international standards in the financial sector.1 The 'Universal Banking' concept is positioning Indian banks as a one-stop financial shop. warehousing. with emphasis on gradual harmonization with global best practices. higher than the 14.7 percent between 1998-99 and 2001-02 to 7 percent between 2002-03 and 2005-06.5 percent growth in the preceding four-year period (1998-99 to 2001-02) and the long-run average of 17 percent (1970-2006).5 percent were located in rural or semi-urban areas. Printed in India. Non-food credit extended by scheduled commercial banks (SCBs) recorded an average annual growth of 26. 2005 SOE New Pvt Sector Banks be over USD 540 billion. and transportation from farm to market. All rights reserved. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. All other Indian banks will have to migrate to Basel II norms by March 31. Reserve Bank of India. Branches numbered 68. 28 private. of which approximately 69. and 4 local area banks. In addition to corporate credit offtake. The financial system is now robust and resilient. and agriculture are the major growth avenues for the banking segment. catering to all the financial needs of customers. a Swiss cooperative. contributing to public confidence.Banking on Reforms Share of banking assets (percent) The efficiency. . India had 89 scheduled commercial banks (excluding regional rural banks). processing. be it traditional banking products or new value-added services like wealth management and advisory. 2009. Finally.116.31 . Banking At the end of March 2006.14 India Calling Financial Sector . The recent acceleration in credit growth could be . retail. and stability of the Indian banking system have improved due to the reforms introduced in the financial sector from the early 1990s. Their share in total banking assets is also increasing at the expense of government banks. Private sector banks are growing at a faster rate than state-owned enterprises (government banks). 29 foreign. 31.1 percent between 2002-03 and 2005-06.8 attributed partly to the step-up in real GDP growth from 5. The sector will have to find innovative channels for credit delivery to serve new rural credit needs. Annual Report 2006 © 2006 KPMG. the Indian banking system has been characterized by sustained demand for bank credit in consonance with the upturn in economic activity. encompassing full supply chain financingstorage. The size of the total banking assets is estimated to Source: RBI Data.31 In the past four years.

India Calling 15

Policy Initiatives
The banking sector is regulated by the Reserve Bank of India (RBI). Total foreign ownership is capped at 74 percent and combined ownership by Foreign Institutional Investors (FIIs) cannot exceed 49 percent. Foreign investors must obtain RBI approval to acquire a stake of 5 percent or more in an Indian bank. Voting rights are restricted to 10 percent. In February 2005, the RBI announced a roadmap for foreign banks in India and guidelines for ownership and governance in private banks. The roadmap has been divided into two phases and provides that foreign banks will be allowed to either set up WOS in India or convert existing branches into a WOS in Phase-I (from March 2005 to March 2009). In Phase-I, eligible foreign banks will be permitted to acquire shareholding only in Indian private sector banks identified for restructuring. In Phase-II (April 2009), limitations on the operations of WOS are likely to be removed and they will be treated on par with Indian private sector banks. Mergers and acquisitions between private sector banks and foreign banks may be permitted in Phase-II. A bank amalgamating with a specified banking institution under a scheme sanctioned and brought into force by the central government is permitted to carry forward and set off the institution as if the amalgamation had not taken place. Further, profits of offshore banking units set up by banks in a Special Economic Zone (SEZ) are eligible for a tax holiday of 100 percent for the first five years and 50 percent for the next five years. Capital account convertibility: The Central Bank of India, in consultation with the GoI, constituted a committee to re-visit the subject of fuller capital account convertibility in the context of progress in economic reforms, stability of external and financial sectors, accelerated growth and global integration. The committee's report assessed measures taken towards capital account liberalization since 1997 and provided an overview of its approach to the subject. According to the committee, the road to convertibility will be spread over a five-year period and split into three distinct phases: Phase-1: 2006-07 , Phase-II: 2007-08 and 2008-09, and Phase-III: 2009-10 and 2010-11. 32 The report also presented the conditions associated with a move towards fuller capital account convertibility and recommended setting up a task force. Accordingly, the RBI constituted an internal task force to re-examine existing regulations and make recommendations to remove operational impediments in the path of liberalization. The processes are expected to be completed by December 4, 2006.

32. Reserve Bank of India, Tarapore Committee

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16 India Calling

Opportunities
The credit penetration of Indian banks is low by regional standards and only two other Asian markets, the Philippines and Indonesia, have lower bank loan/GDP ratios. Banking services have only penetrated 68 million of India's 192 million households, (35 percent of total households), indicating the huge potential for growth.33 Banks are expected to enter into a major consolidation phase as they gear up to face global competition post FY09. Mumbai as a financial center: The GoI proposes to make Mumbai a global financial centre since nearly all transactions involving financial institutions in India are conducted in the city. Mumbai's banks process twice as many checks as those in New Delhi, around 14 percent of the national bank deposits are in the city, 80 percent of India's mutual funds are registered in the metropolis, and close to 90 percent of the country's merchant banking transactions are structured in Mumbai. The city's location, between Singapore and Frankfurt, also works to its benefit. In addition, a committee headed by economist Percy Mistry has been formed to recommend how Mumbai can be made an international finance centre.

Capital Market
Banking services have only penetrated 68 million of 192 million households, (35 percent of total households) indicating the huge potential for growth.33 Capital markets remained buoyant in 2005-06. Stock indices touched record highs, driven by increased interest from domestic and foreign investors on the back of strong macroeconomic fundamentals. Buoyancy in secondary markets brought about a substantial increase in resources raised by Indian corporates through domestic and Euro issues. There are 23 stock exchanges in India, of which the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) are premier institutes.

Policy Initiatives
A GoI authority, Securities and Exchange Board of India (SEBI), regulates the capital markets in India.

Opportunities
The NSE witnessed a growth of around 77 percent in equity market capitalization from USD 345 billion in March 2005 to USD 612 billion in March 2006.34 Trading in equity markets is also on the rise following an increase in Internet trading, which stood at about USD 40 billion in 2005-06, constituting over 11.7 percent of total trading volume in the capital market.

33. 2001 census data 34 National Stock Exchange, Annual Report 2006
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India Calling 17

Mutual funds: Assets under management

Asset Management
The Indian mutual fund industry saw unprecedented growth with assets under management more than doubling in the last two years to the value of USD 66 billion in August 2006. As many as 190 new schemes were launched during the year as against 97 in the previous year. The amount mobilized was USD 15.4 billion as against USD 5.6 billion in the previous year. There are now around 30 asset-management companies with the top 10 accounting for over 75 percent of the assets under management.35

2.5 2 (INR trillion) 1.5 1 0.5 0.0 Mar - 05 1.5

2.0

2.3

Sep - 05

Mar - 06

Growth in six month periods
Source: AMFI

Policy Initiatives
SEBI and an industry association of asset-management companies, Association of Mutual Funds in India, regulate the industry.

Opportunities
The Indian mutual fund industry saw an unprecedented growth with assets under management more than doubling to the value of USD 66 billion (August, 2006) 35 Following the expected opening up of pension funds management to the private sector, close to 250 million salaried Indians could emerge as potential investors. At present, only 2 percent of salaried individuals are considered active mutual fund investors. The household sector invests only around 5 percent in shares and debentures. The entry of large global mutual fund players like Fidelity and Franklin Templeton has also spurred interest among investors.

35. Association of Mutual Funds in India

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36. NBFCs. loan companies.5 billion as of March 2005. like miscellaneous non-banking companies (chit funds). NBFCs were permitted to raise external commercial borrowings with a minimum average maturity of five years from a certain category of lenders to finance import of infrastructure equipment for leasing to infrastructure projects under the approval route. All rights reserved. NBFCs are further sub-divided into equipment-leasing companies. are mostly private sector institutions that have identified their type of activity. Opportunities The growing economy-especially sectors like infrastructure. hire-purchase companies. organizational structure and portfolio mix. Policy Initiatives The RBI regulates NBFCs and 100 percent of FDI is allowed in the sector without prior approval. Annual Report 2006 © 2006 KPMG.18 India Calling Non-Banking Financial Institutions Different types of organizations make up the non-banking financial institutions sector in India. Consequently. Industry sources expect the loan books of major players to grow at 25-30 percent CAGR for the next three years. agriculture. Printed in India. along with banks. largely an offshoot of development planning in India. The residuary non-banking companies have been classified as a separate category as their business does not conform to any of the other defined classes. and investment companies on the basis of their primary business activity. Non-banking financial companies (NBFCs). subject to prescribed minimum capitalization norms for fund and nonfundbased activities. In a major development last year. and housing finance companies. which are either partially regulated by the RBI or are outside its purview. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. following the exit of many NBFCs from deposit-taking activity. and households-is demanding credit. All-India Financial Institutions. Housing finance companies satisfying certain criteria have also been permitted to raise foreign currency convertible bonds after obtaining the RBI's approval. .36 Reporting NBFCs had assets of up to USD 11. have been witnessing an increase in business. industry. There are other NBFCs. mutual benefit finance companies (nidhis and potential nidhis). were created for long-term financing and some of them have a sectoral/regional focus. Reserve Bank of India. The number of reporting NBFCs (registered and unregistered) declined from 875 at the end of March 2003 to 777 at the end of March 2004 and to 573 at the end of March 2005. a Swiss cooperative.

The Insurance Regulatory and Development Authority (IRDA) estimates that the size of the industry is around USD 4. a Swiss cooperative. with 44 deals worth USD 474 million in venture-capital investment in these sectors. unit-linked insurance plans.8 billion in FY04-05). has doubled in the last five years.38 Insurance Life Insurance: There are 16 life-insurance players in India. Regulatory changes now permit venture-capital funds to invest in securities of foreign companies subject to conditions or guidelines issued by the RBI and the SEBI from time to time. January 2006 . 38. with the first-year premium underwritten close to USD 8 billion.39 Non-life insurance tariffs are regulated by the IRDA.6 billion through 68 deals in 2004 to USD 2. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. 2006. (It was USD 3. this is set to change as the IRDA is set to move towards the de-tariff regime with the discontinuance of tariffs effective December 31. the eight private players are growing at a faster rate. in terms of premium collection.2 percent in FY04-05 to 26. numerous tieups between corporate houses. were announced in the insurance sector. Venture-capital and private-equity investments into India increased substantially from USD 1. The life-insurance business. 39 Non-Life Insurance: There are 12 non-life insurance players. Printed in India. Foreign venture-capital funds also increased from 14 to 29 in 2005-06. 2006 39. The life-insurance business grew by 52 percent in the financial year ending March 2006.3 billion through 147 deals in 2005. All rights reserved. public and private sector banks. However. eight of whom are private players. Securities Exchange Board of India.India Calling 19 Venture Capital “ If you talk about the fundamentals which give you better business opportunity. then India has a much younger population which continues to grow. .4 billion in terms of first-year premium in FY05-06. Insurance Regulatory and Development Authority © 2006 KPMG. There are no legal or regulatory differences between venture-capital and private-equity firms.37 Policy Initiative The SEBI regulates venture-capital funds in India. 37 Venture Intelligence. ” Richard Harvey. Thriving IT and ITeS segments (such as business process outsourcing or BPO) continued to be a favorite in 2005. and multinational financial services players. but considerable progress was made in the last four years. China has the disadvantage of an ageing population.39 This year.39 Although the four government-owned players dominate the non-life insurance industry with around 74 percent of the market share. they registered a growth of 52 percent and increased their market share from 20. India's growing international market share has been attributed to its remarkable domestic performance ever since liberalization paved the way for a host of new investment-type. CEO Aviva (April 2006) The venture capital industry is in its nascent stage in India. Annual Report. Opportunities The number of indigenous venture-capital funds increased from 50 in 2004-05 to 80 in 2005-06. in FY05-06.6 percent.

40 Commodity Markets The commodity market has made significant strides in the last few years. 2006. All rights reserved. MCX reported a turnover of USD 116.42 while the NCDEX reported turnover of close to USD 79 billion. a Swiss cooperative. their turnover was close to USD 200 billion. In the first phase. guar seed. Deutsche Securities Asia. At nearly 20 percent. Only 26 percent foreign investment is allowed in the insurance sector. while non-life is expected to grow by around 15 percent. Trading on multi-commodity exchanges started in 2003. to grow to closely match the equities business in five years.42 Industry brokers expect the commodities trading business. 42. The prohibition on futures trade has been lifted. August 2005 MCX (July-September 2006) newsletter NCDEX newsletters (April-June 2006) © 2006 KPMG.20 India Calling Policy Initiatives The non-life and life-insurance sectors are regulated by the GoI-appointed IRDA. 43. The balance is traded at 20-odd regional exchanges. Opportunities Commodity markets are witnessing an upsurge in trading volumes. currently 8-10 percent of the size of their equities business. 2005 Business World.42 Policy Initiatives The GoI-appointed Forwards Market Commission regulates the commodity markets in India. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. although option trading in commodities is still not allowed. urad. silver. . this is set to change as the IRDA is set to move towards the de-tariff regime with the discontinuance of tariffs effective December 31. Printed in India. For the quarter ending June 2006. life insurance is expected to grow at a faster rate than general insurance. However. November 11. Non-life insurance tariffs are regulated by the IRDA. 40. and chana.41 The turnover on all commodity exchanges is growing at a steady rate and for the quarter ending June 2006. Opportunities Industry sources expect India's insurance industry to grow at 15-20 percent CAGR over the next 3-5 years.43 The MCX had a 57 percent share in the total volume traded in national commodity exchanges for the quarter ending June 2006. Media reports suggest that a government committee is reviewing existing guidelines to allow foreign participants access to the Indian commodities and futures market in phases.8 billion. The commodities market largely trades in gold. 41. and now. over 90 percent of the volumes in commodity markets are from the Multi Commodity Exchange of India (MCX) and the National Commodity & Derivatives Exchange in India (NCDEX). they may be allowed to invest in energy. precious and base metals and at a later stage in agricultural commodities. crude oil.

a Swiss cooperative.India Calling 21 Auto and Auto Components .com/. All data relevant to the auto industry has been sourced from http://www. Since then almost all global auto majors have set up their facilities in India taking vehicle production from 2 million in 1991 to 8.9 million in 2006. ! Relationships between OEMs and component manufacturers are changing. 44.siamindia. and supportive government policies. © 2006 KPMG. the automotive industry is shaped by some major trends: ! Original Equipment Manufacturers (OEMs) are forming a variety of strategic alliances and mergers to leverage their individual strengths and generate synergies (for example: GM/Fiat/Suzuki. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. Automobile industry snapshot The size of the automobile sector was around USD 34 billion in 2006 Vehicle sales in 2005-06: 8. and warranty. . Two wheelers 79% The industry has grown at a CAGR of 14 percent per annum over the last 5 years. along with China. with the potential of playing a key role on the global scene in the future.28 billion 1000000 800000 600000 400000 3% 200000 0 2001-02 2002-03 2003-04 2004-05 2005-06 Exports % Sales 8% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Original Equipment/Automobile The Indian automotive industry started its new journey from 1991 with de-licensing and the subsequent opening up for 100 percent FDI through the automatic route.acmainfo. which facilitate free movement of goods between trading partners. Exports have registered a significant leap. touching USD 2. Printed in India. ! In the quest for cost reduction and supply-chain efficiencies. ! It provides direct and indirect employment to 13.9 million units Three Wheelers 4% Cars 13% Comercial vehicles 4% Driven by a combination of factors like stagnation in large global markets. All rights reserved.Cruise in Top Gear The Indian automotive sector has been transforming rapidly over the past few years. while African nations largely account for the import of buses and trucks. a significant amount of manufacturing and support activities is being outsourced to low-cost countries. system aggregation.3 billion).com/. India. The South-East Asian region is the prime destination for Indian two wheelers. are either already established in India or have announced plans to enter the Indian market. the industry is now poised to become a significant regional player.650 billion (USD 34 billion) with an estimated investment of INR 500 billion (USD 10. growth in domestic economy. Ford/Volvo/Mazda). CAGR : 30% Units Europe is the biggest importer of cars from India. This is enabled by greater tierization in the supplier industry.1 million people and accounts for 17 percent of overall indirect taxes.44 Globally. ! The industry has now attained a turnover of INR 1. ! Regional and global trade is being enhanced through a variety of trade agreements. India's auto industry is today a key driver of the country's economy. Most global automotive majors. with suppliers increasingly taking on roles in design. both OEMs and suppliers. has emerged as one of the most attractive automotive markets in the world that no serious player can afford to ignore. All data pertaining to the auto component industry was sourced from http://www. The Indian auto industry has benefited from these trends.

while the sales of motorcycles have increased. Second largest two-wheeler producer. sales of scooters and moped have stagnated. The growth in tractor industry is linked with the growth in agricultural output and exports to neighboring countries. better fuel efficiency. both domestic and exports sales of CVs exhibited strong growth of over 10 percent and 36 percent respectively over the last year. while growing strongly. Growth in the demand for pick-up trucks has coincided with the growth in multi-axle vehicles. ! Last year. ! ! ! ! © 2006 KPMG. it has gone up to 1. Fourth largest commercial vehicle producer.45. and better aesthetics. ! Rising per capita income and changing demographic distribution are conducive to growth. The two-wheeler segment growth is led by rapid urbanization and the resultant rise in demand from semiurban and rural areas. is extremely competitive. India is the world's ! ! ! ! Largest tractor and three-wheeler producer. This is expected to be followed by a shift to tractor-trailer combinations on account of operating economics of higher power-to-weight ratio vehicles.Segment-wise growth trends During 2005-06. a Swiss cooperative. motorcycles have replaced scooters as the preferred mode of transport with higher load bearing capacity (an essential feature for rural areas).000 units in 1995 -1996 to over 3. Over the years.000 in 2006. and easy finance options.000 units in 2004-05. increased investment in road infrastructure and availability of cheaper finance has led to a growth in multi-axle vehicles. The next growth driver for light CVs is expected to be the introduction of lighter pick-ups. growth in three wheeler sales was around 17 percent. increasing income levels. exports of two wheelers crossed half a million registering a growth rate of 40 percent.22 India Calling Key growth drivers OEMs . . where India is currently the second largest market globally. Tractor production touched 293. All rights reserved.96. Eleventh largest passenger car producer.60. with top two players accounting for more than 80 percent of the market. The CV industry is less competitive. In 2005-06. two wheeler sales crossed 7 million units for the first time. At present. In the CV segment. The industry. which means that 130 million people will get added to the working population between 2003 and 2009. registering a growth of around 14 percent. Printed in India.82. This represented a growth of 15 percent over the previous year. Also. ! Sales of passenger cars have grown at 12 percent CAGR over the last decade.9 million vehicles amounting to almost USD 34 billion.000 in 2005-06. The bulk of volume was accounted for by two wheelers. the value of market for passenger cars and commercial vehicles (CVs) is higher. the Indian automobile industry had an output of nearly 8. ! Utility vehicles production was at 1.82 million units sold in 2005-2006 (out of a total of 7 million two wheelers). Sale of three wheelers has grown from 1. ! Three wheelers have also exhibited strong growth with a CAGR of 9 percent. Trends indicate that small and medium cars would dominate the industry and a shift towards highend cars is expected at a faster rate. Last year. India has the highest proportion of population below 35 years-70 percent (potential buyers). With 5.000 units in 2005-06. ! Two wheelers sales have grown at 11 percent CAGR during the last decade. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. wider product range available to customers.

and Europe. Printed in India. Mahindra Scorpio. The auto component sector has been one of the fastest-growing segments of the auto industry. Export of sales 8. as well as the successful development of completely indigenous products such as the Tata Indica. The component industry now has the capability to manufacture the entire range of auto-components.000 10. TVS Victor.000 4. equipment. for example.2 trillion in value and is likely to increase to USD 1. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International.000 direct jobs in its sector along with indirect employment of 1. Size of Component Industry Exports% sales Export of auto components ! Investments in this sector would also grow by USD 15 billion from the current level of USD 3. clocking 16 percent in 2004-05. it could leverage this offshoring trend and the quality of its supply base to seize one of the top two positions in auto component exports from low-cost countries by 2015. The industry grew by over 28 percent between 1995 and 1998.8 million people over the next 10 years.000 Sourcing from low-cost countries is likely to increase from USD 65 billion in 2002 to USD 375 billion by 2015.8 billion.S. . a Swiss cooperative. engine parts. four Japan Institute of Plant Maintenance (JIPM) award winners and one Japan Quality Medal winner. Over the last few years the Indian auto component industry has created a robust capacity and all major global auto component manufacturers have set up units in the country. underscoring the rapid strides made by the industry in cost. © 2006 KPMG.1 billion. which are critical requirements for being a part of the global supply chain. in 2005-06. suspension and braking parts. Bajaj Pulsar. In terms of quality. quality.India Calling 23 Auto component industry snapshot The size of the auto component sector was around USD 10 billion in 2006 Auto Components The global auto component industry is estimated to be USD 1.000 6. and 15 percent in 2005-06. and engineering.000 0 FY00 Fy01 Fy02 Fy03 Fy04 Fy05 Fy06 ! This high growth in the auto component sector is expected to lead to an additional 750. etc. in tierized format. This figure is still very low compared to the volume of world trade (USD 185 billion) in auto components. body and chassis parts. As per ACMA. The auto component industry's all-round capabilities can be gauged from the high levels of indigenization achieved in the vehicle industry.000 firms in the small unorganized sector.000 2. design. Moreover. The Indian auto component industry is quite comprehensive with around 500 firms in the organized sector producing practically all automotive components. which constitute high accepted-quality level countries. and has been sustaining the pace of growth.7 trillion by 2015 as per Automotive Component Manufacturers Association (ACMA). Over 60 percent of the exports of auto components are to developed markets like the U. as certified by the fact that this industry contains nine Deming Prize winners. All rights reserved. ! 20% 15% 10% 5% 0% Increasing share of exports 12. delivery. drive. and TVS Star. over 70 percent of the exports are to global OEMs and Tier 1s. transmission parts. electricals. Tata Indigo. USD m n ! Although India's exports are still small (USD 1. there are more than 10. several auto component players in India have matched or exceeded global standards.8 billion in 2005-06). exports grew by 28 percent to USD 1.

The government's policy initiative aims at promoting integrated. enduring. phased. formulated in 2002. encourage localized R&D. phased. enduring. © 2006 KPMG. All rights reserved. Emphasis on research and development (R&D) activities conducted by companies in India. NATRIP aims at facilitating the introduction of world-class automotive safety. and self-sustained growth of the auto industry.24 India Calling Policy Initiatives The GoI has recognized the automotive sector as a key driver of the country's economy. The key features of the policy are ! Automatic approval for foreign equity investments up to 100 percent in the automotive sector. two wheelers. ! Formulation of an appropriate auto fuel policy to ensure availability of adequate amount of appropriate fuel to meet emission norms. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. Increased budgetary allocation for R&D activities. and auto components. with special emphasis on the export of small cars. boost exports and merge India's strengths in IT and electronics with automotive engineering capabilities. ! The government has also formulated the Automotive Mission Plan (AMP) 20062016. which aims at doubling the automotive sector's contribution to GDP by 2016. and boost growth. ! ! No minimum investment criteria. 2006. Some of them are as under: ! The Indian government's Auto Policy. and self-sustained growth of the Indian automotive sector. aimed at promoting integrated. has given a further boost to the automotive industry by reducing excise duty on small motor vehicles and the duty on raw material. Printed in India. and the thrust on infrastructure development. and performance standards in India and ensuring the seamless integration of the Indian automotive industry with the global one. multi-utility vehicles. ! Initiatives for developing indigenous R&D capabilities in the industry include ! ! ! 150 percent weighted deduction on R&D expenditure. National Automotive Testing and R&D Infrastructure Project (NATRIP) is an ambitious project aimed at setting up world-class automotive testing and R&D infrastructure in the country to deepen manufacturing. a Swiss cooperative. ! The Finance Bill. . improve global competitiveness. and has taken several initiatives to strengthen the sector. emission.

! Japanese carmakers Honda. It allowed the industry to modernize its technology. © 2006 KPMG. improve quality. Toyota and Mitsubishi have also indicated plans to roll out compact cars. All rights reserved. ! Hyundai may introduce another compact car from its upcoming facility in India. the Phased Manufacturing Programme (PMP) laid the foundation for the development of the auto component industry. ! Tata Motors small car project is on track and the company may also. a Swiss cooperative. Globalization of the Indian industry Having experienced growth in the domestic market and sensing opportunity for growing globally. Opportunities High growth potential in the domestic market New line-up: small car hub ! General Motors announced plans to build a new plant in India next year to make a small car. Printed in India. As a result. With support from this policy. Indian OEMs and component players are now looking to expand. the demand for automobiles is expected to sustain strong growth over the medium term. Companies like Tata Motors. while light CV demand would come from the need to cater to developing rural and interior areas. The Indian economy has been growing at over 5 percent over the past 2 decades. the component industry developed further capability to manufacture the new breed of auto-components required for new generation vehicles. .India Calling 25 Policies aimed at auto components sector ! Introduced in the Indian automotive sector in the 1980s for localization. this represents huge potential for sustained growth in the demand for passenger vehicles. Bharat Forge and Sundram Fasteners have been focusing on global expansion through mergers and acquisitions. through its collaboration with Fiat. M&M. Sourcing from low-cost countries is likely to increase from USD 65 billion in 2002 to USD 375 billion by 2015. After it came to an end in 1991. India as an export hub The rapid strides made by Indian auto component players and OEMs in the areas of manufacturing productivity and quality have made India an attractive market for outsourcing. Given the fact that penetration of cars in India is quite low (about 7 per 1000). and is expected to grow at over 7 percent over the next few years. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. the GoI introduced the memorandum of understanding system that continued to emphasize on localization of components. and imbibe good manufacturing and shop-floor practices. The development of roads and ports is expected to drive demand for heavy CVs. ! Japanese carmaker Nissan tied up with Maruti to launch a small car for the Indian market. Many global players are increasingly looking to develop India as a base for supply of components and vehicles for their global operations. This has led to increasing disposable incomes and higher consumption. roll out more compact cars in the market.

an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. a Swiss cooperative. Leveraging India's engineering and design skills The outsourcing story is not just about BPO and knowledge process outsourcing. Rapid jump in capacity and scale Indian auto component manufacturing. with efficiency comparable with petrol engines. Having established themselves in the domestic market. The probable launch of Tata's INR 1. The AMP unveiled at the . ! Diesel is about 40 percent more efficient and 30 percent cheaper than petrol.4 percent till 2009-10. The auto components industry is set to witness the next round of the outsourcing boom. All rights reserved. are translating into greater sales for diesel cars. A large part of the demand for the segment will come from two-wheelers upgrading to passenger cars. Hence. Annual Society of Indian Auto Manufacturers Association Conference. As buyers increasingly become discerning. Hyundai. mostly in semi-urban and rural areas. Printed in India. aims to make the country a hub for auto component manufacturing and design. ! The sale of diesel cars is growing at about 6 to 10 percent every year. is slowly but steadily working on expanding capacities and automation levels. General Motors.00. The share of small cars in the overall passenger car segment is likely to increase from 10 percent to 15-16 percent in 2009-10. along with the availability of better quality diesel in the market. . leading to growth in the segment. The Indian auto component industry is targeting a bigger share of the export market and is ramping up its manufacturing capabilities to meet capacity and quality requirements. new model introduction by auto manufacturers has become the trend. It is expected to get closer to the share of petrol cars in the next few years. as more diesel models will be available to customers. Volkswagen and Renault are likely to launch diesel cars in mainstream car segments (compact and mid-size) by 2009-10.26 India Calling India as a small-car hub The small car segment is likely to grow at a CAGR of 18. Also the launch of diesel models based on well-accepted technologies like Common Rail Diesel Injection (CRDi) will improve customer perception about owning a diesel car. the component industry is constantly looking at maintaining lean and efficient manufacturing systems. Greater variety in vehicles challenges the manufacturing capabilities and economies of scale of component suppliers. tapping opportunities abroad is a natural progression for auto component manufacturers. currently constrained by lack of large capacities. Share of diesel cars to rise Diesel cars race ahead in market share ! A definite increase in demand for diesel cars has upped their market share to over 30 percent from the earlier 20 percent in the last 18 months. Domestic auto component majors have started developing design solutions not just for their foreign collaborators but also for international OEMs. © 2006 KPMG. Players such as Maruti. ! Main driver: The state-of-the-art turbo-charged and CRDi engines represent a giant leap in technology.000 car will be the major growth driver in the segment. The abolition of the special 8 percent excise duty on small cars will also help manufacturers price their models lower. These noise and rattle-free technologies. whose sale is growing at 13 percent annually. The Increased thrust by OEM's will boost the share of diesel cars.

All rights reserved.0% 0. www.0% 4.45 With the twin .indiatimes.5% The IT segment accounts for a major chunk of the IT-ITeS industry in India.47 In the first half of 2006. Its share in the country's GDP almost doubled from 2. with a revenue of USD 29. Printed in India.com.2 advantage of English-speaking skilled human resources at a comparatively low cost.rediff.49 Domestic majors have acquired small and mid-size players in the U. August 10.1 billion in FY06.0 1. the size of the sector is estimated to be USD 36.S.52 45. IT consulting.htm NASSCOM Strategic Review 2006 © 2006 KPMG. IBM recently announced an investment plan of USD 6 billion. Kearney Global Services Location Index 2005.0% 3. In the A. the IT services and hardware segment registered a CAGR of 25 percent. followed by China.43 billion. 52. 49.mphasis. 2006 http://infotech.1 Time Period (yrs. and software testing. MNCs are exploring various organic and inorganic options to augment their presence in the sector.8% 4.) 3 4 5 3 SAP 1. and Wipro are also 40 30 USD Billion 20 10 16.3 billion.48 Home-grown IT majors like Tata Consultancy Services. IT Growth of Indian IT-ITeS industry 4. 51.channeltimes. . India has become the most attractive destination for outsourcing. and Europe to increase their presence and enhance their service offerings.0% 2. At present. http://www. Deal sizes were in the range of USD 40 to USD 60 million. The segment has attracted significant foreign investment. Of these.3 FY 2006E 1. India attracted private equity investments worth USD 2. 46. and Philippines.India Calling 27 Knowledge-Based Services Indian IT-ITeS .6 FY 2004 5. NASSCOM Strategic Review 2006 The Economic Times. India was named number one.0% 28.com ITeS-BPO The ITeS segment recorded a CAGR of 46 percent between FY02 and FY06. The size of the Indian ITeS-BPO market is estimated at USD 7 billion in FY06. Indian IT companies have acquired about a dozen companies aggregating USD 500 million in deal values. the segment's service offerings have expanded from traditional areas of custom application development and application management to remote infrastructure management.0 5 Source: The Economic Times.T.14 billion.tcs. Malaysia.4 FY 2005 36.0% IT Industry Share in GDP Source: NASSCOM Strategic Review 2006 Investment plans of MNC IT giants (USD bn) expanding their employee base. August 24.7 1. Infosys.pdf The Economic Times.0 1. 2006 www.com/0_media_room/releases/200510oct/tcs_UK_pensions. IT-ITeS obtained the largest share in number of deals and in value.com/pdfs/MphasiS_EDS_Acquisition. a Swiss cooperative. It had 36 deals aggregating USD 1.8 percent in FY06.51 Company IBM Microsoft Intel Cisco Systems Amount 6. Between FY02 and FY06.50 The size of outsourcing deals awarded to Indian companies is also on the rise.2% 3. 50. This year.45 Over the years.cms The Economic Times.com/quickiearticleshow/msid2178248.1 FY 2003 0 21.World's Back Office With a CAGR of 28 percent between FY02 and FY06.46 while EDS acquired Mphasis-BFL (a domestic IT company).1% 3.45 The IT sector is categorized into IT (IT services and hardware) and ITeSBPO. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. 48.9 percent in FY02 to 4. IT is one of the fastest growing sectors in India. www. June 7 2006 . 47 . Pearl Group's deal with TCS worth GBP 486 million is the single largest outsourcing contract awarded to an Indian IT company.

analysis. 2006 © 2006 KPMG. Eli Lilly GE. like income-tax. At present. India still has the single largest suitable talent pool with a 28 percent share in the availability of global talent. the country is handling the most sophisticated projects in the world. Policy Initiatives Government policies both at the central and state level encourage investments in the sector. The investment limit for outbound acquisitions has been hiked to 200 percent of the company's net worth. Unilever Source: NASSCOM Strategic Review 2006 Note: This list is illustrative and not exhaustive “Three years ago. Finance & Insurance Companies Fidelity.. GM.85 million and 1. September 5. Business Standard. ABN AMRO. 53. in line with the country's IT needs.2 million people. Tax benefits under these parks will expire in March 2009. A one-stop clearance facility is available.53 At present. . the GoI enacted the SEZ Act in 2005. service tax. Microsoft Corporation Software Technology Parks of India (STPI) and Electronic Hardware Technology Parks of India (EHTPI). In order to promote competitive and hassle-free exports. Chairman. Daimler Chrysler Astra Zenecca. the country was emerging as an IT superpower. The National Association of Software and Service Companies (NASSCOM) estimates that by 2010. ! Export units are granted exemption from various direct and indirect taxes. HP Dell. They now encompass basic work like operating call centers and data entry to high-end work like research. Till the first week of September. during my visit to India. established in SEZs. They are also working on improving education systems.28 India Calling Indian IT industry is dominated by exports (2006 estimates) The ITeS-BPO service offerings are also undergoing a transformational shift. Ford. HSBC.) Concerns have been Domestic 34% Export 66% expressed over the direct employability of the talent pool. Delloitte Consulting. Corporates outsourcing to India Vertical Banking. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. the IT and ITeS sectors in India employ approximately 1. Today. Source: NASSCOM Strategic Review 2006 and this number is on the rise. ! ! ! FDI of as much as 100 percent is permitted under the automatic route. A large number of Fortune 1000 companies have made India their outsourcing hub. Standard Chartered Bank. without the need for RBI permission. and custom duty. I am impressed with the talent we have in our India Development Centre and the quality of software being developed. All rights reserved.54 State governments encourage the establishment of SEZs in their states to generate employment opportunities. respectively. of which 85 are for the IT sector.. ” Bill Gates. Pfizer. Printed in India. (See table along side. and legal outsourcing. a Swiss cooperative. NASSCOM Strategic Review 2006 54. This act provides 15-year tax benefits to export units. Accenture .4 million. and setting up more engineering colleges. Datamonitor Technology Automotive Pharma Others IBM. the demand for IT and back office professionals will rise to 0. However. the government has cleared 150 SEZ proposals. Tesco. the central government provides tax benefits to export units under Professional Services McKinsey & Co. JP Morgan.

India Calling 29 Opportunities India’s share in global IT spend (2005) 2% The Indian IT sector is on the verge of tremendous growth. of which only USD 11. Similarly. Printed in India. a Swiss cooperative. . They have also registered increasing revenue from domestic operations and are working on tapping this market Source: NASSCOM Strategic Review 2006 55. the Indian IT sector has a long way to go and has considerable potential for expansion.4 billion in 2006. have recognized the growth potential of the domestic market. 98% The domestic market is also registering strong growth.4 billion has been addressed (FY05). All rights reserved. its size has increased from India Rest of the World USD 8. NASSCOM Strategic Review 2006 © 2006 KPMG.4 billion has been explored. NASSCOM's IT-ITeS export target for 2010 is USD 60 billion (excluding hardware). the size of the addressable market for the global BPO industry is USD 120-150 billion. Its research indicates that the addressable market size for the global offshore IT industry is USD 150-180 billion.55 Leading IT players. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International.3 billion in 2004 to USD 12. With a mere 2 percent share in the global industry. of which only USD 18. global and domestic.

V-SAT. this segment has a subscriber base of 129.0% Others 6. 502. 56. brought about considerable growth in India's telecommunication sector. The FDI limit includes all foreign investment in the Indian company and proportionate foreign equity in the Indian promoters/investing company.6 0.58 The telecommunication sector in India is governed by a tri-body regulatory system Subscribers in millions 51. global mobile personal communications services. 59. 58. including 129. 2006 India Telecommunications-Strength to Strength. a Swiss cooperative.5 telecommunication sector generated USD 19. cellular. The Hindu.Ringing in New Tones Growth in wireless subscriber base (March) 1998 . while 38 million are subscribers of the Code Division Multiple Access (CDMA).0% The telecommunication sector attracted the second highest FDI inflows in India between August 1991 and July 2006. 57 .04 million wireless subscribers and 41.8 million. Many private players entered the sector.8 2003 2004 2005 2006 comprising the Telecom Commission. July 2006 © 2006 KPMG. The Telecom Policy of 1999. public mobile radio trunked services. The wireless. In 2005-06. of which 91 million are subscribers of the Global System for Mobile Communication (GSM). the Indian 100 90 80 70 60 50 40 30 20 10 1.9 1. and other value-added telecom services. the Department of Telecommunication and the Telecom Regulatory Authority of India (TRAI). Morgan Stanley Report.5 billion in revenue.9 3. 2006 ! FDI of up to 74 percent is permitted in telecom service companies in basic. July 2006 Fact Sheet of Foreign Direct Investment. national/international long distance.59 Tata Teleservices 9.2 00 1992 2001 2000 1998 89. 2006 Progress and Status of Different Telecom Development Parameters Department of Telecommunication. June 28.8 million. Sept 2006 Idea 8.7% Bharti 21.04 million. . India is among the fastest growing telecommunication markets in the world.95 billion. Ministry of Commerce. This can be attributed to a sound regulatory framework and the measures taken to encourage competition.3 6. October 10.30 India Calling Telecommunications . India has a switching capacity of 82.6% Policy Initiatives Hutch-Essar 16. Wireless telephony.1% India is considered one of the most competitive telecommunication markets in the world. international long distance. and national long distance segments witnessed the highest growth rates.4 2002 12.5 33.000 route km of optical fiber cable transmission network and 70. accounting for 11 percent of India's total FDI inflow.57 India is the world's fourth-largest wireless market in terms of subscriber base and is among the top 10 nations in terms of network coverage.56 As of September 2006. which paved the way for liberalization and deregulation. All rights reserved. cumulative FDI inflow stood at USD 3. introduced in India in 1995.000 base stations. it had a total subscriber base of 170. At present. During this period.65 million fixed-line subscribers. grew at a CAGR of 90 percent from 2000 to 2006.0% Source: India Telecommunications-Strength to Strength.2006 With a monthly net wireless subscriber addition of over five million and a year-on-year (y-o-y) growth of 85 percent in the wireless category. October 10.6% Reliance 20. unified access. Printed in India. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. Recent policy initiatives aimed at increasing subscriber base and penetration levels and promoting foreign participation in the sector are listed below: BSNL 18. Morgan Stanley Report. Source: Macquarie report on Indian Telecom sector Indian wireless telecom market player-wise market share.

1995. and video to make rural telephony a viable proposition. including radio paging. ! Special intervention to connect rural areas and to develop a strategic plan to carry text. and voice mail. ! An undertaking that started providing telecommunication services. but before March 31. One of these is a system of unified licensing. ! FDI of up to 74 percent is permitted in Internet Service Providers (ISPs) with gateways. the GoI unveiled a plan to set up shared passive infrastructure (such as towers) for mobile services across the country. 2006 © 2006 KPMG. which provide various last-mile connectivity options for a range of distances. end-to-end-bandwidth and up to 100 percent in ISPs without gateways and infrastructure providers offering dark fiber. This is expected to reduce the cost of service offerings and thus lower tariffs. . Wi-Fi and WiMax). whether basic or cellular. domestic satellite service. ! The use of new wireless technologies (such as 3G-GSM or CDMA. Printed in India. network of trunking. In order to deregulate the telecom sector and enhance its growth. which are in the pipeline. 60. The investment is subject to the fulfillment of prescribed conditions. In July 2006. especially in rural areas. broadband network and Internet services on or after April 1. TRAI recommended several plans. radio paging. but further investment will be subject to FIPB approval. electronic mail. is eligible for a tax holiday of 100 percent of the profits for the first five years and 30 percent of the profits for the next five years. All rights reserved.India Calling 31 ! Under the automatic route. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. This is also subject to the fulfillment of prescribed conditions. a Swiss cooperative. ! Augmenting or supplementing traditional fixed-line voice telephone connectivity using the latest wireless technologies for last-mile connectivity. data. so that the gap with other countries is reduced. An Approach to the 11th Five-Year Plan. FDI of up to 49 percent is allowable. to ensure last-mile connectivity to every village from the block headquarters. which will allow telecom service providers to offer any type of service under any technology in a single circle with a single authorization. The regulator has suggested migration be mandated after five years. Planning Commission. An approach note to the 11th Five-Year Plan (2007-12) prepared by the Planning Commission recommends the following:60 ! Ensuring increased teledensity. 2005.

and a sound regulatory framework provide ample opportunities to invest in one of the most exciting and fastest growing telecommunication markets in the world. A buoyant economy. 2006 © 2006 KPMG.4 percent and 14. divestment options. India is expected to have a telecom subscriber base of 395 million. India has one of the lowest telecom penetration levels among the leading developed and emerging markets. August 29.32 India Calling Opportunities Many equipment manufacturers (handset and networking) have set up or are planning to set up a manufacturing base in India. Macquarie Report on Indian Telecom Sector.61 translating into a 35 percent penetration level. All rights reserved. favorable demographics. With wireless and telecom penetration at 10. including 45 million fixed-line subscribers and 350 million wireless subscribers. Printed in India. research and development. 61. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. Several untapped opportunities can be exploited in the areas of telecom equipment manufacturing. technical collaborations.4 percent. By 2010. a Swiss cooperative.61 respectively. and joint ventures. .

www. Vice Chairman and Head of International Operations. Although the top 10 retailers account for just 2 percent of the retail market.63 rising consumerism and low penetration levels have helped the industry move towards a development phase that supports modern retail formats like supermarkets. it has finally begun to move towards modernization and consolidation. January 25. 63. All rights reserved. However.bbc. Printed in India. and malls. Indian organised retail enters development phase Changing supply dynamics Funds + Quality real estate + Goverment regulations “India is becoming a consumer economy. the Indian retail market is booming.India Calling 33 Consumer Goods and Retail . Wal-Mart India is here Upbeat consumerism driving demand Affordability + willingness to spend ! Core models are in place . Images Malls in India.uk. 2006. At least that seems to be the popular opinion as far as India's retail market. With a size of 7 billion. J P Morgan Report 2006. is concerned.62 The Indian consumer and retail sector has traditionally been characterized by unorganized retailing and fragmented convenience (kirana) stores. ” Mike Duke. .co. especially organized retail. Currently valued at USD 250 billion and expected to grow at 6 percent per annum.5 percent of this market and is estimated to grow at 25-30 percent over the next two to three years. a Swiss cooperative. hypermarkets. with the advent of organized retailing. 2005 © 2006 KPMG.The Demographic Dividend Indian Retail Market It's the proverbial idea whose time has come and which no power on earth might be able to stop. organized retail forms about 3 .Retailers adding newer formats and categories ! Retailers gearing up pace of scale up ! Players extending beyond large cities ! Newer players marking an entry Infancy Development Maturity Decline Source: SSKI Research 62. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. September 15.

products requiring customized services after sales. the GoI. 2005. Any additions to 'singlebrand' product categories would need fresh GoI approval. believing instead that investment in the sector must be conducted in a phased manner to protect the interests of the organized and unorganized segments. Policy Initiatives When the GoI allowed 100 percent FDI in the real estate sector in 2005. the FDI ceiling in retail would be raised. The government has still not allowed FDI in multi-brand retail. the GoI FDI upto 51 per cent permitted in single . big multinational retailers interested in entering the lucrative Indian retail market. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. Opportunities The Indian retail industry (both food and non-food) is the second largest untapped market in the world. and private labels that are branded during manufacture and sold under the same brand internationally. Kearney) © 2006 KPMG. has reduced the cost advantage that unorganized retailers enjoy over organized ones. Foreign players have to first take a local partner and when local players are on par with their international counterparts. .64 64. a Swiss cooperative. Varying sales tax rates across different states and the occurrence of octroi at multiple points compels players to source raw material from different places to avoid local levies. organized retail chains (Pantaloons and Shopper's Stop) have witnessed remarkable growth and are expanding aggressively. Emerging Markets Priorities for Global Retailers-The 2006 Global Retail Development Index (A. All rights reserved.T. can set up a wholesale business in a joint venture with an Indian company and sell strictly to other retailers. but regulations are likely to be eased. However. Alternatively. The A. announced that it would allow foreign companies to own up to 51 percent in single-brand retail companies in India. However. Printed in India. However. it resulted in expansion by way of increased mall space and shopping centers. the industry is still nascent and has a long way to go before it can enable efficient delivery patterns and add concrete value to the country's GDP .34 India Calling Some domestic. in early 2006.brand retail companies in India.T. has shown some reluctance in allowing FDI in other forms of retail. This regulation only covers medical and diagnostic equipment. the implementation of Value-Added Tax (VAT) from April 1. The government hopes that this would prevent outsourcing through third parties and encourage MNCs to set up manufacturing bases in India. This is believed to be a good start for global retail investors though it would benefit only luxury brands. In line with this rationale. Kearney 2006 Global Retail Development Index has rated India 'the most compelling opportunity' and 'the most attractive developing market for global retailers'.

home furnishings. and baked goods).5 percent growth in 2006. growing urbanization and changing lifestyles have fueled growth in this segment. Glaxo SmithKline Consumer Healthcare. enacted against adulterated food has been applied to domestic and imported food commodities (and includes food color. FMCG Industry © 2006 KPMG. Colgate Palmolive. It has now expanded to jewelry. 1954. key investment opportunities within Indian retail are food and grocery. 2005 IBEF Report. packaging. Printed in India. All rights reserved. and watches. Till recently. organized retail was limited to garments. alcoholic beverages. (Only 24 percent foreign equity is permitted in small-scale industries.) The Prevention of Food Adulteration Act. March. except in the case of malted food. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. and regulation of sales). dairy products. Liberalization. 68. 2006 IBEF Report. soaps. staples. toiletries). preservatives. . 66. Hypermarkets are the most favorable format. 2006. and jewelry. footwear. labeling. and small-scale industries. cosmetics. hair care. young working population with an average age of 24. home solutions. 65.08. Going forward. Organized retail could then emerge as the major growth driver in the Indian retail scenario. pesticide residues. chocolates. which grew by 62 percent to USD 581 during the six years ended March 31. food and grocery. The industry is poised for 8. and branded and packaged food and beverages (soft drinks. An added advantage is that Indian consumers are willing to spend more on consumer products due to a rise in per-capita income. The FMCG industry is dominated by global players present in India through subsidiaries such as Hindustan Lever. cereals.1 billion.65 a large. a Swiss cooperative. Indian Fast-Moving Consumer Goods The Fast-Moving Consumer Goods (FMCG) sector is an important contributor to the country's GDP and has a market size in excess of USD 13.65 With increased pressure from the global and domestic community. 67 . while the most lucrative segments include value and rural retailing.India Calling 35 India supports the world's second largest population (over one billion). cosmetics.67 Policy Initiatives68 Automatic investment approval and 100 percent foreign equity for non-resident Indians and foreign multinationals is permitted in the food-processing sector. household care (fabric wash and household cleaners). a huge density of nuclear urban families and an increasing population of working women. The Indian FMCG industry comprises three main segments: personal care (oral care. the GoI is expected to allow greater FDI in retail. a fast-growing middle class (216 million). etc. FMCG Industry India Infoline Consumer Insight Newsletter. entertainment. December 23. Bloomberg India Retail Report.66 It has a wellestablished and efficient supply chain and generates employment for three million people in downstream activities. gifts and books.

69 a rapidly growing services sector and greater industrial activity are stimulants to growth in this industry and the FMCG sector offers a sizeable opportunity going forward. immediate effect of VAT has been the simplification of the tax structure and a probable drop in raw material prices over the long term. the Himachal Pradesh government offers sales tax and power concessions.5per cent Decline in import duty on packaging material from 15 to 5 per cent Decline in import duty from 20 to 12.) A five-year tax holiday for new food-processing units (in fruit and vegetable processing) has been extended in the 2005 Union Budget. FMCG Industry © 2006 KPMG. 69. March 13. An increase in organized retailing and a rise in the number of FMCG players have created efficient distribution systems and a better consumer experience. All rights reserved. and other incentives for setting up a plant in its tax-free zones. . The implementation of VAT has not only proved beneficial for retail growth but also for FMCG growth. A direct. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. The 2005-2006 regulatory changes that have acted as growth drivers in the FMCG sector. IBEF Report. capital subsidies. a Swiss cooperative. Uttaranchal. this offers a great opportunity for high return on investments. 2006 Opportunities Rising disposable incomes and a growing middle class are expected to be the key growth drivers for FMCG demand.5 per cent Exempt from the 16 per cent excise duty Excise duty reduced from 16 to 8 per cent Import duty down to 5 per cent from 15 per cent Fringe Benefit Tax removed Source: Motilal Oswal Report. Heavy advertisement and promotion by FMCG players has led to increased consumption of branded goods. Increased consumption and urbanization levels (33 percent). Printed in India. and Jammu & Kashmir have provided incentives for companies to set up manufacturing facilities in their states. Costs Cost of Raw Materials for Detergents : LAB & Soda Ash Packaging Costs Cost of Raw Materials for Soap :Non edible grade palm oil Cost of producing Ice Cream Cost of Packaged Foods Cost of importing Packaging Machines Cost of celebrity endorsements and brand ambassadors Increase/ Decrease Details Decline in duty on LAB & Soda Ash from 15per cent to 12.36 India Calling States like Himachal Pradesh. (For example.

3 million and USD 37 million between August 1991 . food-processing attracts the highest FDI. USD 90.70 Within the FMCG sector. 70.3 percent of total sectoral investment. a Swiss cooperative. . and toilet preparations. and vegetable oils and vanaspati-attracted FDI of USD 1.5 and July 2006. March 2006 A CII .KPMG Report © 2006 KPMG.205 million. soaps. Motilal Oswal. The three high growth sub sectors-food processing. while the vegetable oils and vanaspati sector accounts for the highest domestic investment. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. Printed in India. All rights reserved. HLL Report.India Calling 37 The FMCG sector accounts for around 3 percent of the total FDI inflow and roughly 7 . cosmetics.

Virgin Radio. whichever is higher. the 300 million strong Indian middle class allocates a higher percentage of its monthly expenditure on entertainment.38 India Calling Entertainment and Media . Operators have to now pay 4 percent of the revenues or 10 percent of the Reserved OTEF (25 percent of the highest bid in the city). Radio th © 2006 KPMG.71 This sector comprises television. Astro Broadcast. which is roughly 50 percent of the total in the country. In revenue terms. Existing players were also given the option to migrate to revenue sharing on payment of OTEF equivalent to the average of successful bidders. The Indian print media segment comprises newspaper. in mn 68 204 112 68 61 119 Source: National Readership Survey. foreign investments and allowing private players are expected to drive growth. This sector has consistently outperformed GDP growth year after year and is expected to grow at a CAGR of 19 percent during the 11th Plan period (2007-12). music. and rising income levels. increasing advertising spends. 2006 India Media: Morgan Stanley Research. 2006 An Approach to the 11th Five-Year Plan.72 Its growth can be attributed to new delivery platforms. 72. Compared to other nations. films. magazine. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. All rights reserved. increased content variety. October 2006. live entertainment and advertising. Printed in India. favorable regulatory initiatives. Radio is estimated to be a USD 70 million industry. a significant growth driver in the newspaper segment has been the increase in foreign ownership holdings from zero to 26 percent. By end-2007 43 players-large Indian as well as global media . With Indian radio moving to a revenue sharing model.Reach across segments Media Magazines Print (Dallies) Television Homes with C&S Access C&S penetration (%) Radio Figs. Besides. There are about 100 million TV households in India. 2006 The government invited bids for 338 stations across 91 cities. etc. and book publishing. Recently. as recent shifts in demographics.74 Media . operators were asked to make 50 percent of the bid OTEF amount as upfront payment. there is an almost unseemly rush to set up stations. to ensure that only serious players participate. 2006 SSKI Research . income patterns and lifestyle coupled with a buoyant economy point towards a promising outlook. Planning Commission. Planning Commission. players (BBC. . 73.) will set up 266 stations in 87 cities. An Approach to the 11 Five-Year Plan. radio. Reforms have finally been initiated in the Indian radio industry with the Information and Broadcasting Ministry moving from a fixed license regime to a revenue-sharing arrangement. Policy initiatives such as a revenue-share regime.Animated by Change Overview The Indian media industry is on the cusp of growth.73 Terrestrial and cable and satellite (C&S) are the prominent delivery platforms for the medium. 71. 74. technological breakthroughs. a Swiss cooperative. print media. with operators required to pay a one time entry fee (OTEF). television is the second largest segment (after print) in the Indian entertainment industry. as annual license fee. April 13.

000 mobile games are being downloaded in India each year. The sector has been dormant for quite some time.75 The gaming industry is registering significant growth. the Anil Ambanipromoted Reliance Entertainment is likely to invest USD 100 million over a three-year period to launch gaming portals and cafes across India. According to the exchange4media reports newsletter dated August 23. have been bullish about the domestic out-of-home advertising market. estimated at USD 193. the business is still at a nascent stage. In 2005. including broadcasters and content providers. Cygnus Reports. . through its subsidiary Videsh Sanchar Nigam Limited (VSNL). etc. Original content has begun to emerge and positive developments are changing the outlook for the industry. 2006 Pitch.. according to industry sources. The Reliance Anil Dhirubhai Ambani Group has also entered the filmed entertainment and radio segments.3 million. a Swiss cooperative. Graphiti Multimedia's J Bole Toh Jadoo and Green Gold Animation's Vikram and Betal.8 a rapidly growing media. The Internet is .78 Attracting Foreign and Domestic Players The industry is attracting new players across all segments. is swiftly becoming a mainstream entertainment industry. radio is one of the fastest growing sub-segments in the entertainment and media sector. June 2006 © 2006 KPMG. 78. clipping over 57 percent. and support for their direct-to-home customers. Although India's potential in animation is universally acknowledged.00.267 million or 47 percent of the total ad pie. Tata Group.93 billion by 2009. Examples of original Indian content include Hanuman. service. According to the Pitch report. followed by films at around 20 percent (2005). excluding mobile gaming. Portland. and clocks a quarterly growth rate of 22-30 percent. Times Group. Kinetic. The USD 0. December 2005 Pitch.7 million a month.77 Its low-cost advantage and English-speaking talent pool seem to be working to India's advantage. 76. Jagran Group and international outdoor specialists such as JC Decaux.26 billion industry is estimated to touch USD 0. 2006.9 percent.76 In monetary terms. April.India Calling 39 Segmental Analysis At around 25 percent. 77 . an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. mobile or through consoles. Posterscope. A strong revival in the FMCG industry has helped television post 15 percent growth in 2005. tied up with the Parisbased Thomson Group to identify opportunities in managing and delivering content for third parties. Print continues to maintain a high growth rate of 14. this amounts to around USD 0. Gaming. Thomson Group also recently announced a partnership with Tata Sky Limited for manufacturing set-top boxes and providing sales. Clear Channel. June 2006 Pitch. Over 6. whether online. All rights reserved. cornering USD 1. Media powerhouses like Star Group. 75. up from 6 percent in 2004. Printed in India. the domestic gaming market is estimated at USD 60 million.

under the service tax net. The radio agreement entitles BBC to cover matches involving all major international teams visiting India. (ii) INR 77/month/sub for the basic service comprising a minimum of 30 free-to-air (FTA) channels. to clarify and expand the scope of the bill to minimize doubts and disputes/litigation. Brought sponsorship service.82 79. and the investment in UTV will significantly advance our presence in India and allow us to develop a strategic relationship with one of the country's leading integrated media companies” Andy Bird. TRAI issued a tariff order for the conditional access system (CAS). HT Media. ! Kept the print media out of the service tax net.indiantelevision. 2006 http://www. TRAI issued an amendment to the Interconnection Regulation of December 10. prescribing two key provisions: i) a maximum retail price of INR 5/month/sub/pay channel mandated to be provided on a la carte basis. Independent News & Media made a strategic equity investment in Dainik Jagran. All rights reserved. Printed in India. August 22. Henderson Global and Financial Times have invested in English dailies Hindustan Times and Business Standard. for all broadcasting and cable services in India. which will offer drama and comedy. Walt Disney International In the broadcasting space.40 India Calling The sector has also seen increased foreign investment inflows. 81. Asian Pulse. 2006 © 2006 KPMG.80 BBC has won exclusive radio rights to all international tour matches in India for four years. has entered into a content agreement with The Wall Street Journal. The Interconnection Regulation covers arrangements among service providers for interconnection and revenue sharing. 2006. a Swiss cooperative. including Australia. excluding sponsorship for sports events. the country's leading print media company. . ! Levied an excise duty of 16 percent on set-top boxes and abolished the 15 percent customs duty. Sri Lanka. respectively. August 28.81 Policy Initiatives The Union Budget 2006-07 ! ! Increased service tax from 10 percent to 12 percent. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. UTV has joined hands with leading Hollywood studios and invested USD 37 million in a deal described as the biggest co-production deal from South Asia. 2004. BBC Worldwide is planning to launch two channels in India shortly-a channel for preschoolers called CBeebies and BBC Entertainment. The acquisition of Hungama TV. effective from December 31. 2006 The Telecom Regulatory Authority of India Notification. Even vernacular papers attracted foreign investment. Pakistan.com/headlines/y2k6/sep/sep67 . 82. especially in print media. President. 80.htm Asian Age. and South Africa. a leading Hindi daily. in CAS areas. September.79 “ India is a long-term strategic priority for the Walt Disney Company. most channels beaming into India have established foreign investment subsidiaries for content development and airtime sales.

FDI in various segments Advertising Films FDI is permitted up to 100 per cent through the automatic route.. 1994. Has only resident Indians as directors on the board.India Calling 41 Certain specified services in this sector attract service tax. portfolio investments by FIIs (within limits prescribed by RBI) and borrowings. All rights reserved. distribution. production. Printed in India. exhibition. ? FM radio Total foreign investment including FDI by OCB/NRI/PIO. a Swiss cooperative. and All key executive officers of the applicant entity are resident Indians. is permitted to the extent of not more than 20 per cent of the paid-up equity in the entity holding a permission for a radio channel subject to the following conditions: ? One Indian individual or company owns more than 50 per cent of the paid-up equity. Cable networks FDI limit of 49 per cent inclusive of both FDI and portfolio investment. such as newspapers. and ? Not undertaking any broadcasting from Indian soil without government approval. Print FDI up to 100 per cent is permitted in publishing/printing scientific and technical magazines. subject to certain conditions: ? ? The largest shareholder must hold at least 51 per cent equity. is permitted up to 100 per cent for all companies under the automatic route. subject to: ? All future laws on broadcasting and no claim of privilege or protection by virtue of approval accorded. FDI has been allowed up to 26 per cent. Companies with a minimum 51 per cent paid-up share capital held by Indian citizens are eligible for providing cable TV services under the Cable Television Network Rules. FDI in all film-related activities such as film financing. Direct-to-home Maximum 49 per cent foreign equity allowed including FDI/NRI/FII. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. In the news and current affairs category. Within the foreign equity. if these carry conversion options. periodicals and journals. At present. excluding the equity held by banks and other lending institutions. Three-fourth of the directors and all executive and editorial staff must be resident Indians. program production services for films do not attract service tax. marketing etc. etc. ? ? ? The majority shareholder exercises management control over the applicant. FDI component should not exceed 20 per cent. . ? TV software production 100 per cent FDI permitted. Source: Ministry of broadcasting © 2006 KPMG.

Growing urbanization and consumerism should bolster advertising spend in India. fuelled by income growth and the availability of quality entertainment options. The 'convergence' of all forms of media to a common digital form. The industry is now entering a second phase of growth. which will be led on the one hand by technology. All rights reserved. Ad spend in India is about 0. licensed digital distribution of music. A progressive regulatory environment. a Swiss cooperative. online film rental subscriptions. Consolidation will be the key theme for the Indian media and entertainment industry. These include online and wireless video games. music downloaded to mobile phones. This reflects significant potential for advertising growth in the general and television advertising market in India Convergence to play a crucial role The GoI has begun to understand the long-term potential of this sector and is according it the status it deserves. especially in distribution. A digital revolution. along with technological breakthroughs. New revenue streams are growing rapidly. by an enabling tax and regulatory infrastructure. . ! ! ! ! Viable international demand. provides scope for even higher growth. © 2006 KPMG. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. We can thus expect continued high growth in this industry. The second phase of growth in the entertainment sector will be driven by ! Explosive growth in domestic demand.48 percent of GDP versus the global average of one percent. and electronic books. National players are expected to increase market share in regional markets through organic or inorganic routes. Printed in India.42 India Calling Opportunities India is probably one of the least tapped entertainment markets in the world. and on the other. Rising corporate investments in the sector.

2006 84. respectively. India has coal reserves of around 200 billion tonnes and lignite reserves of 24 billion tonnes. Ministry of Petroleum and Natural Gas website 85. Coal-Bed Methane and Underground Coal Gasification Coal-Bed Methane (CBM) has huge potential in India and is taken up as part of CBM-III and NELP-VI initiatives. processing.189 billion barrels is a meager 0. with a reserve potential of over 800 million cubic meters of CBM have been awarded so far. it is also strategically located. etc. and other oilfield services. technology.8 billion formed one third of India's total import bill in 2005-06. Compression of CBM and its marketing as compressed natural gas could be a substitute to conventional natural gas.5 percent. etc. The sixth round of NELP launched in 2006.83 . while its consumption is 3. All rights reserved. India has significantly lower cash operating costs. „ Seismic acquisition. a Swiss cooperative. Reliance Annual Report. Major oil and petrochemical companies can also partner with National Oil Companies (NOCs) in their greenfield and expansion projects.. India's share in the global oil reserves of 1.137 billion cubic feet. Foreign companies like Cairns Energy. It has also reduced the duty on petroleum products from 10 percent to 7 percent. India Hydrocarbon Vision2025 © 2006 KPMG. en route to Middle East crude. Owing to the growing demand-supply gap. Over 16 blocks. and Indian Oil Corporation and private players like Reliance and Essar. resulting in the addition of 700 million metric tonnes of hydrocarbons. Domestic crude oil and gas production in India was at 32.2 million metric tonnes and 1. and interpretation activities undertaken by DGH to promote exploration acreages will generate additional oilfield services requirement. „ Acreages awarded under open acreage policy will generate additional work requirement. Gas Authority of India. free marketing rights in the domestic market. Opportunities can be exploited through capacity additions and by forming consortia with private and national oil companies to set up new refineries. offered 55 blocks that received 165 bids.5 New discoveries would trigger an additional requirement of drilling services. Oil imports of USD 43. also have a presence in the subcontinent.India Calling 43 Emerging Sectors Oil and Gas .85 Companies are also exploring the feasibility of generating natural gas through underground coal gasification. NELP . In terms of the East Asian and Pacific markets.84 Downstream Opportunities Destination India as a Refining Hub Cost competitiveness and a favorable location could prove advantageous in developing India as an export-refining hub. .2 percent of the global total each year. Printed in India. the GoI has opened up the exploration and production sector to private players. provides significant benefits to private players in the form of 100 percent FDI. 3 Upstream Opportunities The GoI has conducted five rounds under the New Exploration Licensing Policy (NELP) since 2000. 83. a sevenyear tax holiday. British Gas. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International.Exploring Opportunities Opportunities that will follow: „ Overview The oil and gas industry in India is dominated by state-owned enterprises like Oil and Natural Gas Corporation.

00 9. Hazira Dabhol LNG (Commissioning) Mangalore LNG Refinery and retail expansion Downstream projects by PSUs Downstream projects Private Sectors Upstream RIL KG Basin (Development) Upstream Exploration (Private) Total 2. forecourt automation. etc. © 2006 KPMG. logistics. Domestic tax laws provide for deduction of exploration and drilling expenses-both capital and revenue-upon commercial production. KPMG. Natural gas-related projects and additional gas availability are expected to attract private and foreign companies to support the development of infrastructural facilities such as LNG terminals. The tax holiday attaches to an undertaking as opposed to the legal entity. Printed in India.50 4. if the deductibility of such expenses is specified in the PSA.44 India Calling Planned major investments by 2008 Petro Marketing and Retailing The demand for transportation fuels is growing at over 4 percent per annum and is creating opportunities for existing players and potential investors. All rights reserved. (Specified goods could include goods for setting up a crude petroleum refinery. B) Tax holiday for production of mineral oil Domestic tax laws also provide a tax holiday for 100 percent of the profits from the production of mineral oil for seven years. Indirect Tax Incentives Import of specified goods are either exempted from customs duty or attract a concessional rate of duty. 87 Indian Energy Outlook. .56 4. 2006 .9 percent. who can set up modern retail outlets that include forecourt retailing.20 1.00 29. installation of compressor stations. parts and raw material for manufacture of goods to be supplied in connection with offshore oil exploration. IBEF January 2006 . It also provides for a deduction of unprofitable or abortive exploration expenses. a Swiss cooperative. as compared to the world average of around 24 percent. etc.12 Source: Ministry of Petroleum and Natural Gas 1.87 Figures in USD billion Gas pipelines GTICL (RIL) pipelines GAIL pipelines LNG Petronet LNG.20 0. support services. Kochi Shell LNG.) 86.78 4.35 0. With over 10.44 0. acquiring the latest equipment. the laying of pipelines. construction. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International.000 retail outlets expected to be set up by oil companies.20 0. etc.86 Increasing Significance of Natural Gas The share of natural gas in India's energy basket is only around 8. Dahej (Expansion) Petronet LNG . there are significant opportunities for private and foreign companies to partner/assist in the expansion of the retail network. The PSA provides an option to claim exploration and drilling expenses accumulated till the date of commercial production either in the year of commercial production or over a period of 10 years at the option of the taxpayer.89 Direct Tax Incentives for the Exploration and Production Sector A) Deduction for Exploration and Drilling Expenses The successful bidder of a designated block enters into a Production-Sharing Agreement (PSA) with the President of India acting through the Ministry of Petroleum and Natural Gas.

89 Coal accounts for 80 percent of the mining activities in India. unlike the global industry. and Sponge Iron India Ltd. 89. ! An FDI of 74 percent is allowed for the exploration or mining of coal or lignite for captive consumption. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. .5 percent over the last four years (FY02-FY06) and touched 402 million tonnes in 2005-06. India is ranked third in coal and lignite production. Www. All rights reserved. 2006 88. a Swiss cooperative. Morgan Stanley. June 15. India's 2000 2004 Production 2005 2006(E) Capacity Apparent consump Source: Morgan Stanley Research estimates. metallurgy and processing. For exploration and mining of gold and silver and minerals other than diamonds and precious stones. Major public sector units in the sector include the Steel Authority of India Limited. Competing private sector companies are Tata Steel. ISPAT Industries. tenth in aluminum and eleventh in crude steel. 100 percent FDI is allowed in the setting up of coal-processing plants subject to the condition that the company will not mine coal or sell washed coal or sized coal from its coal-processing plants in the open market. under the automatic route. 2006 © 2006 KPMG.India Calling 45 Steel and Mining . Coal production in India recorded a CAGR of 4. 52 non-metallic. Globally. 4 fuel. The Way Ahead. and JSW Steel Ltd. whereas steel production notched a faster growth of about 6 percent in the same period. is allowed for the exploration and mining of diamonds and precious stones. FDI of up to 100 percent is allowed under the automatic route. The sector is fairly consolidated. more than 50 percent of the Indian steel market is controlled by the top five producers as compared to 27 percent globally.in Cygnus Research. which include 11 metallic. which has an annual production capacity of over 40 million tonnes. sixth in bauxite and manganese ore.91 Production Dispatches Source: CMIE ! Steel production and apparent consumption: 2000-06 (E) 450 200 25 Capacity and Production Million tonnes 150 100 50 0 34 39 26 34 43 36 47 31 33 36 40 30 20 39 10 0 Cosumption Million tonnes Steel Sector The Indian steel sector.9 billion. Essar Steel. February 14. 91. supplying it instead to those parties who provide raw coal to coal-processing plants for washing or sizing. ! Private Indian companies setting up or operating power projects as well as coal or lignite mines for captive consumption are permitted an FDI of up to 100 percent.92 Steel consumption in India recorded a CAGR of 4.Braced for Action Coal production and dispatches 2002-06 450 400 350 300 250 Million Tonnes 200 150 100 50 2002-03 2003-04 2004-05 2005-06 0 337 361 377 402 333 351 370 390 Mining and Metals According to the Ministry of Mines.90 Policy Initiatives There are various norms for FDI in the mining and metals sectors: An FDI of 74 percent.mines. 90. February 2006 CMIE Eco Review Foreign Direct Investment Policy. is ranked eighth among the world's crude steel producers. Printed in India. ! Similarly.nic. and 22 minor minerals. India produces 89 minerals.88 Overall investment in the metal and mining sectors (greenfield and brownfield projects) is estimated to be around USD 69. 92. Rashtriya Ispat Nigam Limited.4 percent over the last five years (FY01-FY05). April 2006 India Steel: Consolidation.

2006 Hindu Business Line. brownfield. de-bottlenecking F2005 Tata Steel SAIL Ispat Essar Posco Mitsui Vedanta Murugappa Mittal Jamshedpur F2006 F2007 F2008 F2009 Jamshedpur F2010 F2011 F2012 Kalinganagar. low-cost labor.86 million in 2005 and a majority stake in Millennium Steel. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. Orissa Chattisgarh 3 mtpa ------------------------------De-bottlenecking of plants-----------------------------Dolvi Hazira Orissa Orissa Orissa Orissa Jharkhand Source: Morgan Stanley estimates. October 18. October 18. 94. 2006 Orissa Steel producers' ranking (October 2006) Company Mittal + Arcelor Nippon Steel Posco JFE Steel Tata + Corus Group Shanghai Baosteel US Steel Nucor Riva Country Luxembourg Japan South Korea Japan India China USA USA Itlay Steel Output (mt) 110 32 31 30 24 24 20 18 18 Similarly. June 15. Indian companies like Tata Steel are evaluating various opportunities overseas. MNCs like Mittal Steel (UK) and Posco (Korea) have planned huge investments in the country. 2006 Zephyr database Daily News and Analysis. UK's leading steel-making company for a price of USD 8 billion. December 26. 93.97 This will prove to be beneficial to steel companies like Mittal Steel (UK). Morgan Stanley. Tata Steel (India). Posco (Korea). making it competitive in the export market. October 21. . All rights reserved. June 15. 97 .greenfield. The Indian Steel Ministry is working towards granting captive licenses for iron ore mining for steelmaking through the new National Mining Policy. Tata Steel made an offer to acquire Corus. 96.95 Tata's deal with Corus group will put the company in the list of top global steel makers. Tata Steel bought Singapore's NatSteel Asia Pte Ltd for USD 296. making it one of largest overseas offers by an Indian company. 2006 Financial Times. Similarly. a Thai company for USD 79.96 Policy Initiatives The growth of the private sector in the Indian steel industry is attributed largely to the liberalization of the industrial policy in India.74 million in early 2006. the growth in the automobile and auto ancillary industries has recently emerged as a strong demand driver for steel in India.93 Its iron ore reserve makes India a prime destination for fresh steel-making and capacity expansion. 2006 Opportunities Raw material availability. Nature of steel projects coming up in India . Source: DNA . a Swiss cooperative.46 India Calling low-cost steel production capacity and the availability of natural resources has induced global steel manufacturers to set up plants in India. In October 2006. 95.94 Prior to this.Daily News and Analysis. 2005 © 2006 KPMG. and a strong raw material linkage make India a favorable destination for steel manufacturing. The government's infrastructure spending in power projects will prove to be a strong growth driver for the industry. and others who plan to invest in capacity expansion. Printed in India. All That Glitters is Steel.

000 Roadways-Highways and Beyond! Indian roads handle 70 percent of the total freight and 85 percent of the total passenger traffic in the country. January 10. January. driven by government initiatives and private participation.India Calling 47 Transportation .231 Source: NHAI Freight index 170 160 150 140 130 120 110 Jul-04 Aug-04 Sep-04 Oct-04 Nov-04 Dec-04 Jan-05 Feb-05 Mar-05 Apr-05 May-05 Jun-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Opportunities Major policy initiatives have been taken to attract foreign and domestic private investments. it needs India. The importance of roads in sustaining growth is now well-appreciated and the GoI is focusing on the expansion and modernization of roads. 2006 99. It has also rationalized the tax structure.846 km Source: Citigroup Report.888 66. air and water transport. All rights reserved.300 km 380 km 4. privatizing ports. “ Fedex's message to Europe: Invest in India June 2006 Infrastructure investments have picked up over the past two years. . water supply and irrigation) in excess of USD 320 billion during the 11th plan (2007-2012). improving rail network by introducing services to new locations. a Swiss cooperative.846 km 7 . Total 33. For capacity expansion of railways: Almost 40 percent is expected to come from the private sector through PPPs To develop and modernize airport infrastructure Ports: Plans to develop 76 new berths by 2012.KPMG Report 98.67 . The Planning Commission has planned an infrastructure investment outlay (defined broadly to include road.666 8. 2006 A CII .111 Infrastructure development For six-laning of the Golden Quadrilateral Modernization and upgrading of highways in the country.50. Projects for 10. introduced tonnage tax. 2006 Road network in India Road network National highways State highways Major district roads District & others Length km 65. It can no longer maintain trade with India at just 1. streamlining customs and excise procedures.Covering the Distance “If Europe wants to remain an economic force in tomorrow's world. Kotak Securities Logistics Report.569 1. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. rail. and moved to a uniform VAT scenario.888 48. 2006 © 2006 KPMG. Planned investment outlay Plan outlay (USD mn) 8. of which 53 are to be undertaken through PPPs.899 4. Source: Merrill Lynch Research.31. telecommunications. Domestic sales of commercial vehicles highlight the rapid increase in the transportation of goods and services98.372 km roads under construction)99: 27% yoy Golden Quadrilateral NSEW Corridor Port Connectivity Other projects 5.000 kms are on offer with an estimated investment of USD 20 billion. and restructuring and modernizing the Mumbai and Delhi airports to improve trade.7 percent of its total. Printed in India. The GoI is investing in highway projects.15. June.763 26. electric power. Private participation is being encouraged in the following NHDP projects (18.888 11. Report on Infrastructure by Merrill Lynch.

and improvement in the safety and reliability of services. increased frequencies. a Swiss cooperative. rationalization of freight structures. A CII . With low-cost airlines directly targeting upper class railway passengers.5 billion per annum) to enhance capacity.221 kms and carries an average 1. build supporting infrastructure. The establishment of logistic parks and terminals. and create a new freight corridor. Significant progress has been achieved in the last two years of the 10th Plan due to an improvement in productivity. 2006 101. however. The railways also plan to shift to PPPs for building and operating select rail infrastructure. the reduction in first-class AC fares by 18 percent in the last Railway Budget will help the railways increase premium traffic.111 million to increase the capacity of coaches and diesel and electric locomotives to meet the 11th Five-Year Plan target. The Indian Railways has allowed private and public sector players to undertake the transport of containerized cargo. Passenger Earnings Freight Earnings Source: Cygnus Research.Chugging Along Freight earnings Freight earnings growing Faster than Passenger earnings The Indian rail network stretches across 63. An Approach to the 11 Five-Year Plan. Printed in India.101 The opening up of container movement to public and private entities is a major initiative that is not only customer friendly but will help the railways regain market share lost to other modes of transport. 2006 Policy Initiatives The 10th Plan emphasized capacity expansion through modernization and technological upgradation of the railway system. arresting the shift to low-cost airlines. and route 600000 Earnings (Rs. This will allow it to undertake capacity augmentation on a much larger scale than what public finances alone would permit. The Indian Railways will step up its investment multi-fold from the current USD 2. and increased use of ITeS would yield similar benefits. According to an Assocham Eco Pulse study. It anticipates further efficiency gains and plans to top it with aggressive investments in FY07-12 (USD 12.5 billion per annum to consolidate its improving financial health. passenger profile management system. 2006-07 © 2006 KPMG. This has enabled capacity augmentation.58 metric tonnes of freight and 14 million passengers each day. Mn) 500000 400000 300000 200000 100000 2001-02 2002-03 2004-05 2003-04 2005-06 0 extensions. rationalization of tariff. It also hopes to reduce its unit costs by another 50 percent in the next three years. 100The pace of railway modernization is likely to be accelerated in the 11th Plan. High-end passenger traffic on the railways grew by about 17 percent in FY06 as against continuous declines in the previous years. acceleration of speed.KPMG Report 100. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. improvement in quality of service. The Railway Ministry is looking for private investments to the tune of USD 1. May. bottlenecks persist. Opportunities A host of policy and tariff measures have helped the railways increase freight volume to 10 percent in FY06 (up from the historical average of 2-3 percent). Planning Commission.48 India Calling Railways . Indian Railway Budget. the railways is now gearing up with various measures like e-ticketing and frequent traveler schemes. th . All rights reserved.

It ranks 21st in terms of global container traffic. . Cygnus Report. 102.India Calling 49 Shipping and Ports-Smooth Sailing Capacity and traffic at major ports Indian ports are important gateways and are being developed as nodal hubs for progress. with exports recording over 20 percent growth per annum. and Dubai Ports are other well-known foreign investors in the sector. PSA. Singapore/Port Kland: 16 percent. Today. May 2006 total foreign trade in terms of volume and 70 percent in terms of value.KPMG Report © 2006 KPMG.2 percent during the last four years. airports.. P&O is the largest international investor in India. development of ports. rest: 14 percent). etc. India accounts for just 1 percent of the world cargo and five to 6 percent of Asian cargo. All rights reserved. are either exempted from customs duty or attract a concessional rate of duty. ! Maersk. inland waterways. At present. ! The first-ever concession agreement was awarded to P&O in 1997 for the Nhava Sheva International Container Terminal. Printed in India. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. which has increased from around 157 million tonnes in 1992 .517 kms. ! BHP Bilton and Malaysia's Integrax Burhart are among the latest players to evince interest in India. Major ports now handle 76 percent of the total cargo volume.5 to over 344 million tonnes in 2005-06. The import of specified goods required for the construction of roads. India has 12 major ports and 185 minor/intermediate ports spread across its vast coastline of 7 . Policy Initiatives FDI is allowed under the automatic route for the construction and maintenance of ports and harbors. May 2006 A CII . The rising demand for Indian goods in the international market and the bilateral agreements India is expected to sign in the near future will result in a sharp rise in cargo traffic. a Swiss cooperative. Capacity will have to be augmented significantly to handle the growing traffic. Indian ports handle 90 percent of India's 450 200 150 100 0 2000 2004 2005 2006(E) 31 25 33 36 40 30 20 10 0 Capacity (mn tonnes-LHS) Traffic (mn tonnes-LHS) Capacity utilisation (%-RHS) Source : Cygnus Report. Nearly 45 percent of Indian containers get trans-shipped at foreign ports (Colombo: 15 percent.102 Traffic at ports grew at a CAGR of 10. the remaining 24 percent is handled by minor ports.

Shipping companies can opt for the scheme or for taxation under normal income-tax provisions. All rights reserved. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. 2006 © 2006 KPMG.9 percent from 1991 to 2005. The notional income is determined in a prescribed manner on the basis of the tonnage of the ship. Tax is payable even in the case of loss. Planning Commission. approximately USD 944 million from public funds has been earmarked for this purpose.KPMG Report 103. Port traffic is expected to touch 800 million metric tonnes by 2012. cost-effective service. are estimated at USD 20 billion. a Swiss cooperative. arising from the operation of ships at normal corporate tax rates. Plans are being made to increase the share of coastal shipping from 7 percent to 13 percent of the total domestic cargo by 2012. Tax is levied on the notional income of the shipping company. 1959. A CII . Ports spend approximately USD 0. Total traffic in tonnes has grown at a CAGR of 6. The scheme is applicable to shipping companies that are incorporated under the Indian Companies Act (with its effective place of management in India) and have at least one ship with minimum tonnage of 15 tonnes and hold a valid certificate under the Merchant Shipping Act. Indian ports are expected to handle 415 million tonnes of cargo in 2006-07 Investment requirements in the Indian maritime sector up to 2012 . . The targeted capacity addition in major ports is about 126 metric tonnes per annum.18 billion per annum on infrastructure. An Approach to the 11th Five-Year Plan.103 The 10th Five-Year Plan period (2002-2007) focuses on modernization.50 India Calling Tonnage Tax on Shipping Companies Indian shipping companies are taxed on a presumptive basis. Opportunities The 11th Plan Draft Note emphasizes the development of ports and related infrastructure to bring them to international standards. Printed in India. and increased public-private partnership. enhancement of service quality.

India Calling 51 Healthcare . World Bank Express Healthcare Management 106. .. This translates into ample opportunities for private and foreign players in the healthcare delivery space. Economist Intelligence Unit. 2006 105. etc. ! Healthcare services provided by hospitals. Printed in India. This segment offers a huge market opportunity to MNCs focused on niche and high-end medical products. and rising health awareness have driven growth.106 Over the next . a Swiss cooperative. launched recently. ! The National Rural Health Mission. ! The manufacture of specified drugs attracts concessional excise duty or none at all. World Health Organization. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. etc. It is also expected to promote policies that strengthen public health management and service delivery in the country.. is either exempted from customs duty or attracts a concessional rate of duty. 104. the country will need 80. drugs. Family Welfare.105 Policy Initiatives ! A task force comprising experts from the Ministries of Health.000 beds per year. Opportunities Healthcare delivery space: India has 1. Tourism and the Director-General of Health Services has been formed to suggest policy measures to the National Accreditation Board for accreditation of all public and private hospitals to ensure quality and timely health services. is expected to provide effective healthcare to the rural population. Pharmaceutical Markets Fact Book.000 population as compared to the world average of 3. respectively. healthcare is a high growth sector with a CAGR of 13 percent between 2001 and 2005. 2005 © 2006 KPMG. Increased private sector participation. Medical devices: There is a greater need for high-end medical devices due to the increasing demand for quality healthcare services. All rights reserved.104 Private and public funding accounts for 82 percent and 18 percent of the total healthcare spending. ! Various initiatives have been taken to increase and strengthen PPPs to provide quality healthcare services in the country.4 10 years. are outside the purview of service tax. like life-saving apparatus.3 and an average of 7 for developed nations. Taxation Benefits ! The import of specified equipment. doctors. increasing income levels.Rx Good Health In India.5 beds per 1. changing disease profile.

skilled labor force. . At the same time. This provides a huge. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. changing disease profile. Printed in India. Leading international contract research organizations are planning to take advantage of India's low-cost. rising income levels. All rights reserved. India's healthcare infrastructure is underdeveloped and government participation is low (18 percent of the overall healthcare spend). and rapid urbanization are driving healthcare spending in India. © 2006 KPMG. a Swiss cooperative. Increasing healthcare coverage. untapped opportunity for private and foreign players.52 India Calling Contract research and pathology services: India is now considered a preferred outsourcing destination. and booming domestic healthcare market.

FDI is permitted in the development of integrated townships. and minimum restrictions.000 hectares*. Additionally.Incentives for Development By offering an internationally competitive environment for the export of goods and services SEZs act as catalysts to economic growth. provides for deduction on profits derived from developing an SEZ. SEZs are treated as foreign territories for economic and financial purposes and units set up in these zones are allowed several fiscal incentives. Direct Tax Benefits Available to a Developer An SEZ developer is entitled to the following direct tax benefits: Section 80-IAB of the Income-Tax Act. IT. chiefly because the tax benefits provided by the central government under STPI and EHTPI expire in March 2009. resorts. and mass rapid transit systems. came into force in February 2006 and the government has cleared 150 projects for setting up SEZs since then. and non-conventional energy. provide an impetus to exports. Similarly.India Calling 53 Special Economic Zones . They attract foreign capital and technology.nic.107 Policy Initiatives108 A multi-product SEZ requires a minimum of 1. Of the 150 approved SEZs. commercial premises. “Indian SEZs will be engines of economic growth. including housing. Union Minister of Commerce and Industry ! except for segments that require industrial licenses. fuel overall economic activity. in case of items reserved for small-scale units. September 5. 85 are dedicated to IT. Printed in India. 107 Business Standard. hotels. KPMG IndiaAlert. All rights reserved.47 acres © 2006 KPMG. biotechnology. it is 10 hectares. 2006 * 1 hectare = 2. the government also gave inprinciple clearance to another 250 SEZs. For gems and jewelry. tax breaks. a Swiss cooperative. The SEZ Act. Investments in SEZ companies are exempted from taxes on interest and capital gains. 100 percent FDI is permitted. 2005.sezindia. ! Where an SEZ developer transfers the operation and maintenance of the zone to another developer. In these zones. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. promote greenfield investment. beginning from the year in which the SEZ is notified. ” Kamal Nath. 1961. This floor has been lowered to 100 hectares for services and certain sector-specific SEZs. . SEZs provide access to a global business environment and advanced infrastructure along with fewer bureaucratic hurdles. and regional-level urban infrastructure facilities such as roads and bridges.in. The minimum land requirement has been liberalized further for specific states and union territories. www. 2006 . A developer would be eligible for 100 percent deduction from such profits for 10 consecutive years within a block of 15 years. and thereby. supported by quality infrastructure. the deduction mentioned above would be transferred for the unexpired period of 10 consecutive years. FDI of up to 100 percent is permitted under the automatic route in the manufacturing sector. August. 108.

consumables) and capital goods without payment of central sales tax. to be created and utilized for acquisition of machinery or plant before the expiry of three years. Printed in India. raw-materials. Domestic sourcing of capital goods. raw materials. distributed. ! Offshore banking units conducting wholesale banking operations in an SEZ can avail of 100 percent income-tax exemption for the first five years and 50 percent for the next five years. and components without payment of CENVAT (erstwhile central excise duty). ! ! ! Import of second-hand capital goods without payment of customs duties. 2005. on income accruing on or after April 1. 2005. © 2006 KPMG. with respect to profits arising from the SEZ. ! Domestic purchase of goods (raw material. Capital gains arising from transfer of assets on shifting an industrial undertaking from an urban area to an SEZ are exempt from capital gains tax. the developer is entitled to exemption from Minimum Alternate Tax (MAT) provisions. Indirect Tax Benefits ! Imports of capital goods. as contained under Section 115JB of the act. it can be used for business. . from the business of developing an SEZ. packing material.54 India Calling ! Further. ! Eligible profits of the unit are also exempt from MAT. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. an exemption of 50 percent of such profits. a Swiss cooperative. Direct Tax Benefits Available to a Unit An SEZ unit would be eligible for benefits as mentioned below: ! A 100 percent exemption of export profits for five years from the year in which it begins to manufacture or render services. and components without payment of customs duties. out of the current income. All rights reserved. or paid on or after April 1. so much of the amount not exceeding 50 percent of the profits as are debited to the profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to a reserve account (to be called the 'Special Economic Zone Re-investment Reserve Account'). ! An SEZ developer is also exempted from the payment of dividend distribution tax on dividends declared. ! ! For another five years. Till the time the amount is so utilized. but not for distribution by way of dividends or remittance as profit outside India or creation of an asset outside India. For the next five consecutive years. Import of goods in the restricted list of Foreign Trade Policy.

Exemption from specified cess payable under various acts on goods purchased from India or imported from outside India (including research and development cess). All rights reserved. The government also plans to promote the setting up of Special Economic Regions (SERs). SERs are expected to facilitate the easy procurement of raw materials and direct export of produce. Given the excellent infrastructure. The 11th Five-Year Plan proposes to facilitate rapid industrial growth through these initiatives:109 ! ! Making taxes and duties non-distortionary and internationally competitive. 2006 © 2006 KPMG. . a Swiss cooperative. An Approach to the 11th Five-Year Plan. SERs would provide a renewed thrust on manufacturing and cater to the large domestic demand by creating economies of scale. which would help the country sustain its growth momentum. The recent reforms in SEZ policies represent a focused initiative on the part of the government to promote industrial activity and enhance forex earnings. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. ! Promoting technological modernization and building international partnerships to achieve high industrial growth. Planning Commission.India Calling 55 ! ! Procurement of taxable services without payment of service tax. ! Import as well as indigenous procurement of capital goods under lease financing. Printed in India. These would focus on providing superior operating infrastructure but would not have tax sops like SEZs. Providing infrastructure and promoting infrastructure development in local areas such as SEZs and SERs. 109.

In case of foreign corporates or individuals. which can be invested. Where FIIs/sub-accounts seek to invest primarily in equities. All rights reserved. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. there is no need for prior regulatory approval but only post-facto filing/intimation with the RBI as follows: filing intimation with the RBI within 30 days of receipt of investment money in India. in which case it can make its entire investment in debt instruments. ! FIIs can buy/sell securities on stock exchanges. each subaccount cannot invest more than 5 percent of the total issued capital of that company. Government approval route: Investment in activities/industries where the automatic route is not available can be made with the approval of the government. An FII can invest up to 30 percent of its portfolio in debt securities. Printed in India. and debt. where the price has been approved by the RBI. Under the automatic route. ! FII investments in India are subject to the following policy/limits: ! No single FII/sub-account can acquire over 10 percent of the paid up capital of an Indian company. no such approval is required for the quantum of funds proposed to be invested. exchange-traded derivatives. FDI can be divided into two broad categories: Investment under the automatic route and investment with prior approval of the government.56 India Calling Investing in India . The regulatory approval process has been substantially liberalized to facilitate investment in India. Policy on FII Investment ! FIIs/sub-accounts can invest in Indian equities.Compounding Returns Regulatory Framework for Investment in India Foreign direct investment in India The objective of India's foreign investment policy is to invite and encourage FDI in India. units. The administrative and compliance aspect of FDI are embedded in the Foreign Exchange Regulations prescribed by the RBI. and filing prescribed documents and particulars of allotment of shares within 30 days of allotment of shares to foreign investors. They can also invest in listed and unlisted securities outside stock exchanges. © 2006 KPMG. SEBI sets annual limits on the quantum of funds. a Swiss cooperative. It is also possible for an FII to declare itself a 100 percent debt FII. commercial papers. . Such approval is granted by the FIPB. ! Where the FIIs/sub-accounts seek to invest in debt securities.

or incorporating a company. Investment Vehicles for Foreign Investors Choice of vehicle Depending on the business needs.India Calling 57 ! All FIIs and their sub-accounts taken together cannot acquire more than 24 percent of the issued capital of an Indian company. All rights reserved. It is not permitted to undertake any commercial/trading/industrial activity. It is also subject to fewer regulatory compliance requirements. Establishing an LO requires the approval of the RBI. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. A BO can. can have only 50 shareholders and is not allowed to have access to deposits from the public directly. carry out activities permitted by the RBI. the General Body. a foreign company considering a business presence in India can choose between setting-up a liaison office. The key distinction between the two is that a private limited company can restrict the right of its members to transfer shares. The investment can be increased up to the sectoral cap/statutory ceiling. however. these generally do not include manufacturing (unless set up in an SEZ) and retail trading. Branch office/project office Foreign companies undertaking projects in India can set up temporary project/site offices (POs) while a branch office (BO) may be set up by companies engaged in manufacturing and trading activities. A PO can only undertake activities relating to and incidental to the execution of specific projects in India. The requirement that prior approval be obtained for a PO that meets specified conditions has been abolished. ! FIIs/sub-accounts can transact in dematerialized form through a recognized stock broker and on a recognized stock exchange and are required to give or take delivery of securities. a branch office/project office. can pass a resolution to this effect. Liaison office A liaison office (LO) is set up to act as a channel of communication between the head office and target customers in India. as applicable to the said company. which also monitors its activities on an ongoing basis. either a WOS or a joint venture with another person. a Swiss cooperative. directly or indirectly. The Board of Directors and subsequently. ! There are no limits on the investments made by FIIs/sub-accounts (whether primarily an equity investor or a debt investor) with respect to debt securities (other than convertible debt securities) issued by a single entity. Local subsidiary or joint venture company A subsidiary or a joint venture company can be formed either as a private limited company or a public limited company. . Printed in India. The RBI regulates the setting up and operation of these offices. © 2006 KPMG.

taxes are levied by the central and state governments. VAT. Direct Tax In India.000 (Approx. Income is taxed in India in accordance with the provisions of the Income-tax Act. and also by local government bodies. Principal taxes. .USD11000) 5.000 (Approx. a Swiss cooperative. © 2006 KPMG. A company with foreign investment can undertake activities that are in compliance with FDI guidelines (discussed earlier in this document). 1961. India has embarked on a series of tax reforms since the early 1990s. All rights reserved. On the other hand. the ROC issues a 'Certificate of Incorporation'.up capital requirement INR 1.58 India Calling A company is regulated inter alia by the Registrar of Companies (ROC) under the Companies Act. states levy taxes like state excise duty. No. and service tax.00. central excise duty. A public company is required to obtain a 'Certificate of Commencement of Business' by filing additional documents with the ROC. which is proof of incorporation.USD2200) After verifying documents. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. Minimum number of shareholders Maximum number of shareholders Minimum number of directors Maximum number of directors Private Company Two Fifty Two Seven Public Company Seven Unlimited Three Twelve (can be increased with Government approval INR 5. A private company can commence business immediately on obtaining this certificate. Minimum paid . Particulars 1.00. customs duties. and stamp duty. The focus of reforms has been on the rationalization of tax rates and simplification of procedures. including income-tax. 1956. 2. 4. The Ministry of Finance (Department of Revenue) through the Central Board of Direct Taxes (CBDT)an apex tax authorityimplements and administers direct tax laws. sales tax. are levied by the central government. Statutory requirements for formation of compaies Sr. 3. Local government bodies levy octroi and other taxes of a local nature like water and property tax. Printed in India.

Individual taxpayers may also be classified as 'residents but not ordinary residents'. if any.. Taxpayers are required to file their tax returns by the specified dates and pay tax. partnerships. for example. Income tax is levied on 'taxable income'. Agricultural income is exempt from income tax at the central level but is taken into account for rate purposes. etc. the global income of domestic companies. in three or four installments. trusts. which are received/accrued or deemed to be received/accrued in India. taxpayers may be classified as residents or non-residents. The tax officer may choose to make a scrutiny assessment to assess the correct amount of tax by calling for further details. . Employed individuals are subject to tax withholding by the employer on a 'pay-as-you-earn' basis. All rights reserved. a Swiss cooperative. Printed in India. Income earned by specified organizations. The 'tax year' in India runs from April 1 to March 31 of the following calendar year for all taxpayers. subject to the fulfillment of certain conditions. Taxable income has to be ascertained separately for different classes of income (termed 'heads of income') and is then aggregated to determine total taxable income. Broadly. Generally. universities. Balance tax payable. The 'previous year' basis of assessment is used. Certain other specified incomes are also subject to tax withholding at specified rates. that is. during the year in which the income is earned. Generally. mutual funds. India adopts the self-assessment tax system. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. can be paid by way of selfassessment tax at the time of filing the return of income. depending on the category they belong to. Foreign companies and non-resident individuals are also subject to tax at varying rates on specified incomes. any income pertaining to the 'tax year' is offered to tax in the following year (known as assessment year). © 2006 KPMG. is exempted from income-tax. and local authorities are subject to tax at flat rates. whereas individuals and other specified taxpayers are subject to progressive tax rates.India Calling 59 Taxation India follows a residence-based taxation system. comprising income under the following heads: ! ! ! ! ! Salaries Income from house property Profits and gains of business or profession Capital gains Income from other sources. taxpayers are liable to make income-tax payments as advance tax. hospitals.

Fringe benefit tax The Fringe Benefit Tax (FBT) was introduced in the Finance Act. the domestic tax law requires companies to pay MAT in lieu of the regular corporate tax. or paid. a Swiss cooperative. Minimum alternate tax To bring zero tax-paying companies with book profits under the tax net. Income of certain sick industrial companies. Income from units in specified zones. FBT can be levied on every employer. A tax credit. MAT is levied at 7 percent [proposed to be increased to 10 percent] (plus applicable . in case the regular corporate tax is lower than the MAT. 2007). the company paying the dividends is required to pay DDT on the amount of dividends declared. excluding individuals. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International.03 percent (inclusive of surcharge and educational cess). being the difference of the tax liability under MAT provisions and regular provisions. However. at the rate of 14.KPMG Report © 2006 KPMG. Such set off shall be allowed on the difference of tax as per regular provisions and as per MAT provisions. including SEZs or specified backward districts. However. MAT is not applicable to: ! ! ! Income exempted from tax (excluding long-term capital gain exempt from tax for the year ending March 31. FBT is payable by the employer on benefits (provided/deemed) that employees (past or present) receive as a consideration of their employment. distributed. and certain institutions enjoying specific exemptions. A CII . Dividend distribution tax Dividend Distribution Tax (DDT) is payable on the dividend declared. All rights reserved. However. can be carried forward to be set off in the year in which tax is payable under the regular provisions. An exemption from this tax has been granted in case of dividends distributed out of profits of SEZ. . no carry forward shall be allowed beyond the seventh assessment year (proposed) succeeding the assessment year in which the tax credit becomes allowable. Printed in India.5 book profits.5 surcharge and education cess) of the adjusted book profits of companies where the regular corporate tax payable is less than 7 percent [proposed 10 percent] of their . Hindu Undivided Family (special community-based entity in India).60 India Calling Kinds of Taxes Annual income tax Annual income tax is levied on income earned for a financial year as per the rates declared by the annual Finance Act. 2005. Dividends paid by an Indian company are currently exempted from income-tax in the hands of the recipient shareholders in India.

000 (approximately USD 33. FBT can also be levied at 30 percent plus applicable surcharge and education cess. All rights reserved. offshore banking units and international financial services centers in SEZs.00. In any other case.India Calling 61 Certain expenses are directly covered within the ambit of FBT. The manner of payment of FBT is similar to that of advance tax. on or before the 15th day of the month following such quarter. Tax incentives Special economic zones Units set up in SEZs Tax holidays are given to units set up in SEZs. a certain percentage of these are deemed fringe benefits. is October 31. ! Sale of a unit of an equity-oriented fund to the mutual fund. FBT being paid or payable in each quarter. Wealth tax Wealth tax can be levied on specified assets at the rate of 1 percent on the value of the assets held by the assessee in excess of the basic exemption of assets amounting to INR 15. Such deduction would be available only up to FY08-09. following the end of the financial year. on which FBT can be levied. Printed in India. conferences.. the due date is July 31. to SEZ developers. etc.KPMG Report © 2006 KPMG. following the end of the financial year. Undertakings set up in export-processing zones/foreign trade zones or EHTP or STP or 100 percent export-oriented units. . With respect to expenditure such as entertainment expenditure. A CII . except for the quarter ending March 31. Securities transaction tax Securities transaction tax is levied on the value of taxable securities transactions including ! Purchase/Sale of equity shares in a company or a derivative equity-oriented fund entered into in a recognized stock exchange. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International.000). The due dates for filing the return for fringe benefits in the case of a company or a person whose accounts are required to be audited under the act. in which case FBT will be payable on or before March 15 of the relevant financial year. are eligible for a deduction of 100 percent on the profits derived from exports for any 10 consecutive years from the year in which such undertaking begins manufacturing or commences its business activities. a Swiss cooperative.

2009. inland waterways. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. 2010. A CII . Tax holiday with respect to infrastructure projects/power/housing: Undertakings engaged in prescribed infrastructure projects are eligible for a consecutive 10-year tax holiday as set out below: ! A 10-year tax holiday in a block of 20 years to be extended to undertakings engaged in developing/operating and maintaining/developing. operating and maintaining infrastructure facilities like roads. 2005. Sikkim/North Eastern States ! 100 percent tax deductible for first 10 years. this time limit is proposed to be extended until March 31.KPMG Report © 2006 KPMG. Printed in India. In Union Budget 2006. bridges. airports. Units set up in industrial parks: Depending on the location of the industrial parks. The scope of telecommunication services has been extended to include broadband network and Internet services. water-treatment systems. All rights reserved. irrigation projects. operating and maintaining ports. model towns and growth centers For developers of industrial parks: A 100 percent tax holiday is available to developers of industrial parks for any 10 out of 15 consecutive assessment years beginning from the year in which the undertaking or the enterprise develops an industrial park. provided it begins not later than March 31. a Swiss cooperative. . ! A 10-year tax holiday in a block of 15 years has also been extended to undertakings involved in developing/operating and maintaining/developing. the following tax holiday is available to units set up therein: ! Himachal Pradesh/Uttaranchal ! ! ! 100 percent tax deductible in the first 5 years 30 percent tax deductible in the next 5 years. ! A two-tier benefit of a 100 percent tax holiday for the first 5 years and a deduction of 30 percent of profits for the subsequent 5 years are available to undertakings that start providing telecommunication services before March 31. and sanitation and sewerage systems or solid waste management systems. for generation/generation and distribution of power. 2006. rail systems.62 India Calling (For details refer to Section on Special Economic Zones) Industrial parks. water-supply projects. A similar exemption has also been extended to undertakings set up before March 31. or inland ports.

The policy currently in force is for the tax year 2004-09. . and service tax laws. license. The effective rates of customs duties may vary pursuant to general and/or specific exemption or concession notifications issued by the government in this regard. Central excise duty Central excise duty (Cenvat) is levied on goods manufactured and produced in India. an apex indirect tax authority. in most cases. The policy remains in force for five years and is amended from time to time. Customs duties Customs duties are levied on import of goods into India at the rates specified in the Customs Tariff Act. A majority of goods are now freely importable.32 percent (basic rate of 16 percent and education cess of 2 percent). Import-export policy Import of goods into and export from India is regulated by the Foreign Trade Policy issued from time to time by the GoI. etc.. It is generally on ad valorem basis at the rate of 16. a manufacturer can avail of the credit of the central excise duties or additional duties of customs (that is. export promotion capital goods scheme. notifications. is levied on the basis of the value of excisable goods.7 percent. recovered from the buyer as a part of consideration for sale of goods.KPMG Report © 2006 KPMG. customs. Cenvat is payable by the manufacturer but is. countervailing duty) paid on specified inputs and capital goods used in the manufacture of excisable goods and also service tax paid on eligible input services and utilize it in discharging central excise duty on finished excisable goods. The effective rates may be lower pursuant to general/specific notifications issued by the government granting whole or partial exemption from duty. Printed in India. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. a Swiss cooperative. and clarifications issued by the CBEC supplement these indirect tax laws. Issues involving interpretation of tax laws are decided by the judiciary. ordinarily. The general effective rate of customs duties in India is 36. The duty. Under the Cenvat scheme. which entitle import of goods at concessional rates against fulfillment of export obligations. Circulars. 1975.India Calling 63 Indirect Tax The Ministry of Finance (Department of Revenue) through the Central Board of Excise and Customs (CBEC). A CII . implements and administers excise (central excise). There are various export incentives like advance. All rights reserved. which is independent of the legislature.

A mechanism for credit of input service tax and central excise duty on specified inputs and capital goods is also in place.64 India Calling VAT/Sales tax From April 1. there are exemptions and a rate of 1 percent and 20 percent for specified products. who do not have any office in India. and the Union Territory of Pondicherry. A CII . The government has notified the 'Export of Service Rules 2005'. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. which defines what constitutes 'export of services'. This act also covers the import of goods into or the export of goods out of India. The effective rate of service tax is currently 12. The standard rate of VAT is 12. 21 states in India have replaced local sales tax with VAT. Service tax The central government levies service tax on notified services. Tamil Nadu. tax is levied under the Central Sales Tax Act (CSTA). VAT is not very different from the local sales tax regime except that it captures value addition at each level of the distribution network. However. The remaining states. States also levy tax on transactions which are 'deemed sales' like works contracts and leases. It is payable by the service provider but is ordinarily recovered from the recipient of services.KPMG Report © 2006 KPMG. 2006. under the 'reverse charge mechanism'. in case of non-resident service providers. Besides that. . The state VAT continues to be a tax on the sale of goods and does not include taxation of services. a Swiss cooperative. Ordinarily. except Uttar Pradesh. Such exports are zero rated. If the transaction involves movement of goods from one state to another (inter-state). this burden is shifted to the recipient of service. have also introduced VAT with effect from April 1. 1956. The standard rate of central sales tax is 4 percent. 2005. Service tax is charged on the gross value of services and is generally payable on a receipt basis.5 percent and there is a reduced rate of 4 percent.24 percent. All rights reserved. service providers are liable for payment of service tax. Printed in India. Sales tax/VAT is not imposed on the import of goods into the country or export of goods out of the country. State VAT is levied on the movement of goods within a state.

the statutes requiring payment of gratuity. Labor laws The entire gamut of employer-employee relationships is governed by a number of labor laws. payments for technicians. etc. A CII . . including royalty payments. consumption. and payments for design and drawings. a large chunk of the labor legislation applies only if the foreign investor were to undertake manufacturing activities in India. Research and development cess A research and development cess is a special levy at the rate of 5 percent on all payments made for the purchase of technology from abroad.India Calling 65 Entry tax Some states levy an entry tax on the entry of goods within the state limits for use. The legislation is all-embracing and ranges from the size of signage to working hours for women and grievance procedures.. However. lump sum payments. entry tax paid in a state can be claimed as input-tax credit against the VAT/central sales tax liability of that state. a Swiss cooperative.KPMG Report © 2006 KPMG. need to be complied with on an ongoing basis as non-compliance would entail penal consequences. which would vary from state to state. Specifically. bonus. or sale. The cess is required to be paid by the importer before remitting any money towards payment of such imports. All rights reserved. provident fund contributions. Printed in India. Generally. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International. The rates vary from state to state.

they respond to a client service environment by leveraging the resources of a globally aligned organization and providing detailed knowledge of local laws.700 Indian and expatriate professionals. Hyderabad. KPMG’s range of services includes Audit. As members of the cohesive business unit that serves the Middle East and South Asia (KPMG’s MESA business unit). The objective of the India Desk is to help local clients on India related issues such as conducting industry and market reviews. due diligence and forensic advisory services. rendering transaction advisory. The firms in India have access to more than 1. Chennai. In India. many of whom are internationally trained. Kolkata and Pune. consumer markets. industry focused.000 international and national clients. identifying opportunities for partnerships and acquisitions. All rights reserved. KPMG provides rapid. KPMG also operates India Desks in a few countries around the world. Delhi. regulations. Tax. and providing advisory on investment structures from a regulation and tax perspective. developing business strategies to invest in new projects. industrial markets.KPMG Report © 2006 KPMG. information. A CII . performance-based. KPMG has offices in India in Mumbai. markets and competition. communication and entertainment. a Swiss cooperative. Printed in India. . and technology enabled services. and infrastructure and government. Clients range across five sectors namely financial services. and Advisory services to over 2. Bangalore.66 India Calling KPMG in India KPMG’s member firms in India were established in September 1993. which reflect a shared knowledge of global and local industries and experience of the Indian business environment. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International.

No one should act on such information without appropriate advice after a thorough examination of the particular situation. Godrej Castlemaine Bund Garden Pune . Block F.kpmg. Phase III Gurgaon 122 002 Tel: +91 124 3074000 Fax: +91 124 2549101 Chennai Wescare Towers 16 Cenotaph Road. Senapati Bapat Marg. Merchant Towers Road No. a Swiss cooperative.Teynampet Chennai 600 018 Tel: +91 44 39844900 Fax: +91 44 39844905 Kolkata Park Plaza. Printed in India. Markets. Floor 6 71 Park Street Kolkata 700 016 Tel: +91 33 39823210 Fax: +91 33 39823222 Pune 703. Inner Ring Road Koramangala. Banjara Hills Hyderabad 500 034 Tel: +91 40 23350060 Fax: +91 40 23350070 Delhi 4B.in. Kamala Mills Compound 448. KPMG (India) Tel: +91 22 3983 5400 e-mail: pudhas@kpmg. DLF Corporate Park DLF City.com KPMG in India Mumbai KPMG House. Mumbai 400 013 Tel: +91 22 39896000 Fax: +91 22 39836000 Bangalore Maruthi Info-Tech Centre 11-12/1. . 4. All rights reserved. Lower Parel. Bangalore – 560 071 Tel: +91 80 41766000 Fax: +91 80 41766999 Hyderabad II Floor. Although we endeavor to provide accurate and timely information. an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International.com The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future.411 001 Tel: +91 20 30585764/65 Fax: +91 20 30585775 Contact Us: India Pradeep Udhas Head. © 2006 KPMG.