a study on investment opportunity in manufacturing sector

PROJECT

ON

A STUDY ON INVESTMENT OPPORTUNITY IN MANUFACTURING SECTOR

SUBMITTED TO:

PROF.

UNDER THE GUIDANCE OF:

MR.

SUBMITTED BY:

JIVESH VERMA

ID NUMBER: AB9023

BATCH: MBA/AU/2009-11

ABSTRACT

India has emerged as one of the world's top ten countries in industrial

production as per UNIDO's new report titled 'Yearbook of Industrial Statistics

2010'. India surpassed Canada, Brazil and Mexico in 2009 to reach the 9th

position from the 12th position it held in 2008.

The Index of Industrial Production (IIP) quick estimates data for October 2010

shows a growth of 11.3 per cent in the manufacturing sector as compared to

October 2009. The cumulative growth during April-October 2009-10 over the

corresponding period of 2008-09 is 11 per cent, according to data by the

Ministry of Statistics and Programme Implementation.

Growth Trends

India is ranked second in terms of manufacturing competence, according to

report '2010 Global Manufacturing Competitiveness Index', by Deloitte Touche

Tohmatsu and the US Council on Competitiveness. The report states that the

country's talent pool of scientists, researchers, and engineers, together with

its English-speaking workforce and democratic regime make it an attractive

destination for manufacturers.

As per the Industrial Outlook Survey conducted by the Reserve Bank of India

(RBI) for October-December 2010 quarter the Indian manufacturing sector

showed positive overall business sentiment in the quarter. The business

expectation index (BEI), which acts as a barometer of the overall health of the

manufacturing sector, has gone up to 126.5 for the assessment quarter, its

highest reading since the April-June 2007 quarter.

The HSBC Markit Purchasing Managers' Index (PMI), based on a survey of

500 companies, posted 58.4 in November 2010, increasing from 57.2 in

October 2010. Incoming new business received by manufacturers in India

increased substantially during the month. Further, the latest expansion in new


order volumes was the strongest in four months. Panellists also indicated a

marked rise in new export business during November 2010.

Around 50 segments in the manufacturing sector grew by 39 per cent,

entering the 'excellent growth' category, during April-December 2010-11,

according to a survey by the Confederation of Indian Industry (CII) and

ASCON. Segments in the excellent category included air conditioners, natural

gas, tractors, nitrogen fertilisers, ball bearings, electrical and cable wires, auto

components, construction equipment, electric fans and tyre industry.

Further, 22 segments made it to the 'high growth' category, registering a

growth of 17.3 per cent during the first nine months of the current fiscal.

Industries such as utility vehicles, crude oil, power transformers, energy

meters, alcoholic beverages and textile machinery have registered around 10-

20 per cent growth.

Exports from special economic zones (SEZs) grew by over 68 per cent to US$

12.55 billion as compared to the corresponding period of 2009-10. [June 30]

Buoyed by India's response to its super-machines, iconic American superbike

maker Harley Davidson is setting up an assembly unit at Bawal, Haryana.

This will be its second plant outside the US, after Brazil

FieldFresh, the 50:50 joint venture of Bharti Enterprises and Filipino firm Del

Monte Pacific Ltd formed in 2007-end, has inaugurated its R&D and

manufacturing unit at Hosur, Tamil Nadu, set up with an investment of US$

26.14 million.

Doosan Heavy Industries and Construction Co Ltd of South Korea had

expressed interest in setting up a power equipment manufacturing facility in

Haryana, to be fully owned by the foreign company.

SIGNATORY PAGE

TO WHOMESOEVER IT MAY CONCERN

This is to confirm that Jivesh Verma, student of RIMS, Bengaluru, is doing a

live project(Thesis) on the topic “A study on investment opportunity

in manufacturing sector” under my guidance and that the work being

done by the candidate is original and is of the standard expected by an MBA

student.

May god bless Him with all success in him career.

Warm regards


TOPIC APPROVAL LETTER

THESIS SYNOPSIS

WORKING TITLE:

A study on investment opportunity in manufacturing sector.

PURPOSE:

The growth rate of manufacturing sector in a country truly reflects its economic potentiality. Most of the developed countries are strong enough in their manufacturing sector.

Though the services sector in India has brought faster economic success, still the manufacturing sector plays an important role on the ground of sustainability.

The growth rate of manufacturing sector in the country has reached at a two-digit percentage growth in the year 2006-07 from April-August. It has around 48% of share in the total composition of Indian economy.

Both government as well as the private sectors has come forward for the development of the manufacturing sector of the country. More investments are being proposed in the sector particularly in the growth rate of capital goods, consumer durables, and some non-durable goods.

Iron and Steel industries

The Iron and Steel Industry in India is one of the fastest growing sectors.India has experienced steady growth in the steel industry. In 1992, India produced 14.33 million tones of finished carbon steels and 1.59 million tones of pig iron. Furthermore, the steel production capacity of the country has increased rapidly since 1991 - in 2008, India produced nearly 46.575 million tones of finished steels and 4.393 million tones of pig iron. With the increased demand in the national market, a huge part of the international market is also served by this industry. Today, India is in seventh position among all the crude steel producing countries.It is expected that India would become the second biggest producer of steel within the year 2016 and the production per year


would be 137 million tonnes The exports pertaining to the steel industry was 6.26 % during the period 2006-07.

Automobile Sector

The cumulative growth of the Passenger Vehicles segment during April 2007 – March 2008 was 12.17 percent. Passenger Cars grew by 11.79 percent, Utility Vehicles by 10.57 percent and Multi Purpose Vehicles by 21.39 percent in this period.

The Commercial Vehicles segment grew marginally at 4.07 percent. While Medium & Heavy Commercial Vehicles declined by 1.66 percent, Light Commercial Vehicles recorded a growth of 12.29 percent.

Three Wheelers sales fell by 9.71 percent with sales of Goods Carriers declining drastically by 20.49 percent and Passenger Carriers declined by 2.13 percent during April- March 2008 compared to the last year.

Two Wheelers registered a negative growth rate of 7.92 percent during this period, with motorcycles and electric two wheelers segments declining by 11.90 percent and 44.93 percent respectively. However, Scooters and Mopeds segment grew by 11.64 percent and 16.63 percent respectively.

Automobile Exports registered a growth of 22.30 percent during the current financial year.

The growth was led by two wheelers segment which grew at 32.31 percent. Commercial vehicles and Passenger Vehicles exports grew by 19.10 percent and 9.37 percent respectively. Exports of Three Wheelers segment declined by 1.85 percent.

Therefore, investing opportunities seems to be very bright in manufacturing sector in India. Even FDI and FII are directing their focus towards the manufacturing sector as it is an evergreen sector and a more stable market compared to other sectors.

For eg:

Maruti Suzuki India (MSI) reported robust volume growth in November 2009 (of 66.6% y-o-y and 2.8% m-o-m) to 87,807 units. The low base of November 2008 has inflated the y-o-y growth figure. However, by the m-o-m there is an impressive 6.7% domestic sales growth, which is the highest mom growth in November for MSI since FY04. Current channel inventory for MSI is optimal at approximately 3 weeks.

In the home market, volumes were boosted by the A2 segment (+60.1% and +8.9% m-o-m), MPVs (+116.4% y-o-y and 3.8% m-o-m) and the A3 segment (+46.3% y-o-y and -0.7% m-o-m). These are the highest A2 segment monthly sales ever. The A3 segment growth was boosted by the launch of the new version of the SX4. Being a fresh model, SX4 sales are contributing approx 25% to the A3 segment product mix, as compared to approx 10-15% historically.

Export growth continued to be healthy, at 128.6% y-o-y, to 11,448 units.

AIM:

To make specific study of the trend in which investors are putting their funds into manufacturing sector.

OBJECTIVES:

To study the behavior of investors towards manufacturing sector.

To find out the trends and market share of iron & steel industries and automobiles in past and in current period.

To project future trends of stock prices.

To ascertain the key growth drivers of manufacturing sector.

To study the problems prevailing in manufacturing sector such as inflationary pressure, cost of manufacturing.

To recommend buy/sell/hold decision in the future on the above company.


HYPOTHESIS:

Manufacturing sector is booming sector for investment.

METHODOLOGY:

Source of Secondary data is obtained from:

Data collection of selected sectors from BSE and NSE.

Data from websites like “www.economywatch.com”, “www.siamindia.com” , “ www.cci.in” , “ www.economictimes.com” , “www.nseindia.com” .

Magazines like analyst ( published by ICFAI ), Investors India, Business World.

PROPOSED CONTENT:

Company profile

Research design

Analysis and interpretation

Findings and conclusion

Recommendation

Bibliography

WORK PLAN:

Submission of Synopsis.

Collection of data through various websites, magazines and company’s database.

Analysis of data.

Interpretation of data.

Drawing inference, interpretation and conclusion.

Based on the conclusion suggestions and recommendations will be made.

http://www.nseindia.com/

http://www.economictimes.com/

http://www.cci.in/

http://www.siamindia.com/

http://www.economywatch.com/

ACKNOWLEDGEMENT

It is well-established fact that behind every achievement lays an unfathomable

sea of gratitude to those who have extended their support and without whom

the project would never have come into existence.

I express my gratitude to RIMS, Bengaluru for providing me an opportunity to

work on this project as a part of the curriculum.

Also, I express my gratitude to Prof. Balaji on the completion of my project.


1

INTRODUCTION

1. Automobile sector

India is an emerging global manufacturing hub for low-cost compact cars. It is

Asia’s third-largest passenger vehicle market and the world’s second-largest two-

wheeler market. It is also the world’s fourth-largest commercial vehicle market.

Changing demographics, rising disposable income and entry of several new players

has expanded the domestic market for passenger vehicles. Low manufacturing costs

due to economies of scale, low R&D and sourcing costs, are increasing affordability

and driving domestic demand.

The Indian automotive industry is expected to be the world’s seventh-largest

automobile market by 2016 and the third largest by 2030, only behind China and the

US. Recent acquisition of Jaguar and Land Rover brands by Tata Motors and launch

of world’s cheapest car, Tata Nano, has placed the Indian automobile market on the

global automotive map. Total value of vehicle exports is estimated to reach US$ 8

billion to US$ 10 billion by 2015. The industry turnover is estimated to reach a level

of US$ 155 billion by 2016. Overall production of automobiles increased from 8.7

million units in 2004–05 to 11.4 million units in 2008–09. Between 2000 and 2009,

the industry witnessed a cumulative foreign direct investment (FDI) flow worth US$

4.3 billion accounting for 4 per cent of the total FDI into the country.


2

Opportunities

Govt policies including weighted tax deduction has deduced upto 200% for

inhouse R&D activities in the country.

Increasing production cost, shorter product life cycle and increasing trends of

geographical expansion to deresk dependence on one market are key factors

that influence companies to outsource.

Availability of low cost skilled and educated manpower; proven product

development capabilities and location advantage due to India’s proximity to

emerging markets.

Revenues are estimated to increase from US$ 40 billion in 2002 to US$ 300

billion in 2015, thereby increasing its share from 0.8 percent to 3.5 per cent.

Challenges

Accelerated modification and diversification of the product portfolio

Pervasion of automobiles with digital technology


3

Increased pressure for innovation and flexibility in development and

manufacturing

2. Textile and apparels

The textile industry in India provides direct employment to more than 35

million people and is the second-largest employment generator after agriculture. The

textiles industry accounts for 14 per cent of the total industrial production in India. At

current prices, it accounts for 4 per cent of the gross domestic product (GDP)—US$

51.36 billion. Textiles and apparel industry exports, valued at US$ 20.02 billion (INR

963.05 billion), contributed about 11.5 per cent to the country’s total exports in 2008–

09. In addition to the four functional SEZs, there are 13 in-principle approved, 19

formally approved and 12 notified SEZs in India.

Opportunities

material for industrial, agricultural and consumer goods.


4

According to the Confederation of Indian Textile Industry (CITI), the potential

size of the Indian textiles industry is expected to reach US$ 110 billion by

2012.

With consumerism and disposable income on the incline, the retail sector has

witnessed rapid growth in the past decade. Several international retailers are

also focusing on India due to its emergence as a potential sourcing destination.

The packtech segment constitutes 38 per cent of the total technical textiles

production in India (2007–08). This industry includes the production of

flexible packaging

Challenges

Scale: Indian firms are typically smaller than their Chinese or Thai counterparts and

there are fewer large firms in India. Some of the Chinese large firms have 1.5 times

higher spinning capacity, 1.25 times denim (and 2 times gray fabric) capacity and

about 6 times more revenue in garment than their counterparts in India thereby

affecting the cost structure as well as ability to attract customers with large orders.

Skills :

1. There is a paucity of technical manpower

2. Indian firms invest very little in training its existing workforce and the skills

are limited to existing proceses.

3. There is an acute shortage of trained operators and supervisors in India.

Domestic Market

The Indian domestic market for all textile and apparel products is estimated at $26 bn

and growing. While the market is very competitive at the low end of the value chain,

the mid or higher ranges are over priced.

3. Healthcare sector

India’s growing population and increasing preference for private health

services over public services is augmenting the growth of the healthcare delivery

market. Among countries outside the US, India has one of the largest numbers of Joint

Commission International (JCI) approved hospitals. The country has 0.5 million

doctors, 0.9 million nurses and about 1 million beds. These factors have transformed


5

it into a leading medical tourism destination. Healthcare expenditure in India is

expected to increase by 15 per cent per annum. This segment is expected to constitute

6.1 per cent of the country’s GDP and employ around nine million people in 2012.

The share of tertiary care in the total healthcare market is currently about 11 per cent.

Opportunities

An additional 1.75 million beds are needed for India to achieve the target of

two beds per 1,000 population by 2025.

To maintain the current doctor-to-nurse ratio of 2.2, an additional 1,600,000

nurses will have to be trained by 2025.

India’s changing demographics and the increasing incidence of non-

communicable and lifestyle-related diseases is expected to trigger the need for

more tertiary care hospitals to cater to this demand.

The potential increase in the penetration rate of medical insurance and

employer plans could result in a higher demand for premium healthcare

services in India, and consequently, increase the demand for hospital beds and

medical equipment.


6

Challenges:

1. cutting edge technology

2. Research and development

3. new innovate treatment

4. customer service quality

4. IT and ITES sector

Total revenues in India’s IT industry touched US$ 70.5 billion in 2008–09 as

compared to US$ 64 billion in 2007–08, growing at more than 12 per cent. The Indian

IT & ITeS industry is primarily concentrated in seven clusters—Bengaluru, NCR-

Delhi, Hyderabad, Chennai, Pune, Mumbai and Kolkata. The contribution of IT

industry to India’s gross domestic product (GDP) has grown from 1.2 per cent in

1997–2008 to an estimated 5.8 per cent in 2008–09. Total revenues in India’s IT

industry touched US$ 70.5 billion in 2008–09 as compared to US$ 64 billion in 2007–

08, growing at more than 12 per cent. The Indian IT industry has been growing at a

compound annual growth rate (CAGR) of 27 per cent from 2003 to 2008. India’s

software and services exports, including its ITeS-BPO exports, touched US$ 47.3

billion in 2008–09, as compared to US$ 40.4 billion in 2007–08, an increase of 14.3

per cent.


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Opportunities

It is estimated that the overall size of the domestic market grew by 20 per cent

in 2008–09 to reach US$ 24.3 billion by 2010.

Domestic IT BPO spending grew by 40 per cent in 2008–09.

The government is taking up e-governance initiatives and increasing its IT

spend/outlay with an allocation of more than US$ 400 million for the Unique

Identification Authority of India (UIDAI) in 2010–11.

The labour cost arbitrage in this sector is about 60 per cent of that in the US.

The growth drivers include the high productivity of India’s human resources

and outsourcing of knowledge processes by SMEs.

Challenges

1. Dependency on US

2. Indian IT firms are outsourced and off- shored

3. Rupee appreciation and FII

4. Diversification in verticals


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5. Power sector

Thermal power accounts for 64.2 per cent of the power produced in India,

followed by hydro-electric power. India’s total installed capacity, as on March 31,

2010, has been estimated at 159,398.49 MW. The outlay for the sector is US$ 115.56

billion (INR 5,547 billion), according to the Eleventh Plan. The government has

launched an initiative for the development of coal-based ultra mega power projects

(UMPPs), each with a capacity of about 4000 MW. The states contributed 79,391.85

MW to the total installed capacity, while the Central and private sectors contributed

50,992.63 MW and 29,014.01 MW, respectively, as of March 2010. The installed

capacity of the renewable energy industry has been estimated at 13,242 MW (as on

July 31, 2009), which constitutes 9 per cent of the country’s total installed capacity.

Opportunities

Construction, operation and maintenance of transmission lines by private

players.


9

Private transmission facilities to be either set up and operated by independent

power transmission companies or joint ventures with state-owned transmission

utilities.

Competitive bidding for multiple transmission projects.

Challenges

Avoiding misconception of the new market arrangements

Keeping anticipation capabilities to adapt and correct policies and processes

(avoiding myopia and sheep behaviour)

Saving minimum core business competency at decision-making level

The environment laws will increase the restrictions to electric engineering

The automation and smart instrumentation presence will be increased

New materials and processes will force a permanent knowledge update

The demand of technical and financial management will increase

The professional competition will increase

The legal aspects will increase in professional activities

6. Financial services sector

The Indian financial market is growing rapidly, with significant potential for

further growth (National Stock Exchange is ranked 18th in terms of value of shares

traded in the world). India has a strong financial regulatory system, administered by

Reserve Bank of India (RBI) and supported by regulatory body such as Securities and

Exchange Board of India (SEBI), which govern capital markets and mutual funds,

among other financial institutions. India’s high savings rate offers significant

opportunity for channelising resources into the financial markets. The NSE and the

BSE are the main exchanges, with the NSE contributing over 70 per cent of the

turnover. There are more than 8,000 brokers in addition to about 44,000 sub-brokers

registered with SEBI. Mutual funds in India had assets under management to the tune

of US$165 billion (INR 7,944 billion) as of December 2009. More than 11,000 non-

banking financial companies (NBFCs) are registered with the RBI. The microfinance

segment in India too is witnessing rapid growth. Market capitalisation of Indian


10

companies on the stock exchange has more than tripled between 2004–05 and 2009–

2010.

Opportunities

High GDP growth rate, driven by significant corporate earnings, is expected to

create the need for more intermediaries in the capital market.

Large number of mutual funds and increasing AUM require more distribution

intermediaries and schemes for better market penetration.

Unorganised money lending is a general practice in micro-credit. High level of

professionalism, more transparency and low interest rates brought in by

organised microfinance firms, is expected to expand the market.

Challenges

Adept to face increasing transaction volumes, regulation and the integration of

previously disparate global markets

Agile at identifying and managing risk


11

Operationally efficient

Customer – centric

Optimized in both business & technology

7. Steel sector

India is the fifth-largest producer of crude steel in the world (2008), with a

production volume of 54.5 million tonnes. 222 memoranda of understanding (MoUs)

have been signed by various states with an intended capacity of about 275.7 million

tonnes and an investment of more than US$ 229 billion (INR 11,000 billion). India

and China are the only countries to have registered positive growth in steel production

in the period between January and March 2009.

The steel production capacity is estimated to reach 124 million tonnes by 2011–12. In

2008–09, the installed capacity for crude steel was estimated at 64.4 million tonnes,

while production was estimated at 54.5 million tonnes, resulting in an 85 per cent

capacity utilisation. Long-products constituted 57 per cent of the total finished steel

consumption, while the remaining 43 per cent was constituted by flat-products in

2007–08.


12

Opportunities

The rising costs of coal and crude oil have resulted in a shift towards the use

of alternate fuels. To leverage this opportunity, companies are investing in

building a pipeline network for gas distribution.

The increasing investments by the state governments in water and sewage

pipes infrastructure management are also expected to augment the anticipated

demand.

Challenges

The condition of the infrastructural facilities of the steel industry in India is

not at all conducive to a sustainable growth and development of the steel

industry of the India.

Even though India is capable of producing steel at a good rate and also

increase the volume of production there is not enough land available to

support such activities. the design institutions in India have not been

successful at recruiting the best of engineers and metallurgists in India. This

has affected the technological aspect of the Indian steel industry.

8. Telecommunication sector

India is one of the biggest telecom markets in the world with 581.81

million subscribers as on January 31, 2010, which are estimated to reach

approximately 700 million by 2012. At the end of January 2010, the overall

tele-density was recorded at 49.5 per cent with a total telephone subscriber

base of 581.81 million. The telecom sector is one of the highest FDI attracting

sectors in India, and has recorded FDI inflows worth over US$ 8.8 billion

between 2000 and 2010. Multiple factors including low tariffs, low handset

prices, effective government regulations, higher incomes and changes in

customer behaviour are the key drivers for growth. Broadband subscribers are


13

expected to grow to 30 million, while Internet subscribers are expected to

grow to 45 million by 2012.

Opportunities

By 2012, total telecom penetration in the largely untapped potential rural

markets of India is expected to reach to about 40 per cent as compared to the

current tele-density of about 16.61 per cent as of June 2009.

Despite the low penetration of internet services in the Indian market, it is

expected to grow in the next decade in terms of number of subscribers. India is

expected to feature among the top 10 broadband markets by 2013.

The expansion of wireless networks and growth in subscriber base, both in

urban and rural areas, has led to a boost in the sale of mobile handsets across

India. The mobile handsets sale grew by 7.9 per cent in 2008–09.

Challenges

1. advanced technology for authentication and e-purchase


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2. security measures

3. efficient use of bandwith.

RESEARCH METHODOLOGY

sector.

OBJECTIVES:

To study the behavior of investors towards manufacturing sector.

To find out the trends and market share of iron & steel industries and

automobiles in past and in current period.

To project future trends of stock prices.

To ascertain the key growth drivers of manufacturing sector.

To study the problems prevailing in manufacturing sector such as inflationary

pressure, cost of manufacturing.

To recommend buy/sell/hold decision in the future on the above company.

HYPOTHESIS:

Manufacturing sector is booming sector for investment.

METHODOLOGY:

Source of Secondary data is obtained from:

Data collection of selected sectors from BSE and NSE.


15

Data from websites like “www.economywatch.com”,

“www.siamindia.com” , “ www.cci.in” , “ www.economictimes.com” ,

“www.nseindia.com” .

Magazines like analyst ( published by ICFAI ), Investors India, Business

World.

PROPOSED CONTENT:

Company profile

Research design

Analysis and interpretation

Findings and conclusion

Recommendation

Bibliography

WORK PLAN:

Submission of Synopsis.

Collection of data through various websites, magazines and company’s

database.

Analysis of data.

Interpretation of data.

Drawing inference, interpretation and conclusion.

Based on the conclusion suggestions and recommendations will be made.


http://www.nseindia.com/

http://www.economictimes.com/

http://www.cci.in/

http://www.siamindia.com/

http://www.economywatch.com/

16

LITRATURE REVIEW

“The act of committing money or capital to an endeavor with the

expectation of obtaining an additional income or profit is investment.”

It’s actually pretty simple: investing means putting your money to work for you.

The money you earn is partly spent and the rest saved for meeting future

expenses. Instead of keeping the savings idle you may like to use savings in

order to get return on it in the future. This is called Investment. Investment is

a term, which is frequently used in the field of economics, business

management, finance and it means savings or savings made through delayed

consumption. Investment can be divided into different types according to

various theories and principles. In general purview, investment is the

application of money for earning more money. A particular amount of money

is invested in the bank or an asset is bought in the anticipation that some

return will be received from the investment in the future.

There can be a number of definitions of Investment. While dealing with the

various options of investment, the definitional variations of investment need to

be kept in mind.

According to economic theories, investment is defined as the “per unit

production of goods, which have not been consumed, however, will be used

for the purpose of future production.” Examples of this type of investments are

tangible goods like construction of a factory or bridge and intangible goods

like 6 months of on-job training. In terms of national production and income,

Gross Domestic Product (GDP) has an essential constituent, which is called

as gross investment. (http://us.geocities.com/frauline2008/terms.html)

What is investment in terms of Business Management:


17

According to business management theories, investment refers to tangible

assets like machinery and equipments and buildings and intangible assets like

copyrights or patents and goodwill. The decision for investment is also known

as capital budgeting decision, which is regarded as one of the key decisions.

(geocities.)

What is investment in terms of Finance:

In finance, investment refers to purchasing securities or any other financial

assets from the capital market or money market or purchasing real properties

with high market liquidity for example, gold, silver, real properties, and

precious items. These are called ‘investment vehicles’. Financial investments

are investment in stocks, bonds, commodities and many other types of

security investments. Indirect financial investments can also be done with the

help of mediators or third parties, such as pension funds, mutual funds,

commercial banks, and insurance companies. According to personal finance

theories, an investment is the implementation of money for buying shares or

mutual funds or purchasing an asset with the involvement of the factor of

capital risk. Here we are going to focus on investment in terms of finance,

only. (geocities.)

WHAT INVESTING IS NOT ?

Investing is not gambling. Gambling is putting money at risk by betting on an

uncertain outcome with the hope that you might win money. Part of the

confusion between investing and gambling, however, may come from the way

some people use investment vehicles. For example, it could be argued that

buying a stock based on a “hot tip” you heard at the water cooler is essentially

the same as placing a bet at a casino. True investing doesn’t happen without

some action on your part. A “real” investor does not simply throw his or her

money at any random investment; he or she performs thorough analysis and

commits capital only when there is a reasonable expectation of profit. Yes,

there still is risk, and there are no guarantees, but investing is more than

simply hoping Lady Luck is on your side.


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(financialhub-sg)


19

WHY SHOULD ONE INVEST?

Obviously, everybody wants more money. It’s pretty easy to understand that

people invest because they want to increase their personal freedom, sense of

security and ability to afford the things they want in life. However, investing is

becoming more of a necessity. The days when everyone worked the same job

for 30 years and then retired to a nice fat pension are gone. For average

people, investing is not so much a helpful tool as the only way they can retire

and maintain their present lifestyle. Nowadays, investments are the

foundation of our future financial level. Bad investments can bring us negative

turnovers and therefore decrease our future possibilities. You are looking at

two options for your money, the first you can spend it or save it and second,

invest it.

In short, one needs to invest to:

§ To beat inflation and earn return on your idle resources

§ generate a specified sum of money for a specific goal in life

§ make a provision for an uncertain future / for retirement.

One of the important reasons why one needs to invest wisely is to meet the

cost of Inflation. Inflation is the rate at which the cost of living increases. The

cost of living is simply what it costs to buy the goods and services you need to

live. Inflation causes money to lose value because it will not buy the same

amount of a good or a service in the future as it does now or did in the past.

For example, if there was a 6% inflation rate for the next 20 years, a Rs. 100

purchase today would cost Rs. 321 in 20 years. This is why it is important to

consider inflation as a factor in any long-term investment strategy. Remember


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to look at an investment’s ‘real’ rate of return, which is the return after

inflation. The aim of investments should be to provide a return above the

inflation rate to ensure that the investment does not decrease in value. For

example, if the annual inflation rate is 6%, then the investment will need to

earn more than 6% to ensure it increases in value.If the after-tax return on

your investment is less than the inflation rate, then your assets have actually

decreased in value; that is, they won’t buy as much today as they did last

year.

Investors can learn a lot from the famous Greek maxim inscribed on the

Temple of Apollo’s Oracle at Delphi: “Know Thyself”. In the context of

investing, the wise words of the oracle emphasize that success depends on

ensuring that your investment strategy fits your personal characteristics.

Even though all investors are trying to make money, each one comes from a

diverse background and has different needs. It follows that specific investing

vehicles and methods are suitable for certain types of investors. Although

there are many factors that determine which path is optimal for an investor,

we’ll look at two main categories: investment objectives, and investing

personality. (indian-capital-market-basics.)

INVESTMENT OBJECTIVES:-

The options for investing our savings are continually increasing, yet every

single investment vehicle can be easily categorized according to three

fundamental characteristics - safety, income and growth - which also

correspond to types of investor objectives. While it is possible for an investor

to have more than one of these objectives, the success of one must come at

the expense of others. Generally speaking, investors have a few factors to

consider when looking for the right place to park their money. Safety of

capital, current income and capital appreciation are factors that should

influence an investment decision and will depend on a person’s age,

stage/position in life and personal circumstances. A 75-year-old widow living


21

off of her retirement portfolio is far more interested in preserving the value of

investments than a 30-year-old business executive would be. Because the

widow needs income from her investments to survive, she cannot risk losing

her investment. The young executive, on the other hand, has time on his or

her side. As investment income isn’t currently paying the bills, the executive

can afford to be more aggressive in his or her investing strategies.

An investor’s financial position will also affect his or her objectives. A multi-

millionaire is obviously going to have much different goals than a newly

married couple just starting out. For example, the millionaire, in an effort to

increase his profit for the year, might have no problem putting down $100,000

in a speculative real estate investment. To him, a hundred grand is a small

percentage of his overall worth. Meanwhile, the couple is concentrating on

saving up for a down payment on a house and can’t afford to risk losing their

money in a speculative venture. Regardless of the potential returns of a risky

investment, speculation is just not appropriate for the young couple.

As a general rule, the shorter your time horizon, the more conservative you

should be. For instance, if you are investing primarily for retirement and you

are still in your 20s, you still have plenty of time to make up for any losses you

might incur along the way. At the same time, if you start when you are young,

you don’t have to put huge chunks of your pay-check away every month

because you have the power of compounding on your side.

On the other hand, if you are about to retire, it is very important that you either

safeguard or increase the money you have accumulated. Because you will

soon be accessing your investments, you don’t want to expose all of your

money to volatility - you don’t want to risk losing your investment money in a

market slump right before you need to start accessing your assets.


22

Personality:-

Peter Lynch, one of the greatest investors of all time, has said that the “key

organ for investing is the stomach, not the brain”. In other words, you need to

know how much volatility you can stand to see in your investments. Figuring

this out for yourself is far from an exact science; but there is some truth to an

old investing maxim: you’ve taken on too much risk when you can’t sleep at

night because you are worrying about your investments.

Another personality trait that will determine your investing path is your desire

to research investments. Some people love nothing more than digging into

financial statements and crunching numbers. To others, the terms balance

sheet, income statement and stock analysis sound as exciting as watching

paint dry. Others just might not have the time to plough through prospectus

and financial statements.

The main factor determining what works best for an investor is his or her

capacity to take on RISK.

Hence, the key to a successful financial plan is to keep apart a larger amount

of savings and invest it intelligently, by using a longer period of time. The

turnover rate in investments should exceed the inflation rate and cover taxes

as well as allow you to earn an amount that compensates the risks taken.

Savings accounts, money at low interest rates and market accounts do not

contribute significantly to future rate accumulation. While the highest rates

come from stocks, bonds, and other types of investments in assets such as

real estate. Nevertheless, these investments are not totally safe from risks, so

one should try to understand what kind of risks are related to them before

taking action. The lack of understanding as how stocks work makes the

myopic point of view of investing in the stock market ( buying when the

tendency to increase or selling when it tends to decrease) perpetuate. To


23

understand the characteristics of each one of the different types of investment

can or may help you determine which of them is the right one for your needs.

A Saving Bank account (SB account) is meant to promote the habit of saving

among the people. It also facilitates safekeeping of money. In this scheme

fund is allowed to be withdrawn whenever required, without any condition.

Hence a savings account is a safe, convenient and affordable way to save

your money. Bank deposits are fairly safe because banks are subject to

control of the Reserve Bank of India with regard to several policy and

operational parameters. Bank also pays you a minimal interest for keeping

your money with them.

Features:

The minimum amount to open an account in a nationalized bank is Rs 100. If

cheque books are also issued, the minimum balance of Rs 500 has to be

maintained. However in some private or foreign bank the minimum balance is

Rs 500 or more and can be up Rs. 10,000. One cheque book is issued to a

customer at a time.

Savings account can be opened either individually or jointly with another

individual. In a joint account only the sign of one account holder is needed to

write a cheque. But at the time of closing an account, the sign of the both the

account holders are needed.

Return:

The interest rate of savings bank account in India varies between 2.5% and

4%. In Savings Bank account, bank follows the simple interest method. The

rate of interest may change from time to time according to the rules of

Reserve Bank of India. One can withdraw his/her money by submitting a

cheque in the bank and details of the account, i.e. the Money deposited,

withdrawn along with the dates and the balance, is recorded in a passbook.

Advantages:

It’s much safer to keep your money at a bank than to keep a large amount of

cash in your home. Bank deposits are fairly safe because banks are subject to


24

control of the Reserve Bank of India with regard to several policy and

operational parameters. The federal Government insures your money. Saving

Bank account does not have any fixed period for deposit. The depositor can

take money from his account by writing a cheque to somebody else or

submitting a cheque directly. Now most of the banks offer various facilities

such as ATM card, credit card etc. Through debit/ATM card one can take

money from any of the ATM centres of the particular bank which will be open

24 hours a day. Through credit card one can avail shopping facilities from any

shop which accept the credit card. And many of the banks also give internet

banking facility through with one do the transactions like withdrawals,

deposits, statement of account etc. (webindia123.)

Fixed Deposits (FD's):-

A fixed deposit is meant for those investors who want to deposit a lump sum

of money for a fixed period; say for a minimum period of 15 days to five years

and above, thereby earning a higher rate of interest in return. Investor gets a

lump sum (principal + interest) at the maturity of the deposit.

Bank fixed deposits are one of the most common savings scheme open to an

average investor. Fixed deposits also give a higher rate of interest than a

savings bank account. The facilities vary from bank to bank. Some of the

facilities offered by banks are overdraft (loan) facility on the amount

deposited, premature withdrawal before maturity period (which involves a loss

of interest) etc. Bank deposits are fairly safer because banks are subject to

control of the Reserve Bank of India.

Features:-

Bank deposits are fairly safe because banks are subject to control of the

Reserve Bank of India (RBI) with regard to several policy and operational

parameters. The banks are free to offer varying interests in fixed deposits of

different maturities. Interest is compounded once a quarter, leading to a

somewhat higher effective rate.


25

The minimum deposit amount varies with each bank. It can range from as low

as Rs. 100 to an unlimited amount with some banks. Deposits can be made in

multiples of Rs. 100/-

Before opening a FD account, try to check the rates of interest for different

banks for different periods. It is advisable to keep the amount in five or ten

small deposits instead of making one big deposit. In case of any premature

withdrawal of partial amount, then only one or two deposit need be

prematurely encashed. The loss sustained in interest will, thus, be less than if

one big deposit were to be encashed. Check deposit receipts carefully to see

that all particulars have been properly and accurately filled in. The thing to

consider before investing in an FD is the rate of interest and the inflation rate.

A high inflation rate can simply chip away your real returns.

Returns: -

The rate of interest for Bank Fixed Deposits varies between 4 and 11 per

cent, depending on the maturity period (duration) of the FD and the amount

invested. Interest rate also varies between each bank. A Bank FD does not

provide regular interest income, but a lump-sum amount on its maturity. Some

banks have facility to pay interest every quarter or every month, but the

interest paid may be at a discounted rate in case of monthly interest. The

Interest payable on Fixed Deposit can also be transferred to Savings Bank or

Current Account of the customer. The deposit period can vary from 15, 30 or

45 days to 3, 6 months, 1 year, 1.5 years to 10 years.


26

Duration Interest rate (%) per annum

15-30 days 4 -5 %

30-45 days 4.25-5 %

46-90 days 4.75--5.5 %

91-180 days 5.5-6.5 %

181-365 days 5.75-6.5 %

1-2 years 6-8 %

2-3 years 6.25-8 %

3-5 years 6.75-8

Advantages: -

Bank deposits are the safest investment after Post office savings because all

bank deposits are insured under the Deposit Insurance & Credit Guarantee

Scheme of India. It is possible to get loans up to75- 90% of the deposit

amount from banks against fixed deposit receipts. The interest charged will be

2% more than the rate of interest earned by the deposit. With effect from A.Y.

1998-99, investment on bank deposits, along with other specified incomes, is

exempt from income tax up to a limit of Rs.12, 000/- under Section 80L. Also,

from A.Y. 1993-94, bank deposits are totally exempt from wealth tax. The

1995 Finance Bill Proposals introduced tax deduction at source (TDS) on

fixed deposits on interest incomes of Rs.5000/- and above per annum.

(webindia123)


27


28

LIQUID FUNDS:-

Liquid funds are used primarily as an alternative to short-term fix deposits.

Liquid funds invest with minimal risk (like money market funds). Most funds

have a lock-in period of a maximum of three days to protect against

procedural (primarily banking) glitches. (iloveindia.)

Liquid funds score over short term fix deposits. Banks give a fixed rate in the

range 5%-5.5% p.a. for a term of 15-30 days. Returns from deposits are

taxable depending on the tax bracket of the investor, which considerably pulls

down the actual return. Dividends from liquid funds are tax-free in the hands

of investor, which is why they are more attractive than deposits.

MONEY MARKET FUNDS:-

A money market fund is a type of mutual fund that is required by law to invest

in low-risk securities. These funds have relatively low risks compared to other

mutual funds and pay dividends that generally reflect short-term interest rates.

Unlike a “money market deposit account” at a bank, money market funds are

not federally insured.

Money market funds typically invest in government securities, certificates of

deposits, commercial paper of companies, and other highly liquid and low-risk

securities. They attempt to keep their net asset value (NAV) at a constant

$1.00 per share—only the yield goes up and down. But a money market’s per

share NAV may fall below $1.00 if the investments perform poorly. While

investor losses in money market funds have been rare, they are possible.

It’s an investment fund that holds the objective to earn interest for

shareholders while maintaining a net asset value (NAV) of $1 per share.

Mutual funds, brokerage firms and banks offer these funds. Portfolios are

comprised of short-term (less than one year) securities representing high-

quality, liquid debt and monetary instruments.


http://www.iloveindia.com/finance/encyclopedia/liquidfunds.html

29

A money market fund’s purpose is to provide investors with a safe place to

invest easily accessible cash-equivalent assets characterized as a low-risk,

low-return investment. Because of their relatively low returns, investors, such

as those participating in employer-sponsored retirement plans, might not want

to use money market funds as a long-term investment option.

(sec.gov) National Savings Certificates (NSC) are certificates issued by

Department of post, Government of India and are available at all post office

counters in the country. It is a long term safe savings option for the investor.

The scheme combines growth in money with reductions in tax liability as per

the provisions of the Income Tax Act, 1961. The duration of a NSC scheme is

6 years.

Features:

NSCs are issued in denominations of Rs 100, Rs 500, Rs 1,000, Rs 5,000

and Rs 10,000 for a maturity period of 6 years. There is no prescribed upper

limit on investment. Individuals, singly or jointly or on behalf of minors and

trust can purchase a NSC by applying to the Post Office through a

representative or an agent. One person can be nominated for certificates of

denomination of Rs. 100- and more than one person can be nominated for

higher denominations. The certificates are easily transferable from one person

to another through the post office. There is a nominal fee for registering the

transfer. They can also be transferred from one post office to another.

One can take a loan against the NSC by pledging it to the RBI or a scheduled

bank or a co-operative society, a corporation or a government company, a

housing finance company approved by the National Housing Bank etc with the

permission of the concerned post master. Though premature encashment is

not possible under normal course, under sub-rule (1) of rule 16 it is possible

after the expiry of three years from the date of purchase of certificate.

Tax benefits are available on amounts invested in NSC under section 88, and

exemption can be claimed under section 80L for interest accrued on the NSC.

Interest accrued for any year can be treated as fresh investment in NSC for

that year and tax benefits can be claimed under section 88.


30

Return:

It is having a high interest rate at 8% compounded half yearly. Post maturity

interest will be paid for a maximum period of 24 months at the rate applicable

to individual savings account. A Rs1000 denomination certificate will increase

to Rs. 1601 on completion of 6 years.

Interest rates for the NSC Certificate of Rs 1000

Year Rate of Interest

1 year Rs 81.60

2 year Rs 88.30

3 year Rs 95.50

4 years Rs103.30

5 years Rs 111.70

6 years Rs 120.80

Advantages:

Tax benefits are available on amounts invested in NSC under section 88, and

exemption can be claimed under section 80L for interest accrued on the NSC.

Interest accrued for any year can be treated as fresh investment in NSC for

that year and tax benefits can be claimed under section 88. NSCs can be

transferred from one person to another through the post office on the payment

of a prescribed fee. They can also be transferred from one post office to

another. The scheme has the backing of the Government of India so there are

no risks associated with your investment.

How to start?

Any individual or on behalf of minors and trust can purchase a NSC by

applying to the Post Office through a representative or an agent. Payments


31

can be made in cash, cheque or DD or by raising a debit in the savings

account held by the purchaser in the Post Office. The issue of certificate will

be subject to the realization of the cheque, pay order, DD. The date of the

certificate will be the date of realization or encashment of the cheque. If a

certificate is lost, destroyed, stolen or mutilated, a duplicate can be issued by

the post-office on payment of the prescribed fee.

(webindia123.)

POST OFFICE MONTHLY INCOME SCHEME

The post-office monthly income scheme (MIS) provides for monthly payment

of interest income to investors. It is meant for investors who want to invest a

sum amount initially and earn interest on a monthly basis for their livelihood.

The MIS is not suitable for an increase in your investment. It is meant to

provide a source of regular income on a long term basis. The scheme is,

therefore, more beneficial for retired persons.

Features:

Only one deposit is available in an account. Only individuals can open the

account; either single or joint. (two or three). Interest rounded off to nearest

rupee i.e., 50 paise and above will be rounded off to next rupee. The minimum

investment in a Post-Office MIS is Rs 1,500 for both single and joint accounts.

The maximum investment for a single account is Rs 4.5 lakh and Rs 9 lakh for

a joint account. The duration of MIS is six years.

Returns:

The post-office MIS gives a return of 8% interest on maturity. The minimum

investment in a Post-Office MIS is Rs 1,000 for both single and joint accounts.


32

Deposit Rs Monthly Interest Amount returned on

maturity

5,000

10,000

50,000

1,00,000

2,00,000

3,00,000

6,00,000

33

66

333

667

1333

2000

4000

5,000

10,000

50,000

1,00,000

2,00,000

3,00,000

6,00,000

Advantages:

Premature closure of the account is permitted any time after the expiry of a

period of one year of opening the account. Deduction of an amount equal to 5

per cent of the deposit is to be made when the account is prematurely closed.

Investors can withdraw money before three years, but a discount of 5%.

Closing of account after three years will not have any deductions. Post

maturity Interest at the rate applicable from time to time (at present 3.5%).

Monthly interest can be automatically credited to savings account provided

both the accounts standing at the same post office. Deposit in Monthly

Income Scheme and invest interest in Recurring Deposit to get 10.5%

(approx) interest. The interest income accruing from a post-office MIS is

exempt from tax under Section 80L of the Income Tax Act, 1961. Moreover,

no TDS is deductible on the interest income. The balance is exempt from

Wealth Tax. .webindia123.)

PUBLIC PROVIDENT FUNDS

PPF is among the most popular small saving schemes. Currently, this scheme

offers a return of 8 per cent and has a maturity period of 15 years. It provides

regular savings by ensuring that contributions (which can vary from Rs.500 to


33

Rs.70,000 per year) are made every year. For efficient “tax saving” there is

nothing better than PPF!

But for those who are looking for liquidity, PPF is NOT a good option.

Withdrawals are allowed only after five years from the end of the financial

year in which the “first deposit” is made. PPF does not provide any regular

income and only provides for accumulation of interest over a 15-year period,

and the lump-sum amount (principal + interest) is payable on maturity.

The lump-sum amount that you receive on maturity (at the end of 15 years) is

completely tax-free!! One can deposit up-to Rs 70,000 per year in the PPF

account and this money will also not be taxed and be removed from your

taxable income.

If you are relatively young and have time on your side, then PPF is for you.

How to invest in PPF?

A PPF account can be opened with a minimum deposit of Rs.100 at any

branch of the State Bank of India (SBI) or branches of its associated banks

like the State Bank of Mysore or Hyderabad. The account can also be opened

at the branches of a few nationalized banks, like the Bank of India, Central

Bank of India and Bank of Baroda, and at any head post office or general post

office. After opening an account you get a pass book, which will be used as a

record for all your deposits, interest accruals, withdrawals and loans.

However, be warned: you can have only one PPF account in your name. If at

any point it is detected that you have two accounts, the second account that

you have opened will be closed, and you will be refunded only the principal,

not the interest. Again, two adults cannot open a joint account. The account

will have to be opened in only one person’s name. Of course, the person who

opens an account is free to appoint nominees.

(indiahowto.)


34

COMPANY FIXED DEPOSIT

Company Fixed Deposit is the deposit placed by investors with companies for

a fixed term carrying a prescribed rate of interest. Company Fixed Deposit

have always offered interest which is 2-3% higher than Bank Deposit rate,

because they have to pay higher interest to banks for borrowing money.

Interest is paid on monthly/quarterly/half yearly/yearly or on maturity basis and

is sent either through cheque or ECS facility. TDS is deducted if the interest

on fixed deposit exceeds Rs.5000/- in a financial year. At the end of deposit

period principal is returned to the deposit holder.

How to choose a good company deposit scheme?

» Ignore the unrated Company Deposit Schemes. Ignore deposit schemes of

little known manufacturing companies. For NBFC’s, RBI has made it

mandatory to have an ‘A’ rating to be eligible to accept public deposits, one

should go further and look at only AA or AAA schemes.

» Within a given rating grade, choose the company with a better reputation.

» Once you decide on a company, next choose the schemes that have given

a better return. Unless you need income regularly, you should prefer

cumulative to regular income option since the interest earned automatically

gets reinvested at the same coupon rate giving upon better yields. It also

gives you a lump-sum amount at one go.

» It is better to make shorter deposit of around 1 year to 3 years. This way

you not only can keep a watch on the company’s rating and servicing but can

also plan to have your money back in case of emergency.


35

» Check on the servicing standards of the company. You should not oblige

companies that care little about investor services like promptly sending

interest warrants or the principal cheque.

» Involve your reputed Financial planner / Investment Advisor like us for

advice in all your transactions. Do not bypass and invest directly just to earn

an extra incentive.

» For investors living in outstation city, check whether the company accepts

outstation cheques and make payment through at par cheques.

Which companies can accept Deposit?

Companies registered under Companies Act 1956, such as:

» Manufacturing Companies.

» Non-Banking Finance Companies,

» Housing Finance Companies.

» Financial Institutions.

» Government Companies.

Upto what limits can a company accept deposit?

A Non-Banking Non-Finance Company (Manufacturing Company) can accept

deposit subject to following limits.

» Upto 10% of aggregate of paid-up share capital and free reserves if the

deposits are from shareholders or guaranteed by directors.

» Otherwise upto 25% of aggregate of paid-up share capital and free

reserves.

A Non-Banking Finance Company can accept deposits upto following limits:


36

» Equipment Leasing Company can accept four times of its net owned fund.

»Loan or Investment Company can accept deposit upto one and half time of

its net owned funds.

What is the period of the deposit?

Company Fixed Deposits can be accepted by a Manufacturing Company

having duration from 6 months to 3 years. Non-Banking Finance Company

can accept deposit from 1 year to 5 years period. A Housing Finance

Company can accept deposit from 1 year to 7 years.

Where not to Invest?

» Companies which offer interest higher than 15%.

» Companies which are not paying regular dividends to the shareholder.

» Companies whose Balance Sheet shows losses.

» Companies which are below investment grade (A or under) rating.

There is an old saying “DON’T PUT All YOUR EGGS IN ONE BASKET”.

The company deposits should be spread over a large number of companies.

This will help the investor to diversify his risk among various

companies/industries. Investors should not put more than 10% of their total

Investible funds in one company.

(avdhootinvestment.)


37

BONDS AND DEBENTURES

Debt instruments can be further classified into the following categories based

on the different characteristics with which they are floated in the market:

Debentures

Bonds

Debentures

Main characteristics

They are fixed interest debt instruments with varying period of maturity.

Can either be placed privately or offered for subscription.

May or may not be listed on the stock exchange.

If listed on the stock exchanges, they should be rated prior to the listing

by any of the credit rating agencies designated by SEBI.

When offered for subscription a debenture redemption reserve has to

be maintained.

The period of maturity normally varies from 3 to 10 years and may also

be more for projects with a high gestation period.

Types of debentures:

There are different kinds of debentures, which can be offered. They are as

follows:

Non convertible debentures (NCD)

Partially convertible debentures (PCD)

Fully convertible debentures (FCD)

The difference in the above instruments is regarding the redeemability of the

instrument:


38

In case of NCDs, the total amount of the instrument is redeemed by the

issuer,

In case of PCDs, part of the instrument is redeemed and part of it is

converted into equity,

In case of FCDs, the whole value of the instrument is converted into

equity. The conversion price is stated when the instrument is issued.

Debentures might be either callable or puttable:-

Callable debenture is a debenture in which the issuing company has the

option of redeeming the security before the specified redemption date at a

pre-determined price.

Similarly, a puttable security is a security where the holder of the instrument

has the option of getting it redeemed before maturity.

BONDS

Bonds may be of many types - they may be regular income, infrastructure,

tax saving or deep discount bonds. These are financial instruments with a

fixed coupon rate and a definite period after which these are redeemed. The

fundamental difference between debentures and bonds is that the former is

normally secured whereas the latter is not. Hence in general bonds are issued

at a higher interest rate than debentures. This avenue of financing is mainly

availed by highly reputed corporate concerns and financial institutions.

The three main kinds of instruments in this category are as follows:

Fixed rate

Floating rate

Discount bonds


39

The bonds may also be regular income with the coupons being paid at

fixed intervals or cumulative in which the interest is paid on redemption.

Unlike debentures, bonds can be floated with a fixed interest or floating

interest rate. They can also be floated without interest and are called

discount bonds as they are issued at a discount to the face value and

an investor is paid the face value on redemption, and if offered for

longer terms are known as deep discount bonds.

The main advantage with interest bearing bonds is the floating interest

rate, which is stipulated based on certain mark-up over stock market

index or some such index.

From the point of view of the investor bonds are instruments carrying

higher risk and higher returns as compared to debentures.

This has to be kept in mind while floating bond issues for financing

purposes. With the current buoyancy in capital markets for equity

instruments the demand for corporate bonds is low.

Foreign Direct Investment

Foreign direct investment (FDI) in its classic definition, is defined as a

company from one country making a physical investment into building a

factory in another country. Its definition can be extended to include

investments made to acquire lasting interest in enterprises operating outside

of the economy of the investor.[1] The FDI relationship consists of a parent

enterprise and a foreign affiliate which together form a Multinational

corporation (MNC).

FDI in India has increased over the years due to the efforts that have been

made by the Indian government. The increased flow of FDI in India has given

a major boost to the country's economy and so measures must be taken in

order to ensure that the flow of FDI in India continues to grow.


http://en.wikipedia.org/wiki/Foreign_investment#cite_note-0

40

Advantages of FDI in

India:

The Indian

government made

several reforms in the

economic policy of the

country in the early

1990s. This helped in

the liberalization and

deregulation of the

Indian economy and also opened the country's markets to foreign direct

investment.

As a result of this, huge amounts of foreign direct investment came into India

through non- resident Indians, international companies, and various other

foreign investors. The growth of FDI in India boosted the economic growth of

the country. Major advantages of FDI in India have been in terms of -

Increased capital flow.

Improved technology.

Management expertise.

Access to international markets.

WHY INDIA

Large domestic market


41

India is one of the largest emerging markets, with a population of over one

billion. India is one of the largest economies in the world in terms of

purchasing power and has a strong middle class base of 300 million.

Now India has two major sectors where the market can be spotted. Urban and

Rural markets.

Rural-urban profile

Urban Rural

Population 2001 – 02 (mn house

hold)

53 135

Population 2009-10 (mn household) 69 153

% Distribution (2001-02) 28 72

Market (Towns/Villages) 3,768 627,000

Universe of Outlets (mn) 1 3.3

Around 70 per cent of the total households in India (188 million) resides in the

rural areas. The total number of rural households is expected to rise from 135

million in 2001-02 to 153 million in


42

2009-10, this presents the largest potential market in the world. The annual

size of the rural FMCG market was estimated at around US$ 10.5 billion in

2001-02. With growing incomes at both the

rural and the urban level, the market potential is expected to expand further.

India - a large consumer goods spender

An average Indian spends around 40 per cent of his income on grocery and 8

per cent on personal care products. The large share of fast moving consumer

goods (FMCG) in total individual spending along with the large population

base is another factor that makes India one of the largest FMCG markets.


43

Consumption pie

Even on an international scale, total consumer expenditure on food in India at

US$ 120 billion is amongst the largest in the emerging.


44

Change in the Indian consumer profile

Consumer Profile

1999 2001 2006

Population (millions) 846 1,012 1,087

Population < 25 years of age 480 546 565

Urbanisation (%) 26 28 31

Rapid urbanisation, increased literacy and rising per capita income, have all

caused rapid growth and change in demand patterns, leading to an explosion

of new opportunities. Around 45 per cent of the population in India is below 20

years of age and the young population is set to rise further. Aspiration levels

in this age group have been fuelled by greater media exposure, unleashing a

latent demand with more money and a new mindset.


45

Demand-supply gap

Currently, only a small percentage of the raw materials in India are processed

into value added products even as the demand for processed and

convenience food is on the rise. This demand supply gap indicates an

untapped opportunity in areas such as packaged form, convenience food and

drinks, milk products etc. In the personal care segment, the low penetration

rate in both the rural and urban areas indicates a market potential.

FMCG Category and

products

Health care –

Fabric wash (laundry

soaps and synthetic

detergents); household

cleaners (dish/utensil

cleaners, floor cleaners,

toilet cleaners, air

fresheners, insecticides and mosquito repellents, metal polish and furniture

polish).

Food and beverages –

Health beverages; soft drinks; staples/cereals; bakery products (biscuits,

bread, cakes); snack food; chocolates; ice cream; tea; coffee; soft drinks;


46

processed fruits, vegetables; dairy products; bottled water; branded flour;

branded rice; branded sugar; juices etc.

Personal care –

Oral care, hair care, skin care, personal wash (soaps); cosmetics and

toiletries; deodorants; perfumes; feminine hygiene; paper products.


47

Indian Competetiveness and Comparison With The World

Materials availability

India has a diverse agro-climatic condition due to which there exists a wide-

ranging and large raw material base suitable for food processing industries.

India is the largest producer of livestock, milk, sugarcane, coconut, spices and

cashew and is the second largest producer of rice, wheat and fruits &

vegetables. India also has an ample supply of caustic soda and soda ash, the

raw materials in the production of soaps and detergents – India produced 1.6

million tonnes of caustic soda in 2003-04. Tata Chemicals, one of the largest

producers of synthetic soda ash in the world is located in India. The

availability of these raw materials gives India the locational advantage.

Cost competitiveness

Labour cost comparison


48

Apart from the advantage in terms of ample raw material availability,

existence of low-cost labour force also works in favour of India. Labour cost in

India is amongst the lowest in Asian countries. Easy raw material availability

and low labour costs have resulted in a lower cost of production. Many multi-

nationals have set up large low cost production bases in India to outsource for

domestic as well as exports market. The Role of Infrastructure in Industrial

Development

One of the most crucial elements to industrial development is effective

infrastructure especially in power supply, transportation and communications.

A study conducted in 2006 Hulten, Bennathan and Srinivasan (2006) shows

the link between physical infrastructure and increased productivity among

manufacturing firms. While it is implied that manufacturing firms need

physical infrastructure to start and maintain production, this fact is often left

out of most work on industrialization studies (Hulten 2006). Policy makers

when considering re-industrialization in India may often overlook this link as

greater attention is given to investment infrastructure. By recognizing the

need for infrastructure among industry the government can launch more

projects that will be benefit the economy and the public at large.

Another piece of literature in the field looks at the effect of better

infrastructure on developed and developing regions. Most studies indicated

that improving infrastructure does not have an influence on the growth or

productivity of firms in places like the US. However, Lall (2007) shows that

better infrastructure can have positive gains for firms in developing regions.

Because states are at various stages of development within India,

infrastructure can have a serious impact on the success of business. Lall

finds that “transport and communications infrastructure are significant

determinants of regional growth in India” (Lall, page 583), while returns in

power supply development are higher for more advance states. Lall explains

that this inconsistency arises from the lack of other public services and capital

in less developed states, meaning transportation and communications serve

as more basic and necessary infrastructure for industry in developing states.


49

These findings and conclusions should not serve to eliminate power supply

from government development projects, rather they should highlight the

importance of diverse public works projects based on the needs of regions

and firms. It is clear from these studies and others that infrastructure

development is a key component of growth in manufacturing, and that

improving public services is a necessary first step in industrial development.

Liberalization, FDI and Current Implications

FDI and trade openness are not new phenomenon in the global market but

India is only recently experiencing the growth effects of liberalization. In the

forty some years after independence the Indian economy was closed off to

the rest of the world, and while some trade did occur across borders, it was

not truly part of the global economy. In 1991, under the pressures of an

economic crisis, the Indian government turned to the World Bank and IMF for

loans. Even though the Indian government never took these loans, the

process of liberalization and privatization required by the World Bank had

already begun, and in a radical move, the Indian government continued these

policies of openness. The government removed numerous licensing

regulations in all industries, began the privatization of many services that were

previously state-run, and most importantly opened the economy to foreign

investments. Opening the markets of India allowed for greater development

and business opportunities for domestic firms, while increasing the

international presence in Indian economics. This liberalization was a huge

step for India, and it ushered in a new period of economic policy that

ultimately shaped India’s stance in the global economy today.

FDI policy in India follows certain regulations on the amount of investment

allowed in certain sectors. While FDI is strictly prohibited in retail trading,

atomic energy, lottery systems and other forms of gambling, most other

sectors are allowed up to one hundred percent invest. A report on FDI policy

put out by the Ministry of Commerce and Industry in 2006 lists the various

industries and permitted levels of investment in each. It is interesting to note

that all manufacturing and heavy industries are allowed one hundred percent


50

investment, and most are given automatic entry route. In contrast, the

amount of FDI allowed for telecommunications is capped at seventy-four

percent on basic telecom and Internet service provision (Foreign Direct

Investment Policy). While the current policy allows for more investment in

manufacturing than other sectors, industry is not the most popular sector for

FDI inflows. In the past eight years the highest percentage of FDI in India has

been directed to the service sector at 20.87 percent. This is followed by

computer software and hardware at 11.95 percent, and then

telecommunications at 7.99 percent.

TABLE 1: FDI BY SECTOR

Source: Department of Industrial Promotion and Policy

It is interesting to note that greater liberalization of FDI towards manufacturing

has not helped it garner international investments in India, and rather the

booming IT and computer services has been a major pull for investors abroad.

Over the past eight years, the amount of FDI directed towards services has

risen at a much higher rate then that of construction, as seen in the graph

below. Moreover, the limits on investment in IT indicate that government

would like domestic firms to retain a role in the development of this sector,

whereas manufacturing does not require domestic involvement. This points to

a difference in prioritization of sectors from the government.


51

GRAPH 1: GROWTH IN FDI BY SECTOR (Amount US$ in millions)

Source: Department of Industrial Promotion and Policy

Not only is there a clear difference in what sectors attract the most FDI but

also there are marked differences in the regional distribution of FDI. The state

of Maharashtra attracts the largest amount of FDI at 24.9 percent, followed by

the state of Delhi and surrounding states of Haryana and Utter Pradesh at

23.4 percent of total foreign investments. In both cases, the most investments

go to telecommunication, services, electrical equipment (such as computer

software and other components), and to some degree transportation

(Bloodgood 28). It is no surprise that Maharashtra is the richest state in India,

and others with low levels of FDI such as Bihar and Assam severely lag in

development. It is clear that liberalization policy has not had the same impact

all over India and equal growth and investment is necessary for stable growth

in the Indian economy.

TABLE 2: FDI EQUITY INFLOWS


52

Source: Competitive Conditions for Foreign Direct Investment in India.

Efficiency of Indian Manufacturing Firms

The efficiency of Indian manufacturing is well behind that of foreign firms,

evidenced by the weak export economy of India. In the context of this

argument, efficiency refers to the ability of a firm to produce reliable goods at

a low cost, in a long term and competitive manner. This is extended to the

overall output of a firm, meaning firms with greater output will be more

efficient. An in depth study of manufacturing efficiency by Kalirajan and Bhide

(2005) describe the growth of manufacturing pre and post reform. Over the

years the manufacturing sector has grown in India the percent of growth has

not been consistent from year to year. Moreover studies on the manufacturing

sector report varying levels of success, with some literature claiming great

strides in industry, and others showing the clear lack of development in the

sector. These discrepancies point to an unstable sector, mainly due to

inefficient and unproductive firms. The authors use a production frontier model

to describe the problems of output among Indian manufacturers. A production

frontier is defined as “the ability of firms to achieve their maximum possible

output from a given set of inputs and technology” (Kalirajan and Bhide 127).

When a firm operates within the production frontier, it depends on an increase

of input to create more output rather then improving the internal structure of

operations. The results of the study show that Indian manufacturing has been

dependant upon this form of growth for many years, and has not broken out of

its current production frontier. Indian firms fail to focus on the overall

improvement of business functions, and are not investing enough in R&D or


53

improving the means of production for goods. In addition, lack of efficiency

means that export diversification has not occurred in a significant way.

Manjappa and Mahesha (2008) extend the ideas of production frontiers

by analyzing productivity growth, efficiency change and technical progress

through the use of the Malmquist Index. This formula allows for the

differentiation of productivity measurements within a firm, and the authors

apply this index to the outputs of five capital-intensive and five labor-intensive

industries between 1994 and 2004. The study presents an interesting

dilemma between growth in the two types of industry. In capital-intensive

industries total factor production (TFP) increased as a result of technical

progress within firms. This is perceived as a “shifting of frontier” (Manjappa

and Mahesha, page 177) for firms, but does not indicate an actual

improvement in efficiency of business operations. On the other hand, labor-

intensive industries experienced productivity regress over the years, even

though efficiency has gone up among these firms. The authors speculate the

efficiency growth was offset by the lack in technical progress among labor-

intensive firms. The contrast between the types of industry indicates that each

one depends on both technical efficiency and change for overall output

growth, further emphasizing the need to improve technologies in the sector

and the way they are used.

Another interesting piece of information comes from Venkataramanaiah

and Parashar (2007) who look at the competitiveness of Small and Medium-

Size Enterprises (SMEs) in Indian industry. They explain that about 20

percent of SMEs are able to enter in the supply chain of goods with larger

firms, ensuring a constant stream of clients and markets. However another 20

percent cannot enter the supply chain due to “uncertain erosion of their

market shares. The remaining 60 percent cannot enter the supply system,

even though “there is a strong demand from customers” ” (Venkataramanaiah

and Parashar 231). SMEs have trouble entering the market for of a variety of

reasons, including access to finance and lack of new technology. The authors

promote the use of industrial clusters, which are similar to SEZs, to enhance

the competitiveness of SMEs.


54

Das and Pant (2006) show that the efficiency of firms is not limited to

business practices as market imperfections do not encourage competiveness

within the sector. The authors find that the years of protectionist policy

influenced the growth of the sector post-liberalization and limited the entry and

exit of firms. Their data indicates “that entry and exit occur at the lower end of

the market, leaving the market structure unaffected” (Das and Pant 66). This

has caused a “missing middle” phenomenon for the sector, as not enough

firms can grow to medium size, and many small firms and a few large

corporations characterize the sector. This is a detriment to overall growth of

the sector as small and medium size businesses struggle with competition

and Indian manufacturing relies on a few large companies for all export

growth. The difficulty of closing a firm in the sector is a detriment to increased

competition as well. To close down a firm in manufacturing can take up to ten

years, and this prevents a dynamic market from emerging, as owners must

operate with unsuccessful firms for many years rather then re-establishing

business. Finally, capital market imperfections result in very few new

enterprises getting start up loans, and the authors suggest increasing the

scope of Developing Financial Institutions. Doing so will mean that more start

up firms can enter the market thus increasing competition and efficiency of all

corporations.

Kambhampati (2006) looks further at the role of financial institutions

and efficiency of firms. Typically financing from private and government

institutions are highly monitored, putting pressure on companies to increase

output. However the Indian system has a low level of corporate governance,

and government loans are not strictly monitored, giving no real incentive for

firms to be efficient. Kambhampati hypothesizes that Foreign Financial

Institutions (FFIs) are more likely to regulate their loans than the government,

resulting in more efficiency from privately backed firms. While the study

proves that FFIs are more regulatory with their financing, neither institution is

especially effective at increasing productivity of firms. One explanation of this

phenomenon is that prior to liberalization, financing from the public and


55

private sector was done on a quota system, and regulation was not given as

much priority as the mere existence of firms. Post-reform little has changed,

despite the influx of foreign capital and reforms in the financing sector. This

indicates that liberalization in itself has not been enough, and that more steps

need to be taken by the government to encourage greater productivity from

firms. With the further opening up of the sector and global pressures it is

imperative that Indian firms increase efficiency in order to be competitive.

Environment-Conscious Manufacturing

India is a fast growing nation, and with comes increased levels of

environmental degradation. Managi and Jena (2008) review Indian

environmental policy and then apply an Environmental Kuznets Curve to

demonstrate a decrease in environmental productivity over a period of twelve

years across high-income and low-income states. In the late 1970s the

government passed legislation that called for a more protectionist stance

regarding the environment. Some years later the Air Act and the

Environmental Protection Act were enacted, giving more legislative authority

to state and central boards. In addition to this, the Department of Environment

(DOE) was created to oversee development projects, facilitate central, state

and local partnerships and monitor pollution levels. Criticisms emerged that

the DOE had limited enforcement powers, nor adequate financial or political

backing. In response the government created the Ministry of Environment and

Forest (MoEF) to further monitoring and promotion of environmental

sustainability. Despite the “Environmental Action Plan” published in 1993, little

action has been taken to significantly reduce the amount of pollution as

economic development and liberalization took precedence. Given this history

of weak environmental policy, the authors explore the “environmental

productivity” of states across India and find an “EKC type relationship exists”

between concern for the environment and income across all states (Managi

and Jena 439). Moreover, environmental productivity has decreased as a

whole across India, something that the government will have to address in a

strong action oriented way.


56

An important element of all sustainability discussion is the Kyoto Protocol and

how different countries respond to the stipulations of the agreement. Baetting,

Brander and Imboden (2008) analyze the cooperation levels of signatories,

including India. Using five different indicators of cooperation, including

willingness and promptness in enacting goals of the framework the authors

find that India ranks higher than the US and China in its level of cooperation.

Part of India’s cooperation comes from its implementation of a Designated

National Authority (DNA) to oversee the Clean Development Mechanism

(CDM) stipulated by Kyoto.

Ganapati and Liu (2009) describe India’s development of a DNA following the

ratification of the Kyoto Protocol. Kyoto calls for a DNA to regulate CDM

projects in the host country, and immediately after ratification 2002, the Indian

government created the National CDM Authority. This authority is a “single

window clearinghouse” for the approval of new projects, making the process

of apply for a CDM a relatively streamline process (Ganapati and Liu 50).

Despite this, the DNA is limited in power and function, and cannot create the

necessary political infrastructure to implement better policies. Moreover, there

is inadequate representation of relevant industries on the CDM Authority such

as coal and natural gas, two main causes of the pollutants that need to be

eliminated in India. Another set back to sustainability is the CDM Authority’s

lack of an explicit set of priority areas for CDM projects. This means that

cases are reviewed on a project-to-project basis, leading to inconsistencies in

regulation and higher transaction costs. Without adequate funding or support,

the CDM Authority cannot be expected to significantly lower the costs of

transactions either, another important role of the DNA. Lowering the cost to

implementing a CDM project is a necessary step to increase the amount

foreign investment in sustainable development in India. Despite the problems

of the CDM Authority, there is considerable room for political discourse and

involvement from local NGOs and business, giving it the ability to increase its

overall power through cross industry links.


57

If India is successful in implementing better policies to increase its

manufacturing sector, it will face an even greater problem of an increase in

environmental degradation as industrial waste increases. To deter a serious

environmental problem the Indian government must take steps to ensure

growth does not result in further environmental ruin. Not only should the

government give more importance to existing environmental ministries, it must

also help its private sector lead the way in green manufacturing. Perhaps the

problem results from a misconception that environmental responsibility and

economic growth cannot work together in a developing country, something

that many studies and much discussion have shown to be untrue.


58

FINDING AND ANALYSIS

World over the significance of productivity and quality in industrial production has

reached its peak today, as a result of the ever-growing competition in industry and

business, primarily because of the pressures of globalization. There is a heightened

need to improvise the cost effectiveness of manufacturing processes, while at the

same time maintaining quality, to withstand the pressures of competition.

Accordingly, it has become imperative for businesses to constantly seek new and

innovative means to production processes and manufacturing techniques, and new

frontiers of technology for enhanced competitiveness of operations. In this context,

this paper seeks to (i) make a macro level review of the manufacturing scenario in the

developing world with special reference to India, (ii) make a micro level study of the

cost management system of a public sector company (Government of Kerala),

KAMCO (Kerala Agro-Machinery Corporation) including benchmarking it with the

industry leader, and (iii) suggest suitable strategies for enhanced cost competitiveness

of the company.

I. MANUFACTURING IN THE DEVELOPING WORLD IN THE ONGOING

GLOBALIZED ERA

1.1. New Manufacturing Context and the Competitiveness Imperative

Growing interest in industrial competitiveness has now currently become a global

phenomenon prominent across all economies–developed and developing, though it

initially originated in the developed world. Wignaraja (2001) has observed,

“Concerns about the process of industrial restructuring in an integrated world

economy have sparked widespread interest in the concept of competitiveness as

applied to national economies and enterprises within them. This interest originated in

the developed world but has recently spilled over into developing countries and


59

economies in transition”. The central issue of competitiveness of developing countries

is “the creation of efficient industrial capacity” . Accordingly, a new manufacturing

context is fast emerging in the developing world wherein apart from knowledge and

technological progress, five mutually reinforcing processes are vitally significant, viz.

(i) revolutionary changes in ICT, (ii) emergence of globally integrated value chains,

(iii) increasing global competition associated with falling trade barriers, (iv) new rules

of the game (introduced through WTO and by foreign buyers of output), and (v)

changing consumer demands.

1.2. Stagnancy in Indian Manufacturing and Sectoral Imbalances

In India, enhancement of manufacturing competitiveness has got added significance

in the ongoing LPG regime, particularly in the later years of globalization (viz. 2000s)

because of intensified competition. In fact, even before the LPG era the existence of a

‘relative stagnation’ was conclusively demonstrated by Ahluwalia (1985) , between

FY 1967 and FY 1980, and that this ‘relative stagnation’ continued even after FY

1980. Nagaraj (2006) who has continued this work in the 1980s and found that the

growth rate during 1980-81 to1986-87 is higher than that during 1966-67 to 1978-79;

but comparable to the one during 1959-60 to1965-66 period. The already existing

stagnation problem has been continuing in the ongoing LPG era also, in spite of an

upturn in the eighties. The problem has in fact worsened owing to growing imbalance

between major sectors of the economy, characterized by fast growing share of

services sector, constantly declining share of agriculture sector and stagnating

industry sector (particularly the manufacturing sub-sector within it). This has

prompted the Government of India to set up a specialized body, NMCC (ie. National

Manufacturing Competitiveness Council) to promote competitiveness of Indian

manufacturing. As of FY 2008, the share of agriculture, industry and services are

respectively 17.6%, 29.4% and 53%. As the imbalance between the three major

sectors grows, it is imminent to chalk out urgent policy measures to correct the

imbalance (Table I)


60

Financial Year Agriculture Industry Services Total GDPFY 1950-51 59.60 14.50 25.90 100FY 1960-61 55.10 17.30 27.60 100FY 1970-71 48.50 20.70 30.80 100FY 1980-81 41.50 21.60 36.90 100FY 1989-90 33.90 27.00 39.10 100FY 1991-92 26.70 31.30 42.00 100FY 2006-07RE 20.80 26.00 53.20 100FY 2007-08ES 19.90 26.10 54.00 100FY 2008-09RE 18.50 26.40 55.10 100FY 2009-10ES 17.60 29.40 53.00 100

about 27% for the last two decades or more. Of this, the share of manufacturing sub-

sector has been roughly about 17% throughout. However, going by international

standards, this share of manufacturing sector may be observed to be quite low. (Table

II). Iyer, A., Kandaswamy, K., et. al have pointed out, “Without a doubt,

manufacturing is the backbone of the economy in most countries, especially so in fast

growing emerging markets. It is clear that for the Indian manufacturing to

successfully distribute wealth across its population, manufacturing has to grow from

its current 17% of GDP to a number closer to 30% (which is the standard for most

developed economies).”


61

Country Agriculture Industry ManufacturingServices

Brazil 5 31 18 64

Russia 6 38 19 56

India 18 28 16 54

China 12 47 33 41

Table II: Composition of GDP in BRIC Countries (as of 2006)

[Source: World Development Indicators 2008, The World Bank, USA., 2008,

pp.202-204)

Indian manufacturing grew only at 6.3% during 1991 to 2003 as against 12% in

China. NSM (2006) formulated by NMCC estimates that to attain the targeted GDP

growth rate of 8 to 10 per cent, the country should target a minimum manufacturing

growth rate of 12 per cent per annum. Besides, the share of manufacturing should be

raised to 30 to 35% by 2020.

II. INDIAN MANUFACTURING AND COST COMPETITIVENESS

2.1. Challenges to Indian Manufacturing – the Issue of Cost Competitiveness

For Indian economy to exhibit a balanced, stable and sustainable growth it is highly

imperative that Indian manufacturing, most importantly the segment comprising of

small and medium enterprises (SMEs), to grow phenomenally primarily through

improving its competitiveness in terms of costs and quality. In the emerging scenario

of global competition, the need for enhancement of productivity and competitiveness

of manufacturing enterprises need not be overemphasized. Robust growth in

manufacturing is an imperative for creation of better employment possibilities and

overall economic development. Besides, competitiveness is central to robust growth

of the manufacturing sector.


62

One of the vital means of enhancing productivity and improving quality is through

proper cost management. It is widely recognized that what Indian manufacturing

needs the most today is improvement in cost competitiveness. Regarding cost

competitiveness, Nakagawa (2008) has observed, “it refers to the edge that the

domestic manufacturers need to have in providing quality products at a certain cost”.

Many progressive organizations have adopted cost competitiveness as the central

theme of business strategy. MUL (Maruti Udyog Ltd.) seeks to attain higher cost

competitiveness through enhanced localization, higher productivity etc. It is worth

noting here that, regarding the challenges faced by Indian manufacturing in the

emerging scenario, NSM (2004) points out, inter alia, the following cardinal factors,

(i) ensuring cost competitiveness and stimulating domestic demand, (ii) investing in

innovations & technology, (iii) enabling SMEs to achieve competitiveness etc.

There are evidences for the declining competitiveness of Indian firms vis-à-vis their

international counterparts in the LPG era. A study by The Economic Times (ET) in

2002 has revealed that the competitiveness of 202 Indian companies during FY 1997

to 2001 period has been constantly coming down, from 23.51 (FY 1997) to 20.92 (FY

2001). But, that of 42 MNCs (Multi-National Corporations) has gradually risen during

the period, from 21.47 to 23.18. Gorden & Kato (2006) have observed that the

profitability of domestic manufacturing firms has been adversely affected with the

increase in import penetration during the reforms regime (FY 1992 to FY 2002

period) and that this negative effect has been lesser in respect of firms with larger

size..

The process of liberalization has opened up new vistas for various sectors of

the economy as also posed certain challenges. While on the one hand, it expands the

scope of cross-border transactions, on the other, the new order holds different

perception about protection and safeguards that a global trading system should

provide to its members (SIDBI report-2001). Development is multi-dimensional

phenomenon. Some of its major dimensions includes: the level of economic growth,

level of education, level of health services, degree of modernization, status of women,

level of nutrition, quality of housing and access to communication.2


63

Till the 1960 the term ‘economic development’ was often used as a synonym

of ‘economic growth’ in economic literature. Now economic development is no

longer considered identical with economic growth. It is taken to mean growth plus

progressive changes in certain crucial variables which determine the well-being of the

people. There are qualitative dimensions in the development process which may be

missing in the growth of an economy expressed in terms of an increase in the national

product or the product per capita.7 Economic growth is defined as sustained and

substantial rise in product per capita (Kuznets). One must differentiate between level

from the rate of economic growth, the level of economic growth of the country is

measured in terms of the size of national (or per capita) real income where as the

percentage change in this level over a given period of time is rate of economic

growth.7 That is, if we define A1 and A2 as the levels of income in two different

periods and G as the percentage rate of growth then

G=A2-A1/A1x100

As a concept, ‘economic development’ is much broader term than ‘economic

growth’. The economic development of India is highly depending upon various

sectors like agriculture, manufacturing & services. “Economic development, achieved

largely through productivity growth, is very important to both developed and

developing nations. However, even though we know that higher productivity leads to

improved economic outcomes (for example, higher income, more choices to the

consumers, better quality products, etc.), there has been no consensus among

researchers about either the desired path of development or the role of state in

economic development”.5

Research objective and Methodology:

In this research we had examined the effects of industrialization on GDP of

the country and the effect of industrialization on economic development of the

country. This study relies heavily on secondary data sources such as publications and

survey findings by CSO and the World Bank that assess the industry trends and

human capital development efforts at the firm level. For macro-economic data on

India, I have drawn upon most recent surveys reported by the Government of India.

Data have also been adapted from other scholarly publications whenever deemed

necessary.


64

The plan of the paper is as follows. Section I summarizes the industrial strategy of

economic development in India. Section II analyses the special role that industries

play in India’s economic growth.

INDIA’S INDUSTRIAL STRATEGY OF ECONOMIC DEVELOPMENT

At the time of independence, India was industrially and economically

backward. The establishment of new industries on a big scale and development of

traditional industries was an essential need of the economy. Large emphasis was laid

on industrialization during the planning period. Huge investments were made in heavy

industries and capital goods sector particularly in iron and steel, heavy engineering

and machine building industries.3 For a predominantly agricultural based country like

India, development of industries is a must for economic growth and development.

There is huge chance for the industrialization of a country like India with a vast

manpower, large and varied resources and sub-continental benefits. After

independence in 1947, a Planning Commission was set up to plan and control Indian

economy. A Five Year Plan was generated to estimate and project various economic

policies.

Prior to the framing of the first five year plan, the major emphasis in industrial

development has been on consumer’s goods industries, while the development of

basis capital goods industries had lagged behind. The very first industrial strategy was

developed or framed under second five year plan, which give emphasis on investment

in heavy industries. Same strategy was carried followed in third five year plan but

after wards the emphasis was shifted on rise in saving and investment rate in the

country, for the impressive development of economic infrastructure, specially in

irrigation, energy, transport and communication etc. The second and third five year

plan accorded a high priority to industrialization, and especially to the development of

basic and heavy industries. But at the end of the third five year plan the economy

faces the recession, the rate of growth in the output of consumer goods industries fall

to 3 per cent in 1966 as compared to 7 per cent in 1965. A broad-based industrial

development and restructuring of manufacturing in tune with emerging demand

pattern is necessary for the accelerated growth of the economy. The first two years of

fourth five year plan were quite promising, with record food grains production and

equally rising industrial production but the remaining three years proved a great


65

disappointment with successive failure of monsoon, Indo-Pak war etc. the fourth plan

achieved only 3.4 per cent GNP growth rate. The fifth five year plan was not taken up

seriously. Under sixth five year plan the allocation of industries has generally been 24

per cent of the total pubic sector outlay. In the next three five year plans, outlays on

industries declined steeply and it was only 6.4 per cent in the ninth plan. The target

growth of industry during the Tenth Plan (2002-07) was put at 10 per cent consistent

with an overall GDP growth of 8 per cent.

The strategy of economic development in India meant direct participation of

government in economic activities such as production and selling & regulation of

private sector economic activities through a complex system of control. Economy

Statistics on India’s Economy has shown (Table-1) that the country's economy has

experienced a robust growth in the second quarter of the year 2006-07. In second

quarter of the year 2006-07, the agriculture and allied activities grew at a rate of 1.7

Percent, industries grew by 10.5 Percent, and the services sector grew by 10.7

Percent. The infrastructure industry in the market economy like India grew at a rate of

7.8 percent during the period of April-Nov 2006. The Gross Domestic Product in the

country increased at an impressive rate of 9.2 percent per annum. The GDP Growth

was mainly led by the fast rising industrial production as well as the growth in the

services sector. The Real growth rate of Gross Domestic Product of India over various

quarters for the year 2006-07 is as follows:

Table-1


66

An analysis of the post-independence growth experience shows two statistically

significant breaks in the rate of growth of the economy. Since 1950-51, India has

passed through ten five year plans and several annual plans and is now in the eleventh

five-year plan. The first break occurred in the early 1980s when the economy moved

to growth rate of around 3.5 to 5.5 per cent. This followed a policy shift away from

excessive controls and restrictions on private enterprise towards gradual decontrol.

The second break occurred in the mid-1990s with the ushering in of deeper and broad

based reforms at the beginning of the decade. The step up in the GDP growth rate to

6.5 per cent in the late 1990s and further to 7.8 per cent during the Tenth Five Year

Plan, with the last three years averaging over 9 per cent, is evidence of the success of

these policy measures. If this trend persists in the medium term, the economy would

average over 8.9 per cent per annum over the Eleventh Five Year Plan period. If we

achieve the GDP growth target of the Eleventh Five Year Plan, and step up the growth

rate to 9.5 per cent in the succeeding year, the Indian economy would have averaged 9

per cent over a decade. This achievement would put India among the select group of

about a dozen medium large economies (such as China, Singapore, Japan, Taiwan

China, Thailand, South Korea, Portugal, Greece and Hong Kong China) that have

averaged a GDP growth of 9 per cent or more for at least a decade during their growth

trajectory. As seen in the table given below, in the recent years the annual growth rate

of industrial production has a tremendous growth of GDP and per capita income at


67

factor cost. GDP at factor cost at constant 1999-2000 prices is projected by the CSO

to grow at 8.7 per cent in 2007-08,which represents a deceleration from the

unexpectedly high growth of 9.4 per cent and 9.6 per cent, respectively, in the

previous two years.

Table-2

THE ROLE OF INDUSTRIES IN ECONOMIC DEVELOPMENT :


68

Industries the back bone of any economy play a crucial role in the development of

a country, as these industries by and large represent a stage in economic transition

from traditional to modern technology. This is the reason why many economists

consider industrial development similar to economic development. The role of

industrialization in economic development arises from the basis facts like raising

income, meeting high-income demand, absorbing surplus labor, social transformation

etc. no country can attain an accelerated rate of economic growth and exploit her

natural resources without being self-sufficient in basic and key industries. A broad-

based industrial development and restructuring of manufacturing in tune with

emerging demand pattern is necessary for the accelerated growth of the economy.

Despite best of their efforts and proper economic planning, India still stands

amongst the line of developing countries in the world, due to low quality of industrial

products. India faces lots of hurdles in the path of rapid economic growth like huge

losses suffered by public sector industries, unfavorable balance of trade, limited

foreign reserves. In 1990 India faces the crises, the most visible sign of the country’s

economic crisis was its extremely low foreign exchange reserves which was Rs. 2,400

crores in June 1991. The rapidly growing burden of national debt was 60% of the

GNP in 1991. While the devaluation of 1991 added to the cost push inflation in Indian

economy9. So India has announced a new economic policy in July 1991 which

comprises a number of economic reforms with liberalization, so to gear up the pace of

our economic development. It is a fact worth nothing that the mounting burden of

borrowings, both domestic and foreign brought the Indian economy to the brink of

insolvency in early 1991. As a part of liberalization, a new industrial policy was

announced by the government of India in two parts, on 24 July, 1991 and 6 august,

1991, respectively.

The pace of industrialization is influenced by a combination of factors such as

sound infrastructure, uninterrupted supply of critical inputs, viz. power, credit and raw

materials, proactive entrepreneurs and factors like well established financial

intermediaries, favorable investment climate to attract domestic as well as Foreign

Direct Investment (FDI), wider application of Information Technology and

competitiveness of products in terms of quality and price in both domestic and

international market. Sluggishness in the growth of Indian industry in recent times is


69

traced to the lack of domestic demand for intermediary goods, low inventory demand

for capital goods, high oil prices, existence of excess capacity in some sectors and

infrastructure constraints particularly in roads and transports. As the industrial

restructuring and other measures for activating capital markets and banking system

has some inherent adjustment lags, turn around has been rather slow. The factors that

constraint the industrial growth at the national level is equally applicable to the

performance of this sector in the State. Manufacturing sector employed about 13 per

cent of the total work force in the country5.

The economic growth and development of the country is generally calculated

on the basis of Growth rate of GDP, which is highly effected by the industrial growth

and development. Contribution of the industries state-wise is shown in Table-I

indicates, that in the end of year (2003-04) the number of factories at the national

level have increased (in comparison to 1990-91) by about 17 percent. In Goa,

Pondicherry, Dadra & Nagar Haveli (DNH) and Daman & Diu (DD) the number of

factories have more than doubled. On the other hand, the number of factories in Bihar

& Jharkhand (B&J), Chandigarh, Delhi, UP & Uttaranchal (UP&U) and Andhra

Pradesh has reduced. All over India the number of factories has been increased from

1,10,179 in 1990-91 to 1,29,074 in 2003-04.

More over capital employed in 2003-04 is 473331 crore as compare to 133658crore in

1990-91. The factors those constraints the industrial growth at the national level are

equally applicable to the performance of this sector in the State. The state-wise

comparison of per cent growth in number of industries contribution to the economy

can be seen in figure 3. some of the states like Tamil Nadu, Kerela, Gujarat, Rajasthan

show a huge growth rate in number of factories in 2003-04 as compare to 1990-91. A

balanced view of the table and figure suggests that as far as the distribution of number

of factories in the post-globalization period is concerned, disparities among the states

have not increased or decreased appreciably in any meaningful way. Nevertheless, the

scale and size of investment, employment, value addition, etc (and not merely the

number of factories) are appropriate measures to assess the significance of

industrialization.


70

Table-3


71


72

On one hand large and heavy industries help in the economic development of

the country, on the other hand small scale industries are as important as other sectors.

Contribution of the sector in terms of generation of employment, output and exports is

quite significant. The importance of the Small & Medium Scale Industries sector is

well-recognised from its significant contribution to the socio-economic objectives of

growth in generation of employment, output, exports and fostering entrepreneurship

(SIDBI report on SSI sector-2001). . It contributed to the over all growth of the

GDP as well as in the terms of employment generation and export. Small Scale

Industries have the advantage of labour intensiveness, low cost technology, low

investment and short gestation period. Therefore, the government accords much

importance for the development of SSI units. The Government of India evolved new

policy initiatives in 1999-2000, an important one being the Credit Insurance Scheme

for providing adequate security to banks and improving flow of investment credit to

SSI units, particularly, export-oriented and tiny units. The working capital limit for

SSI units shall henceforth be determined by the banks on the basis of 20 per cent of


73

the annual turnover or upto Rs.5.0 crores whichever is minimum. Performance of the

small scale sector, therefore, has direct impact on the national economy. 2002-03 to

2004-05, the small enterprises sector registered continuous growth in the number of

units, production, employment and exports (Table-4). During this period the average

annual growth in the number of units was around 4.1 per cent and in employment 4.3

per cent annually. Further, the annual average growth in production, at current and

constant prices, was 12.4 per cent and 8.1 per cent respectively. Thus, there has been a

significant increase in the contribution of this sector to the economic development and

employment generation in the country. At the end of March 2006, there were 19.30

lakh registered and 104.12 lakh unregistered SSI units providing direct employment to

around 299.85 lakh persons. This sector manufactures around 8,000 products,

accounts for 95% of the industrial units and contributes about 39% of the value-

addition in the manufacturing sector, nearly 80% of the manufacturing employment

and have production of Rs.4,18,884 crore. The contribution of micro and small scale

industry in exports of the product is Rs. 1,50,242 crore.

Table-4


74

The Indian Steel Industry – Performance in H1 of FY2010-11

The inherent resilience of the Indian steel industry has been amply proved once again

post-October 2008. Along with China and its peers in the BRIC combine, India’s steel

sector has successfully bucked the sharp deceleration in production and consumption

seen in other major steel producing nations across the globe. It is now common

knowledge that the industry’s impressive performance in this period owes a great deal

to the economic stimulus packages mooted by the Government – focussed heavily on

steel-intensive activities such as sustaining infrastructure spending and measures to

promote spending on consumer durables and means of transportation. The other

significant factors believed to have saved the day for the Indian economy and also for

its steel industry are – India’s large and growing domestic market coupled with a

relatively inward-looking growth path with low export-dependence and an evolving

competitive market structure that ensures increasing degree of efficiency in allocation

of resources and production. For the Indian steel industry, in particular, one added

advantage has been its inherent comparative advantage of a strong domestic resource

and skills base.

The last few quarters have, however, seen gradual withdrawal of the stimulus

measures by the government as the economy started showing signs of regaining its

growth momentum after the initial shocks of the global economic crisis. For the time

being the world economy seems to have averted the looming spectre of a double-dip

recession – even though the speed of recovery has been painfully slow and significant

weakness persists in the US and the EU, the two major engines of growth for the

world economy so far. Another worry that looms large is the perceived overheating of

the Chinese economy and the measures taken by the country to curb excessive

expansion of economic activities and dangers of inflation. In this backdrop of

uncertainty and mixed signals, we look at the performance of the Indian steel industry

in the first half (7 months spanning April-October 2010).

A. Production Performance (April-October 2010)


75

Table 1: Production of Crude Steel (All India), April-October 2010

(Million

Tonnes)

April – OctoberProvisional OctoberProvisional

2009-10 2010-11 Growth

(%)

2009-10 2010-11 Growth

(%)

Main

Producers

13.368 13.613 1.8% 2.034 2.079 2.2%

Major

Producers

7.514 8.139 8.3% 1.047 1.167 11.5%

Others 16.417 17.758 8.2% 2.202 2.549 15.2%

Total (All

India)

37.299 39.510 5.9% 5.283 5.795 9.7%

Source: JPC

Observations:

1) Production from the Main Producers grew marginally by 1.8% in April-

October 2010-11 over the same period last fiscal, in a continuing trend that

reflect slow rate of capacity expansion in that sector. The month of October,

however, has seen some improvement as production grew by 2.2% in

FY2010-11 compared to FY2009-10.

2) Production by the ‘Major’ and ‘Other’ producers, on the other hand showed a

healthy growth of 8.3% and 8.2%, respectively, in April-October 2010-11

compared to the corresponding period in the previous year. These two

producer segments have grown on the back of improved capacity utilization

with the coming on stream of recently installed expanded capacities. In a

further improvement of their performance these two segments have almost

doubled the growth in crude steel production to more than 15% in October

2010 compared to October 2009.

3) Healthy growth in these two segments along with stagnation in the Main

Producing segments imply progressive increase in the share of the private

sector contribution to total steel production in the country. Currently, the share


76

of private sector in total crude steel production is in the vicinity of 55%.

However, the share is likely to get reduced with the completion of the capacity

expansion/creation plans of SAIL, RINL and NMDC.

4) Total production of crude steel in the country at 39.51 million tonnes has

shown an overall increase of around 6% in April-October 2010-11 compared

to the same period an year ago – thereby continuing the post-crisis trend of

around 4%-6% monthly growth rate in production of crude steel.

B. Consumption of Finished Steel (April-October 2010)

Table 2: Structure of Consumption of Finished Steel (All India), October-April

2010

(Million

Tonnes)

April-

OctoberProv.

Prod.

For sale

Imports Exports Net

Import

Stocks Real

Consumption*

2009-10 34.082 3.958 1.718 2.240 0.826 31.611

2010-11 35.595 4.819 1.742 3.077 0.065 34.337

Growth (%) 4.4% 21.8% 1.4% 37.4% (-)92.1% 8.6%

OctoberProv. Prod.

For sale

Imports Exports Net

Import

Stocks Real

Consumption*

2009-10 4.870 0.572 0.179 0.393 0.252 4.456

2010-11 5.189 0.327 0.268 0.059 0.110 4.528

Growth (%) 6.6% (-)42.8% 49.7% (-)85.0% (-)56.3% 1.6%

Source: JPC

Note: * denotes after adjusting for double-counting of flat products.

Observations:


77

1) For the first 7 months of the year i.e., April-October 2010, cumulative real

consumption of finished steel in India grew by a healthy rate of 8.6%

compared to April-October 2009. In the same time period, production (for

sale) of finished steel grew only half as fast at 4.4% while imports increased at

a significantly high rate of 21.8%. As has been observed in the last few years,

divergence between production and consumption growth rates has been

accompanied by a 37.4% growth in net imports from 2.240 million tonnes to

3.077 million tonnes between April-October 2009 and April-October 2010.

2) The point of concern arises as one looks at the provisional data on

consumption of finished steel compiled by JPC. The data reveals a significant

slowdown in domestic steel use with real consumption of finished steel

registering a very low 1.6% growth in October 2010 compared to October

2009. Another development that draws attention is the downturn in Imports by

a very high (-) 42.8% in October 2010 over October 2009.

3) The question that comes uppermost in one’s mind is whether this portends the

beginning of a downturn in the steel cycle in India – perhaps aggravated by the

gradual withdrawal of the economic stimulus measures. To better gauge the

seriousness of the apparent deceleration in consumption seen in October 2010,

we take a look at the underlying movements in the macro-economic

determinants of steel consumption and track the performance of major end-

using sectors of steel leading up to the month of October. Contrary to the blip

shown in steel consumption data in October 2010, the macro-economic and

sectoral data on some of the major drivers of steel consumption would suggest

sustained growth in steel consumption over the near and medium terms. These

are discussed in the following paragraphs.

a) Healthy Growth in GDP and Steel-using Commodity Sectors

Table 3: Quarterly Performance India’s GDP - Commodity and Service

Sectors (at factor cost and at 2004-05 prices) in Q2 of 2010-11

Percentage change over Previous Year

Commodity 2009-10 2010-11 H1 (April –


78

Sectors September)

Q1 Q2 Q1 Q2 2009-10 2010-11

Agriculture 1.9 0.9 2.5 4.4 1.0 3.8

Mining &

Quarrying

8.2 10.1 8.4 8.0 9.1 8.2

Manufacturing 3.8 8.4 13.0 9.8 6.1 11.3

Electricity, Gas

& Water

6.4 7.7 6.2 3.4 7.1 4.8

Construction 8.4 8.3 10.3 8.8 8.4 9.6

Service

Sectors

Trade, hotels

etc.

5.6 8.2 10.9 12.1 6.9 11.5

Finance,

Insurance etc.

11.7 11.3 7.9 8.3 11.5 8.1

Community,

social &

personal

services

7.6 14.0 7.9 7.3 11.0 7.6

GDP 6.3 8.7 8.9 8.9 7.5 8.9

Source: CSO, GOI

It is seen from Table -3 above that the commodity sectors of the economy

(primary and secondary activities) have all recorded fairly robust rates of

growth in H1 of the current over H1 of the preceding year. Quarterly data also

show ‘construction’ growing by 10.3% and8.8% in Q and Q2 of FY2010-11,

respectively. Similarly, ‘manufacturing’ has grown by a very healthy rate of

13.0% and 9.8% in Q1 and Q2 of the current fiscal.


79

Furthermore, the overall growth in GDP of the economy which sets the outer

limit for growth in steel demand has also been impressive at 8.9% for the two

quarters of the current fiscal.

b) Continuing growth in steel using industries at a disaggregated level

Data at a disaggregated industry level also establishes accelerated growth in

the major steel consuming industries during April-September 2010 as placed

in Table 4 below:

Table 4: Growth in IIP of Major Steel Consuming Industries, April –

September 2010-11 versus 2009-10

End -Using Industry % growth over previous year

April-Sept 2009-10 April-Sept 2010-11

Metal products and parts

except machinery & Parts

(-)2.6 26.6

Machinery & equipment

except other than

transport equipment

(-)1.8 18.8

Transport equipment &

parts

21.6 27.4

Other manufacturing (-)3.1 24.2

Manufacturing 4.5 11.0

IIP (General) 4.4 10.2

Use-Based Classification

Capital Goods 5.2 24.3

Consumer Durable 18.6 23.2

Source: CSO, GOI


80

c) High rate of Gross Fixed Capital Formation (GFCF) indicating

growing steel demand triggered by investments in creation of physical

infrastructure and plant and machinery

Table 5: Recovery in GFCF Rate post-October 2010

GFCF as % of GDP at constant 2004-05 Prices

2009-10 2010-11

Q1 Q2 Q1 Q2

32.4 34.3 35.0 34.4

Source: CSO, GOI

The latest NAS data show a rebound in the rate of Gross Fixed Capital

Formation (GFCF) as a percentage of GDP to levels as high as 35% as shown

in Table 5 above. In fact, the biggest achievement of the Indian economy in

the last decade has been its ability to generate and mobilize adequate internal

savings and attract foreign capital to finance growth-inducing investments –

especially in infrastructure and industrial capacity expansion. The Indian steel

industry benefitted immensely from the heightened investments. The current

accelerated rate of savings and a renewed interest/inflow of overseas capital in

Indian markets indicate that achieving and sustaining progressively higher

investment / GFCF rates is well within the capability of the Indian economy in

the near and medium term. This again will imply sustained increase in domes

4) The answer to our earlier question whether the growth impetus is petering out

as is seen in the October 2010 consumption data - is not a simple one. As is

seen from the tables above, the macro-economic fundamentals and the

production behaviour of the major end-using industries suggest that all is well

with the growth story of steel demand. But the data collected by JPC suggest

otherwise. The answer to the fluctuation in monthly data contrary to

expectations perhaps lies in the inability of available data to capture the

inventory build-up cycles/ re-stocking pattern of steel by the user industries on


81

a continuous basis. Apart from the possibility of a temporary slowdown in

production activities, a major reason for the current sluggishness in steel

demand may also be due to the operation of the inventory cycle which has not

been captured fully throughout the data series that introduces an element of

randomness in the series.

C. Behaviour of Prices (April-September 2010)

Comparison of month-wise retail prices (Delhi) year on year show that after

falling sharply and continuously from June 2008 onwards till April 2009, prices were

stable till March 2010 and rose sharply in April 2010. The prices fell subsequently

and recovered thereafter with the current month price being at about the same levels

as last month. The pattern is the same for the representative product categories of

TMT and HR as seen in Graphs 1 to 2.

It is, however, worth noting that flat product prices as represented by HR – are

stronger than the prices of non-flat products. This may be explained by a combination

of slackening in the growth rate of ‘construction’ activities and expanded supply from

the small and medium producers. The flat products prices, on the other hand, benefit

from resurgence in the end-using industries (capital goods and consumer durables)

and a more organized supply side dominated by large producers.

Graph 1: Year-on Year Movement in Retail Market Price for TMT

(10mm) at Delhi Market, 2007-08 till September 2010

TMT (10mm) (Rs/T)

2007-

08

2008-

09

2009-

10

2010-

11

April 32250 46000 34122 40890

May 32075 38200 35438 39420

June 36925 47451 35479 39210

July 30800 43335 33274 36260

Aug 30900 42696 32503 36930


82

Sept 29900 41934 32818 35910

Oct 32550 40253 32328

Nov 31925 38846 31940

Dec 32200 36634 32220

Jan 37450 36448 33970

Feb 40200 34639 33310

Mar 43775 32285 35100

GRAPH 2: YEAR-ON YEAR MOVEMENT IN RETAIL MARKET PRICE FOR HR

COILS

(2.5 mm) at Delhi Market, 2007-08 till september 2010

HR (2.5mm) (Rs/T)

2007-

08

2008-

09

2009-

10

2010-

11

April 34525 48500 33608 45090


83

May 34850 42000 33689 44940

June 35350 48083 33699 44660

July 33700 44111 33729 43410

Aug 33150 44203 35388 43590

Sept 35500 44211 35633 43610

Oct 34950 43204 35428

Nov 35350 40415 35740

Dec 34700 36174 35720

Jan 34850 34663 35980

Feb 37500 33858 35890

Mar 43800 34818 36810

As far as future outlook on prices is concerned, one remains cautiously

optimistic. As Indian steel market has become globally integrated to a very

large extent, domestic prices will continue to be influenced by landed cost of

imports at the margin. Right now, world steel prices have remained stable with

marginal upward pressure from prospects of rising iron ore prices and cutback

in production and hence supply of steel from the Chinese industry. However,

the international economic scene remains highly uncertain with major world


84

economies still not out of the economic morass created by the recent financial

crisis. In a global scenario of oversupply and price volatility and also

considering Indian steel industry’s degree of global integration, much depends

on how the exogenous shocks are handled.

In conclusion, one must say that supported by strong economic

fundamentals and a definite comparative advantage of resource endowment

the Indian steel industry’s medium and long term prospects look robust. The

near term may, however, be rocked by some fluctuations as India’s links with

the global economy are becoming progressively strong. The World Steel

Association (WSA) in its October 2010 Short Range Outlook predicts Indian

steel consumption to grow by 8.2% and 13.6% in CY2010 and 2011,

respectively. It also foresees India to be the third largest user of steel after

China and USA with around 68 Million Tonnes of consumption in 2011.

Observers in India believe that India may be able to achieve a level of

consumption higher than those projected by WSA – if the current economic

growth momentum is sustained.

INDIAN AUTOMOBILE INDUSTRY

The 4 wheeler industry in India has not been able to match up to the performance of

its counterparts in other parts of the world. The main reason for this has been the

regulatory atmosphere that prevailed till the deregulation in the mid 1990s. After the

Liberalisation the passenger car segment saw a boom and many companies from India

as well as foreign entered the market.

However, the smooth sailing was suddenly disrupted in the last quarter of FY1996.

The automobile industry, which contributed substantially to industrial growth in

FY1996, failed to maintain the same momentum between FY1997 and FY1999. The

overall slowdown in the economy and the resultant slowdown in industrial

production, political uncertainty and inadequate infrastructure development were


85

some of the factors responsible for the slowdown experienced by the automobile

industry. In FY2000, the sector experienced a turnaround, posted positive growth

rates and witnessed the launch of many new models. But the spectacular growth in

FY2000 was followed by a decline in FY2001 and only a marginal growth of 0.5% in

FY2002. However, since FY2003, industry sales have increased at a 3-year CAGR of

17.4% to 1.14 million in FY2006.

1.2. DEMAND CHARACTERISTICS:

(A) Passenger Cars:

In developed markets, engine capacity and wheel-base are the bases of segmentation

of passenger cars: price does play a role but only up to a point. Since affordability is

the most important demand driver in India, the domestic car market has until now

been segmented on the basis of vehicle price. Price-based competition takes place in a

continuum rather than in segments since nearly all the models are launched in

multiple versions at different price points. As a result, a higher-end variant may

compete with a lower-end variant of a car in a segment above it.

(B) Multi Utility Vehicle (MUVs):

The MUV segment consists of vehicles that are suited to both rural and urban areas.

In rural areas where the roads are usually bad, these vehicles are used as goods

carriers and also for public transportation. Northern and Western India account for

nearly two-thirds of the demand for MUV. Specifically, in States like Rajasthan,

Madhya Pradesh, Uttar Pradesh and Maharashtra, the demand for MUVs is the

largest. There are three segments of buyers for MUVs: the private market,

Government, and the Defence. Until the 1990s, the Government and Defence

segments accounted for the largest share of the market. The reduction in Government

and defence spending since the 1990s has substantially reduced sales to these two

segments. This has pushed private sector purchases into greater prominence.


86

There are three sub-segments of the UV / MUV segment: the hard-top, soft-top and

pick-up. The hard-top version consists of the higher-end Sports Utility Vehicles

(SUVs) that have been present in the Indian markets since FY1999. Following the

success of the higher-end SUVs, the share of the hard top segment in total MUV sales

has registered an increase. Soft-top MUVs, which are largely dependent on sales in

the rural and semi-urban markets where the vehicles serve as modes of mass

transportation (maxi taxi); have witnessed a contraction in volumes in recent years.

The declining share of the soft-top sub-segment is attributable largely to the

increasing acceptance of SUVs as an alternative to soft-tops (and even higher end-

cars). That apart, soft-top sale have also been affected by a decline in rural income,

increase in sales tax in some states, increase in diesel prices, enforcement of strict

emission control norms, and restraints on the issue of licences to use soft-top vehicles

as rural taxis.

1.3. INDUSTRY OVERVIEW:

The Indian automobile industry posted a spectacular growth of 32%, powered by

improving economic environment, gradual dissipation of job & business uncertainty,

new offerings and good consumer spending in urban and rural India. The upbeat

market sentiment spanned all segments of motor vehicles, with passenger vehicles,

commercial vehicles, two-wheelers and three-wheelers - all recording decent double-

digit growth.

Passenger vehicles, continuing its good run, stole the limelight by notching up 35%

rise in domestic sales. While Maruti Suzuki remained the leader without much of a

challenge and recorded spectacular sales numbers, new players in the segment such as

Ford Motor, General Motors and Volkswagen too benefited from a robust demand for

their recently launched small cars - Figo, Beat and Polo.

Riding on the continuing strong performance of industry and the increased pace of

infrastructure development, commercial vehicles sustained the momentum of the last

six months during May,2010, growing by a whopping 57.7% in domestic market. The


87

smart growth numbers of CVs were, to a great extent, aided by the low base of the

previous year, though.

(A) Maruti Suzuki India Limited(MSIL):

Maruti Suzuki sells one car out of every two cars sold in the country, crossed yet

another landmark, clocking over one-lakh units of sales in a month for the first time.

MSIL sold 102,175 units in May 2010, of which 12,134 units accounted for exports.

Incidentally, the company's domestic sales tally of 90,041 units was also the highest

ever in a month. The previous highest monthly domestic sale was 84,765 units in

February 2010. Maruti Suzuki registered highest ever-domestic sales in A2, A3 and C

segments respectively. A2 segment (comprising of Alto, WagonR, Estilo, Swift, Ritz,

A-Star) grew by 16.6% to clock sales of 62,679 units. A3 segment (SX4, Dzire) rose

by 60.5% to 10,883 units, while domestic sales volume in C segment (Omni, Versa,

Eeco) at 12,953 units soared by 70% y-o-y during the month.

(B) Hyundai Motor India Ltd (HMIL):

Hyundai Motors stayed on course with its domestic sales at 27,151for May,2010,

units growing by 15.5% over the same month last year. HMIL's total sales for May'10

(including exports) stood at 46,808 units as against 43,624 units in May 2009,

registering a 7.3% growth. The exports declined by 2.3% from 20,121 units in May

2009 to 19,657 units in May 2010. The segment-wise cumulative sales of HMIL

during May 2010 were as follows: A2 segment (Santro, i10, Getz & i20) - 42,460

units; A3 segment (Accent & Verna)-4,310 units; A4 segment (Elantra) -1 unit;

andA5 segment (Sonata Transform) - 37 units. The demand for the i20 continues to

swell, as demand has shot up by almost 35% following the launch of the new model

and addition of two trims.


88

(C) General Motors India:

Chevrolet Beat bolstered an impressive growth for General Motors India of 61%,

selling 8,225 units against 5,109 units in May last year. The May 2010 sales

comprised of 2,812 units of the Chevrolet Spark, 2,296 units of Chevrolet Beat, 1,418

units of the Chevrolet Tavera, 854 units of the Cruze, 396 Units of Chevrolet Aveo,

312 units of Chevrolet Aveo U-VA, 84 units of the Chevrolet Captiva and 53 units of

Chevrolet Optra.

(D)Tata Motors:

Tata Motors domestic sales of commercial and passenger vehicles in May 2010 were

52,801 units, a 38% growth over 38,392 units sold in May 2009. Of this, commercial

vehicles racked up 31,475 units - up 37% over 23,004 vehicles sold in May last year.

While LCV sales at 13,755 units grew by 26.6% y-o-y. Passenger Vehicles Business

Unit of Tata Motors reported a total sale of 21,477 units in the domestic market

during May 2010, which translates into a good 38.9% increase compared to 15,459

units a year earlier. Domestic sales of Tata passenger cars at 21,326 units surged by

39% y-o-y. Sales of the Tata Nano were 3,550 units. The Indica range sales at 8,468

units witnessed a 15% slide, while the Indigo range logging 6,600 units grew by a

robust 133%. The Sumo/ Safari range accounted for sales of 2,708 units, higher by


89

6% over May 2009. Exports of Tata Motors at 3,978 units in May 2010 registered a

growth of 121% compared to 1,804 units in May 2009.

(E) Mahindra & Mahindra Ltd (M&M):

M&M clocked 13,476 units of its UV sales in domestic market during May 2010,

growing by a healthy 67.8% over 8,033 units in May 2009. CV and 3-wheeler sales of

M&M in domestic market were also on a high growth trajectory. While CV sales at

7,796 units were up 43.9%, 3-wheeler domestic sales volume increased by 59.4% y-o-

y to 4,309 units during the month.

1.4. FOREIGN DIRECT INVESTMENT IN AUTOMOBILE INDUSTRY:

FDI Inflows to Automobile Industry have been at an increasing rate as India has

witnessed a major economic liberalization over the years in terms of various

industries. The automobile sector in India is growing by 18 percent per year.

The automobile sector in the Indian industry is one of the high performing sectors of

the Indian economy. This has contributed largely in making India a prime destination

for many international players in the automobile industry who wish to set up their

businesses in India. The automobile industry in India is growing by 18 percent per

year. The automobile sector in India was opened up to foreign investments in the year

1991. 100% Foreign Direct Investment (FDI) is allowed in the automobile industry in

India. The production level of the automobile sector has increased from 2 million in

1991 to 9.7 million in 2006 after the participation of global players in the sector.

1.4.1. Advantages of FDI in the Automobile Sector in India:

The basic advantages provided by India in the automobile sector include, advanced

technology, cost-effectiveness, and efficient manpower. Besides, India has a well-

developed and competent Auto Ancillary Industry along with automobile testing and

R&D centres. The automobile sector in India ranks third in manufacturing three

wheelers and second in manufacturing of two wheelers.


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1.4.2. Opportunities of FDI in the Automobile Sector in India:

Opportunities of FDI in the Automobile Sector in India exist in

Establishing Engineering Centres.

Two Wheeler Segment.

Exports.

Establishing Research and Development Centres.

Heavy truck Segment.

Passenger Car Segment.

1.4.3. Important Aspects of FDI in Automobile Industry:

a) FDI up to 100 percent has been permitted under automatic route to this sector,

which has led to a turnover of USD 12 billion in the Indian auto industry and

USD 3 billion in the auto parts industry.

b) The manufacturing of automobiles and components are permitted 100 percent

FDI under automatic route.

c) The automobile industry in India does not belong to the licensed agreement.

d) Import of components is allowed without any restrictions and also encouraged.

1.5. PESTL ANALYSIS:

A. Political:

• In 2002, the Indian government formulated an auto policy that aimed at

promoting integrated, phased, enduring and self-sustained growth of the

Indian automotive industry

• Allows automatic approval for foreign equity investment up to 100% in the

automotive sector and does not lay down any minimum investment criteria.

• Formulation of an appropriate auto fuel policy to ensure availability of

adequate amount of appropriate fuel to meet emission norms

• Confirms the government’s intention on harmonizing the regulatory standards

with the rest of the world


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• Indian government auto policy aimed at promoting an integrated, phased and

conductive growth of the Indian automobile industry.

• Allowing automatic approval for foreign equity investment up to 100% with

no minimum investment criteria.

• Establish an international hub for manufacturing small, affordable passenger

cars as well as tractor and two wheelers.

• Ensure a balanced transition to open trade at minimal risk to the Indian

economy and local industry.

• Assist development of vehicle propelled by alternate energy source.

• Lying emphasis on R&D activities carried out by companies in India by giving

a weighted tax deduction of up to 150% for in house research and R&D

activities.

• Plan to have a terminal life policy for CVs along with incentives for

replacement for such vehicles.

• Promoting multi-model transportation and the implementation of mass rapid

transport system.

B. Economic:

• The level of inflation Employment level per capita is right.

• Economic pressures on the industry are causing automobile companies to

reorganize the traditional sales process.

• Weighted tax deduction of up to 150% for in-house research and R & D

activities.

• Govt. has granted concessions, such as reduced interest rates for export

financing.

• The Indian economy has grown at 8.5% per annum.

• The manufacturing sector has grown at 8-10 % per annum in the last few

years.

• More than 90% of the CV purchase is on credit.

• Finance availability to CV buyers has grown in scope during the last few

years.


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• The increased enforcement of overloading restrictions has also contributed to

an increase in the no. of CVs plying on Indian roads.

• Several Indian firms have partnered with global players. While some have

formed joint ventures with equity participation, other also has entered into

technology tie-ups.

• Establishment of India as a manufacturing hub, for mini, compact cars, OEMs

and for auto components.

C. Social:

• Since changed lifestyle of people, leads to increased purchase of automobiles,

so automobile sector have a large customer base to serve.

• The average family size is 4, which makes it favorable to buy a four wheeler.

• Growth in urbanization, 4th largest economy by ppp index.

• Upward migration of household income levels.

• 85% of cars are financed in India.

• Car priced below USD 12000 accounts for nearly 80% of the market.

• Vehicles priced between USD 7000-12000 form the largest segment in the

passenger car market.

• Indian customers are highly discerning, educated and well informed. They are

price sensitive and put a lot of emphasis on value for money.

• Preference for small and compact cars. They are socially acceptable even

amongst the well off.

• Preference for fuel efficient cars with low running costs.

D. Technological:

• More and more emphasis is being laid on R & D activities carried out by

companies in India.

• Weighted tax deduction of up to 150% for in-house research and R & D

activities.


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• The Government of India is promoting National Automotive Testing and R&D

Infrastructure Project (NATRIP) to support the growth of the auto industry in

India

• Technological solutions helps in integrating the supply chain, hence reduce

losses and increase profitability.

• Customized solutions (designer cars, etc) can be provided with the

proliferation of technology

• Internet makes it easy to collect and analyse customer feedback

• With the entry of global companies into the Indian market, advanced

technologies, both in product and production process have developed.

• With the development or evolution of alternate fuels, hybrid cars have made

entry into the market.

• Few global companies have setup R &D centers in India.

• Major global players like audi, BMW, Hyundai etc have setup their

manufacturing units in India.

E. Environmental:

Physical infrastructure such as roads and bridges affect the use of automobiles.

If there is good availability of roads or the roads are smooth then it will affect

the use of automobiles.

Physical conditions like environmental situation affect the use of automobiles.

If the environment is pleasant then it will lead to more use of vehicles.

Technological solutions helps in integrating the supply chain, hence reduce

losses and increase profitability.

With the entry of global companies into the Indian market, advanced

technologies, both in product and production process have developed.

With the development or evolution of alternate fuels, hybrid cars have made

entry into the market.

Few global companies have setup R &D centers in India.

Major global players like audi, BMW, Hyundai etc have setup their

manufacturing units in India.


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F. Legal:

Legal provision relating to environmental population by automobiles.

Legal provisions relating to safety measures.

Confirms the government’s intention on harmonizing the regulatory standards

with the rest of the world

Indian government auto policy aimed at promoting an integrated, phased and

conductive growth of the Indian automobile industry.

Establish an international hub for manufacturing small, affordable passenger

cars as well as tractor and two wheelers.

Ensure a balanced transition to open trade at minimal risk to the Indian

economy and local industry.

Political / Legal Economic Social Technological

- Environmental

regulation and

protection

- Economic

growth

- Income

distribution

- Government

spending on

research

- Taxation - Monetary

policy

- Demographics - Government and

industry focus on

technological

effort

- International trade

regulation

- Government

spending

- Labor / social

mobility

- New discoveries

and development

- Consumer

protection

- Policy towards

unemployment

- Lifestyle changes - Speed of

technology transfer

- Employment law - Taxation - Attitudes to work

and leisure

- Rates of

technological

obsolescence

- Government

organization / attitude

- Exchange rates - Education - Energy use and

costs


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- Competition

regulation

- Inflation - Fashions and fads - Changes in

material sciences

- Stage of the

business cycle

- Health & welfare - Impact of

changes in

Information

technology

- Economic

"mood" -

consumer

confidence

- Living conditions - Internet!

1.6. PORTER’S FIVE FORCES MODEL:

Porter’s Five Forces of Competition framework views the profitability of an industry

as determined by five sources of competitive pressure. These five forces of

competition include three sources of “horizontal” competition: competition from

substitutes, competition from entrants, and competition from established rivals; and

two sources of “vertical” competition: the bargaining power of suppliers and buyers.

The strength of each of these competitive forces is determined by a number of key

structural variables, as shown in Figure 3.3.

FIGURE 3.2 Porter’s Five Forces of Competition framework


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1) Competition from Substitutes:

The price customers are willing to pay for a product depends, in part, on the

availability of substitute products. The absence of close substitutes for a product, as in

the case of automobiles, means that consumers are comparatively insensitive to price

(i.e., demand is inelastic with respect to price). The existence of close substitutes

means that customers will switch to substitutes in response to price increases for the

product (i.e., demand is elastic with respect to price).

The extent to which substitutes limit prices and profits depends on the propensity of

buyers to substitute between alternatives. This, in turn, is dependent on their price

performance characteristics. The more complex the needs being fulfilled by the

product and the more difficult it is to discern performance differences, the lower the

extent of substitution by customers on the basis of price differences.

FIGURE 3.3. The structural determinants of the Five Forces of Competition

2) Rivalry between Established Competitors:

For most industries, the major determinant of the overall state of competition and the

general level of profitability is competition among the firms within the industry. In

some industries, firms compete aggressively – sometimes to the extent that prices are


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pushed below the level of costs and industry-wide losses are incurred. In others, price

competition is muted and rivalry focuses on advertising, innovation, and other non

price dimensions. Six factors play an important role in determining the nature and

intensity of competition between established firms: concentration, the diversity of

competitors, product differentiation, excess capacity, exit barriers, and cost

conditions.

3) Threat of Entry:

If an industry earns a return on capital in excess of its cost of capital, that industry acts

as a magnet to firms outside the industry. Unless the entry of new firms is barred, the

rate of profit will fall toward its competitive level. The threat of entry rather than

actual entry may be sufficient to ensure that established firms constrain their prices to

the competitive level.

Economies of Scale – Since Indian automobile market is of order $ 350

billion, the economies of scale are very high. Thus, threat of new entrants is

low.

Product Differences – Since there is hardly any difference in the offerings of

the various providers, so product differentiation is low. So threat of new

entrants is high.

Brand Identity – Since there is no big Retailer like Amazon.com or Wal-Mart

in India. So threat of new entrants is high.

Government Policy – Since the Government Policy has been quite restrictive

till now with respect to the Retail market & FDI, so threat of new entrants is

low.

Capital Requirements – The capital requirements for entering in the

automobile sector are substantially high( high fixed cost and cost of

infrastructure), so only big names can think of venturing into this area So, in

that respect threat of new entrants is low.

Access to distribution – Since in India there is no well established

distribution network. So threat of new entrants is low.


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4) Bargaining Power of Buyers:

The firms in an industry operate in two types of markets: in the markets for inputs and

the markets for outputs. In input markets firms purchase raw materials, components,

and financial and labour services. In the markets for outputs firms sell their goods and

services to customers (who may be distributors, consumers, or other manufacturers).

In both markets the transactions create value for both buyers and sellers. How this

value is shared between them in terms of profitability depends on their relative

economic power. The strength of buying power that firms face from their customers

depends on two sets of factors: buyers’ price sensitivity and relative bargaining

power.


the various providers, so product differentiation is low. So bargaining power

of buyers is high.

Buyer Information – Today’s customers are well educated about the various

product offerings in the sector. So bargaining power of buyers is high.

Buyer Switching Costs – Since customers don’t have to pay a fat premium to

be registered for provision of services, so bargaining power of buyers is high.

Brand Identity – High Brand Identity and trustworthiness reduce the

bargaining power of buyers but, otherwise the bargaining power of buyers is

high.

Buyer Profits – Since dealers offers discounts and various bundling services

like 0% insurance, old car sale, etc, on different items. Hence bargaining

power of buyers is high.

5) Bargaining Power of Suppliers:

Analysis of the determinants of relative power between the producers in an industry

and their suppliers is precisely analogous to analysis of the relationship between

producers and their buyers. The only difference is that it is now the firms in the

industry that are the buyers and the producers of inputs that are the suppliers. The key

issues are the ease with which the firms in the industry can switch between different

input suppliers and the relative bargaining power of each party.


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the various suppliers, so product differentiation is low. So bargaining power of

Suppliers is low.

Supplier Information – Today’s automobile manufacturers are well educated

about different Suppliers. So bargaining power of Suppliers is low.

Supplier Switching Costs – Since different Suppliers hold resources as per

buyer’s requirements and a large inventory has to be maintained. So

bargaining power of Suppliers is low as they would have to incur a huge cost

on switching. But if they get automobile manufacturers for similar products

who can pay higher Supplier switching cost is low. In such case, bargaining

power of Suppliers is high.

Brand Identity – High Brand Identity and Trustworthiness of a Supplier

increases the bargaining power of Suppliers. But, otherwise the bargaining

power of suppliers is low.

1.7. SWOT ANALYSIS:

I. Strengths:

Large domestic market.

Sustainable labor cost advantage.

Government incentives for manufacturing plants.

Strong engineering skills in design.

Able to achieve significant gains in productivity.

II. Weaknesses:

Low labor productivity.

High interest costs and high overheads.


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Rising cost of production.

Low investment in Research and Development.

III. Opportunities:

Commercial vehicles.

Heavy thrust on mining and construction activity.

Increase in the income level.

Cut in excise duties.

Rising rural demand.

IV. Threats:

Rising interest rates.

Cut throat competition.

Lack of technology for Indian Companies.

1.7. FACTORS CONTRIBUTING TO THE GROWTH OF INDIAN AUTO

SECTOR:

The convergence of government policies, economy’s growth, people’s purchasing

power have all contributed to the phenomenal growth of Indian Auto industry. Some

of the important growth drivers are explained below:

Rise in the industrial and agricultural output indirectly helps Indian Auto

industry - Industrial and agricultural output increase has reflected in higher

GDP and overall growth of the economy which is about 9% in the last three

years. Higher GDP means more purchasing power. Sales of vehicles for

domestic and commercial consumption have seen high growth in these three

years too.


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Growth in the road infrastructure increases demand for vehicles. Indian

highways and roads have improved a lot in quality and connectivity in the last

20 years. Projects like the Golden Quadrilateral aim to make even remote

areas accessible by road. Some of the National Highways are of international

standards. This has made road transport a viable, cost effective and speedy

option both for goods and passenger traffic.

Rise in the Per capita income increases two/four wheeler sales. Industrial

growth in the 70s, IT boom in the 1980s and BPO boom in the 1990s have

transformed the Indian middle class. The present generation is able to earn the

same levels of salary that their parents were earning after years of work. This

has pushed up the demand for two and four wheelers. A rise in per capita

income is also indirectly responsible for the retail boom and industrial boom

for consumer durables. This has pushed up the demand for commercial

vehicles to enable efficient distribution.

Urbanization changes the face of Indian auto industry. Joint families in towns

and villages have given away to migration of the younger generation to cities

in search of better opportunities. The new-age educated migrants and nuclear

families (many with double income couples) have a higher purchasing power.

Presently, the rate of spread of urbanization is 30% which is likely to increase

by 40% in 2030 (UN). Urbanization has promoted infrastructural development

and it is estimated to spread at a rate of $500 billion in the next 5-6 years.

Rising working class and middle class contribute to increased demand of

automotives. Post 1980s, a surging economy has created millions of new jobs

in the private sector. This has lead to a lot of prosperity in the working class

and the middle income households. They are able to provide for food, clothing

and education and also are able to think of owning luxuries like vehicles.

According to the Planning Commission report, between the year 2003 and

2009, 130 million people would have been added to the working population.

According to a finding from McKinsey, the middle income group will grow

from 50 million to 550 million by 2025.


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Exhaustive range of options in price and models of automotives. Indian

consumer in 70s and 80s had to choose between and Premier Padmini or an

Ambassador. Now there are at least 123 different models of cars from 30 odd

manufacturers available. The prices of the compact cars like Tata’s Nano have

made the world sit up and take note of the truly unbeatable price points.

Attractive Finance Schemes for purchase of automotives. Most nationalized

and foreign banks have very tempting finance options and low interest rates

for purchase of cars and two wheelers. There are specialized companies that

finance the commercial vehicles. All this has made the dream of owning a

vehicle an easy reality.

Favorable Government Policies for the auto sector. Apart from a healthy

growing economy, Indian auto industry has a lot to thank the government for

the amazing growth rates. The Indian government has introduced several

industry specific programs.

a. Government support:

Current Industrial Policy: The New Industrial Policy of 1991 delicensed the

Automobile Industry in India, but passenger car was delicensed in 1993. Now,

no license is required for setting up of any unit for manufacture of

Automobiles except in some special cases. Further, 100 per cent Foreign

Direct Investment (FDI) is permissible under automatic route in this sector

including passenger card segment. The import of technology or technological

upgradation on the royalty payment of 5 per cent without any duration limit

and lump sum payment of US $ 2 million is also allowed under automatics

route in this sector. This liberalization has helped this sector to restructure

itself, absorb newer technologies, and keep pace with the global developments

realizing its full potential.

Exim Policy: Removal of Quantitative Restrictions (QRs) from April 1, 2001

has allowed the import of vehicle, including passenger car segment freely


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subject to certain conditions notified by DGFT. To protect India from

becoming a dumping ground for old and used vehicles produced abroad, the

custom duty on the import of second hand vehicles including passenger cars

has been raised to 105 per cent. The custom duty rate on new Completely

Built Units (CBUs) has also been increased to a level of 60 per cent to allow

Indian countries to a fully competitive environment.

b. Recent policy initiatives:

In order to develop and realize the growth potential of this sector both at

domestic and global level, and to optimize its contribution to the national

economy, the Department of Heavy Industry has decided to draw up a 10 year

Mission Plan for the development of Indian Automotive Sector and creation of

global hub.

To put Indian Auto Industry at the global map, National Automotive Testing

and R&D Infrastructure Project (NATRIP) at the total cost of Rs. 1718 crore

has been initiated.

This project principally aims to:

create critically needed automotive testing infrastructure to enable the

government in ushering in global vehicular safety, emission and

performance standard, _ deepen manufacturing in India, promote larger

value addition and performance standards and facilitates convergence

of India's strength and IT and electronics with automotive engineering.

enhance India's abysmally low global outreach in this sector by

debottlenecking exports, and

provide basic product testing, validation and development

infrastructure so that Indian automotive sector would not face any

export obstacle in the foreign market

Exports of auto parts from South Korea and four large ASEAN countries


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Source: UN Comtrade data


105

Figure Seven: China’s trade in auto parts

Source: UN Comtrade data


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Figure Eight: Indian auto trade overview


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RECOMMENDATION

Research and Development is useful in all manufacturing industries, whether it can

improve products being made or the methods of production. Even in labor-intensive

industries, R&D can enhance labor and increase output. Despite the positive benefits,

expenditure on R&D does not compromised a large portion of manufacturing budgets

with “industry accounting for only 28% of national R&D expenditure” (Kumar and

Aggarwal 442). Moreover, there are few linkages between research institutes and

industry, even in biotech industries like pharmaceuticals. Once again, the high level of

protectionism has not given incentive to companies to discover new and better ways

of producing goods. With the expected and needed rise in competition the government

must facilitate linkages between industry and institutions.

This linkage can be done be on national, state and local levels. In the example

of Banglore and Pune, city laws have increased the amount of research institutions

creating various incentives for firms. The linkages between industries and institutions

are strengthened by the cities’ infrastructure and strong IT sectors. Cities with no IT

clusters do not have linkages between industry and institutes, indicating that the

benefits of IT development can be extended to domestic industry development,

something that has not happened on a large enough scale for the entire country

(Basant and Chandra 1040). Cities that do not have IT cluster can still promote

linkages through incentives for both industry and research facilities. For example,

governments could “sponsor” development of new techniques through more grants,

with a specific focus on industry related benefits.

Another important aspect of R&D is technology transfer from developed

countries, which often ties in with foreign investment. In exchange for lower taxes

and tariffs, the Indian government could facilitate the transfer of information from

foreign companies to domestic firms. Through consortiums of industry, knowledge

exchange could occur in an effective and guaranteed way, rather then depending on

the potential spillover effects of FDI. Foreign firms may be hesitant to divulge

production methods to competing firms, so incentives such as lower taxes and access

to more markets can help foreign firms stay competitive. The transfer of technology

must be coupled with more investment by state R&D institutes all over the country


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rather than in certain cities or clusters. The combined efforts of national, state and

local level government can aid in the development of better production methods and

goods for industrial firms, making them more competitive domestically and

internationally.

Improve Skills of the Manufacturing Workforce

An important part of firm efficiency is a skilled workforce that knows how to

operate machinery on the production line as well as other factors of production for

certain goods. Much of the labor pool in India is untrained, which is a detriment to

production and workers who run the risk of injury when using unfamiliar and unsafe

machinery. Many small and medium size firms cannot afford to put laborers through

training while no national or governmental skills education exists. One large

construction firm, Larsen &Toubro has opened up its own training center in Calcutta

where laborers can learn the standards of construction and certain specialized skills.

The three-month courses come at no cost to students, and the only requirement for

admission is “the right attitude” (Reina). This training center and the other five to be

built in the near future are out of pocket expenses for L&T, and there is no stipulation

that workers trained at the center must work for the firm. These steps taken by L&T

are a good example of what companies can do to improve the labor pool, however

very few firms in India have the financial backing to support training on this scale, or

even for their current workforce.

In addition to training in the formal manufacturing sector training of informal

participatants will aid in the development of small and medium businesses that rely on

informal workers. One of the most significant needs of informal workers is better

skills and higher levels of human capital. A majority of workers in informal

enterprises are untrained and unfamiliar with new technologies, which creates further

inefficiency in many firms. Giving workers the knowledge and skills necessary for

better production not only helps firms but also improves the human capital of every

person. This increases their marketability in the job market, qualifying them for both

informal and formal employment. Moreover, greater understanding of technologies

especially in labor-intensive industries such as manufacturing will increase safety in

the workplace. Finally, better training and awareness of new technologies also aids

home-based entrepreneurs improve their own production capabilities.


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In the case of India, the existing training infrastructure is “under-utilized,

leading to a colossal waste of resources” (Awasthi 2002). Primarily the government

provides this infrastructure, such as training facilities located in certain cities.

However, these institutions cannot address a wide range of workers, especially those

who need it most as “they do not fulfill some entry conditions like education level,

age, timing of suitability of training or even distance” (Awasthi 2002). The

government led initiatives are also outdated in many regards and links to new industry

and technology is limited. Moreover, most Vocational Training Institutes (VTIs) are

geared to citizens with greater education levels and those already participating in the

formal economy. The reach of government lead initiatives is not large enough, which

is why an NGO-led model would function better in this situation. Early studies

indicate that NGO-led training institutions are more effective in skills formation then

government training groups because of their flexibility with courses. Furthermore,

government operated institutions function with low efficiency and do not have

adequate support from central government to improve the current problems. By

linking the existing infrastructure with decentralized and specialized groups the

government could significantly improve the amount of skilled workers in the informal

economy.

In order for NGOs to better serve the education needs of informal worker

certain tools and methods should be implemented among all grassroots and non-

governmental organizations. An important aspect of better training is offering both

theoretical and practical experience. Instead of trying to upgrade skills only through

conceptual means, NGOs should work with local industry to give students a chance to

practice in an actual firm. These could function as “internships” and allow workers to

receive pay while upgrading their skills. Moreover small and medium size firms that

hire informal workers would be able to increase productivity, and connect to a labor

pool with greater skills sets and human capital. For home-based enterprises, NGOs

could offer a chance to work with new technologies by investing in the necessary

technology. Small entrepreneurs could practice on the new machinery within the

training itself, and make the choice as whether or not they would like to purchase the

new technology. In these cases, NGOs could link them to microfinance organizations

to aid in the purchase and installation of better machinery.


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In addition to real-time training and practice, NGOs should offer shorter

courses for informal participants. Long three-month courses can be a drain on already

impoverished people, and often creates high drop out rates for students. Having

shorter time frames, such as one to two weeks for teaching the use of new machinery

and skills upgrading, and three to four week courses to instruct the basics of industry

specific work to inexperienced students.

Finally, NGOs should implement mobile training and increase their ability to

reach all informal workers. While it is important to be an integral part of a community

to create better human capacity it is equally important to utilize resources so that all

students gain access to training. By using mobile means, NGOs can take training to

workers, rather than expect them to shoulder the costs of transportation and housing

for training facilities far from their homes. Mobile training is a useful element in the

rural and urban settings, and will decrease the need for large facilities and waste

produced by permanent buildings.

Alongside the expansion of the reach of training NGOs can get skills

upgrading to target groups that may not even realize they need such courses. Often

target populations are not aware of changes in technology or their lack of key

marketable skills. Many unemployed or laid off workers have trouble re-entering the

market for a variety of reasons, but very few consider lack of skill to be the cause. By

using mobile training NGOs ensure that these unknowing groups of workers get

access to necessary skills development courses. Moreover, this form of training is

informal in itself, which will increase participation “as people in the informal sector

are often distrustful of authority and formal organizations” (Singh 2000). For this

reason NGOs should stay connected to the communities they work after they finish

course training in a certain area. This will ensure they are more trusted by informal

workers, and that they are not perceived as distant “benefactors.” Creating these

changes in training will increase the number of successful course completions and

improve the human capital of more informal workers.

In order for these recommendations to be successful NGOs must create links

with various groups within India. The first, and perhaps most important of these links

is a link to the government, and already existing government programs. The

government is tied in its ability to help the informal sector due to the amount of

human power necessary to effect real change. Moreover, if the government gives


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direct help to the informal sector it will inadvertently incorporate theses workers into

the formal sector, which could be detrimental to business development. The best way

for the government to aid in the development of the informal sector is to provide

financial support to NGOs in the forms of grants, cheap or free access to technology,

and opening the current training infrastructure for NGO use. Financial aid will be a

critical part of the relationship, and providing money to organizations used to

operating on low budgets will be a well-spent investment in the overall economy.

NGOs must also link to private industry based on the training they aim to

provide. Doing so will increase their knowledge of new technologies and skills that

formal enterprises desire in their employees. Additionally creating such links will help

ensure that students can get hands on training in industry. Forging ties with medium

and large size enterprises will offer another form of financing to NGOs in the form of

sponsorship and vetting of future hires. A secondary part of this link is forging ties

with relevant Research and Design Institutes that create the new mechanisms used by

industry. This will guarantee awareness of new technologies, and can strengthen the

links between industry and R&D.

Environmentally Sustainable Manufacturing

Remanufacturing

The process of remanufacturing breaks down discarded and used goods to basic

components that can be utilized to form new products. This product recovery allows

for the distribution of high quality goods at a much lower cost, bringing added benefit

to the consumer and the environment. As Indians purchase and discard more

technological and electronic goods (in addition to automobiles) more waste is

produced, and “graveyards” of unused products are threatening environmental

stability. The industry of remanufacturing is relatively small in developing

countries, especially in India. If the government were to implement policies to aid in

the development of the sector, it could improve the economy and help the

environment, while leading as one of the few nations with a strong remanufacturing

base.

Remanufacturing is a very labor-intensive process through the various stages

of breakdown required for advanced products. Partially due to large number of


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necessary labor, most if not all remanufacturing occurs in the unorganized sector of

manufacturing (Mukherjee and Mondal 450). While the informal sector is important

in the growth of an overall economy, India could benefit more from creating a formal

remanufacturing sector. The processes of product require would increase a demand

for labor, thus employing more citizens, and help reduce waste in landfills. Moreover,

in remanufacturing businesses see profits of up to 20 percent, and in the auto industry

this is even higher (Mukherjee and Mondal 449). It is important to note that certain

industries, such as the remanufacturing of PCs, are difficult to start up as they require

a high level of technological knowledge that most Indian manufacturing firms do not

have. However, success in other industries can create spillovers, and the continual

efforts of R&D can provide the technology necessary for firms to enter these markets.

Currently, there are no stringent take back laws in India that stipulate

the buy-back or disposable processes for manufactured goods. The lack of these laws

means that few original equipment-manufacturing firms (OEMs) offer a buy-back

scheme nor do they have any incentive to do so. By enacting strict laws requiring all

OEMs to buy back at least 50 percent of their products for remanufacturing, the

government can encourage the growth of a remanufacturing sector within existing

firms. Moreover, this stipulation must be required of foreign firms as well, to ensure

level competition among all producers in the market. One effective way that an OEM

can ensure efficiency of the buy-back scheme is through continual contact with

customers. Mukerjee and Mondal (2008) completed a case study of a photocopier

manufacture in India that offers free service and repair to all customers, thus

guaranteeing long-term contact with consumers. In this way the company can also

monitor individual units and present a buy back scheme to a customer when the

separate machine components still have viability for remanufacturing. Introducing the

legislation that will force companies to remanufacture, while providing information

and logistical support for firms, will start India on a path of greater product recovery.

However, these policies would only apply to existing firms, and not aid in the

development of new remanufacturing firms. Through grants, low-interest loans, and

information support the government could facilitate the creation of more

remanufacturing firms. These firms could be linked to various companies, focusing

solely on the process of stripping down old products, allowing OEMs to receive the

components ready to build with. Depending on the market structure, this outsourcing


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may be more cost-effective for a firm, especially smaller OEMs with limited human

capital.

In addition to the expansion of remanufacturing firms the government much

help in the creation of a market willing to buy remanufactured products. A mass

campaign to promote the “like new” quality of remanufactured goods, at almost half

the cost, would increase the domestic consumption of remanufactured goods, and

make companies more competitive in the market place. Moreover, remanufactured

goods could be exported to other nations, such as the members of ASEAN, where a

majority of the population would appreciate the availability of cheap but reliable

goods. Western consumers may be adverse to the idea of remanufactured goods, but it

is likely that the environmental and economic benefits to buying remanufactured

products will open up more foreign markets for Indian firms. Overall the positive

environmental impact and the profits to firms would aid in the development of the

economy; expanding exports while bolstering the domestic sector.

Environmental Efficiency in Small and Medium Size Enterprises

It is important to recognize the need for environmental regulation in smaller

enterprises as they typically rely on less expensive technologies to produce goods,

technologies that typically result in further environmental degradations. However,

there are many problems associated with implementation of environmentally sound

policies among SMEs, particularly the high costs of converting to green technologies.

Thus the government cannot mandate strict green policies as it will put the viability of

SMEs at risk, and reduce the competitiveness of domestic firms. Thriuchelvam,

Kumar and Visvanathan (2003) propose multiple solutions for increasing eenergy

efficiency in SMEs, and one is particularly useful for the Indian manufacturing sector.

Through the use of energy audits, the government can determine deficits in energy

use, and propose solutions “that can be as simple as insulating hot and cold pipes,

sealing air leaks, tune-up of boiler…which normally result in 10-15% improvement in

efficiency with little or no investment” (Thriuchelvam et. al 982). If the government

expanded the MoEF to included an energy audit board that analyzed the energy use of

all size enterprises it would help firms save money, and implement the first steps to an

effective monitoring system.


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In addition to cutting the energy waste of SMEs the government must call for

the implementation of green technologies and processes in all businesses. As the cost

of these processes can be a burden on less productive firms, the government should

aid in the procurement of better technologies for SMEs that do not have the financial

capability. This can be in the form of government-distributed technologies, or

alternatively in the form of soft loans specifically for purchasing environmentally

sound technologies. Along with financing options, the government must implement

stricter enforcement of environmental and taxation policies. For instance, the “polluter

pays” method has already been implemented in India, calling for extra taxation on

firms that produce levels of pollution over the legal limit. However, like most other

regulations in India, it is not well enforced, and if the government expects

improvement it must take the initiative to ensure payment of fines. Moreover, the

fines and fees associated with environmental factors must be universally applied to all

firms, including foreign owned companies. With the increase on social responsibility

the regulation will not drive away business, and can encourage more FDI for the

sector. The combination of strict legislation and options for financing better

technologies will ultimately help the environment and growth of productive industry,

even if it requires initial costs.

Strengthening Environmental Organizations

It is important to explicitly state the need to bolster the status and power of

many Indian environmental agencies, such as the MoEF and the CDM Authority.

Giving increased power does not mean simply financial support, but rather increased

value in the overall growth of the nation. The Indian government must recognize the

initial short term costs of being “green” will be beneficial in the long run, as India can

lead the way as a sustainable developing economy, thus being more attractive for

socially conscious international firms looking to expand overseas. Being

environmentally conscious in its development will give India an edge over its highly

polluting counterpart, China, and increase her prominence worldwide. Thus

environmental agencies deserve a larger presence in the government, including

expanded authority. Finally, all though it does not relate directly to manufacturing, the

government should recognize the need to clean up the streets, fields and rivers of

India that have been polluted by the general public. Launching a mass campaign for


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environmental responsibility will not only encourage manufacturing firms to be green,

but help in the overall development of a cleaner India.

CONCLUSION

India’s dependence upon agriculture and services puts it in a situation of

unsustainable growth as less people can obtain secure employment in either sector.

The development of a strong Indian manufacturing base is important on many levels,

but especially given the recent economic crisis gripping the world. With more and

more companies shutting down and pulling back from outsourcing from the IT sector

of India, now more then even, the economy must rely less on the whims of foreign

markets and become a strong producer of goods that the world depends upon. As the

agriculture industry shrinks, the government must facilitate the transfer of low or

uneducated laborers to guaranteed jobs. The failure to do so will only increase poverty

and urban sprawl.

The policies proposed in this thesis are designed to work in collaboration with

one another, as a total revamping of the Indian manufacturing sector. I acknowledge

that many factors have not been addressed, such as the large problem of labor

regulation and the powerful presence of trade unions in India, and the resulting effect

on business growth. This problem has been explored in depth, but it is clear that the

strict labor laws are unlikely to change, so the government and business must work

around this problem to find creative ways to be successful. Problems of corruption

have been touched upon, but the greater issue must be addressed in a social context to

effect real change in the government and day-to-day operations. Addressing issues of

corruption will also result in more effectiveness in tax collection, bringing in more

revenue for the government.

It is clear that no progress can be made without first implanting the right

infrastructure for growth. Simply opening up the economy is not enough to create a

wealthy nation. The policies proposed through this paper call for major spending on


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behalf of the government, something it must do if it expects India to grow. This is a

somewhat Keynesian approach to economic development, and it is clear the

government cannot expect to reap rewards without heavily investing in the prosperity

of the country. It is hoped that through increase spending and attention to important

factors of production the government of India can create powerful manufacturing base

that will encourage sustainable development for years to come.


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http://mpra.ub.uni-muenchen.de/1231/

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CONTENT

ABSTRACT...................................................................................... ii

SIGNATORY PAGE.........................................................................iii

TOPIC APPROVAL LETTER.......................................................... iv

ACKNOWLEDGMENT.....................................................................v

APPROVED THESIS SYNOPSIS..................................................vii

1. INTRODUCTION ..................................................................................1

2. COMPANY PROFILE..........................................................................25

3. LITERATURE REVIEW.......................................................................41

4. RESEARCH METHODOLOGY...........................................................57

5. FINDING AND ANALYSIS...................................................................59

6. CONCLUSION....................................................................................71

7. RECOMMENDATION..........................................................................73

8. BIBLIOGRAPHY..................................................................................75

9. ANNEXURE – QUESTIONNAIRE.......................................................76


a study on investment opportunity in manufacturing sector

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