india- the land of opportunities

8/10/2019 India- The Land of Opportunities

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Indias Shining Baby-boomers:

Opportunities for the future

White Paper Serieson

Investments in India

Team DEssence

Mobile. +91 9820532465

[email protected]

www.dessenceconsulting.com


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Indian economy has dramatically

changed after the liberalization process

that started in 1991. Indian IT industry

and knowledge workers have put India

on a global map. This has created a

wide range of opportunities. For various

global players, India offers a twin

opportunity. On one side, it offers a

large market with more than one billion

population. The income level of this

population is increasing. Hence, the

potential for growth in demand for

various products and services is

enormous based on current per capita

consumption. On the other side, India

can act as a global sourcing point for

various goods. The highly skilled cheap

labor can no longer be ignored.

India Shining

Indian Governments India Shining

India has long been considered as a

sleeping giant. First generation of

reforms in 1990s has led to awakening

of this giant. Second wave is being

implemented by the present

Government which many believe thatwill lead India in attaining its destined

glory. There are several reasons behind

it. According to Goldman Sachs much

talked report on BRICs, the growth in

most of the developed countries will

saturate. Much of the growth in global

economy will be driven by Brazil,

Russia, India and China. The report

says that BRICs economy will be larger

than G6 economy by 2039. Although

the report may be optimistic, it

nevertheless underlines the importance

of these economies in the future.

The BRICs economies will continue to

grow over the next 50 years. Only India

will continue to grow at the rate of more

than 5 %over the next fifty years. Other

BRICs economies will slow down its

pace after 2030. The major reason

behind this growth would be a large

young and working population in these

countries. Currently, 54% of the

population is below 25 years of age.

According to The Economist, the bulge

in Indian population is going to drive the

growth. This bulge in population had led

to super-normal growth in South East

Asia and China. Same principle can be

applied for India. Based on historical

data, demographics have a powerful

influence over long-term growth rates.

US baby-boomer era has shown it.

However, the changing demographics is

coupled with rising income, the impact

could be visible in the short-to-medium

term too.


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Several reports have been written

comparing China and India. One of the

major differences between China and

India is the presence of private sector

though it may be plagued with license-

raj or inefficiency. The present growth is

driven by the private sector. Hence, the

growth is more sustainable. Apart from

this, the growth is not driven by a single

sector. The growth has been seen

across the sectors. One of the worries is

the lower investment rate. Many critics

say that the growth is not reflected in the

investment rate. This is probably

because the most of the current growth

is achieved through improvements in

productivity and efficiency. The

investment rate may pick up in the next

year. Various earlier reports have said

that Indian economy is plagued by low

productivity. This will no longer be

stumbling block in the near future. Tata

Steel claims that it is one of the

cheapest producers of steel in the world.

There are several such claims in the

Indian industry. Hence, the growth

expectations are reasonable.

India-The positives

The current macroeconomic conditions

in India are strong indicators for positive

outlook for Indian growth. For 2003-04,

Indian economy if poised to grow at the

rate of more than 7%. Services sector is

booming with the help of IT and ITES

industry. Its influence over countrys

GDP has been increasing. The services

sector currently contributes 56% of

GDP. According to CLSA, the economy

is expected to grow at 9% in the next

fiscal followed by 8% growth in the

following fiscal. Inflation is steady and

benign. Fuelled by improvements in

quality and productivity, exports have

become a major force. Foreign

remittances are one of the largest in the

world. Foreign exchange reserves have

swelled to US$ 100 bn placing India

sixth in the world on this measure. Not

long back in 1991, India was facing the

near BoP crisis.

Apart from macro-economic factors,

there are several other reasons for

positive outlook for India.

The relationship with Pakistan

The relationship with Pakistan has

always been a major factor over the

stability in India. The relationship has

significantly changed over the past one

year from the near-war situation that

existed in the last year. The

improvements in the relations with


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Pakistan can act as a boon for Indian

industry. This provides stability in the

region. Also, significant amount of

defense expenditure can be diverted

towards development of the nation. This

also opens a wider door for mutual trade

which has a good prospect.

The Confident young India

Indians have found a new confidence in

themselves. Low interests rates have

fuelled the growth in consumer demand

especially for housing, automobiles and

other consumer goods. The recent

landmark deal in the telecom industry

has made Indian telecom sector as one

of the fastest growing sector.

As said by Indian Prime Minister, India

is a young nation. More than 50% of the

population is below 25 years of age.

Majority of Indian youth especially from

urban middle class is confident about

the bright future.

Political Stability

India is the largest democracy in the

world. The elections have been pre-

poned to be held in April-May. The

Indian election is the grand political

show in the world encompassing 650

mn voters, around 1 mn polling stations

and over 5000 candidates campaigning

in the scorching heat. The ruling alliance

of NDA is confident about its victory in

the elections. This is considered to be a

political stability in the country.

Changing Income Distribution

As said earlier, rising income level is

going to drive the future growth. It is

expected that, the distribution of income

level will change in the next few years.

According to CLSA report on India,

Income profile will dramatically change

in the urban population. Significant

number of people from lower income

class will migrate to upper levels. In

rural areas, there will be small change in

the profile though it could be considered

as significant. This is mainly because

more than 70% of population lives in

rural area. Following table shows the

changing pattern

Income Distribution (%of Population)

16.7 11.152 5.4 1.5

22.814.002

7.41.2

44.5

48.947

33.0

22.7

15.525.031

50.5

67.8

0.5 0.867 3.7 6.8

0%

20%

40%

60%

80%

100%

Rural

2001-

02

Rural

2006-

07

Urban

2001-

02

Urban

2006-

2007

Upper

Upper-Middle

Middle

Lower-middle

Lower

Source: Business World & Media Reports


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Also, people spending habits are

changing rapidly. Following chart clearly

shows it. Indian consumers have finally

started to spend. However, majority of

them are value-for-money customers.

Per Capita Expenditure

0

2000

4000

6000

8000

10000

12000

14000

16000

1997-

98

1998-

99

1999-

00

2000-

01

2001-

02

Rupees

Food, Beverages &

Tobacco

Clothing & footw ear

Gross Rent, Fuel &

Pow er

Appliances &

Furniture

Healthcare

Transport &

Communication

Recreation,

Education & Cultural

Private Expenditure

Source: BW, Media Reports

Foreign Remittances

Over the past years, India has seen

rising remittances from Indian Diaspora

and NRIs. Remittances are among thehighest in the world and have been the

highest for 2003. Following table shows

the details.

Remittances (in US$ bn)

Country 2003

India 18.3

Mexico 13.3

Philippines 7.2Pakistan 4

Brazil 5.2

Columbia 3.07

Source: Economic Times

For many economies, foreign

remittances had been the major driver

for fuelling the economy. Considering

skilled nature of NRIs compared to other

countries, the remittances are expected

to grow further. This could act as a

catalyst for propelling the Indian

economy in the top gear.

Opportunities for Future

investmentsThere are several industries that show

positive prospects for investments apart

from the hot industries like IT and

Telecom. These industries offer an

opportunity for medium and small

players. Following are the industries

which are lucrative for investments

Pharmaceuticals

Auto Component

BPO

Retailing

Agri-Business

Pharmaceuticals

From 2005, the Product Patent regime

will come in to force in India. Whats the

way out for many Indian players? Attack

the largest market by doing things which

they do the best. India top Pharma


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companies have attacked the global

markets and continued their offensive

for the past few years. They are set to

continue the same for considerable

time. They have shown spectacular

three-year earnings CAGR at 47%.

The 1980s saw a major revolution in the

global pharmaceuticals. Many

blockbuster drugs were launched in this

period. But their patents are going to be

expired during the next few years. This

is going to create a huge market for

Generics (Off-patent drugs). Majority of

the market will be captured by Indian

companies. Indian companies have

strong chemistry skills. They are one of

the experts in reverse engineering. Their

vertical integration and low cost

production make them a force to reckon

and they love it.

Following table gives some information

about Indias global ambitions

Generics Market (US$ bn)

2001 2007

World 27 57

India 7 20

source: Datamonitor

The estimates say that the drugs with

annual sales totaling US$ 42 bn will go

off patent. This offers a big market for

companies with manufacturing facilities

in India. The infrastructure is already

established in India. Many companies

already have started manufacturing or

sourcing generics drugs from India. Yet,

the market is big to accommodate more

players. Europe is going to be next

target enlarging the scope of business.

Companies can also look for an

opportunity to do contract manufacturing

for generics MNCs.

Clinical Trails

With a more than one billion population

with a diverse range of people, India

seems to be a good market for clinical

trials. It is also very cheap to conduct

the trails in India. Many companies have

already started clinical trails for few

products in India. However, the

opportunity for investment is huge.

R& D

There is no doubt that India produces a

large number of skilled graduates every

year. The number is close to 2 million

every year. Their skills, analytical

mindset and cheap labor make them a

very attractive place for having R&D.

For many other products, R&D work has

already shifted to India. Same can

happen for Pharmaceuticals too.

Considering the global expenditure on

R&D in the pharma industry, the market


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is enormous. The competing countries

are way behind India.

Many labs have started flourishing in

metros in India. The scenario is similar

to what happened in India software

industry. Earlier the entry, better are the

chances for success in this industry.

Auto-Component

One of the promising industries in India

that going to leap forward considerably

is Auto-Component industry. Various

auto companies are looking for sourcing

raw materials from locations which offer

a sustainable cost reduction in future.

India offers a good way for achieving

this objective.

Over the past decade, Indian Auto-

component industry has seen dramatic

changes. It has improved its productivity

considerably. The quality standards are

improving. The labor costs are cheaper

while the manpower is highly skillful.

The industry has a potential to emerge

as a global sourcing point.

Following table shows Indias position

vis--vis other countries. India offers a

good alternative to other locations. This

is the reason, many players are

optimistic about the future of the

industry.

According to ACMA report, Indian auto-

component production for 2002-03 fiscal

was at USD 5,140 mn. This is expected

to reach USD 6,365 mn in 2005-06. This

figure might even be higher. The pace of

growth will pick up further after 2005-06

mainly through rise in the exports. .The

investments in the sector are picking up.

The fruits from the investment are

expected to be reaped after few years.

Currently, India exports around USD 1

bn auto-components. According to

ACMA, this figure will reach USD 1,240

mn by 2005-06. According to CMIE, the

figure will cross USD 3,500 mn by 2008.

The prospects of the industry are good.

According to Business World survey,

India lacks tier 3 suppliers for becoming

an important global player. The FTA

with Thailand may solve the problem.

Various global players like Dana, Delphi,

Ford, Bosch and Cummins have already


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started sourcing some products from

India.

The story does not end here. India has a

large domestic market for automobiles

which is showing a double digit growth

rate over the past few years. India is

also emerging as a small car sourcing

hub. These developments will definitely

fuel the growth in the Auto-Component

industry. And the players are confident

about the future. Why not? After all,

indigenously developed products like

Scorpio and Indica have been a major

success.

BPO

The Current recession in several

economies has affected the bottom-line

of several companies. Outsourcing has

become a common tool for cutting the

costs thereby improving the bottom-line.

Availability of cheap labor in developing

countries fuelled the process. Over the

period, India has emerged as a natural

destination based on its attractiveness.

The story does not end here. The last

years SARs showed that it is not

advisable to put all eggs in one basket.

Therefore, many other countries also

started attracting outsourcing.

According to Gartner Study, the

worldwide outsourcing market size is

estimated to be at US$ 143 Billion

(2002). North America is the biggest

market contributing 63% followed by

Europe & Middle East with 28% and

Asia-Pacific region with 9% share.

According to Gartner study, Indian BPO

market size is US$ 1.5 bn in 2001. It is a

small portion of entire outsourcing

market. NASSCOM & Gartner predict

that once outsourcing climbs up the

value-chain, larger pie of the

outsourcing will be off shored. India has

emerged as a leading player in the

outsourcing field. Hence, a large portion

of off shored outsourcing will be

grabbed by India. According to

NASSCOM Mckinsey study 2002, Indian

BPO industry size would be worth US$

21 bn. Hence, the market offers a huge

opportunity that can be tapped.

Indian Outsourcing Opportunity(US$ bn)

2001# 2005# 2008*

Total BPOMarket

127 234 310

Off-shored BPOMarket

6.4 35.1 62

Indian BPOMarket

1.5 9.5 21

source: NASSCOM Mckinsey Study 2002 and Gartner

# - Gartner Study

* - NASSCOM McKinsey Study


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India Advantage

Various countries have become a

popular destination for outsourcing.

India has its own advantage which has

made it as a natural destination for

outsourcing. The labor costs are at least

40 to 50 % cheaper compared to

developed countries. It is not the only

low cost game for India. People are

highly skilled. India has the vast

population that can speak and

understand English. Every year, around

2.1 million graduates come out of

schools. This ranges from humanitarian

graduates to high-class engineers.

Apart from labor skills, India is rapidly

developing its infrastructure to support

highly skilled labors.

Following table shows Indias position

with respect to other outsourcing

destinations. It clearly shows that India

has several advantages over other

countries.

Country Capabilities

Capabilities of Workers

Loca

tion

A

ttracti

veness

India

Philippines

Mexico

Australia

UK

ireland

Singapore

China

Source: Nasscom

One major advantage is availability of

players who can offer end-to-end

services to clients. This reduces risks

like risk towards losing sensitive

information as clients are dealing with

only one company.

Following are the services that will drive

the future growth in the BPO industry

Content services

Design (Fashion & others)

Market research

Research and Knowledge

Services

Animation

Geographic Information Services

Employee leasing or staffing

Retailing

For years, India has been considered as

a paradox where a large majority of

people live under poverty. The scenario

is changing. The income levels are

rising. The people are spending. Under

these conditions, the market with one

billion people would be anybodys envy.

The consumers are more accessible.

Therefore, retailing industry would be

primed for dramatic growth.

Low

High

HighLow


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For years, the most of the population is

accessed through retailers which are

part of the un-organized sector.

However, over the last few years,

organized retailing started emerging as

a major force to reach the great Indian

urban middle class.

Retail sales in India last year totaled

around $180bn. Retail spending has

been growing at 3%-4%, but this might

accelerate thanks to improving

conditions in Indias rural sector.

A key feature of the retail industries of

both countries is the rise of the

"organized sector" or chains of outlets

with centralized administration and

purchasing. The organized sector is

displacing "unorganized" retailers orsmall "mom and pop" shops. Indias

organized sector is generally reckoned

to account for about sales of $3bn, or

about 2% of the entire retail industry. A

study commissioned by the

Confederation of Indian Industry (CII)

found that the organized sector had

grown by 40% over the last three years.

Till last year, the number of malls in

operation was barely in double digits.

This year at least 50 new malls - of

100,000 sq. ft size and above - are

slated to go into business in 2004. Retail

consultants KSA Technopak estimates

that another 200 malls will come up in

2005 and 2006.

The organized retailing offers a big

opportunity. According to Economic

Times, the current size of organized

retail is Rs.16, 000 crores (US$ 3.5 bn).

This is expected to reach Rs. 37,000

crores (US$ 8.2 bn) in 2007. Following

table shows the details.

Organized Retail in India(In Rs. mn)

Sector2001-

022007

CAGR(%)

ConsumerDurables

16,500 37,870 18

Food 18,000 74,730 33

Apparel 49,500 104,230 16

Books & Music 4,500 14,260 26

TotalOrganizedRetail

160,000 372,160 18

Source: ETIG

This data represents only organized

sectors. Organized sector represents

only a small portion of entire retail

market. Also, the penetration level for

various products in India is very small.

Hence, the size of organized retail

industry could see a much larger growth

rate. According to study conducted by


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CII, the organized sector may account

for 40% of total retail industry by 2007.

This seems to be over-optimistic.

However, the opportunities are

immense.

The opportunities will not be entirely

seized by big players. There are some

niche areas in the Indian market which

are in developing conditions. Some of

them are

Electrical households

Pharmaceuticals

Home-furnishing & Home depot

Books and stationery

Agri-business

India is one of the largest producers of

agriculture. India ranks either one or two

in the most of the product categories.

The data can easily emphasize that

India is one of the powerhouse in the

world. India has the largest cultivable

land in the world. India is home to all

major climates in the world. The all-year

availability of land for cultivation is the

major advantage for India. Diverse land

and climate makes India an enviable

country.

India's Agriculture Output (mntonnes)

Commodity 2001-02Rank in

theworld

2011-12

Rice 86.91 2 129

Wheat 72.45 2 112.5

Coarse Cereals 30.92 NA 55

Pulses 13.13 1 23.5

Total FoodGrains 203.41 2 320

Oilseeds 21.3 NA 46

Sugarcane 294.67 2 432

Fruits 45.37 2 81

Vegetables 93.92 2 185

Spices 3.02 NA 5.5

Milk 84.6 1 127

Eggs (nos inbn)

34 5 52

Source: Agriculture Ministry, India

Nevertheless, Indias yield is

considerably low compared to the best

benchmarks. One of the major reasons

is that farmers share in the total value is

very low. Following table shows the

details.


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Agriculture Process Chain in India

Source: Worldoffruit.com

Yield Loss (30 to 50 %) (Asian Markets) Shrinkage (10%)

From the table, it is clear that

intermediaries take 60% of the customer

value. There are several reasons behind

it. Following are the major reasons

Low productivity compared to

global standards

Poor post-harvest management

leading to substantial wastages

and deterioration in the quality

Distorted markets where

intermediaries earn larger share

of consumer rupee at the cost of

producers and consumers

More than 25% of the produce is

wasted. Only 2-3 % of the produce is

processed. This offers a big opportunity

for improvements.

There are several initiatives taken by

Indian Government for overcoming the

problems. Some other steps are in the

pipeline.

Following are the areas which offer a big

scope for investments

Food processing

Contract Farming

Organic Farming

Intermediaries take 60 % of consumervalue

Growing Exporting Shipping Importing

Shipping

Wholesaling/

DistributionRetailing

Low

RealisationsHigh Costs

15% 60% 25% 100%

% of Customer Value


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Cold Storage and warehousing

Grain storage

Logistics

Food Parks

Food retail chains

Poultry & Fisheries

Organic farming

Organic farming is emerging as a big

opportunity. For centuries, India has

used organic farming techniques. The

world is moving back to the same

system. Many farmers are aware of

organic farming techniques which were

used till 1980s. Hence, this field offers a

big scope.

The table shows the potential

opportunity for organic farming. The

demand for these products is increasing

in the developed world. Consumers are

also ready to pay premium for such

products.

Opportunities exist in

Farming & Training

Farm marketing

Storage

Certification

Overview of World Markets for Organic Food Beverages

Retail

sales2003

AnnualGrowth

2003 -05

PricePremium

Markets(million

USD/Euro)

% of

totalfood

sales -Estimate in % in %

Germany2,800 -3,100 1.7 - 2.2 5-10% 20-50%

UK1,550 -1,750 1.5 - 2.0 10-15% 30-50 %

Italy1,250 -1,400 1.0 - 1.5 5-15% 35-100 %

France1,200 -1,300 1.0 - 1.5 5-15% 25-35 %

Switzerland 725 - 775 3.2 - 3.7 5-15% 10-40%

Netherlands 425 - 475 1.0 - 1.5 5-10% 15-20 %

Sweden 350 - 400 1.5 - 2.0 10-15% 20-40 %

Denmark 325 - 375 2.2 - 2.7 0-5% 20-30 %

Austria 325 - 375 2.0 - 2.5 5-10% 25-30%

Belgium 200 - 250 1.0 - 1.5 5-10% -

Ireland 40 -50 < 0.5 10-20% -Other

Europe 750 - 850 - - -Total

Europe10,000 -11,000 - - -

USA11,000 -13,000 2.0 - 2.5 10-15% 10-30%

Canada850 -1,000 1.5 - 2.5 10-20% -

Japan 350 - 450 < 0.5 - 10-20%

Oceania 75 - 100 < 0.5 - -

Total23,000 -25,000 - - -

Source :USDA/ITC

There is no doubt that, this industry will

be a major force in Indias future as

India has the necessary resources.


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DEssence Consulting 2004

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