the gujarat vision: making msmes globally competitive

The Gujarat vision: Making MSMEs globally competitive*

Confederation of Indian Industry

PricewaterhouseCoopers 3

Contents

06 The economic crisis

Beyond the downturn

Opportunities&benefits

10 SignificanceofMSMEsfortheIndianeconomy

The Gujarat vision

13 Gujarat: An enduring economy

DistrictwisedispersalofMSMEsinGujarat

15 Gujarat:Industryprofile

Gujarat strengths: Resources

Gujaratstrengths:Infrastructure

Gujaratstrengths:PPPininfrastructure

17 Gujarat: An industrial state

19 MSMEs in Gujarat: An overview

IndustrysectorwiseMSMEs

21 Opportunities&challengesforMSMEsinvarioussectors

Defence

Railways

Automotive

Foundry

32 SWOTanalysis–Indianindustrysectorwise

36 InvestmentopportunitiesforMSMEs

37 RelevanceofFIs&CRAsinpromotingMSMEs

38 MSMEsinfinance&creditpolicies

39 Present institutional structure in Gujarat

40 IndustrialPolicy2009:Overview

46 Promotionofclusterdevelopmentinthestate

IncentiveforMSMEs

47 ChallengesfacedbytheMSMEssector

Page

Foreword

MSME industries in Gujarat are at a crucial juncture today, with several large investments being undertakenbythepublicandprivatesectorplayers,anddevelopmentspromisingasignificanttransformationofthesector.Thesectoriswitnessingafundamentalshiftthatisopeningupnewbusinessopportunitiesfortheindustry.Atthesametime,thecompetitionforscarceresourcesisexpectedtointensifyandsupportenablersintermsofinfrastructure.Withthisbackground,CIIhadrequestedPricewaterhouseCooperstoprobetwokeythemesthatconcerntheGujaratMSMEsector–a)prioritiesfortheGujaratMSMEindustryandb)keyrecommendationsfortheGujaratMSMEindustry.Buoyedbyincentivesandsupportfromthegovernmentaswellasadvancementsinthetechnology,MSMEsareallsettoplayacriticalroleindefiningthefutureoftheindustryandensuring“sustainability”oftheGujaratMSMEsector.

ThisreportanalysestheMSMEpotential,policy,trendsandprioritysectorsofthestatefromapan-IndiaSmall&MediumEnterprisesperspective.PrioritiesforGujaratMSMEhavebeenidentifiedandkeyrecommendationssuggested.

Although we have attempted to analyse various issues in the MSME sector, some issues may nothavebeenincludedbecauseofcertainconstraints.Werequestthereadersofthisreporttohighlightanyissuewhichmaynothavebeencoveredadequately.

Iwouldliketotakethisopportunityonbehalfofmyteamtothankallthosewhoprovidedtheirvaluableinputsandfeedbackinthepreparationofthisreport.

WewouldliketothankPricewaterhouseCoopersforbeingourknowledgepartnerandforpreparingandprovidingthisinsightfulreport.

Iwouldalsoliketoextendmyappreciationtoeveryonewhohelpedusinthiseffort.

Rajendra ShahChairman-CIIMSMELinkages2010and

Managing Director

HarshaEngineersLtd.

Foreword

Anand DikshitExecutive Director

PricewaterhouseCoopers

TheMicro,SmallandMediumEnterprises(MSMEs)areaptlyregardedasthebackboneoftheIndian economy.AccordingtotheUnionMinistryofMSMEs,MSMEs,withtheadditionofmediumenterprisesintheirfold,arenowasectorthatcontributesupto40%tothegrossindustrialmanufacturingvalueaddedtotheeconomy,35%toIndia’sexportsdirectlyandaround8%toIndia’sGDP.Withmorethan13millionunitsandaround33millionpeople,thesectorisprovedtobethesecondlargestemployerafteragriculture.

Inspiteoftheirimmensecontribution,thesectorislargelyinformal:90%oftheunitsarenotregistered,theyarenotcoveredbyannualformaldatacollectionexerciseliketheAnnualSurveyofIndustries;97%ofthemareeitherproprietorshiporpartnershipenterprisesandcloseto95%ofthemdonothaveaccesstoanykindofformalinstitutionalcredit(frombanks,financialinstitutionsetc).

Theirapparentinformalcharacteristicnotwithstanding,thesectorishighlyheterogeneous.Itproducesmorethan8000productsrangingfromhandmadestufftohigh-techcomponentsandmachines.Structuredlikeapyramidwherethebottomhasthebulkoflargelyinformalmicroenterprises,servingdomesticnichemarketsintheirgeographicalvicinity,thesophisticationofprocessesandcapabilitiesriseaswemove upwards.Around20%oftheuppersegmentofMSMEsisapartoflargedomesticorglobalsupplychains.

Iwouldliketotakethisopportunityonbehalfofmyteamtothankallthosewhoprovidedtheirvaluableinputsandfeedbackinthepreparationofthisreport.

WethankConfederationofIndianIndustry(CII)forgivingustheopportunitytopartnerwiththemonthisimportantinitiative.

Theglobaleconomicmeltdownof2008 has been compared with the pastbigslowdownsofthe20thcentury,i.e.the1907bankingcrisis, the Great Depression of1929andtheStagflationofthe 1970s and is believed to havebeentheseverestofall.Triggered by sub-prime assets, theworldsawaseriesofbankandinsurancecompanyfailuresacrossthedevelopedworld.TheLehmanBrothers’bankruptcyandthebuyoutofMerrillLynchbyBankofAmericawerefollowedbythecollapseofWachoviaCorporation and Washington MutualBank.Thesefailurescausedacrisisofconfidencethat made banks reluctant to lend moneyinter-se,orforthatmatter,toanyone.Thiscrisiseffectivelystoppedthefunctioningofglobalcreditmarketsandrequired

unprecedented government intervention.Whiletheworstseems to be behind us, the pace ofrecoveryinmanycountriesisexpectedtobeslowandpainful.

WhileIndiawasnotattheepicentreoftherecentglobalmeltdown,anumberoffactorsaffectedtheperformanceofIndiaInc.TheglobalcreditsqueezeaffectedIndia’sexportsaddingpressure to the export oriented industries such as textiles and gemsandjewellery.Industriesthat were directly dependent ontheavailabilityofconsumercredit such as automobiles and real estate, also took a hit.Anumberofcompaniesacrossindustriesdeferredtheirexpansionprojectsasfundswerenotavailable.Crashinthecommodity prices and a resultant slowdown in demand meant that

the companies in the commodity business such as metals or chemicalshadatoughtime.Anumberofcompaniesendedupbookingforeignexchangelosses.Most services industries such as hospitality;shipping&logisticsbecameindirectvictims.ItisoverayearsinceLehmanfiledforbankruptcyandtheIndianeconomy is showing positive signsofeconomicrevival.WhileinthelastsixmonthsofFY09,IndiaInc.talkedofsurvival,businesses have started looking atnewgrowthopportunities.Given this background, we asked our respondents to revisit the past one year and asked them a fewquestionsaroundthisglobaldownturn, its impact on their businesses, their response to downturn challenges and the key takeawaysgoingforward.

The economic crisis

01


Beyond the downturn

Recoveryexpectationsfrombusiness

A recent analysis by Prowess onIndiaIncperformancesinceMarch 2008, notes that the turnoverforIndiaInc.inthequarterendingJune09isalmostatthesamelevel(2%lower)aswasinthequarterendingMarch2008.Atthesametime,netprofithasincreasedbyalmost15%.Whileapartofdeclineintheturnover can be attributed to the general decline in commodity prices, it was observed that most ofimprovementinIndiaInc.performance(readnetprofit)overthe past year can be attributed

to the success in its cost saving efforts,includingrationalisationofsupplychain.However,goingforward,revenuegrowthhastodriveimprovementinthefinancialperformanceofIndiaInc.Asimilar sentiment was echoed by our respondents when asked to describe recovery expectations fortheirbusinesses.Theywereasked to choose one or more optionsandnearly99%ofourrespondents selected “stable/ growth in demand” as their key recovery expectation with new hiring and capacity addition,

gettingthesecondpriority.Discussions with our respondents indicated that the growth in demandfortheirproductsisakeyrequisiteforsustainingtheongoingrecoverycycle.Beforethisfinancialmeltdownandeconomic global crisis set in early 2008, many companies had undertaken capacity expansion projects, including overseas acquisitionsandgoingforwardtheviabilityofthoseprojectsneedstrongdemandvolumes.

Recovery expectations frombusiness

Return to pre downturn demand/volumes

BSE500companies-quarterlyperformance

8 The Gujarat vision: Making MSMEs globally competitive*

Overthelastfewyears,takingadvantageofbenignliquidityconditions and the available growthopportunities,IndiaInc.embarkedonambitiousexpansion plans and also carried out “strategic”

acquisitions.Thedownturnhadlimited impact in sectors which were predominantly dependent on thedomesticmarketbutaffectedthe international operations across a larger domain because ofmarketshrinkage.Theappetiteforexpansions/acquisitioncameto a halt, as the money supply driedupandthedemandforproductsvanished.Suddenlythefocuswasonsurvivalvis-a-visgrowth.Manycompaniesbecameinternallyfocusedand

worked on achieving operational effectivenessandefficiencies.Atthe same time, the downturn has also presented many attractive acquisitionopportunitieswhichwere/ are available at reasonable/modest prices, especially as stressed companies are exploring divestures to realign the debt equitystructures.

Respondents were asked on their perceptionofkeybenefits,whichare/ may be available in the near tomediumterm.Theirresponseindicates that they perceive that the downturn has provided them with both internal and external opportunities,i.e.harnessingoperationaleffectivenessandefficienciesandachievinggrowththroughstrategicacquisitions.

The respondents mentioned thatduringthepastfewyears,theaspectofoperationaleffectivenessandefficiencydidnotgettherequiredattentionandnow present a big opportunity overtheshorttomediumterm.They viewed cost reduction, reduction in working capital and optimisationofsupplychainaskeycornerstonesforimprovingoperationaleffectivenessandefficiencies.Atthesametime,therespondentsexpectanumberofstrategicacquisitionopportunitiesto be available in the medium term.Anumberofrespondentsexpect opportunities in revising existing business models and identificationofnewrevenuegenerationopportunities.

Opportunitiesandbenefits

AcquisitionannouncedbyIndiaInc.inearly2009

•Motherson’sacquisitionofVisiocorp, a company in administrationinUK

•ApolloTyres’acquisitionofVredestein Benden, accompany in administration in Netherlands

•HCLTechacquisitionofAxon

Note: Weighted average score on a 5-point scale with a scoreof5forrank 1 and vice-versa

Opportunities/benefitsavailabletobusinessinthecurrent phase as the situation improves


Given the present economic outlook, which suggests that short term measures to meet macroeconomic challenges havebeenlargelysuccessful,therespondentswereaskedfortheirassessmentofmediumtermstrategicdirection,IndiaInc.proposes to take to revert to the highgrowthpath.

Organicgrowthwasidentifiedasakeystrategyforgrowthoverthemediumterm.Anumberofrespondentsindicatedtheirpreferencetocompletetheexpansion projects on table, which have been postponed duetoliquiditycrisisandlowdemand.Largenumberofrespondentsemphasisedtheir willingness to explore and evaluate opportunities on acquisitionsandalliances,both

domesticandcrossborder.Mostrespondents believed that growth throughacquisitionsstillholdstrue,however,theevaluationofacquisitionopportunitieswillbemorerigorous.

Respondentsfeelcaution/reducedriskappetite[ascoreof3.3]asakeyconstrainingfactorintakingadvantageofexisting/emerging opportunities, especially onalliances/acquisitions.Despiteampleliquidity,respondentsexpressed concerns on the availabilityoffundinginshortto medium term as they expect acautiousapproachbyfundproviders(bothdebt&equity).Itiswidelyexpectedthatfundproviders are likely to undertake wider and more extensive due diligence, incorporate appropriate covenants to protect their

interests,enforceandmonitorperformance.Therespondentshave also expressed a concern overthelackofgrowthindemandglobally.

WillIndianbusinessesbecomemore cautious about investing in growth opportunities, settling insteadforasloworganicgrowth? The survey results do not provideadefinitiveanswer.We,atPwC,believethatthefocusis more on organic growth and acquisitionopportunitieswillbemore rigorously scrutinised but thepostLehmanworldprovidesan unparalleled opportunity to Indiancompaniesbuoyedupwith domestic demand to achieve worldclassscale.WebelievethattheIndianentrepreneurswillnotletthisopportunitygo.

Note: Weighted average score on a 5-point scale with a scoreof5forrank 1 and vice-versa

Keyconstraintsintakingadvantageofavailableopportunities

Likelystrategyoverthenext3years


TheIndianindustrialeconomyis largely characterised by a dynamicandversatilesetofentrepreneurs, who though are smallandmediumintermsofscaleofoperations,makehugecontributionsofvariedkindtotheeconomy.

The MSME sector has the ability tomakeavailablecosteffective,low-volume customised products andalsoenjoysflexibilityinitsworking to deliver as per the specificrequirements.

TheothertypicalbehavioroftheseMSMEsisthatinmostofthe cases, depending upon their specializstion,theyhaveevolvedasclusters.

TheimportanceofMSMEfortheIndianeconomicgrowthiswellestablished.Howeverwiththechangingfocusfromeconomicgrowth to inclusive growth, MSMEsector’sroleinthesocioeconomicdevelopmentofIndianow needs to be understood, exploredandfacilitated.

Currently, MSMEs share in nationalGDPisabout17%andisprojectedtotouch22%by2012.Thisisduetothefactthatover55%ofMSMEsareaggressivelyupgrading themselves technologically to reduce their input costs and increase productionandexports.MSMEshad been growing at the rate of35%overthelasttwoyears

and now onwards are expected toregistera40%growthratewhich will be technology driven andcontribute46%sharetothecountry’smanufacturingoutput.

MSMEsshareofnationalexportscurrently is estimated at around 38%,whichwillsurgeto44%inthenextfiveyears.Currently,thissectoraccountsfor95%ofindustrial units and is contributing about40%intermsofvalueadditioninthemanufacturingsector.Morethan13millionMSMEs are spread over the country producing about 7,500 items and providing employment tomorethan40millionpeople.

MSMEsinIndiaSmall enterprise promotion has continued to remain an important andintegralpartofIndiandevelopment strategy much beforetheFirstFive-YearPlan,even dating back to 1938 when the National Planning Committee documentswerebeingprepared.The concerted policy emphasis uponsmallfirmsasavitalvehicleofprogressdrawsuponthissector’scrucialhistoricalrole in generating substantial employment and income at the regional level and acting as a

shock-absorberduringperiodsofeconomiccrisis.

The MSME sector contributes significantlytothemanufacturingoutput, employment and exports ofthecountry.Intermsofvalue,thesectoraccountsforabout45%ofthemanufacturingoutputand40%isestimatedtoemployabout 42 million people in over 13 million units throughout the country1.Further,asthetablebelow illustrates, this sector has consistently registered a higher growthratethantherestoftheindustrialsector.

1Source:AnnualReport2008-09,MinistryofMicro,Small&MediumEnterprises,GovernmentofIndia

SignificanceofMSMEsfortheIndianeconomy

02


GrowthtrendofMSMEsectorinIndia

Thereareover6,000productsrangingfromtraditionaltohigh-techitems,whicharebeingmanufacturedbytheMSMEsinIndia.

TheMicro,SmallandMediumEnterprisesDevelopmentAct,2006,beingoperationalfromOctober2006,fixedtheceilingforallsmallenterprisesatRs.50million.

ProductsofMSMEsinIndia

(Source:AnnualReport2008-09,MinistryofMicro,Small&MediumEnterprises,GovernmentofIndia)

(Source:AnnualReport2008-09,MinistryofMicro,Small&MediumEnterprises,GovernmentofIndia)

With its inherent strengths and thestrongpositioning,bothfromthe national and international perspectives, and being in the forefronttopromoteexcellence,thevisionforthestateofGujaratcould be:

•Business–awayoflifewiththegovernmentfacilitatingandencouraging investment and holisticgrowth.

•Achievinghighestlevelsinhuman development indicators inthecountry.

•Attaininghighstandardsofqualitywiththe‘MadeinGujarat’brandreceivinginternationalrecognition.

Inlinewiththeabovementionedparameters,thevisionforthestate could be as summarised as:

ThenewIndustrialPolicyhasbeenformulatedwiththeaimofsupplementingtheexistinggrowth pattern in the state and augmentingthesamewayofwell thought out and sustainable policymeasures.Thesepoliciesaim at ensuring maximum utilisationoftheexistingnaturalresource base and maximising sectorspecificationfacilitation.

Accordingly, all the policy measures proposed are presented along the parameters used to measure global competitiveness:

•Promotinggeographicalstrengths to ensure balanced regional development

•Leveragingexistingstrengthsand resources

•Increasingtheefficiencyofinstitutions available in the state

•Upgradinginfrastructureavailable in the state

•Enhancingtechnicalcompetence and manpower

•Creatinglabourmarketefficiencies

•Rewardingadoptionofnewtechnologies, business sophistication and innovation

•Improvingenvironmentalinfrastructure

•Promotingholisticdevelopment

•Respondingtochangingdomestic and global environment.

ThenewIndustrialPolicyhastaken these into account and has designed interventions to makeGujaratafavouredglobalinvestmentdestination.

The Gujarat vision

“Gujarat aspires to become a beacon ofcomprehensivesocial and economic development”

Source:IndustrialPolicy2009


Gujarat: An enduring economy

Source: Socio Economic Review 2007-08

•Population:Over50million(5.0%ofIndia)

•Geographicalarea:1,96,000sq.km(6.2%ofIndia)

•GrossStateDomesticProduct(GSDP):US$45.3billion

•PerCapitaIncome:US$915atcurrentprices

•Urbanisation:37.4%

•Highindustrialgrowth:Gujarathasdemonstratedahighindustrialgrowthrateof12.5%from2002-2007

•Industrialisation:Gujaratishometoover800largeindustriesand3,20,000micro,small and medium enterprises

03

CompositionofGSDPaspereconomicactivity(2006-07)


•AhmedabadhasthehighestnumberofregisteredMSMEsinGujarat,constituting21%ofthetotalMSMEspresentinthestate.

•Ahmedabad,Surat,Rajkot,VadodaraandValsadarethemajorMSMEclustersinthestate.

•Suratrankssecondwith15%ofthetotalMSMEunitsregisteredinthestatefollowedbyRajkotwith10%ofthetotalregisteredMSMEunits.

•Ahmedabad,SuratandRajkottogetherconstituteapproximately50%ofthetotalregisteredMSMEsinthestate.

•CentralGujaratconstitutes39.65%ofthetotalMSMEsfollowedbySaurashtra(26%),SouthGujarat(24.35%),NorthGujarat(8%),andKutch(2%)region.

DistrictwisedispersalofMSMEsinGujarat

Source:IndustriesinGujarat2007

Banaskantha2%

Mehsana5%

Surat 15%

Rajkot 10%

Bhavnagar3%

Jamnagar4%

Junagadh2%

Valsad5%

Sabarkantha2%

Kheda4%

Bharuch4%

Vadodara6%

PanchMahal2%

Surendranagar2%

Ahmedabad21%

Gandhinagar


Gujarat strengths: Resources

Source:AnnualSurveyofIndustries Figuresinbracketshow%shareofthecountry

•Population 50.5million(5%)

•Area 196,000sq.km.(60%)

•NSDP(2003-04) US$19.27billion(6.3%)

•Manufacturingsector US$5.17billion

•Fixedcapitalinvestment US$17.9billion(18.5%)

•Industrialproduction US$39.72billion(16.2%)

•Exports 14%ofIndia

With 5%ofthecountry’spopulation, Gujarat

has 16%ofits industrial production.Gujarathas an annual average growth

of9%in the last 3 years and an average industrial

growthof15%

Richavailabilityoffeedbackforchemicalindustries – Oil (418 MMT) & Natural Gas (34 MMCD)

– Lignite(1072MMT)

– Petroleumrefining(57.2+30MMT)andpetrochemicals

– Mineral Reserves

• Bauxite 105 MMT

• Bentonite 105 MMT

• Limestone11,860MMT

– Salt 10 MMT

– CastorOil 237,000MMT(45%ofworldproduction)

Gujarat–Industryprofile

04


Gujaratstrengths:PPPininfrastructure

Gujaratstrengths:Infrastructure


•ThefirststatetoenacttheInfrastructureDevelopmentAct encouraging public-private partnershipininfrastructureprojects

•Variousmodelsinplace

•Successfulimplementationinthefollowingsectors:

– Seaports

– Power plants

– Highways & roads

– Piped gas distribution

•Longestcoastline–1600km.

•Chemicalportterminal(3.0MMT capacity) – the only one in India

•LNGterminalsatDahej(5MMT)&Hazira(5MMT)

•GaslandfallpointatHazira

•41Ports(includingonemajorportatKandla)

– CargohandledatKandlais41.5MMT(12%ofIndia)

– Cargo handled by others portsis89.3MMT(80%ofIndia)

•Containerhandling–P&OatMundra and Maersk at Pipavav

•Mundra&Pipavav–Importantports in private sector

•Broadgaugerailnetworkconnecting all major locations

•11airportswithanInternationalairport at Ahmedabad

Environmental management •Sixhazardoussolidwaste

disposal sites at Vatva, Naroda, Nandesari, Ankleshwar*, Surat*, Vapi*

(*ISO14001Certified)

•Fourincineratorsforhazardousindustrial waste at Nandesari, Ankleshwar, Surat, Vapi

•Sixtreatedeffluentconveyancepipelines at Ahmedabad, Vadodara, Dahej, Ankleshwar, Sachin, Sarigam

•19CommonEffluentTreatmentPlants

•GujaratCleanerProductionCentre


Gujarat: An industrial state

05

Contribution to National Economy

Significantshareinkeysectors&products



•World’slargestproducerofcastorandcumin

•World’slargestgas-basedsinglelocationspongeironplant

•World’slargestproducerofprocesseddiamonds

•World’sthirdlargestproducerofdenim

•Asia’slargestgrassrootpetroleumrefineryatJamnagar

•India’slargestproducerofcotton

•India’sfirstLNGchemicalportterminalatHazira

Presence across industry sectors


•ThestrengthofGujarat’smanufacturingsectorliesinitsstrongbaseofmicro,smalland medium scale enterprises (MSMEs).

•MSMEshaveplayedapivotalrole in the industrial dispersal and the overall industrial developmentofthestate.

•MSMEshaveprovedtobe a major contributor totheeconomyofthestate, especially in termsofvalueaddition,employment generation and entrepreneurshipdevelopment.

•Thereareatpresentover320,000MSMEsinGujarat.

•TheGovernmentofIndia,undertheMinistryofMSMEs,has enacted the MSME Development Act 2006 and putintooperation,w.e.f.,2October,2006.

InaccordancewiththeprovisionofMicro,Small&MediumEnterprises Development (MSMED) Act, 2006 the MSMEs areclassifiedintwoclasses.

•Manufacturingenterprises– The enterprises engaged inthemanufacturingorproductionofgoodspertainingtoanyindustryspecifiedinthefirstscheduletotheindustries(Development and Regulation Act,1951).Themanufacturingenterpriseisdefinedinterms ofinvestmentinplant &machinery.

•Serviceenterprises-The enterprises engaged inprovidingorrenderingofservicesandaredefinedintermsofinvestmentinequipment.

Within the enterprises engaged inthemanufacture/production,processingorpreservationofgoods:

•Microenterprise is one where the investment in plant and machinerydoesnotexceedRs.25lakh.

•Smallenterprise is one where the investment in plant and machinery can be more than Rs.5crore.

•Mediumenterprise is where the investment in plant and machinery can be more than Rs.5crorebutshouldnotexceedRs.10crore.

Serviceenterpriseisfurtherclassifiedasunder:

•Microenterprise is an enterprise where the investmentinequipmentdoesnotexceedRs.10lakh;

•Smallenterprise is one where theinvestmentinequipmentismorethanRs.10lakhbutdoesnotexceedRs.2crore;

•Mediumenterprise is that where the investment in equipmentismorethanRs.2crorebutdoesnotexceedRs.5crore.


MSMEs in Gujarat: An overview

06


IndustrysectorwiseMSMEs



ThedefencesectorIndia’sdefencebudget(capitalplus revenue expenditure) at presentstandsatUS$26.5million,makingitoneofthetop10 countries in the world in terms ofmilitaryexpenditure.Budgeteddefenceexpenditureisgrowingat7%-8%annuallyandIndiais expected to spend close to US$100billionondefenceprocurements during the Eleventh FiveYearPlan(2007-2012)period.

Private ownership was allowed in thedefencesectorasrecentlyas2001.Indiandefencecompanieshitherto catered to only one buyer –thegovernment.Newdefenceprocurement policies in 2006 and 2008 changed that due to the mandatoryoffsetclause.

TheoffsetpolicyhasbeenincorporatedintheDefenceProcurement Procedure (DPP) since 2005 which mandates a30%offsetobligationforprocurement proposals where theindicativecostisRs.3billionor more and the schemes are categorisedas‘Buy(Global)’involving outright purchase fromforeign/Indianvendorsand‘BuyandMakewithTransferofTechnology’i.e.purchasefromforeignvendorfollowedbyLicensedProduction.

India’sdomesticproductioncapacity, which in revenue terms currentlystandsataroundUS$4

billion annually, is predominantly state-owned with the private sectoraccountingforlessthan10%ofthetotalturnover.Theserevenuenumbersaresetforaquantumgrowthoverthenextdecade as local production is forecasttoreachUS$13billionannually.Thegrowthpotential,coupled with the procurement policy, creates a multi-billion dollaropportunityfortheIndianprivatesectordefencecompanies.

Following the recommendations oftheKelkarCommittee,the government, through amendments to the DPP in 2009, announced that a 15 year LongTermPerspectivePlanofthearmedforces,outliningtechnology perspective and capability roadmap would be madepublic.Onceimplemented,thiswillprovidethemanufacturingindustry with direction on technology and capability ramp-upneededinfuture.

Internationaldefenceoriginalequipmentmanufacturers(OEMs)under cost pressure are exploring tie-upswithIndiancompanies.India’sstabledemocraticregimecoupledwiththecountry’srecordonnon-proliferationandmanufacturingexpertisemakeitanattractivedestinationforinternationaldefenceOEMstooutsource production with the offsetrequirementactingas acatalyst.

Defence

ThesignificantcontributionmadebySMEsinanation’seconomyhas been well acknowledged globally.AccordingtotheMinistryofMicro,SmallandMedium Enterprises, SMEs, alongwiththeunitsfallingunderthe Micro sector, contribute up to40%ofthegrossindustrialmanufacturingvalueaddedtotheeconomy,35%toIndia’sexportsdirectlyand8%ofIndia’sGDP.Withover13millionunits, the MSME sector provides employment to more than 33 millionpeopleinIndia.

Despite this immense economic contribution, the sector is largelyinformalandhighlyheterogenous.Itproducesover8,000productsrangingfromhand-made articles to highly sophisticated machines and components.

Theofficialdefinitionofafirmin the SMEs sector is one that hasinvestmentsinfixedassetsofplantandmachineryfromRs.2.5milliontoRs.100millionatoriginalcost.TheSMEsectorincludes the small scale industry (SSI)sector,whereafirm(mostlymanufacturing)hasfixedassetsforlessthanRs.50millionandthemediumsector,wherefirms’fixedassetsrangefromRs.50milliontoRs.100million.

TheMSMEsectorinIndia

OpportunitiesandchallengesforMSMEs

07


RoleofSMEsinthedefencesector

The increase in spending on defenceprocurementsaswellastherequirementofoffsetswillopenupsignificantbusinessopportunitiesforIndianSMEs.Arecent industry study estimates thattheIndiandefencesectorcurrently comprises over 6,000 SMEs,whichsupplyaround20%-25%ofcomponentsandsub-assembliestotheDefencePublicSectorUndertakings(DPSUs),ordinancefactories,DefenceResearch and Development Organisation (DRDO) and the armedforces.

Tomakethemostofthisincreased spending, SMEs can integrate themselves into the supplychainsofnationalandinternationaldefencemajors.

IndianSMEshavesomeinherent advantages – innovative capabilities in niche manufacturing,abilitytoabsorbnew technologies and lower overheadcosts-whiletheoffsetrequirementspropelglobalOEMsto work in close coordination with SMEs.ThedefencesectoristhusemergingasalucrativemarketfortheSMEs.

Itistherespectivestategovernments that are primarily responsibleforthepromotionanddevelopmentofmicro,smallandmediumenterprises(MSMEs).The Central Government,

however, supplements the effortsbyprovidingsupportivemeasures aiming to boost MSMEsthroughspecificschemes (such as technology upgradation,developmentofclusters, market assessment, improvedinfrastructure,facilitiesfortrainingandcapacitybuildingofentrepreneurs,etc).

AsthecostoftechnologyisveryhighforMSMEs,thegovernment is looking at ways tofacilitate,incentiviseandsupportthetechnologytransferat individual as well as collective levels.LinkageswithResearch&DevelopmentInstitutes,rewardinginnovation and new technology, creationofTechnologyDevelopmentFund,etc.aresomeofthesuggestionsbeingconsideredatpresent.Theclusterapproachtooffsetthehighercostoftechnologyupgradationmaybeoneofthevisibleoptions.

Challenges

TheIndiandefenceforcesneedto completely overhaul their machineryandfirepowertomaintain their strategic position intheregion.The34%increaseinthecountry’sdefencebudgetin 2009, a recession year, is a testamenttothegrowingfocusonthissector.Indiandefencecompanies, especially OEMs not onlyneedfinancialsupportbutalsorequiresupportinmanagingthegrowthandbusinessscaling.

TheeffortsofSMEstocapitaliseon the tremendous opportunities inthedefencesectorarechallenged by on-the-ground realitiesintheformofthecomplex,andoftencontradictorypolicy regimes, namely the FDIpolicy,IndustrialLicencingregime,theoffsetpolicyandthetaxregime.

Manufacturingofdefenceequipmentissubjecttoa26%caponFDI.TherestrictiononFDIhasthreeimplications:first,itdiscouragesoriginalequipmentmanufacturersfrombringinginproprietarytechnology.Second,itlimitsforeigncapitalinflowsintothesector.Finally,itincreasesthecorrespondingfundrequirementsoftheIndianpartners.Thisisparticularly relevant in the present high interest rate environment in which risk-averse banks arereluctanttolend.Sowhilethere is a contrary view that the 26%capshouldberetainedasitprovidesIndiancompaniesgreater leverage in negotiations, thisbenefitisavailableonlytoahandfuloflargecompaniesasthey have more resources than thebulkofsmallcompaniesthatworkinthissector.

AnIndustrialLicense(IL)isrequiredformanufacturingdefenceequipment.However,thereisnocleardefinitionofdefenceequipment.ThelicensingpolicyrequirestheuseoftheNationalIndustrialClassification


(NIC)codewhenapplyingforanIL.However,theNICcodehasnospecificentriesfordefenceequipment.Consequently,prospectiveIndianandforeigninvestorsneedtorequestclarificationfromthegovernmentonwhetheraproductisadefenceproduct or not – a process that can take several months with arbitrary outcomes! The problem isparticularlyacuteinthecaseofdual-use products that have both civilanddefenceapplications.

The next issue pertains to thestageofdevelopmentofthedefenseindustryinIndia,whichisfledgling,fragmentedanddominatedbythedefencePSUs(DPSUs).Theprivatesectorcomprisesonlyafewlarge and some medium and small companies doing niche workfortheDPSUsandDRDO.Achieving70%indigenisationrequiresastrongprivatesector,comprisingalargenetworkofsmallandmediumsizedplayers– this is the situation in Europe andtheUS.WhileIndiahasadiversifiedmanufacturingbaseand companies in sectors like

autocomponentmanufacturingare well positioned to make the transition to aerospace anddefence,theirproblemisthat they lack the training and certificationsrequiredinthissector.ThisiswheretheDPSUsand the government will have to play a proactive role through vendor development programmes that would include training and assistance in obtaining certificationsandbuildingcapabilities.ImplementingtheRakshaUdyogRatnapolicywould also be a welcome step in thisregard.

Awelldefinedoffsetpolicyiscriticalforgivingdirectiontothenation’sdefenceindustry.Whilethe government has tried to liberalise the policy over the past fouryears,thereisawidespreadview, amongst both private Indianindustryaswellasforeignplayers, that there are large areas ofambiguity(e.g.whichservicesareallowedfordischarginganoffsetobligation,whoiseligibleas“privatedefenceindustry”)andinflexibilityinthepolicysuchasmultipliersandtransferof

technologynotbeingrecognised.There are serious concerns that such policy issues coupled with delaysandpoormanagementoftheoffsetapprovalprocesscouldwellderailtheoffsetprogramme,ifnotthemainacquisitionitself.

TheMinistryofDefence(MoD),whileapprovinganoffsetproposal,specifiesaDPSUor OFB as the Production Agency.Thisisthesinglebiggest roadblock in developing capabilitiesoftheIndianprivatesectorindefencemanufacturing.

The domestic tax regime also doesnotfavourdomesticmanufacturerbySMEswhichfacemultipleIndiantaxes:exciseduty, State VAT /Central sales tax andservicetaxoninputservices.Someofthesestickascosts.Ontheotherhand,aforeignOEMexecutingasupplycontractfortheMoDfromoverseasenjoysvarioustaxanddutyexemptions.ThefollowingtableillustratestheunequalburdenfacedbyIndianmanufacturerswhileexecutingadefencesupplycontractvis-à-visforeignvendorsdirectlyexportingtotheMoD.

Tax Domesticmanufacturer Foreign vendorCustoms Duty Conditional exemption available on

case to case basisExemptionisavailableforimports by MoD

Excise Duty NospecificexemptionforsupplytoMoD.Onlyunit/project/itemspecificexemptionisavailable.

Not applicable on imports

Central Sales Tax (CST) Payable@2%.Noexemption Not applicable on imports

Value Added Tax (VAT) Value Added Tax (VAT) Value Added Tax (VAT)

Service Tax [email protected]%oninputserviceslike payment on technical knowhow/ engineeringservices.Noexemption.

InputservicesavailedbyforeignvendorfromIndiaareexempt.

Thetaxdifferentialbetweendomesticandforeignsupplycanbeashighas30%.Thusthe current tax and duty regime makesdomesticmanufacturinguncompetitive in a competitive biddingprocessandinfactprovidesincentivesforonlysub-system and component manufacturinginIndiawithintegrationandfinalassemblybeingdoneoffshore.

Thus the current tax and duty regime makes domestic manufacturinguncompetitiveandinfactprovidesincentivesforonly sub-system and component manufacturinginIndiawithintegrationandfinalassemblybeingdoneoffshore.Inorderto give a boost to domestic manufacturingandcatalysegrowth amongst the SMEs, there isaneedforrationalisingthetaxregimeandprovidingfocusedincentives similar to those that have been extended to sectors likeITandITES.


IndianRailways,alongwiththeDefenseDepartmentandtheCommunications Department, has traditionally been a bulk-buyer fromtheSMEsector.For2009,IndianRailwayshasfixedatargetto buy materials and components worthRs.3,615crorefromsmalland medium enterprises2.

Specifically,thepotentialforSMEinvolvementisinareasof–

•qualitymetalfabricationofmildsteel and mild stainless steel base,forging

•polymers,plasticsproducts,rubber gasket

•specialtypaints,floorcleaningchemicals and deodorants

•constructionindustries,productsand services

•agroandfoodprocessing.

The major orders in 2009 are –

•IntheEastZone,foritsmzthelastyear’sspendingonSMEs3.

•TheEasternRailwayshaveearmarkedRs.1,000croreforprocuringthepartsandcomponentsofrailwaysfromSMEs.

•SouthEasternRailwaysplanto purchase materials and componentsworthRs.600crore

•PurchaseordersworthRs.15croreareexpectedfromtheMetroRailway,Kolkata.

Besides components procurement forlocomotivemanufacture,thereare several other areas where SMEs / MSMEs can participate significantly,incasetheyhavenotstartedalready.Forexample,IndianRailwaysplanstodevelop50 stations as world class stations through Public Private Partnership mode – these projects would provide ample opportunities to theSMEplayers.Similarly,thereareplansfordeveloping375stationsas‘AdarshStations’thatshallhavebasicfacilitiessuchasdrinkingwater,etc.ConstructionofMultiFunctionalComplexes(MFCs) has also been announced for50railwaystationsinthisyear’sRailwayBudget–suchcomplexesshallhavefacilitieslikeshopping,foodstalls,restaurants,bookstalls,PCO/STD/ISD/Faxbooths, medical stores, variety stores,budgethotelsetc.Alltheseprojects will involve the SME players.

The Dedicated Freight Corridor Project on the Western and Eastern routes (renamed this year as “Diamond Rail Corridors” Project),extensionoftheEasternFreightCorridor,developmentofDelhiMumbaiIndustrialCorridorandaproposedEasternIndustrialCorridoraresomeofthelargescale projects that would provide immense opportunities to the SMEsector–mostlyintermsofcomponentsupplies.

IndianRailways

IndianRailwaysIndianRailways,thelargestrail network in Asia and the world’ssecondlargest,runsaround 11,000 trains everyday ofwhich8,702arepassengertrains, transporting over 18 million passengers and more than2milliontonnesoffreightevery day, covering around 7,000 stations over a total routelengthofover63,000kilometres.RailfreightinIndiahasgrownat8%overthelastfiveyears.FDIinflowinto railways has been over US$75millionfrom2000to2009.

IndianRailwaysisexpectedtoinvestUS$45.9billioninthe11th Plan (2007-12), triple the amount envisaged in the 10th Plan(2002-07).Theannualplanfor2009-10alone,envisagesaninvestmentofUS$7.6billion,for:

•Importofelectric&diesellocomotives over the next three years

•Newprojectsunderpublic-private partnership scheme

•Newcorridors,newelectric& diesel loco and coach factories

•Enhancingcapacityofpassengertrainsby22%

Introduction OpportunityforMSMEsinIndianRailways

2As indicated by the Deputy Commercial Materials Manager, Eastern Railways, in a buyers-sellers meet organised jointly by the Bengal National ChamberofCommerce&Industry(BNCCI)andNationalSmallIndustriesCorporation(NSIC)inJuly2009

3AsindicatedbyCLW’sDeputyManagerofMaterialsinabuyers-sellersmeetorganisedjointlybyBengalNationalChamberofCommerce&IndustryinJuly2009


Area OpportunityforSMEs

ModernisationofIndianRailways

IndianRailwaysiscontinuouslyfocusingonthemodernisationofitsentirerailsystem.Oflate,railwaystationsandtrainsareonpriority,keepinginviewtheforthcomingCommonwealthGames,tobeheldinDelhiin2010.

TheCentreforRailwayInformationSystems(CRIS)ofIndianRailwaysplanstouseRadioFrequencyIdentification(RFID)technologytoimprovethewagonmanagementsystemofthe Railways – such technology can be developed and supplied by SMEs

Rolling stock RollingstockisusuallyprocuredfromMSMEsthroughopentenderprocesses–theaverage per year numbers are:

•Locomotives:500•Coaches:3,655

•EMU/MEMU:935•Wagons:18,000

Factoriesfornewcoaches,diesel and electric locomotives, high speed bogies – in West Bengal, BiharandUP

Allthesefactoriesarelikelytofocusonoutsourcing–thusprovidingpossibleopportunitiesforMSMEs.

Locomotiveenginecomponents

CLWprocuresaround4,500locomotiveenginecomponentsfromSMEs

Electrification&overheadlineequipment

SMEshavealargeroletoplayinelectrification–thetargetduringtheXIPlanis3,500RouteKilometers(RKMs)withanoutlayofRs.3,500crore–1,299RKMshavealreadybeenelectrified

Track & track side development

Atargetof250kmhasbeenfixedfortheconstructionofnewlinesin2009-2010–majorityofthisworkwillbeperformedbytheSMEplayers

Maintenance & service equipment

Inthefirsttwoyearsofthecurrentplanperiod,7,843kmoftrackrenewalshasbeencompletedandatargetof3,500kmhasbeenkeptfor2009-10.Outof66,565kmofbroad gauge track, 57,345 km has been brought under mechanised maintenance – most ofwhichisbeingcateredtobytheSMEsector

Safety&securitysystems TheRailwaysBudget2009-10proposestheprovisionofCCTVsandothersurveillanceequipmentatimportantandvulnerablestations,modernisationofsignalsandtheuseofvarioussafetyequipmentlikedigitalultrasonicflawdetectingmachinesandwheelimpactloaddetectors(WILD)-thisprovidesampleopportunityforSMEmanufacturersofsafetyequipments

Stationequipment&passengerinformationsystem

IndianRailwayshasproposedtointroduceTrainInformationSystemswithautomaticannouncementsinKolkata,ChennaiandDelhisuburbansections–thisisalreadyintheprocessofbeinginstalledinMumbai.

Besides,thereareplansforinstallationofAutomaticVendingMachinesat200largeandmediumsizedstations.MostoftheprocurementrequirementsinthisfieldcanbemetbySMEs

Railway hospitals upgradation

SMEscansupplyvariouscomponentsfortheproposedupgradationoftheMetroRailwayHospital at Tollygunge (West Bengal) to a 75-bed hospital

Logistics Railwaysareintheprocessofbringingtogetherstategovernmentsandmajorlogisticsplayers to set up logistics parks co-habited by multiple players through participative funding.

Mega logistics hubs are being planned alongside the proposed Eastern and Western DedicatedFreightCorridors.

ThefollowingtablelistsdownsomeotherareaswheretheSMEscanprovidetheirproductsandservicestotheIndianRailways.


TheIndianautomotiveindustryisoneofthefastestgrowingindustries in the world today –paralleledonlybyChina.Although the total output in the industry declined marginally in 2008-09 as compared to 2007-08, volumes have surged again inH2of2009-10andprospectsfortheindustrylookbrightagain.According to a latest Fitch report, theIndianautosectorsalesareexpectedtogrowby10%to12%in 2010, with every possibility that Indiawillbeoneofthelargestproducersofautomobilesintheworldinthenextfiveyears.

TheIndianautomotiveindustry(OEMs and components) is concentratedincertainregionsofthe country – the traditional hub has been the National Capital Region (NCR), comprising Delhi, Gurgaon,Noida,etc.Recently,therehasbeenashifttowardsrelocating the automotive production in Pune (Maharashtra), Chennai (Tamil Nadu) and Gujarat,asthesestatesofferbetter incentives to the industry and also serve as better shipment hubsforexportpurposes.

Gujarat has been witnessing increasinginvestmentbothfromIndianandforeigncompaniesinrecenttimesonaccountofits pro-business policies and thishasaugmentedwellfortheengineering industry in Gujarat, whichcontributestoabout10%ofthecountry’stotalengineeringoutput.Theautomotivesectorin Gujarat is still at a relatively

nascent stage, and contributes to about5%ofthecountry’stotalautomotiveoutput.

Significantachievementsforthestate in recent times include:

1.EstablishmentofGeneralMotor’splantinHalol,whichhasacapacityof85,000unitsper year and will commence productionofLCVsin2011

2.RelocationoftheTataNanoplantfromSingur,WestBengalto Sanand, Gujarat in record time,nettinganinvestmentofRs.2,000croresforthestateinmid2008.

Other important players in the region include Asia Motor Works, AtulAuto,MunjalAutoIndiaLtd.andElectrotherm.Rajkotdistrictisthelargestclusterfortheproductionofautocomponentsanddieselenginesinthestate.

GujaratisnowofferingseveralincentivestoSuzukiMotorstoset up an export-oriented unit forproductionandexportofitspopular models including the A-Star.Thestatewouldassistthecompany in setting up railway linksfromitsproductionunittoMundraPort.

From the above illustrations, it is clear that Gujarat is leaving no stone unturned in expediting andencouragingtheflowofinvestment into the region and it is almost certain that the contributionofthestatetothecountry’sautomotiveoutputwillincreaseintheyearstocome.

Automotive

•TheGovernmentofGujarat has been aggressively supporting thegrowthofthissectorthrough development oftheindustrialclusterandindustry-focusedinvestmentregions.

•Introductionofreformsandflexiblelabourlaws

•Promotionanddevelopmentofsmallandmediumenterprises (SMEs) through various innovation initiatives

•Introductionofclusterdevelopment measures to support and strengthen the growthofthesector

•Promotionofinstitutionssuch as Space Application Centre,Indo-GermanToolRoom, Electronics & Quality DevelopmentCentre,etc.to provide support to the engineering sector

Government initiatives

The opportunities ahead

Metallurgy

•Blastfurnaces,sinterplants

•Steelmeltingshopequipment

Heavy electrical industry

•Boilers

•Switchgearandcontrolgear

•Turbines,transformersandgenerators

Dairy machinery

•Evaporators

•Milkandcreamdeodorizers

•Milkrefrigeratorsandstoragetanks

•Spraydryersandheatexchanges

Industrialmachineryandmachine tools

•Moderncementandtextilemachinery

•Materialhandlingequipment

•Oilfieldequipmentandservices, mining machinery

•Precisionmachinetoolsandrenewableenergyequipments

Auto and auto ancillary

•AutoancillarySEZ/parks

•Assemblingandmanufactureofautomobiles

•CNGkitsforautomobiles,industrial automotive bearings

•Manufactureofautocomponentsforalltypesofvehicles

•Automobiledesigncentre


Foundry

Indiahasabout5000foundriesandisthefourthlargestproducerofcastingsintheworld, with an annual output ofover7.5milliontons.Indianfoundriesregularlymeetthedemandsandexpectationsofthe global market and currently export about 300,000 tons annually.ManyIndianfoundrieshaveadoptedthestate-of-the-arttechnology,inallareasofmanufacturing.

Indiahasastabledomesticdemand, which has helped the foundriessurvivetherecentglobaleconomicdownturn.Indiaremainsahighgrowth

regionforsmallcars,tractorsandtwowheelers.TheannualproductionofcarsandSUVsisalreadyaboveonemillionmark.The industrial growth has been impressiveat5-6%,inspiteoftherecessionarytrends.

OfthemanyfoundrycentresinIndia,Gujarathastwoleading clusters – Ahmedabad and Rajkot, each producing morethan40,000tons/year.Ahmedabad has a number ofsmallandmediumsizefoundries,producingavarietyofcastingsinGreyIron,S.G.Iron,SteelandalsoAluminumalloys.

Rajkot engineering cluster producesarangeofproductssuch as castings, pump-sets, automobile components, diesel engine generating sets, bearings, machine tools and soon.Inaddition,anumberofmiscellaneousengineeringitems such as agricultural implements, hydraulic jacks, air compressors,fastenersandsoonarealsomanufacturedinthecluster.

ThepresenceofRajkotEngineeringclusterindifferentengineering segments

Foundry Diesel engine

Machine tools Automobile parts

Pump-sets Bearings Others

•Pumpand motor bodies

•Dieselengine components

•Automobilecomponents

•Cylinderlines

•Othercasting products

•Listerengine

•Peterengine

•Cometengine

•Dieselengine spares

•Conventionalmachine

•Metalcuttinge.g.lathe

(ii) Metal forminge.g.power press, shearing press

•CNCmachines

•Machinetoolsspares

•Connectingrods

•Pistons

•Crankshafts

•Camshafts

•Liners

•Sleeves

•Aircooledblock

•Spares

•Submersiblepump sets

•Centrifugalpump sets

•Mudpumps

•Ballbearing

•Taperrollerbearing

•Cylindricalroller bearing

•Needlerollerbearing

•Sphericalroller bearing

•Forgings

•Agriculturalimplements

•Hydraulicjack

•Aircompressors

•Fans

•Dustcollectors

•Packaging&plastic items


FoundryindustryinIndia

Indiaisoneofthelargestproducersofcastingsintheworldandaccountsforabout8%oftheworld’scastingsproduction.Intheyear,2007-08India’scasting production was estimated tobenearly7.8Millionmetrictons.Indiaisthesecondlargestproducerofgreyironcastingsbehind China and the third largest producerofsteelcastingsintheworld.Indianfoundryindustryproducesvariousgradesofvalue-added castings as per various internationalstandards.Themajorcasting producing countries and their share in production is depictedbelowinthetable.

The major casting producing countries and their share in world casting production

Country %shareofworld casting production

China 34

USA 12

Russia 8

India 8

Japan 7

Germany 6

Brazil 3

Italy 3

France 3

Korea 2

Others 14

Thevarioustypesofcastingsproduced can be categorised intothefollowingtypes:ferrous,non-ferrous,aluminumalloy,graded cast iron, ductile iron andsteel.Castingsaremainlyused in automobiles, railways,

pumps, compressors and valves, diesel engines, cement industry, electrical industry, textile machinery, sanitary pipes andfittings,powergeneration,construction and many other specialisedapplications.Greyironcastingsaccountforthemajorshareoftotalcastingsmarket.Nearly70%ofallcastingsproducedareof greyiron.

TheIndianscenario

InIndia,thereareapproximately4,500foundryunitsoutofwhich80%canbeclassifiedassmall-saleunits,15%asmedium-scaleunitsandjust5%aslarge-saleunits.Approximately,20%ofthefoundryunitshaveISOinternationalqualityaccreditation.

ThereareseveralfoundryclustersinIndia.Someofthemajor clusters are Ahmedabad, Batala,Jalandhar,Ludhiana,Belgaum,Chennai,Kolhapur,Rajkot, Coimbatore, Howrah, Agra,PuneandVijayawada.Mostoftheclustersareknowntocatertoaparticulartypeofend-useindustry.Forexample,whilethefoundriesinAhmedabadmakecastingsforthelocaltextileandpumpmanufacturingindustry,Batala,JalandharandLudhianamainlyproducecastingsforlocalmachinetools,tractorsandagricultureindustry.Coimbatorefoundriesareknownforthepumps,motorsandvalvecastings.Howrahpredominantlyproduces sanitary castings and manholecovers.BelgaumandKolhapurbeltmainlyproduce

automobilecastings.Thefoundryindustry in Rajkot predominantly caters to the local diesel engine, pumpandengineeringindustry.

Exports

Theexportsofcastingshadbeenshowingahealthygrowthrateof25-30%perannumtill2006-07.However, the year 2007-08 saw a dip in the exports, and it grew byapproximately15%vis-à-visthepreviousyear.Theslowdownin export was mainly due to the steep hike in raw material prices coupledwiththeweakeningoftheUSdollarduringtheperiod.InfinancialtermstheexportofcastingswasaroundRs.4,500croresorUS$1.125billion(IUS$=Rs.40.06ason1April’08)in2007-08.

Raw materials and energy

BetweenApril‘07andAugust’08,there was an unprecedented and frequenthikeinallkeyinputstothefoundrysectorsuchaspigiron,scrap,cokeandferroalloyswhichresultedinmanyfoundriesshuttingdowntheiroperations.Pricesofpigironwentupby76%,steelscrapby60%,cokeby165%andferroalloysby100%duringthisperiod.Almostallfoundrieswereforcedtocutdown production and adopt cost cuttingmeasures.

Sincethebeginningof2009,thepriceshavestartedtostabilise.However,manyfoundrieswhichhad purchased raw materials at higherpricesearlierarefacingextreme hardships since they are forcedtosellproductsatlower


prices, corresponding to the currentrawmaterialprices.

EnergypricesinIndiaaretypicallythe highest amongst the leading foundryproducingcountries.Although, the industry has been taking several measures to use energyefficiently,alotmoreneedstobedone.

Product mix

TheIndianfoundryindustrypredominantly produces grey iron,althoughtheproductionofsteel,ductileironandnonferrouscastingsisincreasing.The break-upoftotalproductionofcastingsintodifferentcategoriesisgivenbelowinthetable.

Categorywisebreak-upofcastingsproductioninIndia

Material %productionCast iron 69

Malleable iron 10

Nonferrouscastings

1

Ductile iron 12

Steel castings 8

TheIndianfoundryindustryistryingtofocusonhighervalueadded castings such as ductile irontoimproveprofitabilityandbeatcompetition.Thedemandforlight weight castings is growing, especially in the automobile sector due to the increasing demandforfuelefficientcars.

Manpower

TheIndianfoundryindustryishighlylabourintensive.Asperindustry estimates, it provides directemploymenttoabouthalfamillionpeople.Thegovernmenthas realised the importance ofvocationaleducationandskill-upgradationoftheexistingworkforceandhastakeninitiatives to upgrade nearly 1,390 IndustrialTrainingInstitutes(ITIs)in PPP (Public Private Partnership) mode.

Technology

Inrecenttimes,thegovernmenthas been encouraging technology transferthroughjointventuresandforeigndirectinvestments.The government has cooperated withUNIDOintechnologyupgradationofcertainfoundryclusterslikeHyderabad.Inaddition, the government has providedfinancialassistancetofoundryclustersinAhmedabad,Belgaum, Coimbatore and Howrah to strengthen the industrialinfrastructureandset-upcommonfacilitiesintheclusterunderindustrialinfrastructureupgradationscheme.Therewillbemoreclusterscomingupforupgradation in the 11th Five YearPlan.Thereareseveralother government schemes suchasCLCSS(CreditLinkedCapital Subsidy Scheme) which encourage SMEs to invest in technologicalupgradation.

Environment

Thefoundryindustryisconsidered to be a polluting industry.Hencetheindustryhasbeenunderseverepressurefromthe pollution control boards to installpollutioncontroldevices.Although, the awareness to control pollution has increased among the industry, there is a need to develop and promote cost-effectivepollutioncontrolsystemsfortheindustry.Closerpartnerships between the industry and academic institutions would help in addressing the environmentalchallengesfacingthefoundryindustry.

Fresh investments/expansions andfutureoutlook

Thefoundryindustrywillcontinueto be a sunrise industry in developingcountrieslikeIndiaandChinaformanyyearstocomebecauseofthegrowthinautomobileandinfrastructuresectors.Inrecenttimes,theindustryhasbeenfacingseverechallengesduetorisingcostofinputs and shrinking exports on accountoftheglobaleconomicslowdown.Theindustryneedstofocusonnewmanufacturingstrategies and rationalise production processes, cut costs andintroduceinnovations.Thefutureoutlookfortheindustryisbright due to the growing demand forcastingswithinIndiaaswell asinternationally.

Source:TERIReportNo.2008IE20


1.Electronicsindustry

Strengths

• Availabilityofcheapandskilled manpower

•Home to R&D and designcentresofglobalmajors such as Texas InstrumentsandCisco

•Matured electronic componentsIndustry

Weakness

•Inefficientsales,channels,especiallyforexports

•WeakIPRcreationandmanagement

•Lessemphasisonclean&environmentfriendlytechnology,especially recycling

•Growthrestrictedtoelectroniccomponents and computer segments

Threats•Limitedaccesstocapital•CompetitionfromChinaand

Taiwan•Risingmanpowerandinfrastructurecosts

•FreeTradeAgreements(FTA) with ASEAN countries such as Thailand

•Shortfallincontractedmanufacturingcosts

•Over-dependenceonconsumer electronics

Opportunities

•Increasedcontractmanufacturing

•Increasedoff-shoringintheglobal industry, especially in design

•Risingdomesticsalesofconsumer electronics, with increasing disposable incomes

SWOTanalysis–Indianindustrysector wise

08


2.Textileindustry

Strengths

•Largeanddiverserawmaterial base

•Advancedesigncapabilities

•Presenceacrossthevalue chain

•Cheapandskilledmanpower

Weakness

•Obsoletetechnology•Lowlabourproductivity•Lackofmodernmanagement

practices•Mowinstalledcapabilities–‘smallscaleinnature’

Threats•Poortransportationinfrastructure

•Lackofadequateandtimely credit

•Competitionfromothercountries like China

•Absenceofstructuredtradeinformation

•Tighteningofenvironmentalpollution norms

Opportunities

•Favourablegovernmentpolicies

•Vibrantdemandforhometextile

•PreferentialTradeAgreements(PTA) with other countries

•Stronggrowthpotentialfortechnicaltextilesandperformancefibres

•Vibrantdomesticdemand


3.Leatherindustry

Strengths

•Establishedmanufacturingbase

•Extensiveindustryexperience

•Availabilityoflabouratcompetitive rates

•Government’sinitiativestofacilitategrowth

Weakness

•Lowmaturityofmanufacturingand business processes

•Slowadaptiontoglobalfashiontrends

•Lackofeconomiesofscaleduetofragmentedstructure

Threats•Mountingcompetitionfrom

South East Asian countries in the low-mid segment, andfromEuropeinhigh-end segments

•Potentialthreatofcompaniesfromcompetingnations such as China, settingupmanufacturingfacilitiesinIndia,negatingthevalue-propositionofIndianplayers

Opportunities

•Shiftinglobalmanufacturingbase,fromdevelopedtodeveloping countries

•Capabilitytomoveupthevalue chain

•Consideredasaviablealternative to China

•Impositionofanti-dumpingduty on competing nations


4.Automobilecomponentindustry

Strengths

•Highproductquality•Lowmanufacturingcost•Availabilityofcheapand

skilled manpower•Increasingreplacement

demand•Improvementinroadinfrastructure

Weakness

•Lowcapitalbase•Obsoletetechnology•Limitedgeographicaldiversityofmarkets

•Lackofawarenessofbusinessopportunities

•Inadequateexposuretointernational environment

Threats•Fluctuationsinthecostof

production•Dependenceontradersandagentsforoverseasmarket

•Productsubstituteduetofasttechnologicalchanges

•Competitionfromothersourcing destinations

Opportunities

•InvestinR&Dandtechnologyupgradation

•Buildcredibility,focusingoninternational markets

•Initiationandmanagementofoverseas collaborations

•Achieveeconomiesofscalethroughdiversificationandexpansion


1.Textilesa.Manufactureoftaffetafabric(projectcost–US$1.17million)

b.Manufactureofcropshadefabric(projectcost–US$0.93million)

c.ConversionactivityforNon-wovenHealthcareDisposables(projectcost–US$0.71million)

d.Manufactureofwebbingsforseatbelts(projectcost–US$0.71million)

2.Food&agroprocessinga.Pack-houseprojectofbananas(projectcost–US$1million)

b.Tomatoprocessingatimportantcroppockets(projectcost–US$1million)

c.Baker’syeast(projectcost–US$1.33million)

d.Enzymesforfoodprocessingindustry(projectcost–US$1.10million)

3.Engineeringa.Investmentincastingproject(projectcost–US$2.2million)

b.Autocomponents(OEMsupply)(projectcost–US$2.2million)

c.Forgedautocomponents(projectcost–US$0.88million)

d.Readymixconcreteforconstruction(projectcost–US$0.77million)

4.Gems&jewellerya.Assaying&hallmarkingcentre(projectcost–US$0.44million)

b.Goldrefinery(projectcost–US$0.66million)

5.Chemicalsa.Finechemicals

b.Specialtychemicals

c.Polymeradditives

d.Nylon,Engineeringplastics

6.Centresofexcellencea.Research&developmentfacilities

b.Industryspecificeducationalinstitutesandtrainingcentres


InvestmentopportunitiesforMSMEs09


FinancialInstitutions:•Throughtheproductsandservicestheyprovide,FIsareuniquelyplacedtoinfluencethedirectionandpaceofthecountry’seconomicdevelopmentandbydefault,itslongtermsustainability.

•TheSMEownerswhoarethemaindriversforalltheissuesconcerning their enterprises haveaveryclosefinancialand day-to-day need based relationshipwiththeseFIs.

•Indianbanks,throughtheirwidelyspreadnetwork;providecredit, loans and other services tothousandsofMicro,SmallandMediumEnterprises.Thus, bank managers and loan officersarethelifelineandthegatekeepersofcapitalfortheSMEs.

•Indianbanksservetheentirenationrangingfromthetopcorporate to the smallest microlevelenterpriseandfromthe most sought areas to the remotestpartofthecountry.They touch the maximum populationofthenationinshaping their lives by providing them with their customised productsandservices.

•Despitemanyday-to-dayproblemsfacedbyFIs,theirmutual relationship with SMEs isstrong.ItisinthiscontextthattheseFIscansignificantlyinfluencetheeconomicgrowthanddevelopmentoftheSMEsector and are better placed in bringing about the desired change.

RBIexpectedtoannouncefinancingpackageforMSMEsectorsoonTheReserveBankofIndia(RBI)isexpectedtoannounceafinancingpackagefortheMicro,SmallandMediumEnterprises(MSMEs),asthesectorhasbeenfacingcreditcrunchduetodelayinpaymentsandunwillingnessonthepartofBankstowardsofferingloansinthebackdropofcurrentglobalfinancialscenario,saidDineshRai,Secretary,MinistryofMSME,GovernmentofIndia.

“Sendingaffirmativesignals,theGovernmentofIndiahasalsoappointedacommitteeofsecretariestolookattheproblemsbeingfacedbytheMSMEsector,whichincludearenasofskillsdevelopment,clustersapproach,creditavailability,technicalandmarketconsiderations.IntegratingthesectorwithglobalplayersisalsoofimmenseimportancefortheholisticdevelopmentofIndia”,hefurtheradded.TowardstheendeavorsundertakenbythegovernmentaretheenactmentsofMSMEact2006,PrimeMinister’sEmploymentGenerationProgramforgenerating37lakhjobsundertheeleventhplan,settingupofNationalCommissionforenterprisesinorganisedsector,skillsdevelopmentplanningcommissionamongstothers.

Thedifferentstakeholderswith whom MSMEs are associated with are the local community, large buyers, FIs,B-schools,academicinstitutions, raw material suppliers, machinery providers, internal buyers, civilsocietyorganizations,regulatorybodies,etc.These stakeholders play an importantroleinthelifeandbusinessesofMSMEowners.TheinteractionoftheMSMEswith these stakeholders is frequentanddirect.Although,the stakeholders serve theirownmutualbenefits,generally it develops into ahealthyrelationship.Thisrelationship can play a vital roleintransformingMSMEsintoresponsiblebusinesses.

RelevanceofFIs&CRAsinpromoting MSMEs

10


•Workingcapitalshortages

– Inadequacyofworkingcapital in any case has been astandingproblem.Theslow-down has exacerbated it.AlargesegmentofMSMEs, particularly those thatarepartofsupplychains,reportedthattheywerefacingproblemsduetounpaidbills.

– Most indicated that the problems were more acute at branch level with regards to requestsforenhancementofworkingcapitallimits.

– InspiteofwillingnessofamajorityofMSMEswhicharepartofsupplychainstoutiliseFactoring, it has not taken offduetolegalandothertaxrelatedconstraints.

•Over-archingconcerns

– Theoverarchingconcernsofthe MSME sector remain that ofaccesstoadequatecredit.

– RBIistoooccupiedwiththemacromanagementofeconomy and has not had enoughtimeforimprovementofservicequalityforbankcustomers.

•Termloansandaccesstofundsfornewprojects/start-ups

– Many progressive companies thatwentforexpansionorstarted a new unit during the boom period (last 4-5 years) arenowfacingdifficulttoservice periodic re-payment as market conditions have suddenlyreversed.Inthe

current situation neither top-line nor bottom-line targets couldbemetbyborrowers.

– Though Credit Guarantee forMSMEshavebeenmademoreuserfriendly,mostofthe banks still discourage borrowersfromtakingtheguaranteecoverandaskfortheCollateralSecurity.

•Interestratesandservicecharges

– There is strong perception among the MSMEs (especially among the small segments) that they get a raw deal in interestrates.Theyarealsomade to pay higher charges foralltypesofchargeableservices,especiallynon-fundbased limits such as bank guarantees.

– Theoverwhelmingviewoftheparticipants has been that whileRBIhasannouncedbold rate cuts and asked banks to reduce interest rates, nothing is passed on totheMSMEs.Theinterestis supposed to be charged basedontheperformanceoftheborrower.

•Thirdpartycreditrating

– Most MSMEs complained that third party credit rating requirementunderBASELIIforloansportfolioaboveRs.10 crore had unnecessarily increased the cost burden on them.Mostratingagenciesapply the cut and dry corporatemodelsonMSMEs.Itisgivingvaluetoneither

thebankersnortheMSMEs.Ithasbenefitedonlytherating agencies as they have securedtheirbusinesses.

•Lossesduetoexoticforexderivativesandforwardcontracts

– Exoticforexderivativeinstruments were sold by some banks to unsuspecting MSMEs to manage their forexrisks.LossesworthmorethanRs.2000croreare reported to be absorbed byMSMEsexportersalone.RecentRBIinstructionshavegiven a temporary respite to theaffectedMSMEsbutthestatusquoremains.

•Commoditycrash

– Many MSMEs that were contractedforimportofrawmaterialduring2008sufferedheavy losses as by the time the consignments arrived, the prices crashed, choking theirworkingcapital.Astherewasnoprecedenceofsuchsituations, most bankers failedtocometotheirrescue.

MSMEinfinanceandcreditpolicies

11


•SmallIndustryServiceInstitute(SISI)

SISIisanarmoftheofficeoftheDevelopmentCommissioner,SmallIndustryDevelopment Organisation (SIDO),NewDelhi,inGujarat.SISIhelpsMSMEsmeetvariousneedsofplanning,assessmentand implementation by offeringservicesintechnicalconsultancy, industrial management, training and workshops.

•GujaratInstituteofDevelopment Research(GIDR)

Itisanautonomousbodyengaged in research related todevelopmentissues.GIDR,throughitsindustryfinanceresearch, undertakes study on sectoraldevelopment.Alargeportionofstudiesundertakenbytheinstitutehavefocusedonthedevelopmentofsmallscaleindustries.

•EntrepreneurshipDevelopmentInstituteofIndia(EDI)

Itisanautonomousbodysupported by the Government ofIndiaandtheGovernmentofGujarat and sponsored by other apexfinancialinstitutions.EDIofferseducationforexcellencein entrepreneurship, training andresearch.Theinstitutehas a mandate to promote

thecreationofMicro,Small&MediumEnterprises.

•CenterforEntrepreneurshipDevelopment (CED)

Itisanautonomousbodyjointlypromoted by the Government ofGujarat,GIIC*,GIDC*,GSIC*andGSFC*.CEDaimstocaterto potential entrepreneurs by grooming their management skills.TheinstitutionoffersavarietyoflearningplatformsforMicro,SmallandMediumEnterprisecreation.

•SmallIndustriesDevelopmentBankof India(SIDBI)

SIDBIisanationalsupportinstitutionforsmallandmediumenterprisesfortheirfinancialrequirementsandupgradation.Itsmandateistoworkfortechnology upgradation in Micro, Small & Medium Enterprisesclusters.

•DistrictIndustries Centers(DIC)

DICs,underthegovernanceofIndustriesCommisioneratesupport the development and economicactivitiesofMSMEs,atthedistrictlevel.

Present institutional structure in Gujrat

12


InordertoachievethevisionforGujaratandtheresultantobjectives, sector intervention strategy at certain macro and microlevelisrequired.ThenewIndustrialPolicyhasbeenformulatedwiththeaimofsupplementing the existing growth pattern in the state and augmentingitbywayofwellthought out and sustainable policy measures.Thesepoliciesaimatensuringmaximumutilisationofthe existing natural resource base andmaximisingsector-specificfacilitation.WhileaimingforGujarat to be an internationally favouredinvestmentdestinationunderthenewIndustrialPolicy,the GoG has been conscious oftheneedtoensurethatthestate’sregionalandglobalcompetitiveness is substantially enhanced.Accordingly,allthepolicy measures proposed are presented along the parameters used to measure global competitiveness,viz:

1.Promotinggeographicalstrengths to ensure balanced regional developmentOneoftheclearfocusesofthenewIndustrialPolicywouldbetofacilitateandensurea sustainable and balanced developmentinGujarat.

– Creationofopportunitiesforvigorousindustrialandeconomic activities in the declared backward talukas

– SpecialInvestment

Regions–convergenceofindustrial, social and urban infrastructure.LeverageDMICandtheinfluenceareain Gujarat

– Facilitation to mega projects

2.Leveragingexistingstrengths and resources

For sustainable development, it is necessary to ensure that the existing and inherent advantagesareidentifiedandputtoproductiveuse.ThenewIndustrialPolicyseekstopromote industrial development in the state to optimally use theexistingresourcebase.Thestrengthsofthestateintermsofphysicaladvantagessuchas a long coast line, strong manufacturingbase,excellentlevelsofsupportinfrastructure,highbaseofentrepreneurialeconomy, policy-driven government, etc would all be used to promote industrial developmentinthestate.Thenewpolicyhasidentifiedanddeveloped a strategy which would promote industrial development in the state in a planned manner and to do so, afewfocussectorshavealsobeenidentified.Thesesectorswouldbenefitfromspecialpackages which would be extendedtothembyGoGforencouraging their growth and developmentfurther.Thefocussectorsthathavebeenidentifiedarethatoftextilesandapparels,gems and jewellery, innovative

projects,megaprojects,informalsector,agri-business,fisheries,IT/Knowledge-basedindustries,port and related industries and power sector (non-conventional energy).ImportantinterventionswhichwouldbeneededforeachofthesesectorshavebeenlistedinthenewIndustrialPolicy.Theinterventionsproposed are mentioned below:

– Promotionofclusterdevelopment in the state

– Promotionoftextilesandapparels

– Promotionofgemsandjewellery

– Promotionofagri-business

– Promotionoffisheriesdevelopment

– PromotionofIT/ITeSindustries

– Promotionofportsandrelatedindustries

– Promotionofnon-conventional energy

– Promotionofwomenentrepreneurship

3.Increasingtheefficiencyoftheinstitutionalcatalysing industrial developmentThe GoG recognises that investmentswouldflowonlyinto those regions which possessastrong,efficientandtransparent institutional set up.Informationandfacilitationbeing an important aspect, it had been addressed in

IndustrialPolicy2009-Overview13


theGujaratIndustrialPolicy2003 especially to provide informationinallrelevantfieldsto new as well as existing entrepreneurs.Atthedistrictlevel,DistrictIndustriesCentres(DIC)hasbeenmodernisedandinformationkiosks have been set up in eachDIC,providingthelatestinformationonindustrialdevelopment and relevant aspects.Thestategovernmentintendstocontinuetofocusonitsroleasafacilitatorandbring about competitiveness among districts in promoting industries in Gujarat:

– Investorfacilitation

– Improvingtheefficiencyofenvironmental compliance

4.Improvinginfrastructureavailable in the stateThenewIndustrialPolicyseekstocreateadequateprovisions which aim at upgrading and improving the infrastructureinthestate.Infrastructurewhichiscriticalfortheefficientfunctioningofindustrieshasbeenfocuseduponinthepolicy.Asperthepolicy,theonusofindustrialinfrastructureimprovisationlargely lies with the GoG and theGIDC.

– Upgradingindustrialinfrastructure

– Newindustrialestatesforfocussectors

– Promoting new industrial


estate development through PPP in the existing industrial areas

– Providingefficientlogisticservicesforindustrialgrowth

– InfrastructuredevelopmentforITindustries

– Developmentofportsinfrastructure

– Improvementinhinterlandconnectivity

– Augmenting the power requirementsofthestate

5.Enhancementoftechnical competence and manpowerThenewIndustrialPolicyforGujarathaslaidadequateemphasis on encouraging expansionoftheskilledandeducatedmanpowerbase.The GoG intends to provide incentivesforinvestmentswhich are directed towards enhancingtheskilllevelsofthe manpower and ensuring that the talent pool available in the state is in line with the industryrequirements.

Though the state has, over the years, attracted large volumesofinvestment,theavailabilityofsuitablemanpowerhasbeenlagging.To address this issue, the state government intends to develop industry-responsive and readily employable man powerfocusingonlocalresources.Forthispurpose,

the government has set up GujaratKnowledgeSocietyand has also planned to set up knowledgecorridorsforhighereducation.Inresponsetothecurrent market trends, a large demandfortrainedmanpowerislikelytoemergefromthemanufacturingandservicessector.

The state government intends to introduce industry-responsive short term/ bridged modular courses in existingITIs,Polytechnicsand Engineering Colleges with active user-industry participation and involvement onaPPPbasis.Ithasbeenproposed to set up Extension TrainingCentresinGIDCs,

IndustrialParks,SEZsandindustrialclusters.Anchorinstitutes would be selected forvariousindustrialsectorsto provide industry responsive curricula, need-based training and skill development forfaculties.Thestategovernment will support the developmentofSpecialisedSkillDevelopmentInstitutions.Support will also be provided toDTEandDETforsub–ITI/ Polytechnic, short term (2 weeks) training programmes forspotemployment.

– Skilled manpower development

– Training extension centres

– Anchor institutes

– Specialised skill development

– Incubationcentreforyouth

– Apparel & textile

– SME skill enhancement

– Institutionalarrangementformarket-driven curriculum

6.Creationoflabourmarketefficiencies

The GoG has played a proactive role in ensuring that the sick industrial units ofthestateareprovidedwith incentives which would facilitatetheirrevivalandreutilisationoftheexistingnon-performingorunder-utilisedassets.Thegovernmenthasover the years announced several schemes which have

primarily aimed at providing concessions to the sick industrialunitsinanefforttorevivethem.Itintendstobringthefocusbackontheseunitsand address them through the newIndustrialPolicy.

– Rehabilitationofsickunits

– Assistance to bring the informalsectorintomechanism

7.Rewardingadoptionofnewtechnologies,business sophistication and innovationInordertocreateanenvironment conducive to the nextstageofdevelopmentand attracting investment and talent, the State Government


has accorded priority to research and development activity through promoting R&D institutions as well as encouraging contract research fromprivatesectorindustries,institutions and industrial associations.

The State Government intends to make the SME Sector more comprehensiveandvibrant.GovernmentofGujaratintendsto provide necessary support bywayofinterestsubsidy,venture capital assistance, qualitycertification,skilldevelopment,etc.

– Research & Development

– EnhancecompetitivenessofSMEs

8.ImprovingenvironmentalinfrastructureOneofthemostimportantareasofdevelopmentalactivity, also regarded as highly sensitive, pertains to theenvironment.Globallyaveryhighdegreeofimportanceisattachedtothefactthatproduction and developmental processes should have minimalnegativeexternality.This is a philosophy which is widely agreed upon by the GovernmentofGujarat.Thegrowth and development which thegovernmentenvisagesforthe state would necessarily be asustainableone.

Industrialdevelopmentandassociated growth should

thereforebenecessarilycarriedabout in a process wherein no damage is done to the ecology and to the environment as a whole.Thesubjectmatterofenvironmentsafeguardalsogathers greater momentum in thelightofthefactthatGujaratis a predominantly industrial state.Thestateaccountsfor28%ofthenationalproductioninchemicals.

Inaddition,thereisawiderangeofindustriesinthestateand thus it is more conscious about its responsibility in ensuring a clean and green environment.ThenewIndustrialPolicyintendstoaccord Environment the statusofInfrastructure.Indoing so, the GoG plans toprovideawiderangeofincentivesforallthesectorstoencourage greater compliance with the environmental normsandstandards.Ithas taken initiatives to developinfrastructureforenvironment protection includingsettingupofcommoneffluenttreatmentplants,developmentofhazardouswaste disposal sites and disposaloftreatedeffluentsintosea.Theenvironmentprotection measures would continuetogetpriority.Nowthe environment protection operations will be carried out byathirdpartyresponsibleformonitoring and compliance and not by the polluters/ stake holders.

The state government aims to encourage environment management by rational use ofresources,environmentaudit and taking measures to reduce pollution load, waste recovery, recycling and waste recharge,besidesfocusingontheadoptionofcleanprocesstechnology.Thegovernmentaims to promote waste management as a standalone viable activity through professionalindependenttechnology-drivenentities.Itintends to gain carbon credits andreducecarbonfootprintsintheindustrialsectors.Thiswill provide greater opportunity to the people willing to take thebenefitofgreenbusinesslikecarboncreditearning.Focus would be on green credits through compensatory oradvanceafforestation.Thestate government aims at zerodischargefromspecificindustrial sectors over a period of10years.

Astheuseofcleangreentechnologyalsorequireslargescale investment and is by and large an

expensive process, the state government recognises the need to introduce PPPmethodsforbuildingenvironmentinfrastructure.Athird party management to that extent would monitor and be responsibleforensuringthatallthe necessary environmental guidelines, rules and norms are strictlyfollowedandadhered


to.Theinterventionswhichhavebeendesignedfortheenvironmental sector under the newIndustrialPolicyarelistedbelow:

•GoGwillinitiatePPPinthefollowingareas:

– Desalination plants and plantsforrecyclingwater

– Commonhazardouswasteinfrastructureprojects

– Common environmental infrastructureprojects

– Other projects that can improve environmental compliance

•Forinnovativenon-PPPprojects, GoG will provide financialsupporttothefollowing:

– UseofinnovativetechnologyforrecoveryofusefulmaterialfromE-waste, electroplating waste and photography waste.

– Forship-breakingfacilitiesthat adopt modern technologies

– For implementing innovative technology that canhelpintherecoveryofODSfromoldequipments

– For reduction in energy consumption

– For common desalination plants via Reverse Osmosis (RO) technology forSMEs

– Technology upgradation ofexistingplantsthroughcleaninnovativemeasures.

•Forencouraginggreenpractices, in SMEs, GoG will providefinancialassistancefor

– Useofclean,efficientandinnovative air pollution controlequipment

– Periodical environmental/energy audits

– Settingupofenvironmentmanagement system

– Purchaseofnewequipments/systemsrelated to occupational safetyandhealth

– Installationofsolarenergysystemforenergysaving

– Grading and ranking industries according to their environment performance-gold/silver/bronzepasses

– Rain water harvesting

– Reduction in water consumption

– Providefinancialassistanceforsubstitution/optimisationofrawmaterial including catalysts

•Obtainingcarboncreditandreductionofcarbonfootprint

– Projects that will impact theentireclusterofunitswillbegivenpriorityforobtainingcarboncredits.

– Supportforcarryingoutlifecycle analysis and related measuresforreducingcarbonfootprint.

•Forallprojectsintheareaofenvironmentandwastemanagement, the government will reimburse the electricity dutyforfiveyears

9.PromotingholisticdevelopmentThe GoG, in addition to facilitatingeconomicandindustrial growth, would also ensure that all round social development in the state is also carried on.Thegovernmenthasthereforerealisedtheneedtosynergise social development activitiesofcorporateswithgovernment initiatives to ensure better reach, impact, visibility, sustainability and outcome.Inthiscontext,thestate government would lay emphasis on promoting such activities in PPP mode and make the corporates partners invariousprogrammes.TheconceptofCorporateSocial Responsibility would be actively encouraged and promotedinthestate.

Anindicativelistofsectorswill be outlined where the corporates and industry associations may like to getassociated.Thesemayinclude:promotionofsports

at rural level to make youths capableforparticipationat national/ international competitions, building play grounds, enhancement oftechnicalcompetenceincluding vocational training andprovidinguniformstostudents, adopting PHCs/ CHCs and supporting nutritional programmes, Nirmal GujaratProgrammesetc.

The corporates and industry associations may decide to undertakespecificactivitiesoracombinationofactivitiesinvillages/clusterofvillages/talukas/districts.Theparticipating companies or associations adopting to take up such activities would need toappointadesignatedofficerasDirectorforCSRactivities.AcommitteeconsistingoftheDirector(CSRofthecompany),officerfromDRDAandofficernominatedby

the District Collector (DC) will be constituted to decide onactivities,allocationoffundfromcorporatesandgovernment and monitor the progressoftheseactivities.

10.Responsivenesstochanging domestic and global environmentThe state government will ensure the implementation oftheIndustrialPolicy2009to meet with the stipulated objectivesoftheindustrialpolicy.Recognisingtheincreasinglydynamicnatureoftheworldeconomyinaneraofclose global linkages and the constantneedforfrequentandappropriate response, a course correction mechanism would beputinplace.Thepolicyenvisages building a response system wherein continuous

feedbackandquickresponsetotherequiredpolicychangesaremadepossible.

The state government intends to constitute Development Councilsforfocussedindustrial sectors as well asspecificaspectslikemanpower development, environmentprotection,etc.in order to have continuous inputsandsuggestions.Thecouncils will include industries representatives and experts as members.

An inter-departmental committee headed by the Hon’bleMinisterofState(Industries)willbeconstitutedtoenablerealisationoftheintendedoutcomeofthepolicy.Thecommitteewillalsoreview suggestions received fromDevelopmentCouncilsand recommend midterm correctionstothegovernment.


Cluster based approach is increasingly being recognised assustainable,cost-effectiveand an inclusive strategy to ensure competitiveness and improvementofMicro,SmallandMediumEnterprises(MSMEs).

TheimportanceofMSMEsfortheIndianeconomyintermsoftheir contribution to employment, exports and regional development isverysignificant.Consideringthe importance, Gujarat would lay special emphasis on cluster development approach in the new IndustrialPolicybyannouncingaschemeforassistancetoclusters.The scheme would not only lay importanceonsofterinterventionssuchascapacitybuildingofcluster enterprises through marketing initiatives, technology upgradationinitiatives,quality

improvement and training/ skill upgradationinitiatives;butalsofocusonharderinterventionssuchasthecreationofcluster-specificcommoninfrastructureandfacilities,incubationcenter,CFC,ITIextensioncentreandotherneed-basedfacilities.

This would enable the MSMEs to build their capacities in the clusters,taketheadvantageofemerging global opportunities, enhancethecompetitivenessofclusterbyfacilitatingthecreationofcriticalcommonsupportinfrastructure,ensurecreationofsustainableemploymentopportunities and augment the incomelevelsofpeopleworkingin/dependantonMSMEs.Itwould also make the industry associations/ cluster stakeholders more responsive, participatory

and empower them to participate in Public-Private Partnership (PPP) initiatives to compete globally.

ThefinancialassistanceproposedinthenewIndustrialPolicyisasfollows:

1.Thegovernmentwouldextendfinancialassistance(includingassistancefromGOI)toclusterdevelopmentwithaceilingfortheperiodofthreetofiveyears.

2.ClusterAdvisoryInstitution(CAI)tobeconstitutedforproperdevelopmentofcluster.

3.Financialassistancetonodalinstitution/hiringofexperts.

4.TheywillalsobeprovidedpartialfinancialassistanceforLastMileconnectivity.

Promotionofclusterdevelopmentinthe state

14

•Interestsubsidy – IncentivestoSMEsforsetting up new projects, expansion,diversificationormodernisation

– 5%interestsubsidyuptoRs.fivelakhsperyearforfiveyearsperiod

•Technologyupgradation – Interestsubsidyat3%perannum,maximumRs.threelakh on term loan towards capitalequipment

– Technologyacquisitionfund

– Assistanceforpatentregistration

•R&DSupport – Support to R&D institutions

– Sponsored research – Subsidyat50%oftheprojectmaximumRs.fivelakh

•Qualitycertification – SupportforBIScertification,ISO9000,ISO14000,HACCP, WHO GMP and others

– Subsidyat50%subjecttoamaximumofRs.0.2million

•Marketingsupport – AssistanceforparticipationininternationaltradefairsuptomaximumRs.twolakhs

– A ssistance to industries associationsat50%oftotalrent subject to a maximum Rs.fivelakhs

IncentivesforMSMEs


TheMSMEsectorisfacedbyanumberofchallenges.

•Financialassistance: MSMEs, particularly the tinysegmentofthesmallenterpriseshaveinadequateaccesstofinanceduetoalackoffinancialinformationandnon-formalbusinesspractices.MSMEsalsolackaccesstoprivateequity,venture capital and have a very limited access to secondarymarketinstruments.Withderegulationsofthefinancialsector,theabilityofthebankstoservicethecreditrequirementsoftheMSME sector depends on the underlying transaction costs, efficientrecoveryprocessesandavailablesecurity.

•Creditissue:The main constraint which the MSMEs stillfaceistheavailabilityandhighrateofcredit.Thisis likely to get exacerbated inthecurrentcontextoftheheatbeingfeltbytheIndianfinancialsectorduetotherecentglobalfinancialmeltdown.

•Marketorientation: MSMEs facefragmentedmarketsinrespectoftheirinputsaswellas products and are vulnerable tomarketfluctuations.

•Accessibilitytomarkets& technology: MSMEs lack easy access to inter-state andinternationalmarkets.TheaccessofMSMEstotechnology and products

innovationsislimited.Thereisalsoalackofawarenessofglobal best practices among MSMEs.

•Delaysincompensation:MSMEsfaceconsiderabledelaysinthesettlementofdues/paymentofbillsbythelargescalebuyers.

•Operationcosts: Rising globalcostofcommoditiescontinues to haunt the local manufacturers.Inadditiontorisinginflation,theSMEsectorhas, in many ways become a ‘talentpool’fromwhichskilledlabourandprofessionalsareoftenfishedtofillhigherpaying jobs in large domestic andinternationalcompanies.Asaresult,SMEsfacehigherrecruitment and training costs while dealing with high employeeattritionrates.

•Riskcapital: As the SME sector emerged to become thenation’seconomicgrowthengine,raisingfinancetopower, that growth remains as impediment to sustained expansion.Venturecapitalfirmsaregenerallywaryofinvesting in relatively young or unproventechnologies.Bankstoo are unable to provide debt financing.Inaddition,thereisnoformalmechanismforSMEstoraiseinvestmentfromcapitalmarkets.Asaresult,SMEs either raise money throughinformalmeans,orscale back on their product andserviceoffering.

•Export-drivenbusinessmodel: The past two years have seen a marked appreciationinthevalueoftheIndianRupee.SinceSMEsderivesignificantrevenuesfromexports,thisshiftintheexchange rate ratio has eroded intotheirprofits.SMEslackin-house expertise to analyse hedgingoptionsandforecastexchangeratefluctuations.That, coupled with competition fromothersouth-eastAsiancountrieshasforcedSMEsto re-architect their business models.Theabovementionedchallengescallforaneffectiveaddressablemechanism.

ChallengesfacedbytheMSMEsector

15


Notes


About ConfederationofIndianIndustry

TheConfederationofIndianIndustry(CII)workstocreateandsustainanenvironmentconducivetothegrowthofindustryinIndia,partneringindustryandgovernmentalikethroughadvisoryandconsultativeprocesses.

CIIisanon-government,not-for-profit,industryledandindustrymanagedorganisation,playingaproactiveroleinIndia’sdevelopmentprocess.Foundedover114yearsago,itisIndia’spremierbusinessassociation,withadirectmembershipofover7800organisationsfromtheprivateaswellaspublicsectors,includingSMEsandMNCs,andanindirectmembershipofover90,000companiesfromaround385nationalandregionalsectoralassociations.

CIIcatalyseschangebyworkingcloselywithgovernmentonpolicyissues,enhancingefficiency,competitivenessandexpandingbusinessopportunitiesforindustrythrougharangeofspecialisedservicesandgloballinkages.Italsoprovidesaplatformforsectoralconsensusbuildingandnetworking.Majoremphasisislaidonprojectingapositiveimageofbusiness,assistingindustrytoidentifyandexecutecorporatecitizenshipprogrammes.Partnershipswithover120NGOsacrossthecountrycarryforwardourinitiativesinintegratedandinclusivedevelopment,whichincludehealth,education,livelihood,diversitymanagement,skilldevelopmentandwater,tonameafew.

Complementingthisvision,CII’sthemefor2009-10is‘India@75:Economy,InfrastructureandGovernance.’WithintheoverarchingagendatofacilitateIndia’stransformationintoaneconomicallyvital,technologicallyinnovative,sociallyandethicallyvibrantgloballeaderbyyear2022,CII’sfocusthisyearisonrevivaloftheEconomy,fasttrackingInfrastructureandimprovedGovernance.

With64officesinIndia,9overseasinAustralia,Austria,China,France,Germany,Japan,Singapore,UK,andUSA,andinstitutionalpartnershipswith213counterpartorganisationsin88countries,CIIservesasareferencepointforIndianindustryandtheinternationalbusinesscommunity.

Forfurtherdetails,contactConfederationofIndianIndustry, CIIHouse,GulbaiTekra,NrPanchvati,Ahmedabad - 380 006

Dev Ranjan MukherjeeHead-Gujarat State

Tel.079-40279900,40279911(D)

Fax.079-4027999

Email:[email protected]

JavedSindhiTel: (079) 40279900, 40279917(D)

Fax: (079) 4027999

Email:[email protected]

About PricewaterhouseCoopers

PricewaterhouseCoopersPvt.Ltd.(www.pwc.com/india)providesindustry-focusedtaxandadvisoryservicestobuildpublictrustandenhancevalueforitsclientsandtheirstakeholders.PwCprofessionalsworkcollaborativelyusingconnectedthinkingtodevelopfreshperspectivesandpracticaladvice.

Complementingourdepthofindustryexpertiseandbreadthofskillsisoursoundknowledgeofthelocalbusiness environment inIndia.

PricewaterhouseCoopers is committed to working with our clients to deliver the solutions that help them takeonthechallengesoftheever-changingbusinessenvironment.

PwChasofficesinAhmedabad,Bangalore,Bhubaneshwar,Chennai,Gurgaon,Hyderabad,Kolkata,Mumbai, New Delhi andPune.

ContactsAnand Dikshit Executive Director Email:[email protected]

Prashant BansalEmail:[email protected]

Acknowledgements

Thisreportwouldnothavebeenpossiblewithoutthecommitmentandcontributionofthefollowingindividuals:

PrashantBansal,RadhikaJain,BhaskarSubramaniam,BirjuKankal,KaranDesai.

@2010PricewaterhouseCoopers.Allrightsreserved.“PricewaterhouseCoopers”,aregisteredtrademark,referstoPricewaterhouseCoopersPrivateLimited(alimitedcompanyinIndia)or,asthecontextrequires,othermemberfirmsofPricewaterhouseCoopersInternationalLimited,eachofwhichisaseparateandindependentlegalentity. SC33-10/02Gujratvision

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