Buiding Stong Partnership

Indo - US Economic Summit 2007

Building Strong Partnerships

*connectedthinking

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Table of contents

Education Management

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Farm to Retail - Overview of India’s retail sector

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India: A manufacturing destination

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Infrastructure: a) Roads

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b) Civil Aviation & Aerospace

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c) Port Sector

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d) Real Estate

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Healthcare in India

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Education Management

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Issues in Higher Education & Vocational Education India is one of the world’s fastest growing economies. Its population has a median age of 25, which means that over 550 million people are 25 years or younger. While this gives India a huge demographic edge, it also puts considerable pressure on its policy makers to ensure that the young population is given quality education that will empower the future generations to contribute to and participate in the growth of the country. Is India’s education system geared up for this massive task? Is it ready to meet the current and future challenges? In India, the formal education system consists of 1 to 3 years of preschool, 10 years of school; 2 years of higher secondary school; 3 to 4 years for under-graduate degree followed by Masters, M.Phil and Ph.D degrees. The focus of this paper is on higher education and vocational education in India. India has one of the largest higher education infrastructures in the world with 388 universities / institutions affiliating some 17,000 colleges. Over 450,000 teachers teach 10 million students; third largest after the US and China. This number is growing rapidly. Programmes are offered in all major disciplines. Professional education is imparted with English as the medium of instruction. Prestigious institutions get to pick the very best students. Only 1 out of 200 applicants gets admission into the famed Indian Institutes of Technology. The figure of acceptance is about 1 out of 10 at MIT(USA). Stories of students not making it to IITs, but securing admission in Ivy League colleges in the U.S. are commonplace. India’s higher education system has been a great asset – it has not only catered to the manpower needs of the economy and helped India become self reliant in several areas but its doctors, engineers and scientists have been spectacularly successful in the global arena. Clearly the higher education system has done a good job. But is it good enough for the very rapidly changing present and a very demanding future? Perhaps not and that is the key issue. While there has been a 113% increase in enrolment in higher education (from 4.95 million in 1990-91 to 10.58 million in 2001-02), the net enrollment ratio in 2005-06 is still a mere 9.7% While we spend a meagre 0.37% of our GDP on education, developed countries like Canada spend 1.88% of GDP on higher education alone.

Turning our focus to primary education, India presents a dismal picture. Article 8 of the Indian Constitution mandates universal primary education. Yet, 41 per cent of children do not reach class 5 in India. In this respect, India fares worse than Gambia (20%), Mali (18%), Senegal (15%), Tanzania (17%) and Burkina Faso (25%). Further, the literacy rate in India is lower than that of many other developing countries. Many argue that the development of higher education in India has been at the cost of primary education. Higher education is highly subsidized by the Government – fees at universities have not been revised for several years. At present only 5% of the total cost of operating a university is generated through fees. Yet there is a woeful lack of quality higher education institutions, giving rise to severe competition for entry. Admission to reputed colleges is extremely difficult; one such college in Delhi rejected students who scored less than 95% in their school leaving examination for its bachelors course in economics. This level of competition has resulted in increasing numbers of students seeking higher education overseas – US, Australia and UK being the chief destinations. It has been estimated that Indian students spend approximately USD 4 billion on education overseas every year. In 2004-05, about 80,000 Indian students were studying at US universities comprising roughly 14% of the international students there. A considerable percentage of this student group ultimately settles down overseas – a migration of talent and resources that India can do without. India needs to expand its educational infrastructure at all levels. Towards this end the Indian Government needs to seek out partners both within and abroad. I. Regulation of higher education India is a federal setup with powers to legislate on certain matters with the Central Government, on others with the State Governments and on some matters on the concurrent list which come within the purview of both. Education is on the concurrent list. Exclusive legislative power has been assigned to the Central Govt for co-ordination and determination of standards in institutions of higher education as well as research and scientific and technical institutions while the State Governments are responsible for maintenance of standards of higher education. The coordination and cooperation between the Union and the States is brought about in the field of education through the

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Central Advisory Board of Education (CABE). The cornerstone behind all legislations on education is that education must be a “not for profit” activity. Various Supreme Court judgements have reiterated this. The Central Government has established authorities for overseeing and ensuring high standards of higher education in India which include: 1. The University Grants Commission (UGC) 2. All India Council for Technical Education (AICTE) 3. Specialised Professional Councils, like Medical Council of India (MCI), Bar Council of India (BCI) etc. A. UGC The UGC was established by the Central Government through an Act passed by the Parliament in 1956. UGC has been vested with two responsibilities: (i) providing funds to institutions of higher education; and (ii) coordination, determination and maintenance of standards in such institutions. In carrying out its responsibilities, the UGC serves as the link between the Central and the State Governments and institutions of higher learning. Under the provisions of the UGC Act, the right of conferring or granting degrees is exercisable only by a university established under an Act passed by the Centre or a State or by an institution which is declared by the Central Government to be a deemed university by issuing a notification. The Act also confers powers on the UGC to make rules to provide for, among others: • defining the qualifications required of the teaching staff; • defining the minimum standards of instruction for grant of degree • regulating the maintenance of standards and the coordination of work or facilities in universities;

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• specifying matters in respect of which fees may be charged and scales of fees The UGC has, accordingly, notified rules and regulations governing these issues. Before issuing any regulation, the UGC must seek the approval of the Central Government. B. AICTE All India Council for Technical Education (AICTE) was established in 1988 also through an Act of Parliament. AICTE is vested with the statutory authority for planning, formulation and maintenance of norms and standards, quality assurance through accreditation, funding in priority areas, monitoring and evaluation, maintaining parity of certification and awards and ensuring coordinated and integrated development and management of technical education in the country. AICTE’s purview covers programmes in Engineering, Technology, Architecture, Town Planning, Management, Pharmacy, Applied Arts and Crafts, Hotel Management and Catering Technology etc. For the purpose of facilitating collaboration and partnerships between Indian and Foreign Universities / Institutions, the AICTE has, in 2005, issued Regulations for Entry and Operation of Foreign Universities in India imparting technical education. C. Specialised professional councils The Central Government has also set up specialized professional councils such as the Bar Council of India, Medical Council of India, Dental Council of India etc. with a view to regulating professional education in law, medicine, dentistry etc. The degrees awarded to students admitted by colleges without obtaining the required approval from such bodies are not recognised for registration to practice the respective professions in India. D. State Governments State Governments are responsible for establishment of State Universities and colleges and provide grants for their development and maintenance.

II. Foreign investment in education sector A. FDI policy The Foreign Direct Investment Policy of India allows 100% FDI in the education sector under the automatic route as per Press Note 2 of 2000 issued by the Department of Industrial Policy & Promotion, Ministry of Commerce & Industry. B. Regulatory framework The UGC has so far not notified any regulatory framework in respect of participation in higher education by foreign universities. Regulations are under preparation and are likely to provide for the following:• the prospective foreign education providers be recognized in their home country; • the fees charged by them be controlled by the UGC; • no commercialization of education be allowed; • reservations for backward classes. On March 1, 2007, the Cabinet approved the Regulation of Foreign University Entry and Operation (Maintenance of Quality and Prevention of Commercialisation) Bill, 2007. Due to political opposition to the entry of foreign universities, the Bill’s introduction in the Parliament has been deferred. Media reports indicate that the proposed legislation gives universities of international repute the freedom to not observe domestic norms such as reservations for socially and educationally backward sections and the dispensation from requirement of adhering to admission and fee norms. However, their entry into India may only be with conditions which may cover minimum investment, usage of surplus for further development of their educational institutions in India etc. Unlike the UGC, the AICTE in 2005 has issued regulations for the entry and operations of foreign universities/ institutions imparting technical education in India leading to award of diplomas and degrees including post graduate and doctoral programmes. These regulations and the procedures are so complex

that it almost appears that they are designed to block rather than facilitate entry of foreign universities. Some provisions are even contradictory in nature. For example, one of the conditions for entry and operation reads: “The educational programmes to be conducted in India by Foreign Universities / Institutions leading to award of degrees, diplomas, shall have the same nomenclature as it exists in their parent Country. There shall not be any distinction in the academic curriculum, mode of delivery, pattern of examination etc. and such degrees and diplomas must be fully recognized in their parent Country.” Another one however reads: “The Foreign University / Institution shall be bound by the advice of AICTE with regard to admissions, entry qualifications and the conduct of courses / programmes in technical education, as may be communicated to them from time to time.” Clearly, these two stipulations are contradictory. The equivalence in the curricula that is mandated in the first could be lost by the binding “advice” of AICTE given in the second stipulation. III. Issues in higher education In a report sent to the Prime Minister in end-November, 2006, the National Knowledge Commission (NKC) notes that there is a “quiet crisis in higher education in India that runs deep”. It calls for “a systematic overhaul” of the nation’s universities so that much larger numbers of people can be educated without diluting academic standards. India needs to increase its number of universities to 1,500 by 2015, from 350 now. Such an increase is necessary to raise the proportion of 18 to 24-year-olds entering higher-education institutions to at least 15 percent, up from 7 percent now, which is only half the average for Asia, says the NKC report. The report goes on to add that various universities vary considerably in terms of quality and there is little knowledge creation, little interaction with the economy, society and other academic / research institutions.

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The regulatory environment for education in India is complex and is often criticized as an hindrance to the growth of the sector. The Economist (2005) noted ‘whereas most nations in the world are working towards loosening of statutory control over higher education, India is moving in the reverse direction’. Over-centralisation, lack of institutional autonomy and accountability and slow responses to change have become the distinguishing features of the higher education system in India.

the Ministry of Labour & Employment. The Directorate General of Employment & Training (DGE&T), under the Ministry of Labour & Employment, is responsible for providing skilled workforce to the industry for shop floor level and foreman at supervisory level, both in India and abroad. The DGE&T’s functions include:

Conclusion

• revision of course curricula;

There are two key issues on higher education in India.

• granting affiliation;

1. The need to expand the infrastructure to provide quality education to much larger numbers and

• trade testing & certification.

2. The need to recognize that the Government alone will not be able to do so and it must seek out partners from within and outside India and that partners will come only when they are made to feel welcome. These two issues are well debated and well understood. India’s policy makers now need to muster the will to do what is necessary to effect changes. IV. Vocational and technical education While India’s population growth rate has declined over the years, the labour force is still projected to grow by close to 2 per cent every year. The National Sample Survey Organisation (NSSO) reports that 12.8 million people enter the labour force every year. Over half of the labour force is still engaged in rural activities. Over 90 percent of the labour force still works in the informal sector, much of it at low levels of productivity. As per the Constitution, “Vocational and Technical Training of Labour” is a concurrent subject which means that both the Central and State Governments share the responsibility. The Central Government lays down the policies, standards, norms for affiliation, guidelines and conducts trade test and certification. Implementation of vocational training programme rests with the respective State Governments. Under the Allocation of Business Rules, “Vocational training of craftsmen and apprentices” is allocated to

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• policy formulation on Vocational Training; • laying down standards;

In India, the vocational education programme at secondary school level was introduced in 1976-77 as a state scheme. Due to financial constraints, the programme was introduced initially only in a few States. However, these States have felt the need for central assistance to run the programme. Subsequently, a Centrally Sponsored Scheme of Vocationalisation of Secondary Education was introduced during 198788 and since then around 6,800 institutions have introduced the programme at Grade XI and XII level of education. The Technical/Vocational Education and Training is multi-sectoral in nature. Each ministry/department in Central as well as State Governments is responsible for manpower development in that sector. While some offer regular formal or non-formal courses, others draw from the general pool of educated and trained manpower. Around 150 vocational courses are offered in these schools with an intake capacity of around 1 million students per year. The programme covers all major areas like Agriculture, Engineering and Technology, Business and Commerce, Home Science, Health and Paramedical, and Humanities, Science and Education. Almost all these schools are in the public sector, enrolling close to 400,000 students in the vocational education scheme – utilizing just 40 per cent of the available student capacity in these institutions. These schools offer a total of over 100 courses in various areas - agriculture,

business and commerce, humanities, engineering and technology, home science and health and para medical skills. The Vocational Training Programmes (VTP) conducted are aimed at imparting skills to school leavers at VIII, X and XII standards. The two major VTP schemes are : 1) Craftsmen Training Scheme (CTS) that are conducted through the Industrial Training Institutes (ITIs). 2) Apprenticeship Training Scheme (ATS) which provides on the job training in real life industry environment. There are 5,114 ITIs in the country having a cdapacity of 742,000. The number of Government ITIs is 1,896 while there are 3,218 private Industrial Training Centres. All India Trade Tests are conducted for Craftsmen Training Scheme under the aegis of National Council of Technical Training (NCVT) which trainees appear in after completion of the course. Successful trainees are awarded the National Trade Certificates, which are recognised for employment within the country as well as overseas. Performance of ITIs India’s vocational education infrastructure is woefully inadequate- catering to the training needs of only 2.5 million – 1 million by the DGE&T and 1.5 million by 11 other ministries and departments. It is estimated that an overwhelming 93 per cent of the workforce, which is in the unorganised sector, does not have access to formal vocational training. A survey conducted by the Federation of Indian Chamber of Commerce & Industry (FICCI) on the ITIs in the country makes the following conclusions: • The quality of the Industrial Training Institutes (ITIs) in the country has been deteriorating in the last few years, with the industry increasingly reporting disconnect between the skills imparted in these institutions and the skills demanded in the market. More than half of the ITIs reported underutilisation of seats, indicating that the basic industrial trades offered by these institutes are becoming increasingly unattractive for their limited scope in terms of creating job opportunities.

• As against 107 trades that have been notified by the government, the maximum trades that any ITI offered were just 38. This reflects the inability of the ITIs to ramp up scale and offer new and more marketoriented courses. • While the situation with regard to physical infrastructure and availability of power supply remains comfortable, factors like non-availability of computerized numerically controlled machines (CNCs), inadequate supplies of raw material and lack of focus on staff training and development are key impediments in the strengthening of ITIs in India. The Prime Minister has stated that India faces the challenge of increasing the skilled work force from 5% at present, which is the lowest in the world, to about 50% by 2021 which is the norm in developed countries. This requires that the training capacity be increased by five times. To make working people employable, adequate infrastructure for skill training and certification and for imparting training needs to be created. To sustain a high level of economic growth, it is essential to have a reservoir of skilled and trained manpower. Shortages have already emerged in a number of sectors. The Government recognises that ITIs must keep pace with the technological demands of modern industry and the expanding universe of technical knowledge. The Prime Minister has noted complaints about an imminent shortage of skilled employees and announced the launch of a National Mission on Vocational Education so that the skills deficit in the economy is addressed. The Planning Commission has formed a Task Force on Skill Development which will, inter alia, develop a blueprint for the National Mission. The Government in recent years has taken steps to upgrade ITIs. The Finance Minister, in his Budget Speech 2004-05, had announced measures for upgradation of 500 ITIs in the country. Subsequently, a scheme for upgradation of 100 Government ITIs with domestic funding was approved in March 2005. These 100 ITIs were distributed in 22 States/Union Territory Administrations with 75:25 funding pattern to be shared between Central and State Governments respectively.

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For the remaining 400 Government run ITIs, the Ministry of Labour and Employment began a dialogue with the World Bank for providing financial assistance. The World Bank, in June 2007, approved a credit of US $ 280 million (Rs. 1,231 crore) towards the central share for taking up the ‘Vocational Training Improvement Project’ for upgradation of these 400 ITIs. The remaining 1,396 government ITIs have been proposed to be upgraded into Centers of Excellence in specific trades and skills under the Public-Private partnership (PPP). Under the proposed scheme, the State Government, as the owner of the ITI, continues to regulate admission and fees while the new management will be given academic and financial “autonomy” and the Central Government will provide financial assistance by way of seed money. Industry participation in ITIs is a welcome step that has several advantages. It would ensure increased involvement of the industry resulting in better skills delivery & exposure for the candidates. In turn, the Industry would get skilled & trained manpower. The industry response has been encouraging. Several automobile companies have adopted ITIs and introduced relevant training programmes. Industry chambers like CII and FICCI have also come forward and announced their intent to partner ITIs in various states. To maintain the growth rate of the economy, which is essential to bring people out of poverty, it is imperetive to have a reservoir of technical and skilled manpower. A properly planned and effectively implemented vocational education system will enable the unemployed youth to take up useful employment and contribute to the country’s growth. While scarcity of resources for education is an accepted fact, it is even more true of vocational education in

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India. It is also more expensive to organize courses in vocational education than in general education. This is because vocational and technical education involve heavier capital costs and maintenance costs for laboratory, workshop, equipment, etc. Government expenditure on vocational education has been extremely low, as compared to general secondary education. The Knowledge Commission has recommended that given the demand for skilled manpower in manufacturing and services the Government should aim to spend at least 10 – 15%, of its total public expenditure on education, on vocational education and has suggested 1) enhancing fees, coupled with student loan schemes, 2) raising funds through a cess on employers (for instance 2% of salaries of all employees, as in Singapore) and 3) making it obligatory for companies to finance public vocational education and training programmes (as in Korea). The Planning Commission estimates that every year 2.2 million students leave school after passing Class X. Those who drop out after Class VIII number 19 million. These young people are the ones for look for vocational training and self-employment avenues. As against this, available formal training capacity of the country is only 2.5 million students, thus leaving a huge gap. The ITI system needs to be revamped to fill this gap. Educationists and experts have consistently recommended that education at secondary and higher secondary level should be given a vocational bias to link it with the world of employment. It has also been recommended that 80-90 percent students completing Class X should be diverted to the vocational stream, reducing the pressure on the universities and also preparing students for gainful employment.

Conclusion The advantages of vocational education for a country like India cannot be overstated. It is estimated that at any given time, 1.5 percent to 2 per cent of Europe’s population is under training with VET. The same percentage of India’s population amounts to at least 20 to 30 million people. In sharp contrast, the actual number of people receiving VET is very low, at around 2.5 million.

India needs to put much more emphasis on Vocational Education and Training to bring about a transformation in its manufacturing sector and build entrepreneurship. A major expansion of the vocational education programme is the need of the hour.

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Farm to Retail – Overview of India’s Retail Sector

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Several global studies rank India as the most attractive retail destination in the world. PricewaterhouseCoopers estimates that India’s retail sector is worth an estimated USD350 billion. Over 12 million retail outlets (or kirana stores) comprise India’s unorganised market; more than 80 percent of kirana stores are operated by small family businesses using household labour. Organised retail penetration in India is between three to eight percent. Organised retail is growing at a compounded annual growth rate of between 30 to 40 percent per annum.

PricewaterhouseCoopers estimates that the Indian retail sector is worth USD350 billion and is growing at 40 percent per annum. Organised retail penetration is currently three percent. Some of the drivers fueling the growth of the retail industry include—

India’s retail sector will witness increased growth due to the following factors:

• Rising incomes

• Stable GDP growth rates of nine percent are resulting in increased economic prosperity for the country and for consumers.

• Demanding middle class

• Strong GDP

• Increased numbers of working women

• Large young population

• India’s 300 million-strong middle class are demanding increased access to good and services. • Changing lifestyle patterns are witnessed in the increase of lifestyle- and luxury-oriented purchases and a decrease in essential purchases.

Source: PricewaterhouseCoopers, From Sao Paulo to Shanghai: New Consumer Dynamics—The Impact on Modern Retailing*

• The higher numbers of working women are resulting in an increase in double income families who want to purchase more consumptionoriented goods. Also, the higher number of urban professional working women is driving demand in urban centers. • India has one of the world’s largest youngest populations where half the population is under the age of 25 years. • Increased access to credit is enabling consumers to spend more and save less. (Retail loans have doubled since 2003.) • Residents in rural and Tier II, III cities are demanding that modern trade move into their localities. The population of rural India is the combined populations of the US and the EU and represents 51 percent of consumption. In addition, the spread of IT and BPO operations to Tier II and III cities is raising incomes, improving standards of living and resulting in a desire to acquire more goods and services.

Who Buys More— Rural or Urban India? • The top 10 cities account for 11 percent of India’s total consumption and the next 20 cities account for 20 percent of India’s consumption. • Of the total households in India that earn more than INR300,000 (USD 6,667) per annum, a third reside in rural India.

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Some retail real estate issues that impact the growth of the retail industry include: • High stamp duties on transfer of property, varying by state. • Urban Land Ceiling Act and Rent Control Acts have distorted property markets in cities, leading to exceptionally high property prices. • Presence of strong protenancy laws makes it difficult to evict tenants. This problem is compounded by problems of clear titles to ownership. • Land use conversion is time consuming and complex. • Time consuming legal process for property disputes. • City urban planning projects smaller commercial plots and this, along with rigid building and zoning laws, make it difficult to procure retail space. Source: PricewaterhouseCoopers, From Sao Paulo to Shanghai: New Consumer Dynamics—The Impact on Modern Retailing*

Emerging trends that are observed in the Indian retail sector include: • Increase in Private Labels—Private labels enhance the profitability levels of product categories, increase retailers’ negotiation powers and create consumer loyalty. Retailers are introducing private labels in all categories, including apparel, accessories, footwear and groceries. • Foray into Retail Agribusiness—India’s most prestigious business houses and many global retailers are planning to enter retail agribusiness. Market entrants plan to invest in the entire value chain, moving goods “from the farm to the fridge at home.” Viewed as India’s next “sunrise sector,” retailers use contract farming to access land, manpower and farming skill without having to purchase land. Multinational companies also want a share of this food retail market and may enter the market through cash-and-carry or franchisee models. • Selling to Tier II and III Cities—Indian retailers are planning to extend operations into Tier II and Tier III cities. People living in Tier II and III cities are typically well-educated and are willing to purchase goods and services. Some of the emerging opportunities in the Indian retail sector include: • Low Penetration of Modern Trade—India’s retail market is largely dominated by unorganized players, representing a major growth opportunity for modern trade. The share of organized retail, currently at three percent, is expected to increase to 10 percent by 2010. For consumers, modern trade will provide increased access to products and services. Modern trade will also improve the economy through increased employment, agriculture and sourcing of products and services from India. • Young, Upwardly Mobile Consumers—With the IT/BPO boom in India, a new and younger generation has access to more disposable income than their parents. India’s population, with a median age of 24, is the youngest consumer segment in the world and presents an attractive and lucrative opportunity for retailers. Young Indian consumers have easier access to credit and as a result, a “buy now and pay later” culture is emerging. These consumers are increasingly spending on a variety of luxury products and lifestyle-oriented services and are unapologetic about their generous spending habits. Lifestyle-oriented activities include eating out, watching movies, buying branded apparel, more expensive personal care items and the latest consumer durables electronics.

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• India As A Sourcing Hub—India is a sourcing location for textiles and apparel; companies sourced USD2.5 billion worth of goods from India in 2005 to 2006. Global retailers like Wal-Mart, GAP, JC Penney and Target are increasing their sourcing volumes from India. These companies, which accounted for 50 percent of the apparel outsourced from India in 2005, are now rationalising their vendor bases and limiting their sourcing to a fewer countries like India and China. International retail chains are also setting up captive liaison offices in India instead of depending on third-party buyers. Some of the main challenges include: • Inadequate Availability of Skilled Labour—Developed economies, which have a high penetration of modern retailing formats, employ between 10 to 11 percent of their workforce in retailing, as compared to seven percent employed in India today. With new entrants and existing domestic retailers planning large-scale expansion, there has been a surge in demand for skilled resources. However, this demand is not being met by a readily available supply of talent. There is a growing concern about the paucity of trained retail personnel both at the store and managerial levels. While there is no manpower shortfall in India, given its large working population, the gap lies in finding people with the right hard and soft skill-sets, like customer orientation and selling, which are critical. • Retail Real Estate Issues—Availability of quality retail space is a critical enabler for the anticipated rapid growth of modern retailing in India. With most Indian cities undergoing rapid urbanization, spiraling costs of retail space is a key concern among retailers. With the demand from the commercial properties remaining strong, the cost of real estate in most top tier cities has been rising in the past two years, thereby escalating the lease rentals and the time it takes to break-even. • Absence of Robust Food Supply Chains—India is a fragmented country with 70 percent of the population residing in rural areas. The absence of an infrastructure and logistics system means that reaching consumers and transporting goods is difficult. With growing urbanization the necessity of roads, highways and public transport systems are essential. Due to the presence of large local and multinational companies, India has a fairly organised and developed non-food manufacturing supply chain. However, the food supply chain in India is fragmented and unorganised.

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New Trends in Food

The Imperative of improving India’s food supply chain

A CII-AC Nielsen Org-Marg report on foods and beverages indicates that one of the biggest opportunities in food is likely to be the quasi-meal. Demand for quasi-meals is coming from an increased willingness to experiment with foods and to break rules, one of the main ones being the importance of eating a full meal.

Looking at the figure below, India is at the stage of building supply chains, improving back-end systems, instituting processes and applying technologies. These efforts will ensure:

In addition the rise in the numbers of working women is likely to be one of the most significant factors in altering the food landscape in India. Ready-to-eat meals and culinary aids that assist with and ease the preparation of regional specialties is emerging.

• A reduction in overall costs

That said, to be able to move quasi-meals, ready-to-eat meals and culinary aids to consumers, retailers need to build strong farm-to-fork models. Source: CII, PricewaterhouseCoopers analysis

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• A smoother transfer of goods from point of origin to point-of-sale • Increased operational efficiencies

• Improved customer service since goods can be moved rapidly and efficiently between factories, warehouses and outlets • Better insight into which goods move quickly off shelves and which remain in stock. Some retailers, in order to address the absence of supply chain and logistics systems are establishing captive systems comprised of cargo planes, railway hubs, warehouses, distribution centres, cold chain storage, etc. Logistical challenges, rapidly changing consumer tastes, the evolution of retail formats, the high cost and availability of real estate are characteristics of the Indian retail sector. However, as modern

trade grows, supply chain efficiency will become essential in offering competitively priced products, responding to customers’ changing needs and providing good customer service. Supply chain management involves: supplier management, purchasing, materials management, manufacturing management, warehousing, material handling, transportation, physical distribution and customer service. Establishing an efficient supply chain that links farmers and small manufacturers (who have limited infrastructure or distribution strength) directly with retailers, will maximize value for all stakeholders. Together with back-end infrastructure, this will minimise wastage (especially for fresh foods and vegetables), will increase farmers’ realizations, will encourage best practices in crop management and will improve food safety and hygiene.

According to a FICCI report of October 2004 India is the: • Second highest fruit and vegetable producer in the world (134.5 million tones) with cold storage facilities available only for 10 percent of the produce. • Second highest producer of milk with a cold storage capacity of 70,000 tonne. • Fifth largest producer of eggs. Sixth largest producer of fish with harvesting volumes of 5.2 million tones

The food supply chain can be subdivided into the following sectors: • Primary—Agriculture, horticulture, fisheries and aquaculture are the primary producers • Intermediate—Manufacturers who process the food for ready-to-eat or cook format together with the packaging companies • Last stage—Retailers, wholesalers and caterers are in this last stage of the supply chain. The success of any retail format largely depends on the efficiency of its supply chain. India has a fairly organised and developed non-food manufacturing supply chain, mainly due to the presence of large local and multinational companies that have built significant experience and scale by following best practices in their respective fields. Like most other developing economies, however, India lacks in the last mile distribution segment. The supply chain in India is fairly unidimensional and there is very little value-added activity since the distribution remains fragmented and unorganised. This is primarily due to the geographical and cultural diversity and complexity of the region and the lack of capital available for investing in technology and modern retail formats. PricewaterhouseCoopers’ position paper entitled The Rising Elephant: Benefits of Modern Trade to Indian Economy* indicates that India is among the top two producers of milk, fruits and vegetables in the world. Yet, the organised food retail business in the country is among the least developed in the world. • A large portion of fruits and vegetables are lost due to inadequate postharvest handling, cold storage, processing facilities and convenient marketing channels. • Huge quantities of grains are also wasted because of improper handling and storage, pest infestation and poor logistics management. Existing intermediaries cause delays and eat up a large portion of the earnings that essentially belong to the farmer. The result is a chain replete with inefficiencies.

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International modern trade players such as Metro significantly invest in their operations in transitional economies. In the process of expanding operations, they make a huge difference to the lives of farmers and small-scale vendors by teaching them new techniques to improve productivity and providing them with new market access for their products. Source: PricewaterhouseCoopers, The Rising Elephant: Benefits of Modern Trade to Indian Economy*

The current food supply chain situation in India is weak: • There are inadequate cold chain units • Technologies are not incorporated into supply chains • A regulatory environment that protects middlemen • Several levels of the supply chain • Increased wastage levels of between 24 to 40 percent • Several small stakeholders (farmers, wholesalers, food manufacturers, retailers) who work in silos • Absence of demand forecasting One of the arguments in favour of FDI is that it will bring with it the technologies and expertise required to build robust food supply chains. In the Indian food chain, from farm to fridge, distribution of most food items involves multiple intermediaries and wastage during transportation and storage. While Indian consumers demand fresh products, the cumulative wastage across the supply chain can vary from 24 to 40 percent. Huge quantities of fresh fruits and vegetables are lost due to the lack of a cold chain infrastructure. While inefficiencies increase consumer prices, farmers suffer from extremely low realisations. To unlock operational efficiencies, facilitate growth, reduce costs and improve the time it takes food to move from point of manufacture to point of consumption, robust and scalable supply chains need to be built. The Government too needs to bring in appropriate legislative changes to catalyse this transition in the food supply chain. In advanced countries, retailers, such as Walmart, Tesco, etc have become the Channel Masters of food supply chain, assuming the process from the food manufacturers. In India, with no superstores, no economies of scale, several layers of intermediaries, there is an absence of a channel master. Channel masters manage the supply demand scenario, coordinate the supply chain and managing logistical activities. In India, there are very few large food manufacturers. • Amul, Ruchi Soya, Nestle, MTR, ITC, Dabur, Britannia, HLL’s food and beverages section, beverage companies such as Coke and Pepsi are some of the major players.

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• In poultry Godrej Agrovet, Suguna, Pioneer and Venkateswara hatcheries are some of the companies integrating operations end to end from breeding to ready to eat chicken foods. Data integration, financial flow management, supply-demand matching, collaborative forecasting, information sharing, goods movement synchronization through efficient transport scheduling, are well practiced in high technology industries with immense benefits. Food chain clusters can be formed with the participation of all stakeholders such as farmers, seed growers, merchants, transporters, wholesalers, retailers, financial institutions and insurance companies. Information sharing is essential for generating the efficiencies. Technologies that are based on the Internet and mobile communications can be used to enable information and financial transfer between stakeholders. Also, advances in RFID technology and barcoding will have an impact on the management and tracking of food as it moves through the supply chain, especially in source identification, monitoring procedures, assessing inventory levels and stock-outs and providing supply chain visibility.

“We need a Second Green Revolution. By 2020, India will require to produce over 340 million tones of food grains to feed its growing population. An increase in production would necessitate surmounting many impending factors. Land requirement for afforestation and environment preservation activities would force a situation where the present 170 million hectares arable land would not be fully available for agriculture. It might shrink to 100 million hectares by 2020. In addition there will be shortage of water. The number of farmers available for agriculture will reduce to less than 50 percent.” --Former President A P J Abdul Kalam.

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The retailing of fresh produce in India is increasing. Despite a fragmented supply chain, retailers are aggressively setting up back end systems to move goods from farm-to-fork. As with most emerging economies, food accounts for over half the expenditure of an average family. With increases in disposable incomes, people migrate from consuming grains to include fruits and vegetables. Fresh produce accounts for 50 percent of the Indian shopper’s food and grocery bill compared to 15 percent in the US.

Contract Farming While India is currently the second-largest producer of fruits and vegetables, its agriculture industry is fragmented in the hands of farmers and select agribusiness houses. That said, the amendment of the Agricultural Produce Marketing Committee Act in 14 states enables farmers to sell produce and crops to buyers that offer the best prices. Additionally, while a law regarding the integration of food protocols is tabled in Parliament, once passed, it would repeal nine laws and ensure uniformity among food standards. One outgrowth of a growing agribusiness industry is the use of contract farming to access land, manpower and farming skill. Of the total cultivable land in India, contract farming consumes seven million acres. Companies are entering into contract farming to leverage the cost savings and revenue benefits that are shared among farmers, companies and customers as depicted below. The Food and Agriculture Organisation’s report on contract farming indicates the positive results from a project involving a large FMCG major and farmers in north India. The FMCG company issued contracts to approximately 400 farmers to grow select varieties of tomatoes. A study of the project revealed that production yields and farmers’ incomes increased as a result of the use of hybrid seeds and the availability of an assured market. The yields of contract farmers were 64 percent higher than those not under contract. Typically, farmers do not have access to finance, equipment, seeds, fertilisers and machinery; under contract farming, companies provide access to funds and materials to farmers. Contract farming is likely to also improve food safety since large corporate companies will be partnering with farmers to teach them best practices in crop management and food safety. Studies suggest that almost everything edible contains some bacteria, heavy metals, artificial additives or chemical residues, which are the result of increasing pollution and the use of pesticides. Studies confirm this: • A 1999 study conducted by the All India Co-ordinated Research Project on Pesticides Residue on vegetables and fruits confirmed that 90 to 100 percent of tested samples from four states and 45 to 80 percent tested samples from 12 states were contaminated with pesticides. • Another 2003 research funded by U.K’s Department for International Development found 72 percent palak samples from Delhi contained lead and 21 percent contained zinc that exceeded the limits set by the Prevention of Food Adulteration Act. Teaching farmers best practices in crop management, organic farming, use of pesticides will help decrease the hazards associated with fresh foods and produce. Also proper cold chain facilities which refrigerate foods adequately, robust transportation networks, etc will also help in maintaining the freshness of foods and will help to reduce heath risks.

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Cold Chain Storage

“Are we using our farms, our farmlands to full potential? The answer is no. We need to move the cropping pattern in India from India’s cold chain infrastructure is inadequate and fragmented. The food grains to crops, which are of high industry expects the government to provide between 40 to 50 percent of value. India is well-positioned today to the total investment through viability gap funding. Some estimates suggest feed the world. The vision that we and the that India produces 140 million tonnes of fruits and vegetables and could Rothschilds have for India is to link Indian cross the 300 million tonne mark in the next five years; an investment of fields to the world and put the produce, as about INR18,000 to 20,000 crore in the next five years would be required fresh as it can be, on Western tables in 4-5 to meet about 30 percent of that capacity. Due to a dearth of cold storage days.”

facilities, the seasonal production deteriorates rapidly and has to be sold within weeks. A proper cold chain facility could help meet the demandsupply gap of various food products including fruits and vegetables. The cold chain scenario in India is described below:

-- Sunil Mittal, Chairman and Managing Director, Bharti Group

• Indian supply chain network of six to seven intermediaries between the primary source (farmers, growers, producers) and the final consumer. • Food is less than 14 percent of organised retail trade in India, while an average Indian middle class consumer spends around 50 percent of his/her income on food and food products. This mismatch is largely due to infrastructure constraints. • The shortage of cold storage facilities and refrigerated transport equipment results in inefficiencies in managing perishable products. This, in turn, results in increased wastage. • Since most companies engaged in food processing are in the SmallScale Sector (as per Government policy) economies of scale are difficult to achieve in storage and transportation. The growth of supermarkets in India also promises to generate greater sales potential for chilled products such as packaged meat or fish. Supermarkets enable consumers to Usage Patterns for Transporting Agriculture Produce from Production Sources to Marketing Yards consume fresh produce and products that are stored at the correct temperatures and are contained Method of Transport Percentage in wrapped and sealed packaging. Meat or fish purchased at a mandi, in contrast, usually must be Trucks Ordinary 21 prepared and consumed immediately. Consequently, packaging will play an increasingly important role Tractors 18 in cold chain management and the extension of products’ shelf lives. For example, the need for highTempo Trucks 8 quality plastic packaging for the packing of meats is related to the development of the delivery systems Bullock Carts 49 to move these packaged products to the retail outlet. Reefer transportation has been in existence for two Others 4 decades but has now been considered important with the increase in export of fruits and floriculture Total 100 produce. Initially, reefer transport system was used for Source: www.nic.gov transporting important life-saving drugs, ice-cream, frozen food and meat products. Currently grapes and flowers are being transported from the production location to the exit point at the seaport or the airport in reefer containers. PricewaterhouseCoopers Pvt Ltd. •

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Mode of Transport Adopted for Produce Over Long Distances

Method of Transport

Percentage

Unrefrigerated mode, Traditional packing 83 Unrefrigerated mode, Cartons and boxes 10 Refrigerated trucks

4

Freezer trucks (frozen products)

1

Railway

2

Air

negligible

Source: www.nic.gov

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Case Examples Reliance Industries Reliance Industries signed an MoU with the government of Punjab in August 2006. The project, which proposes to bring an investment of INR5,000 crore into Punjab, is an important part of the overall plan of the retailers’ plans to establish hypermarkets, supermarkets, specialty stores and agri-retail stores across India. Reliance Retail plans to procure several items from the State including milk, fruits, vegetables and grains. The retailer plans to utilize the best farm practices and create value for farmers. It also plans to hire and create captive cold chain facilities. The Punjab initiative will be spread across 50 rural business hubs and will have 250 franchises linked to these hubs. Media reports suggest that Reliance is offering farmers new technology and techniques to increase yields and quality. (A simple example is to explain that planting tomatoes farther apart results in bigger tomatoes. To move to a farm-to-fork model, Reliance is establishing local receiving centers, where produce is collected, cleaned and polished. From there, it will be shipped (typically in fleets of new, cooled trucks) to one of 68 distribution centers nationwide. According to media reports, Reliance will establish distribution points at Special Economic Zones. At distribution centers, each fruit or vegetable will be housed in climates ideal for food preservation and freshness. The cold storage will also enable Reliance to sell produce out

of season. (For example, Indians eat 80 percent of the apple crop during four months of the year. Through improved cold chain and refrigeration infrastructure, Reliance will be in the unique position of being able to sell apples all year long.) The current delivery time for most markets is three to four days; with Reliance’s mega-farm-to-fork model, delivery times may be reduced to a day. By selling in large volumes and reducing delivery times, Reliance will ensure better quality and will be able to offer competitive prices. Mahindra Group The Mahindra Group established Mahindra Agribusiness* in 2000, with an equity stake from International Finance Corporation. Mahindra Agribusiness integrates the agriculture and food chain from agri inputs right through to agri commodities, utilizes contract farming and agri-retailing. • Mahindra Agribusiness establishes agri centres in various districts under the Mahindra Krishi Vihar franchisee model or directly as Mahindra Agribusiness. Its primary focus is on crops like basmati, maize, barley, cotton, lentils, soybeans, durum, hyola and other oilseeds such as sunflower and mustard. • Currently, Mahindra Agribusiness exports 95 percent of its produce to Europe, with the UK being the biggest importer and the remaining produce being

“Poised to usher a new paradigm in rural areas, the agri-business vision of Reliance Retail is to build infrastructure for efficiency, value addition, logistics and market access to improve farm incomes, create an efficient market place for the true price discovery of farm produce, drive major initiatives to bring the best technology and thereby bring about drastic improvements in farm practices.” -Statement issued by Reliance Retail

sent to West Asia and South East Asia. Mahindra Agribusiness sells produce to several European retail chains, including Carrefour, J Sainsbury, Albert Heijn, etc. The division’s main produce is grapes, mangoes and pomegranates. It plans to export 5,000 tonnes of pomegranates and grapes, which will fetch INR75 crore over three years. • Mahindra Agribusiness is involved in contract farming across 100,000 acres in eight states, covering 30,000 farmers. The company had set up agri centres in districts of the country either under the Mahindra Krishi Vihar franchisee model or directly as Mahindra Agribusiness. These centres are one-stop shop for agro service, retailing agro inputs and procuring produce. To supply fresh produce to the domestic modern retail formats, the company is conducting a pilot project in Punjab over 100 acres. The company is supplying to retailers such as Subhiksha, ITC, Namdhari Fresh, etc. *The Legal Entity Mahindra Shubhlabh Services Limited PricewaterhouseCoopers Pvt Ltd. •

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“Are we using our farms, our farmlands to full potential? The answer is no. We need to move the cropping pattern in India from food grains to crops, which are of high value. India is well-positioned today to feed the world. The vision that we and the Rothschilds have for India is to link Indian fields to the world and put the produce, as fresh as it can be, on Western tables in 4-5 days.” -- Sunil Mittal, Chairman and Managing Director, Bharti Group

Pantaloon Retail India Ltd. (PRIL) While fresh food retailers in India implement the farm-to-fork model, Pantaloon Retail India Ltd (PRIL) is reportedly assessing an alternative business model involving the mandi middlemen or arhtiyas, as they are commonly known, in the procurement value chain for its Food Bazaar division. The goal is to ensure buy-in from and involve all stakeholders. Godrej Agrovet Ltd (GAL) GAL is the agricultural business subsidiary of Godrej Industries Ltd (GIL), which is reported to be signing a Memorandum of Understanding (MoU) with the Government of Punjab to launch its farm-to-fork project. Under this project, fresh chickens are procured from farms, dressed in a processing plant and placed on sale in the markets of Punjab and other States. The project can supply between 2,000 to 4,000 chickens a day. The necessary land for a processing plant will be identified in Punjab; two plants are already in Bangalore and Mumbai. GAL will also expand its retail outlets from 12 in Punjab and 2 in Haryana to 200 in 5 years. Ministry of Railways The Ministry of Railways, Government of India, is preparing a draft policy for supply chain infrastructure management of agricultural products. It is reportedly in discussions with retail companies like Cargil, Pantaloon, Reliance and ITC and will offer its land to the highest bidder for setting up agri-retail hubs. There would be a total of 16 hubs, with four hubs in each of the metros. These will be the main hubs and secondary hubs will be established in cities like Lucknow, Bhopal, Hyderabad and Ahmedabad. The Indian Railways may also likely provide supply chain logistics support to retailers. The proposed deal would entail transportation of both agricultural and non-agriculture produce throughout India. Bharti Enterprises Bharti Enterprises entered into a joint venture with Rothschild to form FieldFresh. FieldFresh invested INR230 crore into contract farming to purchase 600 acres and supplies produce to Tesco. FieldFresh Foods (P) Ltd is an equal partnership venture between Bharti Enterprises, one of India’s leading business groups with interests in telecom, agri business and insurance and ELRo Holdings India Ltd, an investment company of the Rothschild family, formed by Sir Evelyn de Rothschild & Lady Lynn Forester de Rothschild. The company has planned an outlay of USD50 million in the first phase. These funds are being used to create state-ofthe- art infrastructure for research and development, climate controlled processing facilities and cold stores. FieldFresh Foods (P) Ltd was incorporated in 2004 and is engaged in providing premium quality fresh produce to the markets worldwide. The company also: • Promotes world class standards for agricultural practices • Teaches progressive farming techniques • Identifies and adopts appropriate technologies

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APMC Act The present system of agricultural marketing, regulated under state Agriculture Produce Marketing Committee (APMC) Acts, is aimed at providing an organized marketplace, where farmers can sell produce under the supervision and administration of local APMCs. The APMC, an autonomous body comprising representatives of farmers, traders and other stakeholders, is expected to protect the interests of all stakeholders, especially the farmer. That said, today, the AMPC Act protects the interest of middle men and agents at the expense of farmers. The APMC Act prohibits farmers from selling directly to organised retail chains. Each day farmers are subjected to changing and unfair prices that are quoted by agents. This licensed commission agents and traders deprive farmers of fairmarket yields. To compound matters, most commission agents also finance growers’ production and other needs. The price ultimately paid by agents to farmers is then “adjusted” to deduct the loan principal and

disguised interest, the latter generally exceeding the statutory limits. The development of farm-tofork models will disintermediate the supply chain, bring efficiency in the agricultural marketing process and create a common Indian market. Farmers will become partners in “farm to fork” value chains and will see that their realizations will increase without raising consumers’ prices. To invite investments into farm-to-fork retail ventures the State and Central governments can— • Waive select duties, fees, cesses registration charges. • Offer single-window facilities obtain the required environment, land transfer clearances and other legalities. • Facilitate the provision of water, electricity, roads, bus stops at locations required by the company. • Encourage the use of Agri Export Zones which attempt to use particular produce/products located in an area for developing and sourcing the raw materials, their processing and packaging (and in some cases for exports). Prioritising the development of the food processing industry to encourage commercialisation, value addition to agricultural produce and tax benefits.

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“The wastage is occurring at various stages of handling after harvesting due to fragmented farming, provisions in the Agricultural Produce Marketing (Development and Regulation) Act, lack of adequate postharvest infrastructure such as cold chain facilities, transportation, proper storage facilities, etc.” -- India’s Minister of State for Food Processing

Conclusion In order to encourage the development of farm-to-fork retail models, the Government can offer incentives and tax-related benefits to incentivise the development and upgradation of the food supply chain. A robust and comprehensive farm-to-fork retail model is required in order to: • Ensure a smoother transfer of goods from point of origin to point-of-sale • Increase operational efficiencies • Reduce overall costs • Improve customer service since goods can be moved rapidly and efficiently between factories, warehouses and outlets • Gain insight into which goods move quickly off shelves and which remain in stock • Reduce wastage across the agricultural supply chain from the current levels of 24 to 40 percent • Improve farmers’ realizations • Encourage safer crop management practices • Ensure that India can supply more fruits and vegetables to overseas markets

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India: A Manufacturing Destination Key Opportunities

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Surging Ahead

Advantage India

The revival of the manufacturing sector has been a happy story in the country’s sustained economic growth. With a nearly 80 per cent weightage in the country’s industrial production the manufacturing growth rate has doubled in the last 5 years – from 6% in 2002-03 to a record 12.3% in 2006-07. Within the sector, industries such as machinery and equipment, food products, basic metals and alloys and chemicals have emerged as major growth drivers in 2007-08 (up to May).

Manufacturers across the globe- ABB, Honeywell, Siemens, Cummins, DaimlerChrysler, Piaggio, Toyota, Degussa and Rohm & Hass, are setting up operations in India. India has all the required skills in process, product, and capital engineering, owing to its manufacturing history and quality education system. India has a vast domestic market and a relatively low-cost skills base which can enable it to become a manufacturing powerhouse within the next 5-10 years.

In April 2007, Shri Kamal Nath, the Minister of Commerce & Industry, noted that “… apart from the remarkable performance in IT services, India is rapidly emerging as a force in manufacturing exports, with capital-intensive products featuring prominently”. And the best is yet to come. According to the Minister, “The manufacturing investments are the ‘first mile investments’ in as far as these are likely to be followed up by further investments to complete the projects and also for their further expansions”. The rising investor confidence in India can be attributed to its rise in position from rank 50 to 43 in the Global Competitive Index, according to The Global Competitiveness Report 2006-07 released by the World Economic Forum in September 2006. Although the latest figures on manufacturing growth have not been encouraging, the government is still optimistic of a strong growth for the sector for another year. According to estimates of Index of Industrial Production released in September ’07, a drop in manufacturing growth to 7.2% was reported in July compared to 14.3% last year. Industry experts attribute the decline in industrial output to the high base effect, a strong rupee and high interest rates. Consumption in the automotive and consumer durable sectors appears to have been most impacted.

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The current surge in investments into India may be attributed to an unprecedented domestic demand spurred by rising incomes and savings. As India’s middle class is growing, so is its buying power. With all the demand drivers in place, more and more MNCs are setting up manufacturing capacities/ facilities in India not only for exports but to meet the growing domestic market. India’s demographics and growing incomes have resulted in a middle class whose size is larger than the entire population of USA. It is expected that if the country’s consumer market continues growing at this rate, India will soon be propelled from the position of 12th to the fifth-largest consumer market in the world, behind the United States, Japan, China and Britain, displacing Germany. The world’s top five mobile manufacturers -- Nokia, Motorola, Samsung, Sony Ericsson and LG – have all set up manufacturing facilities in India. India has become the second-largest market for Nokia in volume terms, displacing the USA. Nokia has gone ahead and set up a Special Economic Zone (SEZ) near Chennai as a developer. Nokia and many of its vendors have also set up their manufacturing plants in the SEZ which is used as a hub wherein the various suppliers of Nokia either manufacture or store their products and provide the same to Nokia as and when required. The incentives provided by SEZs have the potential to contribute to further growth in India’s manufacturing activity. SEZs help in bringing together the factors conducive to excellence in manufacturing and also offer an attractive package of incentives, including several fiscal concessions for the developers, thereby contributing to an increase in the country’s exports and also attracting FDI.

Other factors contributing to the India - manufacturing success story are the following: • Cost Efficiency: The cost of manufacturing in India has been found to be more competitive (about 3040% lower) than that in the US and Europe. This cost and quality advantage is helping India emerge as a preferred sourcing hub for multinationals across the world. • Rich Talent Pool: India has a vast pool of talented engineers and management professionals who are equipped to take on challenges brought about by the implementation of new methods and systems in organizations. India is known for its pool of highly-skilled engineers who can take on precisionbased tasks. The output of trained human power at the degree/diploma level has been consistently increasing since 1985 and touched a figure of 130,000 during the 2000. From a base of 6,800 knowledge workers in 1985-86, the number increased to 522,000 software and services professionals by the end of 2001-02 and 814,000 by 2004-05. • Labour pool: The labour pool in India is exceptionally rich, with 71 million new entrants set to join the working age population by 2010. It takes fewer days to fill skilled job vacancies in India than in either China or Brazil; remuneration costs are also at the low end. India is marginally costlier than China but is significantly cheaper than other emerging economies such as Brazil and Mexico. India has a young work force, with the median age being 25 years. The concerns of an aging population can be deferred for a much longer time than other countries. • Highest Returns on Investments: India offers the highest relative return on investment. Higher returns are a reflection of the higher value-added manufacturing investment that India attracts. India excels in high value-added manufacturing. As against China, which is good in high volume and relatively low technology manufacturing, India has the upper hand in lower-volume manufacturing, where technology use is more intensive.

of manufacturing in overall economic growth of a country and the need for enhancing its productivity, competitiveness and employment generation, the government also created the National Manufacturing Competitiveness Council (NMCC), an interdisciplinary and autonomous body to serve as a policy forum for credible and coherent policy initiatives in manufacturing sector. India’s Government has also been proactively involved in policy-making for specific sectors of manufacturing to provide additional benefits to the manufacturers. • Fiscal sops: Government offers several tax-related industrial incentives for the manufacturing sector, including tax holidays, 100% deductible R&D and capital expenses, accelerated depreciation and exemptions or deferral of state sales taxes. The SEZ Acts also provide for substantial fiscal benefits for units operating in SEZ, as well as to the developers of SEZs. Other sector specific legislations and policies, such as for the infrastructure and IT sector etc., provides further benefits to the specific industries thereby attempting to create a conducive environment for attracting more investments. Defying the traditional view that India is good only for services, the manufacturing sector in India has been moving up the value chain. While Hyundai is setting up a second car plant in the country, Toyota is exporting transmission systems from a new plant in Bangalore. The world’s largest auto parts’ maker, Delphi Corp, has relocated several product lines to India. So has Bosch, another auto parts giant. The phenomenon is not restricted to auto and auto-component firms alone. Companies like Unilever, Kodak, Whirlpool, Timex Watches, Cummins, Tecumseh, GE, ABB and Siemens are already sourcing products from their Indian plants for their global markets. And companies like Nokia and Elcoteq Network Corporation are considering setting up plants in India to meet their global demand for mobile phones.

• Liberal policies: Manufacturing of most items falls under the automatic route of FDI. Some exceptions are items that require industrial licencing and items reserved for the small scale sector – this list has been pruned substantially. Recognizing the importance

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Key Opportunities Electronics & Hardware Manufacturing Until now the Indian electronics hardware industry has only managed to capture a minuscule share of the global electronics hardware market as compared to neighbouring Asian countries. India’s electronics hardware market was worth an estimated USD 12.65 bn in 2005-06 and India’s share in the world production of Electronics and Computer Software/ services was estimated at 2.08 % in the year 2005-06. This sector registered a growth of 34.38 % in 2005-06 over the year 2004-05. The Indian Electronics Industry is a burgeoning one with the market for electronic products growing rapidly. In June, 2007, India added over 8 million new wireless phone users, the highest growth rate in the world. Penetration levels in other high growth products are equally brisk and demand for computer/ IT products, auto electronics and medical electronics is rapidly increasing. This growth rate has attracted several global players like Solectron, Flextronics, Jabil, Nokia, Elcoteq and many more to India. Korean electronics giants LG and Samsung have also proved their commitment by establishing large manufacturing facilities and they now enjoy a significant share in the growing market for products such as Televisions, CD/DVD Players, Audio equipment and other entertainment products. FDI regime Foreign investment up to 100 per cent is permitted under the automatic route in manufacturing with the exceptions being Aerospace & defence equipment manufacturing (which requires an Industrial licence). In order to promote exports of Electronics Hardware by entrepreneurs from India, the Government of India has initiated several schemes such as self certification of all import/export operations of units within the SEZs, statutory services and facilities such as high speed data connectivity to electronic hardware technology parks. However, obstacles to India’s growth as a Electronics & Hardware destination remain. There is lack of awareness at the global level of investment opportunities in India. Poor Infrastructure is cited by investors as the main barrier against foreign investment.

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In an attempt to attract investments into the sector, in March 2007, the Government announced the Semiconductor Policy, providing special incentive packages for the semiconductor and other high tech industries. The Policy provides for special incentives packages for encouraging setting up of semiconductor fabrication and other micro- and nanotechnology manufacturing industries. In brief, the Policy provides for a part of the capital expenditure during the first 10 years for manufacturing units to be borne by the government; no countervailing duty (CVD) on capital goods in case of units outside the SEZs. The Policy also prescribes minimum investments for semiconductor manufacturing (wafer fabs) plants and for ancillary plants. However, the regulations are yet to be notified – the delay has caused several MNCs to defer their investment plans. The Government is all set to announce its muchawaited hardware policy which aims to cut duties and taxes on the industry-manufactured goods almost by half, bringing it at par with the ASEAN level of 12-16%. The policy is also expected to address issues such as infrastructure and skill development besides specifying measures to leverage on research and development skills to make India a hardware hub. The Indian electronic sector faces stiff challenges in the international market as it has to overcome infrastructural constraints leading to high operational costs. There is also a need for forward and backward integration of hardware and software sectors to take advantage of India’s burgeoning software sector. India had been meeting more than half of its electronics hardware requirements through imports. India now needs to promote itself as a destination for electronics and hardware and to promote and develop brand ‘INDIA’ as a big potential market and publicise and showcase itself as a viable destination. It could also participate in International trade fairs specially focusing on Electronics Hardware or its segments; Outsourcing Of Engineering, Design & R&D Services Usually the models followed for outsourcing in India are: 1) Captive Development Centers set up by companies who want to keep designing and R&D as their core functions thus creating an in-house team by hiring Indian engineering talent, such as Microsoft, Intel, Novell, IBM etc;

2) Engineering Services divisions of Indian IT players who cater to a particular market segment, such as Wipro, Infosys and TCS; and 3) Small focused players who only outsource engineering, design, automation etc. services to a wide range of clients, such as Neilsoft.

biotech) have access to a large pool of well-trained and talented graduates, thus providing a source of innovative ideas. Indian companies engaged in knowledge based industries usually invest heavily in training their employees to maintain and improve their skills. In this scenario, growth of these knowledgebased industries seems like a natural progression.

Though the top five growth industries in manufacturing in India have been recognised as gems and jewellery, cement, steel, pharma, and engineering goods, a huge potential can also be seen in other fast growing knowledge based industries such as the outsourcing of Engineering, Design and R&D Services.

India leads in the growth of outsourcing services in the following areas:

Over the past few years, the Indian IT and BPO Industries have dominated the global IT/ITeS sector. Since 1990s there has been a considerable growth in the use of outsourcing other services as well. The main factor driving this trend has to be the competitive pressures that companies all over the globe are facing to create new products and to bring them to the market faster or upgrade the existing products to make them more efficient or functional. In such a scenario, it makes sense for companies located in countries where in-house manpower costs are on the higher side to outsource the engineering and design functions to outsource vendors to save on manpower costs. Outsourcing is also resorted to by companies which need to shift out non-core functions and to focus their attention on their core capabilities.

• Engineering Services Outsourcing

Though engineering services outsourcing was a slow starter, since sharing product development details required more trust in vendors and involved intellectual property rights issues, improvements in bandwidth capabilities and engineering collaboration tools have helped open up the field. Also, considering India’s rich young talent pool and high engineering base, India is emerging as the favoured outsourcing destination of the world for engineering services, design, R&D services etc. As outsourcing moves up the value chain, knowledge based industries will soon prove to be drivers of India’s economic growth. Thanks to India’s higher education system, which boasts of several world-class engineering and business schools, several knowledge-based industries (including

• Information Technology/ IT Offshore Outsourcing • Business Process Outsourcing

• Healthcare Services Outsourcing • Manufacturing Outsourcing Design in aerospace is also a potential growth area. While big names such as HCL Technologies and Infosys Technologies have been working on various systems like flight management and landing gear etc. for major players such as Boeing, Airbus, Hamilton Sundstrand, Boeing etc., aerospace majors like Lockheed Martin, Thales, Pratt & Whitney, Bombardier, Rolls Royce have all shown keen interest to participate in this segment. To realise the potential of this sector, the government has been doing its part. It has notified the Designs Act, 2000 which provides for protection of designs and lays down the framework thereof. The government has also approved the National Design Policy which envisages setting up of specialized Design Centres or “Innovation Hubs” for automobile & transportation sector, jewellery, leather, etc and promoting ‘Designed In India’ as a by-word for quality. It also envisages setting up an India Design Council (IDC) on similar lines as other professional councils such as the Bar Council, Medical Council etc. for performing functions similar to the said councils. Recently the CII has formed a National Committee on Design which would work closely with the upcoming IDC & with Department of Industrial Policy and Promotion to address the various issues related to development of Design in India and towards creating a Global Brand of ‘Designed in India’

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The NMCC has identified innovation as an important factor for growth in its National Manufacturing Strategy paper. As a good beginning to promoting innovation in the manufacturing sector, the CII recently launched the development of the Indian Innovation Index, in collaboration with the INSEAD, a leading business school of France. The Innovation Index would lead to awareness and would be useful in triggering comparisons and inviting questions and ideas for improvement. What the future holds: According to UN ESCAP, India is emerging as a force in manufacturing exports. Until recently, India’s services exports have been a success story. But manufacturing exports have surged, growing 37.3% year-on-year in US dollar terms between April and September 2006. Manufactured exports are dominated by capitalintensive engineering, chemical and petroleum products. The main engineering products iron and steel are feeding large global demand, especially from China. India’s automotive sector is also expanding rapidly. Growth in manufacturing exports, along with growth in domestic demand, is likely to create 25-30 million new jobs in manufacturing and add 1 per cent to India’s annual GDP growth rate. Challenges ahead: Challenges faced by Indian manufacturing warrant appropriate responses from both the govt. as well as the industry for improving the competitiveness of the sector. There are a few areas where both the govt. and the industry need to put in efforts through a welldesigned Public-Private partnership mode: 1. Infrastructure: India has the worst infrastructure amongst the emerging economies. This is affecting the manufacturing sector’s ability to attract more business. Primary issues that needs immediate attention are: • Electricity: Unreliability of power supply is by far the most significant infrastructural constraint. On an average, a company can expect nearly 17 significant power outages per month, against one per month in Malaysia and fewer than five in China. At the same

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time, the cost of power is high -- about 50% higher than in China. • Transport: The high turnaround time at ports, the deterioration in rail system and the poor plight of roads and highways costs companies dearly. India has very few four-lane highways and the bad condition of its roads is affecting the competitiveness of Indian companies. They need to maintain higher inventories, spend more on transportation and face delays in shipping of their export consignments. • Water: The cost of water is 40% higher in India than in Thailand. We need to have a plan for manufacturing hubs like Chennai that are facing acute water shortages. • Natural gas: India does not have piping networks in major parts of the country, including key manufacturing locations like Chennai and Bangalore. This is forcing companies to use more expensive alternative fuels, leading to an increase in the cost of operation. 2. Labour laws. India’s archaic and rigid labour laws prevent companies from adopting flexible hiring policies. Only Mexico is considered as restrictive as India in this respect. In contrast, labour regulations in other countries allow greater flexibility in business operations while protecting worker interests. In most countries, the nature of employment is contract based, with clear stipulations for employment termination at the discretion of the employer, provided statutory severance benefits are available and notice period conditions are met. This allows firms to respond to business cycles in a flexible manner. Also, in India, location tends to determine the quality of labour relations. 3. Multiplicity of taxes: Doing business in India is made cumbersome by multiple taxes levied on Indian manufacturing companies, such as octroi, corporate tax, entry tax, VAT, customs duty etc. Some of these taxes can be set off, others cannot. Though corporate taxation rates have significantly come down in the last 15 years – the top basic rate fell from 48% to 30% in 2005, they still continue to be on the higher side.

4. Discrepancies in inter-state regulations: Regulations between states vary and discourage companies to operate freely across the country. This applies especially to industries like liquor and automobile industry.

Conclusion India has a significant competitive advantage in the skill-intensive industries. Over the next decade, the global trend to manufacture and source products in low-cost countries is likely to gather strength. Taking advantage of this trend, India’s manufacturing exports could increase from US$40 billion in 2002 to approximately US$300 billion by 2015, leading to a share of approximately 3.5 per cent in world manufacturing trade. If India is to achieve this quantum jump in manufacturing exports, several factors need to play their part. India’s manufacturing industry needs to adopt a global mindset and carefully select the product segments. The government needs to play its part by implementing key reforms in taxation, infrastructure, SEZs, labour and skill development.

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Infrastructure: Roads

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Road Sector in India India has an existing road network of more than 3.3 million km, which is the second largest in the world. This is, though lower than USA which has the largest road network of about 6.3 million km significantly more than China which has a road network of about 1.4 million km. India has 110 km of road length available per 100 sq. km, far exceeding the corresponding figures of 68 km per Sq. km and 15 km per Sq. km for USA and China respectively. Similarly, India has 3,064 km of roads per million of population which is although lower than corresponding figure of 22,064 km per million population for USA, is significantly higher than that of China at 1,072 km per million population. In India, the fact that National Highways and State Highways together constitute about 6% of the road network and carry about 80% of the total traffic, clearly emphasizes the importance of National Highways and State Highways. On the other hand District roads and Village roads together constitute 94% of total road network and carry only about 20% of total traffic. Irrespective of this, their importance cannot be underestimated as District Roads and Village Roads are important from connectivity point of view. Road network in India requires major initiatives for enhancing its capacity. Only 12% of the National Highways are four-lane with two-lane and single-lane being 50% and 38% respectively. State Highways have lower capacity, with only 0.7% of total State Highway length being four-lane and corresponding percentage for two-lane and single-lane being 20.3% and 79% respectively. Government’s Objective for Road Sector The main objective of Government of India relating to the road sector is balanced development of the total network. The tasks include widening of roads, improvement in riding quality and strengthening, road

safety measures and providing wayside amenities to cater to the growing demand for road services. In addition, 100 per cent rural connectivity with all-weather roads is a priority objective in national planning. Intermodal issues like road connectivity with airports, railways, ports etc. are also priority issues. Ambitious Programs for Road Sector National Highway Development Programme (NHDP) National Highway Development Programme (NHDP) being implemented by National Highway Authority of India (NHAI) has a total of seven phases with an estimated cost of Rs. 192,100 crores. North-South & East-West (NSEW) Corridor project, which forms the Phase-II of NHDP involves upgradation of existing two-lane highways and four-laning of around 7,300 km of National Highway, connecting Srinagar to Kanyakumari (North-South) and Silchar to Porbandar (East-West). 10,000 km of National Highway is targeted for 4-laning in NHDP Phase-III. Similarly, 2-laning with paved shoulders of 20,000 km of National Highways is targeted under NHDP Phase-IV and 6-laning of Golden Quadrilateral and some other selected stretches covering 6,500 km is targeted under NHDP PhaseDevelopment of 1,000 km of express ways is also targeted under NHDP Phase-VI. Under Phase-VII, NHAI plans to build ring roads to decongest the city traffic. Also, it plans to build bypasses, over-bridges, flyovers, etc. on the existing corridors to support the growth in traffic due to the growth of new habitations along the highways. However, this phase is still in a conceptual stage and the stretches for this phase are yet to be identified. NHDP also envisages connecting of all major ports (Haldia, Paradeep, Vishakapatnam, Chennai & Ennore, Tuticorin, Kochi, New Mangalore, Marmugoa, Jawarharlal Nehru Port Trust and Kandla) to the GQ, through around a 356 km of road network.

Road Network in India

Road network

Length (km)

App. Percentage of total Length

Traffic

National Highway

65,569

2%

40%

State Highway

131,899

4%

40%

Major District Roads

467,763

14%

18%

80%

2%

Other Roads 2,650,000 (Other District Roads and Village Roads)

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Accelerated North East Road Development Programme (ANERDP) The Government has also initiated a special program with the objective of providing connectivity to remote and backward areas in the north-east with the rest of the country as well as with neighboring countries. The programme will be implemented in three phases, with a target to improve and upgrade 7,639 km of highways and will require a total investment of Rs.12,100 crores. Pradhan Mantri Gram Sadak Yojana (PMGSY) The PMGSY, launched in 2000 and being implemented by the Ministry of Rural Development, aims at providing road connectivity through all-weather roads to all unconnected inhabitations, having a population of more than 1,000 persons, by 2003 and thereafter, to those with a population of more than 500 persons; and to connected habitations (beginning with those connected by gravel roads) by the end of the Tenth Plan Period (2007). As per the Ministry of Rural Development the expenditure to be incurred for the Rural Road Development program is about Rs 60,000 crores till 2009-10. The performance with respect to PMGSY projects is far from envisaged. Despite being in its fifth year of operation, 41,765 habitations with population of 1,000 and above are yet to be connected and the connectivity of habitations with population of 500 and above is also unsatisfactory. Huge Requirement of Funds in Near Future In broad terms, the estimation of the investment needs for Expressways, National Highways, and State Highways, comes out to around Rs.30,000 crore, Rs.192,100 crore and Rs.75,000 crore respectively. PMGSY requires around another Rs. 60,000 crore. In the context of Urban Roads, India has 16.1% of developed area occupied by roads which is quite small when compared to a figure of about 26% for United States. Increasing urban population and congestion in cities will increase the demand of urban roads, creating fund requirement for construction of new urban roads too. Apart from funds required for construction and upgradation of roads, huge amounts of funds are also required for maintenance of existing roads. Maintaining

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India’s present highway network to appropriate standards will require annual funding of about Rs.7,000 crores, three times the current level of expenditure. From road safety perspective, with 23.9 deaths annually per 10,000 registered vehicles, India suffers fifteen times the level of traffic deaths experienced in more industrialized countries such as the UK. Accidents also have a major impact on the country’s economy, costing an estimated Rs 3,000 crore or more than 3% of India’s GDP every year. The estimated annual expenditure on safety measures required for reducing this accident rate and economic loss comes out to be about Rs.1–1.5 lakhs per kilometer. Such huge funds requirement cannot be met entirely from the government’s budgetary resources, loans from multilateral agencies and Central Road Fund alone and, therefore, an increased level of private sector participation in the development, operation and maintenance of the road projects has been planned. In this direction, NHDP Phase III to NHDP Phase VII have been planned on (Build-Operate-Transfer) BOT basis. BOT projects are transferred back to the government at the end of the pre-determined concession period. During the concession period, the private developer recovers his cost and earns a return on investment through tolls and budgetary support. The NHAI is also beginning to experiment with private sector participation in road maintenance for completed NHDP stretches. The move could herald the beginning of a new era in road maintenance. Promoting Involvement of Private Sector To promote involvement of private sector in road construction and maintenance, Government of India has taken some major initiatives. Now 100 per cent foreign direct investment (FDI) is allowed in road sector projects. NHAI/Government of India (GoI) may provide a capital grant up to 40% of the project cost, in order to enhance the viability on a case-to-case basis. Furthermore, Land required for the construction and operation of the facilities may be provided by the government, free from encumbrances and Concession period may be allowed up to 30 years depending on the traffic capacity and the viability of the projects. Model Concession Agreements (MCAs) for BOT tollbased, annuity-based projects and also for Operations and Maintenance of the already constructed projects

have been prepared / are under various stages of finalization. The Government has decided to have dispute resolution in line with the Arbitration and Conciliation Act 1996, based on UNCITRAL provisions. Apart from these measures, there is 100% tax exemption in any consecutive 10 years out of 20 years after commissioning of the project. Also duty free import of high capacity and modern road construction equipment is allowed. In addition, external commercial borrowing norms have been made easier to facilitate the process of receiving external funds. Several state governments have also taken initiatives to facilitate private sector’s role in the development of state roads on a BOT basis, by enacting infrastructure development acts (Andhra Pradesh and Gujarat), making appropriate amendments to either the Motor Vehicles Tax Act (Gujarat, Maharashtra, Rajasthan and Karnataka) or the Indian Tolls Act (Madhya Pradesh and Andhra Pradesh). Many states have also set up State Road Development Corporations (SRDCs) for the development and implementation of projects (including the involvement of the private sector).

In the future, the increased level of private sector investments, together with increase in the projects sizes, will put more pressure on the construction companies to enhance their technical and financial capacities. In this regard, it would be helpful for Indian companies to form Joint Ventures with foreign construction companies. Construction companies will also require approaching to equity markets to raise funds for high value projects. In this context, already a few companies have raised funds through the issue of equity shares, Global depository Receipts (GDRs) and Foreign Currency Convertible Bonds (FCCBs). Conclusion Road sector in India is seeing a lot of activity and one can expect this level of activity to carry on in future. There are ambitious targets set by Government and those targets can be met if issues from this sector are suitably addressed and if role of private sector is enhanced in road construction, operations and maintenance.

Policy and Regulatory Support – Roads and Highways Recent Developments • Committee on Infrastructure has approved an expanded NHDP for the next seven years (20052012) largely relying on PPP • Model Concession Agreement for PPPs in national Highways prepared; key features of the MCA include: • Partial guarantee of traffic risk to the Concessionaire. • Concessionaire’s interest protected in regard to competing Roads.

• Performance standards of the Highways clearly spelt out.

• Strong dispute resolution mechanism.

• Focus on Road User’s safety

• 100% FDI under automatic route permitted for all Road development projects

• Users fee charges, revision thereof and concession to local traffic clearly spelt out. • NHAI responsible for providing land free from all encumbrances. NHAI to bear cost of all related pre-construction activities. • Force Majeure conditions and relief to the party under such conditions clearly spelt out.

• NHAI / GOI may provide capital grant up to 40% of project cost to enhance viability on a case to case basis • Concession period allowed up to 30 years • Duty free import of specified modern high capacity equipment for Highway construction • Road Sector declared as an Industry. PricewaterhouseCoopers Pvt Ltd. •

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Infrastructure: Civil Aviation & Aerospace

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Indian Civil Aviation Sector: Soaring High Civil aviation in India has been witnessing phenomenal growth. As highlighted in the Economic Survey of India for 2006-07, policy initiatives have had a marked impact upon air traffic. India’s booming economy and reforms have led to around half a dozen private airlines starting operations in the past three years. Over the last 2 years, passenger traffic (international and domestic) has been reported to have grown at over 25% per annum while air cargo traffic has registered a growth at over 10% per annum. According to the Airports Council International, Asia will witness an annual growth in air traffic of 9% with India likely to be one of the fastest-growing markets (annual growth of 10.4%) over the next 20 years. In this emerging scenario there is an urgent need for modern airports in India with larger capacities and better efficiencies. Indian Airport Sector There are around 450 airports / airstrips in the country, of which over 120 airports are managed by the Airport Authority of India (AAI). The unprecedented growth in air traffic over the recent past has put tremendous pressure on airports – not only in metro cities like Delhi, Mumbai, Chennai, Bangalore, Kolkata and Hyderabad, but also numerous non-metro cities including State capitals and industrial hubs. India’s growing economy has already led to the opening of air corridors to smaller cities. Many of these are now connected by direct air routes, making them more accessible and leading to growth in business, travel & tourism. Report of the Task Force, set up by the Committee on Infrastructure (Planning Commission, Government

of India) on preparing a Financing Plan for Airports (published in July 2006), noted that an investment of about USD 10 Billion is projected for the development of airports in India between 2006-07 and 2013-14. Of this, about USD 700 Million is projected to be required towards capital cost of equipment and instrumentation alone. Going forward, the Task Force expected Public Private Partnerships (PPPs) to play a key role in the development of Indian Airports and contribute towards a total investment of about USD 7.7 Billion. Already, a number of Airport projects with private sector participation, initiated over the last few years, are now taking shape. Modernisation of Delhi and Mumbai Airports With a view to developing world-class airports at Delhi and Mumbai, the Government of India invited private players to bid for taking over operations, management and development of these airports. The bidding process generated considerable interest and witnessed participation of several international players like Fraport (owner & operator of Frankfurt Airport), ASA Mexico, Turkish airport operator – TAV, Airports Company South Africa, etc. in association with Indian private players. Upon completion of this bidding process, operations at these airports were handed over to two joint venture companies – Delhi International Airport (P) Ltd. (DIAL) and Mumbai International Airport (P) Ltd. (MIAL). A consortium led by M/s GMR Group holds a 74 % stake in DIAL with the balance share being held by AAI. Similarly, a consortium led by M/s GVK Group holds a 74 % stake in MIAL (remaining 26% being held by AAI). Various agreements / contracts for handing over the control of the two airports to DIAL and MIAL were executed in April 2006.

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Greenfield Airports at Bangalore and Hyderabad Simultaneously, green-field airports of international standards are being constructed at Hyderabad and Bangalore and are expected to become operational by the middle of 2008. Bangalore International Airport Limited (BIAL) has Siemens Project Ventures, Larsen and Toubro (L&T) and Unique Zurich Airport as equity holders from the private sector, while AAI and Karnataka State Industrial Investment Development Corporation are the two public sector shareholders in the Company. Similarly, GMR Hyderabad International Airport Ltd is a Joint-Venture between GMR Group, Malaysia Airport Holdings Berhad (MAHB), AAI and the State Government of Andhra Pradesh. The ‘Runway’ Ahead • Proposed Modernisation of Chennai and Kolkata Airports: The Prime Minister’s Committee on Infrastructure has given an in-principle approval for the modernisation of Chennai and Kolkata airports, which witnessed average annual growth in passenger traffic of about 15.7% and 14.5% respectively over 2001-02 to 2005-06. During 2005-06, these airports handled about 6.8 million and 4.4 million passengers respectively. • Development of Non-Metro Airports: Besides the development of the major metro airports, the Government of India is also focusing on developing airports in non-metro (Tier-II) cities so as to equip them to handle the phenomenal growth in passenger and cargo traffic currently being witnessed. While the modalities for the development of these airports are being worked out (including consideration of various options like involvement of private players in the development of ‘city-side’ (commercial) infrastructure, public-private joint-ventures for select airports, inviting private participation in the modernisation of a ‘cluster’ of airports, etc.), it is certain that private

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sector involvement will be targeted. It is expected that an investment of about USD 1.8 Billion would be required for the development of 35 such nonmetro airports. These proposed airport development plans have already attracted a host of private companies, including international operators like Changi Airport International (a wholly owned subsidiary of the Civil Aviation Authority of Singapore) and a number of Indian corporate houses, who are keen on participating in these projects. The GVK Consortium (involved with the Mumbai airport modernisation) has been reported to see potential for low-budget airport in non-metro areas possibly clubbing them with what are being called as ‘Merchant Airports’ where cargo operations from various textile, pharmaceutical or agriculture hubs could enhance their feasibility. • Merchant Airports: The Ministry of Civil Aviation has received three separate proposals from the private players for setting up of Merchant Airports in Durgapur (West Bengal), Jhajjar (Haryana) and Gwalior (Madhya Pradesh). The Gwalior proposal aims at setting up a cargo airport and involves an investment of Rs 300 crore while the Durgapur proposal envisages a passenger airport being developed over 2000 acres of land. The Jhajjar proposal has come from Reliance Industries and involves the setting up of an international cargo airport within Reliance’s Special Economic Zone. This interest from private players comes in response to a new policy expected to be ready in a couple of months to allow privately-owned airports. Under this policy the private sector would be able to identify land and build and operate airports without government assistance and without being required to pay the government a revenue share. • Other Greenfield Airports: A number of proposals for setting up Greenfield Airports are under active consideration of the Government of India. These

include Navi Mumbai, Greater Noida and airports like Paykong Airport (Gangtok), Cheithu Airport (Kohima) and an airport at Itanagar for connectivity to North-East. Further, in an effort to support industrial growth, several State Governments like Karnataka and Maharashtra are exploring options for setting up green-field airport projects in other Tier-II cities.

Conclusion There are unique opportunities in the Indian airport sector for potential investors which may extend well beyond the main metro markets. However, private sector participation in these opportunities would require consideration of a number of issues with respect to the legislative & regulatory framework and commercial aspects so as to enable private players to anticipate and deal with the complexities and to facilitate effective project planning.

Projected investment for Indian Airports (2006-07 to 2013-14) Figures in USD Billion

0.38 0.15

0.20

0.71

1.17

2.85

3.13

1.43 Delhi & Mumbai Kolkata & Chennai 7 Greenfield airports (including Bangalore & Hyderabad) Airside infrastructure for 35 nonmetro airports

Cityside infrastructure for 35 non-metro airports Greenfield airports in North East Other aerodrome works Equipment & Infrastructure

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Infrastructure: Port Sector

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Current Status India, with a coastline of over 7000 Kms has a vibrant ports sector, which includes 12 large Ports managed by the Central Government ( referred to as Major Ports) and a very large number of small and large other Ports ( managed by State Governments or run by private sector – 187 In all). The major ports handle bulk of the cargo (75%). The economy has seen a healthy cargo growth of 10% over the last seven years with cargo volumes (in 200506) at over 569 million tonnes. Clearly liquid and solid bulk such as Petroleum, Iron and Coal has been dominating the Indian cargo. Containers too account for about 15%. However this proportion is set to grow as the container penetration in Indian ports is still below world and Asian standards.

The container traffic, in India, has grown at CAGR of 16% over the last 7 years to reach 4.7 Million TEUs at the end of FY 2005-06. Importantly, efficiency of Indian ports continues to improve although they are still short of world standards. Most Major Ports have been consistently improving their turn around times. Ennore Port, India’s only corporatized major port has the distinction of the fastest average turn-around time at 1.19 days. Overall the turnaround time was 3.50 days during 2005-06 with an average output per ship per day was 9267 tonnes. Enhanced role of Private Sector The Government has taken a number of initiatives in enhancing the role of private sector in ports, as a part of Government policy of increasing private sector participation in all infrastructure areas. For example,

Cargo Profile at Major Ports (Mn Tonne) (2005-06)

Petroleum & Oil Products

Iron Ore

Fertiliser & Raw Materials

Coal & Coking Coal

Container

Others

(Source - IPA)

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Port

Operation

Private Operator

Nhava Sheva, JNPT

Container Terminal, BOT 30 years

P & O Ports, Australia

JNPT

Third Container Terminal

Maersk – Concor

Chennai Port

Container Terminal

P & O Ports, Australia

Visakhapatnam

Container Terminal: Visakha

Dubai Ports International & J.M.Baxi

Visakhapatnam

BOT – Berth EQ-8

Gammon India & Portia Mgmt Services

Cochin

Container Terminal: BOT

Dubai Ports International

Tuticorin

Container Terminal

Port of Singapore Authority & SPIC Group

Kolkata

Container Terminal

Cardinal Logistics

Ennore Port

Liquid Cargo Terminal

IMC Group – L&T

Ennore Port

Iron Ore & Coal Terminals

Adani Group

Hazira, Gujarat

Greenfield port BOOT, 35 years concession

Royal Dutch/Shell Group, TotalGaz Electricite Holdings, France

Kulpi, West Bengal

Privatization & development, 50 yr concession, SEZ attached.

P&O Ports, Australia, WBIDC, Mukund-Keventor

Gujarat Pipavav Ports

Container facilities

Maersk India, Port of Singapore Authority, SeaKing Infrastructure

Mundra, Gujarat

Container Terminal

P&O Ports, Australia, Adani Group

Vadinar, Gujarat

All weather port

Essar Group

Jamnagar, Gujarat

POL port

Reliance

Major Ports

Minor Ports

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privatization of specific terminals in Major Ports, permission to private parties to set up multi-purpose minor ports and permission to set up captive jetties/ ports are a few well established steps now. Private participation in development and operation of berths at major ports has achieved a good degree of success. New private ports, particularly in Gujarat, have established themselves very well. Till date, projects worth more than USD 2 billion have been approved in the Ports sector and either commissioned or at various stages of implementation, where private sector is involved.

dredging contracts to O&M contracts to investment opportunities in specific berths as well as setting up of Minor Ports. Container berths in particular have also seen a lot of M & A activity recently. In more specific terms, there are the identified opportunities in each of the maritime states, where private sector is being wooed. For example, Rewas, Dighi and Jaigad ports in Maharashtra, Simar, Vansi-Borsi, Mithivirdi, Bedi and Maroli ports in Gujarat, Alapuzha, Azhikkal, Beypore and Vizhinjam ports in Kerala, Sandheads and Sagar Island in West Bengal, Cuddalore Port, Nagapattinam and Colachel ports in the southern state of Tamil Nadu, Tadri port in Karnataka etc. These are apart from additional terminals in almost all the Major Ports.

The following table gives a broad based view of the current private sector activities in the Indian Ports sector. Ports - a big opportunity now The Planning Commission has projected an investment of Rs.870 billion (almost USD 22 billion), in this sector, during the 11th Five Year Plan period 2007-12. With increasing emphasis on the enhanced role of private sector, there are a large number of interesting economic opportunities for the private sector now - ranging from

Container Traffic Growth

(Source - IPA)

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Pressing Issues that needs to be addressed Despite improvement in efficiencies and cargo handling as well as the healthy trends witnessed in port sector investments and private participation, it is clear that some critical issues facing the port sector still need to be resolved. These would need to be resolved as soon as possible in order to prepare the country for a much needed export thrust: • It has been seen that a number of competing developments, involving huge sums of money, are being promoted in a sub-optimal manner from a national standpoint. State and Central Government developing competing projects is one such example. These should be resolved to avoid duplication of resources. • Port projects, by their very nature, are long gestation projects – the useful life of a berth or a dredged channel often exceeds 50 years. This would correspondingly involve huge capital investments and therefore, debt products with long tenors. Such products are currently not easily available in the Indian financial markets. • Port is only one of the components in the logistics chain. To be effective roads and rail projects need to be envisaged and implemented in conjugation with the port sector development plans in order to optimize the transport sector scenario of the country.

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• Dredging cost is one of the major capital costs incurred by port companies/trusts. Currently, the management accounting treatment for such projects is neither clear nor standardized. This results in skewing the measurement of viability for projects as well as the performance of various berths in a port. • The bulk of traffic in India is handled by Major Ports which come under the Government of India. It is felt that this is at times impeding development of much needed infrastructure since Government approvals can be a lengthy process. Greater autonomy including corporatization could be considered as a first step towards privatization. • It is high time that Government relook at the limited role played by TAMP (Tariff Authority for Major Ports) in regulating tariffs and came out with a comprehensive position on regulation of tariffs and service standards. Conclusion Given the strong GDP growth of over 9% and even better growth of exports, it is only natural that a corresponding ramping up of ports infrastructure would be required. While the port sector has seen some landmark projects in the past few years, investment in the sector would have to be considerably ramped up to accommodate the growing volume of import-export traffic.

Infrastructure: Real Estate

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Office Demand Growth Spurred by the IT Industry India is the world’s back office, currently commanding 44% of the global market for IT and business process outsourcing (BPO) services, according to the National Association of Software and Service Companies (Nasscom), India’s IT industry association. In 2006, service and software exports amounted to $17.1 billion and hardware export another $6.9 billion. Since fiscal year 1999-2000, the Indian IT and IT-enabled services (ITES) industry has expanded at a compound annual growth rate of 28%. The industry’s contribution to India’s GDP has risen from 1.9% in 1999-2000 to a projected 4.8% in 2005-06. This has led to strong demand in the office sector, with most occupier demand coming from the growth of IT and ITES, along with BPO, as multinationals try to capitalize on the young, educated and inexpensive work force. The global demand for Indian outsourcing and offshoring activities stems from a need to reduce production costs. Wage levels in the IT sector have been steadily rising since 2000, but they are still low compared with developed countries. A young IT employee in India still earns about US$8,000 per year, much less than a Western counterpart, who makes about US$50,000-$70,000. Even when the costs of power, telecommunications, office set-up and other infrastructure are included, India retains its cost advantage. A Deutsche Bank report, estimating the per employee cost per year in several offshore locations, showed India’s advantageous position, with a cost of US$5,300. China and Russia trailed at US$7,700 and US$14,450, respectively. Other factors driving the growth of the IT-ITES-BPO sector are a large pool of English-speaking professionals, government policies actively promoting IT export, good quality control systems and the presence of cybersecurity and privacy laws. The growth in offshoring has led to the classification of Indian cities into three tiers in terms of their attractiveness. Tier I cities provide the largest and most qualified labor pool and better infrastructure and real estate formats. They include Bangalore, Mumbai and the National Capital Region (Delhi and surrounding satellite towns such as Gurgaon and Noida). Tier II cities provide relatively smaller work force pools but offer similar quality labor at a cost advantage of 15% to 20% over Tier I cities. They include Hyderabad, Chennai and Pune. Tier III cities provide more cost advantages than

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Tier I and II cities through lower labor and real estate costs and lower staff attrition but are riskier in terms of much smaller labor pools and somewhat lower-quality infrastructure. They include Kolkata, Ahmadabad, Chandigarh, Indore, Nagpur, Vishakhapatnam and Kochi. Nasscom estimates that the IT and BPO industries will create one million additional jobs in the five major hubs (New Delhi, Bangalore, Hyderabad, Chennai and Mumbai) and about 600,000 jobs in other Tier II and III cities by 2010. This should result in office space demand of roughly 21 million m² (226 million square feet), which compares with the total office stock in Central London, for example, of 19 million m² (205 million square feet). Corresponding to the high demandside dynamics, development activity is extensive and is mainly focused on secondary locations. The combined total office stock in the major cities is estimated to stand at about 10 million m² (108 million square feet). Structural Shift in the Retail Sector India ranks as the most attractive retail destination among all emerging markets, according to A.T. Kearney’s Global Retail Development Index. Total sales account for more than US$300 billion and are projected to rise between 6% and 10% per year in the medium term, considering India’s projected upward growth trend and favorable demographics. The retail sector offers opportunities stemming from an ongoing structural change. India’s retail market until recently was very fragmented. The retail scene is still characterized primarily by small, family-owned enterprises and street markets. The largest 10 retailers account just for 2% of the total market. One major reason for the underdevelopment of the retail market was government protection of local retailing from foreign competition. Only as recently as early 2006 has the government allowed 51% FDI in single-brand retail, with Reebok, Nike, Levi Strauss and Benetton opening outlets. However, multibrand retail chains like WalMart have not yet been allowed entry, although further opening of the market is likely in the near future. India’s accelerated growth potential, the rise of a growing middle class with high disposable income and greater contact with the West have all sparked a boom in modern shopping centers that are similar to Western malls. In recent years, the trend toward larger

retail formats, such as shopping malls and department stores, has grown, and the major companies likely will capture up to 10% of total market share within the next five years. Developers have started to respond to the structural shift. By 2007, India will have about seven million m² (75 million square feet) of mall space, out of which 57% will be in Delhi and Mumbai, notes a study by Knight Frank. Although this could result in pockets of oversupply in selected micro-locations, the provision per capita in India overall should remain relatively low, at less than 10 m² (107.6 square feet) per 1,000 inhabitants, compared with the EU15 average of 200 m² (2,153 square feet) per 1,000. Shopping malls are becoming more common, not only in Tier I cities, but also in other large cities (those with populations of more than one million). Based on announced development plans, at least 150 new shopping malls should appear by 2008. Mall developers are adapting quickly to the preferences of their customers. Some new types of projects are automobile malls and wedding malls, which are one-stop shopping destinations. The number of department stores is growing much faster than overall retail, at an annual rate of 24%. Supermarkets have garnered a growing share of the food and grocery trade over the past two decades. Housing Market on a Steep Growth Path Strong urbanization effects are augmenting the growth potential arising from India’s young, expanding population. Less than 30% of the population now lives in urban areas. But India’s Planning Commission forecasts that the urban population will rise by more than 40% by 2020, meaning an increase of about 140 million over the next 15 years, or nearly 10 million per year. Household formation is growing due to population growth and the shift from joint families to nuclear families. The average number in each household has fallen from 5.8 in 1990 to 5.3 in 2005. According to the Tenth Five-Year Plan, a shortage of 22.4 million dwelling units exists. Additional housing needed each year from 2002 to 2007 has been estimated at 4.5 million units. Real income

growth should rise from 5.9% per year in 1991-2005 to 8.7% per year in 2006-2010. The percentage of households with nominal disposable incomes of more than US$3,000 per year should rise from today’s 25% to 56% in 2010. Also, India has moved to a lowerinterest-rate environment, with easier availability of home mortgages. Prime lending rates fell from 16.5% in May 1996 to 11% in May 2006. Government action has also helped to raise housing demand via greater tax incentives. Now, more interest and debt service can be deducted from income taxes than in the ’90s. Positive demographics, rising income, growing urbanization and lower interest rates bode well for demand in the residential sector. India’s homeownership today is estimated at about 30%, compared with roughly 69% in the U.S. Additionally, the availability of financing choices, including the development of a mortgage market, is increasing to meet pent-up demand. Even then, mortgages currently equal less than 3% of India’s GDP, compared with more than 30% in other South Asian countries. Industry Trends With 40 cities of more than one million residents, totaling 128 million people, India offers many potential investment locations. Despite this, commercial sectors tend to concentrate in Tier I and II cities due to the availability of skilled human resources and adequate infrastructure. Real estate investment focuses on a few major cities, which follow their own economic and real estate agenda. The most important investment locations include Delhi (the political center), Mumbai (the financial capital) and Bangalore (the major IT hub). Moreover, Chennai and Hyderabad could establish themselves successfully as investment locations. However, as costs have risen and labor shortages have appeared, cities like Ahmadabad and Chandigarh should compete successfully due to their lower cost basis, and cities like Calcutta and Nagpur likely will take advantage of their relatively large pool of skilled workers. Many cross-border developers plan to enter the residential sector via the emerging trend of integrated townships. With land scarce in most major cities, but large parcels available just outside the city limits, developers are moving toward large, integrated developments with commercial, retail, residential and even medical facilities. Most are joint ventures with

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Indian developers, and some are also in public-private partnerships, with local governments as minority stakeholders. Developers are also showing interest is Special Economic Zones (SEZ). SEZs are specifically delineated, duty-free enclaves outside the customs territory of India. SEZs are approved by the Ministry of Commerce and can be set up by private developers or by central/state government or jointly by any two or more of these. SEZs can be multiproduct or for a single sector, such as IT, pharmaceuticals or textiles. Businesses operating in SEZs enjoy a corporate tax holiday on export earnings, indirect tax exemptions and liberal exchange controls. Developers also receive many fiscal benefits. The income-tax incentives for a SEZ developer include a 10-year tax holiday; exemption from dividend distribution tax; tax-exempt interest on long-term financing; tax-exempt long-term capital gains arising on the transfer of shares in the developer’s company; and no minimum alternative tax. The indirect tax incentives include no import duty; no excise duty; exemption from service tax; and exemption from tax on the sale of electricity for self-generated and purchased power. Traditionally, India has predominantly been a developer’s market, whose main source of financing was private debt. International real estate investors have played only a minor role in India, as FDI into real estate was very restricted and had high threshold requirements. Thus, foreign investment flows were very limited. But India has progressed by introducing reforms and liberalizing investment policies. In early 2005, the government relaxed FDI norms, and now FDI in “greenfield” real estate developments are automatically approved, without a cumbersome permission procedure from the Foreign Investment Promotion Board, if they fulfill certain conditions. That said, FDI is still somewhat limited, and barriers to entry for foreigners are still considerable. For example, foreigner investors cannot buy existing buildings. We estimate that higher-quality commercial real estate in India totals about US$100 billion, equaling about 0.6% of the global commercial real estate stock. In the long term, India’s real estate share should rise to more than 3% of global commercial real estate stock and more than 12% of the Asian stock due to the structural transformation of India’s economy.

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So far, private debt has been the most important source of financing in this sector. The recent growing demand for real estate is driving the substantial demand for construction financing and, according to the Reserve Bank of India, loans to commercial real estate rose in 2005-06 by 84%, to US$2.4 billion. Since 2004, venture capital funds have been permitted to invest in real estate, allowing domestic and foreign investment managers to operate real estate fund vehicles via a private equity route. The first real estate funds are now up and running, and several are in the planning stage. Several foreign funds are exploring investment opportunities, reflecting a strong interest from domestic and international investors. Roughly US$15 billion have been raised on behalf of foreign funds targeting Indian real estate. Currently, real estate investment trusts (REITs) are not allowed in India, but in June 2006 the Securities and Exchange Board of India approved guidelines for real estate mutual funds. Challenges faced by the Indian Real Estate Sector India is an emerging market. Although country risk is hard to measure, Euromoney’s rankings of the country’s creditworthiness based on political, economic and capital market risk can be used as a proxy. With a rating of 56 out of 100, India falls in the lower end of the range, implying higher investment risks. India’s real estate market is opaque. Real estate related data is patchy, key time series are nonexistent or too fragmentary to allow robust analysis, and no historic reference points exist. Hence, valuations and investment decision-making in India are challenging tasks. Investors are faced with typical emerging-market characteristics, most notably low transparency, lack of suitable investment products and low liquidity. Another major barrier to entry is the fragmented ownership structure and absence of clear land titles, restricting organized dealings. Currently, title insurance is unavailable, although, according to press reports, some Indian financial companies are looking into the issues of structuring and pricing such a product. Accessing the Indian real estate market is very difficult due to the lack of investment-grade properties. This lack is reflected by the 0.3 m² (3.2 square feet) of office space per capita in major Indian cities, which is 10 times less than in a typical Western European city.

Research by the World Bank suggests that it takes five times longer to register a property in India than in the U.S. and three times longer than in the UK. Additionally, lease terms in India are rather short. While longer-term leases, up to nine years, can be negotiated, the typical commercial lease term is three years, with options to renew for two more terms of three years. Relative underdevelopment of the capital market in the real estate arena is another drawback. The primary debt and equity markets are active, but the absence of REITs, commercial mortgage-backed securities and other secondary investment vehicles are hindering capital flows. Also, domestic institutional investors, such as pension funds and insurance companies, are prohibited by law from investing directly in real estate, even though they can invest a small portion of their total investments in publicly listed securities. Regulatory risk is another area of concern. The Urban Land Ceiling Act, which imposes a ceiling on the maximum amount of land under individual possession, and a high stamp duty, creating a higher transaction cost, are two such examples. However progress is being made in this area, with the central government and some of the state governments liberalizing these restrictions.

Conclusion Clearly the Indian real estate sector has enormous potential. It is a sunrise sector which will be positively impacted by major demographic, cultural and industrial shifts that are currently ongoing in India. The boom in the IT and BPO industries as also the fundamental changes occurring in the retail sector augur well for the prospects of the real estate sector. Equally, home ownership growth, through relatively easier financing options, will be another key driver in the significant expansion of the sector. The growth will percolate down from Tier 1 to Tier 2 and other tier cities and this will bring forth rapid and significant increase in demand for quality commercial and residential real estate. However, key challenges remain in the form of significant structural deficiencies in the market. The relative underdevelopment of capital market instruments in relation to real estate and the regulatory hurdles posed by the present provisions relating to land and property ownership are major concerns. Equally, the deficiencies in the physical infrastructure can crimp the growth prospects for the real estate sector. It is therefore true to suggest that in many ways the real estate is at a cross roads. Should India address these structural challenges in a sustained and realistic manner, there is no reason why the real estate sector cannot grow manifold in the years to come.

Also, RBI regulations concerning the repatriation of capital somewhat limit exits for cross-border funds. Another challenge that India needs to meet is the inadequacy of its physical infrastructure. Even though India has made significant progress in telecom infrastructure, at least in the urban areas, much needs to be done to improve the quality of transport infrastructure. The quality of Indian roads, railways and airports leaves much to be desired. Moreover, each commercial property needs to have its own back-up generator due to the unreliable supply and distribution of electricity.

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Healthcare in India

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Healthcare is one of India’s rapidly expanding sectors, in terms of both revenue and employment. During the 1990s, Indian healthcare grew at a compound annual rate of 16%. Today the total value of the sector is more than $34 billion. This translates to $34 per capita, or roughly 6% of GDP. By 2012, India’s healthcare sector is projected to grow to nearly $40 billion. The demand side of the Healthcare Industry is being constantly fuelled by the ever increasing Indian population particularly the middle class which is estimated to touch 62.95% of the total population. Added to this is the growing number of foreign tourists coming to India for world class medical services at much lower cost compared to their home countries. On the supply side we have the healthcare service providers, public and private hospitals, pharmaceutical companies, medical, surgical and diagnostic equipment manufacturer and suppliers and insurance companies. In this document we would be exploring Emerging Trends, Medical Tourism and Investment Opportunities in the Indian Healthcare sector. Emerging Trends in Healthcare in India The Indian Healthcare Sector is poised for robust growth. The healthcare sector has been going through constant change over the last decade and now new trends are emerging in this sector. Growth in Healthcare expenditure and World Class Medical Facilities The rising Indian middle class, along with its increasing purchasing power and willingness to pay for quality healthcare, has led to the emergence of high quality corporate hospitals. To meet the emerging demand for improved healthcare services, a number of corporate houses have established their chain of hospitals across the country resulting in world class medical facilities in India. Change in Demographics and Disease Profile One of the most visible trends is the changing demographics and the disease profiles. Owing

to Govt. emphasis on providing better healthcare facilities in rural and urban areas and eradicating diseases like hepatitis and polio, India is doing much better on various healthcare parameters like infant mortality rate, life expectancy etc. Though the ailments like poliomyelitis, leprosy and neonatal tetanus will be eradicated soon, there has been rise in infectious and chronic diseases like AIDS. Certain communicable diseases like dengue fever, viral hepatitis, tuberculosis, malaria etc seems to have developed new strains or have become more resistant to drugs. Add to this the increase in “lifestyle” or “chronic” diseases like hypertension, cancer and diabetes. In 2005, it was estimated that chronic diseases in India accounted for almost 53% of all deaths and 44% of disability-adjusted life years (DALYs). It is estimated that deaths from chronic diseases would register a sharp increase from 3.78 million in 1990 to 7.63 million in 2020 accounting for 66.7% of all deaths. In India diabetic nephropathy is expected to develop in 6.6 million of the 30 million patients suffering from diabetes. Number of people with hypertension is expected to see a quantum leap from an estimated 118.2 million in 2000 to 213.5 million in 2025. Dr. Anbumani Ramadoss, Minister of Health & Family Welfare, Government of India acknowledges that the country’s public health advocacy till date has concentrated mainly on infectious diseases. He does mention, however, that the Government is aware that almost 66% of all deaths in 2020 is likely to be from chronic diseases. The Government has now decided to address the issues related to chronic diseases with equal energy and focus and is keen to involve and work together with the private sector and the civil society with a goal to prevent chronic diseases and save millions of lives. Growth of Private Healthcare Facilities India’s healthcare infrastructure has not kept pace with the economy’s growth. The physical infrastructure is woefully inadequate to meet today’s healthcare demands, much less tomorrow’s. While India has several centers of excellence in healthcare delivery, these facilities are limited in their ability

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to drive healthcare standards because of the poor condition of the infrastructure in the vast majority of the country. Of the 15,393 hospitals in India in 2002, roughly twothirds were public. After years of under-funding, most public health facilities provide only basic care. The total healthcare financing by the public sector is dwarfed by private sector spending. Private firms are now thought to provide about 60% of all outpatient care in India and as much as 40% of all in-patient care. It is estimated that nearly 70% of all hospitals and 40% of hospital beds in the country are in the private sector. Slow Acceptance of Health Insurance A widespread lack of health insurance compounds the healthcare challenges that India faces. Although some form of health protection is provided by government and major private employers, the health insurance schemes available to the Indian public are generally basic and inaccessible to most people. Only 11% of the population has any form of health insurance coverage out of which only 1% of the population was covered by private health insurance in 2004-05 and group insurance accounted for 35% of the total health insurance business during that period. But with the rise of disposable income and a growing middle class the demand for health insurance is bound to go up. To bring more people under the insurance coverage, Govt. is partnering with private sector to provide coverage at low cost. In some cases it has been successful like Yashaswini Insurance Scheme in Karnataka. International and National Accreditation for Hospitals Hospitals are going for national and international accreditation like JCI and NABH. Possible drivers for this could be improved efficiency (lower costs) and better quality services. In recognition of the quality of healthcare delivery services in India, a number of Indian hospitals have received accreditation from international agencies worldwide. For e.g.: • Five hospitals in India -- Indraprastha Apollo Hospital (New Delhi), Apollo Hospital (Chennai), Apollo Hospital (Hyderabad), Wockhardt Hospital (Mumbai)

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and Shroff Eye Hospital (Mumbai) - have been accredited to the leading healthcare accreditation agency in the United States, Joint Commission International (JCI). • NHS of the UK has indicated that India is a favoured destination for surgeries. • The British Standards Institute has now accredited the Delhi-based Escorts Hospital. • India’s independent credit rating agency CRISIL has assigned a grade ‘A’ rating to super specialty hospitals like Escorts and multi specialty hospitals like Apollo. • Wockhardt Hospital has an exclusive association with Harvard Medical International, the global arm of Harvard Medical School, the world’s leading medical institution. • Max Healthcare, in collaboration with Singapore General Hospital, is into clinical practice, research and training National Accreditation Board for Hospitals & Healthcare Providers (NABH) is a constituent board of Quality Council of India, set up to establish and operate accreditation programme for healthcare organizations. Although relatively new, the following Hospitals have already been accredited: • B.M. Birla Heart Research Centre, Kolkata • MIMS Hospital (MIMS Ltd.), Calicut • Kerala Institute of Medical Science, Thiruvananthapuram • Max Super Speciality Hospital, New Delhi • Max Devki Devi Heart & Vascular Institute, New Delhi • Moolchand Hospital, New Delhi • Narayana Hrudayalaya, Bangalore Growth of Pharmaceutical Industry The huge population of India and the increase in expenditure on medicines makes India a very lucrative market for pharmaceutical companies. Further driven by knowledge skills, growing enterprises, low costs, improved quality and buoyant demand (both domestic and international), the pharmaceutical sector’s value of output grew more than tenfold from US$ 1.1 billion

in 1990 to over US$ 12.4 billion during 2005-06. With value of exports at over US$ 4.7 billion in 2005-06, India is today recognised as one of the leading global players in pharmaceuticals. Medical Tourism Medical tourism is one of the major external drivers of growth of the Indian healthcare sector. The emergence of India as a destination for medical tourism leverages the country’s well educated, English-speaking medical staff, state-of-the art private hospitals and diagnostic facilities, and relatively low cost to address the spiraling healthcare costs of the western world. India provides best-in-class treatment, in some cases at less than one-tenth the cost incurred in the US. India’s private hospitals excel in fields such as cardiology, joint replacement, orthopedic surgery, gastroenterology, ophthalmology, transplants and urology. According to a joint study by the Confederation of Indian Industry and McKinsey, Indian medical tourism was estimated at $350 million in 2006 and has the potential to grow into a $2 billion industry by 2012. An estimated 180,000 medical tourists were treated at Indian facilities in 2004 (up from 10,000 just five years earlier), and the number has been growing at 25-30% annually. India has the potential to attract one million medical tourists each year, which could contribute an estimated $5 billion to the economy, according to the Confederation of Indian Industries. In addition to receiving traditional medical treatments, a growing number of western tourists are traveling to India to pursue alternate medicines such as ayurveda, which has blossomed in the state of Kerala, in southwestern India. The number of medical tourists visiting Kerala was close to 15,000 in 2006 and is expected to reach 100,000 by 2010. To encourage the growth of medical tourism, the government is providing a variety of incentives, including lower import duties and higher depreciation rates on medical equipment, as well as expedited visas for overseas patients seeking medical care in India. Investment Opportunities in Indian Healthcare Sector There is tremendous growth potential in the Indian

Healthcare sector. The growing Indian population, increasing disposable income, increasing medical tourism and change in urban lifestyle leading to increase in lifestyle disease would sustain the growth. It is estimated that by 2012 healthcare spending could contribute 8% of GDP. Key Opportunities Sectors in the Indian Healthcare Sector are: • Hospital Services • Training and Education in Healthcare Sector • Wellness Clinics • Medical Tourism • Health Insurance • Pathology Services • Pharmaceutical Industry • Tele Medicine • Medical Devices

Hospital Services The Market - India’s physical healthcare infrastructure is far from being able to meet the current demand. If we consider the huge growth in demand for healthcare that India would be facing in near future, we can see a huge potential investment opportunity for private players. Enormous private capital will be required to enhance and expand the infrastructure to meet the demand. It is estimated that 450,000 additional hospital beds will be required by 2010 – an investment estimated at about $25.7 billion. The Govt. is expected to contribute only 15-20%, thus providing enormous opportunity for private players. The corporate hospital sector of the country is all set to take away a significant share of the tertiary healthcare service business from individual private healthcare providers by 2010. With the advent of private insurance and the emergence of India as a medical tourism destination, there also has been a surge of growth in so-called “super specialty” hospitals, which have teams of specialists, sophisticated equipment, links to other

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medical centers, and the ability to treat a broad range of ailments. Growth Drivers - Government fiscal constraints are driving the growth of Public Private Partnerships (PPPs) to help meet India’s growing demand for healthcare infrastructure. In addition to participating in infrastructure PPPs, opportunities are emerging for foreign companies to create super-specialty hospitals in collaboration with Indian corporations. For instance, Wockhardt Hospitals Group has partnered with Harvard Medical International to create a chain of super specialty hospitals in India. Training and Education in Healthcare sector The Market – India has quite a few world class medical and nursing colleges. Most of these colleges are financed by the Govt. Owning to fiscal problems the number of Govt. backed hospitals hasn’t increased significantly over the years. There are 174 recognised medical colleges, and 68 colleges have been permitted u/s 10A of the Indian Medical Council Act, 1956 during the year under review. Approx. 27000 graduates pass out every year from these colleges. Such graduates after completing compulsory rotating internship are required to be registered with State Medical Council or the Medical Council of India to practice medicine in the country. Growth Drivers - In addition to a deteriorating physical infrastructure, India faces a huge shortage of trained medical personnel, including doctors, nurses and especially paramedics, who may be more willing than doctors to live in rural areas where access to care is limited. There is an immediate need for medical education and training, which could provide additional opportunities for private sector providers or publicprivate partnerships. Wellness Clinics The Market – Wellness clinics are targeted at chronic or lifestyle diseases that are affecting more and more people across the country. With increase in tobacco intake, unhealthy diet and excessive energy intake and physical inactivity, all sections of the society and people from different age groups including those who are in working age are getting affected by chronic diseases

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like diabetes, hypertension and heart diseases. People working in the service sector are the ones most likely to suffer from chronic diseases due to their sedentary lifestyle, unhealthy working hours and unhealthy food habits. It is estimated that about 53% of all deaths in 2005 is attributed to chronic diseases. With no signs of abating and Govt. not in a position to tackle this menace, the rate is bound to go up. Growth Drivers - Preventing chronic diseases is possible by tackling their associated risks and the best place to do so is at the workplace. Corporates are increasingly focusing more on the “wellness” of their employees so as to reduce loss due to illness and absenteeism and increase productivity. Wellness Programs need to be designed and rolled out and regular health and nutrition related consultation have to be provided. Companies like Wipro and Infosys have already taken the plunge in this direction and more and more companies would soon be joining the initiative. There is a huge opportunity for healthcare companies to invest in Wellness Clinics and join hands with corporates to increase the general health of the employees. Medical Tourism The Market - With lower cost of medical services in India, well trained and highly educated medical service providers, world class super specialty hospitals and a government policies favoring the growth of medical tourism, the Medical Tourism business in India is set to boom in near future. About 180,000 patients arrived in 2004 from across the globe for medical treatment and the market in India estimated at US$ 333 million in 2004, grew by about 25 %. Growth Drivers - Not only are patients coming from developed countries like US and UK but India is currently seeing a surge of patients from countries as well as from South Africa and West Asia. Medical Tourism is set to boom in India and private players are all set to cash in on this booming industry. Health Insurance The Market - Owing to liberalization and a growing middle class with increased spending power, there has

been an increase in the number of insurance policies issued in the country. In 2001-02, 7.5 million policies were sold. By 2003-4, the number of policies issued had increased by 37%, to 10.3 million. Growth Drivers - The Insurance Regulatory and Development Authority (IRDA) eliminated tariffs on general insurance as of January 1, 2007, and this move is expected to drive additional growth of private insurance products. In the wake of liberalization, health insurance is projected to grow to $5.75 billion by 2010, according to a study by the New Delhi-based PHD Chamber of Commerce and Industry. In another effort to improve the insurance prospects for India, the IRDA is focused on standardizing medical definitions to ensure consistent pricing and products, and is providing incentives for stand-alone insurance companies. In addition, government subsidies and tax incentives for health insurance are expected to increase the number of policy holders and attract key players to the industry. Pathology Services The Market - The domestic pathology industry has been growing over the last 5 years at an estimated CAGR of 20% and it currently comprises almost 2.5 per cent of the overall healthcare delivery market. Presently there are few big names in this market and this market is largely serviced by small unorganized players and hospitals. With 40,000 independent pathology laboratories in the country, the industry is highly competitive and price driven. Growth Drivers - Molecular diagnostic and pharmacogenomic testing are the future growth drivers of this industry. Outsourcing of pathology tests by foreign hospital is also becoming a huge opportunity. Preventive healthcare and health insurance will further drive domestic growth. Big players can enter this market and set up accredited pathology labs to capture a considerable pie of the market. Pharmaceutical Industry The Market - Despite widespread poverty and

inadequate public healthcare provision, India has much to offer to leading drug makers. Increase in lifestyle diseases, combined with a growing middle class that has more disposable income to spend on treatment, will provide new opportunities for global pharmaceutical firms. Not only does India provide a huge market for foreign pharmaceutical companies, India has also emerged as a major supplier of several bulk drugs. These drugs particularly generic and OTC drugs are produced at much lower prices compared to formulation producers worldwide. Many multinational generics companies have been sourcing products from Indian manufacturers for some years. Some also use Indian contract manufacturers to manufacture the finished product. Contract manufacturing, currently estimated at $350 million, is expected to reach $1billion by 2010, according to CRISIL. Growth Drivers - Some companies encouraged by the relaxation of the rules on foreign ownership and a favorable tax regime have gone beyond contract manufacturing, setting up their own local manufacturing facilities. The financial incentive is compelling: Goldman Sachs estimates that the cost of setting up and running a new manufacturing facility in India is one-fifth of the cost of doing so in the Wes Pharmaceutical research is also one area that is expected to achieve tremendous growth in the coming decade, due to India’s huge and growing population, low per capita drug usage, and increasing incidence of disease. Tele Medicine The Market - Only 25% of India’s specialist physicians reside in semi-urban areas, and a mere 3 % live in rural areas. As a result, rural areas, with a population approaching 700 million, continue to be deprived of proper healthcare facilities. One solution is telemedicine—the remote diagnosis, monitoring and treatment of patients via videoconferencing or the Internet. Telemedicine is a fast-emerging trend in India, supported by exponential growth in the country’s information and communications technology (ICT) sector, and plummeting telecom costs.

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Several major private hospitals have adopted telemedicine services, and a number of hospitals have developed public-private partnerships (PPPs), among them Apollo, AIIMS, Narayana Hridayalaya, Aravind Hospitals and Sankara Nethralaya. Growth Drivers - The early successes of telemedicine pioneers have led to increased acceptance and proliferation of telemedicine. There is a growing movement within India to establish a health grid that connects medical institutions and practitioners throughout the country. This would allow super specialists to exchange case studies, compare experiences, and hold virtual conferences to discuss critical disease patterns and provide treatment. Eventually, telemedicine likely will be practiced in the majority of Indian hospitals, initially in a separate department, and eventually, integrated into medical specialties. Medical Devices The Market - The rebuilding of India’s healthcare infrastructure, combined with the emergence of medical tourism and telemedicine, will drive strong demand for medical equipment, such as x-ray machines, CT scanners and electrocardiograph (EKG) machines. Leading international companies market most high value medical equipment, while only consumables and disposable equipment are made locally. Many international companies have expanded their operations in the Indian market in recent years and established manufacturing facilities to assemble equipment for the domestic market and export sales. The competition is expected to intensify with the entry of more global firms into the medical equipment marketplace. Growth Drivers - The government is encouraging the growth of this market, through policies such as a reduction in import duties on medical equipment, higher depreciation on life-saving medical equipment (40%, up from 25%), and a number of other tax incentives. Many international companies have expanded their operations in the Indian market in recent years and established manufacturing facilities to assemble equipment for the domestic market and export sales. The competition is expected to intensify with the entry of more global firms into the medical equipment marketplace.

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Conclusion Healthcare in India is in rapid and sustained expansion. It will contribute significantly to revenues and to employment generation. Key drivers on both the demand and supply side, which take the form of demographic and life style changes on the demand side and the significant expansion of healthcare infrastructure on the supply side will ensure the growth of this sector for a long time to come. There are however significant challenges that need to be addressed. The lack of adequate healthcare insurance for a vast number of people is a fundamental problem. Equally, the fact that chronic diseases continue to recur is a matter of concern. Public health is fundamental to India’s economic growth prospects and an appropriate public private partnership model, to ensure this, could be the relevant answer. The growth in medical and healthcare infrastructure needs to be sustained, consistent and widespread. Inevitably, Government policy on healthcare will majorly affect the prospects of growth in the healthcare industry. The entry of big reputed names in both the manufacturing and the services segment of the sector and increased competition will promote quality in all its dimensions. Regulatory policies need to incentivise such competition while ensuring, of course, that healthcare remains, at a fundamental level, affordable and available to most people. Healthcare today in India is at a nascent stage and is poised for exponential growth, if judiciously managed through an appropriate choice of regulatory, fiscal and structural reform policy measures.

Contacts

If you would like to discuss issues raised in this report in more detail, please speak with or write to any one of our experts below:

Jairaj Purandare [91] (22) 6669 1400 [email protected] Vivek Mehra [91] (11) 4115 0503 [email protected] S Madhavan [91] (11) 4115 0505 [email protected] Bharti Gupta Ramola [91] (124) 462 0503 [email protected] Ashwani Puri [91] (124) 462 0501 [email protected] Amrit Pandurangi [91] (124) 462 0517 [email protected] Rajarshi Sengupta [91] (33) 2357 3391 [email protected] N.V. Sivakumar [91] (80) 2558 5663 [email protected]

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