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India in 2013

A quick recovery is a must


An annual review of key macroeconomic and sectoral trends

Produced by the Accenture Institute for High Performance

Content
1. Introduction 2. This could be the year that 3. Calendar of events 4. Macro trends for 2013 5. Key themes for the year ahead Fiscal prudence and inflation management are needed to avoid stagflation Getting more out of existing capital will prove critical Rural consumption will continue to drive domestic demand Domestic reforms will be critical to Indias global competitiveness Increased trade liberalization will set the stage for more balanced business growth 1 2 3 4 5 5 6 7 8 9

6. Spotlight 10 Can India capitalize on demographic change? 10 7. Sector outlook Automotive Banking Chemicals Defense Education Fast-moving consumer goods (FMCG) Healthcare Information Technology Infrastructure Media and Entertainment Oil and gas Pharmaceuticals Power Real estate Retail Telecommunications 8. References 12 12 12 13 14 14 15 15 16 16 17 17 17 18 19 19 20 21

Introduction
The year 2013 will test Indian policymakers and industry leaders alike. During 2013, Indias gross domestic product (GDP) is expected to remain in the range of 6-6.5%well below Indias potential as a leading emerging economy. As 2013 unfolds, India will likely continue to face challenging macro-economic conditions. Indias deteriorating fiscal situation and high inflation are cases in point. Barring fiscal restraint and new sources of revenue, Indias annual fiscal deficit may increase to 6 percent of gross domestic product (GDP) in 2013.1 Moreover, inflation is expected to remain above 6 percent especially in sectors such as industrial raw materials and food. The 6-plus percent levels of inflation will provide little incentive to the Reserve Bank of India (RBI) to reduce interest rates substantively. Reduction in interest rates by 25 to 50 basis points due to monetary interventions by the RBI may not free up sufficient capital to invigorate the animal spirits in India.2 Stubborn inflation and a restrained credit environment are likely to continue to depress business leaders confidence as well as appetite for substantial investment in 2013. For instance, in the third quarter of FY2012-13, the Confederation of Indian Industrys Business Confidence Index fell below 50 points, down from 55 and 51.3 points in the first and second quarters respectively.3 Many corporations are expected to delay substantial long-term capital investment (CapEx) during 2013 and focus on realizing greater returns from their existing investments rather than striving to expand quickly. The situation on the external front is challenging too. India must rein in its current account deficit before the imbalance leads to further volatility in the rupee. The nations capacity to digest a larger current account deficit has increased over the last two decades. But its trade deficit is now testing these new limits. Indias trade deficit continues to be much higher than in the previous fiscal year, owing to falling exports and accelerating gold imports, and we expect this scenario to continue during the first quarter of 2013. Such a scenario may compel global investors to press the caution button in 2013 vis-a-vis India, even with recent reforms aimed at liberalizing foreign investment in certain sectors. This could lead to erratic flows of foreign direct investment (FDI) and portfolio investments. Such flows could in turn worsen volatility of the rupee and complicate the picture for Indian companies domestic and global expansion plans. But amid Indias gray clouds is a silver lining: bright spots that could drive business and economic growth. To the relief of industry, growth in consumption in rural India has pressed on. Between FY2009-10 and FY2011-12, rural consumption per capita in India grew annually at the jaw-dropping rate of 19 percent4. For the first time in the last 25 years, incremental cumulative rural spending exceeded incremental cumulative urban spending during that period. We expect this trend to continue in 2013, marked by growth in nonagricultural job opportunities across Indias hinterlands, especially in the construction, telecommunications and financial services industries. Moreover, with a rising number of Indian companies acquiring the capabilities needed to profitably serve Indias rural markets, job opportunities in the nonagriculture space could multiply. Beyond rising incomes and consumer demand in rural areas, India also has the potential to develop new sources of growth in 2013 by deepening its engagement with the global economy.
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Reforms in late 2012 to liberalize FDI in key sectors (such as multi-brand retail) could further encourage foreign investors to snap up medium-term investment opportunities in 2013. In fact, enthusiastic about recent reforms, major global investors are beginning to consider ramping up investments in Indias equity markets.5 However, its not just about external investment flowing into India. Indian companies also have more opportunity to tap into sources of growth abroad. New foreign trade agreements (FTAs) are creating fresh opportunities for Indian companies to diversify their growth model by seizing opportunities in foreign markets in 2013. Like 2012, the coming year will test the nerves of business strategists and, most important, strategy execution teams. While some cash-rich public sector firms and large, financially stable conglomerates may continue cautious expansion, many companies will focus on tapping new markets, improving productivity, preserving margins and managing volatility. In this report, we present ideas that can help businesses in India and elsewhere prepare for the new realities of Indias changing macroeconomic and business environment. As always, we offer these ideas as starting points for lively dialogue about new business directions. We invite your comments and we look forward to the ensuing discussions. Please feel free to contact us at: raghav.narsalay@accenture.com and mamta.kapur@accenture.com

This could be the year that


National mobile roaming charges are eliminated, allowing people to use mobile devices freely across states without having to change their numbers Basel III norms are implemented by banks across the country, making the largest of them more stable SEBI guidelines of a mandatory 25 percent public shareholding in listed companies comes into effect with the aim of improving investor confidence in the equity market The GPS-aided air traffic management and navigation system GAGAN becomes operational, helping major airline operators to cut fuels costs by as much as 20 percent ASEAN and India sign an FTA on services and investments that might boost trade in the region by US$20 billion by 2015 The Bharat Broadband project is launched, connecting 250,000 village panchayats (councils) with fiber optic networks

Calendar of events
2013 January 2013
Direct cash transfer scheme for subsidies goes live

February 2013
Insurance regulator IRDA discloses Bancassurance guidelines Nationwide mobile number portability comes into effect Indo-French joint-venture SARAL satellite launches

March 2013
State elections held in Nagaland, Tripura and Meghalaya National mobile roaming becomes free

April 2013
Basel III implementation deadline comes for banks New airline operator dedicated for North-East India starts operations

May 2013
Indian Navy brings home first of the eight P-8I maritime surveillance aircrafts from Boeing State elections held in Karnataka

June 2013
Companies comply with SEBI guideline of 25 percent public shareholding

July 2013
GPS-aided air traffic management and navigation system GAGAN becomes operational

August 2013
The ASEAN and India sign FTA on services and investments Old mobile handset models that do not comply with new radiation norms are phased out

September 2013
Indias first unmanned lunar landing mission, Chandrayaan II, is launched First phase of the US$1.5 billion Koradi supercritical thermal power plant project is commissioned

October 2013
Indias first Mars Orbiter mission is launched Mumbais offshore container terminal is commissioned

November 2013
Tata Motors compressed airpowered car is launched India receives delivery of aircraft carrier INS Vikramaditya from Russia

December 2013
Bharat Broadband project becomes operational

2014
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Macro trends for 2013


Economic growth
3,500 3,000 US$ billion 2,500 2,000 1,500 1,000 500 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Nominal GDP (US$ billion) 12.0 10.0 Percentage US$ billion 8.0 6.0 4.0 2.0 0 50 40 30 20 10 0

Foreign direct investment (FDI) flows


60

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Real GDP growth percentage (year -over-year)

FDI outflows

FDI inflows

Source: International Monetary Fund, October 2012

Source: Economist Intelligence Unit, December 2012

Industrial production
(% change year-on-year)

Current account
-0 -0 -1 Percentage -2 -3 -4 -5

12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0% US$ billion

-20 -40 -60 -80 -100 -120 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

2008

2009

2010

2011

2012

2013

2014

2015

2016

Current account balance (US$ billion)

Current account balance as percentage of GDP

Source: Economist Intelligence Unit, December 2012

Source: Economist Intelligence Unit, December 2012

2017

Key themes for the year ahead


Fiscal prudence and inflation management are needed to avoid stagflation
Given the last four quarters of high inflation and stagnating growth, India now faces the threat of stagflation. In December 2012, the government lowered its original GDP growth forecast of 7.6 percent for FY2012-13 to 5.7-5.9 percent.6 Indias rising fiscal deficit continues to be a drag growth. The deficit could reach 5.9 percent of GDP for FY2012 far exceeding the governments annual budget projections of 5.3 percent.7 And while wholesale pricebased inflation during 2013 may prove lower than expected because of a higher base effect, the real story will merit careful examination. Inflation of prices for food, fuel and raw materials could become a permanent feature of the Indian growth story. For instance, annual inflation on primary articles has remained above 9 percent since the onset of the global financial crisis in 2008, and this trend is expected to continue in 2013 despite slower growth.8 Moreover, utility prices will likely remain high owing to increases in fuel prices during 2013.9 The expanding deficit is raising the governments borrowing requirements, putting pressure on market liquidity and thus making it costlier for the government to finance growth. Additionally, moderately high level of inflation may not provide the central banking authority with enough room to reduce interest rates beyond 25-50 basis points. Consequently, borrowing costs will probably remain high and credit markets will continue to be restrained. As a result, India is now an outlier when compared to other emerging markets on macroeconomic indicators, including inflation and fiscal deficit. For instance, Indias fiscal deficit as a percentage of GDP in 2013 will likely remain nearly three times higher than deficits in other key emerging markets, such as Brazil and China. Furthermore, consumer price inflation will probably continue to hover above 7 percent in 2013substantially higher than in China and Brazil, where rates are forecasted to hold at 4.8 and 5.7 percent, respectively.10 During 2013, Indias fiscal situation must stabilize. Recent disinvestments by the government in some staterun firms, as well as the lowering of oil subsidies in September, are steps in the right direction.11 But more needs to be done through the active involvement of the private sector. To help the economy achieve fiscal stability and moderate inflation, government will need to abstain from inflationary budgetary spending ahead of the 2014 elections. The state and central governments will have to summon up the courage to embrace expenditure reforms. Given that the Indian government is one of the largest organized purchasers of raw materials and finished products in the nation, it will need to show greater willingness to foster transparency in government procurement through the use of IT and globally accepted procurement norms.

Business imperatives
Work with suppliers to plug inflationary pressure points along the supply chain. Develop public-private partnership (PPP) models to create profitable business opportunities and to help governments achieve efficiency in their spending. Improve business processes to cut costs along the value chain.

Getting more out of existing capital will prove critical


A healthy rate of gross fixed capital formation (the creation of physical assets) was instrumental in keeping the Indian growth story going strong through the first shock to global demand during 2008-2010. However, this cylinder in Indias growth engine has begun to sputter under the continuing threat of domestic stagflation and an uncertain global economy. For instance, total investments in new infrastructure projects, as well as the total number of new infrastructure projects, reached a three-year low in India during the quarter ending December 2012.12 Theres only a modest chance that 2013 will see a reversal of this negative trend. First, business confidence will likely remain shaky in the year ahead. In spite of ongoing reform efforts, confidence in Indias business environment continues to degenerate. Even after a substantial decline in mid-2012, quarter-onquarter business confidence continued to slip in late 2012, according to a recent survey.13 Second (and perhaps most important), financing new longterm capital investments will remain costly in 2013. Despite a possible increase in the central banking authoritys power to lower interest rates,14 sustained high inflation will probably hold commercial lending rates the interest rate charged by commercial banks on rupeedenominated loans at their elevated level. Those rates are expected to hold steady at around 9-10 percent, compared to around 7 percent in China and 3 percent in the United States.15 Securing better returns on existing capital spending through efficient project commissioning and through enhancement of existing plants productivity will therefore be critical to boosting GDP and company balance sheets. With cash-on-hand in an uncertain and credit-restrained environment,16 companies in India will need to execute a more nuanced agenda in the year ahead. They will have to sharpen their focus on nearterm projects to improve returns on existing investments and commit to enhancing operational efficiency and labor productivity via new business technologies and improved business process management.

Business imperatives
Enhance operational efficiency of capital expenditure through better procurement and supply chain management. Invest in cutting-edge technologies and new outsourcing opportunities (such as cloud-based enterprise services) to redesign workflows and speed up project execution. Identify areas to leverage the power of product, process and business model innovation.

Rural consumption will continue to drive domestic demand


Rural India will continue to lead domestic consumption growth in 2013not just because it accounts for nearly 70 percent of Indias population, but also because it now commands the majority share of Indian consumption17. In 2012, rural areas in India laid claim to 56 percent of Indias income, 64 percent of consumer expenditure and 33 percent of Indias savings18. Rural Indias share of consumption of popular consumer goods and durables stood at 30-60 percent, and sales to rural India are growing steadily.19 Between FY2009-10 and FY2011-12, rural consumption per capita in India grew annually at 19 percent two percentage points higher than its urban counterpart. In incremental terms, spending by rural India during these two years reached INR 3,750 billion (US$67 billion), significantly higher than the INR 2,994 billion (US$58 billion) spent by urbanites.20 Strong growth in rural consumption is expected to continue in 2013, as a result of across-the-board increases in country dwellers household incomes. Key contributing factors to rural income growth in 2013 will include increases in non-farm job opportunities and governmentinitiated employment generation schemes. Manufacturing in rural areas could create at least half a million jobs in rural areas. A paradigm shift in focus from relief work to integrated natural resource management in schemes such as the Mahatma Gandhi National Rural Employment Guarantee Scheme (MNREGS) may bring in a larger number of collective and productivity-enhancing ventures. For example, efficiency in rainwater harvesting, fallow-land cultivation and watershed projects could improve under MNREGS in the coming year. This will open doors to more sustainable and productive sources of income for many small farmers being currently bypassed.21 New programs, such as the cashtransfer scheme currently being piloted across 51 districts in 16 states, will also create savings for poor people by reducing the hidden transaction costs, such as transport, that recipients often face when trying to access and receive benefits. Under this initiative, government subsidies for 29 of 42 welfare schemes will be transferred directly into beneficiaries bank accounts. The electronic cash transfers will be based on the 12-digit unique identification number (Aadhaar). If implemented well, the program will enhance the efficiency of welfare schemes, because it will enable the government to reach out to identified beneficiaries and ensure that they receive the services and support owed them. Through this cash transfer program, the government plans to deposit INR 3.2 lakh crore (US$58 billion) in the bank accounts of 10 crore poor families by 2014. A meager 5 percent savings in the form of non-incurred transaction costs leaves about US$3 billion available as additional annual funds that needy people can spend or invest.

Business imperatives
Build a strategy for rural market entry and growth that leverages businesses existing footprint in traditional Indian consumer markets. Develop a corporate social responsibility (CSR) strategy that can help build infrastructure and relationships that have the potential to benefit future business initiatives. Invest in nascent technologies (such as GPS and context-based technologies) that can improve the efficiency of far-flung rural supply chains.

Domestic reforms will be critical to Indias global competitiveness


Reforms in late 2012 have helped renew global interest in the Indian economy. With much fanfare, the Indian government passed new measures to liberalize foreign investment in key sectors, such as retail.22 These reforms sent a loud and clear message to the international community: India is increasingly open for business. Even as Parliament debated the reforms before passing them, FDI in India more than doubled, rising to US$4.62 billion in September 2012, up from US$2.26 billion in August 2012.23 Signaling an appetite for reform and a more transparent regulatory environment will help promote international business confidence in India in the near term and in the countrys long-term prospects. Indeed, the global community continues to point to corruption and government bureaucracy as two of the top three challenges to doing business in India, according to the World Economic Forums 2012-2013 Annual Competitiveness Report.24 Sending the message that India is willing to address these key impediments would go a long way toward improving the countrys near-term prospects. Passing new reforms in contentious areas such as those involving natural resources could be difficult in the coming year, owing to electoral dynamics. Yet action can be taken towards promulgating reforms wherein substantive progress has already been made. For instance, states and the central government can collectively work to implement a goods and services tax, which could abolish additional layers of taxation during 2013. Similarly, the central ministries could work with the National Investment Board to expedite projects worth more than INR 1,000 crore by setting timelines for project approval for the relevant ministries. Moreover, business can help guide Indias next round of reforms and encourage foreign companies to capitalize on the countrys changing regulatory and business environment. Experienced Indian companies can help allay foreign reservations about pursuing opportunities in India. For instance, they could demonstrate to foreign partners the value of gaining a first-mover advantage in India, especially in untapped consumer markets.

Business imperatives
Encourage foreign confidence by supporting the quick implementation of new FDI rules. Partner with government to demonstrate commitment to a stable and transparent regulatory environment. Proactively engage foreign partners to make them aware of the new opportunities created by regulatory change in India.

Increased trade liberalization will set the stage for more balanced business growth
Unlike most Asian economies, Indias economic rise has been driven primarily by domestic consumption. However, an over-reliance on domestic consumption to fuel business or macroeconomic growth is risky. In fact, the Economist Intelligence Unit forecasts that because of structural shifts in the Indian economy, growth in domestic consumption is unlikely to return to the pre-2008 rate of above 20 percent.25 The stage is set for Indian businesses to accelerate their transition to a more diversified growth model in 2013 one based on a balance of domestic and foreign demand. In recent years, India has taken steps to deepen its integration with the global community, particularly in the area of trade. The country continues to lead major Asian economies in the number of established FTAs and is negotiating to expand trade agreements with large economies such as China and Canada.26 Perhaps most important for Indian enterprises, the country is aggressively liberalizing trade ties with high-growth neighboring economies in Southeast Asia and Africa. Take the FTA in goods between India and the Association of Southeast Asian Nations (ASEAN) that went into effect in 2011. Implementation of this agreement immediately boosted trade flows between India and the ASEAN by a staggering 41 percent in FY2011-12.27 With a new FTA in services and investments set to come on line in 2013, the nations globally competitive services industry stands to make substantive gains. The government anticipates that the deal may help increase trade with the ASEAN by 20 percent by 2015.28 In 2013, Indian businesses have the opportunity to position themselves for more balanced, long-term growth. The continued deepening of trade ties with high-growth neighboring economies, as well the potential for moderation in rupee volatility, all bode well for India Inc.s ability to pursue a global and diversified growth strategy in the coming year.

Business imperatives
Determine which capabilities will translate into a differentiated competitive position abroad. Assess regional mergers and acquisitions (M&A) targets for inorganic expansion into regional markets. Redesign operating models to position for global growth.

Spotlight
Can India capitalize on demographic change?

Indias favorable demographic profile is often cited as one of the countrys key economic strengths. Its estimated that the country will host the worlds largest working-age population by 2020, surpassing that of China. Perhaps more important, Indias ongoing demographic transformation could add as much as 2 percent to the countrys annual growth in per capita GDP over the next two decades, according to the IMF.29 However, realizing the full benefits of demographic change, including its potential to accelerate GDP and income growth, will not be easy. India already needs innovative solutions to expand critical aspects of its economy including education, healthcare and job creation to meet the nations current requirements. With a population that is expected to continue expanding through 2030, the pain of these existing shortcomings will only grow more acute if the necessary action is not taken now to address the nascent demands of demographic change.30 One step in the right direction is to begin addressing the finer points of demographic change in India. Business strategies and policy reforms must take into account the significant local variations in demographic profiles. At the state level, for instance, managing demographic change is not only about addressing the needs of a growing working-age population. Many states, especially in the south, are also set to experience a spike in the number of older dependents (individuals aged

over 60). By contrast, the majority of states in the north will continue to see an increase in the number of young dependents (persons under age 15) and an explosion in the number of individuals entering the workforce. As a result, solutions sensitive to local demographic shifts are now required from business and policymakers if India is translate its demographic advantage into economic growth. On the one hand, states with booming populations of young people would benefit by ensuring that this age cohort is productive and healthy. Improving pediatric healthcare would be a good place to start. Moreover, training programs must reach many people while also building the skills that businesses are hungry for. Gujarats ICreate (International Centre for Entrepreneurship and Technology) project is an example of this kind of initiative. ICreate is a world-class incubation center that seeks to provide an ecosystem for young entrepreneurs who want to develop new ideas and products through the use of technology. The project will be guided by leaders from academia and industry. The state government has also launched 20 superior technology centers to provide specialized industry-led training using state-of-the-art technology. Each center is related to a specific industry, such as automotive servicing and solar technology.31 On the other hand, growth and the competitiveness of Indian companies will also depend on how well the spike

in older populations is managed (see Figure 1). In fact, its estimated that India will host the worlds largest population of individuals aged over 65 by 2020, with disproportionate growth in the countrys older dependents occurring in southern states.32 Ensuring that these individuals remain a valuable part of the workforce will be critical for economic growth and business competitiveness. Older individuals who leave the workforce earlier on could place a heavy dependency burden on the countrys working population. Perhaps more important, many of Indias older workers are among the most able to provide Indias younger workers with critical on-the-job training. In this case, government and businesses can learn from their counterparts in European countries that have aging populations. For instance, a UKbased BMW plant implemented 70 process changes on its assembly line to accommodate its aging workforce. The result: productivity improved 7 percent, bringing it on par with assembly lines staffed by younger workers.33 In 2013, government, business and civil society need to collectively accelerate efforts to manage Indias demographic transition. To do so, they will have to continue developing and implementing localized strategies. And they will need to recognize that there is no one-size-fits-all solution to using Indias demographic transition to spur growth.

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Figure 1: Old-age dependency


Percentage of population aged over 60 (select states)

Kerala Tamil Nadu Himachal West Bengal Andhra Orissa Gujarat Maharashta Haryana Bihar Madhaya Pradesh Assam Uttar Pradesh 0 5 10 15 20

1971 2010 2026

Source: ADB Working Paper. Demographic Dividends for India: Evidence and Implications Based on National Transfer Accounts, December 2011

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Sector outlook
Automotive
Superbikes market to gear up
The demand for superbikes and luxury sports cars is expected to gain greater momentum in 2013. Highend automotive manufacturers have begun to test the market in recent years and are now looking to launch newer models to expand with the growing market. Austrian motorcycle maker KTMs partnership with Bajaj Auto could bring forth at least two new high-powered motorcycles in the 350cc range, one under each brand.34 Yamaha, having already launched a line of superbikes, will focus on consolidating its presence in the highpowered segment during 2013 and will update its existing models.

Government to slow Banking efforts to drive demand Rush of capital for hybrid cars injection into Public In mid-2012, as part of the National Electric Mobility Mission Plan 2020, Sector Unit (PSU) banks the Indian government formulated a
US$4 billion investment plan to boost production of electric and hybrid vehicles to meet its target of having 6 million electric vehicles on the market by 2020. While the government plans to contribute close to US$2.4 billion, auto companies will need to make up the remainder of the total. But the governments decision to invest in boosting supply in the coming year will no longer be complemented by efforts to drive demand for electric and hybrid vehicles. In April 2012, the government withdrew its plan to provide subsidies of US$2,500 per unit for electric and hybrid vehicle buyers.36 The central government has decided to fully invest the US$3 billion provisioned in the budget for the current fiscal year into public sector banks to meet the upcoming Basel III capital requirements.38 The three banks that need the most capital because of growing non-performing assets (NPAs) areIndian Overseas Bank, CentralBank of IndiaandBank of Maharashtra.

Improved transparency for better asset quality


Beginning January 1, 2013, it became mandatory for public and private banks to share information relating to credit, derivatives and un-hedged foreign currency exposures among themselves.39 The RBI believes that effective information sharing among banks before sanctioning of new loans or renewing of existing loans can help reduce the incidence of non-performing assets. In addition to information sharing, the RBI has proposed a joint lending mechanism for corporate debt that will help prevent borrowers from seeking multiple loans from different banks against inadequate collateral. Loans under the joint lending agreements are provided by a consortium of staterun banks, which in the case of loans that go bad, insulate individual banks from bearing the entire brunt of the non-performers.40

Car prices to rise across the board


In spite of volatile demand patterns, all major Indian car manufacturers plan to raise prices in 2013. Maruti has announced that it will increase prices across all its models. Prices could reach as high as US$360 for certain models. While Maruti has stated that currency fluctuations are the reason for the hike, General Motors has attributed the price hikes to a rise in input costs. Toyota, Honda and Volkswagen have also decided to increase prices on all their models by 1-3 percent.35

SUVs may continue on a strong growth trajectory


Sport utility vehicles (SUVs) constitute the only automotive segment that is continuing to grow at a furious pace in India. Forecasts suggest that the SUV segment will grow by almost 50 percent in 2013, after having expanded by 56 percent in the first half of 2012. Consumers are increasingly preferring SUVs for their high ground clearance and relative sense of security. The next year will see the launch of many more SUVs and multi-purpose vehicles (MPVs) such as the Ford EcoSport, Nissans version of the Renault Duster and Marutis XA Alpha.37

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New banking licenses to be awarded


The RBI last issued two new banking licenses back in 2002. It will most likely award new licenses in 2013 after the Parliament approves the Banking Laws Amendment Bill. According to the bills draft norms, new promoters will require a minimum capital of US$90 million to be eligible for licenses. Other than awarding new licenses, the amendment will give the RBI more power to regulate banks, raise voting rights for investors in banks and allow state-owned banks to raise capital through bonus and rights issues.41

Chemicals
Legislation may be simplified
The Indian chemical industry has had difficulty increasing its exports to the European Union over the past couple of years, owing to the new REACH legislation that governs and regulates the production and safe use of chemicals.43 With many Indian companies being unable to meet the REACH requirements, the Department of Chemicals and Petrochemicals drafted the National Chemical Policy 2012 to provide direction and guidance to the industry overall. The policy clearly states the need for integrated chemical legislation that will seek to replace the multitude of laws currently governing chemical production and use in India. The coming year could witness a greater effort by the government to unify many of these regulations.44

offloaded its textile, chemicals, paper specialties and emulsions businesses to US-based SK Capital for about US$550 million. Gulf Oil, a part of the Hinduja Group, acquired USbased specialty chemicals company Houghton International for US$1.05 billion in November 2012. This M&A trend will probably continue into the next year.45

R&D may see government push


Per the 12th Five Year Plan (which covers 2012-2017), the Indian government set out a six-point roadmap for enhancing the role of R&D in the chemicals sector. The roadmap calls for a chemical sector council for innovation, dedicated innovation centers in universities, an autonomous US$100 million chemicals innovation fund and an outreach program to include and involve innovators and researchers across the country in the national innovation program. The next year could see most of these action plans implemented.46

Innovations to promote inclusive banking


In 2013, Indian bank account holders will be able to access their accounts, transfer funds, check balances and request checkbooks by simply dialing *99# on their mobile phones. This new technology is available for even the most basic mobile handsets and is part of the governments financial inclusion program. The National Payment Corporation of India has already rolled out this service through public sector telecom service providers such as BSNL and MTNL for customers of 23 banks, and expects other private telecom providers to be included in the short term.42

Inorganic growth to intensify


With limited growth opportunities within the country and globally, Indian companies will sharpen their focus on M&A to expand and diversify their portfolios and to explore new markets. Inorganic growth will likely be an important strategic move for an industry saddled with rising input costs, stiff competition and a sluggish global economy. Indian companies are already actively exploring internal and foreign investment. For example, in December 2012, Clariant Chemicals

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Defense
Mega deals in the near-term pipeline
In December 2012, Indias Ministry of Defense cleared numerous large defense deals, promising many more in the pipeline. In the coming year, India and Israel will probably decide on multiple joint weapons development programs, including missiles, defense systems and radar systems. The next year may see India finalize a US$127 million contract to fit the Indian Navys indigenous aircraft carrier (currently under construction) with long-range surface-to-air missile systems. In addition to Israel, India already has many upcoming defense deals in the pipeline with the Ukraine, France, Singapore and Italy that may be finalized before the general elections.47

minority stake in Pipavav. Even the Japanese conglomerate Mitsubishi has expressed interest in acquiring a stake in Larsen and Toubros shipbuilding subsidiary.48

Education
Rush of investments in higher education
With the education sector opening up to 100 percent FDI, private education could witness a massive surge in new investments. Large business groups have already drafted plans for setting up universities across the country. The UK-based Vedanta Resources Group has been in talks with the Odisha state government to develop a Vedanta University that will spread across 6,000 acres and that will receive an estimated investment of more than US$3 billion. Reliance Industries is also planning to kick-start its Reliance University project and has identified 800 acres of land on the outskirts of Vadodara in Gujarat for setting up the infrastructure.49 Private equity players have also shown keen interest in the education sector, owing to the increased government spending and private players growth plans.

has decided to invest US$7.5 million in a development project in India up to 2020.51 The EU will provide technical assistance in skills development in India in exchange for employment and social policy support. Moreover, the Australian Council for Private Education and Training signed a memorandum of understanding with the National Skill Development Corporation to exchange information and perspectives on education, training and skills development.52 The government of Switzerland has also expressed interest in collaborating with the Maharashtra state government to help the latter bridge its skill gap at the middle organizational level.53

Deadline nearing on Right to Education Act


The Indian government has been unwavering in its decision to meet the March 2013 deadline for enforcing the Right to Education (RTE) Act. However, it might be extended by another two years to address infrastructural shortcomings. Several states, including Bihar and Uttar Pradesh, are lagging behind in meeting the deadline for implementation of the RTE law and are failing to achieve significant targets in requirements such as teacher-student ratio, school infrastructure and teacher qualifications.54

Shipbuilding to attract significant investment


The Indian government allowed PPPs in the defense sector back in 2011. Since then, the Mazagon Dock, Indias biggest naval shipyard, entered into a joint venture with shipbuilders Pipavav Defence & Offshore Engineering. Mazagon Dock has a pipeline of orders estimated at about US$18 billion, which includes manufacturing of six SSK Scorpene submarines (P75) under transfer of technology from French warship manufacturer DCNS. With the opening up of the defense sector to private investment, a host of domestic private players have entered the market while simultaneously attracting investment from multinational companies. DCNS has already decided to invest close to US$250 million in 2013, to buy a

Vocational skills development gains international interest


The governments 12th Five Year Plan clearly stated the intent to set up 1,500 new industrial training institutes and 5,000 skills development centers through a PPP model, the gradual implementation of which will begin in 2013.50 This decision has intensified international interest in Indias skills development sector. To illustrate, the European Union

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Fast-moving consumer goods (FMCG)


Industry majors bullish on strong growth
Despite fragile consumer demand, rising input costs and escalating inflation, the FMCG segment witnessed strong growth (15-20 percent) in 2012. All major players, including ITC, Hindustan Unilever, Dabur, Godrej and Marico, expect additional such growth in the new year. Godrej has decided to focus on the FMCG sector for the next decade, with an eye toward growing its consumer products business tenfold over the period.55 Robust rural consumption will continue to encourage big players to further explore Indias hinterland in search of new markets, channels and product innovations.

the sector does not mirror the return on investments or margins achieved by these firms. Some experts believe that these companies will require at least six to seven years to break even.57 Innovations such as cost optimization through warehouse and logistics management are expected to revolutionize the e-commerce market and enable companies to improve profit margins.

Direct selling guidelines coming


The Indian government is expected to provide guidelines on direct selling to help companies operate seamlessly and reduce the incidence of fraudulent schemes that victimize consumers. Direct sellingthe marketing and selling of products directly to consumers instead of through a fixed retail locationhas been present in India for more than a decade but has been out of the limelight. The Ministry of Corporate Affairs has assembled a committee responsible for drafting a regulatory framework for the direct marketing sector, and the final guidelines are expected during 2013.58 The industry will likely witness 20 percent year-onyear growth over the next few years.

expenditure to 2.5 percent of GDP by the end of the 12th Five Year Plan period, up from the existing 1.4 percent. In addition, the government has allocated US$18 million in the 2012-2013 budget for dispensing essential medicines for free in public health facilities.60 Healthcare major Apollo Hospital is adding 3,000 beds to its hospital chain in the next three years at an investment of US$327 million.61 Private equity funds quadrupled their investment in Indias primary healthcare sector in 2012, with Goldman Sachs, Warburg Pincus, Sequoia Capital and the Government of Singapore Investment Corp investing over US$520 million. In 2013, the interest in healthcare is only expected to rise, and experts forecast investment to surpass US$1 billion.62

Private sector investment to intensify in rural locations


Bangalore-based Narayana Hrudayalaya Hospitals, which currently has 14 facilities with 6,000 beds across seven states, is planning to invest close to US$900 million to set up a chain of 100 low-cost specialty hospitals in rural areas and at least three more cities in India. The low-cost hospital chain will constitute 30,000 beds added over the next five years.63 Eye-care chain Eye-Q, which currently operates 20 specialty eye hospitals, is expected to invest US$30 million into the construction of 80 new hospitals by 2015 as it looks to expand its presence across rural India. 64

Online shopping to become more customer-centric


Internet buying skyrocketed in 2012, with Indian consumers purchasing everything from diapers and books to houses and even groceries online. E-commerce revenues reached US$14 billion, with 2013 earnings expected to be even higher.56 Significant online discounts will continue to attract consumers, as will the ease of shopping, easier return policies and convenient navigation on websites and loyalty programs. While 52 e-commerce companies received over US$700 million of venture capital in 2012, the easy flow of money into

Healthcare
Government expenditure to incentivize private investment
The Indian healthcare market is set to enjoy about 20 percent year-onyear growth, reaching an estimated value of US$100 billion by 2015.59 Meanwhile, the Indian government has decided to increase health

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Medical tourism to maintain strong growth trajectory


Medical tourism is expected to intensify in India during 2013. According to a report by RNCOS, Indias share in the global medical tourism industry will reach around 3 percent by the end of the year. The segment could generate revenue of about US$3 billion by 2013, expanding at a compound annual growth rate (CAGR) of around 26 percent during 20112013. Even the number of medical tourists is expected to grow at a CAGR of over 19 percent during the same period, reaching 1.3 million by the end of 2013. Major domestic healthcare players such as Apollo and Fortis reportedly have obtained 10 percent of their revenues from the medical tourism segment.65

National optic fiber network ready for rollout


The governments US$4 billion national optic fiber network project, also known as the Bharat Broadband Project, is expected to roll out toward the end of 2013.67 The project aims to bring broadband services through fiber optic cables to 250,000 village panchayats as part of a last-mile connectivity initiative. Commercial testing is already under way in 61 village panchayats for the project, which will be executed as a publicprivate partnership. While companies such as BSNL, RailTel and PowerGrid will be responsible for laying out 2.5 million km of fiber throughout the country, private players will be able to sell services using the network.68 The project will serve as the backbone for a host of e-governance, telemedicine and e-education services delivered by private and government-owned content creators.

Government regulations to revive investment profile


The Planning Commissions US$1 trillion commitment to infrastructure projects for the 12th Five Year Plan period is already facing hurdles, with investors unwilling to bet on the sector. To overcome the low confidence levels, Indias government is exploring the possibility of modifying regulations and guidelines to attract investors. The government will set up a national investment board to monitor and advise ministries on expediting infrastructure projects in their respective industries, especially for projects with investments in excess of US$180 million. At present, more than 100 projects over this investment threshold have been delayed owing to regulations.72

Information Technology
IT exporters look east
Sluggish economic recovery in Indias traditional export markets such as the US and Western Europe have compelled Indian IT and IT enabled service (ITeS) providers to look east to other emerging economies. Exports to markets such Russia, the Philippines, some African countries and the Asia Pacific region are expected to grow steadily in the coming year. The Asia Pacific market is growing at 18 percent year-over-year and is expected to account for 8 percent of total IT-ITeS exports by the end of 2013. However, competition from countries such as China, Vietnam, Poland, Brazil and Egypt will present a tough challenge for India in these emerging markets, where it has yet to establish a strong presence.66

Infrastructure
Private sector interest in roads losing steam
Many road infrastructure projects under way in India were put on the back burner in 2012 owing to the general economic slowdown. The governments goal of building 20 kilometers (km) of highways per day hit a major roadblock when it was able to award contracts for only 1,100 km out of the targeted 8,800 km.69 Close to 50 different road infrastructure projects worth US$9 billion and totaling 5,000 km are up for sale in the secondary market, because the debt-ridden companies want to offload projects that they had won but are now finding tough to execute.70 Even prestigious projects such as the Golden Quadrilateral have experienced prolonged delays.71

Multi-brand retail to boost domestic infrastructure


The approval of FDI (for the purchase of majority stakes) in Indias multibrand retail sector may present a major opportunity for the construction and infrastructure sector. It is estimated that an investment of close to US$12 billion will be required to create robust back-end infrastructure such as warehouses and cold storage facilities. According to a government stipulation, 50 percent of FDI into multi-brand retail must be allocated to the creation of such back-end infrastructure and will thus drive infrastructure demand.73

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Media and Entertainment


Slow yet steady rise in FDI
The governments decision to raise the FDI ceiling to 74 percent from 49 percent in broadcast carriage services will boost Indias cable TV sector. In August 2012, the government approved an FDI proposal worth US$180 million from US entertainment giant The Walt Disney Company. Disney would bring in foreign equity for expansion of its existing business, in addition to making new downstream investments in other companies. Disney already has a stake in UTV, and will likely kick-start new projects in 2013 in segments such as media networks, parks and resorts, studio entertainment, consumer products and interactive media. Research suggests that the boost provided by fresh foreign investment will help the industry grow by almost 17 percent year-over-year, reaching an estimated US$32 billion by 2016.74

of urban subscribers and close to 40 percent of rural subscribers may have difficulty affording the service, and thus may be unable to bear the cost associated with migrating to digital cable TV.75

through joint studies in targeted areas. So far, ONGC has drilled four exploratory wells in the Damodar Basin, which may contain about 35 trillion cubic feet of gas, 8 trillion of which experts deem recoverable.79

Oil and gas


Gas gaining prominence
With gas demand expected to grow by 14 percent over the next five years, India aims to increase its liquefied natural gas (LNG) handling capacity to 50 million tons a year by 2017 from 13.5 million tons.76 While oil and gas account for 22 percent and 9 percent of Indias energy mix at present, respectively, the share of gas in the mix is expected to reach 20 percent by 2025. Many of Indias gas power plants are having difficulty satisfying the growing demand. As a result, the government is exploring the possibility of increasing imports of natural gas from countries like the US as well as Australia.77 Bharat Petroleum Corporation Ltd. plans to invest an additional US$8.2 billion during 20122017 to enhance its refining capacity and upstream operations. Having discovered significant gas reserves in Mozambique, BPCL is expected to set up two LNG plants, each with 5 million tons per annum capacity.78 Even the Gas Authority of India aims to increase its purchase of spot cargoes of LNG in 2013 from 16-17 to 25.

End of premium fuels


Premium fuels like Speed, Xtramile and Power marketed by the major oil companies saw demand plunge as prices rose in 2012. Because these products are categorized as branded fuels, the government refused to subsidize them and decided not to exempt them from the high excise duty. With sales drying up, companies may decide to scrap the production and sale of these premium branded fuels in 2013.80

Pharmaceuticals
Chronic disease drugs gaining share
With rising income levels in India, standard of living is also improving in urban and rural areas alike. But changing lifestyles are coming with a higher incidence of lifestyle-related, chronic diseases such as diabetes, heart attacks and cancer. The coming year will witness a rapid growth in such diseases as well as in the market for drugs developed to address them. In 2012, the acute therapeutic drug segment grew by almost 12 percent, while the chronic segment expanded by just over 20 percent.81 Chronic therapies now contribute 50 percent of US-based Lupins Indian revenues, up from about 33 percent five years ago.82

Digitization to include non-metros


Cable television digitization was partially implemented in three out of the four Indian metropolitan cities meeting the much-extended deadline of October 31, 2012. The Information and Broadcasting Ministry has set itself an aggressive target of March 2013 to achieve similar cable TV digitization in 38 additional cities with populations of more than 1 million. The third phase of this initiative seeks to digitize TV across the whole nation by the end of 2014. However, it is unlikely that these targets will be met, as estimates suggest that the number of cable TV subscribers will reach just over 60 million by 2015. More than 20 percent

Interest in shale rising rapidly


The state-owned Oil and Natural Gas Corporation (ONGC) will launch a technology partnership with US-based ConocoPhillips for the exploration of shale oil and gas resources in India. ONGC is in the early stages of shale gas exploration and is looking to cooperate with experts in exploration

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Cheaper generics to come


In 2011, drug patent expiries led to a global loss of market value totaling US$270 billion, and that number is expected to hit US$430 billion by 2016.83 India could benefit from the patent cliff, with its exports expected to reach US$25 billion by 20142015.84 But the Indian government has chosen to leverage the competence of Indian manufacturers in the generic drugs segment to provide consumers with access to affordable medicines. In December 2012, the National Pharmaceutical Pricing Policy declared that it would bring 348 essential drugs under price control.85 Moreover, the Ministry of Health launched a scheme that will give patients access to free generic drugs in all Indian hospitals by April 2013.86 The government has also ordered state governments to stop issuing licenses for the manufacture or sale of drugs on the basis of their brand name. Pharmaceutical companies will no longer be able to sell generic fixed dose combination drugs under their branded names, so these medicines will automatically come under price control. 87

companies into India. However, it will make the sector considerably less attractive for foreign investors. Moreover, buyers of Indian firms producing essential drugs will need to continue manufacturing the medicines after acquisition until the Competition Commission of India decides otherwise.88

Private companies participating in government schemes for rural penetration


Indian pharmaceutical companies such as Cipla, Ranbaxy, Dr. Reddys Labs and Lupin might soon be part of the governments ambitious Jan Aushadhi project, which aims to set up stores selling affordable generic drugs to low-income consumers. In an attempt to commercialize the project and meet growing demand, the government will seek to bulkprocure generic drugs from private sector players. As of 2012, there were 117 Jan Aushadhi stores across the country; the plan calls for expanding that number to at least 600 by 2014 and to 3,000 by the end of the 12th Five Year Plan period.89

increase to about 120 million tons by FY2013.91 The worlds largest coal miner, Coal India, recently signed 35 fuel supply agreements (FSA) that were pending for more than a year. These FSAs will help revive operations of many power units across the country that were facing severe input shortages. However, even Coal India will be unable to supply its customers solely through indigenous production; thus it will have to depend on imports to some extent. Imported coal will be supplied by Coal India on a cost-plus basis. This means that consumers will have to pay for the cost of imported coal plus any additional expenditures incurred by Coal India in handling the material.

Focus to sharpen on renewable energy


The central government wants to derive 15 percent of the countrys energy from renewable sources by 2020. The government proposes to create 30,000 megawatts (MW) of fresh generating capacity from renewable sources during the 12th Five Year Plan period, raising overall renewable power capacity to about 56,000 MW.92 Under the national tariff policy, Maharashtra made it mandatory for all power utilities in the state to procure 0.5 percent of their energy from solar projects annually from 2013 to 2016.93

Stringent FDI approvals to weaken international interest


Foreign investments in Indias pharmaceuticals sector will now require approval from the Foreign Investment Promotion Board, the government decided in December 2012. All foreign investments in existing domestic firms will be subject to clearance by the board, regardless of share of investment. The move intends to address concerns over the rising prices for essential drugs that came with the entry of multinational

Power
Coal shortage will continue to worry power companies
Despite numerous government initiatives to strengthen Indias power sector, the short supply of coal will continue to trouble domestic power companies. Estimates suggest that India will not be able to meet internal demand for coal through indigenous supplies until 2022.90 Moreover, the coal supply shortfall is projected to

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Grid interconnectedness to improve


Efforts are under way to improve the connections among Indias five regional power grids. The National Power Highway project will help link the five grids to facilitate smooth transfer of power capacity among them, allowing one grids surplus to plug anothers deficit. The project is set to be completed by 2014.94

and accountability norms and to fast-track dispute resolution in real estate transactions. However, the government has set no definite time frame for approval and implementation of the bill.96

Retail real estate to boom


The governments nod to FDI in multibrand retail will be a major driving factor for increased activity in the retail real estate segment in 2013. Major cities will see the addition of close to 9.5 million square feet of retail mall space in 2013, with Mumbai, NCR-Delhi, Bangalore and Chennai accounting for 70 percent of the total retail space absorption.97 Absorption rate is forecasted to reach 6.8 million square feet in 2013 and 7.1 million square feet in 2014, as mall developers work to meet global retail standards for design and dimension.

Real estate
Regulations to support growth of low-cost housing
In December 2012, the RBI permitted realty firms and housing finance companies to borrow up to US$1 billion through external commercial borrowing instruments to fund low-cost housing projects. Even slum rehabilitation projects will be eligible to raise such funds. The funds raised may be used to develop low-cost housing projects or to provide loans of up to US$45,000 to individuals who buy units priced at US$55,000 or less. The move seeks to incentivize the development of low-cost housing options for the economically disadvantaged. While international investors are excited about the prospects of investing in residential real estate in India, developers continue to feel apprehensive about the projects low margins.95

procurement requirement will have to be met with the first instance of FDI entry as an average of five years total value of the products purchased. The government believes that this stipulation will benefit small and medium-size enterprises (SMEs) and farmers by enabling them to sell directly to retailers. Yet the requirement seems to really be about pacifying the large voting block comprising small traders and farmers. This unusual procurement clause has already made foreign retail giants apprehensive about investing in India. In addition, at least 50 percent of total FDI brought in must be invested in back-end infrastructure needed for activities such as processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage and warehousing. This percentage must be achieved within three years of the first tranche of FDI, with a minimum of US$100 million brought in by the foreign investor. While this clause has excited Indias real estate and infrastructure sectors, it is already spawning further concerns among retail investors about high sunk costs and overall financial feasibility. Finally, Indias state governments have been given the authority to choose whether to allow FDI in their respective states. Moving forward, the FDI policy allows retailers to set up outlets with majority foreign investment only in cities with populations of more than 1 million. Although 53 cities meet this criterion, only 18 of those are in the 10 states and union territories that have agreed to permit FDI in multi-brand retail. Moreover, state governments continue to feel immense pressure from regional merchant associations to block entry of FDI into the multibrand retail sector.

Retail
FDI rules come with risks
In December 2012, the Parliament passed a bill allowing 51 percent FDI in Indias multi-brand retail sector, opening up the sector to international retail majors. While FDI in singlebrand retail was already permitted, outside investment in multi-brand retail has excited retail investors, consumers and real estate developers. However, a deeper look into the bill may dampen the mood.98 For one thing, the Department of Industrial Policy & Promotion says that 30 percent of the value of manufactured/processed products purchased by multi-brand retail giants should be sourced from Indian small industries, whose total investment in plant and machinery does not exceed US$1 million. The 30-percent

Implementation of Real Estate Regulation Bill still uncertain


The Indian government has drafted the Real Estate Regulation Bill, which is expected to provide a uniform regulatory environment to enforce disclosure, fair practice

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Telecommunications Regulations to simplify


National Telecom Policy may ease mobility but increase call charges
In May 2012, the government cleared National Telecom Policy (NTP) 2012, which abolishes roaming charges. Starting in 2013, mobile phone subscribers will be able to use the same number across the country without having to pay extra fees. The policy will be followed up by full mobile number portability, allowing users to retain their existing number if they change service providers across states. Telecom operators have responded to the new rules by saying that call rates may escalate in the coming year to make up for lost roaming charges. Roaming charges currently account for about 10 percent of the sectors revenues.99 The government expects the policy to help it reach its goal of increasing rural penetration of telecom services from 39 percent to about 70 percent by 2017, and to 100 percent by 2020.

operations

With the NTP 2012 gaining approval, telecom licenses have been uncoupled from the band spectrum made available to them. Operators will now be able to provide any kind of service based on any technology, removing earlier restrictions on usage of specific frequency bands for specific services. Starting in 2013, the government will also develop capabilities for online real-time submission and processing of license requests.100 The NTP 2012 replaces a 13-year-old policy from 1999.

4G services to be launched across the nation


Even as the 3G subscriber base is expected to continue growing in 2013, 4G LTE services will be launched across the country by numerous service providers, including Airtel, Reliance, Videocon and Aircel. Airtel already offers 4G services but only in the cities of Kolkata, Bangalore and Pune. In the coming year, Airtel plans to launch 4G services in New Delhi and Mumbai.

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Legal disclaimer This Report has been published for information and illustrative purposes only and is not intended to serve as advice of any nature whatsoever. The information contained and the references made in this Report are in good faith, neither Accenture nor any its directors, agents or employees give any warranty of accuracy (whether expressed or implied), nor accepts any liability as a result of reliance upon the content. This Report also contains certain information available in public domain, created and maintained by private and public organizations. Accenture does not control or guarantee the accuracy, relevance, timelines or completeness of such information. Project team Raghav Narsalay, Mamta Kapur, Ryan T. Coffey, Aarohi Sen, Smriti Mathur

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