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A REPORT

ON
Indian SMEs – Growth & Opportunities and
Recommendations for Future Financing Decisions in 5
Sectors where ICICI has Current Exposures
By
Hemant Kakkar
A REPORT
ON
Indian SMEs – Growth & Opportunities and
Recommendations for Future Financing Decisions in 5
Sectors where ICICI has Current Exposures
By:
Hemant Kakkar

Submitted in the partial fulfillment of the requirements of MBA Program of


ptu
COMPANY GUIDE
Mr. Amit Bhatia
FACULTY GUIDE
Mrs. Geetanjali Bhatnagar
Date of Submission:
AUTHORIZATION
This report is submitted in partial fulfillment of the requirement of MBA program of Punjab Technical
University,Jalandhar

Hemant Kakkar
ACKNOWLEDGEMENT
In order to complete a project like this, one needs intellectual nourishment,
professional help and constant encouragements from many quarters.
First of all, I would like to express my sincere gratitude to Mr. Amit Bhatia
(Chief Manager, ICICI Bank) for giving me the platform and opportunity to
do a project and providing me with an enriching experience, with the right
blend of theoretical as well as practical exposure. He has not only provided
me with his valuable inputs out of his experience but has also been a source
of inspiration throughout my association with the company.

providing me the necessary support at all the stages.

Last, but not the least,I would like to thank all others who,in one way or another
have helped me so much along the way

Hemant Kakkar

I would like to express my sincere gratitude to my faculty guide,Mrs.Geetanjali Bhatnagar for not only
facilitating me to take a meaningful project but also,
List of Tables
TABLE 1:SMES IN INDIA ................................................................................................................. 5
TABLE 2: MSES PERFORMANCE: UNITS, INVESTMENT, PRODUCTION, EMPLOYMENT & EXPORTS ................... 9
TABLE 3: COMPARATIVE GROWTH RATES .......................................................................................... 10
TABLE 4: CONTRIBUTION OF SMES IN THE GROSS DOMESTIC PRODUCT (GDP) ........................................ 10
TABLE 5: ROAD NETWORK IN INDIA ................................................................................................ 101
TABLE 6: HIGHWAY NETWORK IN INDIA .......................................................................................... 101

List of Figures
FIGURE 1: PRODUCTS OF MSES ........................................................................................................ 7
FIGURE 2: EMPLOYMENT IN MSE SECTOR ......................................................................................... 11
FIGURE 3: AUTOMOBILE COMPONENT INDUSTRY GROWTH ................................................................... 34
FIGURE 4: MAJOR EXPORT DESTINATIONS FOR THE INDIAN AUTOMOBILE COMPONENT INDUSTRY WITH THEIR
3RESPECTIVE MARKET SHARES ...............................................
..................................................... 7
FIGURE 5 : COMPONENTS OF AUTO COMPONENTS EXPORTS ................................................................. 37
FIGURE 6: TREND OF IT‐BPO EXPORT REVENUES OVER THE YEARS .......................................................... 52
FIGURE 7: IT INDUSTRY MARKET‐MIX DURING FY 2008 ........................................................................ 52
FIGURE 8: THE CHART SHOWS A RECOVERY AFTER Q2‐Q3 FY 10. .......................................................... 57
FIGURE 9: HIRING TRENDS: ............................................................................................................. 59
FIGURE 10: BPO REVENUES ........................................................................................................... 64
FIGURE 11: TYPES OF SERVICE PROVIDED BY A TYPICAL LOGISTICS SERVICES PROVIDER ................................. 73
Table of Contents
ABSTRACT ........................................................................................................................................................... 9
Introduction ..................................................................................................................................................... 10
PURPOSE ........................................................................................................................................................ 1
SCOPE ............................................................................................................................................................. 1
LIMITATIONS .................................................................................................................................................. 1
SOURCES ........................................................................................................................................................ 2
METHODS OF COLLECTING DATA ................................................................................................................... 2
REPORT ORGANISATION ................................................................................................................................. 2
Chapter 1: The Indian SME Sector ...................................................................................................................... 3
1.1 What are SMEs? ............................................................................................................................................ 4
1.2 Definition of SMEs in India ............................................................................................................................ 4
1.3 Importance of SMEs ...................................................................................................................................... 5
1.4 SMEs in the Global Scenario .......................................................................................................................... 6
1.5 The Indian Context ........................................................................................................................................ 7
1.5 PERFORMANCE OF SMESs ............................................................................................................................. 8
1.6 COMPARISON OF THE MSE SECTOR WITH THE OVERALL INDUSTRIAL SECTOR:........................................... 10
1.7 EMPLOYMENT IN MSE SECTOR ................................................................................................................... 11 .
1.8 Challenges Faced by SMEs ........................................................................................................................... 12
1.9 Impact of Recession on SMEs ...................................................................................................................... 16
1.10 Recent Government Policies and Measures .............................................................................................. 17
1.11 SME Policy Initiatives in 2009 .................................................................................................................... 19
1.12 Budget 2010 Implications on SMEs ........................................................................................................... 20
1.13 The Budget That Wasn’t ............................................................................................................................ 22
1.14 Recommendations .................................................................................................................................... 23
Chapter 2: The Bank Finance Products ............................................................................................................. 28
2.1 Introduction ................................................................................................................................................ 29
2.2 Fund Based Financing .................................................................................................................................. 29
2.3 Non Fund Based .......................................................................................................................................... 30
Chapter 3: The Automotive Component Industry ............................................................................................ 32
3.1 Introduction to Automotive Component Industry ....................................................................................... 33
3.2 Characteristics of the Automotive Components Industry ............................................................................ 33
3.3 Key Trends of Automotive Components Industry ........................................................................................ 39
3.4 Key Drivers of Automotive Components Industry ....................................................................................... 42 .
3.5 Key Inhibitors of Automotive Components Industry .................................................................................... 45
3.6 Impact of Global Economic Slowdown on Automotive Components Industry ............................................. 46
3.7 Budget 2010 Implications on Automotive Components Industry ................................................................ 47
3.8 Way Forward for Automotive Components Industry ................................................................................... 48
Chapter 4: The Information Technology Industry ............................................................................................ 50
4.1 Introduction to IT Industry .......................................................................................................................... 51
4.2 Characteristics of the IT Industry ................................................................................................................. 51
4.3 Key Trends of the IT Industry ....................................................................................................................... 53
4.4 Key Drivers of the IT Industry ...................................................................................................................... 54
4.5 Key Inhibitors of the IT Industry .................................................................................................................. 55
4.6 Impact of Global Economic Slowdown on the IT Industry ............................................................................ 56
4.7 Budget 2010 Implications on the IT Industry ............................................................................................... 59
4.8 Way forward ............................................................................................................................................... 60
Chapter 5: The Information Technology Enabled Services Industry ................................................................ 62 .
5.1 Introduction to the ITES Industry ................................................................................................................ 63
5.2 Characteristics of the ITES Industry ............................................................................................................. 64
5.3 Indian BPO Segments .................................................................................................................................. 65
5.4 Key Driversof the ITES Industry ................................................................................................................... 66
5.5 Impact of Global Economic Slowdown on the ITES Industry ........................................................................ 67
5.6 Way Forwardfor the ITES Industry ............................................................................................................... 68
Chapter 6: The Logistics Industry ..................................................................................................................... 69
6.1 Introduction to the Logistics Industry .......................................................................................................... 70
6.2 Industry Structure ....................................................................................................................................... 73
6.3 Characteristics of the Logistics Industry....................................................................................................... 74
6.4 Key Trends of the Logistics Industry ............................................................................................................ 79
6.5 Key Drivers of the Logistics Industry ............................................................................................................ 80
6.6 Key Inhibitors of the Logistics Industry ........................................................................................................ 82
6.7 Impact of Global Economic Slowdown on the Logistics Industry ................................................................. 84
6.8 Budget 2010 Implications on the Logistics Industry ..................................................................................... 85
6.9 Way Forward for the Logistics Industry ....................................................................................................... 85
Chapter 7: The Garments & Textiles Industry .................................................................................................. 87
7.1 Introduction to the Garments & Textiles Industry ....................................................................................... 88
7.2 Characteristics of the Garments & Textiles Industry .................................................................................... 89
7.3 Key Drivers of the Garments & Textiles Industry ......................................................................................... 92
7.4 Key Inhibitors of the Garments & Textiles Industry ..................................................................................... 94
7.5 Impact of Global Economic Meltdown ........................................................................................................ 96
7.6 Budget 2010 Implications on the Garments & Textiles Industry .................................................................. 97
7.7 Future Outlook for the Garments & Textiles Industry ................................................................................. 97 .
Chapter 8: The Road Industry ........................................................................................................................... 99
8.1 Introduction to the Road Industry ............................................................................................................. 100
8.2 Characteristics of the Road Industry .......................................................................................................... 101
8.3 Key Enablers of the Road Industry ............................................................................................................. 106
8.4 Key Inhibitors ............................................................................................................................................ 106
8.5 Budget 2010 Implications on the Road Industry ........................................................................................ 107
8.6 Way Forward for the Road Industry .......................................................................................................... 108

Attachments .........................................................................................................................
References............................................................................................................................
ABSTRACT

1 The project undertaken is subdivided into 3 phases which are:


1. Detailed analysis of Indian SMEs
2. Bank Financing SMEs – Products
3. Detailed Sector analysis of the following:
Infrastructure
Roads
Logistics
Land Transport
Textiles & Garment
Automotive Components
IT/ITES

Stage 1: Detailed analysis of Indian SMEs:


In this section the India SME sector is studied in detail under the following sub sections:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
What are SMEs?
Definition of SMEs in India
Importance of SMEs
SMEs in the Global Scenario
The Indian Context
Performance of SMEs
Comparison of the SME Sector with the Overall Industrial Sector
Employment in SME Sector
Challenges Faced by SMEs
Impact of Recession on SMEs
Recent Government Policies and Measures
SME Policy Initiatives in 2009
Budget 2010 Implications and SMEs
The Budget That Wasn’t
Recommendations
Stage 2: Bank Financing SMEs – Products
This is the second stage where an overview of the products through which financing is done
are studied briefly. This is done so as to when the live cases are studied, the kind of financing
instruments involved are understood.
This section is studied under the following subsections:
1.
2.
3.
Introduction
Fund Based Financing
Non Fund Based Financing
Stage 3: Detailed Sector analysis of the following: -
Infrastructure
Roads
Logistics
Land Transport
Textiles & Garment
Automotive Components
IT/ITES

This section is studied under the following subheads:


1.
2.
3.
4.
5.
6.
7.
8.
Introduction
Characteristics of the Industry
Key Trends
Key Drivers
Key Inhibitors
Impact of Global Economic Slowdown
Budget 2010 Implications
Way Forward
INTRODUCTION
PURPOSE
ICICI Bank is India’s largest private sector bank. In the SME space also it is the leader. The bank has
exposures in various sectors of which a subset of 5 sectors on which \a detailed analysis is carried out.
Analysis is useful for any reader who is dealing with the companies under these sectors as it would
provide him/her a detailed 360 degree view of almost all the aspects of the industry.
Post the sector analysis, a SWOT analysis has been done of live projects which would
provide an insight into the company for which this analysis is done, post which
recommendation as to what future course of action should be have been formed.
SCOPE
The scope of my study is up to 5 sectors for which a detailed analysis is carried out namely:
Infrastructure
Roads
Logistics
Land Transport
Textiles & Garment
Automotive Components
IT/ITES

LIMITATIONS



The study in an industrial analysis and has heavy reliance on data available on the
internet. Unavailability of updated data is a significant drawback.
Data regarding live projects is highly confidential for the bank due to which not
all important information important for complete analysis will be available.
India being a dynamic economy is ever revolving, the research and findings
would be impacted in case of major policy decisions post the completion of the
project.

Also no country in the world works in complete isolation, so external events shall
also impact similarly to internal changes.

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SOURCES
The report is on:
A. Industry Analysis

The data used for the first area of study have been obtained from secondary data sources
which include books, articles on websites, research papers published on net.

METHODS OF COLLECTING DATA


The sector study has been done by collecting literature material from various web
resources, company annual reports and industry research reports along with interactions
with the company officials.

REPORT ORGANISATION
The report begins with a study of study of the Indian SME’s and the latest government
policies and budget implications.
Next section gives an overview of the financial products used in financing SMEs.
The next section includes the five sector industry analysis where a preset flow of topics is is
adapted to each industry.

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Chapter 1: The Indian SME Sector
This chapter includes:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
What are SMEs?
Definition of SMEs in India
Importance of SMEs
SMEs in the Global Scenario
The Indian Context
Performance of SMEs
Comparison of the SME Sector with the Overall Industrial Sector
Employment in SME Sector
Challenges Faced by SMEs
Impact of Recession on SMEs
Recent Government Policies and Measures
SME Policy Initiatives in 2009
Budget 2010 Implications and SMEs
The Budget That Wasn’t
Recommendations

3|Page
What are SMEs?
Small and medium enterprises (also SMEs, small and medium businesses, SMBs, and variations
thereof) are companies whose headcount or turnover falls below certain limits.
The lack of a universal definition for SMEs is often considered to be an obstacle for business
studies and market research. Definitions in use today define thresholds in terms of employment,
turnover and assets. They also incorporate a reasonable amount of flexibility around year-to-year
changes in these measures so that a business qualifying as an SME in one year can have a
reasonable expectation of remaining an SME in the next. The thresholds themselves, however,
vary substantially between countries. As the SME thresholds dictate to some extent the provision
of government support, countries in which manufacturing and labor-intensive industries are
prioritized politically tend to opt for more relaxed thresholds.

Definition of SMEs in India


The MSMED Act 2006, which came into force w.e.f. 02/10/2006, defines the Micro, Small, and
Medium Enterprises. As per the Act, the activities are classified into Manufacturing and Service
Category. Initially, the MSMED Act 2006 had not defined the ‘Services Sector’ and RBI’s
guidelines were awaited. However, subsequently RBI has defined the services sector and the
activities that can be covered under the SME sector.
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The following chart indicates the threshold investment levels for both Manufacturing sector
(INVESTMENT IN PLANT & MACHINERY)* and Services sector (INVESTMENT IN
EQUIPMENT)* for the above three categories of Manufacturing and Services Enterprises:
Table 1: SMEs in INDIA
Enterprise
Micro Enterprise
Manufacturing
Not to Exceed
Rs. 25 Lakhs.
Rs.25 lakhs - Rs. 5
Crores.
Rs.5 Crore - Rs. 10
Crore.
Remarks
1. Separate threshold
investment limits
proposed by the Act for
Manufacturing andRs.10 lakhs - Rs. 2
Services Sectors.Crores.
2. Micro Enterprises
Rs. 2 Crore - Rs. 5
newly introduced under
Crore
both the sectors.
Services
Not to Exceed
Rs. 10 Lakhs.
Small Enterprise
Medium
Enterprise

Importance of SMEs
Small and medium-sized enterprises (SMEs) are the backbone of all economies and are a key
source of economic growth, dynamism and flexibility in advanced industrialized countries, as
well as in emerging and developing economies. SMEs constitute the dominant form of business
organization, accounting for over 95% and up to 99% of enterprises depending on the country.
They are responsible for between 60-70% net job creations in Developing countries. Small
businesses are particularly important for bringing innovative products or techniques to the
market. Microsoft may be a software giant today, but it started off in typical SME fashion, as a
dream developed by a young student with the help of family and friends. Only when Bill Gates
and his colleagues had a saleable product were they able to take it to the marketplace and look
for investment from more traditional sources.
The importance of SMEs can be summarized as follows:

Boosting industrial growth: By enhancing existing capacities, and by delivering cost-
efficient goods and services as per the requirements of the local markets, SMEs have been
driving industrial growth.
Inspiring Consumption and Social Change: SMEs play a defining role by offering
reasonable, yet revolutionary goods and services to cater to the changing market
requirements. Currently, SMEs have made its presence felt in areas like education, medical
care, transportation, entertainment and local infrastructure development.
Minuscule investment: SMEs need low capital investment, in terms of per unit of output
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Increased Employment Opportunities: SMEs generate both direct and indirect
employment opportunities, in 2006-07, for instance, for every ten million rupees invested by
the SME sector spawned employment opportunities for over 150 people. However, the same
amount of investment carried out by the overall economy generated employment for just 37.
4 people.
Fuelling the local economy: SMEs make use of natural resources and domestic skills to
cater to the domestic market. The growth of SME sector also helps in socio-economic
upliftment as it generates employment opportunities for untapped masses, living in urban and
rural regions.
Discourages migration to urban areas: SMEs are synonymous for entrepreneurship. And
the best part being setting up an SME doesn’t include much risk. If SMEs generate
employment opportunities in rural and semi-urban areas, migration to urban areas can be
stemmed to a great extent.
Transition from Agriculture Economy to Service-oriented one: SMEs can play a crucial
role in achieving the transition from a dominant agricultural economy to a service oriented
economy, akin to Japan. Japan’s agricultural workforce has gone done from 68 percent to 4.9
percent, in case of United States, from 44 percent to 9 percent.
Further, Indian agriculture sector can no longer generate extra employment opportunities to
meet the requirements of the ever-growing population. In such a situation, only SMEs can
come to the nation’s rescue.

SMEs in the Global Scenario


Even in the global scenario SMEs have always played a crucial role in their respective country's
economy. International comparisons reveal that SMEs create the majority of jobs.
In the USA, nearly half of the private workforce is employed in small firms, of which three-fifth
have less than five employees. In Japan, 78 percent of jobs are generated by SMEs.
The same sector in Korea accounts for 99 percent of all manufacturing enterprises and 69 percent
of employment in this sector. Therefore, SMEs must play a central role in the country’s
employment strategy. This will require modification of policies and programmes to level the
playing field, improve availability of credit, increase productivity, raise quality consciousness
and competitiveness, and enhance job quality.
Recent experiences of different countries in the context of globalization also demonstrate that
SMEs are better insulated from the pressures generated by the volatility of world trade and
capital markets. They are more resistant to the stresses, and more responsive to the demands of
the fast-changing technologies and entrepreneurial responses. Indeed, they are observed to be a
6|Page
very important vehicle for new technology adoption and entrepreneurial development. Ensuring
the competitiveness of the SMEs is important as it would help in overall growth of
manufacturing sector as also the national economy.

The Indian Context


The micro, small and medium enterprises (MSME) sector contributes significantly to the
manufacturing output, employment and exports of the country. It is estimated that in terms of
value, the sector accounts for about 45 per cent of the manufacturing output and 40 percent of the
total exports of the country. The sector is estimated to employ about 42 million persons in over
13 million units throughout the country. Further, this sector has consistently registered a higher
growth rate than the rest of the industrial sector. There are over 6000 products ranging from
traditional to high-tech items, which are being manufactured by the MSMEs in India. It is well
known that the MSMEs provide the maximum opportunities for both self employment and jobs
after agriculture.
Figure 1: Products of MSEs

Recognizing the contribution and potential of the sector, the definitions and coverage of the MSE
sector were broadened significantly under the Micro, Small and Medium Enterprises
Development (MSMED) Act, 2006 which recognized the concept of “enterprise” to include both
manufacturing and services sector besides, defining the medium enterprises. For collecting and
compiling the data for the MSME sector (including khadi, village and coir industries), the Fourth
All India Census of MSMEs with reference year 2006-07, is being conducted in the country. The
7|Page
Census will provide the first database on the MSME sector after the enactment of MSME
Development Act, 2006.

PERFORMANCE OF SMESs
As per the quick estimates of 4th All-India Census of MSMEs, the number of enterprises is
estimated to be about 26 million and these provide employment to an estimated 60 million
persons. Of the 26 million MSMEs, only 1.5 million are in the registered segment while the
remaining 24.5 million (94%) are in the unregistered segment. The State-wise distribution of
MSMEs show that more than 55% of these enterprises are in 6 States, namely, Uttar Pradesh,
Maharashtra, Tamil Nadu, West Bengal, Andhra Pradesh and Karnataka. Further, about 7% of
MSMEs are owned by women and more than 94% of the MSMEs are proprietorships or
partnerships. In view of the MSME sector’s role in the economic and social development of the
country, the Government has emphasized on its growth and development. It has taken various
measures/initiatives from time to time which have facilitated the sector’s ubiquitous growth.
No discussion on MSMEs can be complete without a full treatment of the unorganized sector in
which enterprises are typically established through own funds or funds obtained through non-
institutional sources, they lack managerial bandwidth, do not have established channels for
marketing and are centered around a single traditional technology. More than 94 per cent of
MSMEs are unregistered, with a large number established in the informal or unorganized sector.
The National Commission for Enterprises in the Unorganized Sector (NCEUS) defines
unorganized sector as enterprise employing less than 10 workers. It has estimated such
enterprises at 58 million with employment generated of 104 million persons. Of these, more than
half the workers are classified as ‘self-employed’. A large segment in this universe of self-
employed consists of those who are engaged in non-farm activities. This segment predominantly
consists of own account enterprises, i.e., where there are no hired workers and are run by self
with or without the help of unpaid family members. The own account enterprises can be
distinguished into those running within households and those outside the households. The
household enterprises operate on the basis of family labor – organizing production on its own,
acquire its own raw material, use its own machinery and tools and market its products. Apart
from own account enterprises, this segment also consists of enterprises having hired workers
between 2 to 9. Very often, these enterprises are located in clusters but function independently
without inter-firm linkages.
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The Office of the DC (MSME) provides estimates in respect of various performance parameters
relating to the Sector. The time series data in respect of the Sector on various economic
parameters are incorporated in the following Table: -
Table 2: MSEs Performance: Units, Investment, Production, And
Employment & Exports
* The figures in brackets show the % growth over the previous year.
** Projected

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COMPARISON OF THE MSE SECTOR
WITH THE OVERALL INDUSTRIAL
SECTOR:
The MSE sector has maintained a higher rate of growth vis-à-vis the overall industrial sector as
would be clear from the comparative growth rates of production for both the sectors during last
five years as incorporated in the Table given below: -
Table 3: Comparative Growth Rates
Table 4: Contribution of SMEs in the Gross Domestic Product (GDP)
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EMPLOYMENT IN MSE SECTOR
The total employment from the MSE sector (including SSSBEs) in the country as per the Third
All India Census of MSEs with reference Year 2001-02 was 249.33 lakh numbers. The units
operating with fixed premises are treated as MSEs. As per the estimates compiled for the year
2007-08, the employment was 322.28 lakh persons in the sector. The share of MSEs in the total
employment among units engaged in manufacturing and services is around 34.93%.
Figure 2: Employment In MSE Sector
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Challenges Faced by SMEs
Even today, small businesses in India are set up by first generation entrepreneurs. They often
have a product or service idea, some money, a zest to hard work but limited knowledge about
markets, Government or bank procedures, cash flows or how to manage labor. This is where
mentoring a hand holding support becomes crucial. At times, this comes from an individual such
as friend, relative, an NGO or a parent unit. This is episodic and unable to meet the vast
requirement which the country has. This is sought to be institutionalized through
extension/outreach efforts of central and state Governments. Trained manpower is made
available for this task, right down the district levels, to act as the friend, philosopher and guide.
These resource persons guide in setting up an evit, making it commercially viable, interacting
with financial institutions and understanding markets, as well as the impact of globalization with
advancements in it. There is a strong more towards linking SMEs with bigger commodity or
supply chain and providing acceptable quality and delivery schedules. The Central Government's
agency for the task, the Small Industry Development Organization, has accordingly moved away
from its pre-reform regulatory to a direct promotional role of hand holding, advocacy and
facilitation. This encompasses the legislative support put in place, fiscal incentives and
protection from unequal competition.
Credit
Credit is the lifeline of business. Small businesses lack access to capital and money markets.
Investors are unwilling to invest in proprietorships, partnerships or unlisted companies. As risk
perception about small businesses is high. So is the cost of capital, institutional credit, when
available, requires collateral which in turn makes the owner of the unit even more vulnerable to
foreclosure. Credit guarantee funds which assist lending institution in advancing loans or mutual
guarantee systems involving common guarantees from a group of people have not emerged in a
significant manner. Unit finances come under severe stress whenever an occasional event such as
a large order, rejection of consignment, and inordinate delay in payment occurs. The common
stereotype about a banker lending an umbrella in sunshine and wanting it back as soon as it rains
gets reinforced in their dealing with small enterprises. It is, therefore, not surprising, that small
enterprises prefer to first tap own resources or loans from friends and relatives and then look for
externalfinance.
In India, many of small manufacturing enterprises do not access bank finance and only about
16% of total bank credit finds its way to the sector. Despite being a priority sector for lending,
small manufacturing enterprises get just about 8% of their annual turnover as working capital
requirements, as against normative requirements of 20%. Even for this, cost of credit is high.
12 | P a g e
The problem is recognized and is sought to be addressed through various ways:






Establishment of ISO 9000 certified specialized SSI bank branches in districts/clusters.
Directive for working capital finance @ 20% of annual normative turnover.
Waiver of collateral requirements up to Rs. 0.5 million.
Setting up of a credit Guarantee Trust to cover loans up to Rs. 2.5 million.
Composite loans from a single agency up to Rs. 2.5 million.
A national equity fund for equity to SSI units at 5 percent service charge
Technology
As mentioned earlier, small enterprises are often regarded for their labor intensity and the
capability to work with local resources. In the part, this has often led to less emphasis on
technology. Run of the mill technology coupled with functional packaging and inadequate
finishing have at times led to small sector products being labeled as being of poor or substandard
quality. This has a cascading impact on competitiveness. As small enterprises realize the need to
link up with large ones, they are having a relook at technology options which would improve
productivity, effectiveness and competitiveness.
Market Access
In today’s world, small enterprises can hardly match the advertising support or distribution reach
of a large corporation. In India, small units sell best in limited or neighborhood markets or when
they are meeting a low volume specialized demand which no large player can effectively cater
to. Increasingly, now the endeavor is to build the marketing activity of small units around their
competitive advantage i.e., products which are labor intensive, items which cater to niche
markets, low volume high margin products, sub assembly tasks, outsourcing jobs and
ancillarisation. Sub-contracting exchanges are being established through Government and
Industry associations to promote such interface. After sales service for imported products, AMCs
on electronic equipment, reverse engineering (to the extent that it is WTO compatible) are the
other areas being encouraged, sophisticated marketing is a task best left to large players. Small
enterprises in India are realizing that the term “marketing” perhaps implies different things to
different people for new SME businesses; head on competition with established giants makes
little sense.
Infrastructure
Small units have traditionally operated from homes or a neighborhood work shed. Slowly, they
began moving out and clustering together wherever electricity, water, raw materials, markets or
labors were easier to access. Policy makers in India had anticipated the need for suitable
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infrastructure five decades ago and began a program for setting up industrial estates. Non-
assessment of economic viability, tardy implementation and poor maintenance due to drying up
of funds affected these adversely. Later in the post reform period, the problem was sought to be
addressed by setting up of such estates exclusively for small business. Almost 50 such estates
have been set up. Because of their better infrastructure such as roads, telecommunication, power,
effluent treatment plants, power, banks, watch & ward, and reasonable cost, they have proved to
be popular with small manufacturing for factory accommodation, allotment of sheds on hire
purchase as well as outright sale etc. A concerted move has also now been initiated for upgrading
existing estates.
Globalization
The globalization of trade & commerce has been given a push by agreements in the WTO and
changed the business environment. It has therefore become necessary to sensitize SMEs about
these changes and prepare them for the future. In India, a number of steps have been taken in this
regard. Apart from setting up a WTO cell in the nodal ministry, 28 sensitization workshops were
conducted across the country. Workshops have also been held on intellectual property rights and
bar coding. Monitoring of imports in specific sectors where SMEs have a significant presence
and initiation of anti-dumping action where dumping was noticed, are the other steps taken in
this respect.
Procedures
Government and bank procedures coupled with inspections remain a major hurdle in growth of
small units. There are over 60 central, state and local laws which regulate small businesses in the
areas of labor, factory maintenance environment, municipal bye laws, taxation, power etc. These
require the maintenance of as many as 116 registers and forms. To enforce these, there is an
army of inspector who visit units leading to harassment, delay, obstruction and increase in cost
of production. Many small units are one man shows and cannot satisfy the letter of the law. The
streamlining of such rules and regulations has become necessary if the creative genius of Indian
entrepreneurs is to be fully unleashed. Some state governments have exhibited initiative in this
regard. The Central Government has initiated a study to enact a single law for small businesses.
This enactment should ease the situation considerably.
Exit Mechanism
Like products, Industries too have life cycles. There are industry segments which have seen their
best days. Similarly, there are individual units where no amount of additional funds will help.
Their bank loans have become bad and non performing. A sound exit policy which also
safeguards labor interests has therefore, become necessary. It is anticipated that as of 1998, over
14 | P a g e
Rs. 3.8 billion were locked in sick/weak units. An exit policy would help fresh circulation of a
significant amount. The first steps in this regard have been taken recently by India’s central bank
where by one time settlement of dues as on 31 March, 1997 was allowed. The results have been
encouraging.
Strategy Interventions for Revitalization and Growth
Significant charges in economic environment are being heralded in by the WTO. The removal of
QRS has led to increased competition with imports. Many sectors of industry are facing
competition from Chinese or Taiwanese imports within the country or from Bangladesh, Sri
Lanka or Nepal in export markets. It is the belief of the Indian Government that promotion and
not protection is the answer to the issues of survival and growth. Thus, while reservation of items
for exclusive production continues, the focus must now be on strengthening capabilities. This
implies a holistic look at the concerns of industry. As part of this, the following strategic
interventions have been initiated
I.
II.
III.
IV.
V.
VI.
VII.
Easing access to general credit
Introduction of options of limited partnership and factoring
Subsiding cost of finance for upgrading technology
Industry specific technology up gradation programmes
Fund for developing and accessing overseas markets for export
Expanding reach of infrastructure programmes
Ushering in a regime of self certification in lien of inspections for various regulations
Interventions in the future require that hurdles to growth are removed. They must encourage a
seamless movement from small to medium to large. The Indian Government, therefore, is
working on a new vision for the SSI sector through a flexible approach and a motivated team.
The advocacy role of Government now involves new dimensions such as building up and
arguing cases before the world trade body or dispute redressal for a, articulating needs of small
enterprises before decision makers and other agencies. Credit is increasingly being made
available at international rates. Technology upgrades at both the cluster and the individual level
are being assisted. Cluster level technologies will be at Government cost with only user charges
recovered credit guarantee scheme has been put in place if our market has opened up to due to
WTO, we need to enable our small units established foot holds in new markets opened up for
then by globalization. Thus, along with improving quality, they are being given the opportunity
of over seas travel, conducting market surveys, test marketing etc. The existing industrial centres
are being revamped by involving industry associations with some government assistance and
finally a migration from sunset industries to sunrise industries is being encouraged through a
comprehensive and graceful exit policy, which balances interest of labor with those of the
owners.
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Conclusion
The singular contribution of SMEs is on account of their unique characteristics. Their role in
economic activity is manifest in both tangible and intangible ways. If this contribution is to be
sustained, then their uniqueness needs to be nurtured in an overt and explicit manner. The Indian
experience has shown that it is possible to design targeted interventions be they area specific like
clusters or be they sector / sub-sector or product-specific. Other countries, be they Asian or
OECD, also have policies which aim at similar support. The need of the hour is for us to learn
from each other, drawing upon experiences and identity" "best practice policies". These in turn
have to meet local conditions and circumstances. A "one size fits all" approach will not work.
Nevertheless, there can be no two opinions about the priority that SME policies deserve for
achieving the socio-economic goal of employment growth and social justice, along with the
individual "aspirations".

Impact of Recession on SMEs


MSME sector in any country including India comprises of almost 90 per cent of all the
enterprises. In India, MSME sector accounts for 40 per cent of exports, 45 per cent of the
industrial production and contribute 8 per cent to the GDP. This sector employs an estimated 31
million persons and has been growing at the rate of 12 per cent per annum. MSME sector of
India has felt the tremors of global crisis in varying manner.
The current meltdown of global financial and commodity markets begun with the fall of housing
markets in USA leading to collapse of the sub-prime market in August 2007. The problems later
on engulfed the entire financial and commodity markets throughout the world leading to a
serious liquidity crisis and most of the developed economies going into recession including USA,
UK, and Japan. It also led to slowdown in emerging economies like India and China as most of
their growth was either due to exports to developed markets like USA or due to foreign
investments. Fall of credit markets in US and Europe resulted in foreign investors pulling back
their investments leading to a sharp fall in equity indexes around the world.
Coupled with this the RBI followed a tight monetary policy by increasing the key rates like
Repo, reverse repo and CRR resulting into a serious liquidity crunch in the domestic markets.
The impact on MSME sector of the above can be understood as under:

Slowdown in key markets like USA, Europe and Japan resulted in decline in demand for
goods produced by export oriented enterprises hence directly affecting their revenues and
profitability.
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Due to overall increase in risk perception and liquidity crunch in the domestic markets
the cost of funds has increased considerably for the MSMEs to more than 15% now.
Many MSMEs did a lot of capacity building during the boom time, a significant amount
of which was financed by debt increasing the interest cost significantly. Such companies
faced liquidity pressures due to decrease in demand for their products and unavailability
of alternative sources of finance.
The big financial firms in US and Europe were the key clients of Indian BPO and KPO
industry. The collapse of big banks like Lehman Brothers, Bear Sterns etc. led to
immediate cut down of their business seriously affecting the outsourcing industry.
Export oriented auto ancillary manufacturers had been the worst affected due to fall in
demand of vehicles resulting as a result of high oil prices during the first 9 months of the
year and a general economic slowdown.
The first time we heard stories of distress in the most famous diamond cutting &
polishing industry in Surat & Navsari in Gujarat. Moradabad brassware industry that
contributes to almost one-third of all handicraft exports from India has also been facing
the distress like situation over the last two years, accentuated further by the recent
economic slowdown.
The other export oriented sectors dominated by small enterprises, particularly in the
readymade garments, textiles, leather and engineering have also faced considerable
downfall in the last few months of the financial year 2008-09.
The energy intensive sectors like foundry, ceramics, re-rolling of metals, electro plating
and food processing have faced high degree of turbulence thanks to high fluctuations of
crude prices and metal during the year.
For the month of February 2009 the export figure of India has hovered around 11 billion
US $ where as for the same month in the year 2008 it stood over 15 billion US $. The
story is similar for the other 5 months of the last financial year.

Recent Government Policies and


Measures
In addition to the growth potential of the sector and its critical role in the manufacturing and
value chains, the heterogeneity and the unorganized nature of the Indian MSMEs are important
aspects that need to be factored into policy making and program implementation. There is
considerable segmentation among the MSMEs in terms of their size and need tailor made
policies for each size class. The policies and programmes for the micro and small enterprises in
the sector would need to address their survival strategies and should be in the direction of
providing livelihood alternatives such as social security, skill formation and credit. On the other
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hand, policies/programmes for the larger sized MSMEs need to address issues relating to growth
marketing, access to raw material, credit, skill development and technology up gradation.
Some of the broad policy measures are:

A single comprehensive legislation for the promotion, development and enhancement of the
competitiveness of the MSME sector - Micro, Small and Medium Enterprises Development
(MSMED) Act, 2006 came into effect from October 2006.
National Manufacturing Competitiveness Council (NMCC) was set up to energize and
sustain the growth of the manufacturing industry.
Revised strategy of lending and introduction of newer measures, such as the scheme to
establish Small Enterprises Financial Centres (SEFC) for strategic alliance between branches
of banks and SIDBI located in 388 clusters identified by ministry of SSI.
Promotion and financial support for Credit-cum-Performance Rating in MSME sector in
India, to facilitate greater and easier flow of credit from the banking sector to SMEs.
The National Commission for Enterprises in the Unorganized Sector (NCEUS) has been set
up as an advisory body and a watchdog for the informal sector to bring about improvement in
the productivity of these enterprises for generation of large scale employment opportunities
on a sustainable basis, particularly in the rural areas.
Facilitation of technology transfer through the Technology Bureau for Small Enterprises
(TBSE)
Accelerating initiatives to address various developmental needs for MSMEs in the 11th Five
Year Plan.
“Scheme of Fund for Regeneration of Traditional Industries” [“SFURTI”]
Guarantee coverage under Credit Guarantee Fund for Small Enterprises expanded
substantially
Credit Linked Capital Subsidy Scheme for Technological Up gradation.
New legislation on Limited Liability Partnerships.
Emphasis on bi-lateral/ multi-lateral partnerships at multiple levels.
Merger of the Ministry of SSI with the Ministry of ARI.
Earmarked 40% of net bank credit of public and private sector banks for the priority sector,
which include SMEs.
Earmarked 32% of net bank credit of foreign banks for the priority sectors, of which 10% is
allocated to SMEs.













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SME Policy Initiatives in 2009
A continuous attention to ongoing schemes to assist MSME has demonstrated success in several
areas. However, the Ministry of MSME and other government departments are still working hard
to pull the sector out of the recession and overcome some inherent problems.
Several of the schemes started by the Ministry of Micro, Small and Medium Enterprises
(MSME) to promote the development of micro, small and medium enterprises in the country saw
success last fiscal year. This section outlines some progress areas in 2009 that have made a
positive impact on MSMEs, especially during the painful process of recovering from an
economic recession.
Better Credit Flow: The ‘Policy Package for Stepping up Credit to Small and Medium
Enterprises (SME)’ was set up by the government in August 2005 for doubling the credit flow to
the MSME sector within a period of five years. Credit flow from Public Sector Banks (PSBs) to
this sector has increased from Rs.67,634 crore at the end of March 2005 to Rs.1,91,307 crore at
theendofMarch2009.
Skill Development on Priority: Various measures like enhancing the training capabilities of the
Tool Rooms, MSME Development Institutes and other organizations under the Ministry of
MSME have helped to train nearly 2.61 lakh trainees during 2008-09. The target set for 2009-10
is to train 3.2 lakh persons, with several programs organized free of cost for the weaker sections
of society.
Success of Credit Guarantee Scheme: MSMEs are often unable to provide collateral as
security to procure loans. The government’s credit guarantee scheme has been rather successful
because of timely interventions to make the scheme more attractive to lenders and borrowers.
For instance, the loan limit was enhanced from Rs.25 lakh to Rs.100 lakh, the one-time
guarantee fee was reduced from 2.5% to 1.5%, etc. Success can be gauged from the data on
increased coverage. From about 40,000 proposals received (for loans of Rs.1000 crore) at the
end of March 2004, more than 2.27 lakh proposals (for loans of over Rs.8200 crore) at the end of
November 2009.
Capital Subsidy Spreads Coverage: Under the Credit Linked Capital Subsidy Scheme for
Micro and Small Enterprises (CLCSS), 15 per cent capital subsidy is provided on loan amounts
up to Rs. 100 lakh for technology up gradation. From the 47 products/sub-sectors with nearly
1400 well-approved technologies/machines for subsidy under the scheme, now 179 new
technologies machines for pharma sectors have been added to this list. Until October 2009, 7810
proposals of subsidy were approved and Rs. 338.68 crore was released to the MSEs under the
scheme.
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Quality Improvement on Priority: The ISO-9000/ISO-14001/HACCP Certification
Reimbursement Scheme is an incentive scheme to upgrade technology and improve quality that
provides for one time reimbursement of charges for acquiring ISO-9000/14001/HACCP (or its
equivalent) certification to the extent of 75% of the cost subject to a maximum of Rs. 75,000/- in
total. Decentralized in 2007, the scheme saw growing popularity in 2009, with about 690 units
amounting to Rs. 2.88 crore being reimbursed up to November 2009 during 2009-10.
Employment Generation: The Prime Minister’s Employment Generation Program (PMEGP)
was launched in August 2008 with a total plan outlay of Rs. 4735 crore including Rs. 250 crore
for backward and forward linkages. Around 38 lakh additional employment opportunities in the
terminal four years (2008-09 to 2011-12) of XI Plan are expected. The program provides
financial assistance to set up microenterprises costing up to Rs. 10 lakh in service sector and Rs.
25 lakh in manufacturing sector in the form of subsidy up to 25 per cent of the project cost in
rural areas and 15 per cent for urban areas. Until March 2009, 2,17,762 applications were
received under PMEGP, of which 83,454 candidates were selected. About 36,444 projects were
sanctioned financial assistance by banks for generating an estimated 3.64 lakh additional
employment. Loans were disbursed in 25,507 cases by banks giving employment opportunities
to about 2.55 lakh persons until 31st August 2009. About 4.5 lakh additional employments will
be generated in 2009-10.

Budget 2010 Implications on SMEs


The Small and Medium Entrepreneurs (SMEs) was benefitted in many aspects as the Union
Budget 2010 has given them several tax concessions and benefits. Though there still exists room
for improvement and many items of the SME wish-list did not find place in the Budget.
Tax Rates: From a direct income-tax rate perspective, the proposed reduction of surcharge for
Indian companies from 10% to 7.5% is a welcome initiative but provides only marginal
relief. The proposed increase in the basic rate of Minimum Alternate Tax (‘MAT’) on Book
Profits from 15% to 18% will put additional strain on small companies. The beneficial revision
of income-tax slabs for an individual will increase the take-home for an individual who carries
hisbusinessinproprietaryorpartnershipform.
Provisions relating to Limited Liability Partnership: The Limited Liability Partnership (LLP)
under the statute enacted in March 2009 is currently the most tax friendly form of business entity
for SMEs. This is because it stands protected from the levy of Dividend Distribution Tax and
Minimum Alternate Tax which are applicable to Companies. With the advent of LLP, several
20 | P a g e
small private limited companies desired to convert into LLP but did not so due in absence of
beneficial tax provisions. The Union Budget 2010 proposes to introduce several provisions to
grant tax neutrality to such conversion subject to certain basic conditions.
Income tax holidays: The SME Sector was expecting grant of tax holiday with respect to
support and services provided to IT / ITes Sector on the same lines as eligible to them for
exports. However, the sunset date of 31 March 2011 for the Tax Holiday for exports from STP
and EOU units itself has not been extended. This is likely to disappoint the IT / ITes Sector
including the SMEs who provide services or support thereto. Further, the competitive advantage
that India has so far which is already facing challenges from several other countries is likely to
undergofurtherstraininthisscenario.
Withholding taxes and deduction linked thereto: An expense would now be tax deductible so
long as the underlying taxes deducted at source in a financial year are deposited on or before the
relevant due date for filing of the return of income. It would be more beneficial if such provision
would have been retrospective in nature. This is a welcome provision though the corresponding
interest levied on belated payments is to be enhanced to 18% p.a. as against the current 12% p.a.
Credit Guarantee Scheme Enhancement: The credit support program of the MSME Ministry,
which runs the Credit Guarantee Fund Scheme, has got an additional budget of about Rs. 73
crore i.e. the planned expenditure under this program has gone up from Rs. 99.12 crore to Rs.
172.75 crore.
Other provisions:








Extension of packing credit interest subvention of 2% for another year,
Raising of Audit requirement limit from Rs. 40 lakh to Rs. 60 lakh, and for professionals
from Rs. 10 lakh to Rs. 15 lakh,
Exemption from capital gains on conversion from general partnership to limited liability
partnership,
A one-time grant of Rs. 200 crore to Tirupur Textile Sector,
Government initiative to give more banking licenses and extend banking service for the
under-banked and un-banked segments of the society,
Agreement signed with ADB for US$ 150 million to implement Khadi Udyog Reform,
Doubling of corpus of micro-finance development and equity fund from Rs. 200 crore to
Rs. 400 crore,
Allocation of Rs. 1000 crore to the National Social Security Fund for the employees of
the unorganized sector.
Despite some sporadic initiatives visible here or there in this budget, there clearly seems to be a
lack of a coherent approach towards a sustained development of the MSMEs.
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The Budget That Wasn’t
The Finance Minister has been considerate by giving attention to the SMEs by proposing relief /
rationalization but the Union Budget 2010 could have been more attractive for the SMEs, had it
given further incentives such as higher or rational tax depreciation on assets, progressive basis of
taxation like individuals and several such benefits.
• It was expected that the MSMEs would at least get a 50% reservation out of the total quota of
40% reservation of the priority sector lending.
• Internationally, in most of the developed/ developing countries, MSMEs get between 40%
and 60% of the banking loans, whereas in India, it languishes between 8 – 10%. This is the
biggest reason for MSMEs to not be able to grow, turn sick, or resort to taking money from
the parallel economy at much higher rates. There seems to be a lack of this understanding
despite the fact that the government has announced that a high-level national council will be
formed to oversee the implementation of the recommendations of Prime Minister’s Task
Force on the MSME sector.
• It is also very sad to see that while a small or medium farmer, who is also a businessman, is
extended huge benefits; the unorganized and micro enterprises in the country do not get the
same treatment, though they may need the support more than that farmer.
• The credit support program of the MSME Ministry, which runs the Credit Guarantee Fund
Scheme, has got an additional budget of about Rs. 73 crore i.e. the planned expenditure under
this program has gone up from Rs. 99.12 crore to Rs. 172.75 crore. Through this scheme, the
guarantee cover is provided for collateral-free credit facility, extended by Member Lending
Institutions (MLIs), to the new as well as existing small enterprises on loans of up to Rs. 1
crore. While the objective is laudable, the fact remains that MLIs really have no compulsion
or incentive to extend this facility to the needy small entrepreneurs, because in reality, the
Credit Guarantee Trust doesn’t move fast enough to settle the issues related to the bad-debts,
if any.
• The allocation to ‘Quality of technology support institutions and programs’ has been raised
from Rs. 251.64 crore to Rs. 333.50 crore. This may not be at all enough to upgrade the tool-
rooms and technical institutions of the 24 very important institutions and 4 programs that run
under this scheme, namely Credit Linked Capital Subsidy Scheme, ISO Reimbursement
Scheme, Schemes of National Manufacturing Competitiveness Program and Vertical Shaft
Brick Kiln technology. The conditions of the various tool rooms and technology centres
actually have to be seen to be believed. If machines have come, there are no specialists to
operate them; and if machines & specialists both are present, then there are no funds to run
these centres. Hence, the very purpose of the existence of these centres is defeated.
• The National Commission on the Enterprises in the unorganized and informal sector has zero
allocation in this year’s budget, though till last year, it had a Rs. 1 crore budget. The Rajiv
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Gandhi Udyami Mitra Yojna, which provides handholding assistance to designated nodal
agencies, namely Udyami Mitras, for providing handholding support to first-generation
entrepreneurs in dealing with various procedural and legal hurdles, has got an allocation of
just Rs. 7 crore
MSME Cluster Development Program, under which, special emphasis has been given to
comprehensive development of clusters, including infrastructural development has seen an
increase of about Rs 25 crore taking the total expenditure to Rs. 50.50 crore. But for a
country of our size, this may be spread too thin and too wide to really have any major impact.
The special scheme recommended by PM’s Task Force has got an allocation of just Rs. 1
crore in this year’s budget. It has a massive agenda for immediate action to provide relief and
incentives to MSMEs accompanied by institutional changes and detailing of programs in a
time-bound manner. In addition to this, it also has suggested setting up of appropriate legal
and regulatory structures to create a conducive environment for entrepreneurship and growth
of MSMEs. It also has a task of setting up a special fund exclusively for micro-enterprises,
and introduction of public procurement policy, which mandates government and PSUs to
reach a target of 20% purchases from MSMEs. How all this can be achieved with an
organization backed by Rs. 1 crore budget for the whole of 2010-11 is almost impossible to
understand.

Recommendations
To unleash the Indian manufacturing SME`s, on one hand we need to address the structural and
institutional weaknesses in the system and on another we will have to equip and provide them
assistance for bracing global competition unabashedly.
It is believed that manufacturing capabilities and exportability are inter-related and mutually
reinforcing. Sustainable competitiveness cannot be achieved only by provisioning of short term
measures such as currency manipulation or hedging or SWAPs. In medium and long term,
competitiveness could only be ensured by increasing productivity and reducing transaction costs
in economy.
There are some key exogenous and endogenous factors that stifle manufacturing growth and
limit exportability. Following are some of the recommendations to the SME groups which have
come out as a result of the analysis of the entire study.
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The measures suggested aim at improving the current situation of SME`s.
1. SME Audit of Laws
Constitute a mechanism whereby all laws and bills go through mandatory ‘SME Audit’
(on lines of US and EU) pre-empting negative fallout of existing and emerging
regulations.
On an average the accounting activities of the SME’s has been found to be fairly slow
since on an average it was found it takes around 50 days to prepare the balance sheet one
the annual account closes. This is primarily because the accounting activities are
primarily taken care by an external CA who seems to be overburden with all the financial
and accounting activities of the company. The SME’s can think of keeping a separate
small accounts team to manage the activities efficiently and quickly. It is recommended
that all companies should do budgeting for every year & have financial planning for
various functional areas for each year.
2. Labor Laws
Many states follow a flawed mechanism of determining Minimum Wages based on
sectors in which a worker is employed. Therefore, a worker in engineering sector is
entitled to a different rate than the one in food processing sector.
Nationally let there be a consensus on three issues:
a. Base minimum wages on rational criteria and not sectorally or specific to industry
(unlike the current situation in many states where a worker in Engineering sector is
entitled to a different rate than the one in food processing sector)
b. Allow Contract labor (as already in many states)
c. Provide an option to SMEs for using market based mechanism for ESI and PF and after
having contributed let them be freed from keeping records and unnecessary formalities.
(ESI in particular is one of the schemes where huge contribution goes waste in
dilapidated ESI infrastructure that nobody uses.)
3. Seamless movement of goods across states
Establish unified Regulatory Agency to ensure seamless movement of goods across
states.
4. Promotion of Innovation
There has been a shortage among most of the SME’ s in tracking and reporting important
factors like innovation .Innovation as perceived by most of the SME’s has been launching
of completely new products. However tracking and reporting internal innovation in terms
24 | P a g e
of cutting down cost does not seem to be a focus area of majority of the SME’ s. This
needs to be taken care.
5. Managing attrition
This seems to be an area that SME group does not lay much emphasis on. Although
SME’s have a lot of contract labors, there have been a significant number of permanent
employees who leave the companies. Hence there should be employee friendly policies
which would help SME’s retain employees for long.
6. Alternative Avenues to SME financing:
Highlighting the emergence of risk capital funds and equity funds for SME financing
compared to conventional borrowing, adding that there is a need to create more
alternative SME financing techniques for sustainable double digit growth. An SME
exchange with appropriate framework is needed, besides primary and secondary markets
for SME, simplification of NRI investment policy and the Foreign Exchange
Management Act, implementation of the MSMED Act and the enactment of Limited
Liability Partnership Act (LLP Act), emphasizing the need for increased FDI
participation in SME sector through removal of the 24 per cent cap on FDI investment in
companies according to present policy.
7. Improve Industrial infrastructure
a. Step-up building of hard infrastructure. Neither the current outlay and nor the
institutional and operational mechanisms are commensurate to address huge existing gaps
b. Urgently renew focus on creation of industrial areas with basic infrastructure – an area
now languishing for over 15 years because of lack of attention ( Creation of SEZs will
not improve SMEs’ plight)
8. Easy access of capital for less matured companies or start ups.
Induce massive competition in financial sector opening it up to foreign banks and lifting
restrictions unilaterally. Establish independent Regulatory Authority for Banks and
Finance Institutions to induce competition and improve service quality and let RBI
concentrate management of larger macro-economic issues. Deregulation of the Rating
Companies for better service codes, their rating models and pricing. Do not let
monopolies build in this domain.
9. Significant improvement in infrastructure needed especially power.
a. Improve access to economically priced and adequate Electricity
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b. Support collective SME initiatives for distribution of electricity in geographical
concentrations, industrial areas and clusters
c. Remove policy impediments in open access particularly levy of subsidy element on
collective initiatives
d. Accord top priority on providing electricity to manufacturing units (as has already been
done in a few states)
10. The creation of a “Single Window” facility
This takes care of all issues concerning water, electricity, labor, land etc and is fast
enough to respond to the needs of these SME’s. Take for instance the case of China,
where it takes two days to start a new business.
11. Provide Representation to SME bodies
Provide due representation to SMEs in Prime Minister’s Economic Council, Board of
Trade and other Trade related decision making bodies in Ministry of Commerce for better
appreciation of their needs in policy decisions (none of SME bodies are represented in
these committees).
12. Education and Skilled workforce
SMEs are suffering from acute skill shortages. Most ITIs have become redundant. The
recent ITI up gradation program is not SME need sensitive and is likely to have only
marginal impact.
a. Fund ‘district-wise skill deficiency mapping’ exercise and invite private parties to train
people, develop skills, get them third party rated and pay fee based on success. (There are
already successful initiatives at a few places particularly in Gujarat)
b. Fund Audio-visual and print aids for skill enhancement (on lines of US)
and create channels for continuous skill development coupling it with distance education.
c. Fund massive skill identification and grading program for those not having any formal
education but possessing requisite skills (on lines of recent UNDP sponsored program for
leather craftsmen in Agra wherein 62,000 skilled craftsmen were identified and graded on
skill level and ID cards issued to 47000 of them).
13. Taxes
Area based exemptions create huge disparities with in India. The current dispensation
rewards inefficient companies and punish efficient ones. SMEs suffer most in such
conditions.
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14. Bankruptcy and Insolvency Codes
Put in place the modern bankruptcy and insolvency codes reflecting the needs of ruthless
competitive markets and uncertainties in globalization so that while entrepreneurs are
encouraged to take risk, lenders are confident of quick disposal of cases and repossession
of assets after failure.
15. Stamp Duties
High stamp duties on transfer of property and on commercial transactions such as on
financial instruments create huge cascading effect. Harmonize the Stamp Duties across
states and drastically reduce them.
16. Comprehensive Program for Internationalization of SMEs
Many Indian SME`s are unaware of the brand creation. In today’s scenario this area
needs intensive attention and efforts so as to make Indian firms accepted world wide and
enhances its core competencies.
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Chapter 2: The Bank Finance
Products
This chapter includes:
1.
2.
3.
Introduction
Fund Based Financing
Non Fund Based Financing
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Introduction
Financing can be for working capital ( for ongoing business expenditure ) or term loans (for
capital expenditure). Working capital credit can further be segregated into fund based and non-
fund based . The terms Fund based limits and Non fund based limits are used in connection with
working capital requirements of a Company.
Fund based limits include those where actual funds are proposed to be given. Cash Credit or
overdrafts are the common examples of Fund-based Working Capital Credit Limits. Packing
credit or pre-shipment credit is an example of such Limits where credit is extended to the
exporters for purchasing raw materials/goods, processing and packaging for eventual export sale.
However the borrower has to submit an irrevocable letter of credit and/or a confirmed export
order for availing of Pre-Shipment Credit. Advance at pre-shipment stage is to be adjusted by
submitting export bills. Once the export bills are negotiated/purchased/discounted, pre-shipment
credit shall extinguish and post-shipment credit would commence. Non Fund based limits
include those arrangements where the fund is not actually provided to the borrower for use.
These are commercial documents guaranteeing payment by the bank to the beneficiary, who is
usually the seller of merchandise, against the underlying transaction.

Fund Based Financing


Under Fund based the following facilities are commonly used : -
•Cash credit: Cash credit refers to a system of financing where a borrower is provided a
credit limit, which could be utilized by him for the purpose of running day-to-day business. The
limits are decided based on his overall cash requirement of the business. The calculation is based
on the total operating cycle and gap between payment to be received and to be made. Cash credit
is used mostly for inland trade.
•Overdraft/Line-of-credit: overdraft allows you to draw funds beyond the available limit
of your bank account. The maximum amount you can overdraw is your line of credit. The terms
and amount depend on the relationship you have with your banker and his/her assessment of
your credit worthiness. Overdrafts are flexible and simple to operate. You pay interest only on
the amount you have overdrawn. Overdrafts are flexible and simple to operate. You pay interest
only on the amount you have overdrawn.
a) Packing credit or pre-shipment credit is an example of such Limits where credit is
extended to the exporters for purchasing raw materials/goods, processing and packaging for
eventual export sale. However the borrower has to submit an irrevocable letter of credit
and/or a confirmed export order for availing of Pre-Shipment Credit. Advance at pre-
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shipment stage is to be adjusted by submitting export bills. Once the export bills are
negotiated/purchased/discounted, pre-shipment credit shall extinguish and post-shipment
credit would commence.
b) Post shipment credit is provided after shipment of consignment and is adjustable usually on
realization of export bills. Such facilities are allowed by way of Foreign bills
Negotiation/Purchase/Discounting facilities(FDBP/FUDBP)2 or may be backed by
irrevocable Letters of Credit or might even have sub limits against confirmed export orders
or against book debts.

Non Fund Based


Under Non fund based limits the following are the commonly used arrangements:
•A bank guarantee, like a line of credit, guarantees a sum of money to a beneficiary.
Unlike a line of credit, the sum is only paid if the applicant, on whose behalf the guarantee has
been issued, does not fulfill the stipulated obligations under the contract. This can be used to
essentially insure a buyer or seller from loss or damage due to non-performance by the other
party in a contract. A bank guarantee might be used when a buyer obtains goods from a seller
then runs into cash flow difficulties and can't pay the seller. The bank would pay an agreed-upon
sum [as mentioned in the guarantee bond] to the seller. Similarly, if the supplier was unable to
provide the goods, the bank would then pay the purchaser the agreed-upon sum. Essentially, the
bank guarantee acts as a safety measure for the opposing party in a commercial transaction.
•Deferred payment guarantee: Typically in case of equipment financing, the
manufacturer (by itself/through a financing tie-up) offers credit to the buyers of its equipment at
attractive terms to generate additional demand for its products. The Deferred Payment Guarantee
(DPG) is a bank facility where the bank it extends a guarantee to the equipment manufacturer on
behalf of its client that the financing extended by the manufacturer (by himself or through its
preferred financier would be repaid as per the terms agreed upon.
•Commercial Letter of Credit: Letters of credit accomplish their purpose by substituting
the credit of the bank for that of the customer, for the purpose of facilitating trade. There are
basically two types: commercial and standby. The commercial letter of credit is the primary
payment mechanism for a transaction, whereas the standby letter of credit is a secondary
payment mechanism.
A commercial letter of credit is a contractual agreement between a bank, known as the issuing
bank, on behalf of one of its customers, authorizing another bank, known as the advising or
confirming bank, to make payment to the beneficiary. The issuing bank, on the request of its
customer, opens the letter of credit. The issuing bank makes a commitment to honor drawings
30 | P a g e
made under the credit. The beneficiary is normally the provider of goods and/or services.
Essentially, the issuing bank replaces the bank's customer as the payee.
There are also structured products used for financing .Some structured products are –

Factoring: It is a structured working capital finance solution that includes finance against the
client’s domestic or export receivables, collection of receivables on due date, credit
protection and credit advisory services. It allows the client to convert the accounts
receivables to cash thereby releasing the cash generation potential of the business.
Commercial Paper: (CP) is an unsecured money market instrument issued in the form of a
promissory note. Can be issued by corporates, Primary Dealers and the all-India financial
institutions (FIs) that have been permitted to raise short-term resources under the umbrella
limit fixed by the Reserve Bank of India are eligible to issue CP. Term loans on the other
hand are taken for expenses of a capital nature i.e. benefits from which are to be reaped on a
long term basis. Term loans are taken for buying machinery, land or for setting up new
projects.

31 | P a g e
Chapter 3: The Automotive
Component Industry
This chapter includes:
1.
2.
3.
4.
5.
6.
7.
8.
Introduction
Characteristics of the Industry
Key Trends
Key Drivers
Key Inhibitors
Impact of Global Economic Slowdown
Budget 2010 Implications
Way Forward
Review 2009-10
Increased off-take from OEMs and low base
led to revenue growth of 28 per cent in the
third quarter of 2009-10. Operating margins
improved by around 500 bps y-o-y on account
of lower raw material and fixed costs.
Outlook 2010
Auto component sales are expected to
increase by 13 -15 per cent in the fourth
quarter of 2009-10 on the back of improved
off-take from OEMs and stable replacement
demand. Operating margins are expected to
improve by 300 - 350 bps y-o-y in the fourth
quarter.
32 | P a g e
Introduction to Automotive Component
Industry
The Indian automobile component industry manufactures the entire range of parts required by
the automobile industry for various vehicles including cars, jeeps, light and heavy
commercial vehicles (LCVs and HCVs), tractors and two/three wheelers. The automobile
component industry is an important sector of the Indian economy and a major foreign
exchange earner for the country
The growth and maturity attained by the Indian automobile component industry is in line with
that of the automobile industry in India. The automobile industry is cyclical in nature and is
dependent on the growth of the economy and improvements in infrastructure. Factors like
increased public spending, favourable interest rates and general improvement in per capita
income lead to higher demand for automobiles. Although, the Indian automobile industry is
expected to grow at a measured pace, the automobile component industry in turn is rapidly
achieving global competitiveness, both in terms of cost and quality and is one of the handful
of industries where India has a distinct competitive advantage.
The history of the Indian automobile component industry can be subdivided into various
phases. In Phase I (1960-80) the Industry was predominantly a controlled, restricted and low
growth industry. In Phase II (1980-95) with the advent of Maruti, this industry changed to a
more quality focused, medium volume industry. Exports started growing although at a low
rate during this period. During Phase III (1995 onwards), the market opened globally. Yet in
this respect, unlike China where this opening up was planned and directed very carefully,
India has been different. The opening up of the sector has been haphazard and the
consequence has been the extreme fragmentation.1

Characteristics of the Automotive


Components Industry

Size and Rate of Growth
The Indian automobile component industry has grown from US$ 18 billion during the FY
2007-08 to approximately US$ 19 billion, in 2008-092. The industry is likely to grow up to
US$ 20 billion by FY 2009-10 and almost double to approximately US$ 40 billion by FY
2015-16.3
1
http://www.autopartsasia.com/Sep_inter_s.asp
http://www.google.co.in/search?hl=en&q=indian+automotive+industry+2009%2Bacma%2Bppt&meta=&aq=f&oq=
3
http://acmainfo.com/docmgr/Status_of_Auto_Industry/Status_Indian_Auto_Industry.pdf
2

33 | P a g e
Figure 3: Automobile Component Industry Growth4
The potential Compounded Annual Growth Rate (CAGR) of the Indian automobile
component industry has been anticipated to be at 11% during 2008-2015 5 . By 2016, the
industry is likely to contribute 10% of Gross Domestic Product (GDP) and 30-35% of the
industry.6

Structure
The Indian automobile component industry can be divided into organized and the
unorganized categories of manufacturers. The original equipment market is predominantly
catered for by the organized sector of the industry. The organized automobile component
manufacturers typically supply automobile components to at least one of the OEMs. They
also usually have access to technology due to their ties with foreign collaborators or through
Automotive Vehicle Manufacturers (AVMs). The unorganized sector, on the other hand,
predominantly caters to the aftermarket. They operate independently with little investment
4
5
http://acmainfo.com/docmgr/Status_of_Auto_Industry/Status_Indian_Auto_Industry.pdf
http://www.google.co.in/search?hl=en&q=indian+automotive+industry+2009%2Bacma%2Bppt&meta=&aq=f&oq=
6
7
www.acmainfo.com
http://www.indiacar.net/news/n28729.htm
6
http://ibef.org/artdisplay.aspx?cat_id=60&art_id=9077&in=2
6
http://www.ibef.org/download/Autocomponent_060109.pdf

34 | P a g e
and have a small scale of operation. Their primary focus is high volume and low technology
components. They generally produce components based on copied drawings and their quality
is sub-standard. These small-scale industries secure direct and indirect tax benefits through
favourable government policies. A sizeable amount of production of automobile components
comes from the unorganized sector.
According to the Automotive Components Manufacturers Association (ACMA), companies
with an annual turnover of less than Rs. 50 crore can be classified as Small and Medium
Enterprises (SMEs).
The majority of these units produce internationally competitive components. More and more
SMEs are now looking for foreign partners for technology, skills and to find a potential
market for their products. On a turnover basis, it is estimated that SMEs contribute around
20% of the total production in India and about 1% globally7

Sources of Demand8
The demand for automobile components is derived from three sources: the OEMs, the
replacement market and exports. Currently replacement demand accounts for close to 35% of
total demand, while OEMs account for 50%, with exports accounting for the balance 15%.9
The industry is on the fast track, clocking a CAGR of nearly 28% growth in the last four
years, and is expected to grow at 13% per annum over the next decade to reach around US$
130-159 billion by 2016. 10 This has been propelled by strong domestic demand and an
indigenization drive.
OEM demand: The pattern of growth in the automobile segment affects the performance of
the automobile component segment as the content of the components differs significantly
across vehicle categories. The demand emanating from the automobile segment could have a
significant bearing on the performance of the automobile component manufacturers
supplying this segment. In recent years, the principal drivers of demand for automobile
components from the OEM segment have been passenger cars and commercial vehicles. In
addition to the growth in production (on the strength of rising demand), increasing
indigenization levels of the manufacturing operations of most of the OEMs that have entered
the Indian market have also contributed to the growth in demand from OEMs.
Replacement demand: The automobile component supplier also caters to demand from the
replacement market. Historically, the replacement market provided higher margins to

http://www.ibef.org/download/Autocomponent_060109.pdf
7

35 | P a g e
vendors, but now the margins for vendors are declining as OEMs have increased their focus
to boost their spare sales. The replacement market is also characterized by the presence of a
large number of unorganized sector players who compete on prices. The five factors that
primarily influence the aggregate annual demand for replacement parts are:
Size of the national vehicle population;
Average age of the national vehicle population;
Pollution norms and Government regulations;
Average number of kilometres driven per vehicle; and
Roads and other related conditions.
Export demand: India is a significant exporter of automobile components. Exports of
automobile components from India have clocked a CAGR of 26% during 2003-2008 and the
potential CAGR is expected to be around 27% during 2008-201511.
Automobile components manufactured in India are mainly being exported to the US and
European markets, which have a high population of automobiles. Neighbouring countries in
South Asia are the next most significant export destination12. The major export destinations
for the Indian automobile component industry with their respective market shares are
depicted below13:
11
12
http://www.google.co.in/search?hl=en&q=indian+automotive+industry+2009%2Bacma%2Bppt&meta=&aq=f&oq=
http://ibef.org/artdisplay.aspx?cat_id=60&art_id=9077&in=2
13
http://acmainfo.com/docmgr/Status_of_Auto_Industry/Status_Indian_Auto_Industry.pdf

36 | P a g e
Figure 4: Major export destinations for the Indian automobile component industry with
their respective market shares
Exports are targeted at global OEMs, the replacement market and domestic OEMs who
export vehicles. Currently these exports largely cater to the replacement market, but this
share is declining.
The share of exports as a percentage of turnover has risen from 18.9% in 2003-04 to 20.1% in
2008-09. The composition of exports in terms of the proportion of OEM and aftermarket has
also undergone a sweeping change since the previous decade. The ratio of OEM to
aftermarket has changed from 35:65 in the 1990s to 75:25 in 2007.14
The composition of exports is shown in the figure below15:

Figure 5 : Components of Auto components Exports


While exports have been booming, there has been a sharp rise in imports of automobile
components as well, especially in the last few years. Imports of US$ 1,428 million in 2003-04
have gone up to US$ 6,360 million in 2008-0916. This is a healthy trend, indicative of rising
domestic demand.17
14
15
http://www.dnb.co.in/smes/overview.asp
http://acmainfo.com/docmgr/Status_of_Auto_Industry/Status_Indian_Auto_Industry.pdf
16
www.acmainfo.com
17
http://www.dnb.co.in/smes/overview.asp

37 | P a g e

Supply side
India has around 575 firms making branded automobile components, with another 6,30018 in
the unbranded space, mostly clustered near the vehicle manufacturing hubs in National
Capital Region (NCR), Pane-Mumbai and Chennai 19 . Thus, the Indian Automobile
Component Industry is highly fragmented geographically.
OEMs have neglected the aftermarket for a long period due to their focus on mainstream
products. This has led to proliferation of unorganized small-scale automobile component
manufacturers. Presently, these manufacturers have grown in size and numbers beyond the
control of OEMs. To counter this, OEMs are undertaking measures such as promotion of
genuine brands, customer awareness programs, partnerships with local mechanics, branding
of components and holographic packaging to protect against duplication.
Long controlled by families and limited to the home market, Indian firms are now looking
overseas for increasing market shares, economies of scale and to boost profitability by
attaining higher skill levels and a global customer base.

Tierisation
Globally, the automobile component industry is subject to a four-level tierisation:
Tier 0.5 suppliers: design and integrate components, sub-assemblies and systems into
modules placed directly by the supplier in the assembly plants of the OEMs.
Tier I manufacturers: assemble the final modular systems and supply directly to the OEM
or indirectly through Tier 0.5 suppliers
Tier II component manufacturers: supplies to Tier I manufacturers, assemble the sub-
systems that go into the assembling of the modular systems.
Tier III suppliers: supply to Tier II and Tier I players and make the components that go into
the assembly of sub-assemblies
Tierisation is the result of growing competition among the various automobile component
manufacturers which forced them to curtail manufacturing costs through tierisation. It helps
in reducing costs substantially by reducing the number of direct suppliers (i.e. purchase cost),
providing economies of scale to suppliers through large volumes, sharing design and
development costs of components, reducing time for vendor development, reducing capital
investment for assembling sub-systems etc.
The process of tierisation entails a greater inter-dependence between the two levels of the
industry. With the industry bending more towards integrated systems, component
18
19
http://www.ibef.org/download/Autocomponent_060109.pdf
http://ibef.org/artdisplay.aspx?cat_id=60&art_id=7335&in=2

38 | P a g e
manufacturers are increasingly called upon to be competent and raise their quality standards.
The efficiency of vehicle production is therefore crucially dependent on that of the supplier
base. With these changes, the supplier-buyer relations in the automobile industry are also
evolving in a more complex way.
With tierisation taking root, the Indian automobile component industry is expected to
transform itself from a low-volume fragmented sector into a highly competitive sector
marked by consolidation and world-class technology. Thus, a strategic shift is likely for the
industry players. Currently, the level of system integration and specialization in the Indian
industry is relatively low as compared with global industry standards. But as economies of
scale and systems integration become key determinants of success for automobile component
companies, size (of organization) will become a critical attribute. Accordingly, the Indian
Automobile Component industry can expect a wave of mergers and acquisitions, with the top
players consolidating their position as the rest are relegated to the Tier II and Tier III levels.
The challenges before global OEMs and Tier I players are pressure on sales and margins,
stringent regulations driving technology, discerning customer demand, shifts in global
markets and disintegration of global barriers. SMEs, that are broadly classified as Tier I and
Tier II companies, driven by productivity, cost and volume, are beginning to play an
increasingly important and supportive role to the Tier I companies, which are driven by
technology. However, being small players, it is a challenge for them to avoid issues like delay
in follow-up orders, inability to service large orders due to lack of scale and delay in
shipments.
The tierisation of the Indian Automobile Component industry is also likely to have a
considerable impact on the unorganized components sector. The weakest link in the
tierisation chain is the Tier III vendors. There aren’t enough of them in the market and those
who exist provide a poor quality of products.

Key Trends of Automotive Components


Industry
The key trends that have been witnessed in the Indian Automobile Component Industry are as
follows:
Outsourcing: Global vehicle manufacturers are facing pressures on account of imperatives to
launch newer models (as product lifecycles shorten) with additional features while
maintaining selling prices. Globally, OEMs have identified the potential for cost savings
through outsourcing to India, China and South East Asian countries among others. Global
OEMs such as General Motors, Volvo, and Tier-I companies such as Cummins and
Caterpillar have their global purchasing team present in India to source components are used
in their plants across the world. Additionally, some players have announced their plans to
increase the sourcing of components from Asia. While these exports offer higher volumes,

39 | P a g e
margins may be lower in various cases than domestic sales due to higher costs of logistics
and product liability insurance costs. According to recent estimates, global sourcing of
components from India is to reach up to US$ 33-40 billion by 2015 from the current size of
around US$ 15 billion20. Globally, according to a recent McKinney analysis, outsourcing in
the Automobile Component sector could be worth US$ 375 billion by 2015. India has the
potential to capture up to US$ 25 billion 21 of this total value to become the developing
world’s top sourcing base.22 India has also emerged as an outsourcing hub for automobile
parts for international companies such as Ford, General Motors, Daimler Chrysler AG,
Honda and Toyota23.
Relocating to India is likely to benefit SMEs as much as the larger companies. Skilled and
cheap labour, automation at lower cost and large investments in this sector are attracting
global OEMs to India on a large scale.
Preferred manufacturing base: In the last couple of years, many automobile manufacturers
have identified India as a manufacturing base for some of their models. The higher export of
vehicles increases the demand for domestic automobile components.
Increasing focus on productivity: The increasing pressure on the margins of OEMs has
translated into increasing pressure for the component manufacturers to deliver at lower cost.
This has forced component manufacturers to enhance productivity through various techniques
that include tear-down value analysis, lean manufacturing processes, and collaborative
research among others.
Rising quality consciousness: The average quality of automobile components produced in
India has been improving gradually, particularly during the past few years. Moreover, the
increasing focus of the Indian automobile component manufacturers to address the stringent
quality norms adhered to by global OEMs, has forced Indian companies to upgrade their
facilities. Additionally, improvement in end-of-line rejection rates and customer rejection
rates, the two measures of quality, point to the improved quality levels. According to an
ACMA-McKinsey study, 564 automobile component companies in India have ISO 9000
certification, 56 have QS 9000, 397 have TS-16949, 186 have ISO 14001 and 60 have
OHSAS 18001 certification. 24
SMEs: As mentioned earlier, according to ACMA, companies with an annual turnover of
less than Rs 50 crore can be classified as SMEs.25 A well-debated issue, the definition of
small and medium enterprises in India was very recently ratified. The Micro, Small and
Medium Enterprises Bill, 2006, defines the segment on the basis of investments in plant and
machinery. Small enterprises are those with an investment of not more than Rs 50 million in
20
21

http://www.ibef.org/download/Autocomponent_060109.pdf
www.acmainfo.com
22
http://www.ibef.org/artdisplay.aspx
23
www.ibef.org
24
www.acmainfo.com
25
http://www.ibef.org/artdisplay.aspx
plant and machinery, and medium enterprises are those with an investment of over Rs 50
million but less than Rs 100 million in plant and machinery. This definition has finally put
the segment within a legal framework.26
With India becoming the preferred destination for foreign OEMs, small scale units are set to
flourish even further, provided they are prepared to scale up their capacities while
maintaining high quality levels. With a majority of automobile component units functioning
at a turnover of less than Rs 50 crore, it is necessary that timely investments are made, for
which financing options should be enhanced. It is also necessary that quality levels are
improved, along with the much needed investments in R&D. In general, SMEs, due to lack of
funds, are not able to invest in R&D activities to develop techniques that are globally
competitive. Moreover, attracting the right skills has been a big problem with the small scale
sector. In recent years, the entry of large automotive companies has helped build the
necessary capacity and provide the financial strength to expand to a number of small
suppliers27.
On a turnover basis, it is estimated that SMEs contribute around 20% of total production.
North India, on the whole, is becoming a hub for auto component companies. And the fact
that nearly 35% of auto components exports are from this part of the country makes it an
increasingly important export hub in India 28 . The division of production processes and
outsourcing among global automobile manufacturers has led to a major reorganization of the
supply base within the automobile and auto component industry. This new business model
being followed by global companies holds tremendous potential for the growth of SMEs in
India.
The key limitations that the automobile component SMEs faces include:
Fluctuations in the cost of production; especially raw materials like steel,
aluminium, polymers etc.;
Poor negotiation powers due to the fragmented nature of the industry, which in turn
limits pricing power;
Dependence on traders and agents to access overseas markets which threatens their
competitiveness;
Product substitutes due to fast-changing technology; etc.
Addressing these challenges and risks will be crucial to promoting SMEs in the automobile
component industry. The Indian Government has initiated cluster-based development –
geographical concentration of enterprises having similar lines of business – which gives rise
to external economies and favours emergence of specialized technical, administrative and
26
27

http://www.dnb.co.in/smes/smes.asp
http://www.dnb.co.in/smes/smes.asp
28
http://www.ibef.org/artdisplay.aspx?cat_id=60&art_id=11199&in=3
financial services. This form of networking of small firms is a means of achieving economies
of scale. Extending this initiative further, the Government is encouraging banks to adopt a
cluster-based lending approach to ease availability of funds to SMEs.
Multinational automobile manufacturers like Magna International of Canada, Delphi and
Ford of US and some European companies have announced plans to enter the Indian markets.
This bodes well for the automobile component industry as it would enable the collective
development of automobile component SMEs. This will bring in better technology, skills,
new products and an assured market. Strategic links and contract manufacturing is another
way forward for SMEs in the automobile component industry.29
Plant locations in proximity to OEMs: In a bid to facilitate faster delivery and lower freight
charges, automobile component manufacturers are located largely around their OEM
customers. This is particularly so since a large number of organized sector players supply
directly to the OEM.
Indo-Thai Free Trade Agreement (FTA): The Indo-Thai FTA was signed by India and
Thailand in 2003. With the signing of the FTA, under the `Early Harvest Programme,' both
sides immediately reduced tariffs on 82 products (which included automobile components),
with the objective of reducing them finally to zero by 201030. These 82 items cover 7% of the
Indo-Thai trade31. The FTA was expected to boost Indo-Thai trade, especially with regard to
automobile component industries in the two countries. However, subsequent years have
shown there to be several factors holding back the Indian automobile component industry in
the context of the Indo-Thai FTA. These relate to high cost of production, higher import
duties, infrastructure service costs and a huge interest rate differential compared with
Thailand. These internal cost disadvantages are eroding the competitiveness of domestic
companies with respect to Thai imports. A comparison of the import duties on certain raw
materials in India and Thailand reveals that inputs such as glass parts and chemicals can be
imported duty free into Thailand but attract a 15% duty when imported into India 32 .
Nonetheless, the real impact of the FTA will be more apparent over the longer term.
Investments: Investments in the automobile component sector have grown from US$ 7.2bn
in 2007-08 to US$ 7.7bn in 2008-09.33 . Moreover, the Investment Commission has set a
target to attract Foreign Direct Investment (FDI) worth US$ 5 billion in the next few years.34

Key Drivers of Automotive Components


Industry
29
30
http://www.dnb.co.in/smes/smes.asp
http://www.hinduonnet.com/businessline/2003/08/07/stories/2003080702310400.htm
31
http://www.bilaterals.org/article.php3?id_article=1333
32
http://www.thehindubusinessline.com/2005/06/08/stories/2005060803010300.htm
33
www.acmainfo.com
34
www.ibef.org
The Indian automobile components industry enjoys competitive advantage primarily on the
strength of the following factors:
India has a highly skilled workforce and low labour costs which pull down the
total cost of production. This gives it an added advantage over the other
competitors.
The Indian automobile components industry has the advantage of the lowest
skilled labour cost in the world. Hence, the overall manufacturing costs for firms
in India are highly competitive in comparison to their western counterparts.
In-depth understanding of technical drawings and adoption of global automotive
standards (like American, Korean, Japanese and European) by the Indian players
has led to higher efficiencies and better quality.35
Sourcing parts from India is about 10-20% cheaper for American automobile
makers and about 50% cheaper for European makers. Such cost benefits have
played a major role in the fast pace development of this sector in India36.
Advantage doesn’t come from cost alone. It is about Full Service Supply (FSS)
capability. As product cycles and lead times for product development shrink,
Indian manufacturers have evolved from “build to print” to customized
offerings.37 The industry is capable of becoming a full-fledged service provider
(research, design, development, testing) to global OEMs and scores over
competitors like China and Thailand more in terms of Information Technology
advantages.
India has relatively less stringent environmental regulations (environmental
regulations have rendered the production of some parts like castings cost
prohibitive in developed countries).
Overseas acquisitions by Indian automobile component manufacturers in
situations that offer proximity to global OEMs have been growing. Benefits of
such acquisitions include multi-location manufacturing facilities, expansion of
product range, access to clients and to new technologies and progress in the value
chain of component supply.
The ability to adapt to low-volume production using appropriate technology and
automation and to improve productivity and quality strengthens the industry’s
position in the global arena.
35
36
www.acmainfo.com
http://in.rediff.com/money/2006/jun/06spec4.htm
37
www.ibef.org/industry/autocomponents.aspx
The industry’s competitive advantage coupled with brand consciousness is
increasing the attractiveness of India as an outsourcing hub and consequently is
increasing the focus on exports.
Better growth opportunities are expected to arise for OEMs due to the increasing
rush to add high-tech features to vehicles in order to distinguish them and to
comply with safety and emission regulations.
Compliance with higher emission norms has led to progress in technology, which
has established India’s capability in developing cleaner vehicles and components.
Using standards equivalent to European levels encourages export of Indian
products. Components such as catalytic converters, electronic fuel injection
devices and the design capability for developing cleaner combustion chambers
should soon attract the attention of private R&D centres and institutions for more
collaborative efforts.
India’s high designing and engineering capability is evident from statistics, which
rank India second in the world in terms of availability of skilled labour and first in
terms of availability of qualified engineers in comparison with six other countries,
namely Germany, Brazil, China, Mexico, Czech Republic and the US.
Government initiatives like automatic approval for foreign equity investment up to
100% for the manufacture of automobile components have been very beneficial
for the sector. Manufacturing and imports in this sector are free from licensing and
approvals. There is no local content regulation in the automobile industry. The
engineering export promotion council, under the aegis of the Ministry of
Commerce and Industry, Government of India, has been engaged in promoting
exports of engineering goods including auto parts. Some other government
initiatives that have been effected recently are:
Reduction in the duty of raw material to 8% from the earlier 10% so as to protect
vulnerable industries from global economic crisis.38
In the 2009 Budget, excise duty has been reduced from 16% to 12% on small cars, two and
three wheelers, from 24% to 14% on hybrid cars, from 8% to nil on electric cars and 16% to
nil on specified parts of electric cars. This has created positive market sentiment towards
automobile units, especially the ones having exposure to small car producers. The reduction
in peak customs duty levels from 10% to 5% on specified raw materials for the tyre industry
and a 125% weighted deduction for outsourced R&D should provide some relief to
automobile components producers.
Setting up of the National Automotive Testing and R&D Infrastructure Project (NATRIP) to
create state of the art testing, validation and R&D infrastructure in the country, which would
help in transferring technology from Tier I to Tier III cities. This project, with an investment

http://www.newmediacomm.com/publication/indo_us/julaug08/analysis.html
38
of US$ 380 million, aims to set up independent automotive centres at Manesar, Chennai,
Pune, Indore and Rae Bareily.39
Finalization of the Automotive Mission Plan (AMP) 2016 aims to increase turnover to US$
145 billion, export revenues to US$ 35 billion and provide employment for an additional 25
million people, thereby making India a preferred destination for design and manufacture of
automobile and automobile components.40

Key Inhibitors of Automotive


Components Industry
The key factors that inhibit the growth of the Indian Automobile Component Industry are as
follows:
Indian Automobile Component manufacturers are deprived of economies of scale,
as too many models are being produced in the market with comparatively lesser
demand. This makes it difficult for companies to invest extensively in R&D and
development. Simultaneously, with pressure on prices of components, the
automobile component manufacturers are not able to recover investments in new
equipment and technology.
The Indo-Thai FTA has hurt domestic players as they pay a relatively high duty as
compared to the duty being paid by their Asian counterparts. This has led to a huge
surge in imports from Thailand into India while exports from India have not
benefited so much, given the small size of the Thai market.
The Indian automobile component industry is marked by high transaction costs,
high infrastructure and power costs. This reduces the competitiveness of the
industry with respect to other competitors.
The industry also has inadequate facilities/technologies. This prohibits it from
undertaking large export orders. As such India cannot ignore competition from
other outsourcing destinations like China and Brazil. Raw material prices have been
going up over the past year. For instance, the price of lead, which constitutes 70%
of total cost for battery manufacturers, have been sky rocketing for the last year and
companies like Exide have not been able to pass on the entire cost pressure to the
consumer.41
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www.indiagov.com
41
http://in.rediff.com/money/2006/jun/06spec4.htm
Most international OEMs enforce a product liability clause, which stipulates that
suppliers will be charged punitive damages in case of a line stoppage or a product
recall caused by supply of defective components.
In the case of export contracts from international OEMs, the lead time from the
request for quotation until the time of commencement of actual supplies can be as
high as 3-4 years. This could prove disadvantageous for the sector.
Counterfeit products account for close to 35% with a market share of Rs. 5,300
crore of the current size of Rs. 16,000 crore of the automotive parts to the
replacement market.

Impact of Global Economic Slowdown


on Automotive Components Industry
The automobile industry is being severely affected by the liquidity crisis. What started off
with the commercial vehicle segment now afflicts almost all segments. With sales below
expectations, the collections of gross contribution (sales – truly variable costs) are not
adequate to pay for total periodic expenses like salaries, rent, etc. This cash crunch is further
compounded by the compulsion to pay for the raw material currently lying in finished goods
that have not been sold immediately (in the automaker’s own warehouse or at the
dealers/distributors). As a knee-jerk reaction, many companies are cutting back payments to
their suppliers. Payments more than two months overdue (on a credit period of two months),
compounded by the reluctance of banks to lend more to small companies; have pushed some
component suppliers to the brink of shutting down.
The severe working capital issues of suppliers are causing a boomerang effect back on the
OEMs. The suppliers are finding it difficult to supply for current (immediate sales) of the
OEMs. So we have OEMs stuck with huge finished goods inventory of some products which
are not selling fast and not having components for items which can sell immediately, further
hindering the flow of liquid assets.
Due to the higher risk of carrying high inventory in these uncertain times, distributors and
dealers are not accepting the push until they clear their current inventory. This and the current
huge piles of finished goods (more than two months) with automakers have pushed them to
cut production by 30–50 percent a month, which they are ensuring through block plant
closures.
Production cuts by customers amplify the production cuts at the suppliers even more, as the
suppliers also have finished goods. Suppliers give workers long breaks, which is a huge
business risk as they may not get them back when required, affecting both their business and
that of the OEMs. These are extraordinary times for the global auto industry. The Big Three
US automakers, GM, Ford and Chrysler are asking for US$ 34 billion from the US
government after presenting their restructuring plans to the US Congress.
In recent years, growth also accelerated in resource-rich economies such as the Middle East,
Russia and Brazil while India posted double-digit growth in 2006 and 2007. Although
worries associated with sub prime lending had started to surface in August 2007, even at the
beginning of 2008, there were few signs that the situation would escalate to the extent that it
has and that the global economy and the auto industry would fall into a synchronised global
slump.
While demand in the US and Western Europe was expected to be sluggish in 2008, demand
in emerging markets such as India and China was expected to show healthy growth, while
high oil and commodity prices were expected to underpin strong growth in Russia, the
Middle East and Brazil.
During the first three quarters of 2008, high energy and commodity prices were the major
cause for concern for countries that relied on oil and commodity imports while commodity
producing countries enjoyed an unprecedented boom. In this environment, the US saw high
fuel prices and an economic slowdown that triggered not only a slowdown in demand but
also a shift in demand from large petrol-guzzling SUVs and pick-up trucks to more fuel
efficient passenger cars. Initially, the major theme was segmentation shifts but as the year
progressed, the bigger concern was the collapse in demand for all vehicles.
In 2009, tight credit, the virtual disappearance of leasing, rising unemployment levels and
massive reduction in wealth will all combine to hit vehicle sales. The contraction of five
million units in the US light vehicle market between 2007 and 2009 means that companies
with high exposure to the US market are facing the biggest challenges.42

Budget 2010 Implications on


Automotive Components Industry
The proposals in Union Budget 2010-11 will not have a significant impact on the auto
component and tyre industries. The increase in excise duty on auto components could be
passed on to automobile manufacturers. Even if this is absorbed by the industry, it will be
offset by healthy demand. The interest subvention of 2 per cent will have a marginally
positive impact for SMEs engaged in the export of auto components. For the tyres industry,
the 2 per cent increase in excise duty will be fully passed on to the OEM and replacement
segments.
The auto parts industry had sought a 10-billion-rupee technology development fund, besides
tax holidays for new projects and an increase in customs duties on imported components to
42
http://www.autocarpro.in/contents/marketTrendDetails.aspx?MarketTrendID=35
10 percent from 7.5 percent. Tyre makers were hoping for a steep cut in customs duty on
natural rubber.
However, these demands were not addressed in the budget.

Way Forward for Automotive


Components Industry
The Indian Automobile Component industry as a whole has the potential to grow from US$
35 billion presently to US$ 145 billion in the next seven years while exports are expected to
grow to as much as US$ 35 billion43. Furthermore, exports as a percentage of total sector
revenue are expected to nearly double over the next few years. To meet the combined
demand from domestic and international customers, the industry will have to make
incremental investment. ACMA has forecasted that the industry will invest close to US$ 20
billion by 2015-16 to expand, which translates into a CAGR of 13.6% in investment44.
The industry is expected to witness healthy growth in sales on the strength of strong growth
in exports. However, while the export growth potential remains significant, the ability of
automobile component players to capitalize on their strengths and overcome challenges
assumes greater importance. The recent overseas acquisitions by automobile component
companies will allow diversification of revenues, thus reducing exposure to cyclicality in
domestic market and lending an increased access to new customers and technologies.
The Indian Automobile Component Industry needs to put in considerable efforts and incur
substantial expenditure in order to tackle the high degree of competitive pressure and
accordingly align itself with global standards. This might, in the short run, put additional
pressure on margins, which even presently are small.
Innovation and cost pruning hold the key to meeting the global challenge of rising demand
from developed countries and competition from other emerging economies. Several large
Indian automobile component manufacturers are already gearing to this new reality and are in
the process of substantially investing in capacity expansion, establishing partnerships in India
and abroad, acquiring companies overseas and setting up Greenfield ventures, R&D facilities
and design capabilities.
The trend of domestic automobile component manufacturers acquiring companies abroad is
indicative of the changing business environment in the country. Top automobile component
manufacturers are gearing up to take bigger risks. Their cross-border vision has established
them as global companies. Though the going-global phenomenon is limited to a handful of
43
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www.acmainfo.com
companies, the smaller companies are also indirectly gearing to this trend by entering into
formal manufacturing contracts and specialization.45
The Government of India is drawing up an Automotive Mission Plan 2016 (AMP 2016) that
aims to make India a global automotive hub. To maintain the high rate of growth of the
automobile industry and to retain the attractiveness of the Indian market and further
enhancing the competitiveness of Indian companies, the Government has prepared this ten-
year AMP. The idea is to draw a futuristic plan of action with full participation of the
stakeholders and to implement it to meet the challenges coming in the way of growth of
industry. Through this AMP, Government also wants to provide a level playing field to the
players in the sector and to lay a predictable future direction of growth to enable
manufacturers to make more informed investment decisions.46
The industry is transforming, and the boost in demand will see the emergence of several new
players in the industry. The vast market for automobile components, and the diverse products
and technology involved ensures a place and role for many. At the same time, the entry of
several global automobile manufacturers will bring in more regulation into the industry and
see a pruning of the spurious market. Among the smaller players in the unorganized segment,
this implies moving away from being standalone companies, to entering into either contract
manufacturing or being ancillary units. The newly defined rules that hold the key to success
in the automobile component industry are specialization, development.
45
46

http://www.dnb.co.in/smes/overview.asp
http://www.indiainbusiness.nic.in/industry-infrastructure/industrial-sectors/automobile.htm
Logistics, as defined by the Council of Logistics Management, is "the process of planning,
implementing, and controlling the efficient, effective flow and storage of goods, services, and
related information from point of origin to point of consumption for the purpose of
conforming to customer requirements."
Logistics primarily involves transportation, warehousing, order processing, inventory control,
and material handling activities of goods and services.61
With business organizations increasingly looking to use logistics services at some point or the
other in their routine business, the importance of logistics is increasingly being emphasized.
For instance, manufacturers need to move input materials from their origins to their plants
and then distribute the finished product to their clients. Apart from this, they also have to
meet requirements such as storage of input materials and products during the process.
There are several current trends in the management of logistics. The principal trend, driven
by competitive pressures and client needs, and enabled mainly by information technology, is
to combine and streamline various logistics activities, such as purchasing, storage and
transportation. This trend is occurring both within organisations that handle their own
logistics requirements in-house, and within the operations of logistics services providers. For
example, trucking firms often offer storage, packaging and other related services.
Consequently, as traditional service providers continue to increase their lines of business,
they tend to join the Third Party Logistics (‘3PL’) component by becoming capable of
offering seamless or integrated services tailored to meet the exact needs of clients. A 3PL
service provider is one that manages all or a significant part of the logistics requirements of
manufacturers and traders, performing tasks which include transportation, location and
product consolidation activities, on an outsourced basis.
The evolution of 3PLs came to India in the recent past. It has gradually evolved from the
stage where the Indian firms outsourced their labour requirements, in order to avoid
problems. Subsequently, basic services such as transportation and warehousing began to be
outsourced as well. In most of the cases, these services were outsourced to different service
providers that were essentially 2PLs, i.e., process or functional specialists. With the
increasing demand, the service providers started offering integrated services plus other value-
added services that could help organizations to streamline their supply chains. This, coupled
with competition from multinationals has forced the logistics service providers to transform
themselves from mere transportation providers to value-added service providers.
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50 | P a g e

INTRODUCTION TO LOGISTICS INDUSTRY


Inhouse
Logistics
Outsourcin
g
Transporta
3PL
With the increasing demand, the service providers started offering integrated services plus
other value added services that could help organizations to streamline their supply chain.
This coupled with competition faced from multinationals has forced the logistics service
providers to transform themselves from mere transportation providers to value added service
providers.
The 4th party logistics (‘4PL’) services provider is a supply chain integrator that assembles
and manages the resources capabilities and technology of its own organisation with those of
complementary service provider to deliver a comprehensive supply chain solution. 4PL is
emerging as a path to achieve more than the one time operating cost technology for their
clients in order to allow their clients to totally outsource their logistics management activity.
The 4PLs do not compete with 3PLs as they have superior expertise in their respective fields
by virtue of their investment and specialisation. 4PL providers do not own assets for
transportation or warehousing, but rather leverage the solutions created by 3PL providers.
4PLs are still at a nascent stage and the concept has not taken its root in India as yet. 4PL
services are knowledge oriented and require integrating the best possible and cost effective
logistics solutions for customers. With the integration of global markets and new trade
regimes, this concept offers new vistas of opportunities in the logistics arena.
Apart from the vast infrastructure, which is critical to the industry, logistics is also a
complicated interplay amongst the components of this infrastructure. This interplay is what
constitutes the soft assets of logistics service providers, and is highly critical to the success of
the venture.62
According to the US Council of Logistics Management, “Logistics is one of those parts of the
supply chain process that plans and implements, and controls the efficient, effective, forward
and reverse flow and storage of goods, services and related information between the point of
origin and point of consumption in order to meet customer satisfaction”.
The global logistics industry has come to fruition due to the increasing need for businesses
across various sectors to delegate some of their non-core functions to external agencies that
would specialize in a specific core function. The activity of farming out non-core activities to
external agencies has come to be called ‘outsourcing’. The companies are then able to focus
on their core activities, resulting in empirically large cost reductions.
62
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51 | P a g e
The road freight industry in India is worth about INR 1.42 trillion and is growing at about 6-8
percent year on year. Manpower spends amount to only about 4 percent of sales as against the
overall sector average of 8-10 percent. The industry has traditionally been extremely
fragmented - almost 75 percent of the trucking 'companies' are single truck operators and
almost 90 percent of trucking companies have a turnover of less than INR 10 million
A majority of players in this industry have been small entrepreneurs running family owned
businesses. Given their small scale and limited investment capability, most of their
investments have been focused on short term gains - direct and immediate impact on the top
line / bottom line of the business being the key decision criterion. As a result, investments
that pay off in the longer term, such as those in manpower development, have been minimal
historically. Also, these businesses are typically tightly controlled by the proprietor and his /
her family and as such, making it unattractive for professionals. Poor working conditions, low
pay scales relative to alternate careers, poor or non-existent manpower policies and
prevalence of unscrupulous practices have added to the segment's woes creating the image of
a segment that holds few attractions for those seeking employment.
While industry players have been incapable of investing in manpower development, the
government has also not focused sufficiently on the same. There exist very few formal
training institutions for driver training and practically none for operational training on
associated areas like loading / unloading supervisory, proper handling practices etc.
The result has been that in the current scenario, there exist gaps in core technical skills of the
existing set of personnel. For example, the backbone of the trucking industry truck drivers
lack knowledge of good driving practices and areas associated with driving like
understanding of VAT. Taking a level-wise view of the skill issues, it is seen that in the road
sector, skill issues are widespread across the board with the situation being most severe at the
operational level
Industry Structure
The logistics industry consists of truckers, air carriers, shipping lines, warehousing
companies forwarded couriers and third pes,ers,party logistic companies. The chart given below
depicts the various levels of services offered by logistics service providers.
Figure 11: Types of service provided by a typical logistics services provider
In this regard, international logistics, i.e. the management of cargo movement from one part
of the world to another, has been in the forefront, as most businesses are expanding their
operations on a global footing and are finding it more economical to outsource their logistics
functions to international service providers. The logistic function consist of two primary
sub-functions:


Actual movement of goods and services; and
Management of the movement
Historically, the actual movement of goods and services has been out-sourced asset-based
service providers like airline companies, shipping companies, and road transport companies.
These service provider form a small part of the overall logistics functions. For instance, the
road transport company is primarily responsible for transporting the goods from say, the
manufacturing facility to the airport, after which the airline will ship them to an airport joining
another location. This has remained the platform around which other allied services around
provided
The level of outsourcing of logistics functions has increased primarily due to the outsourcing
of the second sub-function: management of the movement of goods and services and allied
activities. This varies from outsourcing the cargo handling and customs clearance functions
to forwarding to complete suites of out-sourced activities, ranging from transportation, cargo
handling, and warehouse management to eventually bills and order processing.
Over time this has spawned different set of players in the logistics business offering different
suites of services with 3PLs offering the entire gamut of services. 3PL companies typically
do not own the majority of the assets used by them to provide logistics services. These
companies offer the entire suite of logistics services by pooling the services of various third
party asset providers under one roof and offer their clients a one-price, one-stop solution for
their supply chain requirements ranging from international freight to warehousing and
packaging.
The emergence of the second generation 3PL has been seen in recent times and has come to
be known as the 4PL provider. This is a new concept in supply chain outsourcing. Through
alliances between ‘best of breed’ 3PLs, technology providers and management consultants,
4PL organizations can create unique and comprehensive supply chain solutions that cannot be
achieved by any single provider.
The important underlying reason for the existence of the logistics industry is that the
customer is outsourcing the function because it is able to get a better return on its capital by
outsourcing this activity at a price to the service provider rather than carrying out this
function on its own. This puts a ceiling limit on the mark-up that a service provider can put
on its total cost since the customer will be continuously measuring the cost-benefit ratio of
outsourcing the function against carrying it out itself. In such a scenario the key determinants
to growth are an increase in the portfolio of services provided and the bulk discounts that one
can generate by consolidating the requirements of clients having similar needs and providing
asset providers with a larger volume of business annually.

Characteristics of the Logistics Industry


• Industry statistics
India’s real GDP growth rate for the last five years averaged 8.7 per cent. The Indian
economy has witnessed some moderation in growth in 2007 and 2008. During the financial
year, India’s real GDP grew by 9 per cent compared to 9.6 per cent in 2007 and is expected to
grow at around 8 per cent during 2009. In recent times, India has faced the same challenges
as the world, rising energy prices, resultant inflation and a slight slowing down of the
economic momentum.63
The Indian logistics sector remains largely unorganised and at lower end of the evolution
stage as compared to the world as well as the Asian markets. The Indian logistics industry is
at an inflection point with India’s GDP growing at over 9 per cent per year and the
manufacturing sector enjoying double digit growth rates. The logistics industry in India is
expected to reach a market size of over USD 125 bn in year 2010. The sector directly and
indirectly employs about 40 mn people. Strong growth enablers exist in India today in the
form of over USD 490 bn worth of infrastructure investments, phased introduction of VAT
and development of organised retail and agri-processing industries. In addition, strong
foreign direct investment inflows in automotive, capital goods, electronics, retail, and
telecom will lead to increased market opportunities for providers of 3PL in India.
However, as a result of the under-developed trade and logistics infrastructure, the logistics
cost of the Indian economy is over 13% of GDP, compared to less than 10% of GDP in
almost the entire Western Europe and North America. However, as the physical
infrastructure and regulatory changes start making an impact, there is a lot of scope for
lowering these costs.64
The Indian logistics industry is highly unorganised with transporters having fleets smaller
than five trucks, account for over two-thirds of the total trucks owned and operated in India
and make up 80 per cent of revenues. The freight forwarding segment is also represented by
thousands of small customs brokers and clearing and forwarding agents, who cater to local
cargo requirements.
In order to reduce logistics costs and focus on core competencies, Indian companies across
verticals are now increasingly seeking and using the services of third-party logistics service
providers. In addition, with the advent of large MNCs, the need of outsourced supply chain
management along with end to end logistics solutions is on the rise too. The basic logistics
services require lower capital. As a result, smaller players have swarmed the industry.
Integrated logistics solutions business requires higher capital and therefore it serves as an
effective entry barrier.
The Indian logistics market is dominated by surface transport. Almost 78 per cent of total
freight is transported by road in India.65
• Current levels of Outsourcing Low but Growth at a Steady Rate
Third party or outsourced logistics is the outsourcing of a company's logistics operations to a
specialised firm which provides multiple tactical logistics services for use by customers as
63
64
Annual Report Arshiya International Limited - FY 2007-2008
Annual Report Arshiya International Limited - FY 2007-2008
65
Annual Report Arshiya International Limited - FY 2007-2008
opposed to each company having a business unit in-house to oversee its supply chain and
transportation of goods.
With increased geographical distribution of wealth in India, the consumer markets are
extending beyond the five main cities of Mumbai, Delhi, Bangalore, Chennai and Hyderabad.
However, rather than being pre-emptive, the companies are only following with new
distribution outlets. As such, the increased competition across industry verticals is forcing
firms to focus on product distribution, and logistics outsourcing is gaining further momentum
with this.
According to Data monitor, outsourced logistics, at just above one-quarter of the entire $90
billion Indian logistics market, is slated to grow at a compound annual growth rate (CAGR)
of over 16 per cent from 2007-10.66
The level of outsourcing exhibited by Indian businesses is extremely low. The outsourcing of
logistics functions has been limited to the actual movement of goods and certain specific
stand-alone services like customs clearance. There are very few businesses in India that are
outsourcing the cargo movement management sub-function to third parties in India. In fact, it
is only now that the overall logistics function is being given full operational status in larger
companies.
In order to reduce costs and stick to their core competencies, many companies have started
out-sourcing their entire logistics and supply chain management activities.
The major factors leading to the growth of the 3PL concept include;
Reducing overall costs
Need for expertise in logistics service providers
Reduction in labor component of the manufacturing cost
User companies lack necessary skill sets to drive the changes particularly in logistics
arena to face the competition, and
Value added services provided by the 3rd party logistics service providers.
• Type of Service Providers in the Indian logistics industry
The concept of logistics, in its present form, is new to Indian companies. In India, traditional
transporters, freight forwarders and courier companies are fast emerging as integrated
logistics service providers by effectively utilizing their existing infrastructure and experience.
Apart from providing prime functions such as transportation, warehousing, clearing and
forwarding they have also started to handle other activities like inventory management, order
processing, collection of bills, sales and excise duty documentation etc.
66
Source – Annual Report Arshiya International Limited - FY 2007-2008
In future, the demand for logistics services providers will continue to accelerate, fuelled by
the increasing appreciation of outsourcing as a business practice.
The different types of service providers in the Indian logistics scenario are given in below:
Types of Service Providers in the Indian Logistics Industry
Service Providers
Traditional Asset Providers



Airlines
Warehousing
Companies
Road transport
Companies
Profile of operations
These companies provide asset based services,
wherein they perform specific asset based
logistics functions like transportation and
warehousing
Endeavor to increase asset-utilization

marketing
intermediaries
for
Forwarders/Brokers
Book freight/warehousing space on behalf of
their clients
Provide market intelligence to asset providers as
well as asset users
Do not take responsibility for cargo
Custom House Agents
Cargo handlers/Stevedores
Arrange clearance of import and export cargo
Loading and unloading of cargo at the port/airport
Third party logistics Take responsibility of goods
providers/Couriers
Manage the entire transportation and customs
clearance process
Provide the information technology backbone for
shipment tracking and tracing throughout the
transit period
3PLs in India originate from several business segments with a large amount of functional
similarities in their operations. This is in line with global trends.
• Industry Participants
The different types of players in the Indian logistics scenario are given below:
a) Single location focused players – Fragmented, low value add services local / inter - city
operators like local and inter - city courier companies, port handling agents for a single
location, single port owners, single CFS owners, etc.
b) Niche players – High value addition but limited to one activity. They cater to a particular
segment in the entire value chain across the country (e.g., CFSs across a region, courier
companies, bulk truck transporters, etc)
c) Regional players limited by their geographical reach – They cater to logistics solutions
in a particular region or segment (port based, road based, etc).
d) Integrated players offering total logistics solutions – A one-stop shop for logistics and
use multimodal forms of transportation to deliver anything anywhere with the help of their
tie-ups all over the world.
In India, the space for integrated player still remains vacant. Integrated players are at the
high end of the service spectrum and earn superior margins due to the integrated services.
• Revenue Model
The various services offered by the international logistics service providers revolve around
the base line product of managing the international leg of the shipment, by air or sea. The
other services are offered as value added services at either the origin or the destination.
As mentioned earlier, it is pertinent to note that in such arrangements it is not possible for
either of the companies to mark-up the other’s services excessively, since this may break the
ceiling limit chargeable by a service provider. The important underlying criteria for the
existence of the logistics industry is that the customer is outsourcing the function because it is
able to get a better return on its capital by outsourcing this activity at a price to the service
provider rather than carrying out this function on its own. This puts a ceiling limit to the
mark-up that a service provider can put on its total cost since the customer will be
continuously measuring the cost benefit analysis of outsourcing the said function.
In such a scenario the key determinants to growth are an increase in the portfolio of services
provided and whether he is able to make a difference between the prices at which it sells
freight to the customer and the price at which it buys from the airline/shipping line. As
mentioned earlier, this depends on bulk discounts it is able to command by giving the asset
provider a larger volume of business annually.
Operating Model - Global Reach Local Presence
Since the logistics service provider takes custody of the product at the origin (as opposed to
the freight forwarder), it is imperative for it to have a presence of its own or engage an
overseas partner. While most of the multinational companies have their own offices all over
the world, Indian companies enter into alliances with logistics companies for specific regions.
These companies also provide value added services to the Indian companies’ client at the
destination like customs clearance etc. If the client so desires and provides reciprocal
arrangements for the sales made by the overseas partner.
Key Trends of the Logistics Industry
Growth within the organised sector: The logistics and warehousing sector in India, till
now, has been highly fragmented and characterised by the presence of numerous unorganised
players. A large number of players have been providing services in individual segments like
transportation, warehousing, packaging etc. In 2007, organised players accounted for only 6
per cent of the total US$ 100 billion Indian logistics industry However, changing business
dynamics and the entry of global third party logistics players (3PL) has led to the remodelling
of the logistics services in India. From a mere combination of transportation and storage
services, logistics is fast emerging as a strategic function that involves end-to-end solutions
that improve efficiencies.
Entry of Large Corporates: Another trend witnessed over the last few years has been the
entry of several large Indian corporate houses – such as the Bharti group, Tatas and Reliance
Industries Limited – into the logistics sector. The Indian conglomerates foresee huge
potential for specialised logistics and warehousing facilities, particularly in industries like
retail. Companies like Bharti, Tata Realty & Infrastructure, GE Equipment Services and
Reliance Logistics cater to the logistics needs of their own group companies as well as
provide services to the other companies.
Emerging concept of third party logistics: Third party logistics or 3PL is a concept where a
single logistics service provider manages the entire logistics function for a company.
Although still at a nascent stage, the Indian 3PL industry is growing at a rapid pace. Global
sourcing activity and fierce competition amongst manufacturers to cut costs have made
movement of materials rather complex, giving rise to the emergence of several third party
logistics players.
Fuelled by the increasing trend of outsourcing, coupled with the rapid growth in the Indian
manufacturing sector, 3PL is estimated to grow at about 30 per cent annually and become a
US$ 30 billion industry by 2010.
Rapid growth of the warehousing sector: The role of a warehouse has also transformed
from a conventional storehouse to an inventory management set-up with a greater emphasis
on value added services. Warehouses now provide additional services like consolidation and
breaking up of cargo, packaging, labelling, bar coding, reverse logistics etc. It has emerged as
a critical growth driver, leading to large investments by logistics companies for the
development of warehouses and logistics parks. Warehousing and related activities currently
account for about 20 per cent of the total logistics industry. Currently, the organised
warehousing industry in India has a capacity of approximately 80 million metric tonnes (MT)
and is growing at 35 to 40 per cent per annum. An investment of approximately US$ 500
million is being planned by various logistics companies for the development of about 45
million square feet of warehouse space by 2012
Logistics parks – One-stop shop for logistics needs: The concept of a consolidated logistics
centre can be traced back to the Foreign Trade Policy of 2004, which led to the development
of Free Trade Warehouse Zones (FTWZ). While FTWZ were aimed at facilitating import and
export of goods, the need for a one-stop shop that could additionally cater to the domestic
market led to the development of logistics parks as a part of the infrastructure industry in
2005-6. A logistics park is a notified area that facilitates domestic and foreign trade by
providing services like warehousing, cold storage, multimodal transport facility, container
freight stations etc. This area also acts as a place where a company can unload cargo for
distribution, redistribution, packaging and repackaging.

Key Drivers of the Logistics Industry


The Indian logistics sector remains largely unorganised and at lower end of the evolution
stage as compared to the world as well as the Asian markets.
Competition
Of late, India has been an attractive market for the global players because of its size and huge
potential. With the advent of Multi-National Corporations (“MNCs”) in the Indian logistics
industry, the degree of competition has increased manifold. There is stiff rivalry between
transporters, freight forwarders and global 3PLs. With the turnover figures of most players
not being known, it is a little difficult at this stage to estimate the market shares. The players
are competing on the basis of:







Range of services offered,
Geographical spread or reach,
Experience in the industry,
Response time,
Service reliability,
IT capabilities, and
Value for money.
MNCs are ahead of the domestic players in terms of information technology and
communication infrastructure. The domestic players lack financial power and are a little
reluctant towards investing in IT infrastructure. Considering this, it is not going to be an easy
task for the domestic players to sustain in the competitive environment. In order to withstand
the competition, they have to be pro-active and adapt to the changes.
However, industry experts feel that the MNCs have to depend on the local players to establish
a network in the country. This could possibly end up in consolidations, with MNCs joining
hands with the domestic players.
All the key players in this industry have tie-ups with world leaders which enable them to
derive synergies from their global counterparts and thus have an edge over others in terms of
the standard of service provided.
Growth in International Trade
The growth in the logistics industry is dependent on the extent of business activities.
Historically, the growth in the logistics industry has been dependent on the growth in
domestic and international trade. However the recent years have witnessed the growth of
emerging business areas in the new economy such as the services sector, IT industry, and
banking and financial sectors. The growth in these sectors saw the emergence of new value
added services and boosted the growth of the logistics industry as a whole.
Global acceptance of India as an emerging outsourcing location for manufacturing activities
as well as its fast-growing domestic market have seen the advent of Foreign Direct
Investment in manufacturing-oriented sectors like consumer durables, electronics, auto and
auto components. Domestic retail expansion in the agribusiness is also happening at a fast
pace, driven by the move towards organized retail and export opportunity. These sectors are
the largest users of supply chain solutions and outsourced logistics services and thus will
likely drive growth in the Indian logistics sector.
Therefore, their profitability depends on the volume of shipments managed. Any drop or rise
in international trade between India and other countries will have an impact on the logistics
services providers.
Quality Aspects
International trade is highly competitive in today’s age. Therefore when a company is
choosing a logistics service provider, the reliability of the same will be the most important
element in its mind. The logistics provider needs to continuously invest in upgrading its
operational processes in order to compete in the market.
Cost Sensitivity
Logistics is a business where quality of service is assumed and price is paramount. The
customer will always measure the price charged by the logistics provider carefully, since its
own price per unit depends on it. Further, apart from the money made on trading in freight,
all other services provided by a logistics provider are essentially a replacement of an
internally executable activity. For instance, the customer can package the goods on its own or
outsource to a 3PL. In this case, the customer will be fully aware of the opportunity cost,
thus not allowing the service provider to over charge it. Therefore it is vital for the service
provider to achieve operational cost efficiencies.
The Retail Boom
Globally, retail sector has been a key driver for the logistics sector. Organised retail sector in
India has been growing 30% yoy. The total retail industry in India is expected to grow at
$421 million by 2010. This growth in retail sector has increased the demand for organized
logistics.
India Fast Emerging as Global Manufacturing Hub
According to CII, India will emerge as one of the global ‘Manufactured Product’ outsourcing
hubs and reach revenues of approximately $50 billion by 2015. To remain cost-competitive,
contract manufacturers will be required to provide integrated logistics solutions that bolster
the cost saving potential of outsourcing initiative; this will thereby enhance the growth in the
sector to a higher degree.
Government of India – incentives and regulations
The Indian freight and logistics industry is governed by Indian Customs Act 1962 which lays
down the rules and regulations for operating in the industry. The Act also affords some
incentives to the players to provide a fillip to the industry and boost the trade. Typically, the
players also follow International Air Transport Association (IATA) rules. IATA is an
international autonomous organization which lays down the rules for international cargo and
freight forwarding. Further the Industry also has to strictly adhere to the rules laid down by
the Reserve Bank of India vide its circulars under the Foreign Exchange Management Act.
These rules govern the procedures to be followed while making remittances of international
freight and other charges payable to agents overseas.
Government regulations and its actions can affect the efficiency of the logistics systems in the
country. Over the last few years, the Indian Government has taken steps towards improving
the efficiencies in ports and road sectors with a view to attract private investment, improve
capacities and encourage competition.
With the introduction of Value-Added Tax (“VAT”), companies are now beginning to move
from a smaller level godown approach to a national level supply chain system. VAT, which
is expected to replace a plethora of taxes along with government taxes, is also likely to
enhance efficiency of the logistics industry. The time in complying with interstate tax
requirements and at check points affects the ability of the logistics industry to achieve a lower
turnaround time. Changes in the regulatory structure like implementation of VAT are likely
to boost the efficiency of logistics companies by lowering transit time and paper work.

Key Inhibitors of the Logistics Industry


The following problems existing in the Indian logistics industry make it unattractive for
investments and also create entry barriers.





Logistics is a high-cost, low-margin business. The problem of organized players is
compounded by unfair competition with unorganized players, who can get away
without paying taxes and following operating norms stipulated in the Motor Vehicles
Act such as quality of drivers and vehicles, volume and weight restrictions, etc.
Economies of scale are absent in the Indian logistics industry. Even the organized
sector that contributes slightly more than 1% of the logistics cost, is highly
fragmented. Existence of the differential sales tax structure also brought in
diseconomies of scale. Though VAT (Value Added Tax) has been implemented since
April 1, 2005, failure in implementation of a uniform VAT structure across different
states has let the problem persist even today.
Apart from the non-uniform tax structure, Indian LSPs have to pay numerous other
taxes, octrois, and face multiple check posts and police harassment. High costs of
operation and delays involved in compliance with varying documentation
requirements of different states make the business unattractive. On an average, a
vehicle on Indian roads loses 24-48 hours in complying with paperwork and
formalities at different check posts en route to a destination. Fuel worth USD 2.5
billion is spent on waiting at check posts annually. A vehicle that costs USD 30,000
pays USD 7,500 per annum in the form of various taxes, which include the excise
duty on fuel. This is why freight cost is a major component of the cost of a product in
India.
Indian freight forwarders face stiff competition from multi-national freight forwarders
for international freight movement. MNCs, because of their size and operations in
many countries, are able to offer low freight rates and extend credit for long periods.
Indian freight forwarders, on the other hand, because of their smaller size and lack of
access to cheap capital, are not able to match the same. Moreover, clients of MNCs
often want to deal with a single service provider and especially for FOB (Free on
Board) shipments specify the freight forwarders, which most of the time happen to be
the multi-national freight forwarders. This is sort of a non-tariff barrier imposed on
Indian freight forwarders.
Poor physical and communications infrastructure is another deterrent to attracting
investments in the logistics sector. Road transportation accounts for more than 60% of
inland transportation of goods, and highways that constitute 1.4% of the total road
network, carry 40% of the freight movement by roadways. Slow movement of cargo
due to bad road conditions, multiple check posts and documentation requirements,
congestion at seaports due to inadequate infrastructure, bureaucracy, red-tapeism and
delay in government clearances, coupled with unreliable power supply and slow
banking transactions, make it difficult for exporters to meet the deadlines for their
international customers. To expedite shipments, they have to book as airfreight, rather
than sea freight, which adds to the costs of shipments making them uncompetitive in
international markets. Moreover, many large shipping liners avoid Indian ports for
long turnaround times due to delays in loading/unloading and hence Indian exporters
have to resort to transshipments at ports such as Singapore, Dubai and Colombo,
which adds to the costs of shipments and also delays delivery.




Low penetration of IT and lack of proper communications infrastructure also result in
delays, and lack of visibility and real-time tracking ability. Unavailability and absence
of a seamless flow of information among the constituents of LSPs creates a lot of
uncertainty, unnecessary paperwork and delays, and lack of transparency in terms of
cost structures and service delivery. For example, a shipper has to pay a higher freight
rate if it cannot ensure return load. At present, there is no real time process by which a
shipper may know about the availability of trucks and going rates at the destination
market. Therefore, it has to pay more. Had the market information been available to
both the shipper and the service provider, the service provider’s cost structure would
have been transparent to the shipper and it would have ended paying the actual market
rate. Another example would be that LTL (Less than Truckload) shipments cost more
than FTL (Full Truckload) shipments. Now, when a shipper books a LTL shipment, it
has no idea about the status of its shipment after it leaves the warehouse at the origin
and before it reaches the warehouse at the destination. The service provider may still
convert this LTL shipment into a FTL shipment at its own warehouse before
delivering at the destination. So, the shipper ends up paying LTL rates for a FTL
shipment. Had there been visibility during delivery, this problem would not have
occurred.
Since most of the LSPs are of relatively small size, they cannot provide the entire
range of services. However, shippers would like service providers to offer more
value-added services and a single-stop solution to all their logistical problems. The
inability of service providers to go beyond basic services and provide value-added
services such as small repair work, kitting/dekitting, packaging/labeling, order
processing, distribution, customer support, etc. has not been able to motivate shippers
to go for outsourcing in a big way.
Service tax levied on logistics service fees (currently 12.36% with educational cess)
may make outsourcing costly and outweigh the possible benefits.
There is lack of skilled and knowledgeable manpower in the logistics sector.
Management graduates do not consider logistics as a prime job. To improve the status
of the industry, service providers have to move beyond the level of brokers and
truckers to attract and retain talent.

Impact of Global Economic Slowdown


on the Logistics Industry
Bucking the trend and staying relevant is proved to be quite a challenge for logistics
companies in the times of economic slowdown. With the global credit crunch showing no
signs of easing, margins in the logistics sector are set to come under further pressure.
The Indian logistics industry, which was expected to grow annually at the rate of 15 to 20
percent, is at 10 percent now. Also, the GDP growth level, which was expected to be 8.5 to 9
percent, was 7 to 7.5 percent. So, the FDI inflows were be limited in the automotive, capital
goods, electronics, retail and telecom markets. This, in turn, shrank the market opportunities
for the logistics players.
Volume growth has been affected and freight rates have declined steadily in India. India has
registered de-growth in the container trade volume. With reduced trade, container markets
have corroded considerably.
Faced with a credit crunch, logistics service providers are reducing resources and trying to
optimize as much as possible to achieve cost benefit.

Budget 2010 Implications on the


Logistics Industry
Allocation for road transport increased by over 13.0% to Rs 19,894crore, this allocation to
infrastructure sector for developing and improvement of road always complements to Auto
and logistics sector growth. Finance minister has increased allocation on road transport by
13.0% for FY2011 and we believe this will ultimately enable the operational efficiency in
medium to long term for the logistics sector as it provides a larger network of commutation.
The Road transport and Highway Minister, Kamal Nath, recently increased the target of
constructing new road to 20km per day. The increased allocation towards road by the Finance
Minister would help in achieving Kamal Nath’s target for road construction. Apart from this,
the Finance Minister has withdrawn service tax on transportation of cereals, and pulses by
road. This would also benefit road transportation companies.

Way Forward for the Logistics Industry


Overall, the Indian logistics industry is less developed and more fragmented when compared
with countries like the US and European nations. It is clearly divided between a few large
players with a relatively higher distribution strength, advanced IT capabilities and better
financial back-up and offering a wide range of services including value added services, and a
large number of small players with limited infrastructure and a lower level of IT competence.
However, in the coming years, the Indian logistics industry is going to witness an increasing
competitive pressure, with many players changing identities and expanding their service
portfolios. The increasing need of companies to gain supply chain advantage and better their
service offerings to customers is going to churn the logistics industry in a major way.
The logistics companies thrive on the economies of scale. Therefore the organized sector
companies will find it easier catering to higher demand. The semi-organized sector and the
un-organized sector companies will find it tough to handle more volumes of shipments. To
stay in the market these companies will have to strengthen their distribution network and
keep pace with the technological advancements in the rest of the industry. The companies,
which can do it, will gradually move into the organized sector and the rest will struggle for
their existence. The recent merger and acquisition trend is also set to continue in the coming
years to reduce pressure from customers and reduce the costs of operations.
With the increasing globalization and changing economic, political, social and technological
conditions, the logistics industry is likely to face challenges in all respects. Considering this,
the logistics service providers in India should look at ways to meet these challenges and
develop strategies that will take them ahead in the new millennium.
Chapter 7: The Garments &
Textiles Industry
This chapter includes:
1.
2.
3.
4.
5.
6.
7.
8.
Introduction
Characteristics of the Industry
Key Trends
Key Drivers
Key Inhibitors
Impact of Global Economic Slowdown
Budget 2010 Implications
Way Forward
Review 2009-10
Topline grew by 21 per cent y-o-y in Q3
2009-10, faster than the growth witnessed in
the same quarter last year (y-o-y). This was
due to recovery in the economy, leading to
pick-up in textile demand. Operating margins
improved y-o-y, due to decline in raw
material cost and other operating expenses.
Consequently, net margins increased.
However, both operating and net margins
declined slightly q-o-q, due to increased raw
material expenses.
Outlook 2010
Topline growth is expected to improve vis-à-
vis the same period last year, as demand for
textiles is expected to improve in line with
revival of the economy. Operating margins
are expected to remain at third-quarter levels,
but will improve y-o-y, due to lower other
expenses. Consequently, net margins will
also register a rise.
Introduction to the Garments & Textiles
Industry
The history of textiles in India dates back to the use of mordant dyes and printing blocks
around 3000 BC. The diversity of fibers found in India, intricate weaving on its state-of-art
manual looms and its organic dyes attracted buyers from all over the world for centuries. The
British colonization of India and its industrial policies destroyed the innovative eco-system
and left it technologically impoverished. Independent India saw the building up of textile
capabilities, diversification of its product base, and its emergence, once again, as an
important global player.
The Indian apparel industry is identified as a buyer-driven value chain that contains three
types of lead firms: retailers, sourcing agents and apparel manufacturers. Innovation in the
global apparel value chain is primarily associated with the shift from assembly to full-
package production. Full-package production changes fundamentally the relationship
between buyer and supplier giving more autonomy to the supplying firm and creating more
possibilities for innovation and learning. With the globalization of apparel production,
competition has intensified as leading apparel retailers across the world have developed
extensive global sourcing capabilities.
The Indian sourcing market is expected to go up to $35-37 billion by 2011. The trigger for
this growth is likely to come from top global retailers who will seek to take advantage of
India’s abundant multi-fiber based raw material, well established production bases, and
skilled labor67.
Today, the textile and apparel sector employs 35.0 mn people (and is the 2nd largest
employer), generates 1/5th of the total export earnings and contributes 4 per cent to the GDP
thereby making it the largest industrial sector of the country. This textile economy is worth
US $37 bn and its share of the global market is about 5.90 per cent. The sector aspires to
grow its revenue to US $85bn, its export value to US $50bn and employment to 12 million by
the year 2010 (Texmin 2005)
67

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Characteristics of the Garments &
Textiles Industry
• Industry Statistics
The total market size of Indian textile and apparel industry was about $52 billion during the
financial year 2008-09, out of which the domestic industry accounted for $34.6 billion and
the remaining was accounted for by exports68.
The Indian Textile sector provides direct employment to over 33.17 million people and is the
second largest provider of employment after agriculture. 69 Besides, another 54.85 million
people are engaged in its allied activities. The sector contributes about 4% to the country’s
gross domestic product (‘GDP’), 11% to industrial production, 14% to manufacturing sector,
9% of excise collections, 18% of employment in the industrial sector and 12% to the
country's total exports70. The sector which was growing at 3-4% during the last six decades
has now accelerated to an annual growth rate of 16% in value terms and is expected to reach
the level of US $115 billion (exports $55 billion and domestic market $60 billion) by 2012.71
Indian textiles, handlooms and handicrafts are exported to more than 100 countries, with the
US being the largest buyer. Readymade garments are the largest export segment, accounting
for almost 41 per cent of total textile exports. The Indian Government aims to increase textile
exports from India to $50 billion by 2010 and is taking steps to achieve the desired target.72
The strong international competitiveness of India's textile and apparel industry can be
attributed to a number of factors:-

Vertical Integration: India's textile industry is truly vertically integrated from
raw material to finished product, including fiber production, spinning,
knitting and weaving, and apparel manufacture. Business and cultural
linkages with neighboring countries like Bangladesh, Sri Lanka, Nepal,
Thailand, Myanmar and China provide a platform for sourcing from them as
well.
Production Variety: Raw material production includes cotton, silk, wool,
linen and man-made fibers such as polyester, viscose, acrylic, and
polypropylene. Indian companies have built global scale even in non-

http://www.ibef.org/industry/textiles.aspx
http://www.conversationsforabetterworld.com/2009/07/women-and-poverty-indias-textile-industry/
70
http://www.citiindia.com/indian_overview.asp
71
http://smetimes.tradeindia.com/smetimes/news/top-stories/2008/Oct/13/textiles-industry-achieves-16-percent-growth-
rate.html
72
http://www.india-server.com/news/indias-textile-exports-at-20-5-billion-467.html
69
68
traditional areas. Fabric production includes fine dress fabrics, shirting,
fabrics for trousers/shorts, worsted suiting, denim, fleece, jersey, flat/woolen
knits, technical fabrics, and more. Apparel production includes active
sportswear, outerwear, foundation garments, suits, socks, infant wear etc.
Production of made-ups includes a wide variety of bed, bath, and table
linens, kitchen accessories etc.

Labor Force: India's textile and apparel industry directly and indirectly
employs millions of people. The country has an abundant, low-cost base of
labor which has long-term sustainability and skill in fabric and garment
making.
Capacity: India's industry has consistently remained flexible in terms of
production quantity and lead time and thus presents the possibility of
producing quantities as low as a few hundred pieces.
Operating Environment: The textile and apparel industry is an important one
to India. Import duties on capital equipment are low. Fabrics and other raw
materials can be imported duty-free if made up into garments and re-
exported. The apparel industry can import duty free specified trimmings and
embellishments like fasteners, rivets, garment stay, laces, badges, sewing
thread, sequin, tape & others for export production.
Complete Supply Chain: India has a complete supply chain - from fibres to
finished products. At the start of the supply chain, India is one of the world's
biggest suppliers of raw cotton. At the end of the chain, India is capable of
supplying large volumes of apparel and home textiles - and the quality of its
products is improving all the time.
Flexibility: The industry in India is also highly flexible. Large firms are able
to export basic apparel products which require large-scale production, while
small and medium size firms can offer high fashion garments which need to
be manufactured in small quantities and delivered quickly.
Growth Opportunities: As well as being a major exporter, India also
provides growing opportunities for foreign investment, collaboration and
joint ventures following a liberalization of its foreign direct investment
(FDI) policy.
Other drivers of investment and collaboration include India's expanding
domestic market for foreign brands and the benefits to be gained from
partnering with competitive Indian firms for selling in overseas markets.






• Textile Exports
India’s textile exports can be broadly categorized into two large segments- apparel, which
contributes nearly half the revenues, and non-apparel exports like yarn and fabrics, both
natural and man-made.
The Indian apparel export sector has witnessed a whole graph of ups and downs till early
nineties. With buying patterns changing, the repercussion of the shift in retail sourcing is
being felt at the sourcing centres around the world and more so in India. India has always
been recognized for its traditional skills and exclusivity in garment designs and has been a
major sourcing destination, primarily for the European market, which is much more fashion
conscious and has a more evolved retail system.
The emphasis is moving away from one centralized buying agency to different buying agents,
looking after specific product needs. Over the decade, the abilities of Indian apparel exporters
have become regionalized and every region has come to be known for a specific type of
product category, which the buyers, over the years, have also come to recognize. In an
attempt to capitalize on these strengths, buyers have developed sourcing relations with
different buying agents in different regions.
India can broadly be divided into two major buying hubs viz. North and South. While the
Northern hub (particularly Delhi) has come to be recognized as a strong centre for value-
added and high fashion garments, the Southern hub (particularly Bangalore/Chennai) is more
recognized for its ability to do better in basic garments. The reasons for this growing
polarization of capabilities are influenced by many factors including management attitudes,
availability of skilled and disciplined labor, ease in import of fabrics and the emphasis on
compliance and product development.
India's textile exports declined by about 2% during the financial year 2008-09 to
$21.75 billion due to slump in demand from global economies like the US and Europe which
are reeling under the impact of the financial meltdown73. The worst hit was handicrafts which
saw a decline of 48% during the year under consideration, followed by cotton yarn and jute
products which fell by 11.8% and 9.5% respectively.

73
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Key Drivers of the Garments & Textiles
Industry
Some of the key drivers of the Indian Apparel Industry are as under:-
Phase-out of MFA: Under the WTO-negotiated agreement on Textiles and Clothing, the
whole global textile and apparel trade is now free of quota restrictions, which allows
producers to export as much as they can sell. Moreover, it is now considered likely that
international retailers will begin sourcing from countries like India and China in order to
survive the cut-throat pricing war being waged in the Global retail segment74. The Indian
textile industry is witnessing high dynamism after abolition of quota restrictions. CRISIL
Research expects garment exports from India to grow at a CAGR of 11-12% to $16 billion by
2009-10 while the domestic sale of ready made garment is expected to grow at a CAGR of
10-11% to $24 billion by 2009-10.
Increasing demand: The increasing demand for branded clothes coupled with higher
spending power has pushed up the leading players to set up shops and increase their market
penetration.75 More than a dozen international retailers have set up shop in India over the last
couple of years to source their apparel requirements, dispensing with the earlier practice of
operating through local buying agents. This development coincided with the Indian
Government's decision to throw open the garment sector to large players some years ago and
the entry of a number of domestic textile majors into the apparel segment in a big way. The
opportunities for Indian manufacturers are huge in ready-made garments. India’s ready-made
garments sector was stripped off its small scale industry status less than four years ago. As a
result, textile firms were able to undertake massive capacity expansion drives over the past
couple of years. The extension of the textile up-gradation funds scheme (TUFS) will allow
for further expansion.
Comparative Advantages: India has several comparative advantages in the textile sector,
including an abundant availability of raw material and labor. It is the third largest producer of
cotton in the world after China and USA accounting for about 14% of the world cotton
production. It has the distinction of having the largest area under cotton cultivation in the
world ranging between 8 million to 9 million hectares and constituting about 26% of the
world area under cotton cultivation 76 . The country also accounts for about one fourth of
global trade in cotton yarn besides having high level of operational efficiencies in spinning
and weaving. Moreover it ranks fourth in terms of staple fiber production and sixth among
filament yarn production77.
74
75
http://www.blonnet.com/2004/09/27/stories/2004092702320100.htm
http://www.textilereview.com/mar_editorial.htm
76
http://www.cotcorp.gov.in/shares.asp
77
http://www.commodityonline.com/commodities/fibers/kapas.php
Sourcing choices arise from profitability. This includes considering costs, such as, buying
factors of production, like land, buildings and machines versus factors affecting revenues,
including pricing, marketing, and distribution. The issues of labor, material, shipping costs
and tariffs structure also affect sourcing choices. Since apparel production is a labor-intensive
activity, wage rates are also a major factor in sourcing decisions. This gives immediate
competitive advantage to producers in countries like India and China to export to more
developed and high cost countries like the United States and the European Union.78
Good Training Institutions: With the establishment of training institutions like the National
Institute of Fashion Technology, many high quality designers who are able to churn out
modern designs and interact with buyers are making an impression. This is a distinctive
strength of Indian companies.
Government initiatives: Government policies have played a vital role in the steady growth
and development of the Indian apparel export industry. 79 The Government is creating a
congenial environment by reducing cost of production, rationalization of excise duty structure
and removal of infrastructure bottlenecks.80 Some of the recent reform measures that have
been undertaken by the Government are as follows:

Creating level domestic market playing field by extending de-reservation,
uniform application of excise duties and further reduction in import duties on
apparel, textiles and machinery.
Revising labor laws (flexible exit policy), improving infrastructure
(minimize power outages and port delays) and improving availability of high
quality textiles in order to increase foreign direct investment.
Establishing bilateral agreements with US and EU under the quota free
regime, to be competitive against other low cost exporters such as Sri Lanka.
Setting up institutes for training skilled operators on new technologies so as
to speed up production and gain scale.
Foreign Trade Policy:-
Handicrafts and Handloom sectors, among others, have been
identified as Special Focus Initiatives;
Duty free import of trimmings and embellishments for Handlooms &
Handicrafts sectors have been increased from 3% to 5% of Free On
Board value of exports;
78
79





http://www.iigm.in/apparel.html
http://www.dailytimes.com.pk/default.asp?page=2008%5C03%5C15%5Cstory_15-3-2008_pg5_6
80
http://www.hindu.com/2006/05/21/stories/2006052104201000.htm
Import of trimmings and embellishments and samples shall be
exempt from Countervailing Duty;
Handicraft Export Promotion Council has been authorized to import
trimmings, embellishments and samples for small manufacturers; and
Establishment of a Handicraft Special Economic Zone

Key Inhibitors of the Garments &


Textiles Industry
Some of the key inhibitors of the Indian Apparel Industry are as under81:
Government Policies: Despite all the inherent advantages and the various government
reforms that have been undertaken lately, the market for textile and apparel exporters has not
been growing as much as it should have because of the ramifications of policies pursued by
the Government in the past such as reserving garments for small scale industry. 82 To
manufacture garments for the world market, substantial capital investment in fixed assets and
sustained marketing efforts over a period of time are required, which may be beyond the
capabilities of small-scale units. Now that this industry has been opened up for large-scale
units, it is important to consider and act upon, factors which can expedite its progress. For
instance, Special Economic Zones (Apparel Parks) could be set up on the same lines as
software technology parks83.
Labor laws: Restrictive labor laws in India have been unfavorable to more rapid expansion
in the industry. In the absence of concrete labor policies, the industry has often been
paralyzed by strikes, thereby compromising efficient operations. One thing that holds India
back in global competition is its extensive labor laws that are believed to be biased towards
employees. Overprotection, red tape and bureaucracy make India's work force less
manageable, less disciplined and thus less competitive than it could be.
Logistics: Due to its geographical location, India is further from major markets than
competitors such as Mexico, Turkey and China, which are closer to major markets such as
the US, Europe and Japan, respectively. This increases shipping costs. Also, internally,
relatively poor road connectivity and the inadequacy of ports and other export infrastructure
have adversely affected the Indian apparel sector's competitiveness. One major corrective
step is to facilitate the speedy shipment of finished goods. China is able to ship directly to
ports on the west coast of the US. In India, two or three ports should be designated, especially
81
http://www.atimes.com/atimes/South_Asia/HF06Df01.html
http://www.blonnet.com/2004/07/24/stories/2004072400191000.htm
83
http://www.rediff.com/money/2005/aug/26guest.htm
82
on the west coast, where special facilities for speedy clearance of documents and goods
should be given to recognized garment exporters84.
Quality manpower: A recent study by the Textiles Committee noted that only 6% of the
workforce in the Indian apparel industry has received formal institutional training while at the
supervisory level, only 2% of the workforce is trained. This aspect of the textile industry
needs to be worked upon in order to drive the growth in the future. Three issues must be
mentioned here: (a) there is a paucity of technical manpower – there exist barely 30
programmes at graduate engineering (including diploma) levels graduating about 1,000
students – this is insufficient for bringing about technological change in the sector; (b) Indian
firms invest very little in training its existing workforce and the skills are limited to existing
proceses (c) there is an acute shortage of trained operators and supervisors in India. It is
expected that Indian firms will have to invest close to Rs. 1,400 billion by year 2010 to
increase its global trade to $50 billion. This kind of investment would require about 70,000
supervisors and 1.05 million operators in the textile sector and at least 112,000 supervisors
and 2.8 million operators in the apparel sector. The real bottleneck to growth is therefore
going to be availability of skilled manpower.
Cost constraints: Apart from low-cost labor, other factors that affect competitiveness are
relative interest cost, power tariffs, structural anomalies and productivity levels (affected by
technological obsolescence). A study by the International Textile Manufacturers Federation
revealed high power costs in India as compared with other countries such as Brazil, China,
Italy, South Korea, Turkey and the US. Power's share of the total cost of production for the
spinning, weaving and knitting of ring and open-end yarn for India ranged from 10-17%,
which is also higher than that of such countries as Brazil, South Korea and China. Capital
costs as a percentage of total production cost in India were also higher, ranging from 20-29%
as compared with 12-26% in China.
Fragmentation: Given the fragmented nature of the industry, the Indian players are unable to
reap the benefits of economies of scale, in sharp contrast to the Chinese players. Indian firms
are typically smaller than their Chinese or Thai counterparts and there are fewer large firms
in India thereby affecting the cost structure as well as ability to attract customers with large
orders. The central tendency is to add capacity once the order has been won rather than ahead
of the demand. This is a major reason, thus far at least, that Chinese textile manufacturers
have reaped most of the benefits of the post-quota regime. Indian firms need to develop the
managerial capabilities required to manage large work force and design an appropriate supply
chain. For the size of the Indian economy, it will have to have bigger firms producing
standard products in large volumes as well as small and mid size firms producing large
variety in small to mid size batches.
Marketing: Another aspect that requires attention is marketing. To exploit global markets it
is necessary for the Indian garment industry to have better presence in these markets. This

http://www.rediff.com/money/2005/aug/26guest.htm
84
can be facilitated by collaboration with marketers and fashion houses in the United States,
European and Japanese markets.
Processing Houses: There is a scarcity of processing (dyeing and printing) houses in India.
Hence, a policy support is needed from the government and big manufacturers to set up large
processing houses. Garment manufacturing is labor-intensive, and mostly uses female labor.
Seasonal Nature: Garment manufacturing is highly seasonal as people all over the world
tend to buy more new clothes in certain seasons. On the other hand, as fashions tend to
change, it is not possible to manufacture and keep stocks for any length of time. Therefore,
the garment industry tends to be highly seasonal. Furthermore, if as a result of any reason
beyond the control of the manufacturers, the export market takes a dip, the manufacturer will
have to scale down operations. Employment laws in India are not very flexible to
accommodate these special characteristics and requirements of the garment industry.
Domestic Market: While the Indian domestic market is very competitive at the low end of
the value chain, the mid or higher ranges are over priced (i.e., ‘dollar pricing’). Firms are not
taking advantage of the large domestic market in generating economies of scale to deliver
cost advantage in export markets. The Free Trade Agreement with Singapore and Thailand is
expected to allow overseas producers to meet the aspirations of domestic buyers with quality
and prices that are competitive in the domestic market. Ignoring the domestic market, in the
long run, will peril the export markets for domestic producers. In addition, high retail
property prices and high channel margins in India will restrict growth of this market. Firms
need to make their supply chain leaner in order to overcome these disadvantages.

Impact of Global Economic Meltdown


The Indian Textile and Apparel industry has been hit hard by heavy interest rates, less
domestic consumption, and cancelled export orders. Economic slowdown in the US and EU
has affected the textile business in India, resulting in a drastic decline in the country's
garment exports. As meltdown has diminished garment sales in the US, Indian suppliers are
beginning to feel the pinch. As the customers of the Western countries curtailed their
expenses to fight slowdown, export market of apparels in countries like India began to shrink.
To sustain themselves in the market, apparel manufacturers chose to go in for cost cutting;
thereby opting for lay-offs. As per an estimate, during financial 2008-09, almost 800,000
garment and textile employees in India lost their jobs. As economic slowdown branched out
during the year, investments in textiles decreased, ultimately affecting the profitability of the
industry. The industry operated on around 75% of its capacity during the year.

85
http://www.fibre2fashion.com/industry-article/17/1658/recession-cannibalizes-more-indian-textile-jobs1.asp#
Budget 2010 Implications on the
Garments & Textiles Industry

The Finance Minister has proposed a one-time grant of Rs 200cr to the government of
Tamil Nadu towards the cost of installation of a zero liquid discharge system at
Tirupur to sustain knitwear industry. The dyeing units of Tirupur, which is one of the
major textile hub of India, have been facing problems because of environmental
concerns.
The new environmental regulations require the dyeing units to migrate to a zero
discharge system. The government’s proposal to set up an effluent treatment at the
textiles cluster is expected to offer a much-needed relief to the struggling industry.
The Finance Minister has offered extension of existing interest subvention of 2.0% for
one more year till March 31st, 2011 for exports covering handicrafts, carpets,
handlooms and small and medium enterprises (SME). The export oriented units have
seen massive layoffs and shutdowns in the wake of slowdown and the government’s
move is expected to give push to the exports sector with exporters getting access to
funds at cheaper interest rates.
The Finance Minister has proposed to launch an extensive skill development program
in the textile and garment sector by leveraging the strength of existing institutions and
instruments of the Textile Ministry to train 30 lac persons over 5 years.


Future Outlook for the Garments &


Textiles Industry
Branded marketers have adopted several new strategies which will alter the content and scope
of their global sourcing networks. India needs to strive hard to move up the value chain by
making the most of the growing synergy between textiles and clothing segments. This will
call for a much higher degree of consolidation in the apparel sector with larger units buying
up the smaller ones and increasing the share of branded items in the total trade.
Industry analysts expect that India’s labor cost advantage will result in a market share gain
for Indian exports. Indian textile companies, in the post-quota era, have become aggressive
and some of the big players in the industry have lined up investments to take advantage of the
opportunity global market offers. However, as per estimates, Indian companies need to invest
about Rs. 49,613 crore in improving technology in the next 2-3 years to become more
competitive.
Success will depend on apparel manufacturers going for modernization and scale economies
more aggressively and improving the supply chain management86. Right quality at the right
price and at the right time is the key for survival for the Indian apparel export industry. The
end of the quota regime would also see a lot of foreign retail companies moving to India to
divert a major part of their sourcing requirements. In a free trade environment, success of the
buying agents will hinge more on factors such as quality, price, delivery schedules and
marketing skills. While one has to be ever vigilant of non-tariff barriers in the post MFA
world, the new market will be won on the basis of capabilities across the supply chain. Policy
will need to facilitate this building of capabilities at the firm level and the flexible strategies
that firms will need to devise periodically.87
86
87
http://www.blonnet.com/2004/07/24/stories/2004072400191000.htm
http://www.iimahd.ernet.in/~chandra/papers/The%20Textile%20and%20Apparel%20Industry.doc
Chapter 8: The Road Industry
This chapter includes:
1.
2.
3.
4.
5.
6.
7.
8.
Introduction
Characteristics of the Industry
Key Trends
Key Drivers
Key Inhibitors
Impact of Global Economic Slowdown
Budget 2010 Implications
Way Forward
Review 2009-10
Revenue growth of construction players slowed down
in the third quarter of 2009-10, due to delays in project
execution as compared to the corresponding quarter of
previous year. During the same period, operating
margins improved, on account of softening of key raw
material prices. Net margins also improved y-o-y, due
to lower interest rate in Q3 2009-10.
Outlook 2010
The growth in order book of players is expected to
pick up on the back of new orders expected from the
industrial and infrastructure segments, owing to
resolution of some key policy issues, especially in the
roads sector. Operating margins are likely to witness
pressure in the next quarter, due to rising prices of key
raw materials such as cement and steel. Net margins
are expected to remain stable, due to improving
liquidity and low interest rates.
Introduction to the Road Industry
Historically, investments in the infrastructure sector, particularly in the highways, were being
made by the Government mainly because of the large volume of resources required, long
gestation period, uncertain returns and various associated externalities. The galloping
resource requirements and the concern for managerial efficiency and consumer
responsiveness have led in recent time to an active involvement of private sector. To
encourage participation of private sector, the government has also announced several
incentives such as tax exemptions and duty free import of road building equipments and
machinery etc. It has been decided that all the sub projects in NHDP Phase-III to Phase-VII
would be taken up mainly on Public Private Participation (PPP) route following either Build
Operate and Transfer (BOT) toll mode or BOT (Annuity) mode.
An efficient transportation system is critical for sustaining economic growth and the
burgeoning demand for passenger and freight movement. Recognizing this, the Government
of India (GOI) and several state governments have launched initiatives during the past decade
to modernize and improve the transport infrastructure. Starting with the 9th Five Year Plan
(1997-2002), road sector expenditures have gone up from 3% of the total Plan expenditure to
almost 12% today. These expenditures were primarily for national highway and rural road
development programs.
The Union Minister for Road Transport & Highways, Kamal Nath said India would be
launching $70 billion in the road sector in the next three years. The private sector
participation is expected to be about 40 billion USD. Besides projects under the NHAI, the
government also earmarks funds for constructing roads, undertaken by various state
government agencies and municipal corporations including “innovative funding” schemes in
the Budget for boosting the country's roads infrastructure development.
Characteristics of the Road Industry
• Road Network of India
India, having one of the largest road network of 3.314 million km, consists of National
Highways, Expressways, State Highways, Major District Roads, Other District Roads and
Village Roads with following length distribution:
Table 5: Road Network in India
National Highways/Expressways
State Highways
Major and other District Roads
Village Roads
70,548 km
1,28,000 km
4,70,000 km
26,50,000 km
The National Highways have further been classified depending upon the carriageway width
of the Highway. Generally, a single lane has a width of 3.75 m and 3.5 m per lane in case of
multi lane National Highways.
The percentage of National Highways in terms of width is as under:
Table 6: Highway Network in India
Single Lane/ Intermediate lane
Double lane
Four Lane/Six lane/Eight Lane
20,849 km (30%)
37,646 km (53%)
12,053 km (17%)
• Industry Structure
The Indian road construction industry is highly unorganized and fragmented. Only about
0.4% of the 250,000 contractors in India can be classed as medium to large firms (based on
the number of people employed per firm). Many of the medium and large construction firms
are still family owned and lack professional management and work culture. While small and
medium contractors have mushroomed in the recent past, large contractors have not grown at
the same rate either in size (turnover) or number. Consequently, on national and state
highway projects there are few contractors to choose from, only about 45-50 Indian
contractors and about 10-12 foreign contractors. Often these contractors form joint ventures
or consortia among themselves to qualify for most of the medium and large contracts in the
country. Subsequently, these contractors suffer from insufficient capacity; the result is time
and cost overruns, related disputes and poor quality. As such, there is a critical need for
reversing the slow growth of the large contractors and for enhancing the capacity of all sizes
of contracting and consulting firms.
The overall Indian construction industry, of which the road construction industry is a subset,
is highly unorganized. There is no national record of the number of contractors, their
background or capabilities. The present capability of delivery of India’s construction industry
is estimated at Rs. 3, 1008 billion per year. This works out to 12% of GDP. It is estimated
that approximately 250,000 contractors provide employment to about 31 million persons
(about 10% of the total work force) directly or indirectly. There is an urgent need to build the
capabilities of the contractors and workers. There has been a perceptible capacity building
and growth of medium and small contractors in the past few years. The trend for large
contractors, however, has remained somewhat unpredictable. On national highway projects
and big state highway projects under way, about 60 contractors, Indian and foreign, are
working. Many form joint ventures (JVs) and consortia among themselves to take up all
medium to large contracts in the country, with insufficient capacity to handle them. This is
clearly visible from the delays and cost over-runs in projects. Poor quality is also witnessed in
some cases.
While the government is providing increasing budgetary allocation for projects in the
highway sector and has undertaken major up gradation initiatives in high-density corridors, it
has not been possible to allocate sufficient funds matching the needs for maintenance of
National Highways. The physical programmes of road development and removing the
financial bottlenecks need concerted efforts in the form of mobilization of funds from other
sources. In-flow of private sector funds is expected to bridge the gap between the demand and
supply to a certain extent.
Trends of the Road Industry
Projects undertaken by the Ministry under Public/Private Partnership BOT (Toll)
Scheme: In a BOT project, the concessionaire (private sector) is required to meet the
upfront cost and the expenditure on annual maintenance. The concessionaire recovers
the entire upfront cost along with the interest and a return on investment out of the
future toll collection.
As on April 2008, 79 projects have been taken up valued about Rs.22, 249 crores with a
length of about 3,613 kames on Build Operate and Transfer (BOT) basis (Toll based
projects). Out of this, 29 projects have been completed and 50 projects are under progress.
BOT (Annuity) Scheme: In an Annuity project, the concessionaire (private sector) is
required to meet the entire upfront cost (no grant is paid by the client) and the
expenditure on annual maintenance. The concessionaire recovers the entire investment
and a pre‐determined cost of return, out of the annuities payable by the client. The
tolling is done by the client.
As on April 2008, 24 projects valued about Rs. 9,205.61 crores, with a length of about 1,340
kms have been taken on Annuity basis and out of this 8 projects have been completed.
Central Road Fund: The Central Government has created a dedicated fund, called
Central Road Fund from collection of cess from petrol and diesel. Presently, Rs. 2 per
litre is collected as cess on petrol and High Speed Diesel (HSD) Oil. The fund is
distributed for development and maintenance of National Highways, State roads, rural
roads and for provision of road overbridges/underbridges and other safety features at
unmanned railway crossings as provided in Central Road Fund Act, 2000.
Out of the cess of Rs. 2 per liter levied, Rs. 1.5 is being allocated in the following manner:
50% of the cess on high speed diesel (HSD) oil for development of rural roads.
50% of cess on HSD and the entire cess collected on petrol are allocated thereafter as
follows:
i.An amount equal to 57.5% of such sum for the development and maintenance
of National Highways
ii.An amount equal to 12.5% for construction of road under or over bridges and
safety works at unmanned railway crossings
iii.An amount equal to 30% on development and maintenance of State Roads.
Out of this amount, 10% shall be kept as reserved by the Central Govt. for
allocation to States for implementation of State road schemes of inter-state
connectivity and economic importance to be approved by the Central
Government.
Balance cess of Rs. 0.5 per liter is entirely allocated for development and maintenance
of National Highways. An allocation of Rs.12,830 crores has been made under the
CRF for 2007-08 with the following break-up: State Sector Roads: Since the State
Highways and major district and rural roads are the responsibility of respective State
governments, these are developed and maintained by various agencies in States and
Union Territories. However, the funds are also being provided from the Central Road
Fund (CRF) by the Union Government for the development of State roads under the
following schemes:
Improvement of State Roads from the CRF: The funds from the CRF are provided for
improvement of State roads other than rural roads. During the year 2006-07, 605 proposals
amounting to Rs.1, 541.93 crore have been sanctioned for improvement of State roads under
CRF. An amount of Rs. 1,565.32 crore has been allocated for the year 2007-08 for
improvement of State roads under CRF.
Economic Importance & Inter State Connectivity Scheme: To promote inter-state
facilities and also to assist the State governments in their economic development through
construction of road bridges between states and of economic importance, Central
Government provides 100% grant for inter-state of connectivity projects and 50% grant for
projects of economic importance. This fund is also provided from the CRF.
During the year 2006-07, 14 proposals amounting to Rs.103.32 crores with Central share of
Rs. 51.66 crore under EI scheme and 41 proposals amounting to Rs. 239.87 crore under ISC
scheme have been accorded in-principle approval by the Ministry. An amount of Rs. 173.93
crore (Rs. 164.93 crore for the States and Rs 9.00 crore for UTs) is earmarked under this
scheme for the year 2007-08.
Rural Roads: Roads are also being developed in rural areas under the Pradhan Mantri Gram
Sadak Yojana (PMGSY). The objective of PMGSY is to link all villages with a population of
more than 500 persons with all-weather roads by the year 2007. This is being implemented by
Ministry of Rural Development.
Bharat Nirman Yojana: To upgrade rural infrastructure, the Government has formulated a
proposal for providing the road connections to more than 38,484 villages above 1000
population and all 20,867 habitations above 500 population in hilly and tribal areas. To
achieve the targets of Bharat Nirman, 1, 46,185 kms. Of road length is proposed to be
constructed by 2009. This will benefit 66,802 unconnected eligible habitations in the country.
To ensure full farm-to-market connectivity, it is also proposed to upgrade 1,94,132 kms. of
the existing Associated Through Routes. A sum of approximately Rs. 48,000 crore is
proposed to be invested to achieve this.
Research and Development in Road Development: The main thrust of research and
development (R&D) in the roads sector is to build a sustainable road infrastructure
comparable to the best roads in the world. The various components of this strategy are
improvement in design, modernization of construction techniques, introduction of improved
material conforming to latest trends, evolving better and appropriate specifications,
encouraging development and use of new technologies etc. The dissemination of these
matters is done through the publication of new guidelines, code of practices,
instructions/circulars, compilation of state-of-the-art reports and seminars/presentations etc.
The research schemes sponsored by the Department are generally 'applied' in nature, which,
once completed, would enable them to be adopted by user agencies/departments in their work
in the field. The areas covered are roads, road transport, bridges, traffic and transportation
techniques etc. The Department takes the help of various research institutions, academic
institutions and universities to implement the schemes. An outlay of Rs 600.00 lakh has been
provided for R&D in 2007-08. Some of the ongoing major schemes are as follows:

Roads:
i.Development of GIS based National Highways information system;
ii.Guidelines for soil nailing techniques in highway engineering;
iii.Pilot study on effects of overloading on road infrastructure;
iv.Investigation on field performance of bituminous mixes with modified
binders;
v. R&D Studies on performance evaluation of rigid pavements on high density
traffic corridors using instrumentation supported by laboratory tests.
In addition to the above, the proposal of IIT, Roorkee for establishment of the
Ministry's Chair in the institute in the area of development of Highway System has
also been approved.

Bridges: Creation of complete range of independent testing facility at Central Road
Research Institute (CRRI ), New Delhi
Key Enablers of the Road Industry
Traditionally, the road projects were financed only out of the budgetary grants and were
controlled/supervised by the Government. The road sector has attracted very limited private
sector participation in the past. While the traffic has been constantly increasing at a rapid
pace, the traditional system of financing road projects through budgetary allocations has
proved to be inadequate. It was in this context that the necessity for exploring the innovative
means of financing the highly capital intensive road projects was felt.
The beginning of a significant private sector participation in road projects was made with the
launching of India's largest road project - National Highways Development Project (NHDP).
To encourage private sector participation, several initiatives have been taken by the
government which includes:








Declaration of the road sector as an industry.
Provision of capital subsidy up to 40% of the project cost to make projects
commercially viable.
100% tax exemption in any consecutive 10 years out of the first 20 years of a project.
Provision of encumbrance free site for work, i.e. the Government shall meet all
expenses relating to land and other pre-construction activities.
Foreign Direct Investment up to 100% in road sector.
Easier external commercial borrowing norms.
Higher concession period, (up to 30 years).
Right to collect and retain toll.

Key Inhibitors

Investment climate parameters such as availability of skilled staff, operational issues
(land, licenses and clearances, governance) and taxation were perceived as the prime
constraints, followed by material costs, contract enforcement and dispute resolution,
barriers to entry, and subsidies and fiscal concessions. Foreign contractors who were
surveyed cited as the most critical issues cultural bias in project management style,
poor governance, bureaucracy and corruption, risk allocation practices and contract
conditions, visa and travel document processing for expatriates, and lack of
information on the road construction industry. Besides these, foreign contractors also
perceived some intangible constraints, such as preference given to domestic
contractors during the bidding process.
Delays in pre-construction activities are a recurring problem across all road
construction contracts. On average for national highway projects it takes 50% more



time than scheduled to hand over encumbrance free land to the contractors. Often,
encumbrances such as the extent of land acquisition, utilities to be shifted and trees to
be removed are not clearly identified and dealt with in a timely manner. These
activities are also hampered by cumbersome procedures for obtaining the necessary
clearances, unclear laws and regulations and a lack of coordination between the
various government departments and levels. There is a distinct lack of a ‘spirit of
partnership’ between the contractor and the employer. This is critical to effective
project execution, as evidenced in other countries. The result is time and cost overruns
and related disputes that invariably end up in litigation.
Contractors from other sectors face entry barriers such as strict qualification
requirements related to previous technical experience in the sector. Rampant
cartelization and collusion among contractors in some states also prevent these
contractors and non-regional bidders from even submitting their bids. Furthermore, it
is not possible for small and medium contractors to get a rating that would facilitate
easier access to credit for expanding their business. The lack of a single construction
law (such as in China and Singapore) with the requisite legal framework governing all
aspects of construction is another barrier to entry for players interested in entering this
sector. Such a law would also strengthen the dispute resolution mechanism and reduce
the burden on the courts and the ensuing delays in satisfactory resolution of cases.
Inadequacy of skilled human resources is a major constraint across the road
construction industry. Its slow evolution, the rising appeal of other streams of
engineering such as computer science, the closure of civil engineering specialization
in some institutes, the non-availability of suitable jobs upon graduation (in some
states), and the availability of more lucrative jobs in information technology and
financial services are all draining the industry of civil engineers.

Budget 2010 Implications on the Road


Industry



Allocation for road transport increased by over 13% from Rs 175.20 bn to Rs 198.94
bn.
An allocation of Rs 7 bn for development of National Highways under Border Roads
Organization.
Specified road construction machinery items are presently fully exempt from customs
duty subject to specified conditions. Sale or disposal of such machinery items at
depreciated value is being allowed on payment of customs duties on depreciated value
at the rates applicable at the time of import subject to specified conditions.
An allocation of Rs 17.50 bn for Special Accelerated Road Development Project in
the North Eastern Region.
An allocation of Rs 94.72 bn for National Highway Authority of India



An allocation of Rs 2.30 bn for Inter-State and Economically Important Roads in
different States and UTs.
An allocation of Rs 45.75 bn for Development of National Highways.

Way Forward for the Road Industry


Sustained economic growth in India has resulted in increasing freight and passenger traffic
volumes. To meet current and future demands as well as reduce regional disparities India has
made significant investments and improved their road networks although following quite
different strategies. India has concentrated investments on lower level district and rural roads.
The underdeveloped arterial network in India is cause of huge economic losses..
In India financing mechanisms for road development and maintenance appear to be
inadequate and/or insufficient to meet expected demands in coming years. Private sector
participation in road development has been moderate at best, especially when compared to
other infrastructure sectors, and is unlikely it will take a much greater role unless
governments address private investors' concerns related to traffic risks and pricing structures.
India still has much to do in creating policy and regulatory environments that facilitate access
by the private sector to capital markets and provide guarantees for risk mitigation. Reducing
government intervention in financial markets should contribute to their deepening and
broadening as well as foster the growth of the investor base, especially institutional investors
- a natural source for funding road infrastructure. Easing restrictions on the deployment of
funds by institutional investors could significantly improve the flow of capital for roads and
infrastructure development in general. India has created specialized institutions for long-term
infrastructure financing and there are certainly arguments for establishing an Asian
investment bank in the line of the European Investment Bank. These institutions could indeed
play an important role in mobilizing resources by tapping into global financial markets and
channeling funds to road projects. However, their mere existence will not necessarily increase
investments in road infrastructure. As the shortage of viable projects for funding by the IDFC
illustrates, the underlying obstacles hindering investor confidence need to be addressed first
to make infrastructure projects attractive. The strong public good characteristics attached to
most of the road network dictate that the public sector should still be the main actor in
financing roads whether through general, earmarked taxes and/or debt. Developing an
adequate system of road-related charges and taxes will be central in creating a sustainable
model for road financing as well as encouraging an efficient allocation of freight and
passenger traffic patterns.
There is not only abundant global capital but also large levels of domestic savings in both
countries to finance the road infrastructure needs of coming years. The key challenge will be
developing efficient, stable, and sustainable mechanisms to intermediate those resources and
achieving the right balance between international and domestic capital and between private
and public financing.
Books


SME White Book – Business Standard
Credit Appraisal, Risk Management &Decision Making – DD Mukherjee
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