demystifying the indian tiger p.r. ramash deloitte india

Demystifying the Indian Tiger

2

The politics of investment

3 ©2009 Deloitte Touche Tohmatsu India Private Limited

The politics of investment…

• Election results were one of the biggest surprises of the year.

• Most polarized verdict given by the Indian population since 1991, bringing Congress backed UPA into power with an almost majority. Congress had its best show since 1991.

• Result: a stable government for the next 5 years

• The New Government to have more policy headroom as it would have more bargaining power due its dominant position in the coalition.

• Since the Communist Left front is not a part of the Government, the current Government can go in for reforms which were stuck due to Left’s opposition in the last term


The election manifesto was high on reforms

• Plans to add atleast 12,000-15,000 MW of power capacity per annum

• Increased allocation to renewable energy sources like Nuclear and Hydro.

• Pace of Oil and Gas exploration to be increased. Move to make India energy sufficient country.

• Strong emphasis on education with a focus impetus on rural education.

• High spending in core areas like Education, Health, Agriculture, Social Security and Infrastructure.

• Increase the spread of IT and Broadband technology

• PSU disinvestment would be pursued• Encouraging labour intensive, export driven

manufacturing segments by formulating conducive Foreign investment policies.

Sector focus• Road Transport / ighways

‒ Accelerate pace of awarding projects‒ Clear existing backlog

• Aviation‒ Inject capital to airline industry‒ Allow FDI in domestic carriers

• Telecom‒ 3G and Wimax auction

• Steel‒ Production Target: 120 mt (2012)

• O&G‒ Deregulation‒ Transparent oil subsidy mechanism

• Commerce‒ Check falling exports

‒ Ink FTA with Asean and South Korea• Power

‒ New capacity addition‒ Nuclear power


List of pending reforms / legislation

Reform Details

The Insurance Reform Bill Increase Cap on FDI in insurance from 26% to 49%

The Pension Fund Regulatory &Development Authority Bill

Liberalize and Regulate new pension scheme ascompared to the existing Scheme

Labor Laws Amendment Bill Applications to some provisions of labor laws toLabor Laws Amendment Bill companies with 500 or fewer employees to be limited

IFRS Expected 1 April 2011

The Direct Taxes Code Bill, 2009 Expected 1 April 2011

The Companies Bill Expected


Stated intention to execute“Fiscal prudence and disinvestment of public sector units, all these issues will be tackled by the Finance Minister in the Budget” Prime Minister Manmohan Singh

“The government would speed up its rural electrification programme under which it has brought electricity to over 61,000 villages against targeted 1.18 lakh” Power Minister Sushilkumar Shinde

“In the past, there has been enough planning. Now thoughts have to be transformed into action. In a few weeks, a new model will be found so that India can build the highest number of road kilometers. We have to see that all the outlays are utilized” Kamal Nath - Union Minister for Road Transport and Highways

“The issue of deregulation is being discussed and would be put up before cabinet for a decision” Petroleum & Natural Gas Minister Murli Deora

“India will intensify its global economic engagement in sync with the country's profile and the Government will take "every possible step" to give a fillip to the industry.” Commerce and Industry Minister Anand Sharma

“By the end of this year, process for auctioning 3G spectrum would be completed. Mobile Number Portability, which would allow users to switch operators without changing numbers will begin in October.” Communication & IT Minister A Raja

7

Strengths

©2009 Deloitte Touche Tohmatsu India Private Limited

Why India?The Value Proposition

Pull Factors• Availability of skilled talent pool• Low cost manpower• Availability of resources• Strong economic fundamentals• Large domestic market• Enabling institutional and

regulatory environment• Progressive reform process

8

“Indian economy is now ranked 12th largest in the world in terms of GDP……It is projected that it will be the 8th largest economy in the next 20 years with a GDP larger than that of Italy, France and Germany by 2025”

CII-AT Kearney ‘MNC Survey’:70% MNCs surveyed say “high likelihood” of making additional medium and long term investments in India

3 out of every 4 MNCs state performance in India ‘met’ or ‘exceeded’ expectations(Source: IBEF)


StrengthsAdapting to Local Conditions

9

(Source: IBEF)

Developing processes and allocating resources for clearances and approvals

Developing processes and allocating resources for clearances and approvals

Workable solutions to investing in physical infrastructureWorkable solutions to investing in physical infrastructure

McDonald's: unique cold chain network ensures food products move from farms to fork absolutely fresh and at the lowest possible cost

Reverse osmosis water treatment plant in every restaurant to provide pure water

McDonald's: unique cold chain network ensures food products move from farms to fork absolutely fresh and at the lowest possible cost

Reverse osmosis water treatment plant in every restaurant to provide pure water


StrengthsAbility to Leverage Opportunities In India

10

Colgate: worldwide sales rose by 4.5 per cent, subsidiary in India recorded 26 per cent growth

ABB: Parent sales growth 11 per cent while in India subsidiary grew by 15 per cent (FY 2008)

OpportunityOpportunity

Using Indian operations to boost global revenuesUsing Indian operations to boost global revenues

Suzuki: India remained the only major market to grow and saw first half sales moving up by as much as 24% at 4.7 lakh units (Oct 2009)


StrengthsUtilising In-born Strengths

11

(Source: IBEF)

Corporate Social ResponsibilityCorporate Social Responsibility

Well- trained sales forceWell- trained sales force

Customer care initiativesCustomer care initiatives

Leveraging brand strengthsLeveraging brand strengths

Volvo: Provides driver training, preventive maintenance and service agreementsWorks closely with customers to improve vehicle utilisation and returns

Pfizer: Sales force automation tool ‘Optima’ implemented across entire salesorganisation to plan customer contacts and implement marketing programmes

‘Leaders Academy’- comprehensive management development programme

Novartis: Dedicated sales force for targeting disease segments more prevalent

Pfizer: Corex and Becosules are leaders in respective segments

Novartis: Joint Effort to Eradicate Tuberculosis, “Glivec International Patient AssistanceProgramme,” Comprehensive Leprosy Care Programme


StrengthsUtilising In-born Strengths

12

(Source: IBEF)

Wide product portfolioWide product portfolio

Creation of effective distribution network/dealer networkCreation of effective distribution network/dealer network

Launching high quality, best in design, technology rich products Launching high quality, best in design, technology rich products

Innovative promotion and advertising initiatives

Innovative promotion and advertising initiatives

Whirlpool India: initiated Six-Sigma program in 1999Initiative extended from sales and marketing to customer focusQuality consciousQuality conscious

Volvo: FM range of trucks launched recently in India are already Euro III compliant

Pfizer: OTC segment brand-building supported by good ads. Campaign for Gelusil tablets won award for Creative Excellence at 36th ABBY

Whirlpool India: Shift in strategy from premium-player to a mass-player. Has introduced products in all price categories

Novartis: Process of expanding business into new markets. Planning to enter Tier-II and Tier-III cities and rural markets

Threats

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However threats remain…Infrastructure

India's infrastructure need in next few years is estimated at over US$ 340 billion

Power: Total investment opportunity of aboutUS$ 150 billion to generate an additional78,000 MW in the next five years

Road infrastructure: To develop 8,737 km of highways

Urban infrastructure: Expected spend of US$ 50 bn over next 5 years

Ports : Need of US$ 12.4billion in major portsin the next 9 years

Infrastructural Constraints Particulars

Electrical Connection (days to establish) 82

Value Lost to Outages (as % of sales) 9.00

Value Lost to Failures (% of sales) 87.00

Telephone Outages (days) 64

Value Lost to Outages (as % of sales) 62.00

(Source: Deloitte Report on Infrastructure Opportunities in India)

14


Threats…Operational Issues

Starting a Business (Days)

Dealing with Licenses (Days)

Registering Property (Days)

Trading Across Borders (Days)

Enforcing Con-tracts (Days)

Closing a Business (Months)

Paying Taxes (Hours)

48

363

32 20

241

28.8

584

71

270

6736

425

120

264China

India

Time DelaysTime Delays

(Source: World Bank, ISI Emerging Markets)

Delays in providing Posco a mining license

Delays in project implementation for Mittal Steel in Jharkhand


Threats …Operational Issues Possible Agency Approvals Required

Registrar of Companies

District Industry Center

Secretariat of Industrial Assistance

State Infrastructure Corporation

Department. of Town and Country Planning

Local authority/District Collector

Municipal and local authorities

Chief Inspector of Factories

Pollution Control Board

Electricity Board

Chief Inspector of Boilers

State Finance Corporations

State Industrial Development Corporations

Sales Tax Department

Central and State Excise Depts.

State Director of Mines and Geology

Regional Office of Bureau of Indian Standards

Quality Marking Center of State Government

Inspector of Weights and Measures

Regional Office of Director General of Foreign Trade

Starting a Business

(2005)

Dealing with Licenses

(2005)

Registering Property (2005)

Enforcing Con-tracts (2005)

0

5

10

15

20

25

30

35

40

45

13

30

3

25

11

20

6

40China India

Nu

mb

er

of

Pro

ce

du

res

Red TapismRed Tapism

(Source: World Bank, http://dipp.nic.in/invindia/appclea.htm)


Threats…Regulatory Issues

Labour Laws

Labour Laws

Difficulty of Hir-ing Index

Rigidity of Hours Index

Difficulty of Fir-ing Index

Rigidity of Em-ployment Index

Hiring cost (% of salary)

Firing costs (weeks of wages)

0102030405060708090

100

11

40 4030 30

90

56

40

90

62

12.3

79

China

India

Ind

ex

Va

lue

India: Industrial Disputes Act (IDA), 1947: requires firm employing more than 100 workers to get state government permission before retrenching workers

45 laws at national level and close to four times that at state government level to monitor functioning of labour markets

World Bank: India Rigidity of Hiring and Firing Rank: 48. China: 30, Korea: 34, Norway: 30, Singapore: close to 0

In 2004, 482 cases of major work stoppages in India, for China is close to zero

(Source: BBC)

(Source: World Bank)

18

Outlook


Outlook

• India’s growth is at a premium to most economies.

• Incremental returns are likely to be driven by earnings growth.

• With a GDP expectation of 8%, corporate earnings are likely to grow at double digits.

• Fall in oil prices will lead to annual saving of about $20bn or 2% of GDP.

• Decline in interest rates to boost investment and consumption.

• Lower commodity prices are likely to improve profit margins meaningfully.

• Stable central government can put in place much needed reforms, bolster public spending

1919

20

Strategy inputs


Inputs to your strategyAbility to Leverage Opportunities in India

• Cater to a large domestic market

• Localisation of the supply chain

• Utilise India as a base for developing products for the global market

• Set up R&D Centers

• Set up Service Centers

• Avail investment incentives on offer

• Use Indian operations to boost global revenues

Entry Options for MNC’s

• Acquisitions

• Master Franchisee Agreements

• Alliances

• Supplier Contracts

• Greenfield Investments

• Joint Ventures


Success of JVs in India

22

Today, companies seem satisfied with how the JV collaborations are progressing• Indian partners have realized the inherent conflicts of JVs• A thorough research goes in identifying the right partner

• Manufacturing, purchasing, and product adaptation are considered the most successful JV collaboration areas

• The major problem area seems to be in research and development (R&D).

• For JVs to work well, there needs to be equality in the relationship

• Protection of intellectual property is an advantage in India

Global companies are attracted to India because of its skilled workforce, its low wages, and its growing domestic market. Many have sought to navigate with the help of a local partner

Source: IBM Inside India Study Survey 2007

23

Some operational aspects


Exchange control regulations

24

• FDI up to 100 percent permitted under automatic route in most sectors subject to some exclusions, sectoral caps, conditions (e.g. retail, defence, telecom)

• Import of components is allowed without any restrictions

• Payment for Brand name/ trade mark royalty subject to:

‒ Without technology transfer – up to 1% of domestic sales & 2% of exports

‒ With technology transfer – up to 5% of domestic sales & 8% of exports

• Lump sum payment on account of foreign technology collaboration up to USD 2 million under automatic route


WHT and Service tax implications• Intellectual Property Rights

‒ Designs‒ Patents‒ Trade Marks ‒ Other Intangible Property

• Technical Know-how/ Consultancy

• Management Support

• Cross Charges for:‒ Expatriate Employees‒ Common Group Costs‒ Advertisement/ Publicity‒ Infrastructure Sharing

28

Payments by Indian Partner to Foreign Partner

Service Tax Implications under Reverse Charge Mechanism

Availability of Tax credits could be explored

Payments by Foreign Partner to Indian Partner

Service Tax Implications

Availability of exemption benefit on ‘export of services’ could be explored


Free trade agreements

29

• Offer concessional/ exemption customs duty benefits on imports from contracting countries

• Concessions range

• Rules of Origin to be satisfied:‒ Products Wholly Produced or Obtained

in Exporting Contracting State‒ Non-Qualifying Operations‒ Products Not Wholly Produced or

Obtained in Exporting Contracting State‒ Single Contracting State Content –

Value Addition, Change in Tariff Heading‒ Regional Cumulation – Value Addition

Existing FTAs Proposed FTAs

Afghanistan Australia

Bangladesh Europe

Bhutan Gulf Cooperation Council

Chile Indonesia

China Japan

Korea Malaysia

Maldives New Zealand

Mauritius South East ASEAN Nations

Myanmar South Africa Customs Union

Nepal

Pakistan

Singapore

Sri Lanka

Thailand


Preferred locations for manufacturing• EOU/ STP/ EHTP/ FTZ

‒ 100% export profits exempt from tax for 10 years‒ Sunset clause: March 31, 2010

• SEZ‒ 100% export profits exempt from tax for first 5 years‒ 50% for next 5 years ‒ 50% for next 5 years subject to transfer to special reserve

• Special deduction for setting up manufacturing units in Notified areas (J&K, Himachal Pradesh, Uttarakhand)

‒ 100% for first 5 years‒ 30% for remaining 5 years

• Additional R & D deduction‒ 150% deduction for all capital & revenue expenditure (excluding Land &

Building)

Note: Eligibility conditions ,as set out under Income Tax Act ,are required to be complied with to claim the above benefits

30


How does India figure?

• Highly educated workforce:‒ English is lingua franca‒ We even have a God for education!

• High savings – Natural thriftiness. A value for money proposition always finds success

• Entrepreneurial talent:‒ A nation of shopkeepers and businessmen‒ Increasingly Indian operations a source

for the global talent pool• Rule of Law – The judiciary seen as the

bedrock of our democracy. Stable Government.

• Large domestic market Advantage India Advantage India


Contact details William BlommeISG Leader

Partner – Audit

Tel: + 32 2 800 22 05

Fax: + 32 2 800 20 05

E-mail: [email protected]

Erwin VanderveldePartner – Laga Lawyers

Tel: + 32 2 800 70 76

Fax: + 32 2 800 70 03


Bart LiebenDirector – Laga Lawyers

Tel: + 32 2 800 70 39

Fax: + 32 2 800 70 01


Bart VerhelstPartner – International Corporate Tax

Tel: + 32 2 800 86 51

Fax: + 32 2 800 86 01


32

Julien PauwelsDirector – International Indirect Tax

Tel: + 32 2 600 66 25

Fax: + 32 2 600 66 11


Hilde WittemansPartner – Financial Advisory Services, M&A

Tel: + 32 2 600 62 30

Fax: + 32 2 600 62 01


Patrick JouckenPartner - Consulting

Tel: + 32 2 749 57 52

Fax: + 32 2 749 56 70


P.R. RameshManaging Director – Audit

Plot No. 12

Dr. Annie Besant Road

Opp. Shivsagar Estate

Worli Mumbai-400018

Tel: + 91 22 666 79000

Fax: + 91 22 666 79025


mailto:[email protected]
















©2009 Deloitte Touche Tohmatsu India Private Limited33

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