Transcript India`s services sector

Dr Amit Rangnekar
www.dramitrangnekar.com
India’s services sector
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2007- $600b
Contributes 69% of GDP growth
Services exports
$9b in 1997
$19b in 2002
$73b in 2006
Annual growth rate @ 28%
3% of global service export
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Services – India v China
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Economic growth, 1992-2005- India 6%, China 10%
Drivers- India IT, China manufacturing
Services- India 54%, China 41% but manufacturing bigger
Services share of employment- India -1%, China +
India IT $87b- ITS, ITES, software, and e-business
IT- India 70% exports, China 6% Piracy rampant
China- majority software- producers & consumers- domestic
Infrastructure, subsidy, incentives, benefits, SEZs- software
India, service sector succeeded with limited GOI interaction
India- entrepreneurship, China state support
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HEFTI
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Hospitality & Healthcare
E- Education & Entertainment
F- Financial Services
T- Telecom, Travel & Tourism
I- Insurance
Professional Services- counseling, consultancy, legal
Utilities- Salons, pest control, plumbing, laundry
Retail (world’s largest employer)
Construction & real estate
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1947-2007- Sectoral Contribution %
1947
1977
2007
Growth%
(1991-2006)
Agriculture
72
48
18
3%
Industry
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5%
Services
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60
8%
Economy
4%
3%
8%
6%
“ IT and ITES can do for India what automotives did for Japan
and oil for Saudi Arabia.” Noshir Kaka, Principal, McKinsey
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1991-Liberalisation
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Reforms- Deregulation, role reduction of PSUs
Economy integration into international markets
Unleashing India’s entrepreneurial spirit
Result- GDP growth shifts from traditional 3 to 6 to 8%
Asian economic success- Japan, Taiwan, S Korea, China
BRIC- 2050, India 3rd-largest economy after China, US
Economic centre of gravity shifts to Asia- Kissinger
Key to success- Internal regulatory policy & environment
Test- Ability to sustain momentum
Reforms- Labour, privatisation & FDI- remain difficult
Political- ensuring wide distribution of growth benefits is critical
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Services
• Key to India’s economic expansion
• Asian economies’ driven by export-oriented manufacturing
• India- by services- high-end, knowledge-intensive services
exports
• Services outgrow the economy in multiples, productivity also
• WTO definition of services includes construction
• Unusual- low PCI, but in services- middle-income developing
countries
• Theory- Services develop after agriculture & manufacturing
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Can services sustain growth
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Yes- if it benefits all strata
DilemmaKnowledge-intensive sector
Unlikely to become mass employer of low-skilled labour
SolutionGrowth of dynamic services export sectors (IT-ITES)
Generates income growth
Stimulates domestic demand in other sectors- infrastructure
development, construction, manufacturing and retail
• These sectors provides jobs for low-skilled labour
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Sub sectors as enablers
• Sub-sectors- unregulated (IT–ITES) / open to competition
(telecom and aviation)
• Growth drivers- Lowering FDI restrictions & SEZs
• Knowledge-based services (KBS)- IT–ITES- key growth drivers
• Least regulation, low investment, technology advances, low-cost
educated workforce, English-speaking capabilities
• External demand- major $ earnings, burgeoning FDI, MNCs
• Fuel local demand- buildings, infrastructure, affluence, retail,
manufacturing & logistics
• Increase sub-sector productivity- Telecom, financials, biotech
consultancy & private healthcare
• Key- balance telecom, infrastructure, information & financials
• Support thro- transport, power infrastructure and labour
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Issues
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Reforms in ‘enabling’ sub-sectors vary
Services- less regulated wrt manufacturing
FDI restrictions- financials, banking and insurance
Transportation- mixed- Ports open to competition, but restricted in
railways and roads, modernisation of airports under way
Power shortages- major growth constraint
Retail, legal, accountancy- protected from foreign competition
Shopping mall revolution- insatiable demand
Requirements- New skills in integrated distribution & SCM
More Indians travel overseas & xp international service standards
Complete FDI liberalisation fraught with political difficulty
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India
• Energy, entrepreneurialism, optimism
• GDP growth till 2040- 6%(GS), 5% (PWC), 6% (Economist)
• To rival the largest EU economies(2020) & Japan(2030)
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Services % of GDP- Wrt Asian Giants
United Nations Statistics Division 2006
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Services trade
• ‘The aphorism “In a desert one should find camels not
hippopotamuses” is a good guide to analyse the economic growth
pattern. If rain is scarce, then find animals adapted to water scarcity,
not those reliant on water. In an economic environment where,
transport infrastructure is scarce, find “infrastructure camels”industries & firms that thrive should be less than usually reliant on
infrastructure.’
• (World Bank ’06)
• Services- less dependent on major investments, so lesser
investment-related regulatory hurdles
• Transport infrastructure shortcomings tend to have lesser
bearing on most services sectors (Bangalore, Gurgaon)
• Exports US$61b @ 20%- 10Y CAGR
• Imports US$38b
• Technology development- key enabler
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India’s Services Trade
Includes travel & transportation
Source RBI 2006
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Sans travel & transportation
India- Services FDI inflows-2002-06
Computer services
Finance, insurance, real estate
Construction
Transport
Media
Trade, Hotels, Restaurants
Others
Source RBI 2005
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Changes
• Increased outsourcing of services• Software devt, design, testing, back-office and post-sales service
• Increased private consumption of services- High 64% of GDP
domestic consumption fuels growth-(EU58%, Jap55%, China42%)
• New growth drivers- 2003- 30% increase- Hotels & restaurants,
medical care & health services, transport, communication,
education, movies & theatres, vacations- (KSA Technopak
Consumer Outlook 2004)
• Buoyant middle class- (NCAER 2003, based on 2001 census)
• In 2003- 53m households, 280m people AHHI-90k+
• 11m households, AHHI Rs2L-10L+
• Relatively low cost of most goods and services, growing
• By 2010- 108m households AHHI Rs90K+ (>double 2003)
• 28m households, AHHI Rs2L-5L+
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Indian Household Incomes (Rs 000 pa)
Source- NCAER 2005
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How growth in services leads to
development
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Driver
• “The advent of the internet proved to be the most important turning
point. New technology meant that at last India could reap the
benefits of its long-term investments in education, and
inadequacies in infrastructure were less of a hindrance.’
• Joseph Stiglitz, Making Globalization Work
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IT-ITES- Key driver
• Growth, huge forex earnings, created high-quality jobs
• Triggered productivity-enhancing technology thro linkages with
other industries & PSUs
• Driver- International demand- IT, Y2K, BPO, KPO, analytics
• Supportive policy environment
• Large pool of professionals, English, cost advantage
• Legal, engineering, R&D, medical, education, training
• 2005- Industry- $28.2b (NASSCOM 2005), IT services &
software- $16.5b, ITES-BPO- $5.7b, Hardware- $6 billion
• 4% of GDP in 2005, 5% in 2007
• Top10 account for 60% total computer services exports (2003)
• India’s share of global IT software ITES- 3%
• Domestic growth 30%
• Around 2m employees
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Telecom- Enabler
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Efficient telecom infrastructure generates significant spill-over
Info- exchange, 2 way communication, economies lower costs
Connect labour, tech, products & services- local & global
Extensive deregulation & liberalisation, driven by tech & IT
Communications sector CAGR 24%
5% of GDP
Mobiles- 350m mobiles @ 82% pa, tele-density 35/100
Internet use- 51m (2005), Broadband 5m (2008), low penetration
Rural penetration & internet convergence will sustain growth,
address regional inequalities & ensure broad development
• Telecom & information access can enable delivery of basic
services- medical care, financials, education, agri-biz
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How policy drove IT
• Software- Y2K-driven demand
• 1984- Software ‘industry’- investment, low duties, incentives
• 1990s- Software Technology Parks(STP) like EPZ- physical &
communication infrastructure, EOU benefits, tax holidays
• FDI with 100% per cent foreign equity permitted
• 40 STPs by 2004
• 1997- Software import duty 0%, software firms can invest abroad
• 1998- Plan to bolster telecom & other infrastructure
• 1999- Included in ‘priority sector’ for bank lending
• Labour laws enable 24*7 working (Few states)
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Telecom Policy
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1992- Cellular phone & paging opened to private competition
1994- Opened basic telephone services to the private sector
1997- TRAI to drive policy and progress
1999- Revenues fell short of expectations
Enabling policy to drive convergence of telecom, IT & media
2002- International long distance & Internet telephony opened
Tata M&A VSNL
2005- FDI raised from 49 to 74% (With security conditions)
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Policy driven growth
In 10 years, Tariffs
declined from Rs 16 to Re 1,
Dr Amit Rangnekar NMIMS
subscribers www.dramitrangnekar.com
surged from 2 mn to 280 mn
SMS- Price Impact on Volumes
75% price reduction over 3 years,
Dr Amit Rangnekar NMIMS
600%
surge in volume
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Exports of other commercial services
• India’s IT–ITES & telecom sectors dynamism is widely recognised
• 2001–05 Exports of other commercial services (excluding software
services) quadrupled to $13.8b
• 2005–06 grew 64% to $22.6b to rival software services exports
• (RBI 2006a)
• Most growth from ‘miscellaneous other commercial services’
• sub-sector- 20 professional services
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Services Exports
Software
Insurance
Communication
Construction
Financials
Management
Others
Total
2001
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$10b
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2006
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28
$46b
Emerging services exports
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Architectural, engineering & technical services- $5b
Maintenance of offices abroad-$1.5b
Trade services- $0.9b
R&D services- $0.5b
Merchanting services- $0.5b
Advertising / trade fair- $0.4b
Legal services $0.4b
News agency services- $0.35b
Accounting & auditing services- $0.2b
Others- Medical tourism, biotech and films
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Finance – work in progress
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Vital role in investment
Vehicle to channelise savings to individuals & businesses
Banking(1993) & insurance(2000)- opened to private competition
1993- Private sector mutual funds permitted
Stock market reforms- NSE world’s 3rd largest, BSE 5th
Indian borrowers pay more for capital & depositors receive lower
return in comparable economies
• ‘Addressing shortcomings thro’ integrated reforms could raise
India’s GDP growth by 3%’- McKinsey
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Banking
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Tradition- poorly performing public sector banks (PSBs)
Outdated practices and technology
1993- RBI guidelines to establish new PSBs
Foreign banks permitted more liberal entry, modest equity
Interest rates deregulated
Banks- more freedom to invest a assets outside cash/govt
1994 PSBs to raise capital through IPO
Foreign investment remains severely constrained
RoA- from 0.4% (1992) to 1.2% (2004)
NPA to gross advances- 14.4% (1998) to 7.2% (2004)
Bad loan- 2% of all loans, China 20%
Significant inprovement in PSBs
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Banks June 2008 (ET 26Nov P1)
• Commercial banks- 171
• Total ATMs 21147 (2007)
• Total branches- 76003
• SBI- 5600- 27%
• Rural- 30955
• ICICI- 2209- 11%
• Semi urban- 17771
• UTI- 2100- 10%
• Urban-14412
• HDFC- 1471- 7%
• Metropolitan-12865
• Corporation Bank- 901- 4%
• Top 6 Banks
• PNB- 830- 7%
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FDI
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FDI policy- severe resistor
2005- Foreign banks allowed to establish own subsidiary
Limit on investment/ shareholding/ control in PSBs
M&A and consolidation
Union concerns over retrenchments stalled M&A
Financial services- low rural penetration, access will benefit rural
businesses, raise living standards
Bank a/c- 42% rural households
Credit access from formal source- 21%
ICICI- innovation in technology- No 2 bank, now rural thrust
ATM revolution
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Insurance
• Enhance financial intermediation, create liquidity & mobilise
savings
• Cover risks, enable firms to expand, pursue new opportunities
• State monopoly till 1999, IRDA opened private competition
• Private firms-product price control, guidelines for fund investment
• Non-life sector- GIC, 4 subsidiaries, ECGC; Life- LIC
• 2000- 26% foreign equity limit, 49% proposed in 2008
• Life- LIC + 14 private insurers
• 2007- 60% LIC, 40% Private
• Health insurance- fastest growing segment of non-life sector
• Most private insurers have foreign equity partners
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Transport
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Infrastructure- vital to growth, most affects manufacturing
Feeble attempt at upgrading & modernising infrastructure
Public Private Partnerships (PPPs)
Infrastructure- traditionally with public sector
Government funding in transport infrastructure, power and
physical infrastructure- water supply and sewerage
• Projects on a build-operate-transfer (BOT) basis
• 1995- ‘Golden Quadrilateral’ & N-S & E-W corridors- 4 laning and
6 laning of 14 000 km of the existing roads, 70% complete 2007
• 1999- Port connectivity project
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Railways
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Traditional government control driven by political compulsions
Recent improvements in financial performance not service
Modernising is the key
Freight & wagon turnaround times drove profitability
Complex passenger & freight pricing policies simplified
Focus on port connectivity
2006- privatised railway container licences
Profits
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Ports
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2005, 13 private-sector port projects
Additional capacity 47mtpa- 10%+ existing cargo throughput
Investment of Rs26 billion (US$600m)
Significant investment in ‘minor ports’ (state responsibility)
Terminals at state-owned ports leased to private operators, for
container handling
• Allowed JV between major, minor & foreign ports
• Plan- corporatise India’s 12 major ports, handling 75% traffic
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Airports & air services
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Modernisation critical
Government leased India’s 4 principal airports to private players
Foreign companies in consortia bid for Delhi & Mumbai airports
1994- Domestic air services liberalised, private carriers allowed
2006- Private carriers allowed to fly abroad, consolidation
Booming demand- 12 players, 33m passengers (50m N3Y),
FDI in domestic airlines raised to 49%, direct participation of
foreign airlines not allowed
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Services employment
• India’s workforce 337m- (2000)
• IT, finance, insurance, transport, retail, infra-create new jobs
• Can services growth generate 200m jobs (existing un/underemployed) + 170m (new workforce) by 2020?
• Services- 60% GDP share but only 40% employment share
• Services- largest employer in unorganised sector- trade, hotels,
restaurants
• But services largest source of employment growth since 1991
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Retail
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Retail- fragmented, almost exclusively in unorganised sector
Dominated by small,nfamily-owned shops with unpaid labour
India- world’s highest retail outlets density- 15m (US 9L)
Retail industry- largest jobs provider after agriculture
6-7% of employment, 10% of GDP (The Economist 2006)
2003- New shop- 15 licences from 11 government bodies, took
6 months, cost Rs 5L (The Economist 2006)
• States- APMC forbids farmer to sell produce directly to retailers
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Retail
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India retail business $322b(2007)-$590b (2011) @ 13%
Organised retail- 86% in 6 biggest cities
Unorganized retail $309b(2007)- $496b(2012) @ 10%
Organized retail 4% of total retail (2007), 16% by2012 @50%
Unorganized & organized retail to coexist & grow
Unorganized retailers would prefer to compete than exit
Organised retail employ significant low-skilled people
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Retail India $500b
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Large-organised retail
• Constraints- real estate prices, poor transport infrastructure, policy
& unavailability of land
• Change- Retail chains, 200 large malls/shopping centres (2007)
• Reliance- From 806 now, N2Y invest $2.2b to scale up to 1800
supermarkets & hypermarkets, 60 supply centres, employ 5L
• Customers benefit- lower price, better quality, informed salesmen
• Suppliers benefit- reduction in intermediaries, improved storage &
transportation practices and technologies through value chain
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Retail Policy
• 2006- Policy to open up sector in a limited way
• FDI upto 51% in retail trade of ‘single brand’ products
• ‘Multi-product’single brands– but with own branded goods or
private labels allowed to invest
• Policy restricts global majors entry
• FDI would intensify competition, bring best international practices,
create opportunities to export
• Generate retail and small scale ( agri, foods) employment
• Food processing- India adds 7% to agri-output value, China 40%,
Thailand 60 per cent (The Economist 2006)
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Organised v Unorganised Services
sector 2002
Planning Commission 2002
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Logistics
• Modern retail- efficient distribution systems & integrated supply
chains.
• Handicaps- perishables storage, transport delays, poor
infrastructure & regulatory disincentives
• ‘Due to inadequate cold storage, 35-40% fruit & vegetables
grown in India rot where harvested or in transit (The Economist
2006b)
• “On a typical 2150 km journey between Kolkata & Mumbai, a
freight carriers must negotiate restrictions on travel times for
heavy vehicles, traffic jams, limited opening hours on interstate
borders and numerous toll booths. The journey takes around 8
days at an average speed of 11 kmph with around 32 hours
spent waiting at toll booths and checkpoints.” The Economist
(2006)
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Legal & accountancy
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Vital role in supporting & facilitating business, encouraging FDI
Both subject to significant domestic regulation
Limitations on size of firm, barriers to foreign entry
India- 1m lawyers, 2nd to US (1.1m)
Foreign lawyers, law firms, legal services not allowed
Indian lawyers can share profits only with other Indian lawyers
Accountancy services- highly fragmented
ICAI- regulates, does not recognise foreign qualifications
Firms can only operate as partners/ sole proprietors
Foreign accountants cant be equity partners
Foreign firms can practice only if home country reciprocates
Internationally-based accounting firms can operate as consultants
Barriers preclude exposure to best-practice legal
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Construction
• Highly fragmented
• ULCRA prevents people from buying large tracts of land
• Reforms can precipitate large-scale construction & employment
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Reforms
• BPL- 36% (94) to 26% (2000) to 22% (2005)
• Economic growth in services, mainly in urban areas- particularly
in larger cities
• More in some states than others
• Poor finances- constrain education, healthcare & infrastructure
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Education
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Expanded, but constraints hinder economic growth
Universality of elementary education not met
Literacy rates- 18% (1951) to 65% (2001) to 75% (2007)
Encouraging growth in higher education enrolment (5%)
Not vocation based, graduation does not impart skills
"Human capacity is not going to fall short - we have 15m people
coming into the job market every year. Within that are about 2.5m
new graduates and 500,000 postgraduates. What we find is that
skill-sets are not matching a lot of the jobs. What is being taught is
a disconnect from what we require. Last year, to recruit 10,000
people we had to see 300,000 resumés." KV Kamath, CEO ICICI
Bank
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Education
• India- 350 universities, 16,000 colleges, 60m graduates
• 100% education FDI allowed, but GOI doesn’t recognise
qualifications
• Lack of vocational education, specialisation, infrastructure
• Large, qualified, English speaking- scientists & engineers pool
• To catch up each university has to cater to 2.5-3L students
(Mumbai / Delhi University)- but there are only few that size
• Average students / college should be 5k, difficult
• ‘India graduated 250,000 engineers a year, China 600,000 and the
US 137,000 but, only 10% Chinese engineers & 25% Indian
engineers could compete globally’ McKinsey Global 2005
• ‘Extremely capable students rejected by IIT / IIM study abroad’
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Indian entertainment & media
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2007- 99 million newspaper copies (2nd) largest)
60m internet users
5m broadband users, but ad revenues 300cr @50%
2006 Indian entertainment & media industry- 35,300cr, Rs
83,740cr by 2010 @CAGR 19%
Drivers- economic growth, rising incomes, consumerism, policy,
technology (DTH, IPTV), low media penetration & ad spends
TV, Print, Outdoor media to treble
Radio to quadruple
Live entertainment 2.5x
Music- dogged by piracy, low growth
Entire music industry is 750cr in 70 years of existence but mobile
music is 2500cr in < 10 years!
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Indian entertainment & media industry 2006
Media
2006
2010
(Rs Cr)
CAGR Driver / Resistor
%
Entertainment
& Media
35,300
83,740
19
Eco growth, affluence, tech,
low penetration,
consumerism, policy
TV
15000
43000
24
Subscriptions, DTH, IPTV
Print
7000
20000
12
FDI, boom, content, policy
Radio
300
1200
32
FDI, private players,
penetration
OOH
900
1,750
14
Fragmented, likely to evolve
Event Mgt
800
1,800
18
Affluence, westernisation
Music
700
740
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Piracy; mobile music &
licensed digital distribution
may revive
Internet
100
700
50
Already viewed > TV
India Environment
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Strong growing economy, booming external trade, reforms
Huge middle class, growing affluence
FDI- service opportunity
Shortcomings- Power & transport infrastructure
Onerous regulations, corruption , e-governance, improved
accountability, activist media and NGO community.
• Key to success- research, political will, preparation, long term
approach, careful selection of partners / customers
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IPR
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1994 WTO TRIPS
Developing country- Transition period 5Y to implement
Further 5Y to extend patent protection to technology areas
Patent obligations wef Jan 2005 deadline
Amendments to Patents Act, 1970- Process patents
Transitional facility in pharma & agriculture- EMR
Patent term extended to 20 years
Copyright (Amendment) Act 1994- protection to original literary,
dramatic, musical & artistic works, cinematography, films and
sound recordings
• Satellite broadcasting, computer software & digital technology,
also under copyright protection
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Healthcare
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$35b market
Public healthcare spending constrained,urban-rural imbalance
Public healthcare spend 1% of GDP, developing nations 3%
1.5 hospital beds / 1000 people (China, Brazil, Thailand >4)
Public health infrastructure- Majority population- but underequipped, under-financed, shortage of doctors, nurses & drugs
• Private healthcare booming- Private practitioners & hospitals
• Private hospitals also exporting services to foreigners
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Tourism
• India- world's highest mountains, miles of coastline, forests and
wildlife, ancient monuments, World Heritage Sites, forts and palaces,
and the Taj Mahal
• India 2nd in the value-for-money index
• N5Y travel & tourism- 6% to GDP
• Medical tourism- ‘First World treatment at Third World prices’
• Medical tourism- $350m (2006) to $2b (2012)- McKinsey-CII @25%
• 180,000 medical tourists treated in India in 2004
• Modern treatment + cost effective + tourism attractions
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Hospitality
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Tourism boom percolated to hospitality
Hotel and restaurant industry (2007)- $6b @ 22%
Current hotel rooms only 90,000- demand 240,000, gap 150,000
2011- $10b investment,40 international hotel brands, 400,000 jobs
Large-scale local expansion plans
Alternate hospitality formats- residential hotels, destination resorts,
condo hotels, vacation ownership and private residents' club
• 11% hotel demand from long stay guests
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Tourism 2007
India
Asia-Pac
Global
Foreign tourist arrivals (Mn)
5 (14%)
184 (10%)
903 (7%)
Tourism business ($Bn)
11 (24%)
189 (21%)
856 (15%)
Share of global business %
1.25%
5.68%
Rank in global business %
20
6
Share of arrivals
0.56%
2.76%
Rank in arrivals
42
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Initiatives
• Incredible India campaign- domestic & international tourism
• "Incredible India Bed & Breakfast Establishments”- 'Gold' & 'Silver’
• "Medical Visa" ('M'-Visa) category introduced for foreign tourists for
medical tourism
• Tie-up with UNDP to promote rural tourism
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Broad- Services FDI Policy
(AT Kearney 2005 FDI Confidence Index)
Sector
Equity Comments
Construction
100%
Trading
Hotels, resorts, NOT in Housing & real estate
NOT in Retail trading,
51% in single brand retail
100% in cash & carry
Transport
49%
100%
Airlines- Domestic 49%, Foreign not allowed
Road and transport, Railways- not permitted
Telecom
74%
Basic, cell, national, intl long distance, VAS
Insurance
26%
FDI permitted
NBFC
100%
Merchant, underwriting, portfolio, consultancy,
AMC, VC
100%
Ad, Films, R&D, Architecture, travel
Pvt Banks
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Reforms since 1991
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Liberalisation- licensing abolished, except 8 (now 6) PSU industries
Manufacturing SSI reservation to 50 industries
Privatisation and corporatisation of PSUs, autonomy
Forex controls relaxed, openness to FDI
Market determined interest rates & petrol rates, AMP disbanded
Competition Act 2002 replaced MRTP, regulates M&A
Independent regulators in many sectors
Tax reforms to broaden tax base, service focus, CST introduced
CENVAT, uniform state level VAT replaces state sales tax
Tariffs / duties slashed, lower input costs enhanced competitiveness
SEZs- superior infrastructure, tax benefit- stimulate FDI, exports
EOUs- benefits, duty free imports
Duty exemptions on import
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FDI inflow
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Consumerism, growing middle class
Business Standard 2005
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Rapidly increasing middle class
Growing consumer affluence
Demographic shifts, risk averse
Greater media exposure
Population increasingly travelling abroad
Western trends, tastes and brands- growing
High aspirations
Population 47% < 20 years (55% by 2015), 160m teens
More working women, double-income families common
Spur to consumer spending
Finance- easy credit & access- credit cards, banks, ATM, EMI
2004- 43 m credit cards
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Ease of doing Business in Asia (WB 2006)
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